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, 2017

159,845
$
1,598
$
1,745,088
$
5,405,380
$
(4,808,211
) $
(110,067
) $
2,233,788

Adoption of new accounting pronouncement

—

—

—

(3,969
)
—

—

(3,969
)
Net income

—

—

—

408,642

—

—

408,642

Other comprehensive
loss

—

—

—

—

—

(15,726
)
(15,726
)
Issuance of common stock for employees:

Employee Stock Purchase Plan

34

—

5,840

—

—

—

5,840

Stock options exercised

357

4

36,521

—

—

—

36,525

Treasury stock

—

—

—

—

(816,649
)
—

(816,649
)
Stock-based compensation

132

2

27,979

—

—

—

27,981

Balance September 29, 2018

160,368
$
1,604
$
1,815,428
$
5,810,053
$
(5,624,860
) $
(125,793
) $
1,876,432

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

—

—

—

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 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.

Table of Contents

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

” and

together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together

(“LC-MS”)

and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing.

LC-MS

instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA

product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.

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~~second fiscal quarters for ~~2019~~2020 and ~~2018~~2019 ended on ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ 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/A~~10-K

for the year ended December 31, ~~2018,~~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 ~~1, 2019.~~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

Table of Contents

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.

~~Table of Contents~~

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

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 28, 2019~~June 27, 2020 and December 31, ~~2018, $303~~2019, $288 million out of ~~$405~~$356 million and ~~$471~~$249 million out of ~~$1,735~~$337 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, ~~$235~~$204 million out of $

~~405~~

$356 million and ~~$251~~$176 million out of $

~~1,735~~

$337 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at ~~September 28, 2019~~June 27, 2020 and December 31, ~~2018,~~2019, respectively.

Accounts Receivable and Allowance for ~~Doubtful Accounts~~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 ~~doubtful accounts is the best estimate of the amount of probable~~ credit losses ~~in the existing accounts receivable. The allowance~~ is based on a number of factors ~~including~~and is calculated by applying a historical ~~experience and~~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 ~~customer’s credit-worthiness.~~likelihood of recovery. Past due balances with a probability of default based on historical data as well as

relevant

Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL

STATEMENTS

(unaudited) – (Continued)

available forward-looking information are included in the specific adjustment. The ~~allowance for doubtful accounts~~historical loss rate is reviewed on at least ~~a quarterly basis. Past due balances over 90 days~~an annual basis and ~~over a specified amount are reviewed individually for collectibility. Account balances are charged against~~ the allowance ~~when the Company determines it~~for credit losses is ~~probable that the receivable will not be recovered.~~reviewed quarterly for any required adjustments. The Company does not have any

off-balance

sheet credit exposure related to its customers. ~~Historically,~~

Trade receivables related to instrument sales are collateralized by the ~~Company has not experienced significant bad debt losses.~~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~~three and six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (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

Additions

Deduction

Balance at
End of
Period

Allowance for Doubtful Accounts

September 28, 2019
$
7,663
$
6,014
$
(5,461
) $
8,216

September 29, 2018
$
6,109
$
2,752
$
(2,175
) $
6,686


	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 ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ the Company made investments in unaffiliated companies of $7$3 million and $8$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 ~~September 28, 2019~~June 27, 2020 and December 31, ~~2018.~~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.

Table of Contents

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 28, 2019~~June 27, 2020 (in thousands):

Total at
September 28,
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

213

—

213

—

Waters 401(k) Restoration Plan assets

32,796

32,796

—

—

Foreign currency exchange contracts

66

—

66

—

Interest rate cross-currency swap agreements

16,945

—

16,945

—

Total
$
50,020
$
32,796
$
17,224
$
—

Liabilities:

Contingent consideration
$
2,822
$
—
$
—
$
2,822

Foreign currency exchange contracts

826

—

826

—

Total
$
3,648
$
—
$
826
$
2,822


	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, ~~2018~~2019 (in thousands):

Total at
December 31,
2018

Quoted Prices
in Active
Markets
for

Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Assets:

U.S. Treasury securities
$
164,315
$
—
$
164,315
$
—

Foreign government securities

3,463

—

3,463

—

Corporate debt securities

723,059

—

723,059

—

Time deposits

108,638

—

108,638

—

Waters 401(k) Restoration Plan assets

33,104

33,104

—

—

Foreign currency exchange contracts

503

—

503

—

Interest rate cross-currency swap agreements

1,093

1,093

Total
$
1,034,175
$
33,104
$
1,001,071
$
—

Liabilities:

Contingent consideration
$
2,476
$
—
$
—
$
2,476

Foreign currency exchange contracts

224

—

224

—

Total
$
2,700
$
—
$
224
$
2,476

~~Table of Contents~~

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


	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.

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

Table of Contents

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

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 ~~and $2 million~~ at ~~September 28, 2019~~both June 27, 2020 and December 31, ~~2018, respectively,~~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

~~$1.0~~ $910 million and $1.0 billion ~~and~~

~~$510 million~~ at ~~September 28, 2019~~June 27, 2020 and December 31, ~~2018,~~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

~~illion and $502 million~~billion at ~~September 28, 2019~~June 27, 2020 and December 31, ~~2018,~~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.

~~Table of Contents~~

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

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.

Table of Contents

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

Interest Rate Cross-Currency Swap Agreements

~~In 2018,~~As of June 27, 2020, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of ~~$300~~$560 million to hedge the variability in the movement of foreign currency

exchange rates on a portion of its Euro-denominated net asset investments. ~~In 2019, the Company entered into additional interest rate cross-currency swap derivative agreements with an aggregate notional value of $110 million and contract terms between one and three years.~~ 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 28, 2019

December 31, 2018

Notional Value

Fair Value

Notional Value

Fair Value

Foreign currency exchange contracts:

Other current assets
$
24,000
$
66
$
112,212
$
503

Other current liabilities
$
121,580
$
826
$
40,175
$
224

Interest rate cross-currency swap agreements:

Other assets
$
410,000
$
16,945
$
300,000
$
1,093

Accumulated other comprehensive income
$
16,945
$
1,093


	June 27, 2020					December 31, 2019
	Notional Value		Fair Value			Notional Value		Fair Value
Foreign currency exchange contracts:
Other current assets	$	29,735	$	366		$	119,576	$	16
Other current liabilities	$	91,393	$	733		$	29,495	$	1,028

Interest rate cross-currency swap agreements:
Other assets	$	560,000	$	4,392		$	560,000	$	4,485
Accumulated other comprehensive income			$	(4,392	)			$	(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

Three Months Ended

Nine
Months Ended

Statement
Classification

September 28,
2019

September 29,
2018

September 28,
2019

September 29,
2018

Foreign currency exchange contracts:

Realized losses on closed contracts

Cost of sales

$
(3,340
)

$
(23
)

$
(5,858
)

$
(2,158
)

Unrealized losses on open contracts

Cost of sales

(633
)
(5
)
(1,040
)
(1,092
)

Cumulative net
pre-tax
losses

Cost of sales
$
(3,973
) $
(28
) $
(6,898
) $
(3,250
)

Interest rate cross-currency swap agreements:

Interest earned

Interest income
$
2,698
$
927
$
7,848
$
927

Unrealized gains on open contracts

Stockholders’ equity
$
15,847
$
767
$
15,852
$ 767

~~Table of Contents~~


	Financial	Three Months Ended						Six Months Ended
	Statement	June 27, 2020			June 29, 2019			June 27, 2020			June 29, 2019
	Classification	June 27, 2020			June 29, 2019			June 27, 2020			June 29, 2019
Foreign currency exchange contracts:
Realized gains (losses) on closed contracts	Cost of sales	$	1,823		$	136		$	(1,157	)	$	(407	)
Unrealized (losses) gains on open contracts	Cost of sales		(678	)		(3,044	)		646			(2,518	)

Cumulative net pre-tax gains (losses)	Cost of sales	$	1,145		$	(2,908	)	$	(511	)	$	(2,925	)


Interest rate cross-currency swap agreements:
Interest earned	Interest income	$	3,784		$	2,923		$	7,498		$	5,150
Unrealized (losses) gains on open contracts	Stockholders’ equity	$	(5,615	)	$	(6,022	)	$	(93	)	$	1,098

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

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 ~~new~~ program replaced the remaining amounts available from the

pre-existing

program. During the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ the Company repurchased ~~8.6~~0.8 million and ~~4.1~~5.9 million shares of the Company’s outstanding common stock at a cost of ~~$1.9~~$167 million and $1.3 billion, ~~and $809 million,~~ respectively, under the January 2019 authorization and other previously announced programs. As of ~~September 28, 2019,~~June 27, 2020, the Company had repurchased an aggregate of ~~7.8~~11.1 million shares at a cost of ~~$1.7~~$2.5 billion under the January 2019 repurchase program and had a total of ~~$2.3~~$1.5 billion authorized for future repurchases. In addition, the Company repurchased

$8 $9 million and

$9$8 million of common stock related to the vesting of restricted stock units during the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ respectively. ~~The~~

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.~~

~~As of September 28, 2019,~~acquisitions, the Company ~~accrued $18~~has temporarily suspended its share repurchases due to the uncertain business conditions caused by the

COVID-19

pandemic.

Table of Contents

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

The Company had $20 million ~~as a result~~ of treasury stock purchases that were accrued and unsettled at December 31, 2019. These transactions were settled in January 2020. There were 0 unsettled treasury stock purchases as of June 27, 2020, while the Company had accrued $10 million for such purchases as of June 29, 2019, which settled in the

~~fourth~~

~~quarter of 2019.~~

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~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (in thousands):

Balance at
Beginning
of Period

Accruals for
Warranties

Settlements
Made

Balance at
End of
Period

Accrued warranty liability:

September 28, 2019
$
12,300
$
5,271
$
(6,094
) $
11,477

September 29, 2018
$
13,026
$
6,068
$
(6,901
) $
12,193


	Balance at Beginning of Period		Accruals for Warranties		Settlements Made			Balance at End of Period
Accrued warranty liability:
June 27, 2020	$	11,964	$	3,577	$	(5,428	)	$	10,113
June 29, 2019	$	12,300	$	3,571	$	(4,288	)	$	11,583

Restructuring ~~and Other Charges~~

In January ~~2019,~~2020, the Company made organizational changes to better align ~~our~~its resources with ~~our~~its growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 1% 3%

of the Company’s employees.

~~Severance an~~

~~d related~~

~~costs to the Company were immaterial~~

~~and $9 million during~~ During the three and ~~nine~~six months ended ~~September 28, 2019, respectively.~~June 27, 2020, the Company incurred

million and $3 million, respectively, of severance-related costs, lease termination costs and other related costs.

The Company expects to incur an additional $

million of costs for the remainder of the year.

2 Revenue Recognition

The Company recognizes revenue upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company generally enters into contracts that include a combination of products and services. Revenue is allocated to distinct performance obligations and is recognized net of allowances for returns and discounts.

The Company recognizes revenue on product sales at the time control of the product transfers to the customer. In substantially all of the Company’s arrangements, title of the product transfers at shipping point and, as a result, the Company determined control transfers at the point of shipment. In more limited cases, there are destination-based shipping terms and, thus, control is deemed to transfer when the products arrive at the customer site. All incremental costs of obtaining a contract are expensed as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less. Shipping and handling costs are included as a component of cost of

~~Table of Contents~~

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

sales. In situations where the control of the goods transfers prior to the completion of the Company’s obligation to ship the products to its customers, the Company has elected the practical expedient to account for the shipping services as a fulfillment cost. Accordingly, such costs are recognized when control of the related goods is transferred to the customer. In more rare situations, the Company has revenue associated with products that contain specific customer acceptance criteria and the related revenue is not recognized before the customer acceptance criteria are satisfied. The Company elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with specific revenue-producing transactions and collected by the Company from a customer.

Generally, the Company’s contracts for products include a performance obligation related to installation. The Company has determined that the installation represents a distinct performance obligation and revenue is recognized separately upon the completion of installation. The Company determines the amount of the transaction price to allocate to the installation service based on the standalone selling price of the product and the service, which requires judgment. The Company determines relative standalone selling price of installation based upon a number of factors, including hourly service billing rates and estimated installation hours. In developing these estimates, the Company considers past history, competition, billing rates of current services and other factors.

The Company has sales from standalone software, which is included in instrument systems revenue. These arrangements typically include software licenses and maintenance contracts, both of which the Company has determined are distinct performance obligations. The Company determines the amount of the transaction price to allocate to the license and maintenance contract based on the relative standalone selling price of each performance obligation. Software license revenue is recognized at the point in time when control has been transferred to the customer. The revenue allocated to the software maintenance contract is recognized on a straight-line basis over the maintenance period, which is the contractual term of the contract, as a time-based measure of progress best reflects the Company’s performance in satisfying this obligation. Unspecified rights to software upgrades are typically sold as part of the maintenance contract on a

~~when-and-if-available~~

~~basis.~~

Payment terms and conditions vary among the Company’s revenue streams, although terms generally include a requirement of payment within 30 to 60 days of product shipment. Prior to providing payment terms to customers, an evaluation of the customer’s credit risk is performed. Returns and customer credits are infrequent and insignificant and are recorded as a reduction to sales. Rights of return are not included in sales arrangements and, therefore, there is minimal variable consideration included in the transaction price of our products.

Service revenue includes (1) service and software maintenance contracts and (2) service calls (time and materials). Instrument service contracts and software maintenance contracts are typically annual contracts, which are billed at the beginning of the contract or maintenance period. The amount of the service and software maintenance contract is recognized on a straight-line basis to revenue over the maintenance service period, which is the contractual term of the contract, as a time-based measure of progress best reflects the Company’s performance in satisfying this obligation. There are no deferred costs associated with the service contract, as the cost of the service is recorded when the service is performed. Service calls are recognized to revenue at the time a service is performed.

The Company’s deferred revenue liabilities on the consolidated balance sheets ~~consists~~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~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (in thousands):

September 28,
2019

September 29,
2018

Balance at the beginning of the period
$
204,257
$
192,590

Recognition of revenue included in balance at beginning of the period

(174,929
)
(147,310
)
Revenue deferred during the period, net of revenue recognized

206,093

179,571

Balance at the end of the period
$
235,421
$
224,851


	June 27, 2020			June 29, 2019
Balance at the beginning of the period	$	213,695		$	204,257
Recognition of revenue included in balance at beginning of the period		(141,297	)		(172,949	)
Revenue deferred during the period, net of revenue recognized		195,444			229,162

Balance at the end of the period	$	267,842		$	260,470

The Company classified ~~$38~~$54 million and ~~$39~~$38 million of deferred revenue and customer advances in other long-term liabilities at ~~September 28, 2019~~June 27, 2020 and December 31, ~~2018,~~2019, respectively.

