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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 September 26, 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 October 23, 2020: 62,047,666
 
 
 

WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q
INDEX
 
PART I
 
FINANCIAL INFORMATION
  
 
Page
 
 
 
 
 
 
  
 
 
 
 
 
Item 1.
 
  
     
 
 
 
 
  
 
3
 
 
 
 
 
  
 
4
 
 
 
 
 
  
 
5
 
 
 
 
 
  
 
6
 
 
 
 
 
  
 
7
 
 
 
 
 
  
 
8
 
 
 
 
 
  
 
9
 
 
 
 
 
  
 
10
 
 
 
Item 2.
 
  
 
30
 
 
 
Item 3.
 
  
 
42
 
 
 
Item 4.
 
  
 
42
 
     
PART II
 
OTHER INFORMATION
  
     
 
 
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)
 
    
September 26, 2020
   
December 31, 2019
 
    
(In thousands,
 
except per share data)
 
ASSETS
  
Current assets:
    
Cash and cash equivalents
   $ 374,934     $ 335,715  
Investments
     22,136       1,429  
Accounts receivable, net
     494,432       587,734  
Inventories
     326,946       320,551  
Other current assets
     73,225       67,062  
  
 
 
   
 
 
 
Total current assets
     1,291,673       1,312,491  
Property, plant and equipment, net
     469,721       417,342  
Intangible assets, net
     255,168       240,203  
Goodwill
     431,078       356,128  
Operating lease assets
     86,757       93,358  
Other assets
     144,889       137,533  
  
 
 
   
 
 
 
Total assets
   $ 2,679,286     $ 2,557,055  
  
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
        
Current liabilities:
    
Notes payable and debt
   $ 150,000     $ 100,366  
Accounts payable
     60,357       49,001  
Accrued employee compensation
     46,015       43,467  
Deferred revenue and customer advances
     211,348       176,360  
Current operating lease liabilities
     26,745       27,125  
Accrued income taxes
     60,444       45,967  
Accrued warranty
     10,261       11,964  
Other current liabilities
     157,018       137,084  
  
 
 
   
 
 
 
Total current liabilities
     722,188       591,334  
Long-term liabilities:
    
Long-term debt
     1,421,337       1,580,797  
Long-term portion of retirement benefits
     65,003       59,159  
Long-term income tax liabilities
     356,953       394,562  
Long-term operating lease liabilities
     62,471       66,881  
Other long-term liabilities
     92,915       80,603  
  
 
 
   
 
 
 
Total long-term liabilities
     1,998,679       2,182,002  
  
 
 
   
 
 
 
Total liabilities
     2,720,867       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 September 26, 2020 and December 31, 2019
     —         —    
Common stock, par value $0.01 per share, 400,000 shares authorized, 161,381 and 161,030 shares issued, 62,024 and 62,587 shares outstanding at September 26, 2020 and December 31, 2019, respectively
     1,614       1,610  
Additional
paid-in
capital
     1,982,731       1,926,753  
Retained earnings
     6,889,678       6,587,403  
Treasury stock, at cost, 99,357 and 98,443 shares at September 26, 2020 and December 31, 2019, respectively
     (8,788,928     (8,612,576
Accumulated other comprehensive loss
     (126,676     (119,471
  
 
 
   
 
 
 
Total stockholders’ deficit
     (41,581     (216,281
  
 
 
   
 
 
 
Total liabilities and stockholders’ deficit
   $ 2,679,286     $ 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
 
    
September 26, 2020
   
September 28, 2019
 
    
(In thousands, except per share data)
 
Revenues:
    
Product sales
   $ 376,239     $ 370,573  
Service sales
     217,545       206,705  
  
 
 
   
 
 
 
Total net sales
     593,784       577,278  
Costs and operating expenses:
    
Cost of product sales
     166,330       149,793  
Cost of service sales
     96,012       91,262  
Selling and administrative expenses
     135,430       126,036  
Research and development expenses
     34,971       34,333  
Purchased intangibles amortization
     2,657       2,619  
  
 
 
   
 
 
 
Total costs and operating expenses
     435,400       404,043  
  
 
 
   
 
 
 
Operating income
     158,384       173,235  
Other expense
     (1,039     (496
Interest expense
     (10,915     (11,456
Interest income
     4,007       3,455  
  
 
 
   
 
 
 
Income before income taxes
     150,437       164,738  
Provision for income taxes
     23,668       26,605  
  
 
 
   
 
 
 
Net income
   $ 126,769     $ 138,133  
  
 
 
   
 
 
 
Net income per basic common share
   $ 2.04     $ 2.09  
Weighted-average number of basic common shares
     62,002       66,226  
Net income per diluted common share
   $ 2.03     $ 2.07  
Weighted-average number of diluted common shares and equivalents
     62,303       66,768  
The accompanying notes are an integral part of the interim consolidated financial statements.
 
