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

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Business and Financial Overview

The Company has two operating segments: Waters

TM

and TA

TM

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

TM

” 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.

Both the Company’s domestic and international operations have been and continue to be adversely affected by the ongoing global pandemic of a novel strain of coronavirus

(“COVID-19”)

that has led to volatility and uncertainty in the U.S. and international markets. The Company is actively managing its business to respond to the

COVID-19

impact; however, the Company cannot reasonably estimate the length or severity of the

COVID-19

pandemic or the related response, or the extent to which the disruption may materially impact the Company’s business, consolidated financial position, consolidated results of operations or consolidated cash flows in the future.

In 2020, the

COVID-19

pandemic did not materially impact the Company’s manufacturing facilities or those of the third parties to whom it outsources certain manufacturing processes, the distribution centers where its inventory is managed, or the operations of its logistics and other service providers. The Company also did not see material disruptions or delays in shipments of certain materials or components of its products.

At every stage of the pandemic, the Company has taken decisive and appropriate actions, including a mandatory remote work policy for all employees with the exception of those in manufacturing, distribution, and certain laboratory environments, as well as restrictions on

non-essential

travel and visitors into its facilities. The Company has engaged a medical advisor to guide its policy deployment, and the Company continues to take proactive measures to guard the health of its global employee base, and the safety of all customer interactions. The Company has implemented rigorous protocols to promote a safe work environment in all of its locations around the world and continues to closely monitor and update its multi-phase process that was developed during the year to ensure for the safe return of employees to its physical workplaces as social distancing, governmental requirements and other protocols allow.

The vast majority of the markets the Company serves, most notably the pharmaceutical, biomedical research, food/environmental and clinical markets, have continued to operate at various levels, and the Company is working closely with these customers to facilitate their seamless operation. Over the last several years, the Company has executed on a digital workplace strategy focused on providing modern connectivity and

collaboration tools to its employees. The Company’s strategic technology investments have enabled it to swiftly meet remote working needs as the

COVID-19

situation has escalated and evolved. From a customer-facing perspective, the Company is leveraging digital demand generation activities, including virtual demos across all regions in which it operates, remote instrument installations, virtual sales seminars, online product training, and a rapid acceleration in

one-on-one

communications over emails, phone and video conferencing.

While the Company initially anticipated that the

COVID-19

pandemic would have the biggest impact on the Company’s financial results in the second quarter of 2020, and future quarters would improve as countries lifted their business restrictions, the new outbreaks of

COVID-19

in the U.S. and elsewhere throughout the world have demonstrated that the

COVID-19

pandemic continues to be fluid with uncertainties and risks remaining across the global economy. The Company took a proactive approach to managing through this unpredictability and implemented a series of cost reduction actions that include salary reductions, furloughs and reductions in

non-essential

spending and other working capital reductions in order to preserve liquidity and enhance financial flexibility. These cost reductions were completed by the end of 2020; however, the Company’s plan will be adjusted accordingly depending on the pace of the recovery and any further lockdowns.

The Company’s operating results are as follows for the years ended December 31, 2020, 2019 and 2018 (dollars in thousands, except per share data):

		Year Ended December 31,												% change
		2020				2019				2018				2020 vs. 2019				2019 vs. 2018
Revenues:
Product sales		$	1,497,333			$	1,567,189			$	1,604,993				(4	%)			(2	%)
Service sales			868,032				839,407				814,936				3	%			3	%
Total net sales			2,365,365				2,406,596				2,419,929				(2	%)			(1	%)
Costs and operating expenses:
Cost of sales			1,006,689				1,010,700				992,564				—				2	%
Selling and administrative expenses			553,698				534,791				536,902				4	%			—
Research and development expenses			140,777				142,955				143,403				(2	%)			—
Purchased intangibles amortization			10,587				9,693				7,712				9	%			26	%
Asset impairments			6,945				—				—				*	*			—
Litigation provision (settlement)			1,180				—				(426	)			*	*			*	*
Operating income			645,489				708,457				739,774				(9	%)			(4	%)
Operating income as a % of sales			27.3	%			29.4	%			30.6	%
Other expense			(1,775	)			(3,586	)			(47,794	)			(51	%)			*	*
Interest expense, net			(32,800	)			(26,632	)			(9,834	)			23	%			*	*
Income before income taxes			610,914				678,239				682,146				(10	%)			(1	%)
Provision for income taxes			89,343				86,041				88,352				4	%			(3	%)
Net income		$	521,571			$	592,198			$	593,794				(12	%)			—
Net income per diluted common share		$	8.36			$	8.69			$	7.65				(4	%)			14	%