Table of Contents

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 28, 2019

Deferred revenue and customer advances expected to be recognized in:

One year or less
$
197,401

13-24
months

21,962

25 months and beyond

16,058

Total
$
235,421


	June 27, 2020
Deferred revenue and customer advances expected to be recognized in:
One year or less	$	213,402
13-24 months		34,151
25 months and beyond		20,289

Total	$	267,842

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 28, 2019

Amortized
Cost

Unrealized
Gain

Unrealized
Loss

Fair
Value

Time deposits

213

—

—

213

Total
$
213
$
—
$
—
$
213

Amounts included in:

Cash equivalents
$
213
$
—
$
—
$
213

Total
$
213
$
—
$
—
$
213

December 31, 2018

Amortized

Unrealized

Unrealized

Fair

Cost

Gain

Loss

Value

U.S. Treasury securities
$
164,619
$
16
$
(320
) $
164,315

Foreign government securities

3,486

1

(24
)
3,463

Corporate debt securities

725,778

41

(2,760
)
723,059

Time deposits

108,638

—

—

108,638

Total
$
1,002,521
$
58
$
(3,104
) $
999,475

Amounts included in:

Cash equivalents
$
60,532
$
—
$
(1
) $
60,531

Investments

941,989

58

(3,103
)
938,944

Total
$
1,002,521
$
58
$
(3,104
) $
999,475


	June 27, 2020
	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
Time deposits		16,720		—		—		16,720

Total	$	16,720	$	—	$	—	$	16,720


Amounts included in:
Investments		16,720		—		—		16,720

Total	$	16,720	$	—	$	—	$	16,720



	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

~~Table of Contents~~

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

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

September 28, 2019

December 31, 2018

Due in one year or less
$
213

$
797,649

Due after one year through three years

—

201,826

Total
$
213
$
999,475



	June 27, 2020		December 31, 2019
Due in one year or less	$	16,720	$	1,642

Total	$	16,720	$	1,642

Table of Contents

CONDENSED NOTES TO CONSOLIDATED

FINANCIAL

STATEMENTS (unaudited) – (Continued)

Inventories

Inventories are classified as follows (in thousands):

September 28, 2019

December 31, 2018

Raw materials
$
126,326
$
111,641

Work in progress

20,705

15,552

Finished goods

221,759

164,376

Total inventories
$
368,790
$
291,569


	June 27, 2020		December 31, 2019
Raw materials	$	139,452	$	126,850
Work in progress		15,878		15,457
Finished goods		188,679		178,244

Total inventories	$	344,009	$	320,551

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

Table of Contents

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 pro 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

Goodwill and Other Intangibles

The carrying amount of goodwill was ~~$354~~$427 million

and $356 million

at ~~September 28, 2019~~June 27, 2020 and December 31, ~~2018~~

~~, respectiv~~

~~ely~~

.2019, respectively. The acquisition of Andrew Alliance increased goodwill by $72 million while the effect of foreign currency translation decreased goodwill by $1 million.

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

September 28, 2019

December 31, 2018

Gross
Carrying
Amount

Accumulated
Amortization

Weighted-
Average
Amortization
Period

Gross
Carrying
Amount

Accumulated
Amortization

Weighted-
Average
Amortization
Period

Capitalized software
$
464,983
$
320,309

5 years
$
454,307
$
307,634

5 years

Purchased intangibles

199,441

149,017

11 years

201,566

144,184

11 years

Trademarks and IPR&D

13,581

—

—

13,677

—

—

Licenses

5,455

5,046

6 years

5,568

4,875

6 years

Patents and other intangibles

80,765

52,243

8 years

77,753

49,276

8 years

Total
$
764,225
$
526,615

7 years
$
752,871
$
505,969

7 years

	June 27, 2020						December 31, 2019
	Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period		Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period
Capitalized software	$	512,047	$	356,036		5 years	$	481,986	$	333,255		5 years
Purchased intangibles		207,733		156,065		11 years		200,523		151,722		11 years
Trademarks and IPR&D		13,601		—		—		13,782		—		—
Licenses		5,483		5,195		6 years		5,669		5,298		6 years
Patents and other intangibles		84,453		57,028		8 years		83,035		54,517		8 years


Total	$	823,317	$	574,324		7 years	$	784,995	$	544,792		7 years

The gross carrying value of intangible assets and accumulated amortization for intangible assets ~~decreased~~

creased by

~~$20~~ $4 million

and ~~$16 millio~~

n,$3 million, respectively,

in the ~~nine~~six months ended ~~September 28, 2019~~June 27, 2020 due to the effects of foreign currency translation. Amortization expense for intangible assets was ~~$13~~$14 million

and $12 million

for the three months ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018~~

~~, respectively~~

.respectively. Amortization expense for intangible assets was ~~$38~~$27 million

and $25 million

for ~~both~~ the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018.~~

, respectively.

Amortization expense for intangible assets is estimated to be ~~$50~~$51 million per year for each of the next five years.

~~Table of Contents~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)~~7

6 Debt

~~n September 2019, the Company issued the following senior unsecured notes:~~

Face Value

Senior

Unsecured Notes

Term

Interest Rate

(in millions)

Maturity Date

Series L

7 years

3.31
% $
200

September 2026

Series M

10 years

3.53
% $
300

September 2029

~~The Company use~~

~~the proceeds from the issuance of the~~

~~enior~~

~~unsecured n~~

otes to repay other outstanding debt and for general corporate purposes. Interest on the Series L and M Senior Notes is payable semi-annually. The Company may prepay some or all of the Senior Notes at any time in an amount not less than 10% of the aggregate principal amount of the Senior Notes then outstanding, plus the applicable make-whole amount for Series L and M Senior Notes, in each case, upon no more than 60 nor less than 30 days’ written notice to the holders of the Senior Notes. In the event of a change in control (as defined in the

~~note purchase agreement~~

) of the Company, the Company may be required to prepay the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. Other provisions for these senior unsecured notes are similar to the existing senior unsecured notes, as described below.

In November 2017, the Company entered into a credit agreement (the “2017 Credit Agreement”) that provides for a $1.5 billion revolving facility and a $300 million term loan. The revolving facility and term loan both mature on November 30, 2022 and require no scheduled prepayments before that date.

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

Table of Contents

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

As of ~~September 28, 2019~~June 27, 2020 and December 31, ~~2018,~~2019, the Company had a total o

fof $960 million and $1.1 billion, ~~and~~

~~$560 million~~

, respectively,

of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for the Series H senior unsecured note.

In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.

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.

~~Table of Contents~~

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

~~In 2018, the Company entered into~~ ~~three-year~~ interest rate cross-currency swap derivative agreements with an aggregate notional value of $300 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. In 2019, the Company entered into additional interest rate cross-currency swap derivative agreements with an aggregate notional value of $110 million and contract terms between one and three years. See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies.”

~~Table of Contents~~

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

The Company had the following outstanding debt at ~~September 28, 2019~~June 27, 2020 and December 31, ~~2018~~2019 (in thousands):

September 28,

2019

December 31,

2018

Foreign subsidiary lines of credit
$
58
$
178

Senior unsecured notes - Series B - 5.00%, due February 2020

100,000
—
Total notes payable and debt, current

100,058

178

Senior unsecured notes - Series B - 5.00%, due February 2020

—

100,000

Senior unsecured notes - Series E - 3.97%, due March 2021

50,000

50,000

Senior unsecured notes - Series F - 3.40%, due June 2021

100,000

100,000

Senior unsecured notes - Series G - 3.92%, due June 2024

50,000

50,000

Senior unsecured notes - Series H - floating rate*, due June 2024

50,000

50,000

Senior unsecured notes - Series I - 3.13%, due May 2023

50,000

50,000

Senior unsecured notes - Series K - 3.44%, due May 2026

160,000

160,000

Senior unsecured notes - Series L - 3.31%, due September
2026

200,000

—

Senior unsecured notes - Series M - 3.53%, due September
2029

300,000

—

Credit agreement

300,000

590,000

Unamortized debt issuance costs

(4,399
)
(1,828
)
Total long-term debt

1,255,601

1,148,172

Total debt
$
1,355,659
$
1,148,350


	June 27, 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		740,000			625,000
Unamortized debt issuance costs		(3,841	)		(4,203	)

Total long-term debt		1,546,159			1,580,797

Total debt	$	1,696,159		$	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 28, 2019~~June 27, 2020 and December 31, ~~2018,~~2019, the Company had a total amount available to borrow under the 2017 Credit Agreement of ~~$1.5~~$1.1

illion and $1.2 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were ~~3.62%~~2.62% and ~~3.83%~~3.39% at ~~September 28, 2019~~June 27, 2020 and December 31, ~~2018,~~2019, respectively. As of ~~September 28, 2019,~~June 27, 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 $105 million ~~and $90 million~~ at ~~September 28, 2019~~each of June 27, 2020 and December 31, ~~2018, respectively,~~2019, for the purpose of short-term borrowing and issuance of commercial guarantees. The weighted-average interest ~~rates~~rate applicable to these short-term borrowings ~~were~~was 1.48% ~~and 1.88%~~ for ~~September 28, 2019 and~~ December 31, ~~2018, respectively.~~2019. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of June 27, 2020.

Table of Contents

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

7As of June 27, 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

re were 21%, 12.5%, 19% and 17%, respectively, as of ~~September 28, 2019.~~June 27, 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~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ by ~~$15~~$7 million and ~~$21~~$9 million, respectively, and increased the Company’s net income per diluted share by ~~$0.21~~$0.11 and ~~$0.26,~~$0.13, respectively.

The Company’s effective tax rate for the three months ended ~~September 28,~~June 27, 2020 and June 29, 2019 was 15.4% and ~~September 29, 2018 was 16.1% and 16.7%~~15.9%, respectively. The

~~crease~~ decrease in the effective income tax rate can ~~be attributed to a $2 million~~

~~expense~~

~~in the three months ended September 29, 2018 related to the change in foreign currency exchange rates on the earnings taxed in December 2017 under the toll charge of the~~

~~Tax Cuts and Jobs Act (the “~~

~~2017 Tax Act~~

”)

~~. This~~

~~increase~~

~~in income tax expense~~

~~creased the effective tax rate by 1.4 percentage points for the three months ended September 29, 2018. 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.

~~Table of Contents~~

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

The Company’s effective tax rate for the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 was 13.2% and ~~September 29, 2018 was 13.7% and 15.6%~~12.4%, respectively. The effective tax rate for the ~~nine~~six months ended ~~September 28, 2019~~ June 27, 2020

includes a $3$5 million income tax benefit related to certain restructuring charges and a $2 million tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 2.4 percentage points and 1.2 percentage points for the six months ended June 27, 2020, respectively. The effective tax rate for the six months ended June 29, 2019

includes a $

million income tax benefit related to the finalization of certain regulations relating to the Tax

Cuts a

nd Jobs

Act

of 2017 and a $7 million

~~Tax Act~~

~~This~~ income tax benefit

related to stock-based compensation. These income tax benefits

decreased the effective tax rate by ~~0.7~~

1.0

percentage

point and

2.3

percentage points for the ~~nine~~six months ended ~~September 28, 2019. The effective tax rate for the nine months ended September~~June 29, 2018 includes $6 million of additional income tax expense related to the change in foreign currency exchange rates on the earnings taxed in December 2017 under the toll charge of the 2017 Tax Act. This additional income tax expense increased the effective tax rate by 1.3 percentage points for the nine months ended September 29, 2018.2019

, respectively

. 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 ~~uncertain~~gross unrecognized tax ~~positions~~benefits, excluding interest and penalties, for the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (in thousands):

September 28, 2019

September 29, 2018

Balance at the beginning of the period
$
26,108
$
5,843

Net reductions for lapse of statutes taken during the period

(173
)
(189
)
Net additions for tax positions taken during the

prior period
—
18,608

Net additions for tax positions taken during the

current period

1,314

678

Balance at the end of the period
$
27,249
$
24,940



	June 27, 2020			June 29, 2019
Balance at the beginning of the period	$	27,790		$	26,108
Net reductions for lapse of statutes taken during the period		(252	)		(105	)
Net additions for tax positions taken during the current period		536			801

Balance at the end of the period	$	28,074		$	26,804

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, ~~2013. However, carryforward tax attributes that were generated in years beginning on or before January 1, 2014 may still be adjusted upon examination by tax authorities if the attributes are utilized~~

~~in open years~~

.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 28, 2019,~~June 27, 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.

~~8 Leases~~

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

~~right-of-use~~

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

Table of Contents

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

~~Prior to the adoption of the new lease accounting standard, undiscounted future minimum rents payable as of December 31, 2018 under~~

~~non-cancelable~~

~~leases with initial terms exceeding one year were as follows (in thousands):~~

2019
$
28,417

2020

23,424

2021

16,032

2022

11,816

2023 and thereafter

23,269

Total future minimum lease payments
$
102,958

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

~~right-of-use~~

asset and lease liability obligation at the present value of lease payments over the term of the leases. Some of the Company’s leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments. A certain number of these leases contain rent escalation clauses, either fixed or adjusted periodically for inflation of market rates, that are factored into the Company’s determination of lease payments. The Company also has variable lease payments that do not depend on a rate or index, primarily for items such as common area maintenance and real estate taxes, which are recorded as variable costs when incurred.

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

~~non-lease~~

components are generally accounted for as a single lease component. The Company has elected not to apply the recognition requirements of the new accounting guidance to leases with terms less than 12 months. For these leases, the Company recognizes lease payments in net income on a straight-line basis over the term of the lease. As of September 28, 2019 and December 31, 2018, the Company does not have leases that are classified as finance leases.

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

~~As of September 28, 2019, the Company has lease agreements that expire at various dates through 203~~

, with a weighted-average remaining lease term of 4.7 years. Rental expense was $9 million for the three months ended September 28, 2019 under the new lease accounting standard and $8 million for the three months ended September 29, 2018 under the previous lease accounting standard. Rental expense was $27 million for the nine months ended September 28, 2019 under the new lease accounting standard and $23 million for the nine months ended September 29, 2018 under the previous lease accounting standard. As of September 28, 2019, the weighted-average discount rate used to determine the present value of lease liabilities was 3.95%. Cash paid for amounts included in the measurement of lease liabilities in operating activities in the statement of cash flows was $27 million during the nine months ended September 28, 2019.

~~Table of Contents~~

~~CONDENSED N~~

~~OTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)~~

~~The Company’s~~

~~right-of-use~~

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

Financial Statement Classification

September 28, 2019

Assets:

Property operating lease assets

Operating lease assets
$
57,028

Automobile operating lease assets

Operating lease assets

26,122

Equipment operating lease assets

Operating lease assets

1,962

Total lease assets
$
85,112

Liabilities:

Current operating lease liabilities

Current operating lease liabilities
$
23,936

Long-term operating lease liabilities

Long-term
operating lease liabilities

61,372

Total lease liabilities
$
85,308

~~Table of Contents~~

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

~~Undiscounted future minimum rents payable as of September 28, 2019 under~~

~~non-cancelable~~

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

2019 (remaining
3
months)
$
6,600

2020

22,727

2021

15,418

2022

8,538

2023

5,931

2024 and thereafter

38,482

Total future minimum lease payments

97,696

Less: amount of lease payments representing interest

(12,388
)

Present value of future minimum lease payments

85,308

Less: current operating lease liabilities

(23,936
)

Long-term operating lease liabilities
$
61,372

9 Stock-Based Compensation

The Company maintains various ~~shareholder-approved,~~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 s

tock

holders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of June 27, 2020, the 2020 Plan ha

6.6 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 June 27, 2020, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding

under t

he 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~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ 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 28,
2019

September 29,
2018

September 28,
2019

September 29,
2018

Cost of sales
$
531
$
488
$
1,673
$
1,696

Selling and administrative expenses

7,766

6,731

23,293

22,855

Research and development expenses

1,365

1,994

3,951

3,633

Total stock-based compensation
$
9,662
$
9,213
$
28,917
$
28,184



	Three Months Ended				Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Cost of sales	$	635	$	567	$	1,205	$	1,142
Selling and administrative expenses		7,352		7,402		14,725		15,527
Research and development expenses		939		1,345		2,192		2,586

Total stock-based compensation	$	8,926	$	9,314	$	18,122	$	19,255

Table of Contents

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

Stock Options

In determining the fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of

non-qualified

stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury

zero-coupon

issues with a remaining term approximating the expected term used as the input to the Black-Scholes model.