4

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
    
Nine Months Ended
 
    
September 26, 2020
   
September 28, 2019
 
    
(In thousands, except per share data)
 
Revenues:
    
Product sales
   $ 965,342     $ 1,078,341  
Service sales
     613,365       611,961  
  
 
 
   
 
 
 
Total net sales
     1,578,707       1,690,302  
Costs and operating expenses:
    
Cost of product sales
     420,971       439,158  
Cost of service sales
     265,149       272,474  
Selling and administrative expenses
     400,614       393,583  
Research and development expenses
     101,115       105,883  
Purchased intangibles amortization
     7,900       7,164  
Litigation provision
     1,180       —    
Total costs and operating expenses
     1,196,929       1,218,262  
  
 
 
   
 
 
 
Operating income
     381,778       472,040  
Other expense
     (2,149     (1,363
Interest expense
     (38,012     (34,467
Interest income
     12,046       17,641  
  
 
 
   
 
 
 
Income before income taxes
     353,663       453,851  
Provision for income taxes
     50,403       62,322  
Net income
   $ 303,260     $ 391,529  
  
 
 
   
 
 
 
Net income per basic common share
   $ 4.89     $ 5.68  
Weighted-average number of basic common shares
     62,057       68,952  
Net income per diluted common share
   $ 4.86     $ 5.63  
Weighted-average number of diluted common shares and equivalents
     62,371       69,533  
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
   
Nine Months Ended
 
    
September 26,
2020
   
September 28,
2019
   
September 26,
2020
   
September 28,
2019
 
    
(In thousands)
   
(In thousands)
 
Net income
   $ 126,769     $ 138,133     $ 303,260     $ 391,529  
Other comprehensive income (loss):
        
Foreign currency translation
     601       (4,894     (7,156     (4,403
Unrealized (losses) gains on investments before income taxes
     —         (8     —         3,046  
Income tax benefit (expense)
     —         2       —         (702
  
 
 
   
 
 
   
 
 
   
 
 
 
Unrealized (losses) gains on investments, net of tax
     —         (6     —         2,344  
Retirement liability adjustment before reclassifications
     (654     267       (880     165  
Amounts reclassified to other income
     352       88       1,028       271  
  
 
 
   
 
 
   
 
 
   
 
 
 
Retirement liability adjustment before income taxes
     (302     355       148       436  
Income tax (expense) benefit
     (85     60       (197     13  
  
 
 
   
 
 
   
 
 
   
 
 
 
Retirement liability adjustment, net of tax
     (387     415       (49     449  
Other comprehensive income (loss)
     214       (4,485     (7,205     (1,610
  
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income
   $ 126,983     $ 133,648     $ 296,055     $ 389,919  
  
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
6

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
    
Nine Months Ended
 
    
September 26, 2020
   
September 28, 2019
 
Cash flows from operating activities:
  
(In thousands)
 
Net income
   $ 303,260     $ 391,529  
Adjustments to reconcile net income to net cash provided by operating activities:
    
Stock-based compensation
     27,715       28,917  
Deferred income taxes
     1,089       1,817  
Depreciation
     49,407       42,168  
Amortization of intangibles
     41,684       38,151  
Change in operating assets and liabilities:
    
Decrease in accounts receivable
     96,955       57,897  
Increase in inventories
     (8,139     (83,973
Increase in other current assets
     (16,776     (6,259
Increase in other assets
     (2,612     (9,302
Increase (decrease) in accounts payable and other current liabilities
     46,721       (493
Increase in deferred revenue and customer advances
     32,053       34,926  
Effect of the 2017 Tax Cuts & Jobs Act
     —         (3,229
Decrease in other liabilities
     (48,332     (40,957
  
 
 
   
 
 
 
Net cash provided by operating activities
     523,025       451,192  
Cash flows from investing activities:
    
Additions to property, plant, equipment and software capitalization
     (125,340     (110,205
Business acquisitions, net of cash acquired
     (76,664     —    
Investment in unaffiliated companies
     (3,850     (7,250
Purchases of investments
     (22,458     (35,523
Maturities and sales of investments
     1,751       978,419  
  
 
 
