false2020Q2The interest rates applicable to the 2017 Credit Agreement are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (1) the prime rate in effect on such day, (2) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (3) the adjusted LIBO rate on such day (or if such day is not a business day, the immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 2, 3 or 6 month adjusted LIBO rate or EURIBO rate for Euro-denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for LIBO rate or EURIBO rate loans. 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form
 10-Q
 
 
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2020
or
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
.
Commission File Number:
01-14010
 
 
Waters Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
  
13-3668640
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
34 Maple Street
Milford, Massachusetts 01757
(Address, including zip code, of principal executive offices)
(508)
 478-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading Symbol(s)
  
Name of each exchange on which registered
Common Stock, par value $0.01 per share
  
WAT
  
New York Stock Exchange, Inc.
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
☒
    No  
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
☒
    No  
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large accelerated filer   ☒    Accelerated filer   ☐
Non-accelerated filer   ☐    Smaller reporting company   ☐
     Emerging growth company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
 12b-2
of the Act).    Yes  
☐
    No  
☒
Indicate the number of shares outstanding of the registrant’s common stock as of July 24, 2020: 61,925,972
 
 
 
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q
INDEX
 
 
 
 
  
Page
 
PART I
 
FINANCIAL INFORMATION
  
      
Item 1.
 
  
 
3
 
 
 
  
 
3
 
 
 
  
 
4
 
 
 
  
 
5
 
 
 
  
 
6
 
 
 
  
 
7
 
 
 
  
 
8
 
 
 
  
 
9
 
 
 
  
 
10
 
Item 2.
 
  
 
31
 
Item 3.
 
  
 
42
 
Item 4.
 
  
 
42
 
     
PART II
 
  
      
Item 1.
 
  
 
43
 
Item 1A.
 
  
 
43
 
Item 2.
 
  
 
44
 
Item 6.
 
  
 
45
 
 
 
  
 
46
 
Item 1:
 Financial Statements
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
  
 
June 27, 2020
 
    
 
December 31, 2019
 
 
 
(In thousands, except per share data)
  
ASSETS
 
 
 
 
Current assets:
    
     
 
Cash and cash equivalents
   $
339,036
     $
335,715
  
Investments
    
16,720
      
1,429
  
Accounts receivable, net
    
496,276
      
587,734
  
Inventories
    
344,009
      
320,551
  
Other current assets
    
73,386
      
67,062
  
                 
Total current assets
    
1,269,427
      
1,312,491
  
Property, plant and equipment, net
    
459,173
      
417,342
  
Intangible assets, net
    
248,993
      
240,203
  
Goodwill
    
427,492
      
356,128
  
Operating lease assets
    
88,619
      
93,358
  
Other assets
    
154,598
      
137,533
  
                 
Total assets
   $
2,648,302
     $
2,557,055
  
                 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
  
 
 
  
 
 
Current liabilities:
    
     
 
Notes payable and debt
   $
150,000
     $
100,366
  
Accounts payable
    
50,325
      
49,001
  
Accrued employee compensation
    
33,329
      
43,467
  
Deferred revenue and customer advances
    
213,402
      
176,360
  
Current operating lease liabilities
    
26,862
      
27,125
  
Accrued income taxes
    
87,841
      
45,967
  
Accrued warranty
    
10,113
      
11,964
  
Other current liabilities
    
125,448
      
137,084
  
                 
Total current liabilities
    
697,320
      
591,334
  
Long-term liabilities:
    
     
 
Long-term debt
    
1,546,159
      
1,580,797
  
Long-term portion of retirement benefits
    
62,499
      
59,159
  
Long-term income tax liabilities
    
356,607
      
394,562
  
Long-term operating lease liabilities
    
63,828
      
66,881
  
Other long-term liabilities
    
113,631
      
80,603
  
                 
Total long-term liabilities
    
2,142,724
      
2,182,002
  
                 
Total liabilities
    
2,840,044
      
2,773,336
  
Commitments and contingencies (Notes 7, 8 and 12)
  