The relevant data used to determine the value of the stock options granted during the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ are as follows:


	Nine Months Ended						Six Months Ended
Options Issued and Significant Assumptions Used to Estimate Option Fair Values	September 28, 2019			September 29, 2018			June 27, 2020			June 29, 2019
Options issued in thousands		139			147			227			139
Risk-free interest rate		2.5	%		2.7	%		1.4	%		2.5	%
Expected life in years		5			6			6			5
Expected volatility		24.3	%		23.2	%		26.5	%		24.3	%
Expected dividends		—			—			—			—

	Nine Months Ended
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	September 28, 2019			September 29, 2018
Exercise price	$	231.30		$	205.37
Fair value	$	61.85		$	57.99

~~The following table summarizes stock option activity for the plans for the nine months ended September 28, 2019 (in thousands, except per share data):~~

Number of Shares

Exercise Price per

Share

Weighted-Average

Exercise Price per
Share

Outstanding at December 31, 2018

1,790
$
38.09

to

$
208.47

$
142.47

Granted

139
$
183.41

to

$
238.52
$
231.30

Exercised

(256
) $
38.09

to

$
208.47
$
111.11

Canceled

(74
) $
113.36

to

$
238.52
$
159.17

Outstanding at September 28, 2019

1,599
$
38.09

to

$
238.52
$
154.44

	Six Months Ended
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	June 27, 2020		June 29, 2019
Exercise price	$	216.08	$	231.30
Fair value	$	61.70	$	61.85

The following table summarizes stock option activity for the plans for the six months ended June 27, 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		227		$	203.37	to	$	235.06	$	216.08
Exercised		(87	)	$	61.63	to	$	208.47	$	125.50
Canceled		(148	)	$	128.93	to	$	238.52	$	172.91

Outstanding at June 27, 2020		1,447		$	75.94	to	$	238.52	$	168.15

Restricted Stock

During the ~~nine~~six months ended ~~September 28, 2019,~~June 27, 2020, the Company granted 5four thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was ~~$183.41.~~$235.06.

Restricted Stock Units

The following table summarizes the unvested restricted stock unit award activity for the ~~nine~~six months ended ~~September 28, 2019~~June 27, 2020 (in thousands, except per share data):

Shares

Weighted-Average

Fair Value per
Share

Unvested at December 31, 2018

304
$
153.31

Granted

84
$
235.95

Vested

(104
) $
138.95

Forfeited

(23
) $
168.73

Unvested at September 28, 2019

261
$
184.27

	Shares			Weighted-Average Grant Date Fair Value per Share
Unvested at December 31, 2019		260		$	184.70
Granted		105		$	206.73
Vested		(86	)	$	161.84
Forfeited		(15	)	$	185.91

Unvested at June 27, 2020		264		$	200.84

Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period.

Table of Contents

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 mad

e 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~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ are as follows:

Nine Months Ended

Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair
Values

September 28,
2019

September 29,
2018

Performance stock units issued (in thousands)

13

16

Risk-free interest rate

2.4
%

2.0
%
Expected life in years

2.8

2.8

Expected volatility

23.5
%
23.4
%
Average volatility of peer companies

26.2
%
25.8
%
Correlation coefficient

34.2
%
37.2
%
Expected dividends

—

—


	Six Months Ended
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values	June 27, 2020			June 29, 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 six months ended June 27, 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		(37	)	$	184.51
Forfeited		(24	)	$	233.31

Unvested at June 27, 2020		102		$	226.44

~~The following table summarizes the unvested performance stock unit award activity for the nine months ended September 28, 2019 (in thousands, except per share data):~~

Shares

Weighted-Average

Fair Value per
Share

Unvested at December 31, 2018

100
$
212.34

Granted

13
$
372.68

Forfeited

(7
) $
196.87

Unvested at September 28, 2019

106
$
233.03

Table of Contents

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 28, 2019
	Net Income		Weighted- Average Shares		Per Share			Three Months Ended June 27, 2020
	(Numerator)		(Denominator)		Amount			Net Income (Numerator)		Weighted- Average Shares (Denominator)		Per Share Amount
Net income per basic common share	$	138,133		66,226	$	2.09		$	122,929		61,944	$	1.98
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		542		(0.02	)		—		240		—

Net income per diluted common share	$	138,133		66,768	$	2.07		$	122,929		62,184	$	1.98


	Three Months Ended June 29, 2019
	Net Income (Numerator)		Weighted- Average Shares (Denominator)		Per Share Amount
Net income per basic common share	$	144,410		68,989	$	2.09
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		505		(0.01	)

Net income per diluted common share	$	144,410		69,494	$	2.08


	Six Months Ended June 27, 2020
	Net Income (Numerator)		Weighted- Average Shares (Denominator)		Per Share Amount
Net income per basic common share	$	176,491		62,085	$	2.84
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		319		(0.01	)

Net income per diluted common share	$	176,491		62,404	$	2.83


	Six Months Ended June 29, 2019
	Net Income (Numerator)		Weighted- Average Shares (Denominator)		Per Share Amount
Net income per basic common share	$	253,396		70,331	$	3.60
Effect of dilutive stock option, restricted stock, performance s to ck unit and restricted stock unit securities		—		573		(0.03	)

Net income per diluted common share	$	253,396		70,904	$	3.57

Three Months Ended September 29, 2018

Net Income

Weighted-
Average Shares

Per Share

(Numerator)

(Denominator)

Amount

Net income per basic common share
$
141,014

76,575
$
1.84

Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
—

561

(0.01
)

Net income per diluted common share
$
141,014

77,136
$
1.83

Nine Months Ended September 28, 2019

Net Income

Weighted-
Average Shares

Per Share

(Numerator)

(Denominator)

Amount

Net income per basic common share
$
391,529

68,952
$
5.68

Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
—

581

(0.05
)

Net income per diluted common share
$
391,529

69,533
$
5.63

Nine Months Ended September 29, 2018

Net Income

Weighted-
Average Shares

Per Share

(Numerator)

(Denominator)

Amount

Net income per basic common share
$
408,642

77,741
$
5.26

Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
—

654

(0.05
)

Net income per diluted common share
$
408,642

78,395
$
5.21

For ~~both~~ the three and ~~nine~~six months ended ~~September 28, 2019,~~June 27, 2020, the Company had ~~0.1~~0.7 million

and 0.4

million

stock options that were antidilutive due to having higher exercise prices than the Company’s average stock price during the period.

For both the three and ~~nine~~six months ended ~~September~~June 29, ~~2018,~~2019, the Company had ~~0.3 million and~~ 0.1 million stock options that were ~~antidilutive, respectively.~~

antidilutive. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.

Table of Contents

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

11 Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income (loss) are detailed as follows (in thousands):

Currency
Translation

Unrealized Gain
(Loss) on
Retirement Plans

Unrealized Gain
(Loss) on
Investments

Accumulated
Other
Comprehensive
Income (Loss)

Balance at December 31, 2018
$
(105,697
) $
(9,869
) $
(2,405
) $
(117,971
)
Other comprehensive
(loss)
income, net of tax

(4,403
)
449

2,344

(1,610
)

Balance at September 28, 2019
$
(110,100
) $
(9,420
) $
(61
) $
(119,581
)


	Currency Translation			Unrealized Gain (Loss) on Retirement Plans			Accumulated Other Comprehensive Loss
Balance at December 31, 2019	$	(104,066	)	$	(15,405	)	$	(119,471	)
Other comprehensive income (loss), net of tax		(7,757	)		338			(7,419	)

Balance at June 27, 2020	$	(111,822	)	$	(15,067	)	$	(126,890	)

121

Retirement Plans

The Company sponsors various retirement plans. The components of net periodic benefit cost other than the service cost component are included in other expense in the consolidated statements of operations. The summary of the components of net periodic pension costs for the plans for the three and ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ is as follows (in thousands):


	Three Months Ended
	September 28, 2019								September 29, 2018
	U.S.		U.S. Retiree			Non-U.S.			U.S.			U.S. Retiree			Non-U.S.			Three Months Ended
	Pension		Healthcare			Pension			Pension			Healthcare			Pension			June 27, 2020								June 29, 2019
	Plans		Plan			Plans			Plans			Plan			Plans			U.S. Pension Plans		U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans		U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Service cost	$	—	$	124		$	1,081		$	142		$	142		$	1,311		$	—	$	151		$	1,095		$	—	$	108		$	1,075
Interest cost		—		194			426			1,622			159			406			—		177			338			10		230			430
Expected return on plan assets		—		(177	)		(535	)		(1,708	)		(177	)		(486	)		—		(220	)		(454	)		—		(177	)		(538	)
Net amortization:
Prior service credit		—		(5	)		(38	)		—			(4	)		(30	)		—		(5	)		(41	)		—		(5	)		(37	)
Net actuarial loss		—		—			132			771			—			167			—		—			382			—		—			132

Net periodic pension cost	$	—	$	136		$	1,066		$	827		$	120		$	1,368		$	—	$	103		$	1,320		$	10	$	156		$	1,062

Nine Months Ended

September 28, 2019

September 29, 2018

U.S.

U.S.

Retiree

Non-U.S.

U.S.

U.S.

Retiree

Non-U.S.

Pension

Healthcare

Pension

Pension

Healthcare

Pension

Plans

Plan

Plans

Plans

Plan

Plans

Service cost
$
—
$
374
$
3,238
$
426
$
425
$
4,024

Interest cost

23

583

1,291

4,868

477

1,250

Expected return on plan assets

—

(531
)
(1,616
)
(5,123
)
(530
)
(1,442
)
Net amortization:

Prior service credit

—

(15
)
(113
)
—

(14
)
(93
)
Net actuarial loss

—

—

399

2,312

—

515

Net periodic pension cost
$
23
$
411
$
3,199
$
2,483
$
358
$
4,254


	Six Months Ended
	June 27, 2020								June 29, 2019
	U.S. Pension Plans		U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Pension Plans		U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Service cost	$	—	$	302		$	2,194		$	—	$	250		$	2,157
Interest cost		—		353			683			23		389			864
Expected return on plan assets		—		(439	)		(910	)		—		(354	)		(1,081	)
Net amortization:
Prior service credit		—		(10	)		(81	)		—		(10	)		(74	)
Net actuarial loss		—		—			767			—		—			267

Net periodic pension cost	$	—	$	206		$	2,653		$	23	$	275		$	2,133

In ~~2018,~~2019, the Company ~~terminated and settled its frozen U.S. defined benefit pension plan,~~completed the ~~Waters Retirement Plan, by making~~

~~lump-sum~~

~~cash payments and purchasing annuity contracts for participants to permanently extinguish the pension plan’s obligations. The Company also anticipates that it will settle~~termination of the Waters Retirement Restoration ~~Plan during 2019, and the Company may incur pension accounting charges in connection with the termination of this plan.~~Plan.

Table of Contents

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

During fiscal year ~~2019,~~2020, the Company expects to contribute a total of approximately $3 million to $6 million to the Company’s defined benefit plans.

Business Segment Information

The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has 2 operating segments: Waters

and TA

The Waters operating segment is primarily in the business of designing, manufacturing, selling and servicing LC and MS instruments, columns and other precision chemistry consumables that can be integrated and used along with other analytical instruments. The TA operating segment is primarily in the business of designing, manufacturing, selling and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s

two

operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution; and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the 1 reportable segment of the Company.

Net sales for the Company’s products and services are as follows for the three and ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (in thousands):

Three Months Ended

Nine Months Ended

September 28,
2019

September 29,
2018

September 28,
2019

September 29,
2018

Product net sales:

Waters instrument systems
$
223,859
$
238,986
$
647,248
$
677,017

Chemistry consumables

100,256

95,979

299,801

293,818

TA instrument systems

46,458

43,557

131,292

135,673

Total product sales

370,573

378,522

1,078,341

1,106,508

Service net sales:

Waters service

188,031

180,830

556,128

543,411

TA service

18,674

18,669

55,833

54,991

Total service sales

206,705

199,499

611,961

598,402

Total net sales
$
577,278
$
578,021
$
1,690,302
$
1,704,910


	Three Months Ended				Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Product net sales:
Waters instrument systems	$	181,399	$	238,777	$	324,228	$	423,389
Chemistry consumables		95,105		100,292		192,350		199,545
TA instrument systems		38,416		48,196		72,525		84,834

Total product sales		314,920		387,265		589,103		707,768

Service net sales:
Waters service		189,205		192,048		363,342		368,097
TA service		15,859		19,849		32,478		37,159

Total service sales		205,064		211,897		395,820		405,256


Total net sales	$	519,984	$	599,162	$	984,923	$	1,113,024

Table of Contents

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

Continued

)

Net sales are attributable to geographic areas based on the region of destination. Geographic sales information is presented below for the three and ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (in thousands):


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Net Sales:
Asia:
China	$	111,657	$	109,713	$	314,544	$	313,250	$	89,816	$	112,796	$	137,047	$	202,887
Japan		46,840		43,549		136,302		129,497		41,230		45,958		86,319		89,462	��
Asia Other		79,278		68,934		226,276		216,634		77,163		80,081		143,923		146,998

Total Asia		237,775		222,196		677,122		659,381		208,209		238,835		367,289		439,347
Americas:
United States		164,164		170,766		487,261		479,072		148,928		173,940		292,826		323,097
Americas Other		32,294		36,037		97,840		107,567		25,854		32,835		54,132		65,546

Total Americas		196,458		206,803		585,101		586,639		174,782		206,775		346,958		388,643
Europe		143,045		149,022		428,079		458,890		136,993		153,552		270,676		285,034

Total net sales	$	577,278	$	578,021	$	1,690,302	$	1,704,910	$	519,984	$	599,162	$	984,923	$	1,113,024

Net sales by customer class are as follows for the three and ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (in thousands):


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Pharmaceutical	$	328,227	$	325,166	$	972,884	$	968,848	$	311,018	$	350,145	$	583,581	$	644,657
Industrial		171,352		171,985		502,679		517,979		152,110		176,109		295,464		331,327
Academic and governmental		77,699		80,870		214,739		218,083		56,856		72,908		105,878		137,040

Total net sales	$	577,278	$	578,021	$	1,690,302	$	1,704,910	$	519,984	$	599,162	$	984,923	$	1,113,024

Net sales for the Company recognized at a point in time versus over time are as follows for the three and ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (in thousands):


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Net sales recognized at a point in time:
Instrument systems	$	270,317	$	282,543	$	778,540	$	812,690	$	219,815	$	286,973	$	396,753	$	508,223
Chemistry consumables		100,256		95,979		299,801		293,818		95,105		100,292		192,350		199,545
Service sales recognized at a point in time (time & materials)		75,240		75,769		232,806		228,685		78,867		84,807		146,609		157,566