   
 
 
 
Net cash (used in) provided by investing activities
     (226,561     825,441  
Cash flows from financing activities:
    
Proceeds from debt issuances
     315,000       600,362  
Payments on debt
     (425,366     (390,482
Payments of debt issuance costs
     —         (2,932
Proceeds from stock plans
     28,421       34,311  
Purchases of treasury shares
     (196,353     (1,909,700
Proceeds from derivative contracts
     10,330       6,900  
  
 
 
   
 
 
 
Net cash used in financing activities
     (267,968     (1,661,541
Effect of exchange rate changes on cash and cash equivalents
     10,723       (6,723
  
 
 
   
 
 
 
Increase (decrease) in cash and cash equivalents
     39,219       (391,631
Cash and cash equivalents at beginning of period
     335,715       796,280  
  
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 374,934     $ 404,649  
  
 
 
   
 
 
 
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 June 29,
 
2019
     160,841      $ 1,608      $ 1,883,958      $ 6,248,601      $ (7,462,826   $ (115,096   $ 556,245  
Net income
     —          —          —          138,133        —         —         138,133  
Other comprehensive loss
     —          —          —          —          —         (4,485     (4,485
Issuance of common stock for employees:
                  
Employee Stock Purchase Plan
     8        —          1,803        —          —         —         1,803  
Stock options exercised
     19        —          2,378        —          —         —         2,378  
Treasury stock
     —          —          —          —          (588,207     —         (588,207
Stock-based compensation
     1        1        9,632        —          —         —         9,633  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance September 28, 2019
     160,869      $ 1,609      $ 1,897,771      $ 6,386,734      $ (8,051,033   $ (119,581   $ 115,500  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
    
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Stockholders’
Deficit
 
Balance June 27,
 
2020
     161,273      $ 1,613      $ 1,959,498      $ 6,762,909      $ (8,788,872   $ (126,890   $ (191,742
Net income
     —          —          —          126,769        —         —         126,769  
Other comprehensive income
     —          —          —          —          —         214       214  
Issuance of common stock for employees:
                  
Employee Stock Purchase Plan
     10        —          1,641        —          —         —         1,641  
Stock options exercised
     97        1        12,040        —          —         —         12,041  
Treasury stock
     —          —          —          —          (56     —         (56
Stock-based compensation
     1           9,552        —          —         —         9,552  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance September 26, 2020
     161,381      $ 1,614      $ 1,982,731      $ 6,889,678      $ (8,788,928   $ (126,676   $ (41,581
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
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
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
     —          —          —          391,529       —         —         391,529  
Other comprehensive loss
     —          —          —          —         —         (1,610     (1,610
Issuance of common stock for employees:
                 
Employee Stock Purchase Plan
     33        —          5,971        —         —         —         5,971  
Stock options exercised
     256        3        28,475        —         —         —         28,478  
Treasury stock
     —          —          —          —         (1,904,711     —         (1,904,711
Stock-based compensation
     108        1        28,584        —         —         —         28,585  
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance September 28, 2019
     160,869      $ 1,609      $ 1,897,771      $ 6,386,734     $ (8,051,033   $ (119,581   $ 115,500  
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
    
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
     —          —          —          303,260       —         —         303,260  
Adoption of new accounting pronouncement
     —          —          —          (985     —         —         (985
Other comprehensive loss
     —          —          —          —         —         (7,205     (7,205
Issuance of common stock for employees:
                 
Employee Stock Purchase Plan
     31           5,593        —         —         —         5,593  
Stock options exercised
     184        2        22,944        —         —         —         22,946  
Treasury stock
     —          —          —          —         (176,352     —         (176,352
Stock-based compensation
     136        2        27,441        —         —         —         27,443  
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance September 26, 2020
     161,381      $ 1,614      $ 1,982,731      $ 6,889,678     $ (8,788,928   $ (126,676   $ (41,581
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
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 third fiscal quarters for 2020 and 2019 ended on September 26, 2020 and September 28, 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
 
10

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Trump announced a National Emergency relating to the disease. Since then,
COVID-19
has continued to spread 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.
 