   
 
Stockholders’ deficit:
    
     
 
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at June 27, 2020 and December 31, 2019
    
—  
      
—
  
Common stock, par value $0.01 per share, 400,000 shares authorized, 161,273 and 161,030 shares issued, 61,916 and 62,587 shares outstanding at June 27, 2020 and December 31, 2019, respectively
    
1,613
      
1,610
  
Additional
paid-in
capital
    
1,959,498
      
1,926,753
  
Retained earnings
    
6,762,909
      
6,587,403
  
Treasury stock, at cost, 99,357 and 98,443 shares at June 27, 2020 and December 31, 2019, respectively
    
(8,788,872
 )    
(8,612,576
 )
Accumulated other comprehensive loss
    
(126,890
 )    
(119,471
 )
                 
Total stockholders’ deficit
    
(191,742
 )    
(216,281
 )
                 
Total liabilities and stockholders’ deficit
   $
2,648,302
     $
2,557,055
  
                 
The accompanying notes are an integral part of the interim consolidated financial statements.
  
3
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
  
Three Months Ended
  
 
June 27, 2020
 
  
June 29, 2019
 
 
(In thousands, except per share data)
  
Revenues:
    
     
 
Product sales
   $
314,920
     $
387,265
  
 
 
 
 
 
 
 
 
 
Service sales
    
205,064
      
211,897
  
                 
Total net sales
    
519,984
      
599,162
  
Costs and operating expenses:
    
     
 
Cost of product sales
    
134,802
      
156,975
  
Cost of service sales
    
78,332
      
92,571
  
Selling and administrative expenses
    
117,449
      
133,208
  
Research and development expenses
    
31,155
      
36,490
  
Purchased intangibles amortization
    
2,618
      
2,264
  
Litigation provision
    
514
      
—  
  
                 
Total costs and operating expenses
    
364,870
      
421,508
  
                 
 
 
 
 
 
 
 
 
 
Operating income
    
155,114
      
177,654
  
Other expense
    
(736
 )    
(342
 )
 
 
 
 
 
 
 
 
 
Interest expense
    
(13,018
 )    
(11,448
 )
Interest income
    
4,003
      
5,871
  
                 
 
 
 
 
 
 
 
 
 
Income before income taxes
    
145,363
      
171,735
  
Provision for income taxes
    
22,434
      
27,325
  
                 
 
 
 
 
 
 
 
 
 
Net income
   $
122,929
     $
144,410
  
                 
 
 
 
 
 
 
 
 
 
Net income per basic common share
   $
1.98
     $
2.09
  
 
 
 
 
 
 
 
 
 
Weighted-average number of basic common shares
    
61,944
      
68,989
  
 
 
 
 
 
 
 
 
 
Net income per diluted common share
   $
1.98
     $
2.08
  
 
 
 
 
 
 
 
 
 
Weighted-average number of diluted common shares and equivalents
    
62,184
      
69,494
  
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
4
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
  
Six Months Ended
  
 
June 27, 2020
 
  
June 29, 2019
 
 
(In thousands, except per share data)
  
Revenues:
    
     
 
Product sales
   $
589,103
     $
707,768
  
Service sales
    
395,820
      
405,256
  
                 
Total net sales
    
984,923
      
1,113,024
  
Costs and operating expenses:
    
     
 
