Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control — Integrated Framework (2013), our management, including our chief executive officer and chief financial officer, concluded that our internal control over financial reporting was effective as of December 31, 2018.

The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Waters Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Waters Corporation and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2018 appearing under Item 15(c) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 10 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based payment transactions in 2017.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2019

We have served as the Company’s auditor since 1994.

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	December 31,
	2018			2017
	(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	796,280		$	642,319
Investments		938,944			2,751,382
Accounts receivable, net		568,316			533,825
Inventories		291,569			270,294
Other current assets		68,054			72,314

Total current assets		2,663,163			4,270,134
Property, plant and equipment, net		343,083			349,278
Intangible assets, net		246,902			228,395
Goodwill		355,614			359,819
Other assets		118,664			116,728

Total assets	$	3,727,426		$	5,324,354

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and debt	$	178		$	100,273
Accounts payable		68,168			64,537
Accrued employee compensation		64,545			69,024
Deferred revenue and customer advances		164,965			166,840
Accrued income taxes		22,943			73,008
Accrued warranty		12,300			13,026
Other current liabilities		115,832			119,449

Total current liabilities		448,931			606,157
Long-term liabilities:
Long-term debt		1,148,172			1,897,501
Long-term portion of retirement benefits		55,853			67,334
Long-term income tax liabilities		430,866			456,949
Other long-term liabilities		76,346			62,625

Total long-term liabilities		1,711,237			2,484,409

Total liabilities		2,160,168			3,090,566
Commitments and contingencies (Notes 6, 9, 10, 11, 12 and 16)
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at December 31, 2018 and December 31, 2017		—			—
Common stock, par value $0.01 per share, 400,000 shares authorized, 160,472 and 159,845 shares issued, 73,115 and 79,337 shares outstanding at December 31, 2018 and December 31, 2017, respectively		1,605			1,598
Additional paid-in capital		1,834,741			1,745,088
Retained earnings		5,995,205			5,405,380
Treasury stock, at cost, 87,357 and 80,509 shares at December 31, 2018 and December 31, 2017, respectively		(6,146,322	)		(4,808,211	)
Accumulated other comprehensive loss		(117,971	)		(110,067	)

Total stockholders’ equity		1,567,258			2,233,788

Total liabilities and stockholders’ equity	$	3,727,426		$	5,324,354

The accompanying notes are an integral part of the consolidated financial statements.


WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
	Year Ended December 31,
	2018			2017			2016
	(In thousands, except per share data)
Revenues:
Product sales	$	1,604,993		$	1,552,349		$	1,460,296
Service sales		814,936			756,729			707,127

Total net sales		2,419,929			2,309,078			2,167,423
Costs and operating expenses:
Cost of product sales		656,275			623,214			595,796
Cost of service sales		336,289			323,853			295,657
Selling and administrative expenses		536,902			544,363			512,331
Research and development expenses		143,403			132,593			125,187
Purchased intangibles amortization		7,712			6,743			9,889
Litigation (settlement) provision (Note 11)		(426	)		11,114			3,524
Acquired in-process research and development (Note 2)		—			5,000			—

Total costs and operating expenses		1,680,155			1,646,880			1,542,384

Operating income		739,774			662,198			625,039
Other expense		(47,794	)		(340	)		(700	)
Interest expense		(48,641	)		(56,839	)		(44,911	)
Interest income		38,807			36,078			20,686

Income before income taxes		682,146			641,097			600,114
Provision for income taxes		88,352			620,786			78,611

Net income	$	593,794		$	20,311		$	521,503

Net income per basic common share	$	7.71		$	0.25		$	6.46
Weighted-average number of basic common shares		76,992			79,793			80,786
Net income per diluted common share	$	7.65		$	0.25		$	6.41
Weighted-average number of diluted common shares and equivalents		77,618			80,604			81,417

The accompanying notes are an integral part of the consolidated financial statements.

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Net income	$	593,794		$	20,311		$	521,503
Other comprehensive (loss) income:
Foreign currency translation		(36,279	)		101,148			(66,996	)
Unrealized gains (losses) on investments before income taxes		698			(1,794	)		279
Income tax benefit		443			68			111

Unrealized gains (losses) on investments, net of tax		1,141			(1,726	)		390
Retirement liability adjustment before reclassifications		(6,722	)		7,832			(6,783	)
Amounts reclassified to other expense		48,792			3,948			3,263

Retirement liability adjustment before income taxes		42,070			11,780			(3,520	)
Income tax (expense) benefit		(14,836	)		(4,989	)		572

Retirement liability adjustment, net of tax		27,234			6,791			(2,948	)
Other comprehensive (loss) income		(7,904	)		106,213			(69,554	)

Comprehensive income	$	585,890		$	126,524		$	451,949

The accompanying notes are an integral part of the consolidated financial statements.

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Cash flows from operating activities:
Net income	$	593,794		$	20,311		$	521,503
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		37,541			39,436			40,998
Deferred income taxes		2,405			45,510			1,204
Depreciation		57,952			61,450			51,684
Amortization of intangibles		50,456			44,552			44,765
Excess tax benefit related to stock option plans		—			—			13,844
Gain on sale of assets		—			—			(1,500	)
In-process research and development and other non-cash charges		—			5,000			—
Change in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable		(47,921	)		(24,013	)		(31,721	)
(Increase) decrease in inventories		(25,396	)		731			(20,147	)
Increase in other current assets		(12,446	)		(16,323	)		(2,436	)
Decrease (increase) in other assets		6,047			(24,098	)		(1,076	)
(Decrease) increase in accounts payable and other current liabilities		(81,663	)		3,175			6,842
Increase in deferred revenue and customer advances		2,721			10,386			9,974
Enactment of the 2017 Tax Act		(6,059	)		530,383			—
Increase in other liabilities		(27,015	)		1,140			8,986

Net cash provided by operating activities		604,446			697,640			642,920
Cash flows from investing activities:
Additions to property, plant, equipment and software capitalization		(96,079	)		(85,473	)		(94,967	)
Asset and business acquisitions, net of cash acquired		(31,486	)		—			(5,609	)
Investment in unaffiliated company		(7,615	)		(7,000	)		—
Payments for intellectual property licenses		—			(5,000	)		—
Purchases of investments		(1,006,080	)		(2,960,379	)		(2,396,032	)
Maturities and sales of investments		2,824,562			2,522,100			2,004,690
Proceeds from sale of assets		—			—			4,000

Net cash provided by (used in) investing activities		1,683,302			(535,752	)		(487,918	)
Cash flows from financing activities:
Proceeds from debt issuances		274			1,480,190			485,298
Payments on debt		(850,435	)		(1,310,214	)		(325,323	)
Payments of debt issuance costs		—			(2,984	)		(1,705	)
Proceeds from stock plans		52,429			97,789			62,189
Purchases of treasury shares		(1,315,106	)		(332,544	)		(325,759	)
(Payments for) proceeds from derivative contracts		(6,684	)		3,894			(10,401	)

Net cash used in financing activities		(2,119,522	)		(63,869	)		(115,701	)
Effect of exchange rate changes on cash and cash equivalents		(14,265	)		38,669			(21,335	)

Increase in cash and cash equivalents		153,961			136,688			17,966
Cash and cash equivalents at beginning of period		642,319			505,631			487,665

Cash and cash equivalents at end of period	$	796,280		$	642,319		$	505,631

Supplemental cash flow information:
Income taxes paid	$	159,397		$	70,583		$	50,007
Interest paid	$	50,798		$	56,503		$	43,595

The accompanying notes are an integral part of the consolidated financial statements.

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	(In thousands)
Balance December 31, 2015		157,677	$	1,577	$	1,490,342	$	4,863,566		$	(4,149,908	)	$	(146,726	)	$	2,058,851
Net income		—		—		—		521,503			—			—			521,503
Other comprehensive loss		—		—		—		—			—			(69,554	)		(69,554	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		53		1		6,277		—			—			—			6,278
Stock options exercised		730		7		55,904		—			—			—			55,911
Tax benefit related to stock option plans		—		—		13,844		—			—			—			13,844
Treasury stock		—		—		—		—			(325,759	)		—			(325,759	)
Stock-based compensation		174		1		40,874		—			—			—			40,875

Balance December 31, 2016		158,634	$	1,586	$	1,607,241	$	5,385,069		$	(4,475,667	)	$	(216,280	)	$	2,301,949

Net income		—		—		—		20,311			—			—			20,311
Other comprehensive income		—		—		—		—			—			106,213			106,213
Issuance of common stock for employees:
Employee Stock Purchase Plan		50		1		6,874		—			—			—			6,875
Stock options exercised		972		10		90,904		—			—			—			90,914
Treasury stock		—		—		—		—			(332,544	)		—			(332,544	)
Stock-based compensation		189		1		40,069		—			—			—			40,070

Balance December 31, 2017		159,845	$	1,598	$	1,745,088	$	5,405,380		$	(4,808,211	)	$	(110,067	)	$	2,233,788

Adoption of new accounting pronouncement		—		—		—		(3,969	)		—			—			(3,969	)
Net income		—		—		—		593,794			—			—			593,794
Other comprehensive loss		—		—		—		—			—			(7,904	)		(7,904	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		45		—		7,874		—			—			—			7,874
Stock options exercised		438		5		44,550		—			—			—			44,555
Treasury stock		—		—		—		—			(1,338,111	)		—			(1,338,111	)
Stock-based compensation		144		2		37,229		—			—			—			37,231

Balance December 31, 2018		160,472	$	1,605	$	1,834,741	$	5,995,205		$	(6,146,322	)	$	(117,971	)	$	1,567,258

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 Description of Business and Organization

Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLCTM” and together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together (“LC-MS”) and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing. LC-MS instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TATM product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.

2 Basis of Presentation and Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, product returns and allowances, bad debts, inventory valuation, goodwill and intangible assets, income taxes, warranty and installation provisions, litigation, retirement plan obligations, stock-based compensation, equity investments and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions or conditions.

Risks and Uncertainties

The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. The Company consolidates entities in which it owns or controls fifty percent or more of the voting shares. All inter-company balances and transactions have been eliminated.

Translation of Foreign Currencies

The functional currency of each of the Company’s foreign operating subsidiaries is the local currency of its country of domicile, except for the Company’s subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity’s cash flows.

For most of the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets.

The Company’s net sales derived from operations outside the United States were 72%, 71% and 69% in 2018, 2017 and 2016, respectively. Gains and losses from foreign currency transactions are included in net income in the consolidated statements of operations. In 2018, 2017 and 2016, foreign currency transactions resulted in net losses of $3 million, $1 million and $4 million, respectively.

Seasonality of Business

Cash, Cash Equivalents and Investments

Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, primarily in bank deposits, U.S. treasury bill money market funds and commercial paper. Investments with longer maturities are classified as investments, and are held primarily in U.S. treasury bills, U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities.

Investments are classified as available-for-sale in accordance with the accounting standards for investments in debt securities. All debt securities are recorded at fair market value and any unrealized holding gains and losses, to the extent deemed temporary, are included in accumulated other comprehensive income in stockholders’ equity, net of the related tax effects. If any adjustment to fair value reflects a decline in the value of the investment, the Company considers all available evidence to evaluate the extent to which the decline is “other than temporary” and, if so, records a loss as a charge to the statement of operations. The Company classifies its investments exclusive of those categorized as cash equivalents.

