Item 4. Mine Safety Disclosures

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Item 4. Mine Safety Disclosures

Mine Safety Disclosures

Not applicable.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

Officers of the Company are elected annually by the Board of Directors and hold office at the discretion of the Board of Directors. The following persons serve as executive officers of the Company:

Christopher J. O’Connell, 53, has served as a Director of the Company since September 2015, when he assumed the position of President and Chief Executive Officer of the Company. In December 2017, Mr. O’Connell was appointed as the Chairman of the Board of Directors of the Company. Mr. O’Connell served as Executive Vice President and President of Restorative Therapies Group of Medtronic plc from August 2009 to August 2015. From 1994 to August 2009, Mr. O’Connell served in the following positions at Medtronic plc: Senior Vice President and President of Medtronic Diabetes, President of Medtronic Physio-Control, Vice President of Sales and Marketing for the Cardiac Rhythm Management business, Vice President/General Manager of the Patient Management Business, Vice President of Corporate Strategy, Director of Investor Relations and Corporate Development Associate.

Keeley Aleman, 43, was appointed Senior Vice President, General Counsel and Secretary in October of 2019. Ms. Aleman joined Waters Corporation in 2006 as the Assistant General Counsel and held various legal roles focusing on business transactions, commercial strategies, international development, compliance, corporate governance and organizational matters. Prior to joining Waters Corporation she held corporate associate positions at Goodwin Procter, LLP, and Testa, Hurwitz & Thibeault, LLP.

Sherry L. Buck, 56, was appointed Senior Vice President and Chief Financial Officer in January 2017. Previously, Ms. Buck served as the Vice President, Chief Financial Officer of Libbey Inc. since August 2012. From 1993 to 2012, Ms. Buck held several positions at Whirlpool Corporation, including Vice President, Finance/Chief Financial Officer, Global Product and Enterprise Cost Leadership; Vice President, Finance—US; Vice President, Cost Leadership; Vice President, Finance—International; and Vice President, Business Performance Management.

Robert G. Carson, 46, was appointed Senior Vice President, Corporate Development in February 2018. Prior to joining Waters Corporation, he held several positions during his 16 years at Medtronic plc, including Vice President and General Manager, Pacemaker Business from January 2017 to January 2018. In addition, Mr. Carson spent nearly 12 years in Medtronic’s spinal implants and biologics business, serving as Vice President and General Manager from July 2016 to January 2017, Vice President of Global Marketing & Strategy from April 2015 to July 2016 and Vice President & Therapy Segment Leader from October 2012 to April 2015. Mr. Carson began his career with Banc of America Securities.

Dr. Michael C. Harrington, 59, was appointed Senior Vice President, Global Markets in February 2016. Dr. Harrington joined Waters Corporation in 1987 and has held several senior positions with Waters Corporation, including Vice President, Europe and Asia Pacific Operations, Senior Director of US Sales Operations, Director of US Chemistry Sales and General Manager of Phase Separations. Prior to joining Waters Corporation, Dr. Harrington held senior sales positions at Celsis, Inc.

Jonathan M. Pratt, 50, was appointed Senior Vice President and President, TA Instruments in August 2019. Prior to joining Waters Corporation, Mr. Pratt was President of Beckman Coulter Life Sciences. Additionally, he held senior positions at Pall Corporation, where he was President of its Food & Beverage, Laboratory and ForteBio businesses.

Francis Kim, 53, was appointed Senior Vice President, Global Operations in February 2018. Mr. Kim previously served as Vice President of Global Quality Assurance since November 2016. Prior to joining Waters Corporation, he held several positions during his 20 years at Medtronic plc, including Vice President of Quality, Restorative Therapies Group from May 2015 to November 2016 and Vice President of Quality, Regulatory and Clinical Affairs, Surgical Technologies Division from January 2011 to May 2015. On February 17, 2020, Mr. Kim notified the Company that he will be resigning his position on March 16, 2020.

Ian S. King, 63, was appointed Senior Vice President, Global Products in July 2017. Mr. King joined Waters in 1982 and previously served as Senior Vice President, Instrument Technology; Vice President, Separations Technologies; and Vice President and General Manager of Consumable Division, as well as a variety of scientific and management positions in Waters Corporation’s international subsidiaries. Prior to joining Waters Corporation, Mr. King worked at Edinburgh University as a research scientist.

Elizabeth B. Rae, 62, was appointed Senior Vice President, Global Human Resources in February 2016 and was Vice President of Human Resources since October 2005 and Vice President of Worldwide Compensation and Benefits since January 2002. Ms. Rae joined Waters Corporation in January 1996 as Director of Worldwide Compensation. Prior to joining Waters Corporation, she held senior human resources positions in retail, healthcare and financial services companies.

PART II

Item 5:	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is listed on the New York Stock Exchange under the symbol “WAT”. As of February 21, 2020, the Company had 80 common stockholders of record. The Company has not declared or paid any dividends on its common stock in its past three fiscal years and does not intend to pay cash dividends in the foreseeable future. Any future determination to pay cash dividends will be made at the discretion of the Board of Directors and will depend on restrictions and other factors the Board of Directors may deem relevant. The Company has not made any sales of unregistered equity securities in the years ended December 31, 2019, 2018 or 2017.

Securities Authorized for Issuance under Equity Compensation Plans

Equity compensation plan information is incorporated by reference from Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this document and should be considered an integral part of this Item 5.

Stock Price Performance Graph

The following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.

The following graph compares the cumulative total return on $100 invested as of December 31, 2014 (the last day of public trading of the Company’s common stock in fiscal year 2014) through December 31, 2019 (the last day of public trading of the common stock in fiscal year 2019) in the Company’s common stock, the NYSE Market Index, the SIC Code 3826 Index and the S&P 500 Index. The return of the indices is calculated assuming reinvestment of dividends during the period presented. The Company has not paid any dividends since its IPO. The stock price performance shown on the graph below is not necessarily indicative of future price performance.

COMPARISON OF CUMULATIVE TOTAL RETURN SINCE DECEMBER 31, 2014

AMONG WATERS CORPORATION, NYSE MARKET INDEX, SIC CODE 3826 INDEX – LABORATORY ANALYTICAL INSTRUMENTS AND S&P 500 INDEX


	2014		2015		2016		2017		2018		2019
WATERS CORPORATION	$	100.00	$	119.39	$	119.22	$	171.39	$	167.36	$	207.28
NYSE MARKET INDEX	$	100.00	$	95.91	$	107.36	$	127.46	$	116.06	$	145.66
SIC CODE INDEX	$	100.00	$	111.14	$	102.42	$	156.71	$	165.13	$	205.80
S&P 500 INDEX	$	100.00	$	101.38	$	113.51	$	138.29	$	132.23	$	173.86

Purchases of Equity Securities by the Issuer

The following table provides information about purchases by the Company during the three months ended December 31, 2019 of equity securities registered by the Company under the Exchange Act (in thousands, except per share data):


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs (2)		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs (2)
September 29, 2019 to October 26, 2019		646	$	217.06		646	$	2,112,901
October 27, 2019 to November 23, 2019		797	$	214.93		797	$	1,941,602
November 24, 2019 to December 31, 2019		1,092	$	228.96		1,092	$	1,691,643

Total		2,535	$	221.52		2,535	$	1,691,643

(1)	The Company’s repurchase activity related to the vesting of restricted stock units during the three months ended December 31, 2019 was insignificant.

(2)	In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock in open market or private transactions over a two-year period. This new program replaced the remaining amounts available under the pre-existing authorization.

Item 6:	Selected Financial Data

The following table sets forth selected historical consolidated financial and operating data for the periods indicated. The statement of operations and balance sheet data is derived from financial statements for the years 2019, 2018, 2017, 2016 and 2015. The Company’s financial statements as of December 31, 2019 and 2018, and for each of the three years in the period ended December 31, 2019 are included in Part II, Item 8, Financial Statements and Supplementary Data, of this Form

10-K.


In thousands, except per share and employees data	2019			2018		2017		2016		2015
STATEMENT OF OPERATIONS DATA:
Net sales	$	2,406,596		$	2,419,929	$	2,309,078	$	2,167,423	$	2,042,332
Income from operations before income taxes	$	678,239		$	682,146	$	641,097	$	600,114	$	541,918
Net income*	$	592,198		$	593,794	$	20,311	$	521,503	$	469,275
Net income per basic common share*	$	8.76		$	7.71	$	0.25	$	6.46	$	5.70
Weighted-average number of basic common shares		67,627			76,992		79,793		80,786		82,336
Net income per diluted common share*	$	8.69		$	7.65	$	0.25	$	6.41	$	5.65
Weighted-average number of diluted common shares and equivalents		68,166			77,618		80,604		81,417		83,087
BALANCE SHEET AND OTHER DATA:
Cash, cash equivalents and investments	$	337,144		$	1,735,224	$	3,393,701	$	2,813,032	$	2,399,263
Working capital, including current maturities of debt**	$	721,157		$	2,214,232	$	3,663,977	$	3,115,124	$	2,649,457
Total assets**	$	2,557,055		$	3,727,426	$	5,324,354	$	4,662,059	$	4,268,677
Long-term debt	$	1,580,797		$	1,148,172	$	1,897,501	$	1,701,966	$	1,493,027
Stockholders’ (deficit) equity***	$	(216,281	)	$	1,567,258	$	2,233,788	$	2,301,949	$	2,058,851
Employees		7,467			7,246		7,020		6,899		6,594

The provision for income taxes for 2017 includes a $550 million estimate for the impact of the enactment of the 2017 Tax Act, which was signed into law on December 22, 2017. The $550 million income tax provision reduced net income per share by $6.82. The $550 million income tax provision primarily consists of an estimated transition tax, as well as estimated income tax provisions for state and withholding taxes and a provision associated with the remeasurement of the Company’s deferred tax assets and liabilities from 35% to the new U.S. corporate income tax rate of 21%.

The Company adopted new accounting guidance related to stock-based compensation in 2017. The new accounting guidance requires the excess tax benefits or deficiencies related to stock-based compensation to be reflected in the consolidated statements of operations as a component of the provision for income taxes, whereas they were previously recognized in equity. This aspect of the new accounting guidance was required to be adopted on a prospective basis for the statement of operations and retroactive restatement was not permitted. In 2019, 2018 and 2017, the Company recognized an excess tax benefit, which decreased income tax expense by $9 million, $9 million and $20 million, respectively, and added $0.14, $0.11 and $0.24, respectively, to net income per diluted share.

In addition, in December 2018, the Company settled a pension 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, 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.

In January 2019, the company adopted new accounting guidance related to the accounting for leases. The new guidance requires lessees to present the assets and liabilities that arise from leases on their balance sheets. The standard required using a modified retrospective transition approach to be applied to leases existing as of, or entered into after, January 1, 2019. As a result, the Company recorded a $93 million right-of-use asset as of December 31, 2019. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows and stockholder’s (deficit) equity.

***	In 2018, 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.

Item 7:	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business and Financial Overview

The Company has two operating segments: Waters

and TA

. Waters products and services primarily consist of high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC

” and together with HPLC, referred to as “LC”), mass spectrometry (“MS”) and precision chemistry consumable products and related services. TA products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Company’s products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and governmental customers. These customers use the Company’s products to detect, identify, monitor and measure the chemical, physical and biological composition of materials and to predict the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids in various industrial, consumer goods and healthcare products.

The Company’s operating results are as follows for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands, except per share data):


	Year Ended December 31,									% change
	2019			2018			2017			2019 vs. 2018			2018 vs. 2017
Revenues:
Product sales	$	1,567,189		$	1,604,993		$	1,552,349			(2	%)		3	%
Service sales		839,407			814,936			756,729			3	%		8	%

Total net sales		2,406,596			2,419,929			2,309,078			(1	%)		5	%
Costs and operating expenses:
Cost of sales		1,010,700			992,564			947,067			2	%		5	%
Selling and administrative expenses		534,791			536,902			544,363			—			(1	%)
Research and development expenses		142,955			143,403			132,593			—			8	%
Purchased intangibles amortization		9,693			7,712			6,743			26	%		14	%
Litigation (settlement) provision		—			(426	)		11,114			100	%		(104	%)
Acquired in-process research and development		—			—			5,000			—			(100	%)

Operating income		708,457			739,774			662,198			(4	%)		12	%
Operating income as a % of sales		29.4	%		30.6	%		28.7	%
Other expense		(3,586	)		(47,794	)		(340	)			**			**
Interest expense, net		(26,632	)		(9,834	)		(20,761	)		171	%		(53	%)

Income before income taxes		678,239			682,146			641,097			(1	%)		6	%
Provision for income taxes		86,041			88,352			620,786			(3	%)		(86	%)

Net income	$	592,198		$	593,794		$	20,311			—				**

Net income per diluted common share	$	8.69		$	7.65		$	0.25			14	%			**

** Percentage not meaningful

The Company’s net sales decreased approximately 1% in 2019 as compared to 2018, and increased 5% in 2018 as compared to 2017. Foreign currency translation decreased sales by 2% in 2019 and increased sales by 1% in 2018. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year.