Cost of product sales
    
254,641
      
289,365
  
Cost of service sales
    
169,137
      
181,212
  
Selling and administrative expenses
    
265,184
      
267,547
  
Research and development expenses
    
66,144
      
71,550
  
Purchased intangibles amortization
    
5,243
      
4,545
  
Litigation provision
    
1,180
      
—
  
                 
Total costs and operating expenses
    
761,529
      
814,219
  
                 
Operating income
    
223,394
      
298,805
  
Other expense
    
(1,110
 )    
(867
 )
Interest expense
    
(27,097
 )    
(23,011
 )
Interest income
    
8,039
      
14,186
  
                 
Income before income taxes
    
203,226
      
289,113
  
Provision for income taxes
    
26,735
      
35,717
  
                 
Net income
   $
176,491
     $
253,396
  
                 
Net income per basic common share
   $
2.84
     $
3.60
  
Weighted-average number of basic common shares
    
62,085
      
70,331
  
Net income per diluted common share
   $
2.83
     $
3.57
  
Weighted-average number of diluted common shares and equivalents
    
62,404
      
70,904
  
The accompanying notes are an integral part of the interim consolidated financial statements.
5
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
    
Three Months Ended
    
Six Months Ended
  
    
June 27,
2020
    
June 29,
2019
    
June 27,
2020
    
June 29,
2019
  
 
(In thousands)
    
(In thousands)
  
Net income
   $
122,929
     $
144,410
     $
176,491
     $
253,396
  
Other comprehensive income (loss):
    
     
     
     
 
Foreign currency translation
    
11,587
      
(7,031
 )    
(7,757
 )    
491
  
Unrealized gains on investments before income taxes
    
—  
      
710
      
—  
      
3,054
  
Income tax expense
    
—  
      
(157
 )    
—  
      
(704
 )
                                 
Unrealized gains on investments, net of tax
    
—  
      
553
      
—  
      
2,350
  
Retirement liability adjustment before reclassifications
    
(522
 )    
(41
 )    
(226
 )     
(102
 )
Amounts reclassified to other income
    
336
      
90
      
676
      
183
  
  
 
 
    
 
 
    
 
 
    
 
 
  
Retirement liability adjustment before income taxes
    
(186
 )    
49
      
450
      
81
  
Income tax
benefit (
expense
)
    
126
      
(23
 )    
(112
 )    
(47
 )
  
 
 
    
 
 
    
 
 
    
 
 
  
Retirement liability adjustment, net of tax
    
(60
 )    
26
      
338
      
34
  
Other comprehensive income (loss)
    
11,527
      
(6,452
 )    
(7,419
 )    
2,875
  
                                 
Comprehensive income
   $
134,456
     $
137,958
     $
169,072
     $
256,271
  
                                 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
6
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
  
Six Months Ended
  
    
June 27, 2020
    
June 29, 2019
  
 
 
 
    
(In thousands)
  
Cash flows from operating activities:
     
Net income
   $
176,491
     $
253,396
  
Adjustments to reconcile net income to net cash provided by operating activities:
    
     
 
Stock-based compensation
    
18,122
 
    
19,255
  
Deferred income taxes
    
(777
)
    
1,632
  
Depreciation
    
33,220
      
28,704
  
Amortization of intangibles
    
26,983
      
24,911
  
Change in operating assets and liabilities:
    
     
 
Decrease in accounts receivable
    
86,978
      
52,508
  
Increase in inventories
    
(27,089
 )     
(62,200
 )
Increase in other current assets
    
(14,699
 )     
(11,627
 )
Decrease (increase) in other assets
    
8,238
      
(15,060
 )
Increase (decrease) in accounts payable and other current liabilities
    
34,714
      
(10,439
 )
Increase in deferred revenue and customer advances
    
37,558
      
54,672
  
Effect of the 2017 Tax Cuts & Jobs Act
    
—  
      
(3,229
 )
Decrease in other liabilities
    
(29,293
 )    
(29,720
 )
 
                 
Net cash provided by operating activities
    
350,446
      
302,803
  
Cash flows from investing activities:
    
     
 
Additions to property, plant, equipment and software capitalization
    
(97,029
 )    
(65,188
 )
Business acquisitions, net of cash acquired
    
(76,664
 )    
—  
  
Investment in unaffiliated companies
    
(3,350
)
    
(4,750
 )
Purchases of investments
    
(16,828
 )    
(35,523
 )
Maturities and sales of investments
    
1,536
      
890,524
  
                 
Net cash (used in) provided by investing activities
    
(192,335
 )    
785,063
  
Cash flows from financing activities:
    