The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of December 31, 2018 and 2017, $471 million out of $1,735 million and $3,326 million out of $3,394 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $251 million out of $1,735 million and $304 million out of $3,394 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at December 31, 2018 and 2017, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is based on a number of factors, including historical experience and the customer’s credit-worthiness. The allowance for doubtful accounts is reviewed on at least a quarterly basis. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged against the allowance when the Company determines it is probable that the receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its customers. Historically, the Company has not experienced significant bad debt losses.

The following is a summary of the activity of the Company’s allowance for doubtful accounts for the years ended December 31, 2018, 2017 and 2016 (in thousands):


	Balance at Beginning of Period		Additions		Deduction			Balance at End of Period
Allowance for Doubtful Accounts
December 31, 2018	$	6,109	$	6,333	$	(4,779	)	$	7,663
December 31, 2017	$	5,141	$	3,752	$	(2,784	)	$	6,109
December 31, 2016	$	4,617	$	2,399	$	(1,875	)	$	5,141

Concentration of Credit Risk

The Company sells its products and services to a significant number of large and small customers throughout the world, with net sales to the pharmaceutical industry of approximately 56% in each of the years 2018, 2017 and 2016. None of the Company’s individual customers accounted for more than 2% of annual Company sales in 2018, 2017 or 2016. The Company performs continuing credit evaluations of its customers and generally does not require collateral, but in certain circumstances may require letters of credit or deposits. Historically, the Company has not experienced significant bad debt losses.

Inventory

The Company values all of its inventories at the lower of cost or net realizable value on a first-in, first-out basis (“FIFO”).

Income Taxes

Deferred income taxes are recognized for temporary differences between the financial statement and income tax basis of assets and liabilities using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Appropriate long-term liabilities have also been recorded to recognize uncertain tax positions.

As part of the 2017 Tax Act, there is a provision for the taxation of certain off-shore earnings referred to as the Global Intangible Low-Taxed Income (“GILTI”) provision. This new provision taxes off-shore earnings at a rate of 10.5%, partially offset with foreign tax credits. In connection with this new provision, the Company has adopted an accounting policy to treat this new tax as a current period cost.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to expense, while the costs of significant improvements are capitalized. Depreciation is provided using the straight-line method over the following estimated useful lives: buildings — fifteen to thirty years; building improvements — five to ten years; leasehold improvements — the shorter of the economic useful life or life of lease; and production and other equipment — three to ten years. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the consolidated balance sheets and related gains or losses are reflected in the consolidated statements of operations.

Asset Impairments

The Company reviews its long-lived assets for impairment in accordance with the accounting standards for property, plant and equipment. Whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable, the Company evaluates the recoverability of the carrying value of the asset based on the expected future cash flows, relying on a number of factors, including, but not limited to, operating results, business plans, economic projections and anticipated future cash flows. If the asset is deemed not recoverable, it is written down to fair value and the impairment is recorded in the consolidated statements of operations.

Business Combinations and Asset Acquisitions

The Company accounts for business acquisitions under the accounting standards for business combinations. The results of each acquisition are included in the Company’s consolidated results as of the acquisition date and the purchase price of an acquisition is allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values. Any excess of the fair value consideration transferred over the estimated fair values of the net assets acquired is recognized as goodwill. Acquired in-process research and development (“IPR&D”) included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred and acquired IPR&D is tested for impairment annually until completion of the acquired programs. Upon commercialization, this indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life, subject to periodic impairment reviews. If the research and development project is abandoned, the indefinite-lived asset is charged to expense. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.

The Company also acquires intellectual property through licensing arrangements. These arrangements often require upfront payments and may include additional milestone or royalty payments, contingent upon certain future events. IPR&D acquired in an asset acquisition (as opposed to a business combination) is expensed immediately unless there is an alternative future use. Subsequent payments made for the achievement of milestones are evaluated to determine whether they have an alternative future use or should be expensed. Payments made to third parties subsequent to commercialization are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.

Goodwill and Other Intangible Assets

The Company tests for goodwill impairment using a fair-value approach at the reporting unit level annually, or earlier, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Additionally, the Company performs an annual goodwill impairment assessment for its reporting units as of January 1 each year. The goodwill and other intangible assets accounting standards define a reporting unit as an operating segment, or one level below an operating segment, if discrete financial information is prepared and reviewed by management. For goodwill impairment review purposes, the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company has two reporting units: Waters™ and TA™. Goodwill is allocated to the reporting units at the time of acquisition. Under the impairment test, if a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the extent that the carrying amount of goodwill exceeds the implied fair value of the goodwill. The fair value of reporting units was estimated using a discounted cash flows technique, which includes certain management assumptions, such as estimated future cash flows, estimated growth rates and discount rates.

The Company’s intangible assets include purchased technology; capitalized software development costs; costs associated with acquiring Company patents, trademarks and intellectual properties, such as licenses; debt issuance costs and acquired IPR&D. Purchased intangibles are recorded at their fair market values as of the acquisition date and amortized over their estimated useful lives, ranging from one to fifteen years. Other intangibles are amortized over a period ranging from one to ten years. Debt issuance costs are amortized over the life of the related debt. Acquired IPR&D is amortized from the date of completion of the acquired program over its estimated useful life. IPR&D and indefinite-lived intangibles are tested annually for impairment.

Software Development Costs

The Company capitalizes internal and external software development costs for products offered for sale in accordance with the accounting standards for the costs of software to be sold, leased, or otherwise marketed. Capitalized costs are amortized to cost of sales over the period of economic benefit, which approximates a straight-line basis over the estimated useful lives of the related software products, generally three to ten years. The Company capitalized $34 million and $35 million of direct expenses that were related to the development of software in 2018 and 2017, respectively. Net capitalized software included in intangible assets totaled $147 million and $153 million at December 31, 2018 and 2017, respectively. See Note 8, “Goodwill and Other Intangibles”.

The Company capitalizes internal software development costs for internal use. Capitalized internal software development costs are amortized over the period of economic benefit, which approximates a straight-line basis over ten years. Net capitalized internal software included in property, plant and equipment totaled $2 million and $3 million at December 31, 2018 and 2017, respectively.

Other Investments

The Company accounts for its investments that represent less than twenty percent ownership, and for which the Company does not have the ability to exercise significant influence, using the accounting standards for investments in equity securities. Investments for which the Company does not have the ability to exercise significant influence, and for which there is not a readily determinable market value, are accounted for under the cost method of accounting. The Company periodically evaluates the carrying value of its investments accounted for under the cost method of accounting and carries them at the lower of cost or estimated net realizable value. For investments in which the Company owns or controls between twenty and forty-nine percent of the voting shares, or over which it has the ability to exercise significant influence over operating and financial policies, the equity method of accounting is used. The Company’s share of net income or losses of equity investments is included in the consolidated statements of operations and was not material in any period presented.

During the year ended December 31, 2018, the Company made $8 million of investments in unaffiliated companies. During the year ended December 31, 2017, the Company made a $7 million investment in a developer of analytical system solutions used to make measurements, predict stability and accelerate product discovery in the routine analytic, process monitoring and quality control release processes for life science and biopharmaceutical markets. During the year ended December 31, 2016, the Company sold an equity investment that was accounted for using the equity method of accounting and was included in other assets in the consolidated balance sheet for $4 million in cash.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fair Value Measurements

In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of December 31, 2018 and 2017. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions.

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2018 (in thousands):


	Total at December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury securities	$	164,315	$	—	$	164,315	$	—
Foreign government securities		3,463		—		3,463		—
Corporate debt securities		723,059		—		723,059		—
Time deposits		108,638		—		108,638		—
Waters 401(k) Restoration Plan assets		33,104		33,104		—		—
Foreign currency exchange contracts		503		—		503		—
Interest rate cross-currency swap agreements		1,093		—		1,093		—

Total	$	1,034,175	$	33,104	$	1,001,071	$	—

Liabilities:
Contingent consideration	$	2,476	$	—	$	—	$	2,476
Foreign currency exchange contracts		224		—		224		—

Total	$	2,700	$	—	$	224	$	2,476

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2017 (in thousands):


	Total at December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury securities	$	591,988	$	—	$	591,988	$	—
Foreign government securities		6,952		—		6,952		—
Corporate debt securities		1,975,160		—		1,975,160		—
Time deposits		371,511		—		371,511		—
Equity securities		147		—		147		—
Waters 401(k) Restoration Plan assets		35,645		35,645		—		—
Foreign currency exchange contracts		566		—		566		—

Total	$	2,981,969	$	35,645	$	2,946,324	$	—

Liabilities:
Contingent consideration	$	3,247	$	—	$	—	$	3,247
Foreign currency exchange contracts		182		—		182		—

Total	$	3,429	$	—	$	182	$	3,247

Fair Value of 401(k) Restoration Plan Assets

The 401(k) Restoration Plan is a nonqualified defined contribution plan and the assets were held in registered mutual funds and have been classified as Level 1. The fair values of the assets in the plan are determined through market and observable sources from daily quoted prices on nationally recognized securities exchanges.

Fair Value of Cash Equivalents, Investments, Foreign Currency Exchange Contracts and Interest Rate Cross-Currency Swap Agreements

The fair values of the Company’s cash equivalents, investments and foreign currency exchange contracts are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources.

Fair Value of Contingent Consideration

The fair value of the Company’s liability for contingent consideration relates to earnout payments in connection with the July 2014 acquisition of Medimass Research, Development and Service Kft. and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the estimated future results and a discount rate that reflects both the likelihood of achieving the estimated future results and the Company’s creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Although there

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

is no contractual limit, the fair value of future contingent consideration payments was estimated to be $2 million and $3 million at December 31, 2018 and 2017, respectively, based on the Company’s best estimate, as the earnout is based on future sales of certain products, some of which are currently in development, through 2034.

Fair Value of Other Financial Instruments

The Company’s accounts receivable, accounts payable and variable interest rate debt are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s fixed interest rate debt was $510 million and $610 million at December 31, 2018 and 2017, respectively. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $502 million and $608 million at December 31, 2018 and 2017, respectively, using Level 2 inputs.

Derivative Transactions

The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its non-U.S. dollar foreign subsidiaries’ financial statements into U.S. dollars, and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.

The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.

Foreign Currency Exchange Contracts

The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real.

