Waters Earnings 2021-04-03

Waters Earnings 2021-04-03

WAT 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 3, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number:

01-14010

Waters Corporation

(Exact name of registrant as specified in its charter)


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

34 Maple Street

Milford, Massachusetts 01757

(Address, including zip code, of principal executive offices)

(508) 478-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	WAT	New York Stock Exchange, Inc.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒

No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of

Regulation S-T

(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such

files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in

Rule 12b-2

of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in

Rule 12b-2

of the Act). Yes ☐

No ☒

Indicate the number of shares outstanding of the registrant’s common stock as of April 30, 2021: 61,700,498

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WATERS CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM

10-Q

INDEX


		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets (unaudited) as of April 3, 2021 and December 31, 2020		3
	Consolidated Statements of Operations (unaudited) for the three months ended April 3, 2021 and March 28, 2020		4
	Consolidated Statements of Comprehensive Income (unaudited) for the three months ended April 3, 2021 and March 28, 2020		5
	Consolidated Statements of Cash Flows (unaudited) for the three months ended April 3, 2021 and March 28, 2020		6
	Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited) for the three months ended April 3, 2021 and March 28, 2020		7
	Condensed Notes to Consolidated Financial Statements (unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		37
Item 4.	Controls and Procedures		37

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		38
Item 1A.	Risk Factors		38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 6.	Exhibits		39
	Signature		40

Table of Contents

Item 1:

Financial Statements

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)


	April 3, 2021			December 31, 2020
	(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	683,783		$	436,695
Investments		125,986			6,451
Accounts receivable, net		550,677			573,316
Inventories		327,967			304,281
Other current assets		79,510			80,290

Total current assets		1,767,923			1,401,033
Property, plant and equipment, net		513,719			494,003
Intangible assets, net		240,853			258,645
Goodwill		438,139			444,362
Operating lease assets		88,283			93,252
Other assets		162,646			148,625

Total assets	$	3,211,563		$	2,839,920


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and debt	$	100,000		$	150,000
Accounts payable		81,511			72,212
Accrued employee compensation		35,104			72,166
Deferred revenue and customer advances		280,848			198,240
Current operating lease liabilities		26,908			27,764
Accrued income taxes		82,642			76,558
Accrued warranty		10,705			10,950
Other current liabilities		167,331			197,093

Total current liabilities		785,049			804,983
Long-term liabilities:
Long-term debt		1,603,090			1,206,515
Long-term portion of retirement benefits		72,756			72,620
Long-term income tax liabilities		357,824			357,493
Long-term operating lease liabilities		61,503			68,197
Other long-term liabilities		100,379			97,968

Total long-term liabilities		2,195,552			1,802,793

Total liabilities		2,980,601			2,607,776

Commitments and contingencies (Notes 6 , 7 and 1 1 )

Stockholders’ equity:
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at April 3, 2021 and December 31, 2020		—			—
Common stock, par value $0.01 per share, 400,000 shares authorized, 161,859 and 161,666 shares issued, 61,847 and 62,309 shares outstanding at April 3, 2021 and December 31, 2020, respectively		1,619			1,617
Additional paid-in capital		2,054,076			2,029,465
Retained earnings		7,256,116			7,107,989
Treasury stock, at cost, 100,012 and 99,357 shares at April 3, 2021 and December 31, 2020, respectively		(8,969,643	)		(8,788,984	)
Accumulated other comprehensive loss		(111,206	)		(117,943	)

Total stockholders’ equity		230,962			232,144

Total liabilities and stockholders’ equity	$	3,211,563		$	2,839,920

The accompanying notes are an integral part of the interim consolidated financial statements.

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended
	April 3, 2021			March 28, 2020
	(In thousands, except per share data)
Revenues:
Product sales	$	382,022		$	274,183

Service sales		226,523			190,756


Total net sales		608,545			464,939

Costs and operating expenses:
Cost of product sales		158,876			119,839

Cost of service sales		95,271			90,805

Selling and administrative expenses		143,196			147,735

Research and development expenses		38,092			34,989

Purchased intangibles amortization		1,840			2,625

Litigation provision		—			666


Total costs and operating expenses		437,275			396,659


Operating income		171,270			68,280

Other income (expense ), net		9,359			(374	)

Interest expense		(10,946	)		(14,079	)

Interest income		4,101			4,036


Income before income taxes		173,784			57,863

Provision for income taxes		25,657			4,301


Net income	$	148,127		$	53,562


Net income per basic common share	$	2.38		$	0.86

Weighted-average number of basic common shares		62,260			62,232

Net income per diluted common share	$	2.37		$	0.86

Weighted-average number of diluted common shares and equivalents		62,632			62,626

The accompanying notes are an integral part of the interim consolidated financial statements.