** Percentage not meaningful

The Company’s net sales decreased approximately 2% in 2020 as compared to 2019, and decreased 1% in 2019 as compared to 2018. The decline in sales in 2020 can be attributed to the lower customer demand due to interruption in business activities caused by the uncertainties from the

COVID-19 pandemic

across the world. The negative impact of

COVID-19

on our business was more pronounced in the first half of 2020 as the Company’s sales declined 12% as compared to the prior year. In the second half of 2020, our customers began to resume laboratory and manufacturing operations and it resulted in the Company’s second half sales growing 7% as compared to the prior year.

Foreign currency translation increased sales by less than 1% and decreased sales by 2% in 2020 and 2019, respectively. The Company’s acquisitions of Andrew Alliance (as defined below) and ISS (as defined below) did not have material impacts on sales growth in 2020. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year.

Instrument system sales decreased 8% and 4% in 2020 and 2019, respectively. In 2020, the decrease in instrument system sales was attributable to the weaker demand for our products by our customers due to interruption of business activities and the uncertainty caused by

the COVID-19 pandemic. As

customer demand started to return to normal levels, instrument system sales increased 3% in the second half of 2020 as compared to the prior year period, after having declined 22% in the first half of 2020 compared to the prior year period. 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. Foreign currency translation increased instrument system sales by 1% in 2020 and decreased sales by 1% in 2019. Recurring revenues (combined sales of precision chemistry consumables and services) increased 4% and 3% in 2020 and 2019, respectively, as a result of a larger installed base of customers and higher billing demand for service sales. In 2020, recurring revenues were also impacted by the interruption of business activities and the uncertainty caused by

the COVID-19 pandemic.

As our customers began to resume laboratory and manufacturing operations, recurring revenues increased 10% in the second half of 2020 as compared to the prior year period, after having declined 3% in the first half of 2020 compared to the prior year period. Recurring revenues were positively impacted by foreign currency translation in 2020, which increased sales by 1%; however foreign currency translation negatively impacted sales by 2% in 2019.

Geographically, the sales declines in 2020 were broad-based across the world, except for Europe, and were due to the weaker demand and disruption of business activities caused by

the COVID-19 lockdowns.

Sales in Asia decreased 4% in 2020 and increased 2% in 2019, with foreign currency translation having minimal impact on sales in 2020 and negatively impacting sales by 1% in 2019. In 2020, the sales decline in Asia was primarily driven by the 8% decrease in sales in China due to lower demand caused by the

COVID-19

pandemic. Excluding sales in China, the Company’s 2020 sales were flat with foreign currency translation positively impacting sales by 1%. 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.

Sales in Europe increased 5% in 2020 and decreased 4% in 2019, with foreign currency translation positively impacting sales by 3% in 2020 and negatively impacting sales by 4% in 2019. Sales in the Americas decreased 4% and 1% in 2020 and 2019, respectively, with foreign currency translation having minimal impact on sales in 2020 and negatively impacting sales by 1% in 2019.

Sales to pharmaceutical customers increased 2% and were flat in 2020 and 2019, respectively, with foreign currency translation positively impacting sales by 1% in 2020 and negatively impacting sales by 2% in 2019. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, declined 2% in both 2020 and 2019, with foreign currency translation positively impacting sales by 1% in 2020. The lower volume of sales to both pharmaceutical and industrial customers in 2020 was primarily due to the disruption in business activities caused

by COVID-19.

Similarly, TA sales declined 8% and 4% in 2020 and 2019, respectively.

Combined sales to academic and governmental customers decreased 16% in 2020 and increased 2% in 2019, with foreign currency translation having minimal impact on sales in 2020 and decreasing sales by 1% in 2019. The decline in sales to academic and governmental customers in 2020 was due to the lower demand for our products and services as the academic and governmental institutions adjusted their spending during the year to mitigate the effects of

the COVID-19 pandemic.