Interest Rate Cross-Currency Swap Agreements

In 2018, the Company entered into three-year interest rate cross-currency swap derivative agreements with a notional value of $300 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive income in stockholders’ equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):


	December 31, 2018					December 31, 2017
	Notional Value		Fair Value			Notional Value		Fair Value
Foreign currency exchange contracts:
Other current assets	$	112,212	$	503		$	110,759	$	566
Other current liabilities	$	40,175	$	224		$	37,104	$	182

Interest rate cross-currency swap agreements:
Other assets	$	300,000	$	1,093		$	—	$	—
Accumulated other comprehensive income			$	(1,093	)			$	—

The following is a summary of the activity included in the statements of comprehensive income related to the foreign currency exchange contracts (in thousands):


	Financial Statement Classification
	Year Ended December 31,
	2018			2017			2016
Foreign currency exchange contracts:
Realized (losses) gains on closed contracts	Cost of sales	$	(6,684	)	$	3,894		$	(10,401	)
Unrealized (losses) gains on open contracts	Cost of sales		(105	)		1,054			(883	)

Cumulative net pre-tax (losses) gains	Cost of sales	$	(6,789	)	$	4,948		$	(11,284	)

Interest rate cross-currency swap agreements:
Interest earned	Interest income	$	2,713		$	—		$	—
Unrealized gains on open contracts	Stockholders’ equity	$	1,093		$	—		$	—

Stockholders’ Equity

In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a two-year period. This new program replaced the remaining amounts available under the April 2018 authorization of $3 billion. During 2018, 2017 and 2016, the Company repurchased 6.8 million, 1.8 million and 2.3 million shares of the Company’s outstanding common stock at a cost of $1,329 million, $323 million and $318 million, respectively, under the April 2018 authorization and other previously announced programs. In addition, the Company repurchased $10 million, $10 million and $8 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2018, 2017 and 2016, respectively. The Company believes that it has the financial flexibility to fund these share repurchases given current cash levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits.

In December 2018, the Company accrued $23 million as a result of treasury stock purchases that were unsettled as of December 31, 2018. These transactions were settled in January 2019.

Product Warranty Costs

The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.

The following is a summary of the activity of the Company’s accrued warranty liability for the years ended December 31, 2018, 2017 and 2016 (in thousands):


	Balance at Beginning of Period		Accruals for Warranties		Settlements Made			Balance at End of Period
Accrued warranty liability:
December 31, 2018	$	13,026	$	5,033	$	(5,759	)	$	12,300
December 31, 2017	$	13,391	$	8,746	$	(9,111	)	$	13,026
December 31, 2016	$	13,349	$	9,755	$	(9,713	)	$	13,391

Advertising Costs

All advertising costs are expensed as incurred and are included in selling and administrative expenses in the consolidated statements of operations. Advertising expenses were $7 million, $6 million and $11 million for 2018, 2017 and 2016, respectively.

Research and Development Expenses

Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, facilities costs, overhead costs, contract services and other outside costs. Research and development expenses are expensed as incurred. During 2017, the Company incurred a $5 million charge for acquired in-process research and development related to the licensing of certain intellectual property relating to mass spectrometry technologies yet to be commercialized and for which there was no future alternative use as of the acquisition date. These licensing arrangements are significantly related to new, biologically-focused applications, as well as other applications, and require the Company to make additional future payments of up to $7 million if certain milestones are achieved, as well as royalties on future net sales.

Stock-Based Compensation

The Company has two stock-based compensation plans, which are described in Note 13, “Stock-Based Compensation”.

Earnings Per Share

In accordance with the earnings per share accounting standards, the Company presents two earnings per share (“EPS”) amounts. Income per basic common share is based on income available to common shareholders and the weighted-average number of common shares outstanding during the periods presented. Income per diluted common share includes additional dilution from potential common stock, such as stock issuable pursuant to the exercise of stock options outstanding.

Retirement Plans

The Company sponsors various retirement plans, which are described in Note 16, “Retirement Plans”.

Comprehensive Income

The Company accounts for comprehensive income in accordance with the accounting standards for comprehensive income, which establish the accounting rules for reporting and displaying comprehensive income.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

These standards require that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.

Subsequent Events

In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a two-year period. See discussion under the heading, “Stockholders’ Equity”, above.

In January 2019, the Company made organizational changes to better align our resources with our growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 1% of the Company’s employees. The Company currently estimates that it will incur approximately $15 million of severance and related costs during 2019.

In February 2019, certain defined terms related to the subsidiary guarantors were amended in the Company’s credit agreement and senior unsecured note agreements. In addition, the Company amended the senior unsecured note agreements to allow the Company to elect an increase in the permitted leverage ratio from 3.50:1 to 4.0:1, for a period of three consecutive quarters, for a material acquisition of $400 million or more. During the period of time where the leverage ratio exceeds 3.50:1, the interest payable on the senior unsecured notes shall increase by 0.50%. The debt covenants in the senior unsecured note agreements were also modified to address the change in accounting guidance for leases.

Recently Adopted Accounting Standards

In May 2014, amended accounting guidance was issued regarding the recognition of revenue from contracts with customers. The objective of this guidance is to significantly enhance comparability and clarify principles of revenue recognition practices across entities, industries, jurisdictions and capital markets. This guidance was originally effective for annual and interim reporting periods beginning after December 15, 2016; however, the Financial Accounting Standards Board (“FASB”) amended the standard in August 2015 to delay the effective period date by one year to annual and interim periods beginning after December 15, 2017. Adoption prior to December 15, 2016 was not permitted. In March 2016, the FASB clarified the implementation guidance on principal versus agent considerations and, in April 2016, clarification was made regarding certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, additional guidance was issued related to disclosure of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes collected from customers. The Company adopted this standard as of January 1, 2018 and applied the modified-retrospective method. The Company elected the practical expedient and only evaluated the contracts that were considered incomplete as of January 1, 2018 when quantifying the cumulative effect adjustment under the modified retrospective method. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows and, as such, did not require any adjustments to information reported in the prior year.

In January 2016, accounting guidance was issued which primarily affects the classification and measurement of certain financial instruments, principally equity investments and certain financial liabilities. Under the new guidance, there will no longer be an available-for-sale classification for equity securities with readily determinable fair values. Changes to the fair value of equity investments will be recognized through earnings. Equity investments carried at cost should be adjusted for changes in observable prices, as applicable, and qualitatively assessed for impairment annually. Changes to the fair value of financial liabilities under the fair value option due to instrument specific credit risk will be recognized separately in other comprehensive income. The new guidance also requires financial assets and financial liabilities to be presented separately and grouped by

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

measurement category in the notes to the financial statements. The Company adopted this standard as of January 1, 2018 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

In August 2016, accounting guidance was issued that clarifies the classification of certain cash flows. The new guidance addresses eight specific areas where current accounting guidance is either unclear or does not specifically address classification issues. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company adopted this standard as of January 1, 2018 and the adoption of this standard did not have a material impact on the Company’s cash flows.

In October 2016, accounting guidance was issued regarding intra-entity transfers of assets other than inventory. The new guidance eliminates the deferral of tax effects on intra-entity transfers other than inventory and requires an entity to recognize the income tax consequences when the transfer occurs. The Company adopted this standard as of January 1, 2018 with a $4 million charge to beginning retained earnings in the consolidated balance sheet. Please see Note 10, “Income Taxes”, for additional information.

In January 2017, accounting guidance was issued that clarifies the definition of a business. The new guidance provides a more robust framework to use in determining when a set of assets and activities is a business, thus narrowing the definition and the amount of transactions accounted for as business combinations. The Company adopted this standard as of January 1, 2018 and will apply this guidance prospectively to any business combination transactions that take place in the future.

In March 2017, accounting guidance was issued regarding the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires that an employer disaggregate the service cost component from other components of net benefit cost, with service cost reported in the same line items as other compensation costs and the other components of net benefit costs presented outside income from operations. The Company adopted this standard as of January 1, 2018 and has reported the components of net periodic benefit cost other than the service cost component in other income on the consolidated statements of operations for all periods presented. Please see Note 16, “Retirement Plans”, for additional information.

In May 2017, accounting guidance was issued that clarifies the accounting for a change to the terms or conditions of a share-based payment award. The standard provides more specific guidance for determining when a change to an award requires modification accounting and when it should be deemed purely administrative in nature. The Company adopted this standard as of January 1, 2018 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

In August 2017, accounting guidance was issued which simplifies the application of hedge accounting and enables companies to better portray the economics of their risk management activities in their financial statements. The Company adopted this standard in the second quarter of 2018, and this adoption did not have a material impact on the Company’s financial position, results of operations and cash flows.

Recently Issued Accounting Standards

In February 2016, accounting guidance was issued regarding the accounting for leases. This new comprehensive lease standard amends various aspects of existing accounting guidance for leases. The core principle of the new guidance will require lessees to present the assets and liabilities that arise from leases on their balance sheets. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company has adopted this standard using a modified retrospective transition approach to be applied to leases existing as of, or entered into after, January 1, 2019. The adoption of this standard will have a material effect on the Company’s balance sheet by recording a right-of-use lease asset and lease liability

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

that is estimated to be approximately $97 million; however, it will not have an overall material impact on the Company’s results of operations and cash flows.

In June 2016, accounting guidance was issued that modifies the recognition of credit losses related to financial assets, such as debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, and other financial assets that have the contractual right to receive cash. Current guidance requires the recognition of a credit loss when it is considered probable that a loss event has occurred. The new guidance requires the measurement of expected credit losses to be based upon relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the asset. As such, expected credit losses may be recognized sooner under the new guidance due to the broader range of information that will be required to determine credit loss estimates. The new guidance also amends the current other-than-temporary impairment model used for debt securities classified as available-for-sale. When the fair value of an available-for-sale debt security is below its amortized cost, the new guidance requires the total unrealized loss to be bifurcated into its credit and non-credit components. Any expected credit losses or subsequent recoveries will be recognized in earnings and any changes not considered credit related will continue to be recognized within other comprehensive income. This guidance is effective for annual and interim periods beginning after December 15, 2019. The Company currently does not expect that the adoption of this standard will have a material effect on the Company’s financial position, results of operations and cash flows.

In January 2017, accounting guidance was issued that simplifies the accounting for goodwill impairment. The guidance eliminates step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company currently does not expect that the adoption of this standard will have a material effect on the Company’s financial position, results of operations and cash flows.

In March 2017, accounting guidance was issued to amend the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amortization period for certain callable debt securities will be shortened to end at the earliest call date. This guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.

In February 2018, accounting guidance was issued to address the impact of the 2017 Tax Cuts and Jobs Act on items recorded in accumulated other comprehensive income. Current accounting guidance requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect recorded in income from continuing operations, even if the related tax effects were originally recognized in other comprehensive income, the new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Act. This guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.

In August 2018, accounting guidance was issued that modifies the disclosure requirements of fair value measurements. The amendments remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosure and add disclosure requirement identified as relevant. This guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.

In August 2018, accounting guidance was issued that modifies the disclosure requirements of retirement benefit plans. The amendments remove disclosures that are no longer considered cost beneficial, clarify the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

specific requirements of disclosure and add disclosure requirement identified as relevant. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.

3 Revenue Recognition

The Company adopted new accounting guidance regarding the recognition of revenue from contracts with customers as of January 1, 2018 and applied the modified-retrospective method. The Company elected the practical expedient and only evaluated the contracts that were considered incomplete as of January 1, 2018 when quantifying the cumulative effect adjustment under the modified retrospective method. Ultimately, the Company determined that there was not a significant change in the timing or pattern of revenue recognition for the Company’s products and services. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows and, as such, did not require any adjustments to information reported in the prior year. The revenue recognition policies described below were effective as of January 1, 2018.

The Company recognizes revenue upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company generally enters into contracts that include a combination of products and services. Revenue is allocated to distinct performance obligations and is recognized net of allowances for returns and discounts.