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Three Months Ended
	April 3, 2021			March 28, 2020
	(In thousands)
Net income	$	148,127		$	53,562

Other comprehensive income (loss):

Foreign currency translation		5,825			(19,344	)

Unrealized losses on investments before income taxes		(10	)		—

Unrealized losses on investments, net of tax		(10	)		—

Retirement liability adjustment before reclassifications		1,054			296
Amounts reclassified to other income		216			340

Retirement liability adjustment before income taxes		1,270			636
Income tax expense		(348	)		(238	)

Retirement liability adjustment, net of tax		922			398

Other comprehensive income (loss)		6,737			(18,946	)

Comprehensive income	$	154,864		$	34,616

The accompanying notes are an integral part of the interim consolidated financial statements.

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Three Months Ended
	April 3, 2021			March 28, 2020
	(In thousands)
Cash flows from operating activities:
Net income	$	148,127		$	53,562
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		8,305			9,196
Deferred income taxes		2,787			(2,525	)
Depreciation		16,343			15,708
Amortization of intangibles		15,013			13,480
Change in operating assets and liabilities:
Decrease in accounts receivable		7,945			54,026
Increase in inventories		(30,544	)		(29,399	)
Increase in other current assets		(3,080	)		(5,036	)
(Increase) decrease in other assets		(4,219	)		2,745
Decrease in accounts payable and other current liabilities		(29,758	)		(15,825	)
Increase in deferred revenue and customer advances		89,048			46,465
(Decrease) increase in other liabilities		(1,563	)		9,238

Net cash provided by operating activities		218,404			151,635
Cash flows from investing activities:
Additions to property, plant, equipment and software capitalization		(39,503	)		(51,130	)
Business acquisitions, net of cash acquired		—			(76,664	)
Purchases of investments		(122,640	)		(3,520	)
Maturities and sales of investments		3,139			1,139

Net cash used in investing activities		(159,004	)		(130,175	)
Cash flows from financing activities:
Proceeds from debt issuances		500,000			315,000
Payments on debt		(150,000	)		(100,366	)
Payments of debt issuance costs		(3,637	)		—
Proceeds from stock plans		16,295			11,743
Purchases of treasury shares		(173,305	)		(196,226	)
(Payments for) proceeds from derivative contracts		(578	)		2,767

Net cash provided by financing activities		188,775			32,918
Effect of exchange rate changes on cash and cash equivalents		(1,087	)		(32	)

Increase in cash and cash equivalents		247,088			54,346
Cash and cash equivalents at beginning of period		436,695			335,715

Cash and cash equivalents at end of period	$	683,783		$	390,061

The accompanying notes are an integral part of the interim consolidated financial statements.

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited, in thousands)


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Deficit
Balance December 31, 2019		161,030	$	1,610	$	1,926,753	$	6,587,403		$	(8,612,576	)	$	(119,471	)	$	(216,281	)
Net income		—		—		—		53,562			—			—			53,562
Adoption of new accounting pronouncement		—		—		—		(985	)		—			—			(985	)
Other comprehensive loss		—		—		—		—			—			(18,946	)		(18,946	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		9		—		1,736		—			—			—			1,736
Stock options exercised		81		1		10,124		—			—			—			10,125
Treasury stock		—		—		—		—			(176,225	)		—			(176,225	)
Stock-based compensation		133		2		9,013		—			—			—			9,015

Balance March 28, 2020		161,253	$	1,613	$	1,947,626	$	6,639,980		$	(8,788,801	)	$	(138,417	)	$	(337,999	)


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance December 31, 2020		161,666	$	1,617	$	2,029,465	$	7,107,989		$	(8,788,984	)	$	(117,943	)	$	232,144
Net income		—		—		—		148,127			—			—			148,127
Other comprehensive income		—		—		—		—			—			6,737			6,737
Issuance of common stock for employees:
Employee Stock Purchase Plan		11				1,855		—			—			—			1,855
Stock options exercised		95		1		15,129		—			—			—			15,130
Treasury stock		—		—		—		—			(180,659	)		—			(180,659	)
Stock-based compensation		87		1		7,627		—			—			—			7,628

Balance April 3, 2021		161,859	$	1,619	$	2,054,076	$	7,256,116		$	(8,969,643	)	$	(111,206	)	$	230,962

The accompanying notes are an integral part of the consolidated financial statements.

