filings.toolsItem 8. Financial Statements and Supplementary Data
196K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data
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, 2021.
The effectiveness of our internal control over financial reporting as of December 31, 2021 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, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, based on criteria established in
Internal Control—Integrated Framework
(2013) issued by the COSO.
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 $438 million as of December 31, 2021. Management 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. The Company performs an annual goodwill impairment assessment for its reporting units as of December 31 each year. Under the impairment assessment, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the amount of the excess carrying amount of the reporting unit over its fair value. This impairment is limited to the total amount of goodwill allocated to that reporting unit. 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. As disclosed by management, 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 the significant judgment by management when developing the fair value measurement of the reporting units, which in turn led to a high degree of auditor judgment and effort in performing procedures and evaluating management’s significant assumptions related to 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, (i) testing management’s process for developing the fair value estimates; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the significant assumptions used by management related to 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 24, 2022 |
We have served as the Company’s auditor since 1994.
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| (In thousands, except per share data) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 501,234 | $ | 436,695 | ||||
| Investments | 68,051 | 6,451 | ||||||
| Accounts receivable, net | 612,648 | 573,316 | ||||||
| Inventories | 356,095 | 304,281 | ||||||
| Other current assets | 90,914 | 80,290 | ||||||
| Total current assets | 1,628,942 | 1,401,033 | ||||||
| Property, plant and equipment, net | 547,913 | 494,003 | ||||||
| Intangible assets, net | 242,401 | 258,645 | ||||||
| Goodwill | 437,865 | 444,362 | ||||||
| Operating lease assets | 84,734 | 93,252 | ||||||
| Other assets | 153,077 | 148,625 | ||||||
| Total assets | $ | 3,094,932 | $ | 2,839,920 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Notes payable and debt | $ | — | $ | 150,000 | ||||
| Accounts payable | 96,799 | 72,212 | ||||||
| Accrued employee compensation | 101,192 | 72,166 | ||||||
| Deferred revenue and customer advances | 227,561 | 198,240 | ||||||
| Current operating lease liabilities | 27,906 | 27,764 | ||||||
| Accrued income taxes | 61,278 | 76,558 | ||||||
| Accrued warranty | 10,718 | 10,950 | ||||||
| Other current liabilities | 155,054 | 197,093 | ||||||
| Total current liabilities | 680,508 | 804,983 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt | 1,513,870 | 1,206,515 | ||||||
| Long-term portion of retirement benefits | 64,027 | 72,620 | ||||||
| Long-term income tax liabilities | 319,547 | 357,493 | ||||||
| Long-term operating lease liabilities | 59,623 | 68,197 | ||||||
| Other long-term liabilities | 89,803 | 97,968 | ||||||
| Total long-term liabilities | 2,046,870 | 1,802,793 | ||||||
| Total liabilities | 2,727,378 | 2,607,776 | ||||||
| Commitments and contingencies (Notes 6, 9, 10, 11, 12, 13 and 17) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at December 31, 2021 and December 31, 2020 | — | — | ||||||
| Common stock, par value $0.01 per share, 400,000 shares authorized, 162,084 and 161,666 shares issued, 60,728 and 62,309 shares outstanding at December 31, 2021 and December 31, 2020, respectively | 1,621 | 1,617 | ||||||
| Additional paid-in capital | 2,114,880 | 2,029,465 | ||||||
| Retained earnings | 7,800,832 | 7,107,989 | ||||||
| Treasury stock, at cost, 101,356 and 99,357 shares at December 31, 2021 and December 31, 2020, respectively | (9,437,914 | ) | (8,788,984 | ) | ||||
| Accumulated other comprehensive loss | (111,865 | ) | (117,943 | ) | ||||
| Total stockholders’ equity | 367,554 | 232,144 | ||||||
| Total liabilities and stockholders’ equity | $ | 3,094,932 | $ | 2,839,920 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
| Revenues: | ||||||||||||
| Product sales | $ | 1,822,070 | $ | 1,497,333 | $ | 1,567,189 | ||||||
| Service sales | 963,804 | 868,032 | 839,407 | |||||||||
| Total net sales | 2,785,874 | 2,365,365 | 2,406,596 | |||||||||
| Costs and operating expenses: | ||||||||||||
| Cost of product sales | 752,514 | 638,033 | 642,706 | |||||||||
| Cost of service sales | 404,019 | 368,656 | 367,994 | |||||||||
| Selling and administrative expenses | 626,968 | 553,698 | 534,791 | |||||||||
| Research and development expenses | 168,358 | 140,777 | 142,955 | |||||||||
| Purchased intangibles amortization | 7,143 | 10,587 | 9,693 | |||||||||
| Asset impairments | — | 6,945 | — | |||||||||
| Litigation provision (Note 11) | 5,165 | 1,180 | — | |||||||||
| Total costs and operating expenses | 1,964,167 | 1,719,876 | 1,698,139 | |||||||||
| Operating income | 821,707 | 645,489 | 708,457 | |||||||||
| Other income (expense), net | 17,203 | (1,775 | ) | (3,586 | ) | |||||||
| Interest expense | (44,938 | ) | (49,070 | ) | (48,690 | ) | ||||||
| Interest income | 12,221 | 16,270 | 22,058 | |||||||||
| Income before income taxes | 806,193 | 610,914 | 678,239 | |||||||||
| Provision for income taxes | 113,350 | 89,343 | 86,041 | |||||||||
| Net income | $ | 692,843 | $ | 521,571 | $ | 592,198 | ||||||
| Net income per basic common share | $ | 11.25 | $ | 8.40 | $ | 8.76 | ||||||
| Weighted-average number of basic common shares | 61,575 | 62,094 | 67,627 | |||||||||
| Net income per diluted common share | $ | 11.17 | $ | 8.36 | $ | 8.69 | ||||||
| Weighted-average number of diluted common shares and equivalents | 62,028 | 62,414 | 68,166 |
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, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (In thousands) | ||||||||||||
| Net income | $ | 692,843 | $ | 521,571 | $ | 592,198 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Foreign currency translation | (1,903 | ) | 5,984 | 1,631 | ||||||||
| Unrealized (losses) gains on investments before income taxes | (26 | ) | — | 3,046 | ||||||||
| Income tax benefit (expense) | 6 | — | (641 | ) | ||||||||
| Unrealized (losses) gains on investments, net of tax | (20 | ) | — | 2,405 | ||||||||
| Retirement liability adjustment before reclassifications | 9,342 | (6,786 | ) | (9,360 | ) | |||||||
| Amounts reclassified to other income (expense), net | 1,167 | 1,389 | 1,979 | |||||||||
| Retirement liability adjustment before income taxes | 10,509 | (5,397 | ) | (7,381 | ) | |||||||
| Income tax (expense) benefit | (2,508 | ) | 941 | 1,845 | ||||||||
| Retirement liability adjustment, net of tax | 8,001 | (4,456 | ) | (5,536 | ) | |||||||
| Other comprehensive income (loss) | 6,078 | 1,528 | (1,500 | ) | ||||||||
| Comprehensive income | $ | 698,921 | $ | 523,099 | $ | 590,698 | ||||||
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, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (In thousands) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 692,843 | $ | 521,571 | $ | 592,198 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Stock-based compensation | 29,918 | 36,865 | 38,577 | |||||||||
| Deferred income taxes | 16,633 | (2,693 | ) | 9,620 | ||||||||
| Depreciation | 71,560 | 68,685 | 53,839 | |||||||||
| Amortization of intangibles | 60,120 | 56,676 | 51,457 | |||||||||
| Asset impairments | — | 6,945 | — | |||||||||
| Observable unrealized gain o n investment | (9,707 | ) | — | — | ||||||||
| Change in operating assets and liabilities, net of acquisitions: | ||||||||||||
| (Increase) decrease in accounts receivable | (62,448 | ) | 37,467 | (22,195 | ) | |||||||
| (Increase) decrease in inventories | (67,250 | ) | 18,940 | (31,854 | ) | |||||||
| Increase in other current assets | (20,765 | ) | (27,030 | ) | (10,918 | ) | ||||||
| Decrease (increase) in other assets | 4,490 | (37,865 | ) | (16,470 | ) | |||||||
| Increase in accounts payable and other current liabilities | 46,110 | 140,598 | 9,784 | |||||||||
| Increase in deferred revenue and customer advances | 37,845 | 11,073 | 12,189 | |||||||||
| Effect of the 2017 Tax Cuts and Jobs Act | — | — | (3,229 | ) | ||||||||
| Decrease in other liabilities | (52,075 | ) | (40,725 | ) | (39,911 | ) | ||||||
| Net cash provided by operating activities | 747,274 | 790,507 | 643,087 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Additions to property, plant, equipment and software capitalization | (161,266 | ) | (172,384 | ) | (163,823 | ) | ||||||
| Asset and business acquisitions, net of cash acquired | — | (80,545 | ) | — | ||||||||
| Investment in unaffiliated company | (1,788 | ) | (6,143 | ) | (8,843 | ) | ||||||
| Payments for intellectual property licenses | (7,000 | ) | — | — | ||||||||
| Purchases of investments | (279,660 | ) | (25,884 | ) | (36,951 | ) | ||||||
| Maturities and sales of investments | 218,084 | 20,862 | 978,419 | |||||||||
| Net cash (used in) provided by investing activities | (231,630 | ) | (264,094 | ) | 768,802 | |||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from debt issuances | 510,000 | 315,000 | 925,670 | |||||||||
| Payments on debt | (350,000 | ) | (640,366 | ) | (390,482 | ) | ||||||
| Payments of debt issuance costs | (8,537 | ) | — | (2,932 | ) | |||||||
| Proceeds from stock plans | 55,643 | 66,033 | 53,715 | |||||||||
| Purchases of treasury shares | (648,930 | ) | (196,409 | ) | (2,469,258 | ) | ||||||
| Proceeds from derivative contracts | 3,549 | 15,240 | 10,609 | |||||||||
| Net cash used in financing activities | (438,275 | ) | (440,502 | ) | (1,872,678 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (12,830 | ) | 15,069 | 224 | ||||||||
| Increase (decrease) in cash and cash equivalents | 64,539 | 100,980 | (460,565 | ) | ||||||||
| Cash and cash equivalents at beginning of period | 436,695 | 335,715 | 796,280 | |||||||||
| Cash and cash equivalents at end of period | $ | 501,234 | $ | 436,695 | $ | 335,715 | ||||||
| Supplemental cash flow information: | ||||||||||||
| Income taxes paid | $ | 153,504 | $ | 97,621 | $ | 87,998 | ||||||
| Interest paid | $ | 42,408 | $ | 52,103 | $ | 42,843 |
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 (Deficit) | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| 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 | ) | ||||||||||||
| Adoption of new accounting pronouncement | — | — | — | (985 | ) | — | — | (985 | ) | |||||||||||||||||||
| Net income | — | — | — | 521,571 | — | — | 521,571 | |||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 1,528 | 1,528 | |||||||||||||||||||||
| Issuance of common stock for employees: | ||||||||||||||||||||||||||||
| Employee Stock Purchase Plan | 43 | — | 7,531 | — | — | — | 7,531 | |||||||||||||||||||||
| Stock options exercised | 456 | 5 | 58,497 | — | — | — | 58,502 | |||||||||||||||||||||
| Treasury stock | — | — | — | — | (176,408 | ) | — | (176,408 | ) | |||||||||||||||||||
| Stock-based compensation | 137 | 2 | 36,684 | — | — | — | 36,686 | |||||||||||||||||||||
| Balance December 31, 2020 | 161,666 | $ | 1,617 | $ | 2,029,465 | $ | 7,107,989 | $ | (8,788,984 | ) | $ | (117,943 | ) | $ | 232,144 | |||||||||||||
| Net income | — | — | — | 692,843 | — | — | 692,843 | |||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 6,078 | 6,078 | |||||||||||||||||||||
| Issuance of common stock for employees: | ||||||||||||||||||||||||||||
| Employee Stock Purchase Plan | 40 | — | 9,578 | — | — | — | 9,578 | |||||||||||||||||||||
| Stock options exercised | 282 | 3 | 46,062 | — | — | — | 46,065 | |||||||||||||||||||||
| Treasury stock | — | — | — | — | (648,930 | ) | — | (648,930 | ) | |||||||||||||||||||
| Stock-based compensation | 96 | 1 | 29,775 | — | — | — | 29,776 | |||||||||||||||||||||
| Balance December 31, 2021 | 162,084 | $ | 1,621 | $ | 2,114,880 | $ | 7,800,832 | $ | (9,437,914 | ) | $ | (111,865 | ) | $ | 367,554 | |||||||||||||
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
TM
” 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
TM
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.