The most significant decline in academic and governmental sales in 2020 occurred in China where sales declined 31% due to government-mandated spending reductions.

Sales to our academic and governmental customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales can vary significantly from period to period.

Operating income was $645 million in 2020, a decrease of 9% as compared to 2019. This decrease can be attributed to the decline in sales volumes caused by

the COVID-19 pandemic,

unfavorable manufacturing absorption and unfavorable foreign currency translation. The operating income decline was somewhat mitigated by a series of cost reduction actions that included salary reductions, furloughs and reductions

in non-essential spending

that increased operating income by approximately $103 million in 2020 versus our operating plan. Operating income in 2020 also included $27 million of severance-related costs in connection with a reduction in workforce and lease termination and exit costs.

Operating income decreased 4% in 2019 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.

The Company’s effective tax rates were 14.6%, 12.7% and 13.0% for 2020, 2019 and 2018, respectively. Net income per diluted share was $8.36, $8.69 and $7.65 in 2020, 2019 and 2018, 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.

The Company generated $791 million, $643 million and $604 million of net cash flows from operations in 2020, 2019 and 2018, respectively. The increase in operating cash flow in 2020 was primarily a result of the $103 million reduction in expense from the cost actions implemented and working capital improvements during the year. 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 2020 and 2019 net cash flow from operations is $38 million and $29 million, respectively, of income tax payments made in the U.S. in relation to the 2017 transition tax liability. Over the next two 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 $365 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 $172 million, $164 million and $96 million in 2020, 2019 and 2018, respectively. In January of 2020, the Company acquired all of the outstanding stock of Andrew Alliance, S.A. and its two operating subsidiaries, Andrew Alliance USA, Inc. and Andrew Alliance France, SASU (collectively “Andrew Alliance”), for $80 million, net of cash acquired. The Company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration. In December 2020, the Company acquired all of the outstanding stock of Integrated Software Solutions Pty Limited and its two operating subsidiaries, Integrated Software Solutions Limited and Integrated Software Solutions USA, LLC (collectively, “ISS”), for $4 million, net of cash acquired. Neither of these acquisitions had a material effect on the Company’s sales and expenses in 2020.

The cash flows from investing activities in 2020 also included $70 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $151 million on this facility through the end of 2020 and anticipates spending a total of $215 million to build and equip this

new state-of-the-art

manufacturing facility.

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 2020, 2019 and 2018, the Company repurchased

0.8 million, 11.1 million and 6.8 million shares of the Company’s outstanding common stock at a cost of $167 million, $2.5 billion and $1.3 billion, respectively, under authorized share repurchase programs. As of December 31, 2020, the Company has a total of $1.5 billion authorized for future repurchases. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. While 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, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by

the COVID-19 pandemic.

Results of Operations

Sales by Geography

Geographic sales information is presented below for the years ended December 31, 2020, 2019 and 2018 (dollars in thousands):

		Year Ended December 31,												% change
		2020				2019				2018				2020 vs. 2019				2019 vs. 2018
Net Sales:
Asia:
China		$	404,352			$	439,557			$	443,321				(8	%)			(1	%)
Japan			179,815				180,707				173,357				—				4	%
Asia Other			315,010				318,848				305,613				(1	%)			4	%
Total Asia			899,177				939,112				922,291				(4	%)			2	%
Americas:
United States			678,313				692,277				683,596				(2	%)			1	%
Americas Other			119,529				137,964				151,581				(13	%)			(9	%)
Total Americas			797,842				830,241				835,177				(4	%)			(1	%)
Europe			668,346				637,243				662,461				5	%			(4	%)
Total net sales		$	2,365,365			$	2,406,596			$	2,419,929				(2	%)			(1	%)

In 2020, sales decreased 2% as compared to 2019, as the

COVID-19 pandemic

caused interruptions in business activities and uncertainties that resulted in our customers reducing purchases of our products and services. Foreign currency translation had minimal impact on sales in 2020 and negatively impacted sales by 2% in 2019. The sales declines in 2020 occurred in all geographies and were a result of the weaker demand and disruption of business activities caused by

the COVID-19 lockdowns,

except in Europe where sales increased 5% as compared to the prior year. The most significant decline in sales in 2020 occurred in China, where sales declined 8%, as well as declines of 2% in the U.S. and 13% in the Americas Other region.