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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 first fiscal quarters for 2021 and 2020 ended on April 3, 2021 and March 28, 2020, respectively.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on

Form

10-Q

and do not include all of the information and footnote disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions.

It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on

Form 10-K

for the year ended December 31, 2020, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 24, 2021.

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 affected by the ongoing global

COVID-19

pandemic and the resulting volatility and uncertainty it has caused in the U.S. and international markets. Since being declared a pandemic in March 2020 by the World Health Organization,

COVID-19

has continued to spread throughout the U.S. and globally. The

COVID-19

pandemic has caused significant volatility and uncertainty in U.S. and international markets, which has disrupted and is expected to continue to disrupt the Company’s business and could result in a prolonged economic downturn. The Company operates in over 35 countries, including those in regions most impacted by the

COVID-19

pandemic.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 of the Company’s employees, suppliers, manufacturing, or customers could materially impact its consolidated financial position, results of operations or cash flows.

Translation of Foreign Currencies

The functional currency of each of the Company’s foreign operating subsidiaries is the local currency of its country of domicile, except for the Company’s subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity’s cash flows.

For the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets.

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 April 3, 2021 and December 31, 2020, $317 million out of $810 million and $364 million out of $443 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $256 million out of $810 million and $254 million out of $443 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at April 3, 2021 and December 31, 2020, respectively.

Accounts Receivable and Allowance for Credit Losses

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any off-balance sheet credit exposure related to its customers.

Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to

re-possess,

refurbish and

re-sell

the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss.

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

The following is a summary of the activity of the Company’s allowance for credit losses for the three months ended April 3, 2021 and March 28, 2020 (in thousands):


	Balance at Beginning of Period		Impact of CECL Adoption		Additions		Deductions			Balance at End of Period


Allowance for Credit Losses
April 3, 2021	$	14,381	$	—	$	775	$	(1,561	)	$	13,595
March 28, 2020	$	9,560	$	985	$	3,506	$	(1,749	)	$	12,302

Other Investments

During the three months ended April 3, 2021, the Company recorded an unrealized gain on an equity security still held at the reporting date of approximately $10 million within other income (expense) on the income statement. This unrealized gain was recorded as an upward 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 April 3, 2021 and December 31, 2020. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions.

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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 April 3, 2021 (in thousands):


	Total at April 3, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)





Assets:
U.S. Treasury securities	$	12,061	$	—	$	12,061	$	—
Corporate debt securities		119,800		—		119,800		—
Time deposits		58,712		—		58,712		—
Waters 401(k) Restoration Plan assets		39,605		39,605		—		—
Foreign currency exchange contracts		208		—		208		—

Total	$	230,386	$	39,605	$	190,781	$	—


Liabilities:
Contingent consideration	$	1,225	$	—	$	—	$	1,225
Foreign currency exchange contracts		241		—		241		—
Interest rate cross-currency swap agreements		20,030		—		20,030		—

Total	$	21,496	$	—	$	20,271	$	1,225

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2020 (in thousands):


	Total at December 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)





Assets:
Time deposits	$	6,451	$	—	$	6,451	$	—
Waters 401(k) Restoration Plan assets		38,988		38,988		—		—
Foreign currency exchange contracts		836		—		836		—

Total	$	46,275	$	38,988	$	7,287	$	—


Liabilities:
Contingent consideration	$	1,185	$	—	$	—	$	1,185
Foreign currency exchange contracts		185		—		185		—
Interest rate cross-currency swap agreements		44,996		—		44,996		—

Total	$	46,366	$	—	$	45,181	$	1,185

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

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 have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources.

Fair Value of Contingent Consideration

The fair value of the Company’s liability for contingent consideration relates to earnout payments in connection with the December 2020 acquisition of Integrated Software Solutions (“ISS”) and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the 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.

The fair value of future contingent consideration payments related to the December 2020 acquisition of ISS was estimated to be

million at both
April 3, 2021 and December 31, 2020. The fair value is based on the achievement of certain revenue and customer account milestones over the two
years after the acquisition date.