The impact of the global pandemic of a novel strain of coronavirus
(“COVID-19”)
over the last two years has resulted in a widespread public health crisis. The
COVID-19
pandemic has caused significant volatility and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
continued
spread throughout the United States and globally, which has disrupted and may continue to disrupt the Company’s business. The Company operates in over 35 countries, including those in the regions most impacted by the
COVID-19
pandemic. In response, governments of most countries, including the United States, as well as private businesses, have implemented numerous measures attempting to contain and mitigate the effects of
COVID-19.
Such measures have had and are expected to continue to have adverse impacts on the United States and foreign economies of uncertain severity and duration, and have had and may continue to have a negative impact on the Company’s operations, including Company sales, supply chain and cash flow.
COVID-19
and the related economic uncertainty adversely impacted sales of the Company for the year ended December 31, 2020; however, through the date of the issuance of these financial statements, the Company’s consolidated financial position, results of operations and cash flows have not been materially impacted and, thus, the Company concluded that no interim goodwill or long-lived asset impairment analyses were required. Further, there have been no violations of debt covenants. Any prolonged material disruption to the Company’s employees, suppliers, manufacturing, or customers could result in a material impact to its consolidated financial position, results of operations or cash flows in the future.
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 the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets.
The Company’s net sales derived from operations outside the United States were 72%, 71% and 71% in 2021, 2020 and 2019, respectively. Gains and losses from foreign currency transactions are included primarily in cost of sales in the consolidated statements of operations. In 2021, 2020 and 2019, foreign currency transactions resulted in net losses of $5 million, $7 million and $9 million, respectively.
Seasonality of Business
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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investments are classified as
available-for-sale
(“AFS”) debt securities. If the AFS debt security’s fair value exceeds the security’s amortized cost the unrealized gain is recognized in accumulated other comprehensive income in stockholders’ equity (deficit), net of the related tax effects. If the AFS debt security’s fair value declines below its amortized cost the Company considers all available evidence to evaluate the extent to which the decline is due to credit-related factors or noncredit-related factors. If the decline is due to noncredit-related factors then no credit loss is recorded and the unrealized loss is recognized in accumulated other comprehensive income in stockholders’ equity (deficit), net of the related tax effects. If the decline is considered to be a credit-related impairment, it is recognized as an allowance on the consolidated balance sheet with a corresponding charge to the statement of operations. The credit allowance is limited to the difference between the fair value and the amortized cost basis. No credit-related allowances or impairments have been recognized on the Company’s investments in
available-for-sale
debt securities. 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, 2021 and 2020, $440 million out of $569 million and $364 million out of $443 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $298 million out of $569 million and $254 million out of $443 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at December 31, 2021 and 2020, respectively.
Accounts Receivable and Allowance for Credit Losses
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 the trade receivable balance as of January 1, 2020. This new accounting guidance required the Company to move from an incurred loss model to a current expected credit loss (“CECL”) model. Upon adoption, the Company recorded a net decrease of approximately $1 million to the Company’s stockholders’ deficit as of January 1, 2020. The adoption of this standard did not have a material impact on the Company’s balance sheets, results of operations or cash flows.
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 Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. 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. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any off-balance sheet credit exposure related to its customers.
Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to
re-possess,
refurbish and
re-sell
the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The
following is a summary of the activity of the Company’s allowance for credit losses for the year ended December 31
, 2021
, 2020
and 2019
(in thousands). The December 31
, 2021
and 2020
balances are calculated using the CECL method and the December 31
, 2019
balance is calculated using the incurred loss method under legacy GAAP:
| Balance at Beginning of Period | Impact of CECL Adoption | Additions | Deductions | Balance at End of Period | ||||||||||||||||
| Allowance for Credit Losses | ||||||||||||||||||||
| December 31, 2021 | $ | 14,381 | $ | — | $ | 5,380 | $ | (6,533 | ) | $ | 13,228 | |||||||||
| December 31, 2020 | $ | 9,560 | $ | 985 | $ | 9,051 | $ | (5,215 | ) | $ | 14,381 | |||||||||
| December 31, 2019 | $ | 7,663 | $ | — | $ | 4,701 | $ | (2,804 | ) | $ | 9,560 |
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 60%, 59% and 57% in 2021, 2020 and 2019, respectively. None of the Company’s individual customers accounted for more than 2% of annual Company sales in 2021, 2020 or 2019. 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
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.
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.
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 tax as a current period cost.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Leases
The Company’s lease portfolio consists primarily of operating leases. 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 Company categorizes leases as either operating or finance leases at the commencement date of the lease. The Company does not have any material financing leases.
The Company makes variable lease payments that do not depend on a rate or index, primarily for items such as real estate taxes and other expenses. These expenses are recorded as variable costs in the period incurred. For the years ended December 31, 2021, 2020 and 2019, respectively, variable costs incurred were not material.
The Company’s lease agreements may include tenant improvement allowances, rent holidays, and/or contingent rent provisions as well as a certain number of these leases contain rental escalation clauses that are either fixed or adjusted periodically for inflation of market rates which are factored into our determination of lease payments at lease inception. The Company’s leases also sometimes include renewal options and/or termination options which are included in the determination of the lease term when they are reasonably certain to be exercised.
The Company has lease agreements which contain lease and
non-lease
components, which are accounted for as a single lease component for all underlying classes of assets.
For leases with terms greater than 12 months, the Company records a
right-of-use
asset and lease liability at the present value of lease payments over the term of the leases and records rent expense on a straight-line basis over the lease term. The Company has elected not to apply the recognition requirements to short-term leases with terms less than 12 months. For short-term leases, the Company recognizes lease payments in net income on a straight-line basis over the term of the lease. For the years ended December 31, 2021, 2020 or 2019, respectively, costs incurred related to short-term leases were not material.
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 estimates 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.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
During 2020, the Company recorded a
non-cash
charge of $10 million for the impairment of certain intangible assets associated with its 2014 acquisition of Medimass Research Development and Service Kft (“Medimass”). The impairment charge was due to a shift in strategic priorities. 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. The net impact of $7 million is reported separately within the consolidated statements of operations.
Business Combinations and Asset Acquisitions
The Company accounts for business acquisitions under the accounting standards for business combinations. The results of each acquisition are included in the Company’s consolidated results as of the acquisition date and the purchase price of an acquisition is allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values. Any excess of the fair value consideration transferred over the estimated fair values of the net assets acquired is recognized as goodwill. Acquired
in-process
research and development (“IPR&D”) included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred and acquired IPR&D is tested for impairment annually until completion of the acquired programs. Upon commercialization, this indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life, subject to periodic impairment reviews. If the research and development project is abandoned, the indefinite-lived asset is charged to expense. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.
The Company also acquires intellectual property through licensing arrangements. These arrangements often require upfront payments and may include additional milestone or royalty payments, contingent upon certain future events. IPR&D acquired in an asset acquisition (as opposed to a business combination) is expensed immediately unless there is an alternative future use. Subsequent payments made for the achievement of milestones are evaluated to determine whether they have an alternative future use or should be expensed. Payments made to third parties subsequent to commercialization are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.
Goodwill and Other Intangible Assets
The Company tests for goodwill impairment using a fair-value approach at the reporting unit level annually, or earlier, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. 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 purposes, the Company has two reporting units: Waters
TM
and TA
TM
. Goodwill is allocated to the reporting units at the time of acquisition.
As of January 1, 2020, the Company adopted a new accounting standard which eliminated the requirement to calculate the implied fair value of goodwill as noted above to measure a goodwill impairment charge. Under the prior accounting standard, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
goodwill. Under the new accounting standard impairment assessment, an impairment charge is based on the excess of a reporting unit’s carrying amount over its fair value. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the amount of the excess carrying amount of the reporting unit over its fair value. This impairment is limited to the total amount of goodwill allocated to that reporting unit. 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 $36 million, $53 million and $40 million of direct expenses that were related to the development of software in 2021, 2020 and 2019, respectively. Net capitalized software included in intangible assets totaled $155 million and $175 million at December 31, 2021 and 2020, respectively. See Note 8, Goodwill and Other Intangibles.
The Company capitalizes 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 $12 million and $8 million at December 31, 2021 and 2020, 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 method investments is included in the consolidated statements of operations and was not material in any period presented.
During the year ended December 31, 2021, year ended December 31, 2020 and year ended December 31, 2019, the Company made investments in unaffiliated companies of $2 million, $6 million and $9 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In 2021
, the Company also recorded an unrealized gain of $10 million due to an observable change in the fair value of an existing investment the Company does not have the ability to exercise significant influence over.