Total net sales recognized at a point in time		445,813		454,291		1,311,147		1,335,193		393,787		472,072		735,712		865,334


Net sales recognized over time:
Service and software maintenance sales recognized over time (contracts)		131,465		123,730		379,155		369,717		126,197		127,090		249,211		247,690

Total net sales	$	577,278	$	578,021	$	1,690,302	$	1,704,910	$	519,984	$	599,162	$	984,923	$	1,113,024

~~Table of Contents~~

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

Recent Accounting Standard Changes and Developments

Recently Adopted Accounting Standards

In February 2016, accounting guidance was issued regarding the accounting for leases. This new comprehensive lease standard amends various aspects of existing accounting guidance for leases. The core principle of the new guidance requires lessees to present the assets and liabilities that arise from leases on their balance sheets. This guidance was effective for annual and interim reporting periods beginning after December 15, 2018. The Company has adopted this standard using a modified retrospective transition approach to be applied to leases existing as of, or entered into after, January 1, 2019. The adoption of this standard did have a material effect on the Company’s balance sheet by recording a

~~right-of-use~~

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

In March 2017, accounting guidance was issued to amend the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amortization period for certain callable debt securities was shortened to end at the earliest call date. This guidance was effective for annual and interim periods beginning after December 15, 2018. The Company adopted this standard as of January 1, 2019 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

In February 2018, accounting guidance was issued to address the impact of the 2017 Tax Act on items recorded in accumulated other comprehensive income. Current accounting guidance requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect recorded in income from continuing operations, even if the related tax effects were originally recognized in other comprehensive income, the new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Act. This guidance was effective for annual and interim periods beginning after December 15, 2018. The Company adopted this standard as of January 1, 2019 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

In August 2018, accounting guidance was issued to address the capitalization of implementation costs associated with hosting arrangements that meet the definition of a service contract. The new guidance clarified that the

~~internal-use~~

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

~~Recently Issued Accounting Standards~~

In June 2016, accounting guidance was issued that modifies the recognition of credit losses related to financial assets, such as debt securities, trade receivables, net investments in leases,

off-balance

sheet credit exposures, and other

Table of Contents

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

financial assets that have the contractual right to receive cash. Current guidance requires the recognition of a credit loss when it is considered probable that a loss event has occurred. The new guidance requires the measurement of expected credit losses to be based upon relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the asset. As such, expected credit losses may be recognized sooner under the new guidance due to the broader range of information that will be required to determine credit loss estimates. The new guidance also amends the current other-than-temporary impairment model used for debt securities classified as

available-for-sale.

When the fair value of an

available-for-sale

debt security is below its amortized cost, the new guidance requires the total unrealized loss to be bifurcated into its credit and

non-credit

components. Any expected credit losses or subsequent recoveries will be recognized in earnings and any changes not considered credit related will continue to be recognized within other comprehensive income. This guidance is effective for annual and interim periods beginning after December 15, 2019. On January 1, 2020 the Company adopted this new standard using a modified retrospective method for all financial assets measured at amortized cost which only impacted the Company’s allowance on trade accounts receivable. The Company ~~currently does~~did not ~~expect that~~have any significant

off-balance

sheet credit exposures which would be impacted by the ~~adoption~~new guidance. Results for reporting periods beginning after January 1, 2020 are presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease of ~~this~~$1 million to stockholders’ deficit as of January 1, 2020 for the cumulative effect of adopting the new standard ~~will~~due to converting to the current expected credit loss model for the allowance recorded against trade accounts receivables. This accounting standard did not have ~~a material effect~~an impact on the Company’s ~~financial position,~~ results of operations and cash flows.

In January 2017, accounting guidance was issued that simplifies the accounting for goodwill impairment. The guidance eliminates step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This guidance is effective for annual and interim periods beginning after December 15, ~~2019 and early adoption is permitted.~~2019. The Company ~~currently does not expect that the~~adopted this standard on January 1, 2020. The adoption of this standard ~~will~~did not have a material effect on the Company’s financial position, results of operations and cash flows.

~~Table of Contents~~

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

In August 2018, accounting guidance was issued that modifies the disclosure requirements of fair value measurements. The amendments remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosure and add disclosure requirements identified as relevant. This guidance is effective for annual and interim periods beginning after December 15, ~~2019 and early adoption is permitted.~~2019. The Company ~~does not expect that the~~adopted this standard on January 1, 2020. The adoption of this standard ~~will~~did not have a material impact on the Company’s financial position, results of operations and cash flows.

Recently Issued Accounting Standards

In August 2018, accounting guidance was issued that modifies the disclosure requirements of retirement benefit plans. The amendments remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosure and add disclosure requirement identified as relevant. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.

In December 2019, accounting guidance was issued that simplifies the accounting for income taxes by removing certain exceptions within the current guidance, including the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendment also improves consistent application by clarifying and amending existing guidance related to aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step up in the tax basis of goodwill. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.

In January 2020, accounting guidance was issued that clarifies the accounting guidance for equity method investments, joint ventures, and derivatives and hedging. The update clarifies the interaction between different sections of the accounting guidance that could be applicable and helps clarify which guidance should be applied in certain situations which should increase relevance and comparability of financial statement information. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.

Table of Contents

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

In March 2020, accounting guidance was issued that facilitates the effects of reference rate reform on financial reporting. The amendments in the update provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This temporary guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company may elect to apply this guidance for all contract modifications or eligible hedging relationships during that time period subject to certain criteria. The Company is still evaluating the impact of reference rate reform and whether this guidance will be adopted.

In March 2020, the U.S. federal government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the

COVID-19

outbreak which, among other things, contains numerous income tax provisions. While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s consolidated financial statements or related disclosures.

Table of Contents

Item 2:

Management’s Discussion and Analysis of Financial Condition and

~~Results of Operations~~

~~Business and Financial Overview~~

~~The Company has two operating segments: Waters~~

~~and TA~~

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

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

~~The Company’s operating results are as follows for the three and nine months ended September 28, 2019 and September 29, 2018 (dollars in thousands, except per share data):~~

Three Months Ended

Nine Months Ended

September 28,
2019

September 29,
2018

% change

September 28,
2019

September 29,
2018

% change

Revenues:

Product sales
$
370,573
$
378,522

(2
%) $
1,078,341
$
1,106,508

(3
%)
Service sales

206,705

199,499

4
%
611,961

598,402

2
%

Total net sales

577,278

578,021

—

1,690,302

1,704,910

(1
%)
Costs and operating expenses:

Cost of sales

241,055

241,139

—

711,632

705,695

1
%
Selling and administrative expenses

126,036

126,997

(1
%)
393,583

394,049

—

Research and development expenses

34,333

35,173

(2
%)
105,883

105,297

1
%
Purchased intangibles amortization

2,619

2,114

24
%
7,164

5,375

33
%
Litigation provision (settlement)

—

924

(100
%)
—

(748
)
100
%

Operating income

173,235

171,674

1
%
472,040

495,242

(5
%)
Operating income as a % of sales

30.0
%
29.7
%
27.9
%
29.0
%
Other expense

(496
)
(811
)
(39
%)
(1,363
)
(2,293
)
(41
%)
Interest expense, net

(8,001
)
(1,633
)
390
%
(16,826
)
(8,609
)
95
%

Income before income taxes

164,738

169,230

(3
%)
453,851

484,340

(6
%)
Provision for income taxes

26,605

28,216

(6
%)
62,322

75,698

(18
%)

Net income
$
138,133
$
141,014

(2
%) $
391,529
$
408,642

(4
%)

Net income per diluted common share
$
2.07
$
1.83

13
% $
5.63
$
5.21

8
%

The Company’s sales were flat for the third quarter of 2019 as compared to the third quarter of 2018 and decreased 1% for the first nine months of 2019 as compared to the first nine months of 2018. Foreign currency translation decreased sales growth by 1% and 2% for the third quarter and first nine months of 2019, respectively. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year.

Instrument system sales decreased 4% for both the third quarter and first nine months of 2019 as a result of the weaker demand for our products by our customers due to uncertainty caused by macroeconomic conditions and governmental policy changes in certain regions. Foreign currency translation decreased instrument system sales by 1% for both the third quarter and first nine months of 2019. Recurring revenues (combined sales of precision chemistry consumables and services) increased 4% and 2% for the third quarter and first nine months of 2019, respectively, as a result of a larger installed base of customers and higher billing demand for service sales. In the third quarter and first nine months of 2019, recurring revenues were negatively impacted by foreign currency translation which lowered sales growth by 1% and 2%, respectively, as well as one less calendar day as compared to the first nine months of 2018.

~~Table of Contents~~

In the third quarter of 2019, the Company’s sales increased 7% in Asia and decreased 5% in the Americas and 4% in Europe. For the first nine months of 2019, the Company’s sales were flat in the Americas, increased 3% in Asia and decreased 7% in Europe. Foreign currency translation decreased Asia’s sales growth by 1% in the first nine months of 2019 and decreased Europe’s sales growth by 4% and 5% in the third quarter and first nine months of 2019, respectively.

Sales in the Americas were impacted by sales in the U.S. which decreased 4% for the third quarter and increased 2% for the first nine months of 2019. The softer U.S. sales growth can be attributed to a decrease in capital spending on our instrument systems by our pharmaceutical customers, which was partially offset by sales to our industrial customers in the U.S., which grew 5% and 7% during the third quarter and for the first nine months of 2019, respectively. Sales in the Americas were also negatively impacted by declines in Latin America of 18% and 15% during the third quarter and first nine months of 2019, respectively, driven by political instability in both Mexico and Brazil.

The sales growth in Asia was driven by sales growth in Japan of 8% and 5% for the third quarter and first nine months of 2019, respectively, with the effect of foreign currency translation increasing Japan’s sales growth by 5% and 1%, respectively, for the third quarter and first nine months of 2019. Asia sales growth was also impacted by India as sales increased by 4% for the third quarter and decreased by 2% for the first nine months of 2019, primarily due to continued strength in the pharmaceutical market, partially offset by the effect of foreign currency translation which negatively impacted India’s sales growth by 2% and 7%, respectively, for the third quarter and first nine months of 2019. China sales increased 2% in the third quarter and were flat for the first nine months of 2019, due to economic uncertainty stemming from governmental policy in our food and pharmaceutical markets. Sales in Europe were impacted by weak demand in Western Europe caused by the political uncertainties of Brexit and the effect of foreign currency translation, which reduced the sales growth rate by 4% and 5% for the third quarter and first nine months of 2019, respectively.

Sales to pharmaceutical customers increased 1% for the third quarter of 2019 and were flat for the first nine months of 2019, with the effect of foreign currency translation decreasing sales growth by 2% and 3% for the third quarter and first nine months of 2019, respectively. Sales to pharmaceutical customers were driven by an increasing need for global access to prescription drugs and testing of newer and more complex biologic drugs. Thus far in 2019, the pharmaceutical sales growth has come in Asia, where sales grew 12% in the third quarter and 8% for the first nine months, with this sales growth being negatively impacted by declines in sales in all other areas of the world due to macroeconomic conditions and political uncertainties. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, were flat in the third quarter and declined 3% for the first nine months of 2019, with the effect of foreign currency translation having no impact on the third quarter sales, but decreasing sales growth by 1% for the first nine months of 2019. Sales to our industrial customers have been negatively impacted by lower customer demand for our LC, MS and TA instrument systems outside the U.S. Combined sales to academic and governmental customers decreased 4% and 2% in the third quarter and first nine months of 2019, respectively, primarily due to the timing of the release of funds by governments and the negative effect of foreign currency translation, which decreased sales growth by 1% and 2% for the third quarter and first nine months of 2019, respectively.

Operating income increased 1% for the third quarter of 2019 and decreased 5% for the first nine months of 2019. The increase in operating income in the third quarter of 2019 can be attributed to lower variable incentive compensation expenses. The decrease in operating income for the first nine months of 2019 can be attributed to

~~lower sales volume and~~

~~$9 million of severance-related costs in connection with a reduction in workforce that occurred in early 2019.~~

Net income per diluted share for the third quarter of 2019 was $2.07 up 13% compared to the prior year. Net income per diluted share for the first nine months of 2019 was $5.63 up 8% compared to the prior year. The increase in the net income per diluted share is attributed to the effect of the Company’s ongoing share repurchase program as the net income for both the third quarter and first nine months of 2019 has declined as a result of the slightly lower sales and the increase in the net interest expense as a result of the Company moving to its optimal net debt to earnings before interest, taxes, depreciation and amortization of 2.5 times.

The Company generated $451 million and $423 million of net cash flows from operations in the first nine months of 2019 and 2018, respectively. This increase in operating cash flow was primarily a result of a $15 million litigation settlement payment in 2018 that did not recur.

Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $110 million and $64 million in the first nine months of 2019 and 2018, respectively. The first nine months of 2019 include $48 million of capital expenditures related to the expansion of the Company’s precision

~~Table of Contents~~

chemistry consumable operations in the U.S. The Company has incurred $66 million on this facility through the end of the first nine months of 2019 and anticipates spending a total of $215 million to build and equip this new

~~state-of-the-art~~

~~manufacturing facility. During the first nine months of 2019 and 2018, the Company made $7 million and $8 million of investments in unaffiliated companies, respectively.~~

In September 2019, the Company issued fixed rate senior unsecured notes with an aggregate principal of $500 million, of which $200 million of the outstanding notes matures in 7 years and $300 million of the outstanding notes matures in 10 years. The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes.

~~In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a~~

~~two-year~~

period. During the first nine months of 2019 and 2018, the Company repurchased $1.9 billion and $809 million of the Company’s outstanding common stock, respectively, under authorized share repurchase programs. The Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits.

Results of Operations

Business and Financial Overview

The Company has two operating segments: Waters

and TA

. Waters products and

services

primarily consist of high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC

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

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. The Company is actively managing its business to respond to the

COVID-19

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

COVID-19

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

To date, the

COVID-19

pandemic has not materially impacted our manufacturing facilities or those of the third parties to whom we outsource certain manufacturing processes, the distribution centers where our inventory is managed or the operations of our logistics and other service providers. We have also not seen material disruptions or delays in shipments of certain materials or components of our products.

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

non-essential

travel and visitors into our facilities. Early on, we engaged a medical advisor to guide our policy deployment, and we continue to take proactive measures to guard the health of our global employee base, and the safety of all customer interactions. We have implemented rigorous protocols to promote a safe work environment in all of our locations around the world and late in the quarter we began implementation of the first phase of a multi-phase process for the safe return of employees to our physical workplaces as social distancing requirements allow.

The vast majority of the markets we serve, most notably the pharmaceutical, biomedical research, food/environmental and clinical markets, have continued to operate at various levels, and we are working closely with these customers to facilitate their seamless operation. Over the last several years, we have executed on a digital workplace strategy focused on providing modern connectivity and collaboration tools to our employees. Our strategic technology investments have enabled us to swiftly meet remote working needs as the

COVID-19

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

one-on-one

communications over emails, phone and video conferencing.

While we initially anticipated that the

COVID-19

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

COVID-19

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

COVID-19

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

non-essential

spending and other working capital reductions in order to preserve liquidity and enhance financial flexibility. A significant portion of these cost reduction actions are expected to expire at the end of July 2020, and the Company’s costs of sales and operating expenses are expected to gradually increase to

pre-COVID-19

levels as we move through the remainder of 2020.