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 $1.4 billion and $910 million at April 3, 2021 and December 31, 2020, respectively. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $1.3 billion and $1.0 billion at April 3, 2021 and December 31, 2020, respectively, using Level 2 inputs.

Derivative Transactions

The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its

non-U.S.

dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.

The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.

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.

Interest Rate Cross-Currency Swap Agreements

As of April 3, 2021, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $520 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive income in stockholders’ equity (deficit) until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.

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):


	April 3, 2021					December 31, 2020
	Notional Value		Fair Value			Notional Value		Fair Value
Foreign currency exchange contracts:
Other current assets	$	36,131	$	208		$	66,690	$	836
Other current liabilities	$	25,423	$	241		$	20,000	$	185

Interest rate cross-currency swap agreements:
Other liabilities	$	520,000	$	(20,030	)	$	560,000	$	(44,996	)
Accumulated other comprehensive loss			$	23,751				$	44,996

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
	Statement Classification	April 3, 2021			March 28, 2020
Foreign currency exchange contracts:

Realized gains (losses) on closed contracts	Cost of sales	$	1,667		$	(2,981	)
Unrealized (losses) gains on open contracts	Cost of sales		(753	)		1,325

Cumulative net pre-tax gains (losses)	Cost of sales	$	914		$	(1,656	)


Interest rate cross-currency swap agreements:
Interest earned	Interest income	$	3,827		$	3,714
Unrealized gains on contracts, net	Stockholders’ equity (deficit)	$	21,244		$	5,522

Table of Contents

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 program replaced the remaining amounts available from the

pre-existing

program. During the three months ended April 3, 2021 and March 28, 2020, the Company repurchased 0.6 million and 0.8 million shares of the Company’s outstanding common stock at a cost of $173 million and $167

million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the

Company
repurchased

$8 million and $9

million of common stock related to the vesting of restricted stock units during the three months ended April 3, 2021 and March 28, 2020, respectively. As of April 3, 2021, the Company had repurchased an aggregate of 11.8 million shares at a cost of $2.6 billion under the January 2019 repurchase program and had a total of $1.4 billion authorized for future repurchases. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023.

The Company had $7 million of treasury stock purchases that were accrued and unsettled at April 3, 2021. These transactions were settled in April 2021, during the Company’s second quarter.

The Company had $20

million of treasury stock purchases that were accrued and unsettled at December 31, 2019. These transactions were settled in January 2020. The Company did not have any unsettled treasury stock purchases as of December 31, 2020 or March 28, 2020.

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 three months ended April 3, 2021 and March 28, 2020 (in thousands):


	Balance at Beginning of Period		Accruals for Warranties		Settlements Made			Balance at End of Period


Accrued warranty liability:
April 3, 2021	$	10,950	$	2,337	$	(2,582	)	$	10,705
March 28, 2020	$	11,964	$	1,671	$	(2,619	)	$	11,016

Restructuring

In January 2020, the Company made organizational changes to better align its resources with its growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 3% of the Company’s employees.

During the three months ended March 28, 2020, the Company
incurred

$18

million of severance-related costs, lease termination costs and other related costs. The Company did not incur any restructuring charges during the three months ended April 3, 2021.

2 Revenue Recognition

The Company’s deferred revenue liabilities on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.

Table of Contents

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

The following is a summary of the activity of the Company’s deferred revenue and customer advances for the three months ended April 3, 2021 and March 28, 2020 (in thousands):


	April 3, 2021			March 28, 2020
Balance at the beginning of the period	$	239,759		$	213,695
Recognition of revenue included in balance at beginning of the period		(94,078	)		(82,604	)
Revenue deferred during the period, net of revenue recognized		182,384			138,430

Balance at the end of the period	$	328,065		$	269,521

The Company classified $47 million and $42 million of deferred revenue and customer advances in other long-term liabilities at April 3, 2021 and December 31, 2020, respectively.