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, 2021 and 2020. 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, 2021 (in thousands):
| Total at December 31, 2021 | 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 | $ | 13,917 | $ | — | $ | 13,917 | $ | — | ||||||||
| Corporate debt securities | 39,121 | — | 39,121 | — | ||||||||||||
| Time deposits | 19,030 | — | 19,030 | — | ||||||||||||
| Waters 401(k) Restoration Plan assets | 38,729 | 38,729 | — | — | ||||||||||||
| Foreign currency exchange contracts | 504 | — | 504 | — | ||||||||||||
| Total | $ | 111,301 | $ | 38,729 | $ | 72,572 | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration | $ | 1,347 | $ | — | $ | — | $ | 1,347 | ||||||||
| Foreign currency exchange contracts | 195 | — | 195 | — | ||||||||||||
| Interest rate cross-currency swap agreements | 5,363 | — | 5,363 | — | ||||||||||||
| Total | $ | 6,905 | $ | — | $ | 5,558 | $ | 1,347 | ||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31
, 2020
(in thousands):
| Total at December 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Time deposits | $ | 6,451 | $ | — | $ | 6,451 | $ | — | ||||||||
| Waters 401(k) Restoration Plan assets | 38,988 | 38,988 | — | — | ||||||||||||
| Foreign currency exchange contracts | 836 | — | 836 | — | ||||||||||||
| Total | $ | 46,275 | $ | 38,988 | $ | 7,287 | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration | $ | 1,185 | $ | — | $ | — | $ | 1,185 | ||||||||
| Foreign currency exchange contracts | 185 | — | 185 | — | ||||||||||||
| Interest rate cross-currency swap agreements | 44,996 | — | 44,996 | — | ||||||||||||
| Total | $ | 46,366 | $ | — | $ | 45,181 | $ | 1,185 | ||||||||
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, foreign currency exchange contracts and interest rate cross-currency swap agreements 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 December 2020 acquisition of Integrated Software Solutions (“ISS”) 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 achievement of certain revenue and customer account milestones over the two years after the acquisition date 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.
The fair value of future contingent consideration payments related to the December 2020 acquisition of ISS was estimated to be $1 million at both December 31, 2021 and 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value of Other Financial Instruments
The Company’s accounts receivable and accounts payable are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s variable interest rate debt approximates fair value due to the variable nature of the interest rate. The carrying value of the Company’s fixed interest rate debt was $1.3 billion and $0.9 billion at December 31, 2021 and 2020, 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 $1.3 billion and $1.0 billion at December 31, 2021 and 2020, respectively, using Level 2 inputs.
Derivative Transactions
The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its
non-U.S.
dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.
The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.
Foreign Currency Exchange Contracts
The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real.
Interest Rate Cross-Currency Swap Agreements
As of December 31, 2021, the Company had three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $230 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive income in stockholders’ equity (deficit) until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):
| December 31, 2021 | December 31, 2020 | |||||||||||||||
| Notional Value | Fair Value | Notional Value | Fair Value | |||||||||||||
| Foreign currency exchange contracts: | ||||||||||||||||
| Other current assets | $ | 55,309 | $ | 504 | $ | 66,690 | $ | 836 | ||||||||
| Other current liabilities | $ | 9,000 | $ | 195 | $ | 20,000 | $ | 185 | ||||||||
| Interest rate cross-currency swap agreements: | ||||||||||||||||
| Other liabilities | $ | 230,000 | $ | 5,363 | $ | 560,000 | $ | 44,996 | ||||||||
| Accumulated other comprehensive loss | $ | 15,944 | $ | 44,996 |
The following is a summary of the activity included in the consolidated statements of operations and statements of comprehensive income related to the foreign currency exchange contracts and interest rate cross-currency swap agreements
(in thousands):
| Financial Statement Classification | Year Ended December 31, | |||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||
| Foreign currency exchange contracts: | ||||||||||||||
| Realized (losses) gains on closed contracts | Cost of sales | $ | (1,973 | ) | $ | 1,444 | $ | (3,552 | ) | |||||
| Unrealized (losses) gains on open contracts | Cost of sales | (343 | ) | 1,663 | (1,292 | ) | ||||||||
| Cumulative net pre-tax (losses) gains | Cost of sales | $ | (2,316 | ) | $ | 3,107 | $ | (4,844 | ) | |||||
| Interest rate cross-currency swap agreements: | ||||||||||||||
| Interest earned | Interest income | $ | 11,084 | $ | 15,296 | $ | 11,709 | |||||||
| Unrealized gains (losses) on open contracts | Accumulated other | |||||||||||||
| comprehensive loss | $ | 29,052 | $ | (44,996 | ) | $ | 4,485 |
Stockholders’ Equity (Deficit)
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 2021, 2020 and 2019, the Company repurchased 2.0 million, 0.8 million and 11.1 million shares of the Company’s outstanding common stock at a cost of $640 million, $167 million and $2.5 billion, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $9 million, $9 million and $8 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, the Company has a total of $885 million 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.
The Company accrued $20 million at December 31, 2019 as a result of treasury stock purchases that were unsettled. These transactions were settled in January 2020. There was no such accrual at December 31, 2021 or 2020.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 (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)
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 year ended December 31, 2021, 2020 and 2019 (in thousands):
| Balance at Beginning of Period | Accruals for Warranties | Settlements Made | Balance at End of Period | |||||||||||||
| Accrued warranty liability: | ||||||||||||||||
| December 31, 2021 | $ | 10,950 | $ | 8,799 | $ | (9,031 | ) | $ | 10,718 | |||||||
| December 31, 2020 | $ | 11,964 | $ | 7,909 | $ | (8,923 | ) | $ | 10,950 | |||||||
| December 31, 2019 | $ | 12,300 | $ | 7,540 | $ | (7,876 | ) | $ | 11,964 |
Advertising Costs
All advertising costs are expensed as incurred and are included in selling and administrative expenses in the consolidated statements of operations. Advertising expenses were $7 million, $6 million and $6 million for 2021, 2020 and 2019, 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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
These standards require that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
Other Items
During the year ended December 31, 2021, the Company executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation and Bruker Daltronik GmbH regarding their timsTOF product line. In connection with the settlement, the Company is entitled to receive $10 million in guaranteed payments, including minimum royalty payments, which was recognized within other income in our consolidated statement of operations for the year ended year ended December 31, 2021. During the year ended December 31, 2021, the Company received $3 million in guaranteed payments, net of applicable withholding taxes.
Recently Adopted Accounting Standards
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. The Company adopted this standard on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
In January 2020, accounting guidance was issued that clarifies the accounting guidance for equity method investments, joint ventures, and derivatives and hedging. The update clarifies the interaction between different sections of the accounting guidance that could be applicable and helps clarify which guidance should be applied in certain situations which should increase relevance and comparability of financial statement information. This guidance is effective for annual and interim periods beginning after December 15, 2020. The Company adopted this standard on January 1, 2021. 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 March 2020, accounting guidance was issued that facilitates the effects of reference rate reform on financial reporting. The amendments in the update provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January of 2021, an update was issued to clarify that certain optional expedients and exceptions under the reference rate reform guidance for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in the reference rate reform guidance, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This temporary guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company may elect to apply this guidance for all contract modifications or eligible hedging relationships during that time period subject to certain criteria. The Company is still evaluating the impact of reference rate reform and whether this guidance will be adopted.
In October 2021, accounting guidance was issued that requires acquirers in a business combination to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
with Topic 606. The new guidance requires that at the acquisition date, the acquirer should account for the related revenue contracts in accordance with 606 as if it had originated the contracts. This guidance differs from current GAAP which requires an acquirer to recognize assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with 606, at fair value on the acquisition date. This guidance is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those years. The amendments within this update should be applied prospectively to business combinations on or after the effective date of the amendments. Early adoption of the amendment is permitted, including adoption in an interim period. The applicability of this standard is dependent on there being a business combination activity and therefore the Company will evaluate the impact of this guidance when and if there is applicable activity.
3 Revenue Recognition
The Company’s deferred revenue liabilities on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received i
n
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, 2021, 2020 and 2019 (in thousands):
| December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Balance at the beginning of the period | $ | 239,759 | $ | 213,695 | $ | 204,257 | ||||||
| Recognition of revenue included in balance at beginning of the period | (216,920 | ) | (198,209 | ) | (176,981 | ) | ||||||
| Revenue deferred during the period, net of revenue recognized | 250,759 | 224,273 | 186,419 | |||||||||
| Balance at the end of the period | $ | 273,598 | $ | 239,759 | $ | 213,695 | ||||||
The Company classified $46 million and $42 million of deferred revenue and customer advances in other long-term liabilities at December 31, 2021 and 2020, 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, 2021 | ||||
| Deferred revenue and customer advances expected to be recognized in: | ||||
| One year or less | $ | 227,561 | ||
| 13-24 months | 26,840 | |||
| 25 months and beyond | 19,197 | |||
| Total | $ | 273,598 | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2021 | ||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gain | Loss | Value | |||||||||||||
| U.S. Treasury securities | $ | 13,929 | $ | — | $ | (12 | ) | $ | 13,917 | |||||||
| Corporate debt securities | 39,135 | — | (14 | ) | 39,121 | |||||||||||
| Time deposits | 19,030 | — | — | 19,030 | ||||||||||||
| Total | $ | 72,094 | $ | — | $ | (26 | ) | $ | 72,068 | |||||||
| Amounts included in: | ||||||||||||||||
| Cash equivalents | $ | 4,017 | $ | — | $ | — | $ | 4,017 | ||||||||
| Investments | 68,077 | — | (26 | ) | 68,051 | |||||||||||
| Total | $ | 72,094 | $ | — | $ | (26 | ) | $ | 72,068 | |||||||
| December 31, 2020 | ||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gain | Loss | Value | |||||||||||||
| Time deposits | 6,451 | — | — | 6,451 | ||||||||||||
| Total | $ | 6,451 | $ | — | $ | — | $ | 6,451 | ||||||||
| Amounts included in: | ||||||||||||||||
| Investments | 6,451 | — | — | 6,451 | ||||||||||||
| Total | $ | 6,451 | $ | — | $ | — | $ | 6,451 | ||||||||
The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):
| December 31, 2021 | December 31, 2020 | |||||||
| Due in one year or less | $ | 71,066 | $ | 6,451 | ||||
| Due after one year through three years | 1,002 | — | ||||||
| Total | $ | 72,068 | $ | 6,451 | ||||
Net realized gains and losses on sales of investments were not material in 2021, 2020 and 2019.
5 Inventories
Inventories are classified as follows (in thousands):
| December 31, 2021 | December 31, 2020 | |||||||
| Raw materials | $ | 165,240 | $ | 133,490 | ||||
| Work in progress | 19,726 | 18,678 | ||||||
| Finished goods | 171,129 | 152,113 | ||||||
| Total inventories | $ | 356,095 | $ | 304,281 | ||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2021, 2020 and 2019, the Company
recorded inventory-related excess and obsolescence provisions of $
million, $
million
and
$
million, respectively.