These expected cost reductions reflect our core assumptions that the business moves through the recovery phase, and business conditions improve in the second half of 2020; however, our plan will be adjusted accordingly depending on the pace of the recovery.

Table of Contents

The Company’s operating results are as follows for the three and six months ended June 27, 2020 and June 29, 2019 (dollars in thousands, except per share data):


	Three Months Ended									Six Months Ended
	June 27, 2020			June 29, 2019			% change			June 27, 2020			June 29, 2019			% change
Revenues:
Product sales	$	314,920		$	387,265			(19	%)	$	589,103		$	707,768			(17	%)
Service sales		205,064			211,897			(3	%)		395,820			405,256			(2	%)

Total net sales		519,984			599,162			(13	%)		984,923			1,113,024			(12	%)
Costs and operating expenses:
Cost of sales		213,134			249,546			(15	%)		423,778			470,577			(10	%)
Selling and administrative expenses		117,449			133,208			(12	%)		265,184			267,547			(1	%)
Research and development expenses		31,155			36,490			(15	%)		66,144			71,550			(8	%)
Purchased intangibles amortization		2,618			2,264			16	%		5,243			4,545			15	%
Litigation provision		514			—			—			1,180			—			—

Operating income		155,114			177,654			(13	%)		223,394			298,805			(25	%)
Operating income as a % of sales		29.8	%		29.7	%					22.7	%		26.8	%

Other expense		(736	)		(342	)		115	%		(1,110	)		(867	)		28	%
Interest expense, net		(9,015	)		(5,577	)		62	%		(19,058	)		(8,825	)		116	%

Income before income taxes		145,363			171,735			(15	%)		203,226			289,113			(30	%)
Provision for income taxes		22,434			27,325			(18	%)		26,735			35,717			(25	%)

Net income	$	122,929		$	144,410			(15	%)	$	176,491		$	253,396			(30	%)


Net income per diluted common share	$	1.98		$	2.08			(5	%)	$	2.83		$	3.57			(21	%)

In the second quarter of 2020, the Company’s sales decreased 13% as compared to the second quarter of 2019 and decreased 12% for the first half of 2020 as compared to the first half of 2019. This decline in sales in the 2020 periods can be attributed to the interruption in business activities caused by the uncertainties from the

COVID-19

pandemic across the world. Foreign currency translation decreased sales by 1% for both the second quarter and first half of 2020. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year.

Instrument system sales decreased 23% for the second quarter and 22% for the first half of 2020 as a result of weaker demand for our products by our customers due to interruption of business activities and the uncertainty caused by the

COVID-19

pandemic. Foreign currency translation decreased instrument system sales by 1% for the first half of 2020. Recurring revenues (combined sales of precision chemistry consumables and services) decreased 4% and 3% for the second quarter and first half of 2020, respectively, also as a result of interruption of business activities and the uncertainty caused by the

COVID-19

pandemic. Chemistry consumable sales decreased 5% and 4% in the second quarter and first half of 2020, respectively, while service sales declined 3% and 2% in the second quarter and first half of 2020, respectively. Recurring revenues were negatively impacted by foreign currency translation which lowered sales by 1% in both the second quarter and first half of 2020, as well as the first half of 2020 having one less calendar day as compared to the first half of 2019.

In both the second quarter and first half of 2020, the Company’s sales declined across all major geographies. The broad-based decline in sales was a result of the weaker demand and disruption of business activities caused be the

COVID-19

lockdowns. In the second quarter of 2020, the Company’s sales decreased 13% in Asia, 15% in the Americas, and 11% in Europe. For the first half of 2020, the Company’s sales decreased 16% in Asia, 11% in the Americas, and 5% in Europe. Foreign currency translation decreased Asia’s sales by 1% in both the second quarter and first half of 2020 and decreased Europe’s sales by 2% in both the second quarter and first half of 2020.

In the second quarter of 2020, the Company’s sales decreased 20% in China, 14% in the U.S., 4% in Asia Other, and 10% in Japan, with foreign currency translation negatively impacting Asia Other sales by 1% and benefiting Japan sales by 1%. In the first half of 2020, sales decreased 32% in China, 9% in the U.S., 2% in Asia Other and 4% in Japan, with foreign currency translation negatively impacting China sales by 1%, Asia Other sales by 2%, and benefiting Japan sales by 1%.

Table of Contents

Sales in China declined 20% in the second quarter of 2020, improving from the 48% decline experienced in the first quarter of 2020, as the

COVID-19

business restrictions in China were slowly lifted. Excluding China, the Company’s sales in the first half of 2020 declined 7%, with foreign currency translation negatively impacting sales by 1%.

Sales to pharmaceutical customers decreased 11% for the second quarter and 9% for the first half of 2020, primarily due to the disruption in business activities caused by

COVID-19,

with the effect of foreign currency translation decreasing sales by 1% for both the second quarter and first half of 2020. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, declined 14% in the second quarter and 11% in the first half of 2020, primarily due to lower demand caused by the

COVID-19

pandemic, with the effect of foreign currency translation decreasing sales by 1% for both the second quarter and first half of 2020. Similarly, TA sales declined 20% and 14% in the second quarter and first half of 2020, respectively. For the first half of 2020, the most significant decline in academic and governmental sales occurred in China where sales were 48% lower than the comparable 2019 period on mandated governmental spending reductions. Combined sales to academic and governmental customers decreased 22% and 23% in the second quarter and first half of 2020, respectively, as governmental customers adjusted their spending to mitigate the effects of the

COVID-19

pandemic. Foreign currency translation decreased academic and governmental sales by 1% for both the second quarter and first half of 2020. Sales to our academic and governmental customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales can vary significantly from period to period.

Operating income decreased 13% and 25% for the second quarter and first half of 2020, respectively. The decreases were primarily a result of the decline in sales volumes caused by the

COVID-19

pandemic and were somewhat mitigated by a series of cost reduction actions that included salary reductions, furloughs and reductions in

non-essential

spending that increased operating income by approximately $60 million for the first half of 2020 versus our operating plan. In addition, operating income in the second quarter and first half of 2020 also included $3 million and $21 million, respectively, of severance-related costs in connection with a reduction in workforce and lease termination costs. The Company’s plan was to reduce its expenses by approximately $100 million compared to our internal operating plan during 2020 to improve its financial position and liquidity to mitigate the impact of the decline in sales caused by

COVID-19.

The Company was able to realize approximately 60% of the cost action and restructuring savings in the first half of 2020 and the Company anticipates the remaining 40% of this savings plan will be achieved in the second half of 2020 when the Company currently expects its spending to gradually return to

pre-COVID-19

levels. This plan reflects our core assumptions that the business moves through the recovery phase, and business conditions improve in the second half of 2020; however, our plan will be adjusted accordingly depending on the pace of the recovery.

The Company generated $350 million and $303 million of net cash flows from operations in the first half of 2020 and 2019, respectively. This increase in operating cash flow was primarily a result of the $54 million reduction in expense from the cost actions implemented during the second quarter of 2020.

Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $97 million and $65 million in the first half of 2020 and 2019, respectively. In January of 2020, the Company acquired all of the outstanding stock of Andrew Alliance, S.A. and its two operating subsidiaries, Andrew Alliance USA, Inc. and Andrew Alliance France, SASU (collectively “Andrew Alliance”), for $80 million, net of cash acquired. The company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration. This acquisition is not expected to have a material effect on the Company’s sales and expenses. The cash flows from investing activities in the first half of 2020 also included $43 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $123 million on this facility through the end of the first half of 2020 and anticipates spending a total of $215 million to build and equip this new

state-of-the-art

manufacturing facility. Due to the uncertain business conditions caused by the

COVID-19

pandemic, in the second quarter of 2020 the Company temporarily slowed down the remaining construction and buildout of this facility.

In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a

two-year

period. During the first half of 2020 and 2019, the Company repurchased $167 million and $1.3 billion of the Company’s outstanding common stock, respectively, under authorized share repurchase programs. While the Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by the

COVID-19

pandemic.

Table of Contents

Results of Operations

Sales by Geography

Geographic sales information is presented below for the three and ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (dollars in thousands):

Three Months Ended

Nine Months Ended

September 28,
2019

September 29,
2018

% change

September 28,
2019

September 29,
2018

% change

Net Sales:

Asia:

China
$
111,657
$
109,713

2
% $
314,544
$
313,250

—

Japan

46,840

43,549

8
%
136,302

129,497

5
%
Asia Other

79,278

68,934

15
%
226,276

216,634

4
%

Total Asia

237,775

222,196

7
%
677,122

659,381

3
%
Americas:

United States

164,164

170,766

(4
%)
487,261

479,072

2
%
Americas Other

32,294

36,037

(10
%)
97,840

107,567

(9
%)

Total Americas

196,458

206,803

(5
%)
585,101

586,639

—

Europe

143,045

149,022

(4
%)
428,079

458,890

(7
%)

Total net sales
$
577,278
$
578,021

—
$
1,690,302
$
1,704,910

(1
%)


	Three Months Ended							Six Months Ended
	June 27, 2020		June 29, 2019		% change			June 27, 2020		June 29, 2019		% change
Net Sales:
Asia:
China	$	89,816	$	112,796		(20	%)	$	137,047	$	202,887		(32	%)
Japan		41,230		45,958		(10	%)		86,319		89,462		(4	%)
Asia Other		77,163		80,081		(4	%)		143,923		146,998		(2	%)

Total Asia		208,209		238,835		(13	%)		367,289		439,347		(16	%)
Americas:
United States		148,928		173,940		(14	%)		292,826		323,097		(9	%)
Americas Other		25,854		32,835		(21	%)		54,132		65,546		(17	%)

Total Americas		174,782		206,775		(15	%)		346,958		388,643		(11	%)
Europe		136,993		153,552		(11	%)		270,676		285,034		(5	%)

Total net sales	$	519,984	$	599,162		(13	%)	$	984,923	$	1,113,024		(12	%)

In the ~~third~~second quarter and first ~~nine months~~half of ~~2019,~~2020, the

COVID-19

pandemic disrupted businesses throughout the world and negatively impacted the Company’s sales across all major geographies. Sales in China ~~were negatively impacted by economic uncertainty caused by certain regulatory changes~~declined 20% and 32% in our food and pharmaceutical markets. The increase in sales in Japan was driven by instrument systems, primarily to pharmaceutical customers, and foreign currency translation, which increased Japan’s sales growth by 5% and 1% for the ~~third~~second quarter and first ~~nine months~~half of ~~2019, respectively. Sales growth in Asia Other was broad-based across all product~~2020, respectively, and ~~customer classes in 2019. Sales growth~~sales in the U.S. declined ~~as a result of our large pharmaceutical customers decreasing capital spending on our instrument systems~~14% and 9% in the third quarter of 2019, which has resulted low single-digit sales growth in the first nine months of 2019. Sales declines in the rest of the Americas and Europe were broad-based across all product and customer classes due to macroeconomic conditions and political instability. Sales in Europe were also negatively impacted by the effect of foreign currency translation, which decreased sales 4% and 5% for the thirdsecond quarter and first ~~nine months~~half of ~~2019, respectively.~~2020, respectively, due to the

COVID-19

pandemic.

~~Table of Contents~~

Net sales by customer class are presented below for the three and ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (dollars in thousands):

Three Months Ended

Nine Months Ended

September 28,
2019

September 29,
2018

% change

September 28,
2019

September 29,
2018

% change

Pharmaceutical
$
328,227
$
325,166

1
% $
972,884
$
968,848

—

Industrial

171,352

171,985

—

502,679

517,979

(3
%)
Academic and governmental

77,699

80,870

(4
%)
214,739

218,083

(2
%)

Total net sales
$
577,278
$
578,021

0
% $
1,690,302
$
1,704,910

(1
%)


	Three Months Ended							Six Months Ended
	June 27, 2020		June 29, 2019		% change			June 27, 2020		June 29, 2019		% change
Pharmaceutical	$	311,018	$	350,145		(11	%)	$	583,581	$	644,657		(9	%)
Industrial		152,110		176,109		(14	%)		295,464		331,327		(11	%)
Academic and governmental		56,856		72,908		(22	%)		105,878		137,040		(23	%)

Total net sales	$	519,984	$	599,162		(13	%)	$	984,923	$	1,113,024		(12	%)

In the ~~third~~second quarter and first ~~nine months~~half of ~~2019,~~2020, the decline in sales to pharmaceutical customers ~~were negatively impacted~~was primarily due to the disruption in business activities caused by

COVID-19,

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

COVID-19

diagnostic testing and the ~~effect~~development of ~~foreign~~new drugs and therapies. Foreign currency translation ~~which~~ decreased sales to pharmaceutical customers by 2%1% in both the second quarter and ~~3%, respectively, as well as a slower release~~first half of ~~capital budgets by our customers due to uncertain macroeconomic conditions due to Brexit, particularly in Europe, and regulatory changes in our food and pharmaceutical markets in China.~~2020. The decline in sales to industrial customers in the ~~third~~ quarter was primarily due to ~~weaker~~the lower demand ~~for our~~caused by

~~LC-MS~~

~~instruments, while~~ the ~~decline~~COVID-19 pandemic.

Similarly, TA sales declined of 20% and 14% in the second quarter and first ~~nine months~~half of ~~2019 was primarily due to a 2% decline in TA sales.~~2020, respectively. The ~~decrease~~decreases in sales to academic and governmental customers ~~was~~were broad-based across all product classes ~~with increases in Europe and Asia Other being offset by declines in other regions.~~as governmental customers adjusted their spending to mitigate the effects of the

COVID-19 pandemic.