The amount of deferred revenue and customer advances equals the transaction price allocated to unfulfilled performance obligations for the period presented. Such amounts are expected to be recognized in the future as follows (in thousands):


	April 3, 2021
Deferred revenue and customer advances expected to be recognized in:
One year or less	$	280,848
13-24 months		25,860
25 months and beyond		21,357

Total	$	328,065

3 Marketable Securities

The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):


	April 3, 2021
	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
U.S. Treasury securities	$	12,061	$	—	$	—		$	12,061
Corporate debt securities		119,810		7		(17	)		119,800
Time deposits		58,712		—		—			58,712

Total	$	190,583	$	7	$	(17	)	$	190,573


Amounts included in:
Cash equivalents	$	64,590	$	1	$	(4	)	$	64,587
Investments		125,993		6		(13	)		125,986

Total	$	190,583	$	7	$	(17	)	$	190,573


	December 31, 2020
	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
Time deposits		6,451		—		—			6,451

Total	$	6,451	$	—	$	—		$	6,451


Amounts included in:
Investments		6,451		—		—			6,451

Total	$	6,451	$	—	$	—		$	6,451

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):


	April 3, 2021		December 31, 2020
Due in one year or less	$	164,762	$	6,451
Due after one year through three years		25,811		—

Total	$	190,573	$	6,451

4 Inventories

Inventories are classified as follows (in thousands):


	April 3, 2021		December 31, 2020
Raw materials	$	141,600	$	133,490
Work in progress		21,689		18,678
Finished goods		164,678		152,113

Total inventories	$	327,967	$	304,281

5 Goodwill and Other Intangibles

The carrying amount of goodwill was $438 million and $444 million at April 3, 2021 and December 31, 2020, respectively. The effect of foreign currency translation decreased goodwill by $6 million.

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


	April 3, 2021						December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period		Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period



Capitalized software	$	563,157	$	403,614		5 years	$	584,452	$	409,847		5 years
Purchased intangibles		202,828		160,028		11 years		205,585		160,342		11 years
Trademarks		9,680		—		—		9,680		—		—
Licenses		5,960		5,773		6 years		5,923		5,697		6 years
Patents and other intangibles		92,321		63,678		8 years		90,699		61,808		8 years

Total	$	873,946	$	633,093		7 years	$	896,339	$	637,694		7 years

The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $27 million and $19 million, respectively, in the three months ended April 3, 2021 due to the effects of foreign currency translation. Amortization expense for intangible assets was $15 million and $13 million for the three months ended April 3, 2021 and March 28, 2020, respectively. Amortization expense for intangible assets is estimated to be $62 million per year for each of the next five years.

Table of Contents

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

6 Debt

In March 2021, the Company issued the following senior unsecured notes:


Senior Unsecured Notes	Term	Interest Rate	Face Value (in millions)		Maturity Date

Series N	5 years	1.68%	$	100	March 2026
Series O	10 years	2.25%	$	400	March 2031

The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes. Interest on the Series N and O Senior Notes is payable semi-annually. The Company may prepay some or all of the Senior Notes at any time in an amount not less than 10% of the aggregate principal amount of the Senior Notes then outstanding, plus the applicable make-whole amount for Series N and O Senior Notes, in each case, upon no more than 60 nor less than 20 days’ written notice to the holders of the Senior Notes.

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

In November 2017, the Company entered into a credit agreement (the “2017 Credit Agreement”) that provides for a $1.5 billion revolving facility and a $300 million term loan. As of April 3, 2021 and December 31, 2020, the revolving facility and term loan had a total of $300 million and $400 million, respectively, outstanding and mature on November 30, 2022 and require no scheduled prepayments before that date.

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

As of April 3, 2021 and December 31, 2020, the Company had a total of $1.4 billion and $1.0 billion, respectively, of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for the Series H senior unsecured note. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest.

These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.

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)

The Company had the following outstanding debt at April 3, 2021 and December 31, 2020 (in thousands):


	April 3, 2021			December 31, 2020
Senior unsecured notes - Series E - 3.97%, due March 2021		—			50,000
Senior unsecured notes - Series F - 3.40%, due June 2021		100,000			100,000

Total notes payable and debt, current		100,000			150,000

Senior unsecured notes - Series G - 3.92%, due June 2024		50,000			50,000
Senior unsecured notes - Series H - floating rate*, due June 2024		50,000			50,000
Senior unsecured notes - Series I - 3.13%, due May 2023		50,000			50,000
Senior unsecured notes - Series K - 3.44%, due May 2026		160,000			160,000
Senior unsecured notes - Series L - 3.31%, due September 2026		200,000			200,000
Senior unsecured notes - Series M - 3.53%, due September 2029		300,000			300,000
Senior unsecured notes - Series N - 1.68%, due March 2026		100,000			—
Senior unsecured notes - Series O - 2.25%, due March 2031		400,000			—
Credit agreement		300,000			400,000
Unamortized debt issuance costs		(6,910	)		(3,485	)

Total long-term debt		1,603,090			1,206,515

Total debt	$	1,703,090		$	1,356,515

*	Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.25%.