The Company recognizes revenue on product sales at the time control of the product transfers to the customer. In substantially all of the Company’s arrangements, title of the product transfers at shipping point and, as a result, the Company determined control transfers at the point of shipment. In more limited cases, there are destination-based shipping terms and, thus, control is deemed to transfer when the products arrive at the customer site. All incremental costs of obtaining a contract are expensed as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less. Shipping and handling costs are included as a component of cost of sales. In situations where the control of the goods transfers prior to the completion of the Company’s obligation to ship the products to its customers, the Company has elected the practical expedient to account for the shipping services as a fulfillment cost. Accordingly, such costs are recognized when control of the related goods is transferred to the customer. In more rare situations, the Company has revenue associated with products that contain specific customer acceptance criteria and the related revenue is not recognized before the customer acceptance criteria are satisfied. The Company elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with specific revenue-producing transactions and collected by the Company from a customer.

Generally, the Company’s contracts for products include a performance obligation related to installation. The Company has determined that the installation represents a distinct performance obligation and revenue is recognized separately upon the completion of installation. The Company determines the amount of the transaction price to allocate to the installation service based on the standalone selling price of the product and the service, which requires judgment. The Company determines relative standalone selling price of installation based upon a number of factors, including hourly service billing rates and estimated installation hours. In developing these estimates, the Company considers past history, competition, billing rates of current services and other factors.

The Company has sales from standalone software, which is included in instrument systems revenue. These arrangements typically include software licenses and maintenance contracts, both of which the Company has determined are distinct performance obligations. The Company determines the amount of the transaction price to

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

allocate to the license and maintenance contract based on the relative standalone selling price of each performance obligation. Software license revenue is recognized at the point in time when control has been transferred to the customer. The revenue allocated to the software maintenance contract is recognized on a straight-line basis over the maintenance period, which is the contractual term of the contract, as a time-based measure of progress best reflects the Company’s performance in satisfying this obligation. Unspecified rights to software upgrades are typically sold as part of the maintenance contract on a when-and-if-available basis.

Payment terms and conditions vary among the Company’s revenue streams, although terms generally include a requirement of payment within 30 to 60 days of product shipment. Prior to providing payment terms to customers, an evaluation of the customer’s credit risk is performed. Returns and customer credits are infrequent and insignificant and are recorded as a reduction to sales. Rights of return are not included in sales arrangements and, therefore, there is minimal variable consideration included in the transaction price of our products.

Service revenue includes (i) service and software maintenance contracts and (ii) service calls (time and materials). Instrument service contracts and software maintenance contracts are typically annual contracts, which are billed at the beginning of the contract or maintenance period. The amount of the service and software maintenance contract is recognized on a straight-line basis to revenue over the maintenance service period, which is the contractual term of the contract, as a time-based measure of progress best reflects the Company’s performance in satisfying this obligation. There are no deferred costs associated with the service contract, as the cost of the service is recorded when the service is performed. Service calls are recognized to revenue at the time a service is performed.

The Company’s deferred revenue liabilities on the consolidated balance sheets consists of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.

The following is a summary of the activity of the Company’s deferred revenue and customer advances for the year ended December 31, 2018, 2017 and 2016 (in thousands):


	December 31,
	2018			2017			2016
Balance at the beginning of the period	$	192,589		$	173,780		$	170,201
Recognition of revenue included in balance at beginning of the period		(159,258	)		(143,589	)		(140,688	)
Revenue deferred during the period, net of revenue recognized		170,926			162,398			144,267

Balance at the end of the period	$	204,257		$	192,589		$	173,780

As of December 31, 2018 and 2017, $39 million and $26 million of deferred revenue and customer advances were classified in other long-term liabilities, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The amount of deferred revenue and customer advances equals the transaction price allocated to unfulfilled performance obligations for the period presented. Such amounts are expected to be recognized in the future as follows (in thousands):


	December 31, 2018
Deferred revenue and customer advances expected to be recognized:
In one year or less	$	164,965
In 13-24 months		22,856
In 25 months and beyond		16,436

Total	$	204,257

4 Marketable Securities

The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):


	December 31, 2018
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		Loss			Value
U.S. Treasury securities	$	164,619	$	16	$	(320	)	$	164,315
Foreign government securities		3,486		1		(24	)		3,463
Corporate debt securities		725,778		41		(2,760	)		723,059
Time deposits		108,638		—		—			108,638

Total	$	1,002,521	$	58	$	(3,104	)	$	999,475

Amounts included in:
Cash equivalents	$	60,532	$	—	$	(1	)	$	60,531
Investments		941,989		58		(3,103	)		938,944

Total	$	1,002,521	$	58	$	(3,104	)	$	999,475


	December 31, 2017
	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
U.S. Treasury securities	$	593,599	$	82	$	(1,693	)	$	591,988
Foreign government securities		6,982		—		(30	)		6,952
Corporate debt securities		1,977,329		897		(3,066	)		1,975,160
Time deposits		371,515		—		(4	)		371,511
Equity securities		77		70		—			147

Total	$	2,949,502	$	1,049	$	(4,793	)	$	2,945,758


Amounts included in:
Cash equivalents	$	194,377	$	—	$	(1	)	$	194,376
Investments		2,755,125		1,049		(4,792	)		2,751,382

Total	$	2,949,502	$	1,049	$	(4,793	)	$	2,945,758

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):


	December 31,
	2018		2017
Due in one year or less	$	797,649	$	2,042,673
Due after one year through three years		201,826		902,938

Total	$	999,475	$	2,945,611

In 2018, net realized losses on sales of investments were $1 million. Realized gains and losses on sales of investments were not material in 2017 and 2016.

5 Inventories

Inventories are classified as follows (in thousands):


	December 31,
	2018		2017
Raw materials	$	111,641	$	99,033
Work in progress		15,552		15,324
Finished goods		164,376		155,937

Total inventories	$	291,569	$	270,294

During 2018, 2017 and 2016, the Company recorded inventory-related excess and obsolescence provisions of $8 million, $2 million and $9 million, respectively.

6 Property, Plant and Equipment

Property, plant and equipment consist of the following (in thousands):


	December 31,
	2018			2017
Land and land improvements	$	36,554		$	37,525
Buildings and leasehold improvements		299,103			294,219
Production and other equipment		494,302			484,475
Construction in progress		41,909			22,140

Total property, plant and equipment		871,868			838,359
Less: accumulated depreciation and amortization		(528,785	)		(489,081	)

Property, plant and equipment, net	$	343,083		$	349,278

In February 2018, the Company’s Board of Directors approved expanding its precision chemistry consumable manufacturing operations in the U.S. The Company anticipates spending an estimated $215 million to build and equip this new state-of-the-art manufacturing facility, and has spent $11 million on this facility through December 31, 2018.

During 2018, 2017 and 2016, the Company retired and disposed of approximately $9 million, $15 million and $15 million of property, plant and equipment, respectively, most of which was fully depreciated and no longer in use. Gains on disposal were immaterial for the years ended December 31, 2018 and 2017.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7 Acquisitions

In July 2018, the Company acquired the sole intellectual property rights to the Desorption Electrospray Ionization (“DESI”) imaging technology for $30 million in cash and a future contractual obligation to pay a minimum royalty of $3 million over the remaining life of the patent. DESI is a mass spectrometry imaging technique that is used to develop medical therapies. The Company accounted for this transaction as an asset acquisition as it did not meet the definition of a business. The Company allocated $33 million of fair value to a purchased intangible asset which will be amortized over the useful life of 12 years.

In September 2016, the Company acquired all of the outstanding stock of Rubotherm GmbH (“Rubotherm”), a manufacturer of gravimetric analysis systems, for approximately $6 million in cash, $5 million of which was paid at closing and an additional $1 million paid after closing to settle certain liabilities. Rubotherm develops and manufactures analytical test instruments for thermogravimetric and sorption measurements that are used in both industrial and academic research laboratories in disciplines that include chemistry, material science and engineering. The Rubotherm acquisition will help support and further expand product offerings within TA’s thermal analysis business.

In each acquisition, the sellers provided the Company with customary representations, warranties and indemnification, which would be settled in the future if and when a breach of the contractual representation or warranty condition occurs. The pro forma effect of the ongoing operations for Waters Corporation, the DESI imaging technology and Rubotherm, either individually or in the aggregate, as though these acquisitions had occurred at the beginning of the periods covered by this report was immaterial.

8 Goodwill and Other Intangibles

The carrying amount of goodwill was $356 million and $360 million at December 31, 2018 and 2017, respectively. During the year ended December 31, 2018, the effect of foreign currency translation decreased goodwill by $4 million.

The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):


	December 31, 2018						December 31, 2017
	Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period		Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period
Capitalized software	$	454,307	$	307,634		5 years	$	438,652	$	285,461		5 years
Purchased intangibles		201,566		144,184		11 years		169,870		138,750		11 years
Trademarks and IPR&D		13,677		—		—		13,923		—		—
Licenses		5,568		4,875		6 years		5,840		4,628		6 years
Patents and other intangibles		77,753		49,276		8 years		72,815		43,866		8 years

Total	$	752,871	$	505,969		7 years	$	701,100	$	472,705		7 years

The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $23 million and $17 million, respectively, in the year ended December 31, 2018 due to the effects of foreign currency translation. Amortization expense for intangible assets was $50 million, $45 million and $45 million for the years ended December 31, 2018, 2017 and 2016, respectively. Amortization expense for intangible assets is estimated to be $51 million per year for each of the next five years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9 Debt

In November 2017, the Company entered into a new credit agreement (the “2017 Credit Agreement”) that provides for a $1.5 billion revolving facility and a $300 million term loan. The revolving facility and term loan both mature on November 30, 2022 and require no scheduled prepayments before that date.

The interest rates applicable to the 2017 Credit Agreement are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (a) the prime rate in effect on such day, (b) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (c) the adjusted LIBO rate on such day (or if such day is not a business day, the immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 2, 3 or 6 month adjusted LIBO rate or EURIBO rate for Euro-denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for LIBO rate or EURIBO rate loans. The facility fee on the 2017 Credit Agreement ranges between 7.5 and 25 basis points per annum, based on the leverage ratio, of the amount of the revolving facility commitments and the outstanding term loan. The 2017 Credit Agreement requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the 2017 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.

As of December 31, 2018 and 2017, the Company had a total of $560 million and $700 million of outstanding senior unsecured notes, respectively. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for Series H and J senior unsecured notes. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company had the following outstanding debt at December 31, 2018 and 2017 (in thousands):


	December 31,
	2018			2017
Foreign subsidiary lines of credit	$	178		$	273
Senior unsecured notes - Series D - 3.22%, due March 2018		—			100,000

Total notes payable and debt, current		178			100,273

Senior unsecured notes - Series B - 5.00%, due February 2020		100,000			100,000
Senior unsecured notes - Series E - 3.97%, due March 2021		50,000			50,000
Senior unsecured notes - Series F - 3.40%, due June 2021		100,000			100,000
Senior unsecured notes - Series G - 3.92%, due June 2024		50,000			50,000
Senior unsecured notes - Series H - floating rate*, due June 2024		50,000			50,000
Senior unsecured notes - Series I - 3.13%, due May 2023		50,000			50,000
Senior unsecured notes - Series J - floating rate**, due May 2024		—			40,000
Senior unsecured notes - Series K - 3.44%, due May 2026		160,000			160,000
Credit agreement		590,000			1,300,000
Unamortized debt issuance costs		(1,828	)		(2,499	)

Total long-term debt		1,148,172			1,897,501

Total debt	$	1,148,350		$	1,997,774

* Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.25%.
** Series J senior unsecured notes bore interest at a 3-month LIBOR for that floating rate interest period plus 1.45%.