Table of Contents

Waters Products and Services Net Sales

Net sales for Waters products and services ~~are~~were as follows for the three and ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (dollars in thousands):

Three Months Ended

September 28, 2019

% of
Total

September 29, 2018

% of
Total

% change

Waters instrument systems
$
223,859

44
% $
238,986

46
%
(6
%)
Chemistry consumables

100,256

19
%
95,979

19
%
4
%

Total Waters product sales

324,115

63
%
334,965

65
%
(3
%)
Waters service

188,031

37
%
180,830

35
%
4
%

Total Waters net sales
$
512,146

100
% $
515,795

100
%
(1
%)

Nine Months Ended

September 28, 2019

% of
Total

September 29, 2018

% of
Total

% change

Waters instrument systems
$
647,248

43
% $
677,017

45
%
(4
%)
Chemistry consumables

299,801

20
%
293,818

19
%
2
%

Total Waters product sales

947,049

63
%
970,835

64
%
(2
%)
Waters service

556,128

37
%
543,411

36
%
2
%

Total Waters net sales
$
1,503,177

100
% $
1,514,246

100
%
(1
%)


	Three Months Ended
	June 27, 2020		% of Total			June 29, 2019		% of Total			% change
Waters instrument systems	$	181,399		39	%	$	238,777		45	%		(24	%)
Chemistry consumables		95,105		20	%		100,292		19	%		(5	%)

Total Waters product sales		276,504		59	%		339,069		64	%		(18	%)
Waters service		189,205		41	%		192,048		36	%		(1	%)

Total Waters net sales	$	465,709		100	%	$	531,117		100	%		(12	%)


	Six Months Ended
	June 27, 2020		% of Total			June 29, 2019		% of Total			% change
	June 27, 2020		% of Total			June 29, 2019		% of Total			% change
Waters instrument systems	$	324,228		37	%	$	423,389		43	%		(23	%)
Chemistry consumables		192,350		22	%		199,545		20	%		(4	%)

Total Waters product sales		516,578		59	%		622,934		63	%		(17	%)
Waters service		363,342		41	%		368,097		37	%		(1	%)

Total Waters net sales	$	879,920		100	%	$	991,031		100	%		(11	%)

The effect of foreign currency translation decreased Waters sales by 1% ~~and 2%~~ for the ~~third quarter and~~ first ~~nine months~~half of ~~2019, respectively. Waters service sales benefited from increased sales of service plans and higher service demand billings to a larger installed base of customers.~~2020. Precision chemistry consumables sales ~~increased on~~decreased in the ~~uptake in columns~~second quarter and ~~application-specific testing kits and were~~first half of 2020, primarily driven by decreased sales in the U.S., as the demand for chemistry consumables was impacted by the disruption and uncertainty caused by

the COVID-19 pandemic,

while demand in China ~~primarily~~ increased in the second quarter which resulted in 23% growth in the quarter and 5% growth for the first half of 2020. Waters service sales decreased on lower service demand billings due

to ~~pharmaceutical customers.~~COVID-19 business

closures, particularly in Europe and India. Waters recurring revenues were also negatively impacted by one less calendar day in the first half of 2020 and the negative impact of foreign currency translation, which lowered sales by 1% in both the second quarter and first half of 2020. Waters instrument system sales (LC and MS technology-based) decreased in all geographical regions, primarily due to lower sales as a result of weaker demand for our products and services by our customers due to the disruption and uncertainty caused by

the COVID-19 pandemic.

In the second quarter of 2020, Waters sales decreased 8% in Europe, 13% in the U.S. and 21% in China due to the impact of the

COVID-19

pandemic. Waters sales in Europe and China were also negatively impacted by the effect of foreign currency translation ~~which lowered sales~~ by 1%2% and 2% in the third quarter and first nine months of 2019, respectively, as compared to the third quarter and first nine months of 2018, as well as one less calendar day in the first nine months of 2019. Waters instrument system sales (LC and MS technology-based) decreased in most major geographical regions, primarily due to lower sales to pharmaceutical and industrial customers due to uncertainty caused by macroeconomic conditions relating to Brexit and other regulatory changes in certain regions.

In the third quarter of 2019, Waters sales decreased 6% in the Americas and 4% in Europe, and increased 6% in Asia. Foreign currency translation decreased Europe’s sales by 4%. Within Asia, Waters sales increased 2%1%, ~~9% and 18% in China, Japan and the rest of Asia,~~ respectively. In the first ~~nine months~~half of ~~2019,~~2020, Waters sales ~~increased~~decreased 3% in ~~Asia but decreased 1% and 6%~~Europe, 9% in the ~~Americas~~U.S. and 34% in China due to the impact of the

COVID-19

pandemic. Waters sales in Europe ~~respectively, where~~and China were also both negatively impacted by the effect of foreign currency ~~decreased sales~~translation by 5%2%. ~~Within Asia, Waters sales were flat in China and increased 4% in Japan and 12% in the rest of Asia.~~

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TA Product and Services Net Sales

Net sales for TA products and services ~~are~~were as follows for the three and ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (dollars in thousands):

Three Months Ended

September 28, 2019

% of
Total

September 29, 2018

% of
Total

% change

TA instrument systems
$
46,458

71
% $
43,557

70
%
7
%
TA service

18,674

29
%
18,669

30
%
—

Total TA net sales
$
65,132

100
% $
62,226

100
%
5
%

Nine Months Ended

September 28, 2019

% of
Total

September 29, 2018

% of
Total

% change

TA instrument systems
$
131,292

70
% $
135,673

71
%
(3
%)
TA service

55,833

30
%
54,991

29
%
2
%

Total TA net sales
$
187,125

100
% $
190,664

100
%
(2
%)


	Three Months Ended
	June 27, 2020		% of Total			June 29, 2019		% of Total			% change
TA instrument systems	$	38,416		71	%	$	48,196		71	%		(20	%)
TA service		15,859		29	%		19,849		29	%		(20	%)

Total TA net sales	$	54,275		100	%	$	68,045		100	%		(20	%)


	Six Months Ended
	June 27, 2020		% of Total			June 29, 2019		% of Total			% change
TA instrument systems	$	72,525		69	%	$	84,834		70	%		(15	%)
TA service		32,478		31	%		37,159		30	%		(13	%)

Total TA net sales	$	105,003		100	%	$	121,993		100	%		(14	%)

The ~~increase~~decline in TA instrument system and service sales in the ~~third~~second quarter and first half of 2019 can be attributed to strong sales growth in Asia Other and the U.S. for TA’s thermal analysis and microcalorimetry instrument systems. The decrease in TA’s instrument system sales in the first nine months of 20192020 was primarily due to lower customer demand ~~resulting from macroeconomic conditions, tariff posturing and political instability. TA service sales increased~~ due to ~~sales of service plans and billings to a higher installed base of customers.~~the

COVID-19

pandemic. The effect of foreign currency translation ~~was flat~~had minimal impact on sales for the second quarter of 2020 and decreased TA sales 1% for the ~~third~~first half of 2020.

TA sales declined in all major regions of the world due to the impact from

COVID-19,

except for Asia Other, where sales grew over 10% in both the second quarter and first ~~nine months~~half of ~~2019, respectively.~~

2020.

In the third quarter of 2019, TA sales increased 13% in Asia and 3% in the Americas, but decreased 4% in Europe. For the first nine months of 2019, TA sales increased 2% in the Americas and 1% in Asia, but decreased 14% in Europe. TA’s sales in the U.S. increased 4% in both the third quarter and first nine months of 2019. TA sales in Europe were negatively impacted by the effect of foreign currency translation, which decreased sales 3% and 4% in third quarter and first nine months of 2019, respectively.

Cost of Sales

Cost of sales for the ~~third~~second quarter and first ~~nine months~~half of ~~2019 was flat~~2020 decreased 15% and ~~increased 1%~~10%, respectively, ~~as compared to the third quarter and first nine months of 2018~~primarily due to a ~~change~~decrease in sales ~~mix. The effect~~volume from lower customer demand caused by the

COVID-19

pandemic, which was mitigated by a $12 million reduction of ~~foreign currency translation on~~planned expenses from salary reductions, furloughs and reductions in

non-essential

spending. In addition, cost of sales ~~had a slight impact on the third quarter of 2019, but increased cost of sales~~was also negatively impacted by ~~2% for the first nine months of 2019.~~foreign currency translation. Cost of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix, product costs of instrument systems and amortization of software platforms. At current foreign currency exchange rates, the Company expects foreign currency translation to negatively impact gross profit for the remainder of ~~2019.~~2020. To date, the Company has not had significant issues with its supply chain; however, the prolonged impact of

COVID-19

on businesses could negatively impact our suppliers’ ability to deliver goods to us, as well as possibly increase the cost of those goods used in our manufacturing operations.

Selling and Administrative Expenses

Selling and administrative expenses decreased 12% and 1% for the ~~third~~second quarter and first half of ~~2019 and were flat~~

~~year-to-date.~~

2020, respectively. Selling and administrative expenses decreased in these periods primarily from the $33 million reduction in expenses from salary reductions, furloughs and reductions in

non-essential

spending. These savings were partially offset by $3 million and $21 million for ~~both~~ the ~~third~~second quarter and ~~the~~ first ~~nine months~~half of ~~2019 were impacted by higher merit compensation costs that were offset by lower variable incentive compensation costs. In addition, the first nine months~~2020, respectively, of ~~2019 were impacted by the $9 million of~~

one-time

severance-related costs in connection with a reduction in ~~workforce.~~ workforce and lease-terminations. Excluding these expenses, selling and administrative expenses declined 9%

year-to-date.

The Company anticipates incurring approximately $6 million of severance-related and lease termination expenses over the remainder of 2020. In addition, the effect of foreign currency translation decreased selling and administrative expenses by 1% for both the ~~third~~second quarter and first half of ~~2019 and did not have a significant impact on such expenses for the first nine months of 2019.~~2020.

As a percentage of net sales, selling and administrative expenses were ~~22.3%~~22.6% and ~~23.7%~~26.9% for the ~~third~~second quarter of ~~2019~~2020 and

year-to-date,

respectively, and ~~22.3%~~22.2% and ~~23.4%~~24.0% for the ~~third~~second quarter and first half of ~~2018~~2019, respectively. The increase in this percentage is attributable to the decline in sales and the $21 million

~~year-to-date,~~of one-time severance-related

~~respectively.~~

and lease termination costs.

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Research and Development Expenses

Research and development expenses decreased 2%15% and 8% in the ~~third~~second quarter and ~~increased 1%~~first half of 2020, respectively. These expenses decreased in these periods primarily from the $9 million reduction in expenses from salary reductions, furloughs and reductions in

non-essential

spending in the ~~first nine months~~second quarter of 2019, primarily as a result of merit compensation increases and the costs associated with new products and the development of new technology initiatives. The effect of foreign currency translation decreased research and development expenses by 2% for the third quarter and 3% for the first nine months of 2019, as the weakening of the British pound had a favorable effect on the currency translation of the Company’s U.K.-based research and development expenses.

2020.

Interest Expense, Net

The ~~increase~~increases in net interest expense in the ~~third~~second quarter and first ~~nine months~~half of ~~2019 was~~2020 were primarily attributable to higher outstanding debt balances and lower interest income on lower cash, cash equivalents and investment ~~balances, being somewhat offset by the additional interest income from the~~

~~U.S.-to-Euro~~balances.

~~interest rate cross-currency swap agreements.~~

Provision for 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 28, 2019.~~June 27, 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 continue 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 ~~first nine months~~half of 2020 and 2019 ~~and 2018~~ by ~~$15~~$7 million and ~~$21~~$9 million, respectively, and increased the Company’s net income per diluted share by ~~$0.21~~$0.11 and ~~$0.26,~~$0.13, respectively.

The Company’s effective tax rate for the ~~third~~second quarter of 2020 and 2019 was 15.4% and ~~2018 was 16.1% and 16.7%~~15.9%, respectively. The decrease in the effective income tax rate can be attributed to a $2 million expense in the third quarter of 2018 related to the change in foreign currency exchange rates on the earnings taxed in December 2017 under the toll charge of the 2017 Tax Act. This increase in income tax expense increased the effective tax rate by 1.4 percentage points in the third quarter of 2018. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts

pre-tax income

~~income~~ recognized in jurisdictions with different effective tax rates.

The Company’s effective tax rate for the first ~~nine months~~half of 2020 and 2019 was 13.2% and ~~2018 was 13.7% and 15.6%~~12.4%, respectively. The effective tax rate for the first ~~nine months~~half of 2020 included a $5 million income tax benefit related to certain restructuring charges and a $2 million tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 2.4 percentage points and 1.2 percentage points for the first half of 2020, respectively. The effective tax rate for the first half of 2019 ~~includes~~included a $3 million income tax benefit related to the finalization of certain regulations relating to the Tax Cuts and Jobs Act of 2017 ~~Tax Act. This~~and a $7 million income tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by .71.0 percentage point and 2.3 percentage points for the first ~~nine months~~half of 2019. The effective tax rate for the first nine months of 2018 includes $6 million of additional income tax expense related to the change in foreign currency exchange rates on the earnings taxed in December 2017 under the toll charge of the 2017 Tax Act. This additional income tax expense increased the effective tax rate by 1.3 percentage points for the first nine months of 2018.2019, respectively. 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.

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Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows (in thousands):

Nine Months Ended

September 28, 2019

September 29, 2018

Net income
$
391,529
$
408,642

Depreciation and amortization

80,319

82,811

Stock-based compensation

28,917

28,184

Deferred income taxes

1,817

278

Change in accounts receivable

57,897

36,893

Change in inventories

(83,973
)
(47,826
)
Change in accounts payable and other current liabilities

(493
)
(93,637
)
Change in deferred revenue and customer advances

34,926

23,085

Effect of the 2017 Tax Cuts & Jobs Act

(3,229
)
12,450

Other changes

(56,518
)
(27,983
)

Net cash provided by operating activities

451,192

422,897

Net cash provided by investing activities

825,441

1,257,718

Net cash used in financing activities

(1,661,541
)
(1,626,443
)
Effect of exchange rate changes on cash and cash equivalents

(6,723
)
(7,118
)

(Decrease) increase in cash and cash equivalents
$
(391,631
) $
47,054


	Six Months Ended
	June 27, 2020			June 29, 2019
Net income	$	176,491		$	253,396
Depreciation and amortization		60,203			53,615
Stock-based compensation		18,122			19,255
Deferred income taxes		(777	)		1,632
Change in accounts receivable		86,978			52,508
Change in inventories		(27,089	)		(62,200	)
Change in accounts payable and other current liabilities		34,714			(10,439	)
Change in deferred revenue and customer advances		37,558			54,672
Effect of the 2017 Tax Cuts & Jobs Act		—			(3,229	)
Other changes		(35,754	)		(56,407	)

Net cash provided by operating activities		350,446			302,803
Net cash (used in) provided by investing activities		(192,335	)		785,063
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 Flow from Operating Activities

Net cash provided by operating activities was ~~$451~~$350 million and ~~$423~~$303 million during the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ respectively. This increase in operating cash flow was primarily a result of the $54 million reduction in expense from the cost actions implemented in the second quarter of 2020. The changes within net cash provided by operating activities include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the changes in net income:

The changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales. Days sales outstanding increased to 8087 days at ~~September 28, 2019~~June 27, 2020 as compared to 7779 days at ~~September~~June 29, ~~2018.~~2019.

The changes in inventory were primarily attributable to ~~new product launches and a~~the reduction in the inventory build ~~of safety stock~~plan to adjust inventory ~~in advance of the Brexit decision, as well as~~levels for lower ~~than~~ anticipated sales ~~volumes.~~volume due to the

COVID-19

pandemic.

The changes in accounts payable and other current liabilities were a result of the timing of payments to vendors, as well as the annual payment of management incentive compensation.

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

Other changes were attributable to variation in the timing of various provisions, expenditures, prepaid income taxes and accruals in other current assets, other assets and other liabilities.

Cash Flow from Investing Activities

Net cash ~~provided by~~used in investing activities totaled ~~$825~~$192 million in the ~~nine~~six months ended ~~September 28, 2019~~June 27, 2020 compared to net cash provided by investing activities that totaled ~~$1,258~~$785 million in the ~~nine~~six months ended ~~September~~June 29, ~~2018.~~2019. Additions to fixed assets and capitalized software were ~~$110~~$97 million and ~~$64~~$65 million in the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ respectively. In February 2018, the Company’s Board of Directors approved expanding its precision chemistry consumable manufacturing operations in the U.S. The Company anticipates spending an estimated $215 million to build and equip this new

state-of-the-art

manufacturing facility, which will be paid for with existing cash, investments and debt capacity. The Company ~~has~~ incurred ~~$51~~$38 million of costs associated with the construction of this facility during the ~~nine~~six months ended ~~September 28, 2019.~~June 27, 2020. The Company has incurred $123 million on this facility through the end of the second quarter of 2020. Due to the uncertain business conditions caused by the

COVID-19

pandemic, the Company temporarily slowed down the completion of the remaining construction and buildout of this facility.