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 1% 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 Americas Other 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.

Sales by Trade Class

Net sales by customer class are presented below for the years ended December 31, 2020, 2019 and 2018 (dollars in thousands):

		Year Ended December 31,												% change
		2020				2019				2018				2020 vs. 2019				2019 vs. 2018
Pharmaceutical		$	1,386,966			$	1,365,275			$	1,365,731				2	%			—
Industrial			707,772				719,377				737,144				(2	%)			(2	%)
Academic and governmental			270,627				321,944				317,054				(16	%)			2	%
Total net sales		$	2,365,365			$	2,406,596			$	2,419,929				(2	%)			(1	%)

In 2020, sales to pharmaceutical customers increased 2% with foreign currency translation positively impacting sales by 1%. The lower sales volumes to pharmaceutical customers in the first half of 2020 can be attributed to the disruption in business activities caused

by COVID-19, despite

increased demand for our products and services from certain pharmaceutical customers who are

involved with COVID-19 diagnostic testing

and the development of new drugs and therapies. Sales to industrial customers in 2020 declined 2%, which were significantly impacted by the TA sales declines of 8% in 2020. The sales declines to academic and governmental customers were broad-based across all product classes as academic and governmental customers adjusted their spending to mitigate the effects of

the COVID-19 pandemic,

which significantly impacted sales in China.

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.

Waters Products and Services Net Sales

Net sales for Waters products and services were as follows for the years ended December 31, 2020, 2019 and 2018 (dollars in thousands):

		Year Ended December 31,																								% change
		2020				% of Total				2019				% of Total				2018				% of Total				2020 vs. 2019				2019 vs. 2018
Waters instrument systems		$	890,855				42	%		$	963,871				45	%		$	1,000,625				47	%			(8	%)			(4	%)
Chemistry consumables			432,080				20	%			412,018				19	%			400,287				18	%			5	%			3	%
Total Waters product sales			1,322,935				62	%			1,375,889				64	%			1,400,912				65	%			(4	%)			(2	%)
Waters service			794,189				38	%			761,594				36	%			738,433				35	%			4	%			3	%
Total Waters net sales		$	2,117,124				100	%		$	2,137,483				100	%		$	2,139,345				100	%			(1	%)			—

Waters products and service sales decreased 1% in 2020 and were flat in 2019. Waters instrument system sales (LC and MS technology-based) decreased 8% in 2020 primarily attributed to the weaker demand for our products and services by our customers due to the disruption and uncertainty caused

by the COVID-19 pandemic.

Precision chemistry consumables sales increased 5% and 3% in 2020 and 2019, respectively, despite the disruption in business activities caused

by COVID-19

in 2020. Waters service sales increased 4% and 3% in 2020 and 2019, respectively, primarily due to increased sales of service plans and higher service demand billings

to a higher installed base of customers respectively, with sales in 2020 being partially offset by the weaker demand and disruption of business activities caused by

the COVID-19 lockdowns.

The effect of foreign currency translation increased Waters sales by 1% in 2020 and decreased sales by 2% in 2019.

In 2020, Waters sales in Europe and Japan increased 6% and 2%, respectively, with foreign currency translation adding 3% to Waters sales growth in Europe. Waters sales in India increased less than 1%, while all other geographies’ sales declined with the most significant sales decline occurring in China, which was down 9%. 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.

TA Product and Services Net Sales

Net sales for TA products and services were as follows for the years ended December 31, 2020 and December 31, 2019 (dollars in thousands):

		Year Ended December 31,																								% change
		2020				% of Total				2019				% of Total				2018				% of Total				2020 vs. 2019				2019 vs. 2018
TA instrument systems		$	174,398				70	%		$	191,300				71	%		$	204,081				73	%			(9	%)			(6	%)
TA service			73,843				30	%			77,813				29	%			76,503				27	%			(5	%)			2	%
Total TA net sales		$	248,241				100	%		$	269,113				100	%		$	280,584				100	%			(8	%)			(4	%)

TA product and service sales declines in 2020 were primarily due to lower customer demand resulting from the

COVID-19 pandemic.