As of April 3, 2021 and December 31, 2020, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1.5 billion and $1.4 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.68% and 2.92% at April 3, 2021 and December 31, 2020, respectively. As of April 3, 2021, the Company was in compliance with all debt covenants.

The Company and its foreign subsidiaries also had available short-term lines of credit totaling $122 million and $109 million at April 3, 2021 and December 31, 2020, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of April 3, 2021

December 31, 2020.

investments.

7 Income Taxes

Price	222.53	EPS	6
Shares	70	P/E	40
MCap	15,473	P/FCF	34
Net Debt	851	EBIT	513
TEV	16,324	TEV/EBIT	32
TTM 2019-09-28, in MM, except price, ratios

10-Q	2021-04-03	Filed 2021-05-06
10-K	2020-12-31	Filed 2021-02-24
10-Q	2020-09-26	Filed 2020-10-28
10-Q	2020-06-27	Filed 2020-07-29
10-Q	2020-03-28	Filed 2020-04-29
10-K	2019-12-31	Filed 2020-02-25
10-Q	2019-09-28	Filed 2019-10-30
10-Q	2019-06-29	Filed 2019-07-31
10-Q	2019-03-30	Filed 2019-05-03
10-K	2018-12-31	Filed 2019-02-26
10-Q	2018-09-29	Filed 2018-11-02
10-Q	2018-06-30	Filed 2018-08-03
10-Q	2018-03-31	Filed 2018-05-04
10-K	2017-12-31	Filed 2018-02-27
10-Q	2017-09-30	Filed 2017-11-03
10-Q	2017-07-01	Filed 2017-08-04
10-Q	2017-04-01	Filed 2017-05-05
10-K	2016-12-31	Filed 2017-02-24
10-Q	2016-10-01	Filed 2016-11-04
10-Q	2016-07-02	Filed 2016-08-05
10-Q	2016-04-02	Filed 2016-05-06
10-K	2015-12-31	Filed 2016-02-26
10-Q	2015-10-03	Filed 2015-11-06
10-Q	2015-07-04	Filed 2015-08-07
10-Q	2015-04-04	Filed 2015-05-08
10-K	2014-12-31	Filed 2015-02-27
10-Q	2014-09-27	Filed 2014-10-31
10-Q	2014-06-28	Filed 2014-08-01
10-Q	2014-03-29	Filed 2014-05-02
10-K	2013-12-31	Filed 2014-02-27
10-Q	2013-09-28	Filed 2013-11-01
10-Q	2013-06-29	Filed 2013-08-01
10-Q	2013-03-30	Filed 2013-05-03
10-K	2012-12-31	Filed 2013-02-26
10-Q	2012-09-29	Filed 2012-11-02
10-Q	2012-06-30	Filed 2012-08-03
10-Q	2012-03-31	Filed 2012-05-04
10-K	2011-12-31	Filed 2012-02-24
10-Q	2011-10-01	Filed 2011-11-04
10-Q	2011-07-02	Filed 2011-08-05
10-Q	2011-04-02	Filed 2011-05-06
10-Q	2010-10-02	Filed 2010-11-05
10-Q	2010-07-03	Filed 2010-08-06
10-Q	2010-04-03	Filed 2010-05-07
10-K	2009-12-31	Filed 2010-02-26

8-K	2020-10-27
8-K	2020-10-08
8-K	2020-08-17
8-K	2020-07-28
8-K	2020-07-14
8-K	2020-06-17
8-K	2020-05-12
8-K	2020-04-28
8-K	2020-02-17
8-K	2020-02-04
8-K	2019-10-29
8-K	2019-09-12
8-K	2019-07-30
8-K	2019-05-14
8-K	2019-04-23
8-K	2019-01-23
8-K	2018-10-23
8-K	2018-09-01
8-K	2018-07-24
8-K	2018-05-09
8-K	2018-05-09
8-K	2018-04-24
8-K	2018-01-23

EX-10.2	d172825dex102.htm
EX-10.3	d172825dex103.htm
EX-10.4	d172825dex104.htm
EX-10.5	d172825dex105.htm
EX-10.6	d172825dex106.htm
EX-31.1	d172825dex311.htm
EX-31.2	d172825dex312.htm
EX-32.1	d172825dex321.htm
EX-32.2	d172825dex322.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company