Instrument system sales decreased 4% and increased 2% in 2019 and 2018, respectively. In 2019, the decrease in instrument system sales was primarily driven by weaker demand for our products by our customers due to uncertainty caused by macroeconomic conditions and governmental policy changes. In 2018, the increase in instrument system sales was primarily driven by an increase in demand for LC and TA’s instrument systems. Foreign currency translation decreased instrument system sales by 1% in 2019 and increased instrument system sales by 1% in 2018. Recurring revenues (combined sales of precision chemistry consumables and services) increased 3% and 8% in 2019 and 2018, respectively, as a result of a larger installed base of customers and higher billing demand for service sales. Recurring revenues were impacted by foreign currency, which decreased sales by 2% in 2019 and increased sales by 2% in 2018.

Geographically, the decline in the Company’s sales in 2019 was a result of increased sales in the U.S., Canada, Japan and the rest of Asia being offset by a decrease in sales in other geographies on weaker demand for our products due to uncertainty caused by macroeconomic conditions, primarily from Brexit as well as Latin America, and governmental policy changes in China. In addition, the effect of foreign currency translation negatively impacted sales by 2% overall. The Company’s sales growth in 2018 was primarily driven by the 7% sales growth in Asia, with China’s sales growing 15%.

Sales in Europe decreased 4% in 2019 and increased 4% in 2018. In 2019, Europe sales were impacted by weak demand in Western Europe caused by the political uncertainties of Brexit and the effect of foreign currency translation, which reduced sales by 4% in 2019 and increased sales by 3% in 2018.

Sales in the Americas decreased 1% in 2019 and increased 3% in 2018. The Americas sales in 2019 were negatively impacted by macroeconomic conditions in Latin America, and the 2018 Americas sales growth can be attributed to the increase in sales after the lower customer demand stemming from the 2017 natural disasters in the U.S., Mexico and Puerto Rico.

Sales to pharmaceutical customers were flat in 2019 and grew 5% in 2018. Sales to pharmaceutical customers in 2019 were negatively impacted by the lower customer demand in China for our instrument systems as a result of changes in governmental policy and lower sales in Latin America. Despite the sales declines in China and Latin America, the need for global access to prescription drugs and the testing of newer and complex biologic drugs increased in the rest of the world.

Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, declined 2% in 2019 and grew 2% in 2018. The 2019 industrial customer sales were negatively impacted by a 6% decline in TA instrument system sales and a 1% decline from the effect of foreign currency translation.

Combined sales to academic and governmental customers increased 2% in 2019 and 8% in 2018, with the effect of foreign currency translation decreasing sales by 1% in 2019 and increasing sales by 1% in 2018. Sales to academic and governmental customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales growth rates can vary significantly from period to period.

Operating income was $708 million in 2019, a decrease of 4% as compared to 2018. This decrease can be attributed to lower sales volume, the effect of foreign currency translation and $10 million of severance-related costs in connection with a reduction in workforce that occurred in early 2019, offset by lower variable incentive compensation costs.

Operating income increased 12% in 2018 as compared to 2017. This increase was primarily a result of the effect of higher sales volume achieved in 2018, as well as the effect of approximately $33 million of facility closure, litigation and intellectual property payment charges from 2017 that did not recur in 2018.

The Company’s effective tax rates were 12.7%, 13.0% and 96.8% for 2019, 2018 and 2017, respectively. Net income per diluted share was $8.69, $7.65 and $0.25 in 2019, 2018 and 2017, respectively. In 2018, the Company settled a pension plan obligation and incurred a $46 million expense which reduced the net income per diluted share by $0.39. In 2017, The Company incurred a $550 million income tax provision related to the 2017 Tax Cuts and Jobs Act (“2017 Tax Act”) which reduced the net income per diluted share by $6.82, and excluding the 2017 Tax Act income tax provision, the Company’s effective tax rate in 2017 would have been 11.0%.

The Company generated $643 million, $604 million and $698 million of net cash flows from operations in 2019, 2018 and 2017, respectively. The increase in operating cash flow in 2019 was primarily a result of payments made in 2018 that did not recur, including $103 million of income tax payments made in the U.S. relating to the Company’s estimated 2017 transition tax liability and 2018 estimated tax payments, a $15 million litigation settlement payment and $11 million of contributions to certain defined benefit pension plans. Included in the 2019 net cash flow from operations is $29 million of income tax payments made in the U.S. in relation to the 2017 transition tax liability. Over the next three years, the Company is required to make annual U.S. federal tax payments of approximately $38 million to tax authorities in connection with the Company’s estimated remaining transition tax liabilities of $404 million under the 2017 Tax Act. The final 60% of the total liability is required to be paid over a three-year period beginning in 2023.

Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $164 million, $96 million and $85 million in 2019, 2018 and 2017, respectively. In 2019, $68 million of capital expenditures paid related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $85 million of costs for this facility through the end of 2019. In 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.

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. During 2019, 2018 and 2017, the Company repurchased 11.1 million, 6.8 million and 1.8 million shares of the Company’s outstanding common stock at a cost of $2.5 billion, $1.3 billion and $323 million, respectively, under the January 2019 authorization and other previously announced programs. As of December 31, 2019, the Company has a total of $1.7 billion authorized for future repurchases. The Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment 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 September 2019, the Company issued fixed interest rate senior unsecured notes with an aggregate principal amount of $500 million, of which $200 million of the outstanding notes matures in seven years and the remaining $300 million matures in 10 years. The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes.

During 2019 and 2018, the Company entered into $260 million and $300 million, respectively, of

U.S.-to-Euro

interest rate cross-currency swap agreements that hedge the Company’s net investment in its Euro denominated net assets, bringing the total currency interest rate cross-currency swap agreement notional value to $560 million at December 31, 2019. As a result of entering into these agreements, the Company lowered its net interest expense by $12 million and $3 million during 2019 and 2018, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $15 million in 2020, $11 million in 2021 and $1 million in 2022 as the three-year term of the agreements expire.

In January 2020, the Company made organizational changes to better align its resources with its growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 3% of the Company’s employees. The Company expects to incur approximately $25 million of severance costs, lease termination costs and other related costs during 2020.

In January 2020, the Company entered into a definitive agreement to acquire Andrew Alliance, an innovator in specialty laboratory automation technology, including software and robotics for approximately $80 million. This acquisition is not expected to have a material effect on the Company sales and expenses in 2020.

Results of Operations

Sales by Geography

Geographic sales information is presented below for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):


	Year Ended December 31,						% change
	2019		2018		2017		2019 vs. 2018			2018 vs. 2017
Net Sales:
Asia:
China	$	439,557	$	443,321	$	387,059		(1	%)		15	%
Japan		180,707		173,357		167,258		4	%		4	%
Asia Other		318,848		305,613		308,300		4	%		(1	%)

Total Asia		939,112		922,291		862,617		2	%		7	%
Americas:
United States		692,277		683,596		669,274		1	%		2	%
Americas Other		137,964		151,581		140,715		(9	%)		8	%

Total Americas		830,241		835,177		809,989		(1	%)		3	%
Europe		637,243		662,461		636,472		(4	%)		4	%

Total net sales	$	2,406,596	$	2,419,929	$	2,309,078		(1	%)		5	%

In 2019, sales in China were negatively impacted by economic uncertainty caused by certain regulatory changes in our food and pharmaceutical markets. The 4% increase in sales in Japan was driven by instrument systems, primarily to pharmaceutical and academic and governmental customers, as well as foreign currency translation, which increased Japan’s sales by 2% in 2019. Sales growth in Asia Other was due primarily to pharmaceutical and academic and governmental customer classes in 2019. Sales in the U.S. increased by 1% despite large pharmaceutical customers slowing capital spending on our instrument systems. Sales declines in the rest of the Americas and Europe were broad-based across all product and customer classes due to macroeconomic conditions and political instability, except in Europe where sales to academic and governmental customers grew 8%. Sales in Europe were also negatively impacted by the effect of foreign currency translation, which decreased sales 4% in 2019.

In 2018, sales in China increased across all product lines and were driven by double-digit increases in sales to pharmaceutical, academic and governmental customers. The effect of foreign currency translation increased sales in Japan by 2% in 2018 and sales growth was also driven by increased sales to pharmaceutical and industrial customers. The sales decline in Asia Other in 2018 was a result of lower customer demand in India and weaker sales to environmental customers in the first quarter of 2018. In 2018, sales growth in Europe was driven by TA’s products and services and recurring revenues to pharmaceutical and industrial customers. In addition, the effect of foreign currency translation increased sales in Europe by 3% in 2018. Sales growth in the U.S. in 2018 was driven by recurring revenues and TA instruments. Sales in the rest of the Americas had double-digit sales growth for instrument systems and double-digit sales growth for pharmaceutical customers, which was offset by a decline in sales to industrial customers.

Net sales by customer class are presented below for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):


	Year Ended December 31,						% change
	2019		2018		2017		2019 vs. 2018			2018 vs. 2017
Pharmaceutical	$	1,365,275	$	1,365,731	$	1,294,668		—			5	%
Industrial		719,377		737,144		721,088		(2	%)		2	%
Academic and governmental		321,944		317,054		293,322		2	%		8	%

Total net sales	$	2,406,596	$	2,419,929	$	2,309,078		(1	%)		5	%

In 2019, sales to pharmaceutical customers were negatively impacted by the effect of foreign currency translation, which decreased sales to pharmaceutical customers by 2%, as well as a slower release of capital budgets by our customers due to uncertain macroeconomic conditions due to Brexit and regulatory changes in our food and pharmaceutical markets in China. Offsetting those declines was an increase in the need for global access to prescription drugs and the testing of newer and complex biologic drugs. The decline in sales to industrial customers in 2019 was due to weaker demand for our

LC-MS

instruments and also a 4% decline in TA sales. The increase in sales to academic and governmental customers was primarily due to higher instrument system sales.

In 2018, sales to pharmaceutical customers were driven by recurring revenues, with double-digit growth in China, Canada and Latin America. Sales growth for the industrial market in 2018 was driven by TA products and services, and

mid-single-digit

sales growth in Europe, Japan and India. The increase in sales to academic and governmental customers in 2018 was broad-based across all product classes and geographies, with double-digit growth in China, India and Canada.

Waters Products and Services Net Sales

Net sales for Waters products and services are as follows for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):


	Year Ended December 31,															% change
	2019		% of Total			2018		% of Total			2017		% of Total			2019 vs. 2018			2018 vs. 2017
Waters instrument systems	$	963,871		45	%	$	1,000,625		47	%	$	988,750		48	%		(4	%)		1	%
Chemistry consumables		412,018		19	%		400,287		18	%		372,157		18	%		3	%		8	%

Total Waters product sales		1,375,889		64	%		1,400,912		65	%		1,360,907		66	%		(2	%)		3	%
Waters service		761,594		36	%		738,433		35	%		686,656		34	%		3	%		8	%

Total Waters net sales	$	2,137,483		100	%	$	2,139,345		100	%	$	2,047,563		100	%		—			4	%

Precision chemistry consumables sales increased in both 2019 and 2018, driven by sales in the U.S. and China, primarily to pharmaceutical customers, on the uptake in columns and application-specific testing kits. Waters service sales in both 2019 and 2018 benefited from increased sales of service plans and higher service demand billings to a higher installed base of customers. Waters instrument system sales (LC and MS technology-based) decreased in 2019 in most major geographical regions, primarily due to lower sales to pharmaceutical and industrial customers due to uncertainty caused by macroeconomic conditions relating to Brexit and other regulatory changes in certain regions. The effect of foreign currency translation decreased Waters sales by 2% in 2019 and had a minimal impact on Waters sales in 2018.

In 2019, Waters sales increased 2% in Asia, were flat in the Americas and decreased 3% in Europe, where the effect of foreign currency decreased sales by 4%. Within Asia, Waters sales decreased 1% in China and increased 4% in Japan and 9% in the rest of Asia, excluding India.

In 2018, Waters sales increased 7% in Asia, 4% in Europe and 2% in the Americas. Waters sales increased 15% in China in 2018 and were broad-based across all product classes, with double-digit increases in sales to pharmaceutical, academic and governmental customers. Waters sales in Japan in 2018 increased 5%, with the effect of foreign currency translation increasing sales 2%. Sales in Asia Other declined 2% in 2018, primarily due to lower customer demand in India and a negative 2% impact of foreign currency translation. In the Americas, U.S. sales increased 1% in 2018.

TA Product and Services Net Sales

Net sales for TA products and services are as follows for the years ended December 31, 2019 and December 31, 2018 (dollars in thousands):


	Year Ended December 31,															% change
	2019		% of Total			2018		% of Total			2017		% of Total			2019 vs. 2018			2018 vs. 2017
TA instrument systems	$	191,300		71	%	$	204,081		73	%	$	191,442		73	%		(6	%)		7	%
TA service		77,813		29	%		76,503		27	%		70,073		27	%		2	%		9	%

Total TA net sales	$	269,113		100	%	$	280,584		100	%	$	261,515		100	%		(4	%)		7	%

TA’s instrument system sales declined in 2019 primarily due to lower customer demand resulting from macroeconomic conditions, tariff posturing and political instability, while 2018 instrument system sales growth was broad-based across all product classes. TA service sales increased due to sales of service plans and billings to a higher installed base of customers. The effect of foreign currency translation had a minimal impact on TA’s sales in both 2019 and 2018.

In 2019, TA sales decreased 4% in the Americas, 12% in Europe and increased 1% in Asia. TA sales in the U.S. increased 9% in 2018, while sales in the rest of the Americas increased 8%. TA’s sales in Asia were driven by double-digit sales growth in India and 8% sales growth in China, which was offset by declines in Japan.