As of December 31, 2018 and 2017, the Company had a total amount available to borrow under existing credit agreements of $1,208 million and $498 million, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 3.83% and 2.98% at December 31, 2018 and 2017, respectively. As of December 31, 2018, the Company was in compliance with all debt covenants.

The Company and its foreign subsidiaries also had available short-term lines of credit totaling $90 million and $91 million at December 31, 2018 and 2017, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. The weighted-average interest rates applicable to these short-term borrowings were 1.88% and 1.48% for December 31, 2018 and 2017, respectively.

Annual maturities of debt outstanding at December 31, 2018 are as follows (in thousands):


	Total
2019	$	178
2020		100,000
2021		150,000
2022		590,000
2023		50,000
Thereafter		260,000

Total	$	1,150,178

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10 Income Taxes

Income tax data for the years ended December 31, 2018, 2017 and 2016 is as follows (in thousands):


	Year Ended December 31,
	2018		2017		2016
The components of income from operations before income taxes are as follows:
Domestic	$	57,822	$	55,751	$	35,154
Foreign		624,324		585,346		564,960

Total	$	682,146	$	641,097	$	600,114


	Year Ended December 31,
	2018			2017		2016
The current and deferred components of the provision for income taxes on operations are as follows:
Current	$	85,947		$	575,276	$	77,407
Deferred		2,405			45,510		1,204

Total	$	88,352		$	620,786	$	78,611

The jurisdictional components of the provision for income taxes on operations are as follows:
Federal	$	24,021		$	535,777	$	19,693
State		(9,717	)		26,561		3,090
Foreign		74,048			58,448		55,828

Total	$	88,352		$	620,786	$	78,611

The differences between income taxes computed at the United States statutory rate and the provision for income taxes are summarized as follows for the years ended December 31, 2018, 2017 and 2016 (in thousands):


	Year Ended December 31,
	2018			2017			2016
Federal tax computed at U.S. statutory income tax rate	$	143,251		$	224,384		$	210,040
Enactment of the 2017 Tax Act		(6,059	)		550,000			—
Foreign currency exchange impact on distributed earnings		7,495			—			—
GILTI, net of foreign tax credits		13,727			—			—
Settlement of tax audits		—			706			345
State income tax, net of federal income tax benefit		2,910			1,289			2,008
Net effect of foreign operations		(66,092	)		(134,117	)		(133,518	)
Effect of stock-based compensation		(9,089	)		(19,566	)		—
Other, net		2,209			(1,910	)		(264	)

Provision for income taxes	$	88,352		$	620,786		$	78,611

The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of December 31, 2018. The Company has a contractual tax rate in Singapore of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones, which the Company expects to continue to meet. The effect of applying the contractual tax rate rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income during the years ended December 31, 2018, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and 2016 by $28 million, $25 million and $23 million, respectively, and increased the Company’s net income per diluted share by $0.36, $0.31 and $0.29, respectively.

The Company’s effective tax rates were 13.0%, 96.8% and 13.1% for the years ended December 31, 2018, 2017 and 2016, respectively, and were impacted by the following:

	•		In December 2017, the U.S. enacted legislation informally referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”). For the year ended December 31, 2017 the Company accrued a $550 million tax provision related to the 2017 Tax Act. The $550 million expense consisted of $490 million related to the federal transition tax, $40 million for state income taxes and foreign withholding taxes and $20 million for the revaluation of the Company’s deferred tax assets and liabilities at the new federal tax rate of 21%. This provision reduced net income per diluted share by $6.82 in 2017, and the Company’s effective tax rate was 11.0% excluding this $550 million provision.

	•		During 2018, the Internal Revenue Service issued proposed regulations on the federal transition tax and various other aspects of the Tax Reform law. The Company finalized its analysis of the transition tax and related liabilities, including uncertain tax positions, in the fourth quarter of 2018 pursuant to U.S. Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 118. As a result of the new guidance issued and additional work to complete the calculation of its federal transition tax, the Company reduced its provisional accrual for federal, state and foreign taxes by net $24 million during 2018. In addition, the Company also assessed its uncertain tax positions related to these taxes and accrued income tax reserves of $18 million during 2018. The net favorable impact to the 2018 provision for income taxes is $6 million.

	•		The provision for income taxes for 2018 includes a $7 million expense related to the 2017 Tax Act. This additional tax results from the change in foreign currency exchange rates on the earnings taxed on December 31, 2017 under 2017 Tax Act as compared with the foreign currency exchange rates on the date of distribution of assets into the U.S. We do not expect this expense to recur in future periods.

	•		The 2018 effective income tax rate of 13.0% was impacted by the reduction in the U.S. federal income tax rate from 35% to 21% as a result of the 2017 Tax Act, which decreased the Company’s effective tax rate by 2.0 percentage points as compared to 2017. The 2017 Tax act also added a new Global Intangible Low-Taxed Income (GILTI) tax, which increased the Company’s 2018 effective tax rate by approximately 2.0 percentage points.

	•		After the completion of the Company’s review of its capital allocation strategy in the fourth quarter of 2018, the Company determined that it will provide income taxes on all future foreign earnings from 2018 forward. As a result, this change added 0.6 percentage points to the 2018 effective tax rate as compared to 2017.

	•		In addition, the reduction in the U.S. federal income tax rate from 35% to 21% as a result of the 2017 Tax Act also reduced the 2018 tax benefit on stock compensation. The Company recorded a tax benefit on stock-based compensation in 2018 and 2017 that decreased income tax expense by $9 million and $20 million, respectively, and added $0.11 and $0.24 to net income per diluted share, respectively.

	•		The difference between the 2017 and 2016 effective tax rates can be attributed primarily to the 2016 provision for income taxes including a $3 million tax benefit (0.7 percentage points) related to the release of a valuation allowance on certain net operating loss carryforwards.

The remaining differences between effective tax rates can primarily be attributed to differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The tax effects of temporary differences and carryforwards which give rise to deferred tax assets and deferred tax liabilities are summarized as follows (in thousands):


	December 31,
	2018			2017
Deferred tax assets:
Net operating losses and credits	$	63,052		$	75,630
Depreciation		7,495			5,952
Amortization		3,633			—
Stock-based compensation		9,984			9,815
Deferred compensation		27,939			21,434
Revaluation of equity investments and licenses		3,148			3,465
Inventory		4,588			4,864
Accrued liabilities and reserves		7,213			8,230
Other		8,727			11,873

Total deferred tax assets		135,779			141,263
Valuation allowance		(53,893	)		(62,098	)

Deferred tax assets, net of valuation allowance		81,886			79,165
Deferred tax liabilities:
Capitalized software		(19,491	)		(19,630	)
Amortization		—			(3,394	)
Indefinite-lived intangibles		(13,753	)		(13,254	)
Deferred tax liability on foreign earnings		(20,443	)		(21,000	)

Total deferred tax liabilities		(53,687	)		(57,278	)

Net deferred tax assets	$	28,199		$	21,887

The Company has gross foreign net operating losses of $240 million that do not expire under current laws. As of December 31, 2018, the Company has provided a deferred tax valuation allowance of $54 million, of which $51 million relates to certain foreign net operating losses. The Company’s net deferred tax assets associated with net operating losses and tax credit carryforwards are approximately $12 million as of December 31, 2018, which represent the future tax benefit of foreign net operating loss carryforwards that do not expire under current law.

As a result of the adoption of new accounting guidance related to stock-based compensation in 2017, the Company no longer records excess tax benefits related to stock-based compensation in equity. The income tax benefits associated with equity compensation expense recognized for tax purposes and credited to income tax expense were $9 million and $20 million for the years ended December 31, 2018 and 2017, respectively. For the year ended December 31, 2016, the income tax benefit recognized for tax purposes and credited to additional paid-in capital was $14 million.

The Company accounts for its uncertain tax positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax positions on the presumption that all concerned tax authorities possess full knowledge of those tax positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a summary of the activity of the Company’s uncertain tax positions for the years ended December 31, 2018, 2017 and 2016 (in thousands):


	2018			2017			2016
Balance at the beginning of the period	$	5,843		$	9,964		$	14,450
Net reductions for settlement of tax audits		—			(22	)		(828	)
Net reductions for lapse of statutes taken during the period		(436	)		(5,178	)		(4,998	)
Net additions for tax positions taken during the prior period		17,651			—			—
Net additions for tax positions taken during the current period		3,050			1,079			1,340

Balance at the end of the period	$	26,108		$	5,843		$	9,964

With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2013. However, carryforward tax attributes that were generated in years beginning on or before January 1, 2014 may still be adjusted upon examination by tax authorities if the attributes are utilized. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities.

As of December 31, 2018, the Company expects to record additional reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of approximately $1 million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.

In addition, upon completion of the Company’s review of its capital allocation strategy in the fourth quarter of 2018, the Company has determined that it will provide income taxes on all future foreign earnings. However, the Company will continue to be permanently reinvested in relation to the cumulative historical outside basis difference that is not related to earnings. The determination of the unrecognized deferred tax liability on cumulative historical outside basis differences that are not related to earnings is not practicable.

The Company adopted new accounting guidance which eliminates the deferral of tax effects on intra-entity transfers other than inventory and requires an entity to recognize the income tax consequences when the transfer occurs. The Company adopted this standard as of January 1, 2018 with a $4 million charge to beginning retained earnings in the consolidated balance sheet.

11 Litigation

From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. The Company believes it has meritorious arguments in its current litigation matters and believes any outcome, either individually or in the aggregate, will not be material to the Company’s financial position, results of operations or cash flows. During the year ended December 31, 2017, the Company incurred $11 million of litigation provisions and related costs, primarily related to the issuance of a verdict in a patent litigation case. In the first quarter of 2018, the Company resolved the case with a final settlement that resulted in a gain of $2 million. During the year ended December 31, 2016, the Company recorded $4 million of litigation provisions and related costs. The accrued patent litigation expense is in other current liabilities in the consolidated balance sheets at December 31, 2018 and 2017.

12 Other Commitments and Contingencies

Lease agreements, expiring at various dates through 2031, cover buildings, office equipment and automobiles. Rental expense was $28 million, $27 million and $28 million for the years ended December 31, 2018, 2017 and

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2016, respectively. Future minimum rents payable as of December 31, 2018 under non-cancelable leases with initial terms exceeding one year are as follows (in thousands):


2019	$	28,417
2020		23,424
2021		16,032
2022		11,816
2023 and thereafter		23,269

Total	$	102,958

The Company licenses certain technology and software from third parties. Future minimum license fees payable under existing license agreements as of December 31, 2018 are immaterial for the years ended December 31, 2019 and thereafter. The Company enters into licensing arrangements with third parties that require future milestone or royalty payments contingent upon future events. Upon the achievement of certain milestones in existing agreements, the Company could make additional future payments of up to $7 million, as well as royalties on future net sales.

The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company’s costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.