It is unclear whether increases in the number of infections will continue and amplify as certain areas of the economy are
re-opened
and restrictions are eased, or whether so called “second waves” of
COVID-19
infections will be experienced in the U.S. and globally. The Company operates in over 35 countries, including those in the regions most impacted by the
COVID-19
pandemic.
In the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019, the Company experienced a decline in net sales of 7% 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
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.
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 September 26, 2020 and December 31, 2019, $359 million out of $397 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, $262 million out of $397 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 September 26, 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
 
11

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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.
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
 
nine months ended September 26, 2020 and September 28, 2019 (in thousands). The September 26, 2020 balance is calculated using the CECL method and the September 28, 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
             
September 26, 2020
   $ 9,560      $ 985      $ 7,826      $ (5,784   $ 12,587  
September 28, 2019
   $ 7,663      $ —        $ 6,014      $ (5,461   $ 8,216  
Other Investments
During the nine months ended September 26, 2020 and September 28, 2019, the Company made investments in unaffiliated companies of $4 million and $7 million, respectively.
During the nine months ended September 26, 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 September 26, 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 September 26, 2020 (in thousands):
 
    
Total at
September 26,
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
   $ 22,136      $ —        $ 22,136      $ —    
Waters 401(k) Restoration Plan assets
     34,466        34,466        —          —    
Foreign currency exchange contracts
     832        —          832        —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 57,434      $ 34,466      $ 22,968      $ —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities:
           
Contingent consideration
   $ 2,903      $ —        $ —        $ 2,903  
Foreign currency exchange contracts
     390        —          390        —    
Interest rate cross-currency swap agreements
     15,190        —          15,190        —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 18,483      $ —        $ 15,580      $ 2,903  
  
 
 
    
 
 
    
 
 
    
 
 
 
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2019 (in thousands):
 
    
Total at
December 31,
2019
    
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
           
Time deposits
   $ 1,642      $ —        $ 1,642      $ —    
Waters 401(k) Restoration Plan assets
     30,158        30,158        —          —    
Foreign currency exchange contracts
     16        —          16        —    
Interest rate cross-currency swap agreements
     4,485           4,485     
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 36,301      $ 30,158      $ 6,143      $ —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities:
           
Contingent consideration
   $ 2,557      $ —        $ —        $ 2,557  
Foreign currency exchange contracts
     1,028        —          1,028        —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 3,585      $ —        $ 1,028      $ 2,557  
  
 
 
    
 
 
    
 
 
    
 
 
 
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.
 
13

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Fair Value of Cash Equivalents, Investments, Foreign Currency Exchange Contracts and Interest Rate Cross-Currency Swap Agreements
The fair values of the Company’s cash equivalents, investments and foreign currency exchange contracts are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources.
Fair Value of Contingent Consideration
The fair value of the Company’s liability for contingent consideration relates to earnout payments in connection with the July 2014 acquisition of Medimass Research, Development and Service Kft. and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the estimated future results and a discount rate that reflects both the likelihood of achieving the estimated future results and the Company’s creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Although there is no contractual limit, the fair value of future contingent consideration payments was estimated to be $3 million at both September 26, 2020 and December 31, 2019, based on the Company’s best estimate, as the earnout is based on future sales of certain products, some of which are currently in development, through 2034.
Fair Value of Other Financial Instruments
The Company’s accounts receivable, accounts payable and variable interest rate debt are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s fixed interest rate debt was $910 million and $1.0 billion at September 26, 2020 and December 31, 2019, 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 $938 million and $1.0 billion at September 26, 2020 and December 31, 2019, 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.
 
14

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Interest Rate Cross-Currency Swap Agreements
As of September 26, 2020, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $560 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive income in stockholders’ (deficit) equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.
The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):
 
    
September 26, 2020
    
December 31, 2019
 
    
Notional
Value
    
Fair
Value
    
Notional
Value
    
Fair
Value
 
Foreign currency exchange contracts:
           
Other current assets
   $ 57,380      $ 832      $ 119,576      $ 16  
Other current liabilities
   $ 65,536      $ 390      $ 29,495      $ 1,028  
Interest rate cross-currency swap agreements:
           
Other (liabilities) assets
   $ 560,000      $ (15,190    $ 560,000      $ 4,485  
Accumulated other comprehensive loss (income)
      $ 15,190         $ (4,485
The following is a summary of the activity included in the statements of comprehensive income related to the foreign currency exchange contracts (in thousands):
 
    
Financial

Statement

Classification
  
Three Months Ended
   
Nine Months Ended
 
    
September 26,
2020
    
September 28,
2019
   
September 26,
2020
   
September 28,
2019
 
 
Foreign currency exchange contracts:
         
Realized gains (losses) on closed contracts
   Cost of sales    $ 1,113      $ (3,340    $ (45
 
 
 
 
 