6 Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Land and land improvements | $ | 36,428 | $ | 36,884 | ||||
| Buildings and leasehold improvements | 446,061 | 376,705 | ||||||
| Production and other equipment | 621,792 | 588,625 | ||||||
| Construction in progress | 117,148 | 125,925 | ||||||
| Total property, plant and equipment | 1,221,429 | 1,128,139 | ||||||
| Less: accumulated depreciation and amortization | (673,516 | ) | (634,136 | ) | ||||
| Property, plant and equipment, net | $ | 547,913 | $ | 494,003 | ||||
In February 2018, the Company’s Board of Directors approved expanding its precision chemistry consumable manufacturing operations in the United States. The Company has incurred costs of $200 million to build and equip this new state-of-the-art manufacturing facility as of December 31, 2021, and anticipates spending approximately $50 million to complete the facility in 2022.
During 2021, 2020 and 2019, the Company retired and disposed of approximately $23 million, $19 million and $11 million of property, plant and equipment, respectively, most of which was fully depreciated and no longer in use. Gains or losses on disposals were immaterial for the years ended December 31, 2021, 2020 and 2019.
7 Acquisitions
On January 15, 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.
Andrew Alliance offers lab workflow automation solutions with the combination of its software platform and smart, connected laboratory equipment and accessories.
The Company allocated $7 million of the purchase price to intangible assets comprised of developed technology, trade name and customer relationships. The developed technology and customer relationships will be
amortized over ten years and the trade name will be amortized over 3 years. The Company allocated $72 million of the purchase price to goodwill, which is not deductible for tax purposes. The principal factor that resulted in recognition of goodwill in the acquisition was that the purchase price was based, in part, on cash flow projections assuming the integration of any acquired technology, distribution channels and products with the Company’s products, which are higher than if the acquired companies’ technology, customer access or products were utilized on a stand-alone basis. The goodwill also includes value assigned to assembled workforce, which cannot be recognized as an intangible asset.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of the assets and liabilities acquired were determined using various income-approach valuation techniques, which use Level 3 inputs. The following table presents the fair values as of the acquisition date, as determined by the Company, of 100% of the assets and liabilities owned and recorded in connection with the acquisition of Andrew Alliance (in thousands):
| Cash | $ | 713 | ||
| Accounts receivable and current other assets | 806 | |||
| Inventory | 669 | |||
| Prepaid and other assets | 611 | |||
| Property, plant and equipment, net | 757 | |||
| Operating lease assets | 847 | |||
| Intangible assets | 6,960 | |||
| Goodwill | 71,632 | |||
| Total assets acquired | 82,995 | |||
| Accrued expenses and other liabilities | 2,093 | |||
| Total consideration | 80,902 | |||
| Fair value of minority investment | 3,525 | |||
| Cash consideration paid | $ | 77,377 | ||
On December 15, 2020, the Company acquired all of the outstanding stock of ISS, for $4 million, net of cash acquired. In addition, the Company may have to pay additional contingent consideration which has an estimated fair value of $1 million as of the close date. The contingent consideration is recorded as a liability and will be paid to the prior shareholders of ISS if certain revenue and customer account conditions are achieved over the next two years after the acquisition date.
ISS offers clinical laboratory software systems that will support and further expand product offerings within our clinical business. The net assets acquired primarily relate to ISS’ laboratory information system,
OMNI-Lab.
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 from Andrew Alliance and ISS, either individually or in the aggregate, as though these acquisitions had occurred at the beginning of the periods covered by this report were immaterial.
8 Goodwill and Other Intangibles
The carrying amount of goodwill was $438 million and $444 million at December 31, 2021 and 2020, respectively. The effect of foreign currency translation decreased goodwill by $6 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Weighted- Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Weighted- Average Amortization Period | |||||||||||||||||||
| Capitalized software | $ | 575,658 | $ | 420,862 | 5 years | $ | 584,452 | $ | 409,847 | 5 years | ||||||||||||||
| Purchased intangibles | 201,302 | 163,752 | 11 years | 205,585 | 160,342 | 11 years | ||||||||||||||||||
| Trademarks | 9,680 | — | — | 9,680 | — | — | ||||||||||||||||||
| Licenses | 12,635 | 6,199 | 7 years | 5,923 | 5,697 | 6 years | ||||||||||||||||||
| Patents and other intangibles | 102,353 | 68,414 | 8 years | 90,699 | 61,808 | 8 years | ||||||||||||||||||
| Total | $ | 901,628 | $ | 659,227 | 7 years | $ | 896,339 | $ | 637,694 | 7 years | ||||||||||||||
The Company capitalized $55 million and $68 million of intangible assets for the years ended December 31, 2021 and 2020, respectively. The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $49 million and $38 million, respectively, in the year ended December 31, 2021 due to the effects of foreign currency translation. Amortization expense for intangible assets was $60 million, $57 million and $51 million for the years ended December 31, 2021, 2020 and 2019, respectively. Amortization expense for intangible assets is estimated to be $62 million per year for each of the next five years.
During 2020, the Company recorded a
non-cash
charge of $10 million for the impairment of certain intangible assets associated with its 2014 acquisition of Medimass due to a shift in strategic priorities. As a result, the Company reduced the gross carrying amount and accumulated amortization balances of its intangible assets by $15 million and $5 million, respectively.
9 Debt
On September 17, 2021, the Company entered into an amended and restated credit agreement (the “2021 Credit Agreement”), which amended the Company’s existing credit agreement entered into in 2017 (the “2017 Credit Agreement”). The 2021 Credit Agreement provides for a $1.8 billion revolving facility (the “2021 Credit Facility”) and converted the $300 million term loan under the 2017 Credit Agreement into part of the new revolving facility. As of December 31, 2021, the 2021 Credit Facility had a total of $210 million outstanding. As of December 31, 2020, the revolving credit facility and the term loan governed by the 2017 Credit Agreement had a total of $400 million outstanding. The 2021 Credit Facility matures on September 17, 2026 and requires no scheduled prepayments before that date.
The interest rates applicable to the 2021 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, 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 2021 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 2021 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
any fiscal quarter. In addition, the 2021 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.
In March 2021, the Company issued the following senior unsecured notes:
| Senior Unsecured Notes | Term | Interest Rate | Face Value (in millions) | Maturity Date | ||||||||||||
| Series N | 5 years | 1.68 | % | $ | 100 | March 2026 | ||||||||||
| Series O | 10 years | 2.25 | % | $ | 400 | March 2031 |
The Company used th
e
proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes. Interest on the Series N and O 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 N and O 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.
As of December 31, 2021 and 2020, the Company had a total of $1.3 billion and $1.0 billion, 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)
The Company had the following outstanding debt at December 31, 2021 and 2020 (in thousands):
| December 31, 2021 | December 31, 2020 | |||||||
| Senior unsecured notes - Series E - 3.97%, due March 2021 | — | 50,000 | ||||||
| Senior unsecured notes - Series F - 3.40%, due June 2021 | — | 100,000 | ||||||
| Total notes payable and debt, current | — | 150,000 | ||||||
| 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 | 200,000 | ||||||
| Senior unsecured notes - Series M - 3.53%, due September 2029 | 300,000 | 300,000 | ||||||
| Senior unsecured notes - Series N - 1.68%, due March 2026 | 100,000 | — | ||||||
| Senior unsecured notes - Series O - 2.25%, due March 2031 | 400,000 | — | ||||||
| Credit agreement | 210,000 | 400,000 | ||||||
| Unamortized debt issuance costs | (6,130 | ) | (3,485 | ) | ||||
| Total long-term debt | 1,513,870 | 1,206,515 | ||||||
| Total debt | $ | 1,513,870 | $ | 1,356,515 | ||||
| * | Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.25%. |
|---|
As of December 31, 2021 and 2020, the Company had a total amount available to borrow under the 2021 or 2017 Credit Agreement of $1.6 billion and $1.4 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.74% and 2.92% at December 31, 2021 and 2020, respectively. As of December 31, 2021, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $121 million and $109 million at December 31, 2021 and 2020, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of December 31, 2021 or December 31, 2020.
As of December 31, 2021, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $230 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.
Annual maturities of debt outstanding at December 31, 2021 are as follows (in thousands):
| Total | ||||
| 2022 | $ | — | ||
| 2023 | 50,000 | |||
| 2024 | 100,000 | |||
| 2025 | — | |||
| 2026 | 670,000 | |||
| Thereafter | 700,000 | |||
| Total | $ | 1,520,000 | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10 Income Taxes
Income tax data for the years ended December 31, 2021, 2020 and 2019 is as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| The components of income before income taxes are as follows: | ||||||||||||
| Domestic | $ | 144,410 | $ | 75,193 | $ | 97,325 | ||||||
| Foreign | 661,783 | 535,721 | 580,914 | |||||||||
| Total | $ | 806,193 | $ | 610,914 | $ | 678,239 | ||||||
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| The components of the income tax provision were as follows: | ||||||||||||
| Federal | $ | 16,302 | $ | 28,385 | $ | 7,009 | ||||||
| State | 3,691 | 4,243 | 3,329 | |||||||||
| Foreign | 76,724 | 59,408 | 66,083 | |||||||||
| Total current tax provision | $ | 96,717 | $ | 92,036 | $ | 76,421 | ||||||
| Federal | $ | 10,491 | $ | (8,244 | ) | $ | 6,913 | |||||
| State | 345 | (506 | ) | 1,253 | ||||||||
| Foreign | 5,797 | 6,057 | 1,454 | |||||||||
| Total deferred tax provision | 16,633 | (2,693 | ) | 9,620 | ||||||||
| Total provision | $ | 113,350 | $ | 89,343 | $ | 86,041 | ||||||
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, 2021, 2020 and 2019 (in thousands):
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Federal tax computed at U.S. statutory income tax rate | $ | 169,300 | $ | 128,292 | $ | 142,430 | ||||||
| Foreign currency exchange impact on distributed earnings | — | — | (3,229 | ) | ||||||||
| GILTI, net of foreign tax credits | 10,476 | 13,319 | 10,523 | |||||||||
| State income tax, net of federal income tax benefit | 4,036 | 2,415 | 3,459 | |||||||||
| Net effect of foreign operations | (54,566 | ) | (48,962 | ) | (52,727 | ) | ||||||
| Effect of stock-based compensation | (6,682 | ) | (6,798 | ) | (9,211 | ) | ||||||
| Other, net | (9,214 | ) | 1,077 | (5,204 | ) | |||||||
| Provision for income taxes | $ | 113,350 | $ | 89,343 | $ | 86,041 | ||||||
The Company’s effective tax rates were 14.1%, 14.6% and 12.7% for the years ended December 31, 2021, 2020 and 2019, 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, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Prior to April 1, 2021, the
Company had a tax exemption on income arising from qualifying activities in Singapore, based upon the achievement of certain contractual milestones, which the Company met as of December 31, 2020 and maintained through March 2021. The effect of applying these concessionary income tax rates 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, 2021, 2020 and 2019 by $20 million, $21 million and $24 million, respectively, and increased the Company’s net income per diluted share by $0.32, $0.33 and $0.35, respectively.