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During the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ the Company purchased ~~$36~~$17 million and ~~$908~~$36 million of investments, respectively, while ~~$978~~$2 million and ~~$2,269~~$891 million of investments matured, respectively, and were used for financing activities described below.

On January 15, 2020, the Company acquired all of the outstanding stock of 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.

Cash Flow from Financing Activities

In September 2019, the Company issued senior unsecured notes with an aggregate principal amount of $500 million. The Series L $200 million notes have a seven-year term and a fixed interest rate of 3.31%. The Series M $300 million notes have a

~~10-year~~

~~term and a fixed interest rate of 3.53% The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes.~~ During the ~~nine~~six months ended ~~September 28, 2019 and September 29, 2018,~~June 27, 2020, the Company’s net debt borrowings increased by ~~$210~~$15 million ~~and decreased by $850 million, respectively.~~while they remained flat during the six months ended June 29, 2019. During the ~~nine~~six months ended ~~September~~June 29, ~~2018,~~2019, the Company reduced its outstanding debt using cash repatriated under the 2017 Tax Act. As of ~~September 28, 2019,~~June 27, 2020, the Company had a total of ~~$1.4~~$1.7 billion in outstanding debt, which consisted of ~~$1.1 billion~~$960 million in outstanding senior unsecured notes and ~~$300~~$740 million borrowed under a term loan under the credit agreement dated November 2017 (“2017 Credit Agreement”). As of ~~September 28, 2019,~~June 27, 2020, the Company had a total amount available to borrow under the 2017 Credit Agreement of ~~$1.5~~$1.1 billion after outstanding letters of credit. As of ~~September 28, 2019,~~June 27, 2020, the Company was in compliance with all debt covenants.

In 2018 and ~~April~~ 2019, the Company entered into ~~$410~~a total of $560 million of

U.S.-to-Euro

interest rate cross-currency swap agreements that hedge the Company’s net investment in its Euro denominated net assets. As a result of entering into these agreements, the Company anticipates lowering net interest expense by approximately $12 million annually over the three-year term of the agreements.

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 new program replaced the remaining amounts available from the

pre-existing

program. During the first ~~nine months~~half of ~~2019~~2020 and ~~2018,~~2019, the Company repurchased ~~$1.9~~$167 million and $1.3 billion, ~~and $809 million,~~ respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased $8$9 million and $9$8 million of common stock related to the vesting of restricted stock units during both the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ respectively. The Company expects to increase its share repurchase activity in 2019 as compared to 2018 and intends to use existing cash and investments, cash flows from operations and, as needed, borrowings under its existing credit facilities to fund its repurchases under its share repurchase program.

The Company received ~~$34~~$15 million and ~~$42~~$30 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan during the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ respectively.

The Company had cash and cash equivalents of ~~$405~~$356 million as of ~~September 28, 2019.~~June 27, 2020. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with ~~$303~~$288 million held by foreign subsidiaries at ~~September 28, 2019,~~June 27, 2020, of which ~~$235~~$204 million was held in currencies other than U.S. dollars. ~~The~~While the Company believes it has sufficient levels of cash flow and access to its existing cash and cash equivalents, as well as the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, to fund operations and capital expenditures, service debt interest, finance potential acquisitions and continue the authorized stock repurchase program in the U.S. ~~These cash requirements are managed~~, we have temporarily suspended our share repurchases due to the uncertain business conditions caused by the ~~Company’s cash flow from operations, its existing cash and cash equivalents and the use of the Company’s revolving credit facility.~~

COVID-19

pandemic.

Management believes, despite the impact of

COVID-19

on our business, as of the date of this report, that the Company’s financial position, along with expected future cash flows from earnings based on historical trends and the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, will be sufficient to service debt and fund working capital and capital spending requirements, authorized share repurchase amounts and potential acquisitions for at least the next twelve months.

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~~the next twelve months. The Company has conducted a~~

~~post-tax~~

reform evaluation of its capital allocation strategy and the Company is currently planning to use its existing cash and cash equivalents, cash flow from operations and available debt capacity to repurchase up to $4 billion of the Company’s common stock over the next two years. The Company is working towards a near-term capital structure of approximately 2.5 times the Company’s net

~~debt-to-earnings~~

before interest, taxes, depreciation and amortization ratio to fund a significant portion of these share repurchases. In addition, as of December 31, 2018, the Company determined that it will provide income taxes on all future foreign earnings and reverse its historical assertion that its foreign earnings were permanently invested. However, the Company will continue to be permanently reinvested in relation to the cumulative historical outside basis difference that is not related to the unremitted earnings. There have been no other significant changes to the Company’s financial position.

Contractual Obligations, Commercial Commitments, Contingent Liabilities and Dividends

A summary of the Company’s contractual obligations and commercial commitments is included in the Company’s Annual Report on Form

~~10-K/A~~10-K

for the year ended December 31, ~~2018,~~2019, as filed with the SEC on ~~March 1, 2019.~~February 25, 2020. The Company reviewed its contractual obligations and commercial commitments as of ~~September 28, 2019~~June 27, 2020 and determined that there were no material changes outside the ordinary course of business from the information set forth in the Annual Report on Form

~~10-K/A,~~10-K.

~~with the exception of the recently issued senior unsecured notes as described in Note 6, “Debt.”~~

From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. The Company believes that it has meritorious arguments in its current litigation matters and that any outcome, either individually or in the aggregate, will not be material to the Company’s financial position or results of operations.

During fiscal year ~~2019,~~2020, the Company expects to contribute a total of approximately $3 million to $6 million to its defined benefit plans, excluding the U.S. defined benefit pension plans.

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

Off-Balance

Sheet Arrangements

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

off-balance

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

The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company’s costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.

Critical Accounting Policies and Estimates

In the Company’s Annual Report on Form

~~10-K/A~~10-K

for the year ended December 31, ~~2018,~~2019, as filed with the SEC on ~~March 1, 2019,~~February 25, 2020, the Company’s most critical accounting policies and estimates upon which its financial status depends were identified as those relating to revenue recognition, loss provisions on accounts receivable and inventory, valuation of long-lived assets, intangible assets and goodwill, income taxes, uncertain tax positions, warranty, litigation, pension and other postretirement benefit obligations, stock-based compensation and business combinations and asset ~~acquisitions and valuation of contingent consideration.~~acquisitions. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the ~~nine~~six months ended ~~September 28, 2019.~~June 27, 2020. The Company did not make any changes in those policies during the ~~nine~~six months ended ~~September 28, 2019.~~June 27, 2020.

~~Table of Contents~~

New Accounting Pronouncements

Please refer to Note 14, Recent Accounting Standard Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.

Table of Contents

Special Note Regarding Forward-Looking Statements

Certain of the statements in this Quarterly Report on Form

10-Q,

including the information incorporated by reference herein, may contain forward-looking statements with respect to future results and events, including any statements regarding, among other items, anticipated trends or growth in the Company’s business, including, but not limited to, the impact of the ongoing

COVID-19

pandemic; the impact of new or proposed tariff or trade regulations or changes in the interpretation or enforcement of existing regulations; the impact of foreign currency translation on financial results; development of products by acquired businesses; the growth rate of sales and research and development expenses; the impact of costs associated with developing new technologies and bringing these new technologies to market; the impact of new product launches and the associated costs, such as the amortization expense related to software platforms; geographic sales mix of business; development of products by acquired businesses and the amount of contingent payments to the sellers of an acquired business; anticipated expenses, including interest expense, capitalized software costs and effective tax rates; the impact of the 2017 Tax Act in the U.S.; the impact and outcome of the Company’s various ongoing tax audit examinations; the achievement of contractual milestones to preserve foreign tax rates; the impact and outcome of litigation matters; the impact of the loss of intellectual property protection; the impact of new accounting standards and pronouncements; the adequacy of the Company’s supply chain and manufacturing capabilities and facilities; the impact of regulatory compliance; the Company’s expected cash flow, borrowing capacity, debt repayment and refinancing; the Company’s ability to fund working capital, capital expenditures, service debt, repay outstanding lines of credit, make authorized share repurchases, fund potential acquisitions and pay any adverse litigation or tax audit liabilities, particularly in the U.S.; future impairment charges; the Company’s contributions to defined benefit plans; the Company’s expectations regarding changes to its financial position; compliance with applicable environmental laws; and the impact of recent acquisitions on sales and earnings.

Many of these statements appear, in particular, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form

10-Q.

Statements that are not statements of historical fact may be deemed forward-looking statements. You can identify these forward-looking statements by the use of the words “feels”, “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “suggests”, “appears”, “estimates”, “projects”, “should” and similar expressions, whether in the negative or affirmative. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without limitation:

Risks related to the effects of the

COVID-19

pandemic on our business, including: portions of our global workforce being unable to work fully and/or effectively due to working remotely, illness, quarantines, government actions, facility closures or other reasons related to the pandemic, increased risks of cyber attacks resulting from our temporary remote working model, disruptions in our manufacturing capabilities or to our supply chain, volatility and uncertainty in global capital markets limiting our ability to access capital, customers being unable to make timely payment for purchases and volatility in demand for our products.

Foreign currency exchange rate fluctuations that could adversely affect translation of the Company’s future sales, financial operating results and the condition of its

non-U.S.

operations, especially when a currency weakens against the U.S. dollar.

Current global economic, sovereign and political conditions and uncertainties, particularly regarding the effect of the

COVID-19

pandemic; new or proposed tariffs or trade regulations or changes in the interpretation or enforcement of existing regulations; the U.K. voting to exit the European Union as well as the Chinese government’s ongoing tightening of restrictions on procurement by government-funded customers; the Company’s ability to access capital and maintain liquidity in volatile market conditions; changes in timing and demand for the Company’s products among the Company’s customers and various market sectors or geographies, particularly if they should reduce capital expenditures or are unable to obtain funding, as in the cases of governmental, academic and research institutions; the effect of mergers and acquisitions on customer demand for the Company’s products; and the Company’s ability to sustain and enhance service.

Negative industry trends; changes in the competitive landscape as a result of changes in ownership, mergers and continued consolidation among the Company’s competitors; introduction of competing products by other companies and loss of market share; pressures on prices from customers or resulting from competition; regulatory, economic and competitive obstacles to new product introductions; lack of acceptance of new products; expansion of our business in developing markets; spending by certain

end-markets;

ability to obtain alternative sources for components and modules; and the possibility that future sales of new products related to acquisitions, which trigger contingent purchase payments, may exceed the Company’s expectations.

4341

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Increased regulatory burdens as the Company’s business evolves, especially with respect to the United States Food and Drug Administration and the United States Environmental Protection Agency, among others, as well as regulatory, environmental and logistical obstacles affecting the distribution of the Company’s products, completion of purchase order documentation by our customers and ability of customers to obtain letters of credit or other financing alternatives.

Risks associated with lawsuits, particularly involving claims for infringement of patents and other intellectual property rights.

The impact and costs incurred from changes in accounting principles and practices; the impact and costs of changes in statutory or contractual tax rates in jurisdictions in which the Company operates, specifically as it relates to the 2017 Tax Act in the U.S.; shifts in taxable income among jurisdictions with different effective tax rates; and the outcome of and costs associated with ongoing and future tax audit examinations or changes in respective country legislation affecting the Company’s effective rates.

Certain of these and other factors are discussed under the heading “Risk Factors” under Part I, Item 1A of the Company’s Annual Report on Form

~~10-K/A~~10-K

for the year ended December 31, ~~2018,~~2019, as filed with the SEC on ~~March 1, 2019.~~February 25, 2020. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements, whether because of these factors or for other reasons. All forward-looking statements speak only as of the date of this Quarterly Report on Form

10-Q

and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by law, the Company does not assume any obligation to update any forward-looking statements.

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to the risk of interest rate fluctuations from the investments of cash generated from operations. Investments with maturities greater than 90 days are classified as investments, and are held primarily in U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities. As of ~~September 28, 2019,~~June 27, 2020, the Company estimates that a hypothetical adverse change of 100 basis points across all maturities would not have a material effect on the fair market value of its portfolio.

The Company is also exposed to the risk of exchange rate fluctuations. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of ~~September 28, 2019~~June 27, 2020 and December 31, ~~2018, $303~~2019, $288 million out of ~~$405~~$356 million and ~~$471~~$249 million out of ~~$1,735~~$337 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, ~~$235~~$204 million out of ~~$405~~$356 million and ~~$251~~$176 million out of ~~$1,735~~$337 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at ~~September 28, 2019~~June 27, 2020 and December 31, ~~2018,~~2019, respectively. As of ~~September 28, 2019,~~June 27, 2020, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.

Assuming a hypothetical adverse change of 10% in

year-end

exchange rates (a strengthening of the U.S. dollar), the fair market value of the Company’s cash, cash equivalents and investments held in currencies other than the U.S. dollar as of ~~September 28, 2019~~June 27, 2020 would decrease by approximately ~~$24~~$18 million, of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders’ (deficit) equity.

There have been no other material changes in the Company’s market risk during the ~~nine~~six months ended ~~September 28, 2019.~~June 27, 2020. For information regarding the Company’s market risk, refer to Item 7A of Part II of the Company’s Annual Report on Form

~~10-K/A~~10-K

for the year ended December 31, ~~2018,~~2019, as filed with the SEC on ~~March 1, 2019.~~February 25, 2020.

Item 4:

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer (principal executive officer and principal financial officer), with the participation of management, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in

Rules

13a-15(e)

and

15d-15(e)

under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form

10-Q.

Based on this evaluation,

~~Table of Contents~~

the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of ~~September 28, 2019~~June 27, 2020 (1) to ensure that information required to be disclosed by the

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Company, including its consolidated subsidiaries, in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, to allow timely decisions regarding the required disclosure and (2) to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

~~Change~~Changes in Internal ~~Controls~~Control Over Financial Reporting

No change was identified in the Company’s internal control over financial reporting (as defined in

Rules

13a-15(f)

and

15d-15(f)

under the Exchange Act) during the quarter ended ~~September 28, 2019~~June 27, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II:

Other Information

Item 1:

Legal Proceedings

There have been no material changes in the Company’s legal proceedings during the three months ended ~~September 28, 2019~~June 27, 2020 as described in Item 3 of Part I of the Company’s Annual Report on Form

~~10-K/A~~10-K

for the year ended December 31, ~~2018,~~2019, as filed with the SEC on ~~March 1, 2019.~~February 25, 2020.

Item 1A:

Risk Factors

Information regarding risk factors of the Company is set forth under the heading “Risk Factors” under Part I, Item 1A in the Company’s Annual Report on Form

~~10-K/A~~10-K

for the year ended December 31, ~~2018,~~2019, as filed with the SEC on ~~March 1, 2019.~~February 25, 2020. The Company reviewed its risk factors as of ~~September 28, 2019~~June 27, 2020 and determined that there were no material changes from the ones set forth in the Form

~~10-K/A.~~10-K,

other than those included below. Note, however, the discussion under the subheading “Special Note Regarding Forward-Looking Statements” in Part I, Item 2 of this Quarterly Report on Form

10-Q.

These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and operating results.