Cost of Sales

Cost of sales for 2019 increased 2% as compared to 2018, due to a change in sales mix. The effect of foreign currency translation decreased cost of sales by 1% in 2019 primarily from the favorable foreign currency translation effect the British Pound had on the Company’s U.K. manufacturing operations.

Cost of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix, product costs of instrument systems and amortization of software platforms. At current foreign currency exchange rates, the Company expects that the impact of foreign currency translation may decrease sales and gross profit during 2020.

Selling and Administrative Expenses

Selling and administrative expenses were flat in 2019 and decreased 1% in 2018. In 2019, selling and administrative expenses were impacted by merit compensation costs that were offset by lower variable incentive compensation costs. In addition, 2019 was also impacted by the $10 million of severance-related costs in connection with a reduction in workforce that occurred in January of 2019. The effect of foreign currency translation decreased selling and administrative expenses by 1% in 2019 and had a minimal impact in 2018.

As a percentage of net sales, selling and administrative expenses were 22.2%, 22.2% and 23.6% for 2019, 2018 and 2017, respectively.

Research and Development Expenses

Research and development expenses were flat in 2019 and increased 8% in 2018. Research and development expenses in both 2019 and 2018 were impacted by additional headcount, merit compensation and costs associated with new products and the development of new technology initiatives. Foreign currency translation decreased research and development costs by 2% in 2019 and had a minimal impact on research and development costs in 2018.

Acquired

In-Process

Research and Development

During 2017, the Company incurred charges of $5 million for acquired

in-process

research and development related to milestone payments associated with a licensing arrangement for 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. These future payments may be significant and occur over multiple years.

Interest Expense, Net

The increase in net interest expense in 2019 was primarily attributable to higher outstanding debt balances and lower interest income on lower cash, cash equivalents and investment balances, being somewhat offset by the additional interest income from the

U.S.-to-Euro

interest rate cross-currency swap agreements.

Provision for Income Taxes

The Company’s effective tax rates were 12.7%, 13.0% and 96.8% in 2019, 2018 and 2017, respectively.

The Company’s effective income tax rate differs from the U.S. federal statutory rate each year due to differences in the proportionate amounts of

pre-tax

income recognized in jurisdictions with different effective tax rates and the items discussed below.

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, 2019. The Company has a received a tax holiday 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 0% 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, 2019, 2018 and 2017 by $24 million, $28 million and $25 million, respectively, and increased the Company’s net income per diluted share by $0.35, $0.36 and $0.31, respectively.

During 2019, the Company’s effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, an $11 million provision related to the Global Intangible

Low-Taxed

Income (“GILTI”) tax and a tax benefit of $9 million on stock-based compensation.

The 2018 effective tax rate differed from the U.S. federal statutory tax rate primarily due to the jurisdictional mix of earnings, a $14 million provision related to the GILTI tax, an $8 million provision for a change in foreign currency exchange rates related to the transition tax, a $9 million benefit related to stock-based compensation and a $6 million net benefit related to the finalization of the impact of the Tax Cuts and Jobs Act (the “2017 Act”).

The 2017 effective tax rate of 96.8% differs from the 35% U.S. statutory tax rate primarily due to the 2017 Act and the jurisdictional mix of earnings. As a result of the 2017 Act, for the year ended December 31, 2017, the Company accrued a $550 million tax provision, which 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 2017, the Company also had a benefit of $20 million related to stock-based compensation. 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.

Prior to the enactment of the 2017 Act, the Company had indefinite reinvestment assertion on a significant portion of its undistributed earnings from foreign subsidiaries. At the end of 2018, and as a result of the enactment of the 2017 Act, we reevaluated our historic assertion and no longer considered these earnings to be indefinitely reinvested in our foreign subsidiaries. The Company recorded a tax provision of $3 million and $4 million for 2019 and 2018, respectively, for future withholding taxes and U.S. state taxes on repatriation of 2019 and 2018 undistributed earnings.

The Company’s effective tax rate is influenced by many significant factors, including, but not limited to, the wide range of income tax rates in jurisdictions in which the Company operates; sales volumes and profit levels in each tax jurisdiction; changes in tax laws, tax rates and policies; the outcome of various ongoing tax audit examinations; and the impact of foreign currency transactions and translation. As a result of variability in these factors, the Company’s effective tax rates in the future may not be similar to the effective tax rates for the current or prior years, or for previously forecasted periods.

Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows (in thousands):


	Year Ended December 31,
	2019			2018			2017
Net income	$	592,198		$	593,794		$	20,311
Depreciation and amortization		105,296			108,408			106,002
Stock-based compensation		38,577			37,541			39,436
Deferred income taxes		9,620			2,405			45,510
In-process research and development and other non-cash charges		—			—			5,000
Change in accounts receivable		(22,195	)		(47,921	)		(24,013	)
Change in inventories		(31,854	)		(25,396	)		731
Change in accounts payable and other current liabilities		9,784			(81,663	)		3,175
Change in deferred revenue and customer advances		12,189			2,721			10,386
Effect of the 2017 Tax Cuts and Jobs Act		(3,229	)		(6,059	)		530,383
Other changes		(67,299	)		20,616			(39,281	)

Net cash provided by operating activities		643,087			604,446			697,640
Net cash provided by (used in) investing activities		768,802			1,683,302			(535,752	)
Net cash used in financing activities		(1,872,678	)		(2,119,522	)		(63,869	)
Effect of exchange rate changes on cash and cash equivalents		224			(14,265	)		38,669

(Decrease) increase in cash and cash equivalents	$	(460,565	)	$	153,961		$	136,688

Cash Flow from Operating Activities

Net cash provided by operating activities was $643 million, $604 million and $698 million in 2019, 2018 and 2017, respectively. The changes within net cash provided by operating activities include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the changes in net income:

	•	The changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales. Days sales outstanding was 77 days at December 31, 2019, 74 days at December 31, 2018 and 71 days at 2017.

	•	The changes in inventory were primarily attributable to new product launches and the increase in safety stock in advance of Brexit.

	•	The changes in accounts payable and other current liabilities were the result of timing of payments to vendors. In addition, the change in 2019 as compared to 2018 includes $29 million and $103 million, respectively, of income tax payments made in the U.S. relating to the Company’s estimated 2017 tax reform liability and 2018 estimated income tax payments and a $15 million litigation settlement payment.

	•	Net cash provided from deferred revenue and customer advances results from annual increases in new service contracts as a higher installed base of customers renew annual service contracts.

	•	Other changes were attributable to variation in the timing of various provisions, expenditures, prepaid income taxes and accruals in other current assets, other assets, other liabilities, and income tax expenses related to the 2017 Tax Act. In addition, in 2018, the Company made $11 million of contributions to certain defined benefit pension plans.

Cash Provided By (Used in) Investing Activities

Net cash provided by investing activities totaled $769 million and $1,683 million in 2019 and 2018, respectively, while net cash used in investing activities totaled $536 million in 2017. Additions to fixed assets and capitalized software were $164 million, $96 million and $85 million in 2019, 2018 and 2017, respectively. In February 2018, the Company’s Board of Directors approved expanding its chemistry synthesis 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, which will be paid for with existing cash, investments and debt capacity. Through December 31, 2019, the Company has incurred $85 million of costs for this facility.

During 2018 and 2017, the Company purchased $1.0 billion and $3.0 billion of investments, respectively. During 2019, 2018 and 2017, $1.0 billion, $2.8 billion and $2.5 billion of investments matured, respectively. The majority of the proceeds received in 2019 and 2018 were repatriated into the U.S. at lower income tax rates as a result of the 2017 Tax Act and used to reduce the Company’s debt and to repurchase shares.

Asset and business acquisitions, net of cash acquired, were $31 million during 2018. There were no business acquisitions in 2019 or 2017. During 2019 and 2018, the Company made $9 million and $8 million of investments in unaffiliated companies, respectively. During 2017, the Company made a $7 million payment for an 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. Also during 2017, the Company made payments of $5 million to acquire and license intellectual property relating to mass spectrometry technologies yet to be commercialized.

In January 2020, the company entered into a definitive agreement to acquire Andrew Alliance, an innovator in specialty laboratory automation technology, including software and robotics for approximately $80 million in cash. This acquisition is not expected to have a material effect on the Company’s sales and expenses in 2020.

Cash Used in Financing Activities

In September 2019, the Company issued fixed interest rate senior unsecured notes with an aggregate principle of $500 million, of which $200 million of the outstanding notes matures in seven years and the remaining $300 million matures in 10 years. The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes.

In November 2017, the Company entered into a credit agreement (the “2017 Credit Agreement”), which 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.

Interest on the Company’s 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.

The Company’s net debt borrowings increased by $535 million in 2019, decreased by $850 million in 2018 and increased by $170 million in 2017. As of December 31, 2019, the Company had a total of $1.7 billion in outstanding debt, which consisted of $1.1 billion in outstanding senior unsecured notes, $300 million borrowed under a term loan and $325 million borrowed under a revolving credit facility, with both the term loan and revolving credit facilities under the 2017 Credit Agreement. As of December 31, 2019, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1,173 million after outstanding letters of credit. As of December 31, 2019, the Company was in compliance with all debt covenants.

As of December 31, 2019, the Company has entered into three-year interest rate cross-currency swap derivative agreements with a notional value of $560 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. As a result of entering into these agreements, the Company lowered its net interest expense by $12 million and $3 million during 2019 and 2018, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $15 million annually in 2020, $11 million in 2021 and $1 million in 2022 as the three-year term of the agreements expire.

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. During 2019, 2018 and 2017, the Company repurchased 11.1 million, 6.8 million and 1.8 million shares of the Company’s outstanding common stock at a cost of $2.5 billion, $1.3 billion and $323 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $8 million, $10 million and $10 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2019, 2018 and 2017, respectively.

The Company received $54 million, $52 million and $98 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan in 2019, 2018 and 2017, respectively.

The Company had cash and cash equivalents of $337 million as of December 31, 2019. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $249 million held by foreign subsidiaries at December 31, 2019, of which $176 million was held in currencies other than U.S. dollars. The Company believes it has sufficient levels of cash flow and access to its existing cash and cash equivalents, as well as the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, to fund operations and capital expenditures, service debt interest, finance potential acquisitions and continue the authorized stock repurchase program in the U.S. These cash requirements are managed by the Company’s cash flow from operations, its existing cash and cash equivalents and the use of the Company’s revolving credit facility.

Management believes, as of the date of this report, that the Company’s financial position, along with expected future cash flows from earnings based on historical trends and the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, will be sufficient to service debt and fund working capital and capital spending requirements, authorized share repurchase amounts and potential acquisitions for at least the next twelve months. Prior to the enactment of the 2017 Act, the Company had an indefinite reinvestment assertion on a significant portion of its undistributed earnings from foreign subsidiaries. At the end of 2018, and as a result of the enactment of the 2017 Act, we reevaluated our historic assertion and no longer considered these earnings to be indefinitely reinvested in our foreign subsidiaries.

Contractual Obligations and Commercial Commitments

The following is a summary of the Company’s known contractual obligations as of December 31, 2019 (in thousands):


	Payments Due by Year (1)
	Total		2020		2021		2022		2023		2024		2025		After 2025
Notes payable and debt	$	100,366	$	100,366	$	—	$	—	$	—	$	—	$	—	$	—
Interest on senior unsecured notes		214,160		33,962		30,273		28,160		27,182		24,654		22,714		47,215
Long-term debt (2)		1,585,000		—		150,000		625,000		50,000		100,000		—		660,000
2017 Tax Act liability		403,768		38,454		38,454		38,454		72,101		96,135		120,170		—
Operating leases		103,359		29,489		21,774		16,743		9,175		6,867		5,550		13,761

Total	$	2,406,653	$	202,271	$	240,501	$	708,357	$	158,458	$	227,656	$	148,434	$	720,976

(1)	Does not include normal purchases made in the ordinary course of business and uncertain tax positions discussed below.

(2)

The following is a summary of the Company’s known commercial commitments as of December 31, 2019 (in thousands):


	Amount of Commitments Expiration Per Period
	Total		2020		2021		2022		2023		2024		2025		After 2025
Letters of credit	$	1,797	$	1,797	$	—	$	—	$	—	$	—	$	—	$	—

The Company has long-term liabilities for deferred employee compensation, including pension and supplemental executive retirement plans. The payments related to the supplemental retirement plan are not included above since they are dependent upon when the employee retires or leaves the Company and whether the employee elects

lump-sum

or annuity payments. During fiscal year 2020, the Company expects to contribute approximately $3 million to $6 million to the Company’s defined benefit plans.

The Company has contingent consideration for an earnout pertaining to its July 2014 acquisition of the net assets of Medimass Research, Development and Service Kft. (“Medimass”). The earnout payments are not included above since they are dependent upon many factors that cannot be predicted with any certainty. The estimated fair value of the contingent consideration as of December 31, 2019 is $3 million.

The Company licenses certain technology and software from third parties. Future minimum license fees payable under existing license agreements as of December 31, 2019 are immaterial. 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. It is not possible to predict with reasonable certainty whether these milestones will be achieved or the timing for achievement. As a result, these potential payments are not included in the table above.

The Company has not paid any dividends and has no plans, at this time, to pay any dividends in the future.