13 Stock-Based Compensation

In May 2012, the Company’s shareholders approved the Company’s 2012 Equity Incentive Plan (“2012 Plan”). As of December 31, 2018, the 2012 Plan has 2.4 million shares available for grant in the form of incentive or non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, performance stock units or other types of awards. The Company issues new shares of common stock upon exercise of stock options, restricted stock unit conversion or performance stock unit conversion. Under the 2012 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 2012 Plan is scheduled to terminate on May 9, 2022. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock, and restricted stock units and performance stock units may be issued under the 2012 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of December 31, 2018, the Company had stock options, restricted stock and restricted and performance stock unit awards outstanding.

In May 2009, the Company’s shareholders approved the 2009 Employee Stock Purchase Plan, under which eligible employees may contribute up to 15% of their earnings toward the quarterly purchase of the Company’s common stock. The plan makes available 0.9 million shares of the Company’s common stock, which includes the remaining shares available under the 1996 Employee Stock Purchase Plan. As of December 31, 2018, 1.4 million shares have been issued under both the 2009 and 1996 Employee Stock Purchase Plans. Each plan period lasts

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

three months beginning on January 1, April 1, July 1 and October 1 of each year. The purchase price for each share of stock is the lesser of 90% of the market price on the first day of the plan period or 100% of the market price on the last day of the plan period. Stock-based compensation expense related to this plan was $1 million for each of the years ended December 31, 2018, 2017 and 2016, respectively.

The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations, based on their grant date fair values. The Company recognizes the expense using the straight-line attribution method. The stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest; therefore, the amount of expense has been reduced for estimated forfeitures. Forfeitures are estimated based on historical experience. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.

The consolidated statements of operations for the years ended December 31, 2018, 2017 and 2016 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock purchase plan (in thousands):


	2018		2017		2016
Cost of sales	$	2,212	$	3,032	$	2,738
Selling and administrative expenses		30,443		33,335		34,451
Research and development expenses		4,886		3,069		3,809

Total stock-based compensation	$	37,541	$	39,436	$	40,998

During the years ended December 31, 2018, 2017 and 2016, the Company recognized $1 million, $4 million and $7 million, respectively, of stock compensation expense related to the modification of certain stock awards upon the retirement of senior executives.

Stock Options

In determining the fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of non-qualified stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the year ended December 31, 2018, 2017 and 2016 are as follows:


Options Issued and Significant Assumptions Used to Estimate Option Fair Values	2018			2017			2016
Options issued in thousands		321			389			324
Risk-free interest rate		2.7	%		2.2	%		1.9	%
Expected life in years		6			6			6
Expected volatility		25.3	%		22.7	%		24.7	%
Expected dividends		—			—			—

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	2018		2017		2016
Exercise price	$	196.78	$	170.24	$	135.02
Fair value	$	59.89	$	45.73	$	37.44

The following table summarizes stock option activity for the plans for the year ended December 31, 2018 (in thousands, except per share data):


	Number of Shares			Exercise Price per Share					Weighted- Average Exercise Price per Share
Outstanding at December 31, 2017		2,039		$	38.09	to	$	194.26	$	124.41
Granted		321		$	188.26	to	$	208.47	$	196.78
Exercised		(433	)	$	38.09	to	$	154.33	$	102.92
Canceled		(137	)	$	98.21	to	$	154.33	$	125.93

Outstanding at December 31, 2018		1,790		$	38.09	to	$	208.47	$	142.47

The following table details the options outstanding at December 31, 2018 by range of exercise prices (in thousands, except per share data):


Exercise Price Range	Number of Shares Outstanding		Weighted- Average Exercise Price		Remaining Contractual Life of Options Outstanding		Number of Shares Exercisable		Weighted- Average Exercise Price
$38.09 to $123.55		575	$	103.24		5.1		450	$	99.53
$123.56 to $141.74		597	$	133.21		7.4		290	$	132.29
$141.75 to $208.47		618	$	187.92		9.0		54	$	182.46

Total		1,790	$	142.47		7.2		794	$	117.08

During 2018, 2017 and 2016, the total intrinsic value of the stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $44 million, $76 million and $53 million, respectively. The total cash received from the exercise of these stock options was $45 million, $91 million and $56 million for the years ended December 31, 2018, 2017 and 2016, respectively.

The aggregate intrinsic value of the outstanding stock options at December 31, 2018 was $86 million. Options exercisable at December 31, 2018, 2017 and 2016 were 0.8 million, 0.9 million and 1.3 million, respectively. The weighted-average exercise prices of options exercisable at December 31, 2018, 2017 and 2016 were $117.08, $103.63 and $92.26, respectively. The weighted-average remaining contractual life of the exercisable outstanding stock options at December 31, 2018 was 5.8 years.

At December 31, 2018, the Company had 1.8 million stock options that are vested and expected to vest. The intrinsic value, weighted-average exercise price and remaining contractual life of the vested and expected to vest stock options were $86 million, $142.18 and 7.1 years, respectively, at December 31, 2018.

As of December 31, 2018, there were $41 million of total unrecognized compensation costs related to unvested stock option awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.5 years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted Stock

During the years ended December 31, 2018, 2017 and 2016, the Company granted five thousand, eight thousand and ten thousand shares of restricted stock, respectively. The weighted-average fair value per share on the grant date of the restricted stock granted in 2018, 2017 and 2016 was $194.73, $130.35 and $113.88, respectively. The Company has recorded $1 million of compensation expense in each of the years ended December 31, 2018, 2017 and 2016 related to the restricted stock grants. As of December 31, 2018, the Company had five thousand unvested shares of restricted stock outstanding, which have been fully expensed.

Restricted Stock Units

The following table summarizes the unvested restricted stock unit award activity for the year ended December 31, 2018 (in thousands, except per share data):


	Shares			Weighted-Average Fair Value per Share
Unvested at December 31, 2017		374		$	124.81
Granted		91		$	207.85
Vested		(139	)	$	115.75
Forfeited		(22	)	$	131.72

Unvested at December 31, 2018		304		$	153.31

Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period. The amount of compensation costs recognized for the years ended December 31, 2018, 2017 and 2016 on the restricted stock units expected to vest were $16 million, $17 million and $17 million, respectively. As of December 31, 2018, there were $32 million of total unrecognized compensation costs related to the restricted stock unit awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.2 years.

Performance Stock Units

The Company’s performance stock units are equity compensation awards with a market vesting condition based on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded.

In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on the performance period of the underlying performance stock units. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the input to the Monte Carlo simulation model. The correlation coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

other during the performance period. The relevant data used to determine the value of the performance stock units granted during the year ended December 31, 2018, 2017 and 2016 are as follows:


Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values	2018			2017			2016
Performance stock units issued in thousands		40			40			27
Risk-free interest rate		2.4	%		1.6	%		1.4	%
Expected life in years		3.0			3.0			3.0
Expected volatility		22.0	%		20.9	%		23.3	%
Average volatility of peer companies		25.9	%		25.6	%		26.1	%
Correlation Coefficient		35.9	%		37.8	%		38.6	%
Expected dividends		—			—			—

The following table summarizes the unvested performance stock unit award activity for the year ended December 31, 2018 (in thousands, except per share data):


	Shares			Weighted-Average Fair Value per Share
Unvested at December 31, 2017		64		$	196.29
Granted		40		$	235.63
Forfeited		(4	)	$	188.45

Unvested at December 31, 2018		100		$	212.34

The amount of compensation costs recognized for the years ended December 31, 2018 and 2017 on the performance stock units expected to vest were $5 million and less than $1 million, respectively. As of December 31, 2018, there were $14 million of total unrecognized compensation costs related to the restricted stock unit awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 2.3 years.

14 Earnings Per Share

Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):


	Year Ended December 31, 2018
	Net Income		Weighted-Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	593,794		76,992	$	7.71
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		626		(0.06	)

Net income per diluted common share	$	593,794		77,618	$	7.65


	Year Ended December 31, 2017
	Net Income		Weighted-Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	20,311		79,793	$	0.25
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		811		—

Net income per diluted common share	$	20,311		80,604	$	0.25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Year Ended December 31, 2016
	Net Income		Weighted-Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	521,503		80,786	$	6.46
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		631		(0.05	)

Net income per diluted common share	$	521,503		81,417	$	6.41

For the years ended December 31, 2018, 2017 and 2016, the Company had 0.1 million, 0.4 million and 0.9 million stock options that were antidilutive, respectively, due to having higher exercise prices than the Company’s average stock price during the period. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.

15 Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income (loss) are detailed as follows (in thousands):


	Currency Translation			Unrealized Gain (Loss) on Retirement Plans			Unrealized Gain (Loss) on Investments			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2017	$	(69,418	)	$	(37,103	)	$	(3,546	)	$	(110,067	)
Other comprehensive (loss) income, net of tax		(36,279	)		27,234			1,141			(7,904	)

Balance at December 31, 2018	$	(105,697	)	$	(9,869	)	$	(2,405	)	$	(117,971	)

16 Retirement Plans

U.S. employees are eligible to participate in the Waters Employee Investment Plan, a 401(k) defined contribution plan, immediately upon hire. Employees may contribute up to 60% of eligible pay on a pre-tax or post-tax basis and the Company makes matching contributions of 100% for contributions up to 6% of eligible pay. The Company also sponsors a 401(k) Restoration Plan, which is a nonqualified defined contribution plan. Employees are 100% vested in employee and Company matching contributions for both plans. For the years ended December 31, 2018, 2017 and 2016, the Company’s matching contributions amounted to $17 million, $16 million and $15 million, respectively.

The Company adopted new accounting guidance which requires that an employer disaggregate the service cost component from other components of net benefit cost. As a result of the adoption of this standard, the components of net periodic benefit cost other than the service cost component are included in other income in the consolidated statements of operations and all previous periods have been adjusted accordingly.

In May 2018, the Company’s board of directors approved the termination of two defined benefit pension plans in the U.S. for which the pay credit accruals have been frozen, the Waters Retirement Plan and the Waters Retirement Restoration Plan (collectively, the “U.S. Pension Plans”). In December 2018, the Company settled the Waters Retirement Plan obligation by making lump-sum cash payments and purchasing annuity contracts for participants to permanently extinguish the pension plan’s obligations. As a result, the Company recorded a $46 million charge to other expense, which consisted of a $6 million cash contribution to the plan and a $40 million non-cash charge related to the reversal of unrecognized actuarial losses recorded in accumulated other comprehensive income in the stockholders’ equity. The $46 million pre-tax charge reduced net income per diluted share by $0.39. The termination of the Waters Retirement Restoration Plan is expected to be completed in 2019.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company also sponsors other employee benefit plans in the U.S., including a retiree healthcare plan, which provides reimbursement for medical expenses and is contributory. There are various employee benefit plans outside the United States (both defined benefit and defined contribution plans). Certain non-U.S. defined benefit plans (“Non-U.S. Pension Plans”) are included in the disclosures below, which are required under the accounting standards for retirement benefits.

The Company contributed $13 million, $12 million and $12 million in the years ended December 31, 2018, 2017 and 2016, respectively, to the non-U.S. plans (primarily defined contribution plans) which are currently outside of the scope of the required disclosures. The eligibility and vesting of non-U.S. plans are consistent with local laws and regulations.

The net periodic pension cost is made up of several components that reflect different aspects of the Company’s financial arrangements as well as the cost of benefits earned by employees. These components are determined using the projected unit credit actuarial cost method and are based on certain actuarial assumptions. The Company’s accounting policy is to reflect in the projected benefit obligation all benefit changes to which the Company is committed as of the current valuation date; use a market-related value of assets to determine pension expense; amortize increases in prior service costs on a straight-line basis over the expected future service of active participants as of the date such costs are first recognized; and amortize cumulative actuarial gains and losses in excess of 10% of the larger of the market-related value of plan assets and the projected benefit obligation over the expected future service of active participants.