$ (5,858
Unrealized gains (losses) on open contracts
   Cost of sales      808        (633      1,455        (1,040
     
 
 
    
 
 
    
 
 
    
 
 
 
Cumulative net
pre-tax
gains (losses)
   Cost of sales    $ 1,921      $ (3,973    $ 1,410      $ (6,898
     
 
 
    
 
 
    
 
 
    
 
 
 
Interest rate cross-currency swap agreements:
           
Interest earned
   Interest income    $ 3,777      $ 2,698      $ 11,275      $ 7,848  
Unrealized gains on open contracts
   Stockholders’ deficit    $ 19,582      $ 15,847      $ 19,675      $ 15,852  
Stockholders’ Equity
In January 2019, the Company’s Board of
Directors
authorized
the Company to repurchase up to $4 billion of its
outstanding
common stock over a
two-year
period. This program replaced the remaining amounts available from the
pre-existing
program. During the nine months ended September 26, 2020 and September 28, 2019, the Company repurchased 0.8 million and 8.6 million shares of the Company’s outstanding common stock at a cost of $167 million and $1.9 billion, respectively, under the January 2019 authorization and other previously announced programs. As of September 26, 2020, the Company had repurchased an aggregate of 11.1 million shares at a cost of $2.5 billion under the January 2019 repurchase program and had a total of $1.5 billion authorized for future repurchases. In addition, the Company repurchased $10 million and $8 million of common stock related to the vesting of restricted stock units during the nine months ended September 26, 2020 and September 28, 2019, respectively. While the Company believes that it has the financial flexibility to fund these share repurchases given current cash levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by the
COVID-19
pandemic.
 
15

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The Company had $20 million of treasury stock purchases that were accrued and unsettled at December 31, 2019. These transactions were settled in January 2020. There were no unsettled treasury stock purchases as of September 26, 2020, while the Company had accrued $18 million for such purchases as of September 28, 2019, which settled in the subsequent quarter.​​​​​​​
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 nine months ended September 26, 2020 and September 28, 2019 (in thousands):
 
    
Balance at

Beginning

of Period
    
Accruals for

Warranties
    
Settlements

Made
    
Balance at

End of

Period
 
Accrued warranty liability:
           
September 26, 2020
   $ 11,964      $ 5,442      $ (7,145    $ 10,261  
September 28, 2019
   $ 12,300      $ 5,271      $ (6,094    $ 11,477  
Restructuring
In January 2020, the Company made organizational changes to better align its resources with its growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 3% of the Company’s employees. During the three and nine months ended September 26, 2020, the Company incurred $6 million and $27 million, respectively, of severance-related costs, lease termination costs and other related costs. The Company expects to incur an additional $4 million of costs for the remainder of the year.
2 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 in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.
The following is a summary of the activity of the Company’s deferred revenue and customer advances for the nine months ended September 26, 2020 and September 28, 2019 (in thousands):
 
    
September 26,
2020
    
September 28,
2019
 
Balance at the beginning of the period
   $ 213,695      $ 204,257  
Recognition of revenue included in balance at beginning of the period
     (177,667      (174,929
Revenue deferred during the period, net of revenue recognized
     213,895        206,093  
  
 
 
    
 
 
 
Balance at the end of the period
   $ 249,923      $ 235,421  
  
 
 
    
 
 
 
The Company classified $39 million and $38 million of deferred revenue and customer advances in other long-term liabilities at September 26, 2020 and December 31, 2019, respectively.
 
16

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The amount of deferred revenue and customer advances equals the transaction price allocated to unfulfilled performance obligations for the period presented. Such amounts are expected to be recognized in the future as follows (in thousands):
 
    
September 26, 2020
 
Deferred revenue and customer advances expected to be recognized in:
  
One year or less
   $ 211,348  
13-24 months
     22,452  
25 months and beyond
     16,123  
  
 
 
 
Total
   $ 249,923  
  
 
 
 
3 Marketable Securities
The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):
 
    
September 26, 2020
 
    
Amortized

Cost
    
Unrealized

Gain
    
Unrealized

Loss
    
Fair

Value
 
Time deposits
     22,136        —          —          22,136  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 22,136      $ —        $ —        $ 22,136  
  
 
 
    
 
 
    
 
 
    
 
 
 
Amounts included in:
           
Investments
     22,136        —          —          22,136  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 22,136      $ —        $ —        $ 22,136  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
    
December 31, 2019
 
    
Amortized

Cost
    
Unrealized

Gain
    
Unrealized

Loss
    
Fair

Value
 
Time deposits
     1,642        —          —          1,642  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 1,642      $ —        $ —        $ 1,642  
  