Off-Balance

Sheet Arrangements

The Company has not created, and is not party to, any special-purpose or

off-balance

sheet entities for the purpose of raising capital, incurring debt or operating parts of its business that are not consolidated (to the extent of the Company’s ownership interest therein) into the consolidated financial statements. The Company has not entered into any transactions with unconsolidated entities whereby it has subordinated retained interests, derivative instruments or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company.

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.

Critical Accounting Policies and Estimates

Summary

The preparation of consolidated financial statements 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. Critical accounting policies are those that are central to the presentation of the Company’s financial condition and results of operations that require management to make estimates about matters that are highly uncertain and that would have a material impact on the Company’s results of operations given changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that reasonably could have been used in the current period. On an ongoing basis, the Company evaluates its policies and estimates. 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. There are other items within the Company’s consolidated financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could potentially have a material impact on the Company’s consolidated financial statements.

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.

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 the 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 are 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 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 their 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 at December 31, 2019 was $214 million on the consolidated balance sheets consist 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.

Loss Provisions on Accounts Receivable and Inventory

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company does not request collateral from its customers, but collectibility is enhanced through the use of credit card payments and letters of credit. The Company assesses collectibility based on a number of factors, including, but not limited to, past transaction history with the customer, the credit-worthiness of the customer, industry trends and the macro-economic environment. Historically, the Company has not experienced significant bad debt losses. Sales returns and allowances are estimates of future product returns related to current period revenue. Material differences may result in the amount and timing of revenue for any period if management made different judgments or utilized different estimates for sales returns and allowances for doubtful accounts. The Company’s accounts receivable balance at December 31, 2019 was $588 million, net of allowances for doubtful accounts of $10 million.

The Company values all of its inventories at the lower of cost or net realizable value on a

first-in,

first-out

basis (“FIFO”). The Company estimates revisions to its inventory valuations based on technical obsolescence,

historical demand, projections of future demand, including that in the Company’s current backlog of orders, and industry and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional write-downs may be required. The Company’s inventory balance at December 31, 2019 was recorded at its net realizable value of $321 million, which is net of write-downs of $26 million.

Long-Lived Assets, Intangible Assets and Goodwill

The Company assesses the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger impairment include, but are not limited to, the following:

	•	significant underperformance relative to historical or projected future operating results, particularly as it pertains to capitalized software and patent costs;

	•	significant negative industry or economic trends, competitive products and technologies; and

	•	significant changes or developments in strategic technological collaborations or legal matters which affect the Company’s capitalized patents, purchased technology, trademarks and intellectual properties, such as licenses.

When the Company determines that the carrying value of an individual intangible asset, long-lived asset or goodwill may not be recoverable based upon the existence of one or more of the above indicators, an estimate of undiscounted future cash flows produced by that intangible asset, long-lived asset or goodwill, including its eventual residual value, is compared to the carrying value to determine whether impairment exists. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the asset is written-down to its estimated fair value. Net intangible assets, long-lived assets and goodwill amounted to $240 million, $417 million and $356 million, respectively, as of December 31, 2019.

The Company performs annual impairment reviews of its goodwill on

December 31

of each year. For goodwill impairment review purposes, the Company has two reporting units: Waters and TA. The Company currently does not expect to record an impairment charge in the foreseeable future as the fair values of the reporting units significantly exceeds the carrying value of the reporting units; however, there can be no assurance that, at the time future reviews are completed, a material impairment charge will not be recorded. The factors that could cause a material goodwill impairment charge in the future include, but are not limited to, the following:

	•	significant decline in the Company’s projected revenue, earnings or cash flows;

	•	significant adverse change in legal factors or business climate;

	•	significant decline in the Company’s stock price or the stock price of comparable companies;

	•	adverse action or assessment by a regulator; and

	•	unanticipated competition.

Income Taxes

As part of the process of preparing the consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the Company estimating its income taxes, taking into account the amount, timing and character of taxable income, tax deductions and credits and assessing changes in tax laws, regulations, agreements and treaties. Differing treatment of items for tax and accounting purposes, such as depreciation, amortization and inventory reserves, result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. In the event that actual results differ from these estimates, or the Company adjusts these estimates in future periods, such changes could materially impact the Company’s financial position and results of operations.

The accounting standards for income taxes require that a company continually evaluate the necessity of establishing or changing a valuation allowance for deferred tax assets depending on whether it is more likely than not that the actual benefit of those assets will be realized in future periods.

Uncertain Tax Positions

The Company accounts for its uncertain tax return 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 classified interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. At December 31, 2019, the Company had unrecognized tax benefits, excluding interest and penalties, of $28 million.

The Company has been granted a 0% contractual tax rate in Singapore that requires the achievement of certain operational and financial milestones that the Company expects to meet, to the extent not already achieved, by December 31, 2020 and maintain through at least March 31, 2021. As part of the Company’s determination of uncertain tax positions, the Company regularly assesses its progress against these operational and financial milestone targets to determine whether the milestones can be reasonably achieved. These milestones were negotiated with the Singaporean tax authorities and established based on the Company’s historical financial performance; the anticipated customer

end-market

demand, particularly in certain regions in the world, and the Company’s anticipated future operating plans. These assessments require significant judgments and estimates about the Company’s ability to meet the milestone targets for the following types of objectives: reaching and maintaining annual revenue and business spending targets; meeting capital expenditures targets; attaining and sustaining employment targets; and establishing a local research and development and service center. The Company regularly monitors its actual and forecasted sales and operating results against these milestones and the Company makes the determination as to whether the future forecasted financial results are most likely to be achieved. These milestones are very similar in nature to the previous Singaporean tax holiday contractual agreements that the Company successfully completed. These milestones are not required to be met until December 2020, at the earliest, which gives the Company sufficient time to make any necessary adjustments to its operating plans to achieve the milestones.

Currently, the Company has determined that it is more likely than not to realize the contractual tax rate in Singapore of 0% and has not recognized an uncertain tax position in its balance sheet related to the achievement of the contractual milestones in Singapore. However, these milestones can be significantly influenced by the business climate in Singapore and the Company’s overall financial performance and, in the event that the Company determines that the milestone targets are not expected to be met, the Company would no longer be able to record a tax benefit at a 0% contractual tax rate on income earned in Singapore from and after the April 1, 2016 start date of the contract period. At such time, the Company would record an income tax charge on the affected Singapore income earned back to April 1, 2016 at the Singapore statutory tax rate(s) (currently 17%), with a corresponding income tax liability recorded on the balance sheet. For the year ended 2019, 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 and net income per diluted share by $24 million and $0.35, respectively.

Warranty

Product warranties are recorded at the time revenue is recognized for certain product shipments. 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 incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company’s previous estimates, revisions to the estimated warranty liability would be required. At December 31, 2019, the Company’s warranty liability was $12 million.

Litigation

As described in Part I, Item 3, Legal Proceedings, of this Form

10-K,

the Company is a party to various pending litigation matters. With respect to each pending claim, management determines whether it can reasonably estimate whether a loss is probable and, if so, the probable range of that loss. If and when management has determined, with respect to a particular claim, both that a loss is probable and that it can reasonably estimate the range of that loss, the Company records a charge equal to either its best estimate of that loss or the lowest amount in that probable range of loss. The Company will disclose additional exposures when the range of loss is subject to considerable uncertainty.

Pension and Other Retirement Benefits

In 2018, the Company settled its defined benefit pension plan in the U.S. As a result of this settlement, the Company’s defined benefit pension obligations were significantly reduced in 2018 and 2019. The Company still maintains a number of smaller defined benefit pension plans and other retirement benefits throughout the world. Assumptions used in determining projected benefit obligations and the fair values of plan assets for the Company’s remaining less significant pension plans and other retirement benefits are evaluated periodically by management. Changes in assumptions are based on relevant Company data. Critical assumptions, such as the discount rate used to measure the benefit obligations and the expected long-term rate of return on plan assets, are evaluated and updated annually. The Company has assumed that the weighted-average expected long-term rate of return on plan assets will be 6.25% for its U.S. benefit plans and 3.11% for its

non-U.S.

benefit plans.

At the end of each year, the Company determines the discount rate that reflects the current rate at which the pension liabilities could be effectively settled. The Company utilized Milliman’s Bond Matching model to determine the discount rate for its U.S. benefit plans. The Company determined the discount rate for its

non-U.S.

benefit plans based on the analysis of the Mercer Pension Discount Curve for high quality investments as of December 31, 2019 that best matched the timing of the plan’s future cash flows for the period to maturity of the pension benefits. Once the interest rates were determined, the plan’s cash flow was discounted at the spot interest rate back to the measurement date. At December 31, 2019, the Company determined the weighted-average discount rate to be 3.42% for the U.S. benefit plans and 1.38% for the

non-U.S.

benefits plans.

one-quarter

percentage point increase in the assumed long-term rate of return 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.

Stock-based Compensation

The accounting standards for stock-based compensation require that all share-based payments to employees be recognized in the statements of operations based on their fair values. The Company has used the Black-Scholes option pricing model and Monte Carlo simulation model to determine the fair value of its stock option awards and performance stock unit awards, respectively. Under the fair-value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating stock price volatility and employee stock option exercise behaviors. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted. As stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest, the amount of the expense has been reduced for estimated forfeitures. These accounting standards require forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If factors change and the Company employs different assumptions in the application of these accounting standards, the compensation expense that the Company records in future periods may differ significantly from what the Company has recorded in the current period. The Company recognizes the expense using the straight-line attribution method.

As of December 31, 2019, unrecognized compensation costs and related weighted-average lives over which the costs will be amortized were as follows (in millions):


	Unrecognized Compensation Costs		Weighted-Average Life in Years
Stock options	$	32		3.2
Restricted stock units		36		3.3
Performance stock units		10		1.9
Restricted stock		—		—

Total	$	78		3.1

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.

Recent Accounting Standard Changes and Developments

Information regarding recent accounting standard changes and developments is incorporated by reference from Part II, Item 8, Financial Statements and Supplementary Data, of this document and should be considered an integral part of this Item 7. See Note 2 in the Notes to the Consolidated Financial Statements for recently adopted and issued accounting standards.

Item 7A:	Quantitative and Qualitative Disclosures About Market Risk

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.

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 these 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

As of December 31, 2019, the Company has entered into three-year interest rate cross-currency swap derivative agreements with a notional value of $560 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’ (deficit) 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.

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, 2019					December 31, 2018
	Notional Value		Fair Value			Notional Value		Fair Value
Foreign currency exchange contracts:
Other current assets	$	119,576	$	16		$	112,212	$	503
Other current liabilities	$	29,495	$	1,028		$	40,175	$	224
Interest rate cross-currency swap agreements:
Other assets	$	560,000	$	4,485		$	300,000	$	1,093
Accumulated other comprehensive income			$	(4,485	)			$	(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,
	2019			2018				2017
Foreign currency exchange contracts:
Realized (losses) gains on closed contracts			Cost of sales		$	(3,552	)		$	(6,684	)	$	3,894
Unrealized (losses) gains on open contracts			Cost of sales			(1,292	)			(105	)		1,054

Cumulative net pre-tax (losses) gains			Cost of sales		$	(4,844	)		$	(6,789	)	$	4,948

Interest rate cross-currency swap agreements:
Interest earned			Interest income		$	11,709			$	2,713		$	—
Unrealized gains on open contracts			Stockholders’ (deficit) equity		$	4,485			$	1,093		$	—

Assuming a hypothetical adverse change of 10% in

year-end

exchange rates (a strengthening of the U.S. dollar), the fair market value of the foreign currency exchange contracts outstanding as of December 31, 2019 would decrease

pre-tax

earnings by approximately $15 million. Assuming a hypothetical adverse change of 10% in

year-end

exchange rates (a strengthening of the U.S. dollar), the fair market value of the interest rate cross-currency swap agreements outstanding as of December 31, 2019 would increase by approximately $56 million and would be recorded to foreign currency translation in other comprehensive income within stockholders’ (deficit) equity. The related impact on interest income would not have a material effect on

pre-tax

earnings.

The Company’s cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. The Company’s 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. As of December 31, 2019, the carrying value of the Company’s cash and cash equivalents approximated fair value.

The Company is exposed to the risk of interest rate fluctuations from the investments of cash generated from operations. Investments with maturities greater than 90 days are classified as investments, and are held primarily in U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities. As of December 31, 2019, the Company estimates that a hypothetical adverse change of 100 basis points across all maturities would not have a material effect on the fair market value of its portfolio.

The Company is also exposed to the risk of exchange rate fluctuations. 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, 2019 and 2018, $249 million out of $337 million and $471 million out of $1,735 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $176 million out of $337 million and $251 million out of $1,735 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at December 31, 2019 and 2018, respectively. As of December 31, 2019, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.

Assuming a hypothetical adverse change of 10% in

year-end

exchange rates (a strengthening of the U.S. dollar), the fair market value of the Company’s cash, cash equivalents and investments held in currencies other than the U.S. dollar as of December 31, 2019 would decrease by approximately $18 million, of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders’ (deficit) equity.

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, 2019.