Summary data for the U.S. Pension Plans, U.S. Retiree Healthcare Plan and Non-U.S. Pension Plans are presented in the following tables, using the measurement dates of December 31, 2018 and 2017, respectively.

The reconciliation of the projected benefit obligations for the plans at December 31, 2018 and 2017 is as follows (in thousands):


	2018									2017
	U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Projected benefit obligation, January 1	$	168,064		$	17,121		$	96,378		$	159,416		$	14,921		$	85,311
Service cost		568			566			5,368			450			546			5,082
Employee contributions		—			1,159			622			—			1,041			605
Interest cost		6,491			636			1,707			6,829			618			1,518
Actuarial losses (gains)		6,415			(621	)		(2,274	)		8,658			942			(2,590	)
Benefits paid		(3,416	)		(1,007	)		(3,277	)		(5,058	)		(947	)		(2,078	)
Plan amendments		—			(130	)		(44	)		—			—			636
Plan settlements		(177,150	)		—			(2,791	)		(2,231	)		—			(1,229	)
Other plans		—			—			1,063			—			—			196
Currency impact		—			—			(3,030	)		—			—			8,927

Projected benefit obligation, December 31	$	972		$	17,724		$	93,722		$	168,064		$	17,121		$	96,378

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The accumulated benefit obligations for the plans at December 31, 2018 and 2017 are as follows (in thousands):


	2018							2017
	U.S. Pension Plans		U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans		U.S. Pension Plans		U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Accumulated benefit obligation	$	972		*	*	$	82,026	$	168,064		*	*	$	82,615

** Not applicable.

The reconciliation of the fair value of the plan assets at December 31, 2018 and 2017 is as follows (in thousands):


	2018									2017
	U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Fair value of plan assets, January 1	$	171,373		$	11,125		$	74,990		$	144,665		$	9,142		$	65,548
Actual return on plan assets		2,555			(584	)		1,070			27,729			1,542			390
Company contributions		6,625			387			10,778			6,162			347			4,733
Employee contributions		—			1,159			622			—			1,041			605
Plan settlements		(177,137	)		—			—			(2,125	)		—			(915	)
Benefits paid		(3,416	)		(1,007	)		(3,277	)		(5,058	)		(947	)		(2,078	)
Other plans		—			—			—			—			—			(213	)
Currency impact		—			—			(2,596	)		—			—			6,920

Fair value of plan assets, December 31	$	—		$	11,080		$	81,587		$	171,373		$	11,125		$	74,990

The summary of the funded status for the plans at December 31, 2018 and 2017 is as follows (in thousands):


	2018									2017
	U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Projected benefit obligation	$	(972	)	$	(17,724	)	$	(93,722	)	$	(168,064	)	$	(17,121	)	$	(96,378	)
Fair value of plan assets		—			11,080			81,587			171,373			11,125			74,990

Funded status	$	(972	)	$	(6,644	)	$	(12,135	)	$	3,309		$	(5,996	)	$	(21,388	)

The summary of the amounts recognized in the consolidated balance sheets for the plans at December 31, 2018 and 2017 is as follows (in thousands):


	2018									2017
	U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Long-term assets	$	—		$	—		$	3,284		$	4,562		$	—		$	1,245
Current liabilities		(972	)		(387	)		(1	)		(76	)		(347	)		—
Long-term liabilities		—			(6,257	)		(15,418	)		(1,177	)		(5,649	)		(22,633	)

Net amount recognized at December 31	$	(972	)	$	(6,644	)	$	(12,135	)	$	3,309		$	(5,996	)	$	(21,388	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Non-U.S. Pension Plans, all of the plans where the projected benefit obligation is in excess of plan assets also have an accumulated benefit obligation that is in excess of plan assets. The summary of the Non-U.S. Pension Plans that have projected benefit obligations and accumulated benefit obligations in excess of plan assets at December 31, 2018 and 2017 is as follows (in thousands):


	2018		2017
Projected benefit obligation	$	60,359	$	81,498
Accumulated benefit obligations	$	56,029	$	71,967
Fair value of plan assets	$	44,940	$	58,865

The summary of the components of net periodic pension costs for the plans for the years ended December 31, 2018, 2017 and 2016 is as follows (in thousands):


	2018									2017									2016
	U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Service cost	$	568		$	566		$	5,368		$	450		$	546		$	5,082		$	377		$	473		$	4,954
Interest cost		6,491			636			1,707			6,829			618			1,518			6,931			557			1,699
Expected return on plan assets		(6,833	)		(706	)		(1,974	)		(10,298	)		(587	)		(1,688	)		(9,635	)		(519	)		(1,596	)
Settlement loss		45,157			—			—			155			—			232			—			—			—
Net amortization:
Prior service credit		—			(19	)		(108	)		—			—			(168	)		—			—			(192	)
Net actuarial loss		3,082			—			680			2,770			—			959			2,702			—			753

Net periodic pension cost (benefit)	$	48,465		$	477		$	5,673		$	(94	)	$	577		$	5,935		$	375		$	511		$	5,618

The summary of the changes in amounts recognized in other comprehensive income (loss) for the plans for the years ended December 31, 2018, 2017 and 2016 is as follows (in thousands):


	2018									2017							2016
	U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans		U.S. Retiree Healthcare Plan		Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Prior service credit (cost)	$	—		$	130		$	44		$	—	$	—	$	(636	)	$	—		$	—		$	—
Net (loss) gain arising during the year		(10,616	)		(670	)		4,088			8,879		13		1,609			(3,352	)		(594	)		(3,361	)
Amortization:
Prior service credit		—			(19	)		(35	)		—		—		(168	)		—			—			(192	)
Net loss		48,239			—			680			2,925		—		1,191			2,702			—			753
Other Plans		—			—			(354	)		—		—		—			—			—			(360	)
Currency impact		—			—			583			—		—		(2,033	)		—			—			884

Total recognized in other comprehensive (loss) income	$	37,623		$	(559	)	$	5,006		$	11,804	$	13	$	(37	)	$	(650	)	$	(594	)	$	(2,276	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The summary of the amounts included in accumulated other comprehensive loss in stockholders’ equity for the plans at December 31, 2018 and 2017 is as follows (in thousands):


	2018									2017
	U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans			U.S. Retiree Healthcare Plan		Non-U.S. Pension Plans
Net actuarial (loss) gain	$	(59	)	$	(83	)	$	(13,987	)	$	(37,682	)	$	588	$	(18,857	)
Prior service credit		—			112			666			—			—		530

Total	$	(59	)	$	29		$	(13,321	)	$	(37,682	)	$	588	$	(18,327	)

The summary of the amounts included in accumulated other comprehensive loss expected to be included in next year’s net periodic benefit cost for the plans at December 31, 2018 is as follows (in thousands):


	2018
	U.S. Pension Plans		U.S. Retiree Healthcare Plan		Non-U.S. Pension Plans
Net actuarial loss	$	—	$	—	$	(537	)
Prior service credit		—		19		147

Total	$	—	$	19	$	(390	)

The plans’ investment asset mix is as follows at December 31, 2018 and 2017:


	2018						2017
	U.S. Retiree			Non-U.S.			U.S.			U.S. Retiree			Non-U.S.
	Healthcare			Pension			Pension			Healthcare			Pension
	Plan			Plans			Plans			Plan			Plans
Equity securities		61	%		7	%		77	%		65	%		7	%
Debt securities		39	%		18	%		23	%		35	%		16	%
Cash and cash equivalents		0	%		5	%		0	%		0	%		8	%
Insurance contracts and other		0	%		70	%		0	%		0	%		69	%

Total		100	%		100	%		100	%		100	%		100	%

The plans’ investment policies include the following asset allocation guidelines:


	U.S. Retiree Healthcare Plan					Non-U.S. Pension Plans Policy Target
	Policy Target			Range
Equity securities		65	%		40% - 90%		5	%
Debt securities		35	%		10% - 60%		20	%
Cash and cash equivalents		0	%		0% - 20%		10	%
Insurance contracts and other		0	%		0% - 20%		65	%

The asset allocation policy for the U.S. Retiree Healthcare Plan was developed in consideration of the following long-term investment objectives: achieving a return on assets consistent with the investment policy, achieving portfolio returns which compare favorably with those of other similar plans, professionally managed

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

portfolios and of appropriate market indexes and maintaining sufficient liquidity to meet the obligations of the plan. Within the equity portfolio of the U.S. Retiree Healthcare Plan, investments are diversified among market capitalization and investment strategy, and targets a 20% allocation of the equity portfolio to be invested in financial markets outside of the United States. The Company does not invest in its own stock within the U.S. Retiree Healthcare Plan’s assets.

Plan assets are measured at fair value using the following valuation techniques and inputs:


Level 1:		The fair value of these types of investments is based on market and observable sources from daily quoted prices on nationally recognized securities exchanges.

Level 2:		The fair value of these types of investments utilizes data points other than quoted prices in active markets that are observable either directly or indirectly.

Level 3:		These bank and insurance investment contracts are issued by well-known, highly-rated companies. The fair value disclosed represents the present value of future cash flows under the terms of the respective contracts. Significant assumptions used to determine the fair value of these contracts include the amount and timing of future cash flows and counterparty credit risk.

There have been no changes in the above valuation techniques associated with determining the value of the plans’ assets during the years ended December 31, 2018 and 2017.

The fair value of the Company’s retirement plan assets are as follows at December 31, 2018 (in thousands):


	Total at December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Retiree Healthcare Plan: Mutual funds(a)		11,080		11,080		—		—

Total U.S. Retiree Healthcare Plan		11,080		11,080		—		—
Non-U.S. Pension Plans:
Cash equivalents(b)		4,439		4,439		—		—
Mutual funds(c)		20,430		20,430		—		—
Bank and insurance investment contracts(d)		56,718		—		—		56,718

Total Non-U.S. Pension Plans		81,587		24,869		—		56,718

Total fair value of retirement plan assets	$	92,667	$	35,949	$	—	$	56,718

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of the Company’s retirement plan assets are as follows at December 31, 2017 (in thousands):


	Total at December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Pension Plans:
Mutual funds(e)	$	163,438	$	163,438	$	—	$	—

Total U.S. Pension Plans		163,438		163,438		—		—
U.S. Retiree Healthcare Plan:
Mutual funds(f)		11,125		11,125		—		—

Total U.S. Retiree Healthcare Plan		11,125		11,125		—		—
Non-U.S. Pension Plans:
Cash equivalents(b)		5,783		5,783		—		—
Mutual funds(g)		17,244		17,244		—		—
Bank and insurance investment contracts(d)		51,963		—		—		51,963

Total Non-U.S. Pension Plans		74,990		23,027		—		51,963

Total fair value of retirement plan assets		249,553	$	197,590	$	—	$	51,963

Investments valued at NAV		7,935

Total retirement plan assets	$	257,488

(a)	The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: 40% in the common stock of large-cap U.S. companies, 21% in the common stock of international growth companies and 39% in fixed income bonds of U.S. companies and U.S. government.