 
 
    
 
 
    
 
 
    
 
 
 
Amounts included in:
           
Cash equivalents
   $ 213      $ —        $ —        $ 213  
Investments
     1,429        —          —          1,429  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 1,642      $ —        $ —        $ 1,642  
  
 
 
    
 
 
    
 
 
    
 
 
 
The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):
 
    
September 26, 2020
    
December 31, 2019
 
Due in one year or less
   $ 22,136      $ 1,642  
  
 
 
    
 
 
 
Total
   $ 22,136      $ 1,642  
  
 
 
    
 
 
 
 
17

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
4 Inventories
Inventories are classified as follows (in thousands):
 
    
September 26, 2020
    
December 31, 2019
 
Raw materials
   $ 134,527      $ 126,850  
Work in progress
     20,183        15,457  
Finished goods
     172,236        178,244  
  
 
 
    
 
 
 
Total inventories
   $ 326,946      $ 320,551  
  
 
 
    
 
 
 
5 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.
In addition, 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 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  
  
 
 
 
 
18

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The impact of the Andrew Alliance acquisition on the Company’s revenues and net income during the quarter was immaterial. The
 
year-to-date
pr
o
 
forma effect on the ongoing operations of the Company as though this acquisition had occurred at the beginning of the periods covered by this report was also immaterial.
6 Goodwill and Other Intangibles
The carrying amount of goodwill was $431 million and $356 million at September 26, 2020 and December 31, 2019, respectively. The acquisition of Andrew Alliance increased goodwill by $72 million while the effect of foreign currency translation decreased goodwill by $3 million.
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):
 
    
September 26, 2020
    
December 31, 2019
 
    
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Weighted-
Average
Amortization
Period
    
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Weighted-
Average
Amortization
Period
 
Capitalized software
   $ 542,127      $ 378,999       
5 years
     $ 481,986      $ 333,255       
5 years
 
Purchased intangibles
     209,877        159,747       
11 years
       200,523        151,722       
11 years
 
Trademarks and IPR&D
     13,702        —         
—  
       13,782        —         
—  
 
Licenses
     5,600        5,345       
6 years
       5,669        5,298       
6 years
 
Patents and other intangibles
     86,972        59,019       
8 years
       83,035        54,517       
8 years
 
  
 
 
    
 
 
       
 
 
    
 
 
    
Total
   $ 858,278      $ 603,110       
7 years
     $ 784,995      $ 544,792       
7
years
 
  
 
 
    
 
 
       
 
 
    
 
 
    
The gross carrying value of intangible assets and accumulated amortization for intangible assets increased by $25 million and $17 million, respectively, in the nine months ended September 26, 2020 due to the effects of foreign currency translation. Amortization expense for intangible assets was $15 million and $13 million for the three months ended September 26, 2020 and September 28, 2019, respectively. Amortization expense for intangible assets was $
42
 million and $
38
 million for the nine months ended September 26, 2020 and September 28, 2019, respectively. Amortization expense for intangible assets is estimated to be $55 million per year for each of the next five years.
7 Debt
In November 2017, the Company entered into a credit agreement (the “2017 Credit Agreement”) that provides for a $1.5 billion revolving facility and a $300 million term loan.
As of September 26, 2020 and December 31, 2019, the revolving facility and term loan had a total of $615 million and $625 million, respectively, outstanding and mature on November 30, 2022 and require no scheduled prepayments before that date.
The interest rates applicable to the 2017 Credit Agreement are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (1) the prime rate in effect on such day, (2) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (3) the adjusted LIBO rate on such day (or if such day is not a business day, the immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 2, 3 or 6 month adjusted LIBO rate or EURIBO rate for Euro-denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for LIBO rate or EURIBO rate loans. The facility fee on the 2017 Credit Agreement ranges between 7.5 and 25 basis points per annum, based on the leverage ratio, of the amount of the revolving facility commitments and the outstanding term loan. The 2017 Credit Agreement requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the 2017 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.
 