The effectiveness of our internal control over financial reporting as of December 31, 2019 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, 2019 and 2018, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 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, 2019, based on criteria established in

Internal Control — Integrated Framework

(2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

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.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill Impairment Assessment

As described in Notes 2 and 8 to the consolidated financial statements, the Company’s consolidated goodwill balance was $356 million as of December 31, 2019. Management performs an impairment test as of

December 31

of each year, or more frequently if events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. 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 estimated fair value of the reporting units significantly exceeds the carrying value.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting units. This in turn led to a high degree of effort in performing procedures and evaluating audit evidence related to management’s estimated future cash flows, including the estimated growth rates.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimate, evaluating the appropriateness of the discounted cash flow model, testing the completeness, accuracy, and relevance of underlying data used in the model and evaluating the significant

assumptions used by management, including the estimated growth rates. Evaluating management’s assumptions related to estimated revenue growth rates involved evaluating whether the growth rates used by management were reasonable considering the current and past performance of the reporting units and whether those growth rates were consistent with evidence obtained in other areas of the audit.


/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 25, 2020

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	December 31,
	2019			2018
	(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	335,715		$	796,280
Investments		1,429			938,944
Accounts receivable, net		587,734			568,316
Inventories		320,551			291,569
Other current assets		67,062			68,054

Total current assets		1,312,491			2,663,163
Property, plant and equipment, net		417,342			343,083
Intangible assets, net		240,203			246,902
Goodwill		356,128			355,614
Operating lease assets		93,358			—
Other assets		137,533			118,664

Total assets	$	2,557,055		$	3,727,426

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Notes payable and debt	$	100,366		$	178
Accounts payable		49,001			68,168
Accrued employee compensation		43,467			64,545
Deferred revenue and customer advances		176,360			164,965
Current operating lease liabilities		27,125			—
Accrued income taxes		45,967			22,943
Accrued warranty		11,964			12,300
Other current liabilities		137,084			115,832

Total current liabilities		591,334			448,931
Long-term liabilities:
Long-term debt		1,580,797			1,148,172
Long-term portion of retirement benefits		59,159			55,853
Long-term income tax liabilities		394,562			430,866
Long-term operating lease liabilities		66,881			—
Other long-term liabilities		80,603			76,346

Total long-term liabil ities		2,182,002			1,711,237

Total liabilities		2,773,336			2,160,168
Commitments and contingencies (Notes 6, 9, 10, 11, 12 , 13 and 1 7 )
Stockholders’ (deficit) equity:
Preferred stock, par value $0.01 per share, 5,000 shares authorized, no ne issued at December 31, 2019 and December 31, 2018		—			—
Common stock, par value $0.01 per share, 400,000 shares authorized, 161,030 and 160,472 shares issued, 62,587 and 73,115 shares outstanding at December 31, 2019 and December 31, 2018, respectively		1,610			1,605
Additional paid-in capital		1,926,753			1,834,741
Retained earnings		6,587,403			5,995,205
Treasury stock, at cost, 98,443 and 87,357 shares at December 31, 2019 and December 31, 2018, respectively		(8,612,576	)		(6,146,322	)
Accumulated other comprehensive loss		(119,471	)		(117,971	)

Total stockholders’ (deficit) equity		(216,281	)		1,567,258

Total liabilities and stockholders’ (deficit) equity	$	2,557,055		$	3,727,426

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended December 31,
	2019			2018			2017
	(In thousands, except per share data)
Revenues:
Product sales	$	1,567,189		$	1,604,993		$	1,552,349
Service sales		839,407			814,936			756,729

Total net sales		2,406,596			2,419,929			2,309,078
Costs and operating expenses:
Cost of product sales		642,706			656,275			623,214
Cost of service sales		367,994			336,289			323,853
Selling and administrative expenses		534,791			536,902			544,363
Research and development expenses		142,955			143,403			132,593
Purchased intangibles amortization		9,693			7,712			6,743
Litigation provision (settlement) (Note 11)		—			(426	)		11,114
Acquired in-process research and development (Note 2)		—			—			5,000

Total costs and operating expenses		1,698,139			1,680,155			1,646,880

Operating income		708,457			739,774			662,198
Other expense		(3,586	)		(47,794	)		(340	)
Interest expense		(48,690	)		(48,641	)		(56,839	)
Interest income		22,058			38,807			36,078

Income before income taxes		678,239			682,146			641,097
Provision for income taxes		86,041			88,352			620,786

Net income	$	592,198		$	593,794		$	20,311

Net income per basic common share	$	8.76		$	7.71		$	0.25
Weighted-average number of basic common shares		67,627			76,992			79,793
Net income per diluted common share	$	8.69		$	7.65		$	0.25
Weighted-average number of diluted common shares and equivalents		68,166			77,618			80,604

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,
	2019			2018			2017
	(In thousands)
Net income	$	592,198		$	593,794		$	20,311
Other comprehensive (loss) income:
Foreign currency translation		1,631			(36,279	)		101,148
Unrealized gains (losses) on investments before income taxes		3,046			698			(1,794	)
Income tax (expense) benefit		(641	)		443			68

Unrealized gains (losses) on investments, net of tax		2,405			1,141			(1,726	)
Retirement liability adjustment before reclassifications		(9,360	)		(6,722	)		7,832
Amounts reclassified to other expense		1,979			48,792			3,948

Retirement liability adjustment before income taxes		(7,381	)		42,070			11,780
Income tax benefit (expense)		1,845			(14,836	)		(4,989	)

Retirement liability adjustment, net of tax		(5,536	)		27,234			6,791
Other comprehensive (loss) income		(1,500	)		(7,904	)		106,213

Comprehensive income	$	590,698		$	585,890		$	126,524

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,
	2019			2018			2017
	(In thousands)
Cash flows from operating activities:
Net income	$	592,198		$	593,794		$	20,311
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		38,577			37,541			39,436
Deferred income taxes		9,620			2,405			45,510
Depreciation		53,839			57,952			61,450
Amortization of intangibles		51,457			50,456			44,552
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		(22,195	)		(47,921	)		(24,013	)
( Increase ) decrease in inventories		(31,854	)		(25,396	)		731
Increase in other current assets		(10,918	)		(12,446	)		(16,323	)
(Increase) decrease in other assets		(16,470	)		6,047			(24,098	)
Increase (decrease) in accounts payable and other current liabilities		9,784			(81,663	)		3,175
I ncrease in deferred revenue and customer advances		12,189			2,721			10,386
Effect of the 2017 Tax Cuts and Jobs Act		(3,229	)		(6,059	)		530,383
(Decrease) i ncrease in other liabilities		(39,911	)		27,015			1,140
Net cash provided by operating activities		643,087			604,446			697,640
Cash flows from investing activities:
Additions to property, plant, equipment and software capitalization		(163,823	)		(96,079	)		(85,473	)
Asset and business acquisitions, net of cash acquired		—			(31,486	)		—
Investment in unaffiliated company		(8,843	)		(7,615	)		(7,000	)
Paym ents for intellectual p roperty licen ses		—			—			(5,000	)
P urc hases of investments		(36,951	)		(1,006,080	)		(2,960,379	)
Maturities and sales of inves tments		978,419			2,824,562			2,522,100
Net cash provided by (used in) investing activities		768,802			1,683,302			(535,752	)
Cash flows from financing activities:
Proceeds from debt issuances		925,670			274			1,480,190
Payments on debt		(390,482	)		(850,435	)		(1,310,214	)
Payments of debt issuance costs		(2,932	)		—			(2,984	)
Proceeds from stock plans		53,715			52,429			97,789
Purchases of treasury shares		(2,469,258	)		(1,315,106	)		(332,544	)
Proceeds from (payments for) derivative contracts		10,609			(6,684	)		3,894
Net cash used in financing activities		(1,872,678	)		(2,119,522	)		(63,869	)
Effect of exchange rate changes on cash and cash equivalents		224			(14,265	)		38,669
(Decrease) increase in cash and cash equivalents		(460,565	)		153,961			136,688
Cash and cash equivalents at beginning of period		796,280			642,319			505,631
Cash and cash equivalents at end of period	$	335,715		$	796,280		$	642,319
Supplemental cash flow information:
Income taxes paid	$	87,998		$	159,397		$	70,583
Interest paid	$	42,843		$	50,798		$	56,503

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(DEFICIT)


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity ( Def i cit )
	(In thousands)
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

Net income		—		—		—		592,198			—			—			592,198
Other comprehensive loss		—		—		—		—			—			(1,500	)		(1,500	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		43		—		7,996		—			—			—			7,996
Stock options exercised		406		4		45,715		—			—			—			45,719
Treasury stock		—		—		—		—			(2,466,254	)		—			(2,466,254	)
Stock-based compensation		109		1		38,301		—			—			—			38,302

Balance December 31, 2019		161,030	$	1,610	$	1,926,753	$	6,587,403		$	(8,612,576	)	$	(119,471	)	$	(216,281	)

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 (“UPLC

” 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 TA

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, goodwill and intangible assets, income taxes, litigation, stock-based compensation and contingencies, and to a lesser extent, product returns and allowances, bad debts, inventory valuation, warranty and installation provisions, retirement plan obligations and equity investments, which are not as significant to our financial statements. 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)

Reclassifications

Certain amounts from prior year have been reclassified in the accompanying financial statements in order to be consistent with the current year’s classification.

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

% and

% in 2019, 2018 and 2017, respectively. Gains and losses from foreign currency transactions are included

primar

ily

cost of sales

in the consolidated statements of operations. In 2019, 2018 and 2017, foreign currency transactions resulted in net losses of $

million, $

million and $

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’

(deficit)

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, 2019 and 2018, $249 million out of $337 million and $471 million out of $1,735 million, respectively, of the Company’s total

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $176 million out of $337 million and $251 million out of $1,735 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at December 31, 2019 and 2018, respectively.

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 year ended December 31, 2019, 2018 and 2017 (in thousands):


	Balance at Beginning of Period		Additions		Deduction			Balance at End of Period
Allowance for Doubtful Accounts
December 31, 2019	$	7,663	$	4,701	$	(2,804	)	$	9,560
December 31, 2018	$	6,109	$	6,333	$	(4,779	)	$	7,663
December 31, 2017	$	5,141	$	3,752	$	(2,784	)	$	6,109

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

% in each of the years 2019, 2018 and 2017. None of the Company’s individual customers accounted for more than

% of annual Company sales in 2019, 2018 or 2017. 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 provision taxes

off-shore

earnings at a rate of 10.5%, partially offset with foreign tax credits. In connection with this provision, the Company’s accounting policy is 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-nine 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

in-process

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

December 31

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

purposes, the

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; 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. 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 $40 million and $34 million of direct expenses that were related to the development of software in 2019 and 2018, respectively. Net capitalized software included in intangible assets totaled $149 million and $147 million at December 31, 2019 and 2018, respectively. See Note

, “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 $

million and $

million at December 31, 2019 and 2018, 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 at cost, adjusted for subsequent observable price changes as applicable. The Company periodically evaluates the carrying value of its investments for which the Company does not have the ability to exercise significant influence, and for which there is not a readily determinable fair value and carries them at cost, less impairment, adjusted for subsequent observable price changes. For equity investments in which the Company has the ability to exercise significant influence over operating and financial policies of the investee, 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, 2019, the Company made $9 million of investments in unaffiliated companies. During the year ended December 31, 2018, the Company made a $8 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.

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, 2019 and 2018. 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, 2019 (in thousands):


	Total at December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Time deposits	$	1,642	$	—	$	1,642	$	—
Waters 401(k) Restoration Plan assets		30,158		30,158		—		—
Foreign currency exchange contracts		16		—		16		—
Interest rate cross-currency swap agreements		4,485		—		4,485		—

Total	$	36,301	$	30,158	$	6,143	$	—

Liabilities:
Contingent consideration	$	2,557	$	—	$	—	$	2,557
Foreign currency exchange contracts		1,028		—		1,028		—

Total	$	3,585	$	—	$	1,028	$	2,557

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)

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

is no contractual limit, the fair value of future contingent consideration payments was estimated to be $

million and $

million at December 31, 2019 and 2018, 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 $1.0 billion and $510 million at December 31, 2019 and 2018, 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 $1.0 billion and $502 million at December 31, 2019 and 2018, respectively, using Level 2 inputs.

Derivative Transactions

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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

As of Decem

er 31, 2019

, the Company

has

entered into three-year interest rate cross-currency swap derivative agreements with

notional value of $560 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’ (deficit) 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.

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, 2019					December 31, 2018
	Notional Value		Fair Value			Notional Value		Fair Value
Foreign currency exchange contracts:
Other current assets	$	119,576	$	16		$	112,212	$	503
Other current liabilities	$	29,495	$	1,028		$	40,175	$	224

Interest rate cross-currency swap agreements:
Other assets	$	560,000	$	4,485		$	300,000	$	1,093
Accumulated other comprehensive income			$	(4,485	)			$	(1,093	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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,
	2019			2018				2017
Foreign currency exchange contracts:
Realized (losses) gains on closed contracts			Cost of sales		$	(3,552	)		$	(6,684	)	$	3,894
Unrealized (losses) gains on open contracts			Cost of sales			(1,292	)			(105	)		1,054

Cumulative net pre-tax (losses) gains			Cost of sales		$	(4,844	)		$	(6,789	)	$	4,948

Interest rate cross-currency swap agreements:
Interest earned			Interest income		$	11,709			$	2,713		$	—
Unrealized gains on open contracts			Stockholders’ ( def i cit ) equity		$	4,485			$	1,093		$	—

Stockholders’ (Deficit) 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. During 2019, 2018 and 2017, the Company repurchased 11.1 million, 6.8 million and 1.8 million shares of the Company’s outstanding common stock at a cost of $2.5 billion, $1.3 billion and $323 million, respectively, under the

January 2019

authorization and other previously announced programs. In addition, the Company repurchased $8 million, $10 million and $10 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2019, 2018 and 2017,

respectively. As of December 31, 2019, the Company has a total of $1.7 billion authorized for future repurchases.

he Company accrued $20 million

and $23 million at December 31, 2019 and 2018, respectively, as a result of treasury stock purchases that were unsettled. These transactions were settled in January 2020 and 2019, respectively.