TA’s instrument system sales declined in 2019 primarily due to lower customer demand resulting from macroeconomic conditions, tariff posturing and political instability. TA service sales increased in 2019 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 2020 and 2019.

TA sales declined in all major regions in 2020. In 2019, TA sales decreased 4% in the Americas, 12% in Europe and increased 1% in Asia.

Cost of Sales

Cost of sales were flat in 2020 as compared to 2019, due to lower sales volume, change in sales mix, unfavorable manufacturing absorption and the effect of foreign currency translation increasing cost of sales by 1% in 2020, 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 foreign currency translation to slightly increase sales and gross profit during 2021.

Selling and Administrative Expenses

Selling and administrative expenses increased 4% in 2020 and were flat in 2019. The increase in selling and administrative expenses in 2020 can be attributed to the salary merit and incentive compensation increases along with the severance-related costs in connection with a reduction in workforce and lease-termination and exit costs. Severance and lease termination and exit costs were $27 million and $10 million in 2020 and 2019, respectively. Offsetting these increases in selling and administrative expenses were $70 million of savings in 2020, which

includes COVID-19 and

restructuring cost saving actions that reduced planned salaries

and non-essential spending.

The effect of foreign currency translation had minimal impact on selling and administrative expenses in 2020 and decreased selling and administrative expenses by 1% in 2019.

As a percentage of net sales, selling and administrative expenses were 23.4%, 22.2% and 22.2% for 2020, 2019 and 2018, respectively.

Research and Development Expenses

Research and development expenses decreased 2% in 2020 and were flat in 2019. Research and development expenses in 2020 include $15 million of cost action savings from salary reductions, furloughs and reductions

in non-essential spending.

Research and development expenses in both 2020 and 2019 were impacted by additional headcount, merit compensation and costs associated with new products and the development of new technology initiatives. Foreign currency translation had minimal impact on research and development costs in 2020 and decreased research and development costs by 2% in 2019.

Asset Impairments

During 2020, due to a shift in strategic priorities, the Company recorded a

non-cash

charge of $10 million for the impairment of certain intangible assets associated with the acquisition of Medimass Research Development and Service Kft (“Medimass”). In conjunction with the intangible asset impairment, the Company also reduced its liability for contingent consideration of $3 million during 2020 as the carrying value of this liability is based on the future sales of the Medimass intangible assets that were impaired. See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, under the heading “Asset Impairments” in the Notes to Consolidated Financial Statements for a description of the impairment charge.

Interest Expense, Net

The increase in net interest expense in 2020 can be attributed to lower cash and investment balances in 2020 compared to 2019.

Provision for Income Taxes

The Company’s effective tax rates were 14.6%, 12.7% and 13.0% in 2020, 2019 and 2018, 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, 2020. The Company has received a tax exemption on income arising from qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones, which the Company met as of December 31, 2020 and expects to maintain through March 2021. The effect of applying the 0% concessionary income tax rate rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the Company’s net income during the years ended December 31, 2020, 2019 and 2018 by $21 million, $24 million and $28 million, respectively, and increased the Company’s net income per diluted share by $0.33, $0.35 and $0.36, respectively. In addition, the Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period of April 1, 2021 through March 31, 2026.

During 2020, the Company’s effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, a $13 million provision related to the Global Intangible

Low-Taxed

Income (“GILTI”) tax and a tax benefit of $7 million on stock-based compensation.

The 2019 effective tax rate differed from the U.S. federal statutory tax rate primarily due to the jurisdictional mix of earnings, an $11 million provision related to the 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”).