     
 
Proceeds from debt issuances
    
315,000
      
363
  
Payments on debt
    
(300,366
 )    
(245
 )
Proceeds from stock plans
    
14,739
      
30,129
  
Purchases of treasury shares
    
(196,297
 )     
(1,329,635
 )
Proceeds from derivative contracts
    
7,558
      
4,654
  
                 
Net cash used in financing activities
    
(159,366
 )     
(1,294,734
 )
Effect of exchange rate changes on cash and cash equivalents
    
4,576
      
(1,414
 )
                 
Increase (decrease) in cash and cash equivalents
    
3,321
      
(208,282
 )
Cash and cash equivalents at beginning of period
    
335,715
      
796,280
  
                 
Cash and cash equivalents at end of period
   $
339,036
     $
587,998
  
                 
The accompanying notes are an integral part of the interim consolidated financial statements.
7
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
(DEFICIT)
(unaudited, in thousands)
    
Number
of
Common
Shares
     
Common
Stock
     
Additional
Paid-In

Capital
     
Retained
Earnings
     
Treasury
Stock
    
Accumulated
Other
Comprehensive
Loss
    
Total
Stockholders’
Equity
  
Balance March 30, 2019
    
160,825
     $
1,608
     $
1,872,216
     $
6,104,191
     $
(6,901,629
 )   $
(108,644
 )   $
967,742
  
Net income
    
—  
      
—  
      
—  
      
144,410
      
—  
      
—  
      
144,410
  
Other comprehensive loss
    
—  
      
—  
      
—  
      
—  
      
—  
      
(6,452
 )    
(6,452
 )
Issuance of common stock for employees:
    
     
     
     
     
     
     
 
Employee Stock Purchase Plan
    
15
      
—  
      
2,498
      
—  
      
—  
      
—  
      
2,498
  
Treasury stock
    
—  
      
—  
      
—  
      
—  
      
(561,197
 )    
—  
      
(561,197
 )
 
Stock-based compensation
    
1
      
—  
      
9,244
      
—  
      
—  
      
—  
      
9,244
  
                                                         
Balance June 29, 2019
    
160,841
     $
1,608
     $
1,883,958
     $
6,248,601
     $
(7,462,826
 )   $
(115,096
 )   $
556,245
  
                                                         
                                           
    
Number
of
Common
Shares
     
Common
Stock
     
Additional
Paid-In

Capital
     
Retained
Earnings
     
Treasury
Stock
    
Accumulated
Other
Comprehensive
Incom
e
(
Loss
)
    
Total
Stockholders’
Deficit
  
Balance March 28, 2020
    
161,253
     $
1,613
     $
1,947,626
     $
6,639,980
     $
(8,788,801
 )   $
(138,417
 )   $
(337,999
 )
Net income
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
122,929
 
 
 
—  
 
 
 
—  
 
 
 
122,929
 
Other comprehensive income
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
11,527
 
 
 
11,527
 
Issuance of common stock for employees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee Stock Purchase Plan
 
 
12
 
 
 
—  
 
 
 
2,216
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
2,216
 
Stock options exercised
 
 
6
 
 
 
—  
 
 
 
779
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
779
 
Treasury stock
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(71
)
 
 
—  
 
 
 
(71
)
Stock-based compensation
 
 
2
 
 
 
 
 
 
8,877
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
8,877
 
                                                         
Balance June 27, 2020
    
161,273
     $
1,613
     $
1,959,498
     $
6,762,909
     $
(8,788,872
 )   $
(126,890
 )   $
(191,742
 )
                                                         
The accompanying notes are an integral part of the consolidated financial statements.
8
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited, in thousands)
    
Number
of
Common
Shares
     
Common
Stock
     
Additional
Paid-In

Capital
     
Retained
Earnings
    
Treasury
Stock
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Total
Stockholders’
Equity
  