19

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
As of September 26, 2020 and December 31, 2019, the Company had a total of $960 million and $1.1 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.
In February 2019, certain defined terms related to the subsidiary guarantors were amended in the 2017 Credit Agreement and senior unsecured note agreements. In addition, the Company amended the senior unsecured note agreements to allow the Company to elect an increase in the permitted leverage ratio from 3.50:1 to 4.0:1, for a period of three consecutive quarters, for a material acquisition of $400 million or more. During the period of time where the leverage ratio exceeds 3.50:1, the interest payable on the senior unsecured notes shall increase by 0.50%. The debt covenants in the senior unsecured note agreements were also modified to address the change in accounting guidance for leases.
The Company had the following outstanding debt at September 26, 2020 and December 31, 2019 (in thousands):
 
   
September 26, 2020
   
December 31, 2019
 
Foreign subsidiary lines of credit
   $ —       $ 366  
Senior unsecured notes
 Series B
5.00%, due February 2020
     —         100,000  
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       100,366  
Senior unsecured notes
Series E
3.97%, due March 2021
     —         50,000  
Senior unsecured notes
Series F
3.40%, due June 2021
     —         100,000  
Senior unsecured notes
Series G
3.92%, due June 2024
     50,000       50,000  
Senior unsecured notes
Series H
floating rate*, due June 2024
     50,000       50,000  
Senior unsecured notes
Series I
3.13%, due May 2023
     50,000       50,000  
Senior unsecured notes
Series K
3.44%, due May 2026
     160,000       160,000  
Senior unsecured notes
Series L
3.31%, due September 2026
     200,000       200,000  
Senior unsecured notes
Series M
3.53%, due September 2029
     300,000       300,000  
Credit agreement
     615,000       625,000  
Unamortized debt issuance costs
     (3,663     (4,203
  
 
 
   
 
 
 
Total long-term debt
     1,421,337       1,580,797  
  
 
 
   
 
 
 
Total debt
   $ 1,571,337     $ 1,681,163  
  
 
 
   
 
 
 
 
*
Series H senior unsecured notes bear interest at a
3-month
LIBOR for that floating rate interest period plus 1.25%.
As of both September 26, 2020 and December 31, 2019, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1.2 billion after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.68% and 3.39% at September 26, 2020 and December 31, 2019, respectively. As of September 26, 2020, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $108 million and $105 million at September 26, 2020 and December 31, 2019, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. The weighted-average interest rate applicable to these short-term borrowings was 1.48% for December 31, 2019. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of September 26, 2020.
 
20

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
As of September 26, 2020, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $560 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.
8 Income Taxes
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 September 26, 2020. The Company has a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones, which the Company expects to meet. The effect of applying the contractual tax rate rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the nine months ended September 26, 2020 and September 28, 2019 by $12 million and $15 million, respectively, and increased the Company’s net income per diluted share by $0.20 and $0.21, respectively.
The Company’s effective tax rate for the three months ended September 26, 2020 and September 28, 2019 was 15.7% and 16.1%, respectively. The decrease in the effective income tax rate can be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
The Company’s effective tax rate for the nine months ended September 26, 2020 and September 28, 2019 was 14.3% and 13.7%, respectively.
 
The effective tax rate for the nine months ended September 26, 2020 includes a $6 million income tax benefit related to certain restructuring charges and a $3 million tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 1.8 percentage points and 0.9 percentage points, respectively, for the nine months ended September 26, 2020. The effective tax rate for the nine months ended September 28, 2019 includes a $3 million income tax benefit related to the finalization of certain regulations relating to the Tax Cuts and Jobs Act of 2017 and a $7 million income tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 0.7 percentage points and 1.5 percentage points, respectively, for the nine months ended September 28, 2019. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
The Company accounts for its uncertain tax return reporting positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
The following is a summary of the activity of the Company’s gross unrecognized tax benefits, excluding interest and penalties, for the nine months ended September 26, 2020 and September 28, 2019 (in thousands):
 
   
September 26, 2020
   
September 28, 2019
 
Balance at the beginning of the period
   $ 27,790      $ 26,108  
Net reductions for lapse of statutes taken during the period
     (427      (173
Net additions for tax positions taken during the current period
     907        1,314  
  
 
 
    
 
 
 
Balance at the end of the period
   $ 28,270      $ 27,249  
  
 
 
    
 
 
 
With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2014. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities. As of September 26, 2020, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of less than $1 million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.