During 2021, the Company’s effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, a $10 million provision related to the GILTI tax and a tax benefit of $7 million on stock-based compensation.
The 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 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.
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 $4 million, $3 million and $3 million for 2021, 2020 and 2019, respectively, for future withholding taxes and U.S. state taxes on the repatriation of 2021, 2020 and 2019 undistributed earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The tax effects of temporary differences and carryforwards which give rise to deferred tax assets and deferred tax liabilities are summarized as follows (in thousands):
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Deferred tax assets: | ||||||||
| Net operating losses and credits | $ | 55,813 | $ | 61,962 | ||||
| Depreciation | — | 5,701 | ||||||
| Operating leases | 19,288 | 24,317 | ||||||
| Amortization | 2,316 | 2,377 | ||||||
| Stock-based compensation | 8,074 | 7,773 | ||||||
| Deferred compensation | 30,105 | 27,754 | ||||||
| Deferred revenue | 10,997 | 11,341 | ||||||
| Revaluation of equity investments and licenses | 3,083 | 4,492 | ||||||
| Inventory | 5,405 | 5,060 | ||||||
| Accrued liabilities and reserves | 6,675 | 10,639 | ||||||
| Unrealized foreign currency gain/loss | 2,266 | — | ||||||
| Other | 6,713 | 3,483 | ||||||
| Total deferred tax assets | 150,735 | 164,899 | ||||||
| Valuation allowance | (58,834 | ) | (60,101 | ) | ||||
| Deferred tax assets, net of valuation allowance | 91,901 | 104,798 | ||||||
| Deferred tax liabilities: | ||||||||
| Capitalized software | (24,357 | ) | (23,748 | ) | ||||
| Operating leases | (19,251 | ) | (24,314 | ) | ||||
| Indefinite-lived intangibles | (15,534 | ) | (14,973 | ) | ||||
| Unrealized foreign currency gain/loss | — | (10,819 | ) | |||||
| Depreciation | (3,481 | ) | — | |||||
| Deferred tax liability on foreign earnings | (17,283 | ) | (17,277 | ) | ||||
| Total deferred tax liabilities | (79,906 | ) | (91,131 | ) | ||||
| Net deferred tax assets | $ | 11,995 | $ | 13,667 | ||||
The Company has gross foreign net operating losses of $229 million, of which $202 million do not expire under current laws and $27 million start expiring in 2022. As of December 31, 2021, the Company has provided a deferred tax valuation allowance of $59 million, of which $53 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 $3 million as of December 31, 2021, which represent the future tax benefit of foreign net operating loss carryforwards that do not expire under current law.
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 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2021, 2020 and 2019 (in thousands):
| 2021 | 2020 | 2019 | ||||||||||
| Balance at the beginning of the period | $ | 28,666 | $ | 27,790 | $ | 26,108 | ||||||
| Net reductions for settlement of tax audits | (1,300 | ) | (399 | ) | — | |||||||
| Net reductions for lapse of statutes taken during the period | (433 | ) | (684 | ) | (261 | ) | ||||||
| Net additions for tax positions taken during the current period | 1,759 | 1,959 | 1,943 | |||||||||
| Balance at the end of the period | $ | 28,692 | $ | 28,666 | $ | 27,790 | ||||||
As of 2021, the total amount of gross unrecognized tax benefits was $29 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, 2016. 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, 2021, the Company expects to record additional reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of approximately $18 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, 2021, the Company is currently under an income tax audit in the U.S. for its 2017 and 2018 tax years. The Company is also subject to various foreign audits and inquiries and we currently do not expect any material adjustments.
The following i
s
a summary of the activity of the Company’s valuation allowance for the years ended December 31, 2021, 2020 and 2019 (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: | ||||||||||||||||
| 2021 | $ | 60,101 | $ | 2,919 | $ | (4,186 | ) | $ | 58,834 | |||||||
| 2020 | $ | 51,221 | $ | 1,137 | $ | 7,743 | $ | 60,101 | ||||||||
| 2019 | $ | 53,893 | $ | (1,242 | ) | $ | (1,430 | ) | $ | 51,221 |
| * | 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, 2021 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, 2020 was primarily due to the effect of foreign currency translation on a valuation allowance related to a net operating loss carryforward and acquired historical net operating losses. The change in the valuation allowance during the year ended December 31, 2019 was primarily due to the effect of foreign currency translation on a valuation allowance related to a net operating loss carryforward. |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In March 2020, the U.S. federal government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the
COVID-19
outbreak which, among other things, contains numerous income tax provisions. The CARES Act does not have a material impact on the Company’s consolidated financial statements or related disclosures.
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, 2021, the Company executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation and Bruker Daltronik GmbH regarding their timsTOF product line. In connection with the settlement, the Company is entitled to receive $10 million in guaranteed payments, including minimum royalty payments, which was recognized within other income in our consolidated statement of operations for the year ended December 31, 2021. During the year ended December 31, 2021, the Company received $3 million in guaranteed payments, net of applicable withholding taxes. The Company also had a litigation provision of $5 million during the year ended December 31, 2021 related to a legal settlement. The accrued patent litigation expense is in other current liabilities in the consolidated balance sheets at December 31, 2021 and 2020
.
12 Leases
As
of December
,
2021
and
2020
, the Company had lease agreements that expire at various dates through
2034
, with weighted-average remaining lease terms of
4.7
years and
5.2
years, respectively. Rental expense was $
million, $
million and $
million for the years ended December
,
2021
,
2020
and
2019
, respectively. As of December
,
2021
and
2020
, the weighted-average discount rates used to determine the present value of lease liabilities were
3.04
% and
3.50
%, respectively. During the years ended December
,
2021
,
2020
and
2019
, cash paid for amounts included in the measurement of lease liabilities in operating activities in the statement of cash flows was $
million, $
million and $
million, respectively. The Company recorded $
million, $
million and $
million
right-of-use
assets in exchange for new operating lease liabilities during the years ended December
,
2021
,
2020
and
2019
, respectively.
The Company’s
right-of-use
lease assets and lease liabilities included in the consolidated balance sheets are classified as follows (in thousands):
| December 31, | ||||||||||
| Financial Statement Classification | 2021 | 2020 | ||||||||
| Assets: | ||||||||||
| Property operating lease assets | Operating lease assets | $ | 55,774 | $ | 62,374 | |||||
| Automobile operating lease assets | Operating lease assets | 28,236 | 29,694 | |||||||
| Equipment operating lease assets | Operating lease assets | 724 | 1,184 | |||||||
| Total lease assets | $ | 84,734 | $ | 93,252 | ||||||
| Liabilities: | ||||||||||
| Current operating lease liabilities | Current operating lease liabilities | $ | 27,906 | $ | 27,764 | |||||
| Long-term operating lease liabilities | Long-term operating lease liabilities | 59,623 | 68,197 | |||||||
| Total lease liabilities | $ | 87,529 | $ | 95,961 | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Undiscounted future minimum rents payable as of December 31, 2021 under
non-cancelable
leases with initial terms exceeding one year reconcile to lease liabilities included in the consolidated balance sheet as follows (in thousands):
| 2022 | $ | 29,311 | ||
| 2023 | 20,763 | |||
| 2024 | 14,688 | |||
| 2025 | 10,642 | |||
| 2026 | 7,107 | |||
| 2027 and thereafter | 11,072 | |||
| Total future minimum lease payments | 93,583 | |||
| Less: amount of lease payments representing interest | (6,054 | ) | ||
| Present value of future minimum lease payments | 87,529 | |||
| Less: current operating lease liabilities | (27,906 | ) | ||
| Long-term operating lease liabilities | $ | 59,623 | ||
13 Other Commitments and Contingencies
The Company licenses certain technology and software from third parties in the course of ordinary business. Future minimum license fees payable under existing license agreements as of December 31, 2021 are immaterial for the years ended December 31, 2022 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 $2 million.
The Company enters into standard indemnification agreements i
n
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.
14 Stock-Based Compensation
In May 2020, the Company’s shareholders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of December 31, 2021, the 2020 Plan has 6.7 million shares available for grant in the form of incentive or
non-qualified
stock options, stock appreciation rights (“SARs”), restricted stock or other types of awards (e.g. restricted stock units and performance stock units). The Company issues new shares of common stock upon exercise of stock options, restricted stock unit conversion or performance stock unit conversion. Under the 2020 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 2020 Plan is scheduled to terminate on May 13, 2030. 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, restricted stock units and performance stock units may be issued under the 2020 Plan for such
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consideration as is determined by the Compensation Committee of the Board of Directors. As of December 31, 2021, 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 0.8 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, 2021, 1.6 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, 2021, 2020 and 2019, 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, 2021, 2020 and 2019 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):
| 2021 | 2020 | 2019 | ||||||||||
| Cost of sales | $ | 2,500 | $ | 2,485 | $ | 2,271 | ||||||
| Selling and administrative expenses | 21,727 | 29,711 | 30,907 | |||||||||
| Research and development expenses | 5,691 | 4,669 | 5,399 | |||||||||
| Total stock-based compensation | $ | 29,918 | $ | 36,865 | $ | 38,577 | ||||||
During the years ended 2020 and 2019, the Company recognized $1 million and less than $1 million of expense, respectively, of stock-based compensation related to the modification of certain stock awards upon the retirement of senior executives. There was no expense related to stock award modifications in 2021.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2021, 2020 and 2019 are as follows:
| Options Issued and Significant Weighted-Average Assumptions Used to Estimate Option Fair Values | 2021 | 2020 | 2019 | |||||||||
| Options issued in thousands | 160 | 267 | 146 | |||||||||
| Risk-free interest rate | 0.8 | % | 1.2 | % | 2.5 | % | ||||||
| Expected life in years | 6 | 6 | 5 | |||||||||
| Expected volatility | 32.4 | % | 27.8 | % | 24.5 | % | ||||||
| Expected dividends | — | — | — |
| Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant | 2021 | 2020 | 2019 | |||||||||
| Exercise price | $ | 281.33 | $ | 215.12 | $ | 230.37 | ||||||
| Fair value | $ | 91.48 | $ | 63.14 | $ | 61.75 |
The following table summarizes stock option activity for the plans for the year ended December 31, 2021 (in thousands, except per share data):
| Number of Shares | Exercise Price per Share | Weighted- Average Exercise Price per Share | ||||||||||||||||||
| Outstanding at December 31, 2020 | 1,067 | $ | 75.94 | to | $ | 238.52 | $ | 179.59 | ||||||||||||
| Granted | 160 | $ | 250.15 | to | $ | 371.64 | $ | 281.33 | ||||||||||||
| Exercised | (282 | ) | $ | 75.94 | to | $ | 238.52 | $ | 165.29 | |||||||||||
| Canceled | (254 | ) | $ | 139.51 | to | $ | 280.80 | $ | 198.05 | |||||||||||
| Outstanding at December 31, 2021 | 691 | $ | 88.71 | to | $ | 371.64 | $ | 202.24 | ||||||||||||
The following table details the options outstanding at December 31, 2021 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 | |||||||||||||||
| $88.71 to $194.2 5 | 232 | $ | 135.77 | 4.3 | 213 | $ | 133.11 | |||||||||||||
| $194.2 6 to $224.37 | 232 | $ | 206.51 | 7.4 | 84 | $ | 204.73 | |||||||||||||
| $224.38 to $371.64 | 227 | $ | 265.81 | 8.4 | 34 | $ | 237.24 | |||||||||||||
| Total | 691 | $ | 202.24 | 6.7 | 331 | $ | 162.09 | |||||||||||||
During 2021, 2020 and 2019, 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 $43 million, $45 million and $45 million, respectively. The total cash received from the exercise of these stock options was $46 million, $59 million and $46 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The aggregate intrinsic value of the outstanding stock options at December 31, 2021 was $118 million. Options exercisable at December 31, 2021, 2020 and 2019 were 0.3 million, 0.5 million and 0.7 million, respectively. The weighted-average exercise prices of options exercisable at December 31, 2021, 2020 and 2019 were $162.09, $154.16 and $134.94, respectively. The weighted-average remaining contractual life of the exercisable outstanding stock options at December 31, 2021 was 5.5 years. The aggregate intrinsic value of stock options exercisable as of December 31, 2021 was $71 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2021, the Company had 0.7 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 $117 million, $201.85 and 6.9 years, respectively, at December 31, 2021.