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 undistributed earnings from foreign subsidiaries to be indefinitely reinvested. The Company recorded a tax provision of $3 million, $3 million and $4 million for 2020, 2019 and 2018, respectively, for future withholding taxes and U.S. state taxes on the repatriation of 2020, 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,
		2020				2019				2018
Net income		$	521,571			$	592,198			$	593,794
Depreciation and amortization			125,361				105,296				108,408
Asset impairments			6,945				—				—
Stock-based compensation			36,865				38,577				37,541
Deferred income taxes			(2,693	)			9,620				2,405
Change in accounts receivable			37,467				(22,195	)			(47,921	)
Change in inventories			18,940				(31,854	)			(25,396	)
Change in accounts payable and other current liabilities			140,598				9,784				(81,663	)
Change in deferred revenue and customer advances			11,073				12,189				2,721
Effect of the 2017 Tax Cuts and Jobs Act			—				(3,229	)			(6,059	)
Other changes			(105,620	)			(67,299	)			20,616
Net cash provided by operating activities			790,507				643,087				604,446
Net cash (used in) provided by investing activities			(264,094	)			768,802				1,683,302
Net cash used in financing activities			(440,502	)			(1,872,678	)			(2,119,522	)
Effect of exchange rate changes on cash and cash equivalents			15,069				224				(14,265	)
Increase (decrease) in cash and cash equivalents		$	100,980			$	(460,565	)		$	153,961

Cash Flow Provided By Operating Activities

Net cash provided by operating activities was $791 million, $643 million and $604 million in 2020, 2019 and 2018, 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 70 days at December 31, 2020, 77 days at December 31, 2019 and 74 days at December 31, 2018.

	•		The change in inventory in 2020 compared to 2019 is a result of the Company’s efforts to reduce its inventory levels during the COVID-19 pandemic to preserve its liquidity. The changes in inventory in 2019 and 2018 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 changes in 2020, 2019 and 2018 include $38 million, $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 made in 2019.

	•		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 (Used in) Provided By Investing Activities

Net cash used in investing activities totaled $264 million in 2020. Net cash provided by investing activities totaled $769 million and $1,683 million in 2019 and 2018, respectively. Additions to fixed assets and capitalized software were $172 million, $164 million and $96 million in 2020, 2019 and 2018, 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, 2020, the Company has incurred $151 million of costs for this facility.

During 2020, 2019 and 2018, the Company purchased $26 million, $37 million and $1.0 billion of investments, respectively. During 2020, 2019 and 2018, $21 million, $978 million and $2.8 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 $81 million and $31 million during 2020 and 2018, respectively. There were no business acquisitions in 2019. During 2020, 2019 and 2018, the Company made $6 million, $9 million and $8 million of investments in unaffiliated companies, respectively.

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. The Company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration. This acquisition did not have a material effect on the Company’s sales and expenses in 2020.

In December 2020, the company entered into a definitive agreement to acquire ISS, a provider of clinical laboratory software systems, for $4 million in cash. This acquisition did not have a material effect on the Company’s sales and expenses in 2020.

Cash Used in Financing Activities

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 decreased by $325 million in 2020, increased by $535 million in 2019 and decreased by $850 million in 2018. As of December 31, 2020, the Company had a total of $1.4 billion in outstanding debt, which consisted of $960 million in outstanding senior unsecured notes $300 million borrowed under a term loan and $100 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, 2020, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1.4 billion after outstanding letters of credit. As of December 31, 2020, the Company was in compliance with all debt covenants.

As of December 31, 2020, 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 $15 million, $12 million and $3 million during 2020, 2019 and 2018, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $11 million annually 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 2020, 2019 and 2018, the Company repurchased 0.8 million, 11.1 million and 6.8 million shares of the Company’s outstanding common stock at a cost of $167 million, $2.5 billion and $1.3 billion, respectively, under the January 2019 authorization and other previously announced programs. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. In addition, the Company repurchased $9 million, $8 million and $10 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2020, 2019 and 2018, respectively.

The Company received $66 million, $54 million and $52 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan in 2020, 2019 and 2018, respectively.

The Company had cash, cash equivalents and investments of $443 million as of December 31, 2020. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $364 million held by foreign subsidiaries at December 31, 2020, of which $254 million was held in currencies other than U.S. dollars. While 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., we have temporarily suspended our share repurchases due to the uncertain business conditions caused by the

COVID-19

pandemic.

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.