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 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, 2019, 2018 and 2017 (in thousands):


	Balance at Beginning of Period		Accruals for Warranties		Settlements Made			Balance at End of Period
Accrued warranty liability:
December 31, 2019	$	12,300	$	7,540	$	(7,876	)	$	11,964
December 31, 2018	$	13,026	$	5,033	$	(5,759	)	$	12,300
December 31, 2017	$	13,391	$	8,746	$	(9,111	)	$	13,026

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 $6 million, $7 million and $6 million for 2019, 2018 and 2017, 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 $

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 14, “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 17, “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. 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 2020, the Company made organizational changes to better align its resources with its growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 3% of the Company’s employees. The Company expects to incur approximately $25 million of severance-related costs, lease termination costs and other related costs during 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Recently Adopted 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 requires lessees to present the assets and liabilities that arise from leases on their balance sheets. This guidance was effective for annual and interim reporting periods beginning after December 15, 2018. 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 did have a material effect on the Company’s balance sheet by recording a

right-of-use

lease asset and lease liabilities in the amount $100 million as of January 1, 2019; however, it did not have a material impact on the Company’s results of operations, cash flows and retained earnings.

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 was shortened to end at the earliest call date. This guidance was effective for annual and interim periods beginning after December 15, 2018. The Company adopted this standard as of January 1, 2019 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 February 2018, accounting guidance was issued to address the impact of the 2017 Tax 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 was effective for annual and interim periods beginning after December 15, 2018. The Company adopted this standard as of January 1, 2019 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 2018, accounting guidance was issued to address the capitalization of implementation costs associated with hosting arrangements that meet the definition of a service contract. The new guidance clarified that the

internal-use

software capitalization guidance should be used to determine when implementation costs are capitalizable. This guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company elected to prospectively adopt this guidance as of January 1, 2019 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

Recently Issued Accounting Standards

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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 requirements 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 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.

In December 2019, accounting guidance was issued that simplifies the accounting for income taxes by removing certain exceptions within the current guidance; including the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. The amendment also improves consistent application by clarifying and amending existing guidance related to aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step up in the tax basis of goodwill. 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

the

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

are

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 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

their

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 (1) service and software maintenance contracts and (2) 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s deferred revenue liabilities on the consolidated balance sheets consist 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, 2019, 2018 and 2017 (in thousands):


	December 31,
	2019			2018			2017
Balance at the beginning of the period	$	204,257		$	192,589		$	173,780
Recognition of revenue included in balance at beginning of the period		(176,981	)		(159,258	)		(143,589	)
Revenue deferred during the period, net of revenue recognized		186,419			170,926			162,398

Balance at the end of the period	$	213,695		$	204,257		$	192,589

The Company classified $

million and $

million of deferred revenue and customer advances in other long-term liabilities at December 31, 2019 and 2018, respectively.

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, 2019
Deferred revenue and customer advances expected to be recognized in:
One year or less	$	176,360
13-24 months		21,029
25 months and beyond		16,306

Total	$	213,695

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, 2019
	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
Time deposits	$	1,642	$	—	$	—	$	1,642

Total	$	1,642	$	—	$	—	$	1,642

Amounts included in:
Cash equivalents	$	213	$	—	$	—	$	213
Investments		1,429		—		—		1,429

Total	$	1,642	$	—	$	—	$	1,642

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	December 31, 2018
	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair 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

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


	December 31, 2019		December 31, 2018
Due in one year or less	$	1,642	$	797,649
Due after one year through three years		—		201,826

Total	$	1,642	$	999,475

Net realized gains and losses on sales of investments were not material in 2019, 2018 and 2017.

5 Inventories

Inventories are classified as follows (in thousands):


	December 31, 2019		December 31, 2018
Raw materials	$	126,850	$	111,641
Work in progress		15,457		15,552
Finished goods		178,244		164,376

Total inventories	$	320,551	$	291,569

During 2019, 2018 and 2017, the Company recorded inventory-related excess and obsolescence provisions of $13 million, $8 million and $2 million, respectively.

6 Property, Plant and Equipment

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


	December 31,
	2019			2018
Land and land improvements	$	37,040		$	36,554
Buildings and leasehold improvements		355,425			299,103
Production and other equipment		537,211			494,302
Construction in progress		57,985			41,909

Total property, plant and equipment		987,661			871,868
Less: accumulated depreciation and amortization		(570,319	)		(528,785	)

Property, plant and equipment, net	$	417,342		$	343,083

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 $85 million on this facility through December 31, 2019.

During 2019, 2018 and 2017, the Company retired and disposed of approximately $11

million, $9 million and $15 million of property, plant and equipment, respectively, most of which was fully depreciated and no longer in use. Gains on disposals were immaterial for the years ended December 31, 2019, 2018 and 2017.

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 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 and the DESI imaging technology, either individually or in the aggregate, as though this acquisition 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 at both December 31, 2019 and 2018.

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


	December 31, 2019						December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period		Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period
Capitalized software	$	481,986	$	333,255		5 years	$	454,307	$	307,634		5 years
Purchased intangibles		200,523		151,722		11 years		201,566		144,184		11 years
Trademarks and IPR&D		13,782		—		—		13,677		—		—
Licenses		5,669		5,298		6 years		5,568		4,875		6 years
Patents and other intangibles		83,035		54,517		8 years		77,753		49,276		8 years

Total	$	784,995	$	544,792		7 years	$	752,871	$	505,969		7 years

The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $12 million and $11 million, respectively, in the year ended December 31, 2019 due to the effects of foreign currency translation. Amortization expense for intangible assets was $51 million, $50 million and $45 million for the years ended December 31, 2019, 2018 and 2017, respectively. Amortization expense for intangible assets is estimated to be $52 million per year for each of the next five years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9 Debt

In September 2019, the Company issued the following senior unsecured notes:


Senior						Face Value
Unsecured Notes	Term		Interest Rate			(in millions)		Maturity Date
Series L		7 years		3.31	%	$	200		September 2026
Series M		10 years		3.53	%	$	300		September 2029

The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes. Interest on the Series L and M Senior Notes is payable semi-annually. The Company may prepay some or all of the Senior Notes at any time in an amount not less than 10% of the aggregate principal amount of the Senior Notes then outstanding, plus the applicable make-whole amount for Series L and M Senior Notes, in each case, upon no more than 60 nor less than 20 days’ written notice to the holders of the Senior Notes. In the event of a change in control (as defined in the note purchase agreement) of the Company, the Company may be required to prepay the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. Other provisions for these senior unsecured notes are similar to the existing senior unsecured notes, as described below.

In November 2017, the Company entered into a 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 (1) the prime rate in effect on such day, (2) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (3) 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, 2019 and 2018, the Company had a total of $1.1 billion and $560 million, respectively, of outstanding senior unsecured notes. 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 the Series H senior unsecured note. 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)

In February 2019, certain defined terms related to the subsidiary guarantors were amended in the 2017 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.

The Company had the following outstanding debt at December 31, 2019 and 2018 (in thousands):


	December 31, 2019			December 31, 2018
Foreign subsidiary lines of credit	$	366		$	178
Senior unsecured notes - Series B - 5.00%, due February 2020		100,000			—

Total notes payable and debt, current		100,366			178
Senior unsecured notes - Series B - 5.00%, due February 2020		—			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 K - 3.44%, due May 2026		160,000			160,000
Senior unsecured notes - Series L - 3.31%, due September 2026		200,000			—
Senior unsecured notes - Series M - 3.53%, due September 2029		300,000			—
Credit agreement		625,000			590,000
Unamortized debt issuance costs		(4,203	)		(1,828	)

Total long-term debt		1,580,797			1,148,172

Total debt	$	1,681,163		$	1,148,350

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

As of both December 31, 2019 and 2018, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1.2 billion after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 3.39% and 3.83% at December 31, 2019 and 2018, respectively. As of December 31, 2019, the Company was in compliance with all debt covenants.

The Company and its foreign subsidiaries also had available short-term lines of credit totaling $105 million and $90 million at December 31, 2019 and 2018, 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 1.48% and 1.88% for December 31, 2019 and 2018, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Annual maturities of debt outstanding at December 31, 2019 are as follows (in thousands):


	Total
2020	$	100,366
2021		150,000
2022		625,000
2023		50,000
2024		100,000
Thereafter		660,000

Total	$	1,685,366

10 Income Taxes

Income tax data for the years ended December 31, 2019, 2018 and 2017 is as follows (in thousands):


	Year Ended December 31,
	2019		2018		2017
The components of income from operations before income taxes are as follows:
Domestic	$	97,325	$	57,822	$	55,751
Foreign		580,914		624,324		585,346

Total	$	678,239	$	682,146	$	641,097


	Year Ended December 31,
	2019		2018			2017
The components of the income tax provision from operations were as follows:
Federal	$	7,009	$	27,277		$	499,828
State		3,329		(11,964	)		21,163
Foreign		66,083		70,634			54,285

Total current tax provision	$	76,421	$	85,947		$	575,276

Federal	$	6,913	$	(3,256	)	$	35,949
Stat e		1,253		2,247			5,398
Foreign		1,454		3,414			4,163
Total deferred tax provision		9,620		2,405			45,510

Total provision	$	86,041	$	88,352		$	620,786

NOTES TO CONSOLIDATED FINANCIAL

STATEMENTS

— (Continued)

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, 2019, 2018 and 2017 (in thousands):


	Year Ended December 31,
	2019			2018			2017
Federal tax computed at U.S. statutory income tax rate	$	142,430		$	143,251		$	224,384
Enactment of the 2017 Tax Cuts and Jobs Act		—			(6,059	)		550,000
Foreign currency exchange impact on distributed earnings		(3,229	)		7,495			—
GILTI, net of foreign tax credits		10,523			13,727			—
Settlement of tax audits		—			—			706
State income tax, net of federal income tax benefit		3,459			2,910			1,289
Net effect of foreign operations		(52,727	)		(57,003	)		(131,694	)
Effect of stock-based compensation		(9,211	)		(9,089	)		(19,566	)
Other, net		(5,204	)		(6,880	)		(4,333	)

Provision for income taxes	$	86,041		$	88,352		$	620,786

The Company’s effective tax rates were 12.7%, 13.0% and 96.8% for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company’s effective income tax rate differs from the U.S. federal statutory rate each year due to differences in the proportionate amounts of

pre-tax

income recognized in jurisdictions with different effective tax rates and the items discussed below.

During 2019, the Company’s effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, a $11 million provision related to the GILTI tax and a tax benefit of $9 million on stock-based compensation.

net benefit related to the finalization of the impact of the Tax Cuts and Jobs Act (the “2017 Act”).

The 2017 effective tax rate of 96.8% differs from the 35% U.S. statutory tax rate primarily due to the 2017 Act and the jurisdictional mix of earnings. As a result of the 2017 Act, for the year ended December 31, 2017, the Company accrued a $550 million tax provision. 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 2017, the Company also had a benefit of $20 million related to stock-based compensation.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Prior to the enactment of the 2017 Act, the Company had an indefinite reinvestment assertion on a significant portion of its undistributed earnings from foreign subsidiaries. At the end of 2018, and as a result of the enactment of the 2017 Act, the Company reevaluated its historic assertion and no longer considered these earnings to be indefinitely reinvested in its foreign subsidiaries. The Company recorded a tax provision of $3 million and $4 million for 2019 and 2018, respectively, for future withholding taxes and U.S. state taxes on repatriation of 2019 and 2018 undistributed earnings.

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,
	2019			2018
Deferred tax assets:
Net operating losses and credits	$	55,939		$	63,052
Depreciation		4,776			7,495
Operating leases		19,849			—
Amortization		3,738			3,633
Stock-based compensation		9,790			9,984
Deferred compensation		20,077			22,058
Unrealized foreign currency gain/loss		7,955			5,881
Deferred revenue		9,696			4,654
Revaluation of equity investments and licenses		3,424			3,148
Inventory		4,824			4,588
Accrued liabilities and reserves		7,215			7,213
Other		3,839			4,073

Total deferred tax assets		151,122			135,779
Valuation allowance		(51,221	)		(53,893	)

Deferred tax assets, net of valuation allowance		99,901			81,886
Deferred tax liabilities:
Capitalized software		(21,025	)		(19,491	)
Operating leases		(19,553	)		—
Indefinite-lived intangibles		(14,363	)		(13,753	)
Deferred tax liability on foreign earning s		(18,027	)		(20,443	)

Total deferred tax liabilities		(72,968	)		(53,687	)

Net deferred tax assets	$	26,933		$	28,199

The Company has gross foreign net operating losses of $221 million that do not expire under current laws. As of December 31, 2019, the Company has provided a deferred tax valuation allowance of $51 million, of which $48 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 $8 million as of December 31, 2019, which represent the future tax benefit of foreign net operating loss carryforwards that do not expire under current law.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company accounts for its uncertain tax return reporting positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting 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.