(b)	Primarily represents deposit account funds held with various financial institutions.

(c)	The mutual fund balance in the Non-U.S. Pension Plans is primarily invested in the following categories: 56% in international bonds, 24% in the common stock of international companies and 20% in various other global investments.

(d)	Amount represents bank and insurance guaranteed investment contracts.

(e)	The mutual fund balance in the U.S. Pension Plans are invested in the following categories: 45% in the common stock of large-cap U.S. companies, 30% in the common stock of international growth companies and 25% in fixed income bonds issued by U.S. companies and by the U.S. government and its agencies.

(f)	The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: 41% in the common stock of large-cap U.S. companies, 24% in the common stock of international growth companies and 35% in fixed income bonds of U.S. companies and U.S. government.

(g)	The mutual fund balance in the Non-U.S. Pension Plans is invested in the following categories: 58% in international bonds and 32% in the common stock of international companies, 1% in mortgages and real estate and 9% in various other global investments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the changes in fair value of the Level 3 retirement plan assets for the years ended December 31, 2018 and 2017 (in thousands):


	Insurance Guaranteed Investment Contracts
Fair value of assets, December 31, 2016	$	45,093
Net purchases (sales) and appreciation (depreciation)		6,870

Fair value of assets, December 31, 2017		51,963
Net purchases (sales) and appreciation (depreciation)		4,755

Fair value of assets, December 31, 2018	$	56,718

The weighted-average assumptions used to determine the benefit obligation in the consolidated balance sheets at December 31, 2018, 2017 and 2016 are as follows:


	2018						2017						2016
	U.S.			Non-U.S.			U.S.			Non-U.S.			U.S.			Non-U.S.
Discount rate		4.40	%		1.95	%		3.94	%		1.79	%		4.41	%		1.71	%
Increases in compensation levels		**			2.66	%		**			2.43	%		**			2.47	%

**	Not applicable

The weighted-average assumptions used to determine the net periodic pension cost for the years ended December 31, 2018, 2017 and 2016 are as follows:


	2018						2017						2016
	U.S.			Non-U.S.			U.S.			Non-U.S.			U.S.			Non-U.S.
Discount rate		3.96	%		1.93	%		4.28	%		1.80	%		4.42	%		2.20	%
Return on plan assets		4.35	%		2.75	%		6.53	%		2.64	%		6.47	%		2.74	%
Increases in compensation levels		**			2.70	%		**			2.63	%		**			2.50	%

**	Not applicable

To develop the expected long-term rate of return on assets assumption, the Company considered historical returns and future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio and historical expenses paid by the plan. A one-quarter percentage point increase in the assumed long-term rate of return on assets would decrease the Company’s net periodic benefit cost by less than $1 million. A one-quarter percentage point increase in the discount rate would decrease the Company’s net periodic benefit cost by less than $1 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During fiscal year 2019, the Company expects to contribute a total of approximately $3 million to $6 million to the Company’s defined benefit plans. Estimated future benefit payments from the plans as of December 31, 2018 are as follows (in thousands):


	U.S. Pension and Retiree Healthcare Plans		Non-U.S. Pension Plans		Total
2019	$	1,084	$	1,551	$	2,635
2020		1,160		2,552		3,712
2021		1,243		2,782		4,025
2022		1,307		2,821		4,128
2023		1,366		3,038		4,404
2024 - 2028		7,146		19,277		26,423

17 Business Segment Information

The accounting standards for segment reporting establish standards for reporting information about operating segments in annual financial statements and require selected information for those segments to be presented in interim financial reports of public business enterprises. They also establish standards for related disclosures about products and services, geographic areas and major customers. The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: WatersTM and TATM.

The Waters operating segment is primarily in the business of designing, manufacturing, selling and servicing LC and MS instruments, columns and other precision chemistry consumables that can be integrated and used along with other analytical instruments. The TA operating segment is primarily in the business of designing, manufacturing, selling and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s two operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution; and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the one reportable segment of the Company.

Net sales for the Company’s products and services are as follows for the years ended December 31, 2018, 2017 and 2016 (in thousands):


	2018		2017		2016
Product net sales:
Waters instrument systems	$	1,000,625	$	988,750	$	943,218
Chemistry consumables		400,287		372,157		345,413
TA instrument systems		204,081		191,442		171,665

Total product sales		1,604,993		1,552,349		1,460,296
Service net sales:
Waters service		738,433		686,656		639,432
TA service		76,503		70,073		67,695

Total service sales		814,936		756,729		707,127

Total net sales	$	2,419,929	$	2,309,078	$	2,167,423

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net sales are attributable to geographic areas based on the region of destination. Geographic sales information is presented below for the years ended December 31, 2018, 2017 and 2016 (in thousands):


	2018		2017		2016
Net Sales:
Asia:
China	$	443,321	$	387,059	$	331,354
Japan		173,357		167,258		167,977
Asia Other		305,613		308,300		283,653

Total Asia		922,291		862,617		782,984
Americas:
United States		683,596		669,274		665,280
Americas Other		151,581		140,715		141,902

Total Americas		835,177		809,989		807,182
Europe		662,461		636,472		577,257

Total net sales	$	2,419,929	$	2,309,078	$	2,167,423

None of the Company’s individual customers accounts for more than 2% of annual Company sales. Net sales by customer class are as follows for the years ended December 31, 2018, 2017 and 2016 (in thousands):


	2018		2017		2016
Pharmaceutical	$	1,365,731	$	1,294,668	$	1,206,316
Industrial		737,144		721,088		690,119
Governmental and academic		317,054		293,322		270,988

Total net sales	$	2,419,929	$	2,309,078	$	2,167,423

Net sales for the Company recognized at a point in time versus over time are as follows for the years ended December 31, 2018, 2017 and 2016 (in thousands):


	2018		2017		2016
Net sales recognized at a point in time:
Instrument systems	$	1,204,706	$	1,180,192	$	1,114,883
Chemistry consumables		400,287		372,157		345,413
Service sales recognized at a point in time (time & materials)		317,549		299,385		279,482

Total net sales recognized at a point in time		1,922,542		1,851,734		1,739,778

Net sales recognized over time:
Service and software sales recognized over time (contracts)		497,387		457,344		427,645

Total net sales	$	2,419,929	$	2,309,078	$	2,167,423

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Long-lived assets information at December 31, 2018 and 2017 is presented below (in thousands):


	2018		2017		2016
Long-lived assets:
United States	$	203,664	$	186,344	$	207,062
Americas Other		1,680		1,720		832

Total Americas		205,344		188,064		207,894
Europe		118,513		136,440		114,848
Asia		19,226		24,774		14,376

Total long-lived assets	$	343,083	$	349,278	$	337,118

The Other category includes Canada, Latin America and Puerto Rico. Long-lived assets exclude goodwill, other intangible assets and other assets.

18 Unaudited Quarterly Results

The Company’s unaudited quarterly results are summarized below (in thousands, except per share data):


	First			Second			Third			Fourth
2018	Quarter			Quarter			Quarter			Quarter			Total
Net sales	$	530,670		$	596,219		$	578,021		$	715,019		$	2,419,929
Costs and operating expenses:
Cost of sales		221,421			243,135			241,139			286,869			992,564
Selling and administrative expenses		130,407			136,645			126,997			142,853			536,902
Research and development expenses		34,480			35,644			35,173			38,106			143,403
Purchased intangibles amortization		1,659			1,602			2,114			2,337			7,712
Litigation (settlement) provisions		(1,672	)		—			924			322			(426	)

Total costs and operating expenses		386,295			417,026			406,347			470,487			1,680,155

Operating income		144,375			179,193			171,674			244,532			739,774
Other income (expense)		346			(1,828	)		(811	)		(45,501	)		(47,794	)
Interest expense		(13,838	)		(11,692	)		(11,435	)		(11,676	)		(48,641	)
Interest income		9,666			8,888			9,802			10,451			38,807

Income before income taxes		140,549			174,561			169,230			197,806			682,146
Provision for income taxes		28,598			18,884			28,216			12,654			88,352

Net income	$	111,951		$	155,677		$	141,014		$	185,152		$	593,794

Net income per basic common share		1.42			2.00			1.84			2.48			7.71
Weighted-average number of basic common shares		78,883			77,833			76,575			74,802			76,992
Net income per diluted common share		1.40			1.98			1.83			2.46			7.65
Weighted-average number of diluted common shares and equivalents		79,715			78,438			77,136			75,345			77,618

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	First			Second			Third			Fourth
2017	Quarter			Quarter			Quarter			Quarter			Total
Net sales	$	497,969		$	558,250		$	565,584		$	687,275		$	2,309,078
Costs and operating expenses:
Cost of sales		211,095			229,627			235,892			270,453			947,067
Selling and administrative expenses		130,673			130,093			135,206			148,391			544,363
Research and development expenses		30,752			32,937			33,782			35,122			132,593
Purchased intangibles amortization		1,729			1,693			1,682			1,639			6,743
Litigation provisions		—			10,018			—			1,096			11,114
Acquired in-process research and development		5,000			—			—			—			5,000

Total costs and operating expenses		379,249			404,368			406,562			456,701			1,646,880

Operating income		118,720			153,882			159,022			230,574			662,198
Other income (expense)		149			(97	)		12			(404	)		(340	)
Interest expense		(12,725	)		(14,083	)		(14,750	)		(15,281	)		(56,839	)
Interest income		7,343			8,370			9,516			10,849			36,078

Income before income taxes		113,487			148,072			153,800			225,738			641,097
Provision for income taxes		7,930			16,250			17,696			578,910			620,786

Net income (loss)	$	105,557		$	131,822		$	136,104		$	(353,172	)	$	20,311

Net income (loss) per basic common share		1.32			1.65			1.71			(4.44	)		0.25
Weighted-average number of basic common shares		80,073			79,979			79,712			79,454			79,793
Net income (loss) per diluted common share		1.31			1.63			1.69			(4.44	)		0.25
Weighted-average number of diluted common shares and equivalents		80,769			80,756			80,521			79,454			80,604

The Company typically experiences an increase in sales in the fourth quarter, as a result of purchasing habits for capital goods of customers that tend to exhaust their spending budgets by calendar year end. Selling and administrative expenses are typically higher after the first quarter in each year as the Company’s annual payroll merit increases take effect. Selling and administrative expenses will vary in the fourth quarter in relation to performance in the quarter and for the year. In the first quarter of 2018 and third quarter of 2017, the Company recorded $1 million and $4 million of stock compensation expenses, respectively, in selling and administrative expenses related to the modification of certain stock awards upon the retirement of senior executives.

In the second quarter of 2017, the Company incurred a $10 million litigation provision related to the issuance of a verdict in a patent litigation case. In the first quarter of 2018, the Company resolved the case with a final settlement that resulted in a gain of $2 million (see Note 11). In the first quarter of 2017, the Company recorded a $5 million charge related to acquired in-process research and development (see Note 2). In the fourth quarter of 2018, the Company settled a pension plan obligation and recorded a $46 million charge, which consisted of a $6 million cash contribution to the plan and a $40 million non-cash charge related to the reversal of unrecognized actuarial losses recorded in accumulated other comprehensive income in the stockholders’ equity (see Note 16). In the fourth quarter of 2017, the Company recorded a $550 million income tax provision as a result of the 2017 Tax Act (see Note 10).

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