Contractual Obligations and Commercial Commitments

The following is a summary of the Company’s known contractual obligations as of December 31, 2020 (in thousands):

		Payments Due by Year (1)
		Total				2021				2022				2023				2024				2025				2026				After 2026
Notes payable and debt		$	150,000			$	150,000			$	—			$	—			$	—			$	—			$	—			$	—
Interest on senior unsecured notes			180,198				30,273				28,160				27,182				24,654				22,714				17,801				29,414
Long-term debt (2)			1,210,000				—				400,000				50,000				100,000				—				360,000				300,000
2017 Tax Act liability			365,314				38,454				38,454				72,101				96,135				120,170				—				—
Long-term software subscriptions			41,593				13,075				12,636				10,309				5,573				—				—				—
Operating leases			103,705				29,599				23,453				14,569				10,951				8,269				5,682				11,182
Total		$	2,050,810			$	261,401			$	502,703			$	174,161			$	237,313			$	151,153			$	383,483			$	340,596

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

(2)

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

	negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities. As of December 31, 2020, the Company was in compliance with all such covenants.

The following is a summary of the Company’s known commercial commitments as of December 31, 2020 (in thousands):

		Amount of Commitments Expiration Per Period
		Total				2021				2022				2023				2024				2025				2026				After 2026
Letters of credit		$	1,961			$	1,961			$	—			$	—			$	—			$	—			$	—			$	—

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 or results of operations.

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 2021, 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 December 2020 acquisition of the net assets of ISS. 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, 2020 is $1 million.

The Company licenses certain technology and software from third parties. Future minimum license fees payable under existing license agreements as of December 31, 2020 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 recognizes revenue upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company generally enters into contracts that include a combination of products and services. Revenue is allocated to distinct performance obligations and is recognized net of allowances for returns and discounts.

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

Generally, the Company’s contracts for products include a performance obligation related to installation. The Company has determined that the installation represents a distinct performance obligation and revenue is recognized separately upon the completion of installation. The Company determines the amount of the transaction price to allocate to the installation service based on the standalone selling price of the product and the service, which requires judgment. The Company determines 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, 2020 of $240 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.

Allowance for credit losses on Accounts Receivable

The Company adopted new accounting guidance regarding the accounting for credit losses as of January 1, 2020 using a modified retrospective transition approach that was applied to our trade receivable balances. The allowance for credit losses policies described below were effective as of January 1, 2020.

The Company maintains allowances for expected credit losses based on applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance on current receivables along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. The historical loss rate is calculated by comparing the prior year actual sales and accounts receivable balances to estimate the period of collection of trade receivables by aging category. This collection information by aging category is then compared to write offs over the same prior year period to estimate the amount of allowance that is attributable to each category of our accounts receivable aging. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. If the financial condition of the Company’s customers were to deteriorate beyond what is estimated in the current expected credit loss model, 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 credit 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, 2020 was $573 million, net of allowances for expected credit losses of $14 million.

Loss Provision on 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”). 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, 2020 was recorded at its net realizable value of $304 million, which is net of write-downs of $29 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 $259 million, $494 million and $444 million, respectively, as of December 31, 2020.

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 estimated 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, 2020, the Company had unrecognized tax benefits, excluding interest and penalties, of $29 million.

The Company has a tax exemption in Singapore on certain types of income through March 2021, based upon the achievement and continued satisfaction of certain operational and financial milestones, which the Company met as of December 31, 2020 and expects to maintain through March 2021. These milestones include 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. Currently, the Company has determined that it is more likely than not to realize the tax exemption in Singapore and, accordingly, has not recognized any reserves for unrecognized tax benefits on its balance sheet related to this exemption. In the event that any of the milestone targets were not met, the Company would not be entitled to the tax exemption on income earned in Singapore dating back to the start date of the agreement (April 1, 2016), and all the tax benefits previously recognized would be reversed, resulting in the recognition of income tax expense equal to the statutory tax of 17% on income earned during that period.

In addition, the Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. This new incentive has similar requirements for business spending targets, attaining and sustaining employment targets and performance of certain research and manufacturing activities.

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, 2020, the Company’s warranty liability was $11 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 2.99% 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, 2020 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, 2020, the Company determined the weighted-average discount rate to be 2.25% for the U.S. benefit plans and 1.12% for the

non-U.S.

benefits plans.

A

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, 2020, 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		$	22				3.3
Restricted stock units			42				3.3
Performance stock units			9				1.9
Restricted stock			—				—
Total		$	73				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.