The following is a summary of the activity of the Company’s gross unrecognized tax benefits, excluding interest and penalties, for the year ended December 31, 2019, 2018 and 2017 (in thousands):


	2019			2018			2017
Balance at the beginning of the period	$	26,108		$	5,843		$	9,964
Net reductions for settlement of tax audits		—			—			(22	)
Net reductions for lapse of statutes taken during the period		(261	)		(436	)		(5,178	)
Net additions for tax positions taken during the prior period		—			17,651			—
Net additions for tax positions taken during the current period		1,943			3,050			1,079

Balance at the end of the period	$	27,790		$	26,108		$	5,843

As of 2019, the total amount of gross unrecognized tax benefits was $28 million, all of which, if recognized, would impact the Company’s effective tax rate.

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, 2014. 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, 2019, 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.

As of December 31, 2019, the Company is currently under an income tax audit in the U.S. for its 2016 tax year. The Company is also subject to various foreign audits and inquiries and we currently do not expect any material adjustments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a summary of the activity of the Company’s valuation allowance for the years ended December 31, 2019, 2018 and 2017 (in thousands):


	Balance at Beginning of Period		Charged to Provision for Income Taxes*			Other**			Balance at End of Period
Valuation allowance for deferred tax assets:

2019	$	53,893	$	(1,242	)	$	(1,430	)	$	51,221
2018	$	62,098	$	(2,128	)	$	(6,077	)	$	53,893
201 7	$	61,225	$	(6,363	)	$	7,236		$	62,098

*	These amounts have been recorded as part of the income statement provision for income taxes. The income statement effects of these amounts have largely been offset by amounts related to changes in other deferred tax balance sheet accounts.

The change in the valuation allowance during the year ended December 31, 2019 is primarily due to the effect of foreign currency translation on a valuation allowance related to a net operating loss carryforward. The change in the valuation allowance during the year ended December 31, 2018 was primarily due to the write-off of a valuation allowance to Retained Earnings for the tax effect related to intra-entity transfers. The change in the valuation allowance during the year ended December 31, 2017 was primarily due to the effect of foreign currency translation on a valuation allowance related to a net operating loss carryforward.

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. The accrued patent litigation expense is in other current liabilities in the consolidated balance sheets at December 31, 2019 and 2018.

12 Leases

The Company adopted new accounting guidance regarding the accounting for leases as of January 1, 2019 using a modified retrospective transition approach that was applied to leases existing as of, or entered into after, January 1, 2019. The Company elected the package of transition provisions available for expired or existing contracts, which allowed the Company to carryforward historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. Upon adoption, the Company recorded a

right-of-use

lease asset and lease liabilities in the amount $

million as of January 1, 2019. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows and retained earnings.

The Company’s operating leases consist of property leases for sales, demonstration, laboratory, warehouse and office spaces, automotive leases for sales and service personnel and equipment leases, primarily used in our manufacturing and distribution operations. The lease policies described below were effective as of January 1, 2019. For leases with terms greater than 12 months, the Company recorded the related

right-of-use

asset and lease liability obligation at the present value of lease payments over the term of the leases. Some of the Company’s leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments. A certain number of these leases contain rent escalation clauses, either fixed or adjusted periodically for inflation of market rates, that are factored into the Company’s determination of

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

lease payments. The Company also has variable lease payments that do not depend on a rate or index, primarily for items such as real estate taxes and other expenses, which are recorded as variable costs when incurred. Variable costs incurred were not material in 2019.

In addition, the Company’s lease agreements that contain lease and

non-lease

components are generally accounted for as a single lease component. The Company has elected not to apply the recognition requirements of the new accounting guidance to leases with terms less than 12 months. For these leases, the Company recognizes lease payments in net income on a straight-line basis over the term of the lease. Costs incurred related to leases with terms less than 12 months were not material in 2019. As of December 31, 2019 and 2018, the Company does not have leases that are classified as finance leases.

When available, the Company uses the rate implicit in the lease to discount lease payments to determine the present value of the lease liabilities; however, most of the leases do not provide a readily determinable implicit rate and, as required by the accounting guidance, the Company estimated its incremental secured borrowing rate to discount the lease payments based on information available at lease commencement (or, for the leases in existence on the adoption date, the January 1, 2019 information). The Company’s incremental borrowing rate reflects the estimated rate of interest that the Company would pay to borrow on a collateralized basis over a similar term to the lease payments in a similar economic environment.

As of December 31, 2019, the Company has lease agreements that expire at various dates through 2034, with a weighted-average remaining lease term of 5.3 years. Rental expense was $36 million for the year ended

December 31, 2019 under the new lease accounting standard and $28 million for the year ended December 31, 2018 under the previous lease accounting standard. As of December 31, 2019, the weighted-average discount rate used to determine the present value of lease liabilities was 3.80%. Cash paid for amounts included in the measurement of lease liabilities in operating activities in the statement of cash flows was $36 million during the year ended December 31, 2019. The Company

recorded

$118 million

right-of-use

assets in exchange for new operating lease liabilities during the year ended December 31, 2019. The total

right-of-use

assets

recorded

during 2019 includes the $100 million

right-of-use

assets recorded upon adoption as of January 1, 2019.

The Company’s

right-of-use

lease assets and lease liabilities included in the consolidated balance sheets are classified as follows (in thousands):


	Financial Statement Classification	December 31, 2019
Assets:
Property operating lease assets	Operating lease assets	$	64,206
Automobile operating lease assets	Operating lease assets		27,197
Equipment operating lease assets	Operating lease assets		1,955

Total lease assets		$	93,358

Liabilities:
Current operating lease liabilities	Current operating lease liabilities	$	27,125
Long-term operating lease liabilities	Long-term operating lease liabilities		66,881

Total lease liabilities		$	94,006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Undiscounted future minimum rents payable as of December 31, 2019 under

non-cancelable

leases with initial terms exceeding one year reconcile to lease liabilities included in the consolidated balance sheet as follows (in thousands):


2020	$	29,489
2021		21,774
2022		16,743
2023		9,175
2024		6,867
2025 and thereafter		19,311

Total future minimum lease payments		103,359
Less: amount of lease payments representing interest		(9,353	)

Present value of future minimum lease payments		94,006
Less: current operating lease liabilities		(27,125	)

Long-term operating lease liabilities	$	66,881

Prior to the adoption of the new lease accounting standard, undiscounted future minimum rents payable as of December 31, 2018 under non-cancelable leases with initial terms exceeding one year were as follows (in thousands):


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

Total future minimum lease payments	$	102,958

13 Other Commitments and Contingencies

The Company licenses certain technology and software from third parties.

Future minimum license fees payable under existing license agreements as of December 31, 2019 are immaterial for the years ended December 31, 2020 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14 Stock-Based Compensation

In May 2012, the Company’s shareholders approved the Company’s 2012 Equity Incentive Plan (“2012 Plan”). As of December 31, 2019, the 2012 Plan has 2.1 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, 2019, 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, 2019, 1.5

million shares have been issued under both the 2009 and 1996 Employee Stock Purchase Plans. Each plan period lasts 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, 2019, 2018 and 2017, 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, 2019, 2018 and 2017 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):


	2019		2018		2017
Cost of sales	$	2,271	$	2,212	$	3,032
Selling and administrative expenses		30,907		30,443		33,335
Research and development expenses		5,399		4,886		3,069

Total stock-based compensation	$	38,577	$	37,541	$	39,436

During the years ended December 31, 2019, 2018 and 2017, the Company recognized less than $1 million, $1 million and $4 million of expense, respectively, of stock-based compensation related to the modification of certain stock awards upon the retirement of senior executives.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2019, 2018 and 2017 are as follows:


Options Issued and Significant Assumptions Used to Estimate Option Fair Values	2019			2018			2017
Options issued in thousands		146			321			389
Risk-free interest rate		2.5	%		2.7	%		2.2	%
Expected life in years		5			6			6
Expected volatility		24.5	%		25.3	%		22.7	%
Expected dividends		—			—			—


Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	2019		2018		2017
Exercise price	$	230.37	$	196.78	$	170.24
Fair value	$	61.75	$	59.89	$	45.73

The following table summarizes stock option activity for the plans for the year ended December 31, 2019 (in thousands, except per share data):


	Number of Shares			Exercise Price per Share					Weighted- Average Exercise Price per Share
Outstanding at December 31, 2018		1,790		$	38.09	to	$	208.47	$	142.47
Granted		146		$	183.41	to	$	238.52	$	230.37
Exercised		(406	)	$	38.09	to	$	208.47	$	113.06
Canceled		(75	)	$	113.36	to	$	238.52	$	159.67

Outstanding at December 31, 2019		1,455		$	61.63	to	$	238.52	$	158.61

The following table details the options outstanding at December 31, 2019 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
$61.63 to $128.93		529	$	117.10		5.1		430	$	114.85
$128.94 to $192.62		520	$	160.06		7.7		208	$	149.37
$192.63 to $238.52		406	$	210.84		8.2		91	$	196.83

Total		1,455	$	158.61		6.9		729	$	134.94

During 2019, 2018 and 2017, 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 $45 million,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$44 million

and

$76 million, respectively. The total cash received from the exercise of these stock options

was $46 million,

$45 million

and

$91 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The aggregate intrinsic value of the outstanding stock options at December 31, 2019 was $110 million. Options exercisable at December 31, 2019, 2018 and 2017

were 0.7 million

0.8 million

and

0.9 million, respectively. The weighted-average exercise prices of options exercisable at December 31, 2019, 2018 and 2017

were $134.94,

$117.08

and

$103.63, respectively. The weighted-average remaining contractual life of the exercisable outstanding stock options at December 31, 2019 was 6 years.

The aggregate intrinsic value of stock options exercisable as of December 31, 2019 was $72 million.

At December 31, 2019, the Company had 1.4 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 $109 million, $158.33 and 6.9 years, respectively, at December 31, 2019.

As of December 31, 2019, there were $32 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 3.2 years.

Restricted Stock

During the years ended December 31, 2019, 2018 and 2017, the Company granted

five

thousand

five thousand and

eight

thousand shares of restricted stock, respectively. The weighted-average fair value per share on the grant date of the restricted stock granted in 2019, 2018 and 2017 was $183.41,

$194.73 and

$130.35, respectively. The Company has recorded $1 million of compensation expense in each of the years ended December 31, 2019, 2018 and 2017 related to the restricted stock grants. As of December 31, 2019, 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, 2019 (in thousands, except per share data):


	Shares			Weighted-Average Grant Dat e Fair Value per Share
Unvested at December 31, 2018		304		$	153.31
Granted		86		$	235.31
Vested		(104	)	$	139.07
Forfeited		(26	)	$	167.60

Unvested at December 31, 2019		260		$	184.70

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, 2019, 2018 and 2017 on the restricted stock units expected to vest were $14 million, $16 million and $17 million, respectively. As of December 31, 2019, there were $33 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 3.3 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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, 2019, 2018 and 2017 are as follows:


Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values	2019			2018			2017
Performance stock units issued in thousands		13			40			40
Risk-free interest rate		2.4	%		2.4	%		1.6	%
Expected life in years		2.8			3.0			3.0
Expected volatility		23.5	%		22.0	%		20.9	%
Average volatility of peer companies		26.2	%		25.9	%		25.6	%
Correlation Coefficient		34.2	%		35.9	%		37.8	%
Expected dividends		—			—			—

The following table summarizes the unvested performance stock unit award activity for the year ended December 31, 2019 (in thousands, except per share data):


	Shares			Weighted-Average Fair Value per Share
Unvested at December 31, 2018		100		$	212.34
Granted		13		$	372.68
Forfeited		(8	)	$	200.26

Unvested at December 31, 2019		105		$	233.11

The amount of compensation costs recognized for the years ended December 31, 2019

, 2018

and 2017 on the performance stock units expected to vest were $

million

, $5 million

and

less than

million, respectively

. As of Decem

er 31, 2019, there were $

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

1.9

years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15 Earnings Per Share

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


	Year Ended December 31, 2019
	Net Income		Weighted-Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	592,198		67,627	$	8.76
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		539		(0.07	)

Net income per diluted common share	$	592,198		68,166	$	8.69


	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

For the years ended December 31, 2019, 2018 and 2017, the Company had 0.1 million, 0.1 million and 0.4 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.

16 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	)
Other comprehensive income (loss), net of tax		1,631			(5,536	)		2,405			(1,500	)

Balance at December 31, 2019	$	(104,066	)	$	(15,405	)	$	—		$	(119,471	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17 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

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, 2019, 2018 and 2017, the Company’s matching contributions amounted to $17 million, $17 million and $16 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

was

completed in 2019.

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 $15 million, $13 million and $12 million in the years ended December 31, 2019, 2018 and 2017, 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.

Net actuarial (gains) losses that arose during the year were due to changes in the discount rate as well as differences between expected and actual return on plan assets.