As of December 31, 2021, there were $19 million of total unrecognized compensation costs related to unvested stock option awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.5 years.
Restricted Stock
During the years ended December 31, 2021, 2020 and 2019, the Company granted four thousand, six thousand and five thousand shares of restricted stock, respectively. The weighted-average fair value per share on the grant date of the restricted stock granted in 2021, 2020 and 2019 was $256.28, $229.67 and $183.41, respectively. The Company has recorded $1 million of compensation expense in each of the years ended December 31, 2021, 2020 and 2019 related to the restricted stock grants. As of December 31, 2021, the Company had 3 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, 2021 (in thousands, except per share data):
| Shares | Weighted-Average Grant Date Fair Value per Share | |||||||
| Unvested at December 31, 2020 | 271 | $ | 202.00 | |||||
| Granted | 88 | $ | 283.10 | |||||
| Vested | (88 | ) | $ | 184.60 | ||||
| Forfeited | (26 | ) | $ | 224.71 | ||||
| Unvested at December 31, 2021 | 245 | $ | 234.97 | |||||
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, 2021, 2020 and 2019 on the restricted stock units expected to vest were $17 million, $15 million and $14 million, respectively. As of December 31, 2021, there were $41 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 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. Beginning with the grants made in 2020, the vesting conditions for performance stock units now include a performance condition based on future sales growth.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2021, 2020 and 2019 are as follows:
| Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values | 2021 | 2020 | 2019 | |||||||||
| Performance stock units issued in thousands | 41 | 58 | 13 | |||||||||
| Risk-free interest rate | 0.2 | % | 1.3 | % | 2.4 | % | ||||||
| Expected life in years | 2.9 | 2.9 | 2.8 | |||||||||
| Expected volatility | 38.7 | % | 25.1 | % | 23.5 | % | ||||||
| Average volatility of peer companies | 34.7 | % | 26.1 | % | 26.2 | % | ||||||
| Correlation Coefficient | 45.8 | % | 36.6 | % | 34.2 | % | ||||||
| Expected dividends | — | — | — |
The following table summarizes the unvested performance stock unit award activity for the year ended December 31, 2021 (in thousands, except per share data):
| Shares | Weighted-Average Fair Value per Share | |||||||
| Unvested at December 31, 2020 | 95 | $ | 230.36 | |||||
| Granted | 41 | $ | 315.98 | |||||
| Vested | (5 | ) | $ | 242.94 | ||||
| Forfeited | (44 | ) | $ | 199.22 | ||||
| Unvested at December 31, 2021 | 87 | $ | 285.73 | |||||
The amount of compensation costs recognized for the years ended December 31, 2021, 2020 and 2019 on the performance stock units expected to vest were $3 million, $6 million and $7 million, respectively. As of December 31, 2021, there were $12 million of total unrecognized compensation costs related to the restricted stock unit awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 2.0 years.
15 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
| Year Ended December 31, 2021 | ||||||||||||
| Net Income | Weighted-Average Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| Net income per basic common share | $ | 692,843 | 61,575 | $ | 11.25 | |||||||
| Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 453 | (0.08 | ) | ||||||||
| Net income per diluted common share | $ | 692,843 | 62,028 | $ | 11.17 | |||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended December 31, 2020 | ||||||||||||
| Net Income | Weighted-Average Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| Net income per basic common share | $ | 521,571 | 62,094 | $ | 8.40 | |||||||
| Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 320 | (0.04 | ) | ||||||||
| Net income per diluted common share | $ | 521,571 | 62,414 | $ | 8.36 | |||||||
| 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 | |||||||
For the years ended December 31, 2021, 2020 and 2019, the Company had 0.1 million, 0.3 million and 0.1 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 othe
r
comprehensive loss are detailed as follows (in thousands):
| Currency Translation | Unrealized Gain (Loss) on Retirement Plans | Unrealized Loss on Investments | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance at December 31, 2019 | $ | (104,066 | ) | $ | (15,405 | ) | $ | — | $ | (119,471 | ) | |||||
| Other comprehensive income (loss), net of tax | 5,984 | (4,456 | ) | — | 1,528 | |||||||||||
| Balance at December 31, 2020 | $ | (98,082 | ) | $ | (19,861 | ) | $ | — | $ | (117,943 | ) | |||||
| Other comprehensive income (loss), net of tax | (1,903 | ) | 8,001 | (20 | ) | 6,078 | ||||||||||
| Balance at December 31, 2021 | $ | (99,985 | ) | $ | (11,860 | ) | $ | (20 | ) | $ | (111,865 | ) | ||||
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
or
post-tax
basis and the Company makes matching contributions of 100% for contributions up to 6% of eligible pay. The Company also sponsors a 401(k) Restoration Plan, which is a nonqualified defined contribution plan. Employees are 100% vested in employee and Company matching contributions for both plans. For the years ended December 31, 2021, 2020 and 2019, the Company’s matching contributions amounted to $19 million, $7 million and $17 million, respectively.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $17 million, $14 million and $15 million in the years ended December 31, 2021, 2020 and 2019, respectively, to the
non-U.S.
plans (primarily defined contribution plans) which are currently outside of the scope of the required disclosures. The eligibility and vesting of
non-U.S. plans
are consistent with local laws and regulations.
The net periodic pension cost is made up of several components that reflect different aspects of the Company’s financial arrangements as well as the cost of benefits earned by employees. These components are determined using the projected unit credit actuarial cost method and are based on certain actuarial assumptions. The Company’s accounting policy is to reflect in the projected benefit obligation all benefit changes to which the Company is committed as of the current valuation date; use a market-related value of assets to determine pension expense; amortize increases in prior service costs on a straight-line basis over the expected future service of active participants as of the date such costs are first recognized; and amortize cumulative actuarial gains and losses in excess of 10% of the larger of the market-related value of plan assets and the projected benefit obligation over the expected future service of active participants.
Summary data for the U.S. Pension Plans, U.S. Retiree Healthcare Plan and
Non-U.S. Pension
Plans are presented in the following tables, using the measurement dates of December 31, 2021 and 2020, respectively.
The reconciliation of the projected benefit obligations for the plans at December 31, 2021 and 2020 is as follows (in thousands):
| 2021 | 2020 | |||||||||||||||
| U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
| Projected benefit obligation, January 1 | $ | 25,369 | $ | 119,590 | $ | 21,186 | $ | 103,366 | ||||||||
| Service cost | 884 | 4,577 | 665 | 4,519 | ||||||||||||
| Employee contributions | 1,176 | 561 | 1,149 | 514 | ||||||||||||
| Interest cost | 559 | 1,247 | 711 | 1,413 | ||||||||||||
| Actuarial (gains) losses | (852 | ) | (5,803 | ) | 2,788 | 2,624 | ||||||||||
| Benefits paid | (1,178 | ) | (5,334 | ) | (1,130 | ) | (1,474 | ) | ||||||||
| Plan amendments | — | 69 | — | — | ||||||||||||
| Plan settlements | — | (341 | ) | — | (1,449 | ) | ||||||||||
| Currency impact | — | (7,642 | ) | — | 10,077 | |||||||||||
| Projected benefit obligation, December 31 | $ | 25,958 | $ | 106,924 | $ | 25,369 | $ | 119,590 | ||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The reconciliation of the fair value of the plan assets at December 31, 2021 and 2020 is as follows (in thousands):
| 2021 | 2020 | |||||||||||||||
| U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
| Fair value of plan assets, January 1 | $ | 16,168 | $ | 93,890 | $ | 13,773 | $ | 83,011 | ||||||||
| Actual return on plan assets | 1,682 | 2,739 | 1,967 | 1,395 | ||||||||||||
| Company contributions | 466 | 5,529 | 409 | 3,581 | ||||||||||||
| Employee contributions | 1,176 | 561 | 1,149 | 514 | ||||||||||||
| Plan settlements | — | (341 | ) | — | (1,449 | ) | ||||||||||
| Benefits paid | (1,178 | ) | (5,334 | ) | (1,130 | ) | (1,474 | ) | ||||||||
| Currency impact | — | (5,875 | ) | — | 8,312 | |||||||||||
| Fair value of plan assets, December 31 | $ | 18,314 | $ | 91,169 | $ | 16,168 | $ | 93,890 | ||||||||
The summary of the funded status for the plans at December 31, 2021 and 2020 is as follows (in thousands):
| 2021 | 2020 | |||||||||||||||
| U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
| Projected benefit obligation | $ | (25,958 | ) | $ | (106,924 | ) | $ | (25,369 | ) | $ | (119,590 | ) | ||||
| Fair value of plan assets | 18,314 | 91,169 | 16,168 | 93,890 | ||||||||||||
| Funded status | $ | (7,644 | ) | $ | (15,755 | ) | $ | (9,201 | ) | $ | (25,700 | ) | ||||
The change in the Company’s projected benefit obligation for the year ended December 31, 2021 was primarily due to fluctuations in foreign currency exchange rates during the year, net actuarial gains that arose during the year driven by an increase in discount rates and differences between expected and actual return on plan assets. The change in the Company’s projected benefit obligation for the year ended December 31, 2020 was primarily due to net actuarial losses that arose during the year driven by a decline in discount rates, differences between expected and actual return on plan assets, and also fluctuations in foreign currency exchange rates during the year.
