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Basis of Presentation and Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2017
Basis of Presentation and Summary of Significant Accounting Policies [Abstract] |
Basis of Presentation and Summary of Significant Accounting Policies | 2 Basis of Presentation and Summary of Significant Accounting Policies Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. On an ongoing basis, the Company evaluates its estimates, inc luding those related to revenue recognition, product returns and allowances, bad debts, inventory valuation, goodwill and intangible assets, income taxes, warranty and installation provisions, litigation, retirement plan obligations, stock-based compensati on, equity investments and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about t he carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions or conditions. Risks and Uncertainties The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. The Company consolidates entities in which it owns or controls fifty percent or more of the voting shares. All inter-company balances and transactions have been eliminated. Translation of Foreign Currencies The functional currency of each of the Company’s foreign operating subsidiaries is the local currency of its country of domicile, except for the Company’s subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respectiv e 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 preva iling during the period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets. The Company’s net sales derived from operations outside the United States were 71%, 69% and 68% in 2017, 2016 and 2015, respectively. Gains and losses from foreign currency transactions are included in net income in the consolidated statements of ope rations. In 2017, 2016 and 2015 foreign currency transactions resulted in net losses of $1 million and $4 million, and a net gain of $3 million, respec tively. Seasonality of Business The Company typically experiences an increase in sales in the fourth quarter, as a result of purchasing habits for capital goods of customers that tend to ex haust their spending budgets by calendar year end. Cash, Cash Equivalents and Investments Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, primarily in bank deposits, U.S. treasury bill money market funds and commercial paper. Investments with longer maturities are classified as investments, and are held primarily in U.S. treasury bills, U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities. Investments are classified as avail able-for-sale in accordance with the accounting standards for investments in debt and equity securities. All available-for-sale securities are recorded at fair market value and any unrealized holding gains and losses, to the extent deemed temporary, are in cluded in accumulated other comprehensive income in stockholders’ equity, net of the related tax effects. If any adjustment to fair value reflects a decline in the value of the investment, the Company considers all available evidence to evaluate the extent to which the decline is “other than temporary” and, if so, records a loss as a charge to the statement of operations. The Company classifies its investments exclusive of those categorized as cash equivalents. The Company maintains cash balan ces in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of December 31, 2017 and 2016, $3,326 million out of $3,394 million and $2,766 million out of $2,813 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $304 million out of $3,394 million and $261 million out of $2,813 million of cash, cash equivalents and investments were held in currencies oth er than the U.S. dollar at December 31, 2017 and 2016, respectively. Accounts Receivable and Allowance for Doubtful Accounts Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Th e 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 historical experience and the customer’s credit-worthiness. The allowance for doubtful accounts is reviewed on at least a quarterly basis. Past due balances over 90 days and over a specified amount are reviewed individually for colle ctibility. Account balances are charged against the allowance when the Company determines it is probable that the receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its customers. The allowance for s ales returns is the best estimate of the amount of future product returns related to current period revenue and is based on historical experience. The following is a summary of the activity of the Company’s allowance for doubtful accounts and sales returns for the years ended December 31, 2017, 2016 and 2015 (in thousands):
|  |  | Balance at |  |  |  |  |  | Balance at
|  |  | Beginning |  |  |  |  |  | End of
|  |  | of Period |  | Additions |  | Deductions |  | Period
Allowance for Doubtful Accounts and Sales |  |  |  |  |  |  |  |  |  |  |  |
| Returns: |  |  |  |  |  |  |  |  |  |  |  |
| 2017 |  | $ | 8,657 |  | $ | 9,059 |  | $ | (8,386) |  | $ | 9,330
| 2016 |  | $ | 7,496 |  | $ | 6,912 |  | $ | (5,751) |  | $ | 8,657
| 2015 |  | $ | 7,179 |  | $ | 6,739 |  | $ | (6,422) |  | $ | 7,496