The Company’s business has been and may continue to be negatively affected by outbreaks of disease, such as epidemics or pandemics, including the ongoing

COVID-19

pandemic

Outbreaks of disease, such as epidemics or pandemics, have and could continue to negatively affect the Company’s business. Both the Company’s domestic and international operations have been and continue to be adversely affected by the ongoing global

COVID-19

pandemic 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 throughout the U.S. and globally. The

COVID-19

pandemic. Many countries, including the U.S. have implemented measures such as quarantine,

shelter-in-place,

curfew and similar isolation measures, including government orders and other restrictions on the conduct of business operations. Such measures have had and are expected to continue to have adverse impacts on the U.S. and foreign economies of uncertain severity and duration and have had and may continue to have a negative impact on the Company’s operations, including the Company’s sales, supply chain and cash flow. Additionally, the widespread pandemic has caused and is expected to continue to cause significant disruption of global financial markets, which may reduce the Company’s ability to access capital.

The

COVID-19

pandemic also has the potential to significantly impact our supply chain if our manufacturing facilities or those of third parties to whom we outsource certain manufacturing processes, the distribution centers where our inventory is managed or the operations of our logistics and other service providers are disrupted, temporarily closed or experience worker shortages. We may also see disruptions or delays in shipments of certain materials or components of our products.

As a result of the ongoing

COVID-19

pandemic, the Company has transitioned the majority of its workforce to a temporary remote working model, which may result in the Company experiencing lower workforce efficiency and productivity, which in turn may adversely affect the Company’s business, results of operations and financial condition.

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As Company employees work from home and access the Company’s system remotely, the Company may be subject to heightened security risks, including the risks of cyber attacks. Additionally, if any of the Company’s key management employees are unable to perform their duties for a period of time, including as the result of illness, the Company’s business, results of operations and financial condition could be adversely affected.

The Company cannot reasonably estimate the length or severity of the

COVID-19

pandemic or the related response, or the extent to which the disruption may continue to impact the Company’s business, financial position, results of operations and cash flows. Ultimately, the

COVID-19

pandemic could have a material adverse impact on the Company’s business, financial positions, results of operations and cash flows.

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

The following table provides information about purchases by the Company during the three months ended ~~September 28, 2019~~June 27, 2020 of equity securities registered by the Company under the Exchange Act (in thousands, except per share data):

Period

Total Number
of Shares
Purchased (1)

Average
Price Paid
per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs (2)

Maximum Dollar
Value of Shares that
May Yet Be
Purchased Under
the Programs (2)

June 30, 2019 to July 27, 2019

959
$
216.81

959
$
2,633,353

July 28, 2019 to August 24, 2019

830
$
209.60

830
$
2,459,393

August 25, 2019 to September 28, 2019

937
$
220.19

937
$
2,253,122

Total

2,726
$
215.78

2,726
$
2,253,122


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs (2)
March 29, 2020 to April 25, 2020		—	$	—		—	$	1,524,905
April 26, 2020 to May 23, 2020		—	$	—		—	$	1,524,905
May 24, 2020 to June 27, 2020		—	$	—		—	$	1,524,905

Total		—	$	—		—	$	1,524,905

(1)	The ~~Company’s repurchase activity~~Company repurchased less than one thousand shares of common stock at a cost of less than $1 million related to the vesting of restricted stock ~~units~~ during the three months ended ~~September 28, 2019 was insignificant.~~June 27, 2020.

(2)

In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock in open market or private transactions over a

two-year

period. This new program replaced the remaining amounts available under the

pre-existing

authorization. During the second quarter of 2020, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by the

COVID-19

pandemic.

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Item 6:

Exhibits


Exhibit Number			Description of Document

10.1		Chief Executive Officer Transition and Separation Agreement.

10.2		President and Chief Executive Employment Agreement.
	~~10.1~~
10.3		Change of Control/Severance Agreement, dated July 14, 2020 between Waters Corporation and Udit Batra.

10.4		~~Note Purchase~~Employee Form of Stock Option Award Agreement ~~(Incorporated~~under the Waters Corporation 2020 Equity Incentive Plan.

10.5		Director Form of Stock Option Award Agreement under the Waters Corporation 2020 Equity Incentive Plan.

10.6		Form of RSU Agreement under the Waters Corporation 2020 Equity Incentive Plan.

10.7		CEO Form of PSU Agreement under the Waters Corporation 2020 Equity Incentive Plan.

10.8		Employee (non-CEO) Form of PSU Agreement under the Waters Corporation 2020 Equity Incentive Plan.

10.9		Director Form of RSA Agreement under the Waters Corporation 2020 Equity Incentive Plan.

10.10		Waters Corporation 2020 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 to the ~~Registrant’s Current Report on~~Company’s Form ~~8-K~~S-8 dated ~~September 16, 2019~~June 8, 2020 (File No. ~~001-14010)~~333-239020)).

31.1
	~~31.1~~			Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2
	~~31.2~~			Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1
	~~32.1~~			Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)

32.2
	~~32.2~~			Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)

101
	~~101~~			The following materials from Waters Corporation’s Quarterly Report on Form 10-Q for the quarter ended ~~September 28, 2019,~~June 27, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Cash Flows (unaudited) and (vi) Condensed Notes to Consolidated Financial Statements (unaudited).

104
	~~104~~			Cover Page Interactive Date File (formatted in iXBRL and contained in Exhibit 101).

(*)

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filing, except to the extent the Company specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


~~Waters Corporation~~ WATERS CORPORATION

/s/ Sherry L. Buck
Sherry L. Buck
Senior Vice President and
Chief Financial Officer

Date: ~~October 30, 2019~~July 29, 2020

4746


Delaware		13-3668640
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


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.


Large accelerated filer	☒		Accelerated filer	☐

Non-accelerated filer	☐		Smaller reporting company	☐
~~Non-accelerated filer~~		☐			~~Smaller reporting company~~	☐

			Emerging growth company	☐


	September 28, 2019			December 31, 2018
	(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	404,649		$	796,280
Investments		—			938,944
Accounts receivable, net		504,865			568,316
Inventories		368,790			291,569
Other current assets		65,602			68,054

Total current assets		1,343,906			2,663,163
Property, plant and equipment, net		381,496			343,083
Intangible assets, net		237,610			246,902
Goodwill		353,938			355,614
Operating lease assets		85,112			—
Other assets		159,203			118,664

Total assets	$	2,561,265		$	3,727,426

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and debt	$	100,058		$	178
Accounts payable		64,805			68,168
Accrued employee compensation		33,040			64,545
Deferred revenue and customer advances		197,401			164,965
Current operating lease liabilities		23,936			—
Accrued treasury stock repurchases		18,016			23,005
Accrued income taxes		49,576			22,943
Accrued warranty		11,477			12,300
Other current liabilities		98,844			92,827

Total current liabilities		597,153			448,931
Long-term liabilities:
Long-term debt		1,255,601			1,148,172
Long-term income tax liabilities		393,863			430,866
Long-term operating lease liabilities		61,372			—
Long-term portion of retirement benefits		55,386			55,853
Other long-term liabilities		82,390			76,346

Total long-term liabilities		1,848,612			1,711,237

Total liabilities		2,445,765			2,160,168
Commitments and contingencies (Notes 6, 7, 8 and 12)
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 5,000 shares authorized, 0ne issued at September 28, 2019 and December 31, 2018		—			—
Common stock, par value $0.01 per share, 400,000 shares authorized, 160,869 and 160,472 shares issued, 65,117 and 73,115 shares outstanding at September 28, 2019 and December 31, 2018, respectively		1,609			1,605
Additional paid-in capital		1,897,771			1,834,741
Retained earnings		6,386,734			5,995,205
Treasury stock, at cost, 95,752 and 87,357 shares at September 28, 2019 and December 31, 2018, respectively		(8,051,033	)		(6,146,322	)
Accumulated other comprehensive loss		(119,581	)		(117,971	)

Total stockholders’ equity		115,500			1,567,258

Total liabilities and stockholders’ equity	$	2,561,265		$	3,727,426


	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, NaN 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.


~~PART I~~	~~FINANCIAL INFORMATION~~	Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements		3

	Consolidated Balance Sheets (unaudited) as of ~~September 28, 2019~~June 27, 2020 and December ~~31,2018~~31, 2019			3

	Consolidated Statements of Operations (unaudited) for the three months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~			4

	Consolidated Statements of Operations (unaudited) for the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~			5

	Consolidated Statements of Comprehensive Income (unaudited) for the three and ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~			6

	Consolidated Statements of Cash Flows (unaudited) for the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~			7

	Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited) for the three months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~			8

	Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited) for the ~~nine~~six months ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~			9

	Condensed Notes to Consolidated Financial Statements (unaudited)				10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34		31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44		42

Item 4.	Controls and Procedures		44		42

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		45		43

Item 1A.	Risk Factors		45		43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		45		44

Item 6.	Exhibits		46		45

	Signature		47		46


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance June 30, 2018		160,298	$	1,603	$	1,798,708	$	5,669,039	$	(5,361,355	)	$	(132,901	)	$	1,975,094
Net income		—		—		—		141,014		—			—			141,014
Other comprehensive income		—		—		—		—		—			7,108			7,108
Issuance of common stock for employees:
Employee Stock Purchase Plan		10		—		1,789		—		—			—			1,789
Stock options exercised		52		1		5,743		—		—			—			5,744
Treasury stock		—		—		—		—		(263,505	)		—			(263,505	)
Stock-based compensation		8		—		9,188		—		—			—			9,188

Balance September 29, 2018		160,368	$	1,604	$	1,815,428	$	5,810,053	$	(5,624,860	)	$	(125,793	)	$	1,876,432


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (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


	Total at September 28, 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		213		—		213		—
Waters 401(k) Restoration Plan assets		32,796		32,796		—		—
Foreign currency exchange contracts		66		—		66		—
Interest rate cross-currency swap agreements		16,945		—		16,945		—

Total	$	50,020	$	32,796	$	17,224	$	—

Liabilities:
Contingent consideration	$	2,822	$	—	$	—	$	2,822
Foreign currency exchange contracts		826		—		826		—

Total	$	3,648	$	—	$	826	$	2,822


	Total at December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury securities	$	164,315	$	—	$	164,315	$	—
Foreign government securities		3,463		—		3,463		—
Corporate debt securities		723,059		—		723,059		—
Time deposits		108,638		—		108,638		—
Waters 401(k) Restoration Plan assets		33,104		33,104		—		—
Foreign currency exchange contracts		503		—		503		—
Interest rate cross-currency swap agreements		1,093				1,093

Total	$	1,034,175	$	33,104	$	1,001,071	$	—

Liabilities:
Contingent consideration	$	2,476	$	—	$	—	$	2,476
Foreign currency exchange contracts		224		—		224		—

Total	$	2,700	$	—	$	224	$	2,476

	Financial	Three Months Ended						Nine Months Ended
	Statement Classification	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018
Foreign currency exchange contracts:
Realized losses on closed contracts	Cost of sales	$	(3,340	)	$	(23	)	$	(5,858	)	$	(2,158	)
Unrealized losses on open contracts	Cost of sales		(633	)		(5	)		(1,040	)		(1,092	)

Cumulative net pre-tax losses	Cost of sales	$	(3,973	)	$	(28	)	$	(6,898	)	$	(3,250	)

Interest rate cross-currency swap agreements:
Interest earned	Interest income	$	2,698		$	927		$	7,848		$	927
Unrealized gains on open contracts	Stockholders’ equity	$	15,847		$	767		$	15,852		$	767


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


	September 28, 2019			December 31, 2018
Foreign subsidiary lines of credit	$	58		$	178
Senior unsecured notes - Series B - 5.00%, due February 2020		100,000			—
Total notes payable and debt, current		100,058			178
Senior unsecured notes - Series B - 5.00%, due February 2020		—			100,000
Senior unsecured notes - Series E - 3.97%, due March 2021		50,000			50,000
Senior unsecured notes - Series F - 3.40%, due June 2021		100,000			100,000
Senior unsecured notes - Series G - 3.92%, due June 2024		50,000			50,000
Senior unsecured notes - Series H - floating rate*, due June 2024		50,000			50,000
Senior unsecured notes - Series I - 3.13%, due May 2023		50,000			50,000
Senior unsecured notes - Series K - 3.44%, due May 2026		160,000			160,000
Senior unsecured notes - Series L - 3.31%, due September 2026		200,000			—
Senior unsecured notes - Series M - 3.53%, due September 2029		300,000			—
Credit agreement		300,000			590,000
Unamortized debt issuance costs		(4,399	)		(1,828	)
Total long-term debt		1,255,601			1,148,172
Total debt	$	1,355,659		$	1,148,350


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

Total future minimum lease payments	$	102,958


	Financial Statement Classification	September 28, 2019
Assets:
Property operating lease assets	Operating lease assets	$	57,028
Automobile operating lease assets	Operating lease assets		26,122
Equipment operating lease assets	Operating lease assets		1,962

Total lease assets		$	85,112

Liabilities:
Current operating lease liabilities	Current operating lease liabilities	$	23,936
Long-term operating lease liabilities	Long-term operating lease liabilities		61,372

Total lease liabilities		$	85,308


2019 (remaining 3 months)	$	6,600
2020		22,727
2021		15,418
2022		8,538
2023		5,931
2024 and thereafter		38,482

Total future minimum lease payments		97,696
Less: amount of lease payments representing interest		(12,388	)

Present value of future minimum lease payments		85,308
Less: current operating lease liabilities		(23,936	)

Long-term operating lease liabilities	$	61,372


	Number of Shares			Exercise Price per Share						Weighted-Average Exercise Price per Share
Outstanding at December 31, 2018		1,790			$	38.09	to	$	208.47	$	142.47
Granted		139			$	183.41	to	$	238.52	$	231.30
Exercised		(256	)		$	38.09	to	$	208.47	$	111.11
Canceled		(74	)		$	113.36	to	$	238.52	$	159.17

Outstanding at September 28, 2019		1,599			$	38.09	to	$	238.52	$	154.44


	Shares			Weighted-Average Fair Value per Share
Unvested at December 31, 2018		304		$	153.31
Granted		84		$	235.95
Vested		(104	)	$	138.95
Forfeited		(23	)	$	168.73

Unvested at September 28, 2019		261		$	184.27


	Three Months Ended September 29, 2018
	Net Income		Weighted- Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	141,014		76,575	$	1.84
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		561		(0.01	)

Net income per diluted common share	$	141,014		77,136	$	1.83


	Nine Months Ended September 28, 2019
	Net Income		Weighted- Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	391,529		68,952	$	5.68
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		581		(0.05	)

Net income per diluted common share	$	391,529		69,533	$	5.63


	Nine Months Ended September 29, 2018
	Net Income		Weighted- Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	408,642		77,741	$	5.26
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		654		(0.05	)

Net income per diluted common share	$	408,642		78,395	$	5.21


	Currency Translation			Unrealized Gain (Loss) on Retirement Plans			Unrealized Gain (Loss) on Investments			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2018	$	(105,697	)	$	(9,869	)	$	(2,405	)	$	(117,971	)
Other comprehensive (loss) income, net of tax		(4,403	)		449			2,344			(1,610	)

Balance at September 28, 2019	$	(110,100	)	$	(9,420	)	$	(61	)	$	(119,581	)