Balance December 31, 2018
    
160,472
     $
1,605
     $
1,834,741
     $
5,995,205
     $
(6,146,322
 )   $
(117,971
 )   $
1,567,258
  
Net income
    
—  
      
—  
      
—  
      
253,396
      
—  
      
—  
      
253,396
  
Other comprehensive income
    
—  
      
—  
      
—  
      
—  
      
—  
      
2,875
      
2,875
  
Issuance of common stock for employees:
    
     
     
     
     
     
     
 
Employee Stock Purchase Plan
    
25
      
—  
      
4,168
      
—  
      
—  
      
—  
      
4,168
  
Stock options exercised
    
239
      
2
      
26,097
      
—  
      
—  
      
—  
      
26,099
  
Treasury stock
    
—  
      
—  
      
—  
      
—  
      
(1,316,504
 )    
—  
      
(1,316,504
 )
 
Stock-based compensation
    
105
      
1
      
18,952
      
—  
      
—  
      
—  
      
18,953
  
                                                         
Balance June 29, 2019
    
160,841
     $
1,608
     $
1,883,958
     $
6,248,601
     $
(7,462,826
 )   $
(115,096
 )   $
556,245
  
                                                         
                                           
    
Number
of
Common
Shares
     
Common
Stock
     
Additional
Paid-In

Capital
     
Retained
Earnings
    
Treasury
Stock
    
Accumulated
Other
Comprehensive
Loss
    
Total
Stockholders’
Deficit
  
Balance December 31, 2019
    
161,030
     $
1,610
     $
1,926,753
     $
6,587,403
     $
(8,612,576
 )   $
(119,471
 )   $
(216,281
 )
Net income
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
176,491
 
 
 
—  
 
 
 
—  
 
 
 
176,491
 
Adoption of new accounting pronouncement
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(985
)
 
 
—  
 
 
 
—  
 
 
 
(985
)
Other comprehensive loss
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(7,419
)
 
 
(7,419
)
Issuance of common stock for employees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee Stock Purchase Plan
 
 
21
 
 
 
 
 
 
3,952
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
3,952
 
Stock options exercised
 
 
87
 
 
 
1
 
 
 
10,904
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
10,905
 
Treasury stock
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(176,296
)
 
 
—  
 
 
 
(176,296
)
Stock-based compensation
 
 
135
 
 
 
2
 
 
 
17,889
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
17,891
 
                                                         
Balance June 27, 2020
    
161,273
     $
1,613
     $
1,959,498
     $
6,762,909
     $
(8,788,872
 )   $
(126,890
 )   $
(191,742
 )
                                                         
The accompanying notes are an integral part of the consolidated financial statements.
9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1 Basis of Presentation and Summary of Significant Accounting Policies
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.
The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s second fiscal quarters for 2020 and 2019 ended on June 27, 2020 and June 29, 2019, respectively.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form
10-Q
and do not include all of the information and footnote disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated.
The preparation of consolidated financial statements in conformity with U.S. 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. Actual amounts may differ from these estimates under different assumptions or conditions.
It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 25, 2020.
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.
Both the Company’s domestic and international operations have been and continue to be adversely affected by the ongoing global pandemic of a novel strain of coronavirus
(“COVID-19”)
and the resulting volatility and uncertainty it has caused in the U.S. and international markets. In March 2020, the World Health Organization declared
COVID-19
a pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, President Trump announced a National Emergency relating to the disease. Since then,
COVID-19
has continued to spread
10
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
throughout the U.S. and globally. The
COVID-19
pandemic has caused significant volatility and uncertainty in U.S. and international markets, which has disrupted and is expected to continue to disrupt the Company’s business and could result in a prolonged economic downturn. The Company operates in over 35 countries, including those in the regions most impacted by the
COVID-19
pandemic.
In the six months ended June 27, 2020 as compared to the six months ended June 29, 2019, the Company experienced a decline in net sales of 12% due in large part to the
COVID-19
pandemic and related economic uncertainty; 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 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.
Translation of Foreign Currencies
The functional currency of each of the Company’s foreign operating subsidiaries is the local currency of its country of domicile, except for the Company’s subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity’s cash flows.
For most of the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets.
Cash, Cash Equivalents and Investments
Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified as investments. 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 June 27, 2020 and December 31, 2019, $288 million out of $356 million and $249 million out of $337 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $204 million out of $356 million and $176 million out of $337 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at June 27, 2020 and December 31, 2019, 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
11
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited) – (Continued)
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.
Any recovery of amounts that were written off prior to adoption of the new CECL standard that are received after adoption are recorded in income in the period in which they are received.
The following is a summary of the activity of the Company’s allowance for doubtful accounts for the three and six months ended June 27, 2020 and June 29, 2019 (in thousands). The June 27, 2020 balance is calculated using the CECL method and the June 29, 2019 balance is calculated using the incurred loss method under legacy GAAP:
    