 
21

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
9 Stock-Based Compensation
The Company maintains various stockholder-approved, stock-based compensation plans which allow for the issuance of incentive or
non-qualified
stock options, stock appreciation rights, restricted stock or other types of awards (e.g. restricted stock units and performance stock units).
In May 2020, the Company’s stockholders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of September 26, 2020, the 2020 Plan had 6.5 million shares available for grant in the form of incentive or
non-qualified
stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units 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 or restricted 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 consideration as is determined by the Compensation Committee of the Board of Directors. As of September 26, 2020, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding under the 2020 Plan.
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 three and nine months ended September 26, 2020 and September 28, 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):
 
    
Three Months Ended
    
Nine Months Ended
 
    
September 26,
2020
    
September 28,
2019
    
September 26,
2020
    
September 28,
2019
 
Cost of sales
   $ 645      $ 531      $ 1,850      $ 1,673  
Selling and administrative expenses
     7,747        7,766        22,472        23,293  
Research and development expenses
     1,201        1,365        3,393        3,951  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total stock-based compensation
   $ 9,593      $ 9,662      $ 27,715      $ 28,917  
  
 
 
    
 
 
    
 
 
    
 
 
 
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
 
22

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
is the yield currently available on U.S. Treasury
zero-coupon
issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the nine months ended September 26, 2020 and September 28, 2019 are as follows:
 
    
Nine Months Ended
 
Options Issued and Significant Assumptions Used to Estimate Option Fair Values
  
September 26,
2020
   
September 28,
2019
 
Options issued in thousands
     267        139  
Risk-free interest rate
     1.2
%
     2.5
%
Expected life in years
     6        5  
Expected volatility
     27.8
%
     24.3
%
Expected dividends
     —          —    
 
    
Nine Months Ended
 
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant
  
September 26,
2020
    
September 28,
2019
 
Exercise price
   $ 215.12      $ 231.30  
Fair value
   $ 62.93      $ 61.85  
The following table summarizes stock option activity for the plans for the nine months ended September 26, 2020 (in thousands, except per share data):
 
    
Number of Shares
    
Exercise Price per Share
    
Weighted-Average

Exercise Price per
Share
 
Outstanding at December 31, 2019
     1,455      $ 61.63        to      $ 238.52      $ 158.61  
Granted
     267      $ 188.63        to      $ 235.06      $ 215.12  
Exercised
     (184    $ 61.63        to      $ 208.47      $ 124.58  
Canceled
     (150    $ 128.93        to      $ 238.52      $ 176.27  
  
 
 
             
Outstanding at September 26, 2020
     1,388      $ 75.94        to      $ 238.52      $ 172.08  
  
 
 
             
Restricted Stock
During the nine months ended September 26, 2020, the Company granted six thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $229.67.
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the nine months ended September 26, 2020 (in thousands, except per share data):
 
    
Shares
    
Weighted
-
Average

Grant Date Fair
Value per Share
 
Unvested at December 31, 2019
     260      $ 184.70  
Granted
     119      $ 206.99  
Vested
     (87    $ 162.12  
Forfeited
     (18    $ 187.90  
  
 
 
    
Unvested at September 26, 2020
     274      $ 201.34  
  
 
 
    
Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period.
 
23

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

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 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 nine months ended September 26, 2020 and September 28, 2019 are as follows:
 
    
Nine Months Ended
 
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair
Values
  
September 26,
2020
   
September 28,
2019
 
Performance stock units issued (in thousands)
     58       13  
Risk-free interest rate
     1.3     2.4
Expected life in years
     2.9       2.8  
Expected volatility
     25.1     23.5
Average volatility of peer companies
     26.1     26.2
Correlation coefficient
     36.6     34.2
Expected dividends
     —         —    
The following table summarizes the unvested performance stock unit award activity for the nine months ended September 26, 2020 (in thousands, except per share data):
 
    
Shares
    
Weighted-Average

Fair Value per
Share
 
Unvested at December 31, 2019
     105      $ 233.11  
Granted
     58      $ 190.45  
Vested
     (36    $ 184.51  
Forfeited
     (25    $ 231.35  
  
 
 
    
Unvested at September 26, 2020
     102      $ 226.44  
  
 
 
    
 
24

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
10 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
 
    
Three Months Ended September 26, 2020
 
    
Net Income
    
Weighted-
Average Shares
    
Per Share
 
    
(Numerator)
    
(Denominator)
    
Amount
 
Net income per basic common share
   $ 126,769        62,002      $ 2.04  
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
     —          301        (0.01
  
 
 
    
 
 
    
 
 
 
Net income per diluted common share
   $ 126,769        62,303      $ 2.03  
  
 
 
    
 
 
    
 
 
 
 
    
Three Months Ended September 28, 2019
 
    
Net Income
    
Weighted-
Average Shares
    
Per Share
 
    
(Numerator)
    
(Denominator)
    
Amount
 
Net income per basic common share
   $ 138,133        66,226