The summary of the amount
s
recognized in the consolidated balance sheets for the plans at December 31, 2021 and 2020 is as follows (in thousands):
| 2021 | 2020 | |||||||||||||||
| U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
| Long-term assets | $ | — | $ | 1,992 | $ | — | $ | 971 | ||||||||
| Current liabilities | (466 | ) | — | (409 | ) | (1,999 | ) | |||||||||
| Long-term liabilities | (7,178 | ) | (17,747 | ) | (8,792 | ) | (24,672 | ) | ||||||||
| Net amount recognized at December 31 | $ | (7,644 | ) | $ | (15,755 | ) | $ | (9,201 | ) | $ | (25,700 | ) | ||||
The accumulated benefit obligation for all defined benefit pension plans was $92 million and $103 million at December 31, 2021 and 2020, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The summary of the
Non-U.S.
Pension Plans that have accumulated benefit obligations in excess of plan assets at December 31, 2021 and 2020 is as follows (in thousands):
| 2021 | 2020 | |||||||
| Accumulated benefit obligations | $ | 75,178 | $ | 84,940 | ||||
| Fair value of plan assets | $ | 66,414 | $ | 68,334 |
The summary of the
Non-U.S.
Pension Plans that have projected benefit obligations in excess of plan assets at December 31, 2021 and 2020 is as follows (in thousands):
| 2021 | 2020 | |||||||
| Projected benefit obligations | $ | 96,010 | $ | 107,093 | ||||
| Fair value of plan assets | $ | 78,264 | $ | 80,422 |
The summary of the components of net periodic pension costs for the plans for the years ended December 31, 2021, 2020 and 2019 is as follows (in thousands):
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| 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 | $ | — | $ | 884 | $ | 4,577 | $ | — | $ | 665 | $ | 4,519 | $ | — | $ | 499 | $ | 4,339 | ||||||||||||||||||
| Interest cost | — | 559 | 1,247 | — | 711 | 1,413 | 29 | 777 | 1,735 | |||||||||||||||||||||||||||
| Expected return on plan assets | — | (1,011 | ) | (1,835 | ) | — | (871 | ) | (1,874 | ) | — | (706 | ) | (2,154 | ) | |||||||||||||||||||||
| Settlement loss | — | — | 77 | — | — | 235 | 27 | — | 1,548 | |||||||||||||||||||||||||||
| Net amortization: | ||||||||||||||||||||||||||||||||||||
| Prior service credit | — | (19 | ) | (87 | ) | — | (19 | ) | (163 | ) | — | (19 | ) | (108 | ) | |||||||||||||||||||||
| Net actuarial loss | — | 10 | 1,186 | — | — | 1,571 | — | — | 531 | |||||||||||||||||||||||||||
| Net periodic pension cost | $ | — | $ | 423 | $ | 5,165 | $ | — | $ | 486 | $ | 5,701 | $ | 56 | $ | 551 | $ | 5,891 | ||||||||||||||||||
The summary of the changes in amounts recognized in other comprehensive income (loss) for the plans for the years ended December 31, 2021, 2020 and 2019 is as follows (in thousands):
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | ||||||||||||||||||||||||||||
| Prior service credit | $ | — | $ | — | $ | (69 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||
| Net gain (loss) arising during the year | — | 1,524 | 6,708 | — | (1,692 | ) | (3,104 | ) | 32 | (648 | ) | (8,940 | ) | |||||||||||||||||||||||
| Amortization: | ||||||||||||||||||||||||||||||||||||
| Prior service credit | — | (19 | ) | (87 | ) | — | (19 | ) | (163 | ) | — | (19 | ) | (108 | ) | |||||||||||||||||||||
| Net loss | — | 10 | 1,263 | — | — | 1,806 | 27 | — | 2,079 | |||||||||||||||||||||||||||
| Other Plans | — | — | — | — | — | — | — | — | 18 | |||||||||||||||||||||||||||
| Currency impact | — | — | 1,179 | — | — | (2,225 | ) | — | — | 178 | ||||||||||||||||||||||||||
| Total recognized in other comprehensive income (loss) | $ | — | $ | 1,515 | $ | 8,994 | $ | — | $ | (1,711 | ) | $ | (3,686 | ) | $ | 59 | $ | (667 | ) | $ | (6,773 | ) | ||||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of net periodic benefit cost other than the service cost component are included in other income (expense) in the consolidated statements of operations.
The summary of the amounts included in accumulated other comprehensive loss in stockholders’ equity for the plans at December 31, 2021 and 2020 is as follows (in thousands):
| 2021 | 2020 | |||||||||||||||
| U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
| Net actuarial loss | $ | (889 | ) | $ | (14,938 | ) | $ | (2,423 | ) | $ | (24,138 | ) | ||||
| Prior service credit | 55 | 152 | 74 | 358 | ||||||||||||
| Total | $ | (834 | ) | $ | (14,786 | ) | $ | (2,349 | ) | $ | (23,780 | ) | ||||
The plans’ investment asset mix is as follows at December 31, 2021 and 2020:
| 2021 | 2020 | |||||||||||||||
| U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
| Equity securities | 77 | % | 8 | % | 67 | % | 5 | % | ||||||||
| Debt securities | 23 | % | 18 | % | 33 | % | 20 | % | ||||||||
| Cash and cash equivalents | 0 | % | 1 | % | 0 | % | 1 | % | ||||||||
| Insurance contracts and other | 0 | % | 73 | % | 0 | % | 74 | % | ||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
The plans’ investment policies include th
e
following asset allocation guidelines:
| U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans Policy Target | |||||||||||
| Policy Target | Range | |||||||||||
| Equity securities | 60 | % | 30% - 90% | 13 | % | |||||||
| Debt securities | 35 | % | 20% - 50% | 19 | % | |||||||
| Cash and cash equivalents | 0 | % | 0% - 10% | 8 | % | |||||||
| Insurance contracts and other | 5 | % | 0% - 10% | 60 | % |
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. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 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, 2021 and 2020.
The fair value of the Company’s retirement plan assets are as follows at December 31, 2021 (in thousands):
| Total at December 31, 2021 | 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) | 18,314 | 18,314 | — | — | ||||||||||||
| Total U.S. Retiree Healthcare Plan | 18,314 | 18,314 | — | — | ||||||||||||
| Non-U.S. Pension Plans: | ||||||||||||||||
| Cash equivalents (b) | 1,333 | 1,333 | — | — | ||||||||||||
| Mutual funds (c) | 23,891 | 23,891 | — | — | ||||||||||||
| Bank and insurance investment contracts (d) | 65,945 | — | — | 65,945 | ||||||||||||
| Total Non-U.S. Pension Plans | 91,169 | 25,224 | — | 65,945 | ||||||||||||
| Total fair value of retirement plan assets | $ | 109,483 | $ | 43,538 | $ | — | $ | 65,945 | ||||||||
The fair value of the Company’s retirement plan assets are as follows at December 31, 2020 (in thousands):
| Total at December 31, 2020 | 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) | 16,168 | 16,168 | — | — | ||||||||||||
| Total U.S. Retiree Healthcare Plan | 16,168 | 16,168 | — | — | ||||||||||||
| Non-U.S. Pension Plans: | ||||||||||||||||
| Cash equivalents (b) | 1,188 | 1,188 | — | — | ||||||||||||
| Mutual funds (f) | 23,582 | 23,582 | — | — | ||||||||||||
| Bank and insurance investment contracts (d) | 69,120 | — | — | 69,120 | ||||||||||||
| Total Non-U.S. Pension Plans | 93,890 | 24,770 | — | 69,120 | ||||||||||||
| Total fair value of retirement plan assets | $ | 110,058 | $ | 40,938 | $ | — | $ | 69,120 | ||||||||
| (a) | The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: 48% in the common stock of large-cap U.S. companies, 29% in the common stock of international growth companies and 23% in fixed income bonds of U.S. companies and the U.S. government. |
|---|
| (b) | Primarily represents deposit account funds held with various financial institutions. |
|---|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| (c) | The mutual fund balance in the Non-U.S. Pension Plans is primarily invested in the following categories: 58% in international bonds, 31% in the common stock of international companies and 11% 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: 36% in the common stock of large-cap U.S. companies, 31% in the common stock of international growth companies and 33% 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: 64% in international bonds, 19% in the common stock of international companies and 17% in various other global investments. |
|---|
The following table summarizes the changes in fair value of the Level 3 retirement plan assets for the years ended December 31, 2021 and 2020 (in thousands):
| Insurance Guaranteed Investment Contracts | ||||
| Fair value of assets, December 31, 2019 | $ | 60,119 | ||
| Net purchases (sales) and appreciation (depreciation) | 9,001 | |||
| Fair value of assets, December 31, 2020 | 69,120 | |||
| Net purchases (sales) and appreciation (depreciation) | (3,175 | ) | ||
| Fair value of assets, December 31, 2021 | $ | 65,945 | ||
The weighted-average assumptions used to determine the benefit obligation in the consolidated balance sheets at December 31, 2021, 2020 and 2019 are as follows:
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| U.S. | Non-U.S. | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
| Discount rate | 2.70 | % | 1.40 | % | 2.25 | % | 1.12 | % | 3.42 | % | 1.38 | % | ||||||||||||
| Increases in compensation levels | * | * | 2.74 | % | * | * | 2.69 | % | * | * | 2.83 | % | ||||||||||||
| Interest crediting rate | 5.25 | % | 0.99 | % | 5.25 | % | 0.85 | % | 5.25 | % | 0.79 | % |
| ** | Not applicable |
|---|
The weighted-average assumptions used to determine the net periodic pension cost for the years ended December 31, 2021, 2020 and 2019 are as follows:
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| U.S. | Non-U.S. | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
| Discount rate | 2.25 | % | 1.40 | % | 3.42 | % | 1.98 | % | 4.41 | % | 2.25 | % | ||||||||||||
| Return on plan assets | 6.25 | % | 2.58 | % | 6.25 | % | 2.99 | % | 6.25 | % | 3.11 | % | ||||||||||||
| Increases in compensation levels | * | * | 3.11 | % | * | * | 3.62 | % | * | * | 3.20 | % | ||||||||||||
| Interest crediting rate | 5.25 | % | 0.77 | % | 5.25 | % | 0.63 | % | 5.25 | % | 0.58 | % |
| ** | Not applicable |
|---|
To develop the
expected long-term rate of return on assets assumption, the Company considered historical returns and future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio and historical expenses paid by the plan. A
one-quarter
percentage point increase in the assumed long-term rate of return on assets would decrease the Company’s net periodic benefit cost by
less than $1 million
. A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2022, 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, 2021 are as follows (in thousands):
| U.S. Retiree Healthcare Plans | Non-U.S. Pension Plans | Total | ||||||||||
| 2022 | $ | 1,452 | $ | 4,090 | $ | 5,542 | ||||||
| 2023 | 1,554 | 2,285 | 3,839 | |||||||||
| 2024 | 1,643 | 2,635 | 4,278 | |||||||||
| 2025 | 1,703 | 3,815 | 5,518 | |||||||||
| 2026 | 1,726 | 3,093 | 4,819 | |||||||||
| 2027 - 2031 | 8,358 | 23,408 | 31,766 |
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
TM
and TA
TM
.