Balance at
Beginning

of Period
     
Impact of
CECL

Adoption
     
Additions
     
Deduction
    
Balance at
End of

Period
  
 
 
Allowance for Doubtful Accounts
    
     
     
     
     
 
June 27, 2020
   $
9,560
     $
985
     $
6,664
     $
(3,901
 )   $
13,308
  
June 29, 2019
   $
7,663
     $
—  
     $
3,793
     $
(3,426
 )   $
8,030
  
Other Investments
During the six months ended June 27, 2020 and June 29, 2019, the Company made investments in unaffiliated companies of $3 million and $5 million, respectively.
During the
three and
six months ended June 27, 2020, the Company recorded an unrealized loss on an equity security still held at the reporting date of approximately $1 
million within other expense on the income statement. This unrealized loss was recorded as a downward price adjustment to the carrying value of the investment due to an observable price change of a similar security issued during the current period.
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 June 27, 2020 and December 31, 2019. 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.
12
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at June 27, 2020 (in thousands):
    
Total at
June 27,
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
   $
16,720
     $
—  
     $
16,720
     $
—  
  
Waters 401(k) Restoration Plan assets
    
33,453
      
33,453
      
—  
      
—  
  
Foreign currency exchange contracts
 
 
366
 
 
 
—  
 
 
 
366
 
 
 
—  
 
Interest rate cross-currency swap agreements
    
4,392
      
—  
      
4,392
      
—  
  
                                 
Total
   $
54,931
     $
33,453
     $
21,478
     $
—  
  
  
 
 
     
 
 
     
 
 
     
 
 
  
Liabilities:
    
     
     
     
 
Contingent consideration
   $
2,787
     $
—  
     $
—  
     $
2,787
  
Foreign currency exchange contracts
    
733
      
—  
      
733
      
—  
  
                                 
Total
   $
3,520
     $
—  
     $
733
     $
2,787
  
                                 
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2019 (in thousands):
    
Total at
December 31,
2019
     
Quoted Prices
in Active
Markets
for Identical
Assets

(Level 1)
     
Significant
Other
Observable
Inputs
(Level 2)
     
Significant
Unobservable
Inputs

(Level 3)
  
Assets:
    
     
     
     
 
Time deposits
   $
1,642
     $
—  
     $
1,642
     $
—  
  
Waters 401(k) Restoration Plan assets
    
30,158
      
30,158
      
—  
      
—  
  
Foreign currency exchange contracts
    
16
      
—  
      
16
      
—  
  
Interest rate cross-currency swap agreements
    
4,485
      
     
4,485
      
 
                                 
Total
   $
36,301
     $
30,158
     $
6,143
     $
—  
  
                                 
Liabilities:
    
     
     
     
 
Contingent consideration
   $
2,557
     $
—  
     $
—  
     $
2,557
  
Foreign currency exchange contracts
    
1,028
      
—  
      
1,028
      
—  
  
                                 
Total
   $
3,585
     $
—