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, 2019 and 2018, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The reconciliation of the projected benefit obligations for the plans at December 31, 2019 and 2018 is as follows (in thousands):


	2019									2018
	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	$	972		$	17,724		$	93,722		$	168,064		$	17,121		$	96,378
Service cost		—			499			4,339			568			566			5,368
Employee contributions		—			1,214			499			—			1,159			622
Interest cost		29			777			1,735			6,491			636			1,707
Actuarial (gains) losses		(32	)		2,081			13,385			6,415			(621	)		(2,274	)
Benefits paid		—			(1,109	)		(3,281	)		(3,416	)		(1,007	)		(3,277	)
Plan amendments		—			—			—			—			(130	)		(44	)
Plan settlements		(969	)		—			(7,407	)		(177,150	)		—			(2,791	)
Other plans		—			—			1,598			—			—			1,063
Currency impact		—			—			(1,224	)		—			—			(3,030	)

Projected benefit obligation, December 31	$	—		$	21,186		$	103,366		$	972		$	17,724		$	93,722

The accumulated benefit obligations for the plans at December 31, 2019 and 2018 are as follows (in thousands):


	2019						2018
	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	$	—		**	$	88,105	$	972		**	$	82,026

	**	Not applicable.

The reconciliation of the fair value of the plan assets at December 31, 2019 and 2018 is as follows (in thousands):


	2019									2018
	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	$	—		$	11,080		$	81,587		$	171,373		$	11,125		$	74,990
Actual return on plan assets		—			2,140			6,237			2,555			(584	)		1,070
Company contributions		969			448			6,103			6,625			387			10,778
Employee contributions		—			1,214			499			—			1,159			622
Plan settlements		(969	)		—			(7,044	)		(177,137	)		—			—
Benefits paid		—			(1,109	)		(3,281	)		(3,416	)		(1,007	)		(3,277	)
Other plans		—			—			82			—			—			—
Currency impact		—			—			(1,172	)		—			—			(2,596	)

Fair value of plan assets, December 31	$	—		$	13,773		$	83,011		$	—		$	11,080		$	81,587

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The summary of the funded status for the plans at December 31, 2019 and 2018 is as follows (in thousands):


	2019								2018
	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	$	—	$	(21,186	)	$	(103,366	)	$	(972	)	$	(17,724	)	$	(93,722	)
Fair value of plan assets		—		13,773			83,011			—			11,080			81,587

Funded status	$	—	$	(7,413	)	$	(20,355	)	$	(972	)	$	(6,644	)	$	(12,135	)

The summary of the amounts recognized in the consolidated balance sheets for the plans at December 31, 2019 and 2018 is as follows (in thousands):


	2019								2018
	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	$	—	$	—		$	1,466		$	—		$	—		$	3,284
Current liabilities		—		(448	)		(4	)		(972	)		(387	)		(1	)
Long-term liabilities		—		(6,965	)		(21,817	)		—			(6,257	)		(15,418	)

Net amount recognized at December 31	$	—	$	(7,413	)	$	(20,355	)	$	(972	)	$	(6,644	)	$	(12,135	)

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, with the exception of a defined benefit plan in Belgium which has a projected benefit obligation of $11 million, an accumulated benefit obligation of $6 million, and plan assets of $10 million at December 31, 2019. 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, 2019 and 2018 is as follows (in thousands):


	2019		2018
Projected benefit obligation	$	81,566	$	60,359
Accumulated benefit obligations	$	73,644	$	56,029
Fair value of plan assets	$	60,832	$	44,940

The summary of the components of net periodic pension costs for the plans for the years ended December 31, 2019, 2018 and 2017 is as follows (in thousands):


	2019								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			U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Service cost	$	—	$	499		$	4,339		$	568		$	566		$	5,368		$	450		$	546		$	5,082
Interest cost		29		777			1,735			6,491			636			1,707			6,829			618			1,518
Expected return on plan assets		—		(706	)		(2,154	)		(6,833	)		(706	)		(1,974	)		(10,298	)		(587	)		(1,688	)
Settlement loss		27		—			1,548			45,157			—			—			155			—			232
Net amortization:
Prior service credit		—		(19	)		(108	)		—			(19	)		(108	)		—			—			(168	)
Net actuarial loss		—		—			531			3,082			—			680			2,770			—			959

Net periodic pension cost (benefit)	$	56	$	551		$	5,891		$	48,465		$	477		$	5,673		$	(94	)	$	577		$	5,935

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The summary of the changes in amounts recognized in other comprehensive income (loss) for the plans for the years ended December 31, 2019, 2018 and 2017 is as follows (in thousands):


	2019								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			U.S. Pension Plans		U.S. Retiree Healthcare Plan		Non-U.S. Pension Plans
Prior service (cost) credit	$	—	$	—		$	—		$	—		$	130		$	44		$	—	$	—	$	(636	)
Net gain (loss) arising during the year		32		(648	)		(8,940	)		(10,616	)		(670	)		4,088			8,879		13		1,609
Amortization:
Prior service credit		—		(19	)		(108	)		—			(19	)		(35	)		—		—		(168	)
Net loss		27		—			2,079			48,239			—			680			2,925		—		1,191
Other Plans		—		—			18			—			—			(354	)		—		—		—
Currency impact		—		—			178			—			—			583			—		—		(2,033	)

Total recognized in other comprehensive (loss) income	$	59	$	(667	)	$	(6,773	)	$	37,623		$	(559	)	$	5,006		$	11,804	$	13	$	(37	)

The summary of the amounts included in

accumulated

other comprehensive loss in stockholders’ (deficit) equity for the plans at December 31, 2019 and 2018 is as

follows (in thousands):


	2019								2018
	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	$	—	$	(731	)	$	(20,600	)	$	(59	)	$	(83	)	$	(13,987	)
Prior service credit		—		93			506			—			112			666

Total	$	—	$	(638	)	$	(20,094	)	$	(59	)	$	29		$	(13,321	)

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, 2019 is as follows (in thousands):


	2019
	U.S. Pension Plans		U.S. Retiree Healthcare Plan		Non-U.S. Pension Plans
Net actuarial loss	$	—	$	—	$	(1,541	)
Prior service credit		—		19		158

Total	$	—	$	19	$	(1,383	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The plans’ investment asset mix is as follows at December 31, 2019 and 2018:


	2019						2018
	U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Equity securities		64	%		6	%		61	%		7	%
Debt securities		36	%		21	%		39	%		18	%
Cash and cash equivalents		0	%		1	%		0	%		5	%
Insurance contracts and other		0	%		72	%		0	%		70	%

Total		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		60	%		30% - 90%		5	%
Debt securities		35	%		20% - 50%		20	%
Cash and cash equivalents		0	%		0% - 10%		10	%
Insurance contracts and other		5	%		0% - 10%		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 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 45% 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, 2019 and 2018.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of the Company’s retirement plan assets are as follows at December 31, 2019 (in thousands):


	Total at December 31, 2019		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)		13,773		13,773		—		—

Total U.S. Retiree Healthcare Plan		13,773		13,773		—		—
Non-U.S. Pension Plans:
Cash equivalents (b)		690		690		—		—
Mutual funds (c)		22,202		22,202		—		—
Bank and insurance investment contracts (d)		60,119		—		—		60,119

Total Non-U.S. Pension Plans		83,011		22,892		—		60,119

Total fair value of retirement plan assets	$	96,784	$	36,665	$	—	$	60,119

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 ( e )		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 ( f )		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

(a)	The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: 35% in the common stock of large-cap U.S. companies, 29% in the common stock of international growth companies and 36% in fixed income bonds of U.S. companies and the 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: 57% in international bonds, 23% 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. 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 the U.S. government.
(f)	The mutual fund balance in the Non- U.S. Pension Plans is invested in the following categories: 56% in international bonds, 24% in the common stock of international companies and 20% in various other global investments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the changes in fair value of the Level

retirement plan assets for the years ended December

2019

and

2018

(in thousands):


	Insurance Guaranteed Investment Contracts
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
Net purchases (sales) and appreciation (depreciation)		3,401

Fair value of assets, December 31, 2019	$	60,119

The weighted-average assumptions used to determine the benefit obligation in the consolidated balance sheets at December 31, 2019, 2018 and 2017 are as follows:


	2019						2018						2017
	U.S.			Non-U.S.			U.S.			Non-U.S.			U.S.			Non-U.S.
Discount rate		3.42	%		1.38	%		4.40	%		1.95	%		3.94	%		1.79	%
Increases in compensation levels			**		2.83	%			**		2.66	%			**		2.43	%

**	Not applicable

The weighted-average assumptions used to determine the net periodic pension cost for the years ended December 31, 2019, 2018 and 2017 are as follows:


	2019						2018						2017
	U.S.			Non-U.S.			U.S.			Non-U.S.			U.S.			Non-U.S.
Discount rate		4.41	%		2.25	%		3.96	%		1.93	%		4.28	%		1.80	%
Return on plan assets		6.25	%		3.11	%		4.35	%		2.75	%		6.53	%		2.64	%
Increases in compensation levels			**		3.20	%			**		2.70	%			**		2.63	%

**	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

one-quarter

percentage point increase in the discount rate would decrease the Company’s net periodic benefit cost by

less than $1 million

During fiscal year 2020, 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, 2019 are as follows (in thousands):


	U.S. Retiree Healthcare Plans		Non-U.S. Pension Plans		Total
2020	$	1,123	$	2,723	$	3,846
2021		1,209		4,746		5,955
2022		1,281		3,238		4,519
2023		1,376		2,749		4,125
2024		1,437		2,884		4,321
2025 - 2029		7,420		20,691		28,111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

18 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: Waters

and TA

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, 2019, 2018 and 2017 (in thousands):


	2019		2018		2017
Product net sales:
Waters instrument systems	$	963,871	$	1,000,625	$	988,750
Chemistry consumables		412,018		400,287		372,157
TA instrument systems		191,300		204,081		191,442

Total product sales		1,567,189		1,604,993		1,552,349
Service net sales:
Waters service		761,594		738,433		686,656
TA service		77,813		76,503		70,073

Total service sales		839,407		814,936		756,729

Total net sales	$	2,406,596	$	2,419,929	$	2,309,078

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, 2019, 2018 and 2017 (in thousands):


	2019		2018		2017
Net Sales:
Asia:
China	$	439,557	$	443,321	$	387,059
Japan		180,707		173,357		167,258
Asia Other		318,848		305,613		308,300

Total Asia		939,112		922,291		862,617
Americas:
United States		692,277		683,596		669,274
Americas Other		137,964		151,581		140,715

Total Americas		830,241		835,177		809,989
Europe		637,243		662,461		636,472

Total net sales	$	2,406,596	$	2,419,929	$	2,309,078

None of the Company’s individual customers accounts for more than

% of annual Company sales. Net sales by customer class are as follows for the years ended December 31, 2019, 2018 and 2017 (in thousands):


	2019		2018		2017
Pharmaceutical	$	1,365,275	$	1,365,731	$	1,294,668
Industrial		719,377		737,144		721,088
Academic and governmental		321,944		317,054		293,322

Total net sales	$	2,406,596	$	2,419,929	$	2,309,078

Net sales for the Company recognized at a point in time versus over time are as follows for the years ended December 31, 2019, 2018 and 2017 (in thousands):


	2019		2018		2017
Net sales recognized at a point in time:
Instrument systems	$	1,155,171	$	1,204,706	$	1,180,192
Chemistry consumables		412,018		400,287		372,157
Service sales recognized at a point in time (time & materials)		323,247		317,549		299,385

Total net sales recognized at a point in time		1,890,436		1,922,542		1,851,734
Net sales recognized over time:
Service and software sales recognized over time (contracts)		516,160		497,387		457,344

Total net sales	$	2,406,596	$	2,419,929	$	2,309,078

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Long-lived assets information at December 31, 2019 and 2018 is presented below (in thousands):


	2019		2018		2017
Long-lived assets:
United States	$	276,891	$	203,664	$	186,344
Americas Other		1,929		1,680		1,720

Total Americas		278,820		205,344		188,064
Europe		116,734		118,513		136,440
Asia		21,788		19,226		24,774

Total long-lived assets	$	417,342	$	343,083	$	349,278

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

19 Unaudited Quarterly Results

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


	First			Second			Third			Fourth
2019	Quarter			Quarter			Quarter			Quarter			Total
Net sales	$	513,862		$	599,162		$	577,278		$	716,294		$	2,406,596
Costs and operating expenses:
Cost of sales		221,031			249,546			241,055			299,068			1,010,700
Selling and administrative expenses		134,339			133,208			126,036			141,208			534,791
Research and development expenses		35,060			36,490			34,333			37,072			142,955
Purchased intangibles amortization		2,281			2,264			2,619			2,529			9,693

Total costs and operating expenses		392,711			421,508			404,043			479,877			1,698,139

Operating income		121,151			177,654			173,235			236,417			708,457
Other expense		(525	)		(342	)		(496	)		(2,223	)		(3,586	)
Interest expense		(11,563	)		(11,448	)		(11,456	)		(14,223	)		(48,690	)
Interest income		8,315			5,871			3,455			4,417			22,058

Income before income taxes		117,378			171,735			164,738			224,388			678,239
Provision for income taxes		8,392			27,325			26,605			23,719			86,041

Net income	$	108,986		$	144,410		$	138,133		$	200,669		$	592,198

Net income per basic common share		1.52			2.09			2.09			3.15			8.76
Weighted-average number of basic common shares		71,704			68,989			66,226			63,795			67,627
Net income per diluted common share		1.51			2.08			2.07			3.12			8.69
Weighted-average number of diluted common shares and equivalents		72,415			69,494			66,768			64,348			68,166

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	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 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

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, the Company resolved the case with a final settlement that resulted in a gain of $2 million (see Note 1

). 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 1

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