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, 2021, 2020 and 2019 (in thousands):
| 2021 | 2020 | 2019 | ||||||||||
| Product net sales: | ||||||||||||
| Waters instrument systems | $ | 1,089,248 | $ | 890,855 | $ | 963,871 | ||||||
| Chemistry consumables | 507,209 | 432,080 | 412,018 | |||||||||
| TA instrument systems | 225,613 | 174,398 | 191,300 | |||||||||
| Total product sales | 1,822,070 | 1,497,333 | 1,567,189 | |||||||||
| Service net sales: | ||||||||||||
| Waters service | 876,626 | 794,189 | 761,594 | |||||||||
| TA service | 87,178 | 73,843 | 77,813 | |||||||||
| Total service sales | 963,804 | 868,032 | 839,407 | |||||||||
| Total net sales | $ | 2,785,874 | $ | 2,365,365 | $ | 2,406,596 | ||||||
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, 2021, 2020 and 2019 (in thousands):
| 2021 | 2020 | 2019 | ||||||||||
| Net Sales: | ||||||||||||
| Asia: | ||||||||||||
| China | $ | 521,128 | $ | 404,352 | $ | 439,557 | ||||||
| Japan | 182,597 | 179,815 | 180,707 | |||||||||
| Asia Other | 372,040 | 315,010 | 318,848 | |||||||||
| Total Asia | 1,075,765 | 899,177 | 939,112 | |||||||||
| Americas: | ||||||||||||
| United States | 774,014 | 678,313 | 692,277 | |||||||||
| Americas Other | 151,206 | 119,529 | 137,964 | |||||||||
| Total Americas | 925,220 | 797,842 | 830,241 | |||||||||
| Europe | 784,889 | 668,346 | 637,243 | |||||||||
| Total net sales | $ | 2,785,874 | $ | 2,365,365 | $ | 2,406,596 | ||||||
None of the Company’s individual customers accounts for more than 2% of annual Company sales. Net sales by customer class are as follows for the years ended December 31, 2021, 2020 and 2019 (in thousands):
| 2021 | 2020 | 2019 | ||||||||||
| Pharmaceutical | $ | 1,667,061 | $ | 1,386,966 | $ | 1,365,275 | ||||||
| Industrial | 829,204 | 707,772 | 719,377 | |||||||||
| Academic and governmental | 289,609 | 270,627 | 321,944 | |||||||||
| Total net sales | $ | 2,785,874 | $ | 2,365,365 | $ | 2,406,596 | ||||||
Net sales for the Company recognized at a point in time versus over time are as follows for the years ended December 31, 2021, 2020 and 2019 (in thousands):
| 2021 | 2020 | 2019 | ||||||||||
| Net sales recognized at a point in time: | ||||||||||||
| Instrument systems | $ | 1,314,861 | $ | 1,065,253 | $ | 1,155,171 | ||||||
| Chemistry consumables | 507,209 | 432,080 | 412,018 | |||||||||
| Service sales recognized at a point in time (time & materials) | 354,666 | 365,776 | 323,247 | |||||||||
| Total net sales recognized at a point in time | 2,176,736 | 1,863,109 | 1,890,436 | |||||||||
| Net sales recognized over time: | ||||||||||||
| Service and software sales recognized over time (contracts) | 609,138 | 502,256 | 516,160 | |||||||||
| Total net sales | $ | 2,785,874 | $ | 2,365,365 | $ | 2,406,596 | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-lived assets information at December 31, 2021 and 2020 is presented below (in thousands):
| 2021 | 2020 | 2019 | ||||||||||
| Long-lived assets: | ||||||||||||
| United States | $ | 395,446 | $ | 350,615 | $ | 276,891 | ||||||
| Americas Other | 1,662 | 1,179 | 1,929 | |||||||||
| Total Americas | 397,108 | 351,794 | 278,820 | |||||||||
| Europe | 130,806 | 119,978 | 116,734 | |||||||||
| Asia | 19,999 | 22,231 | 21,788 | |||||||||
| Total long-lived assets | $ | 547,913 | $ | 494,003 | $ | 417,342 | ||||||
The Americas 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 | |||||||||||||||||
| 2021 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
| Net sales | $ | 608,545 | $ | 681,647 | $ | 659,233 | $ | 836,449 | $ | 2,785,874 | ||||||||||
| Costs and operating expenses: | ||||||||||||||||||||
| Cost of sales | 254,147 | 280,254 | 271,128 | 351,004 | 1,156,533 | |||||||||||||||
| Selling and administrative expenses | 143,196 | 158,213 | 152,545 | 173,014 | 626,968 | |||||||||||||||
| Research and development expenses | 38,092 | 44,949 | 41,986 | 43,331 | 168,358 | |||||||||||||||
| Purchased intangibles amortization | 1,840 | 1,809 | 1,759 | 1,735 | 7,143 | |||||||||||||||
| Litigation provisions | — | — | — | 5,165 | 5,165 | |||||||||||||||
| Total costs and operating expenses | 437,275 | 485,225 | 467,418 | 574,249 | 1,964,167 | |||||||||||||||
| Operating income | 171,270 | 196,422 | 191,815 | 262,200 | 821,707 | |||||||||||||||
| Other income (expense) | 9,359 | 9,321 | (607 | ) | (870 | ) | 17,203 | |||||||||||||
| Interest expense | (10,946 | ) | (12,027 | ) | (11,081 | ) | (10,884 | ) | (44,938 | ) | ||||||||||
| Interest income | 4,101 | 3,698 | 2,548 | 1,874 | 12,221 | |||||||||||||||
| Income before income taxes | 173,784 | 197,414 | 182,675 | 252,320 | 806,193 | |||||||||||||||
| Provision for income taxes | 25,657 | 30,122 | 21,490 | 36,081 | 113,350 | |||||||||||||||
| Net income | $ | 148,127 | $ | 167,292 | $ | 161,185 | $ | 216,239 | $ | 692,843 | ||||||||||
| Net income per basic common share | 2.38 | 2.71 | 2.63 | 3.55 | 11.25 | |||||||||||||||
| Weighted-average number of basic common shares | 62,260 | 61,685 | 61,359 | 60,984 | 61,575 | |||||||||||||||
| Net income per diluted common share | 2.37 | 2.69 | 2.60 | 3.52 | 11.17 | |||||||||||||||
| Weighted-average number of diluted common shares and equivalents | 62,632 | 62,157 | 61,888 | 61,423 | 62,028 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| First | Second | Third | Fourth | |||||||||||||||||
| 2020 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
| Net sales | $ | 464,939 | $ | 519,984 | $ | 593,784 | $ | 786,658 | $ | 2,365,365 | ||||||||||
| Costs and operating expenses: | ||||||||||||||||||||
| Cost of sales | 210,644 | 213,134 | 262,342 | 320,569 | 1,006,689 | |||||||||||||||
| Selling and administrative expenses | 147,735 | 117,449 | 135,430 | 153,084 | 553,698 | |||||||||||||||
| Research and development expenses | 34,989 | 31,155 | 34,971 | 39,662 | 140,777 | |||||||||||||||
| Purchased intangibles amortization | 2,625 | 2,618 | 2,657 | 2,687 | 10,587 | |||||||||||||||
| Asset Impairments | — | — | — | 6,945 | 6,945 | |||||||||||||||
| Litigation provisions | 666 | 514 | — | — | 1,180 | |||||||||||||||
| Total costs and operating expenses | 396,659 | 364,870 | 435,400 | 522,947 | 1,719,876 | |||||||||||||||
| Operating income | 68,280 | 155,114 | 158,384 | 263,711 | 645,489 | |||||||||||||||
| Other (expense) income | (374 | ) | (736 | ) | (1,039 | ) | 374 | (1,775 | ) | |||||||||||
| Interest expense | (14,079 | ) | (13,018 | ) | (10,915 | ) | (11,058 | ) | (49,070 | ) | ||||||||||
| Interest income | 4,036 | 4,003 | 4,007 | 4,224 | 16,270 | |||||||||||||||
| Income before income taxes | 57,863 | 145,363 | 150,437 | 257,251 | 610,914 | |||||||||||||||
| Provision for income taxes | 4,301 | 22,434 | 23,668 | 38,940 | 89,343 | |||||||||||||||
| Net income | $ | 53,562 | $ | 122,929 | $ | 126,769 | $ | 218,311 | $ | 521,571 | ||||||||||
| Net income per basic common share | 0.86 | 1.98 | 2.04 | 3.51 | 8.40 | |||||||||||||||
| Weighted-average number of basic common shares | 62,232 | 61,944 | 62,002 | 62,170 | 62,094 | |||||||||||||||
| Net income per diluted common share | 0.86 | 1.98 | 2.03 | 3.49 | 8.36 | |||||||||||||||
| Weighted-average number of diluted common shares and equivalents | 62,626 | 62,184 | 62,303 | 62,501 | 62,414 |
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, however during the second quarter of 2020, the Company’s selling and administrative expenses decreased compared to the first quarter of 2020 as a result of severance-related costs incurred during the first quarter of 2020 in connection with a reduction in workforce and lease-termination and exit costs. These costs were offset by
COVID-19 and restructuring
cost-saving actions that reduced planned
salaries and non-essential spending,
beginning in the second quarter of 2020 and totaled $70 million for the year. Selling and administrative expenses will vary in the fourth quarter in relation to performance in the quarter and for the year.
During the first quarter of 2021, the Company recorded an unrealized gain of $10 million due to an observable change in fair value of an existing investment the Company does not have the ability to exercise significant influence over. This unrealized gain was recorded in Other income.
During the second quarter of 2021, the Company executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation and Bruker Daltronik GmbH regarding their timsTOF product line. In connection with the settlement, the Company is entitled to receive $10 million in guaranteed payments, including minimum royalty payments, which was recognized within other income in our consolidated statement of operations. This settlement was recorded in Other income.
During the fourth quarter of 2020, the Company recorded a
non-cash
charge of $10 million for the impairment of certain intangible assets associated with its 2014 acquisition of Medimass. The impairment charge was due to a shift in strategic priorities. 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. The net impact of $7 million is reported separately within the consolidated statements of operations.
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