Concentration of Credit Risk The Company sells its products and services to a significant number of large and small customers throughout the world, with net sales to the pharmaceutical industry of approximately 56% in both 2017 and 2016 and 54% in 2015. None of the Company’s individual customers accounted for more than 2% of annual Company sales in 2017, 2016 or 2015. The Company performs con tinuing credit evaluations of its customers and generally does not require collateral, but in certain circumstances may require letters of credit or deposits. Historically, the Company has not experienced significant bad debt losses. Inventory The Company values all of its inventories at the lower of cost or net realizable value on a first-in, first-out basis (“FIFO”). Income Taxes Deferred income taxes are recognized for temporary differences between the financial statement and income tax basis of assets and liabilities using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Appropriate long-term liabilities have also been recor ded to recognize uncertain tax return reporting positions. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to expense, while the costs of significant improvements are capitalized. Depreciation is provided using the straight-line method over the following estimated useful lives: buildings — fifteen to thirty years; building improvements — five to ten years; leasehold improvements — the shorter of the economic useful life or life of lease; and production and other equi pment — three to ten years. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the consolidated balance sheets and related gains or losses are reflected in the consolidated statements of operations. Asset Impairments The Company reviews its long-lived assets for impairment in accordance with the accounting standards for property, plant and equipment. Whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable, the Company evaluates the recoverability of the carrying value of the asset based on the expected future cash flows, relying on a number of factors, including, but not limited to, operating results, business plans, economic projec tions and anticipated future cash flows. If the asset is deemed not recoverable, it is written down to fair value and the impairment is recorded in the consolidated statements of operations. Business Combinations and Asset Acquisitions The Company accounts for business acquisitions under the accounting standard s for business combinations. T he results of each acquisition are included in the Company’s consolidated results as of the acquisition date and the purchase price of an acquisition is allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values. Any excess of the fair value consideration transferred over the estimated fair values of the net ass ets acquired is recognized as goodwill. Acquired in-process research and development (“IPR&D”) included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acqui sition are expensed as incur red and acquired IPR&D is tested for impairment annually until completion of the acquired programs. Upon commercialization, this indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life, subject to periodi c impairment reviews. If the research and development project is abandoned, the indefinite-lived asset is charged to expense. Legal costs, due diligence costs, business valuation costs and all other b usiness acquisition costs are expensed when incurred. The Company also acquires intellectual property through licensing arrangements. These arrangements often require upfront payments and may include additional milestone or royalty payments, contingent up on certain future events. I PR&D acquired in an asset acquisition (as opposed to a business combination) is expensed immediately unless there is an alternative future use. Subsequent payments made for the achievement of milestones are evaluated to determine whether they have an alternative future use or should be expensed. Payments made to third parties subsequent to commercialization are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets. Goodwill and Other Intangible Assets The Company tests for goodwill impairment using a fair-value approach at the reporting unit level annually, or earlier, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Additionally, the Company performs an annual goodwill impairment assessment for its reporting units as of January 1 each year. The goodwill and other intangible assets accounting standards define a reporting u nit as an operating segment, or one level below an operating segment, if discrete financial information is prepared and reviewed by management. For goodwill impairment review purposes, the Company has two reporting units: Waters® and TA®. Goodwill is alloca ted to the reporting units at the time of acquisition. Under the impairment test, if a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the extent that the carrying amount of goodwill exceeds the impli ed fair value of the goodwill. The fair value of reporting units was estimated using a discounted cash flows technique, which includes certain management assumptions, such as estimated future cash flows, estimated growth rates and discount rates. The Comp any’s intangible assets include purchased technology; capitalized software development costs; costs associated with acquiring Company patents, trademarks and intellectual properties, such as licenses; debt issuance costs and acquired IPR&D. Purchased intan gibles are recorded at their fair market values as of the acquisition date and amortized over their estimated useful lives, ranging from one to fifteen years. Other intangibles are amortized over a period ranging from one to ten years. Debt issuance costs are amortized over the life of the related debt. Acquired IPR&D is amortized from the date of completion of the acquired program over its estimated useful life. IPR&D and indefinite-lived intangibles are tested annually for impairment. Software Development Costs The Company capitalizes internal and external software development costs for products offered for sale in accordance with the accounting standards for the costs of software to be sold, leased, or otherwise marketed. Capitalized costs are amortized to cost of sales over the period of economic benefit, which approximates a straight-line basis over the estimated useful lives of the related software p roducts, generally three to ten years. The Company capitalized $35 million and $33 million of direct expenses that were related to the development of software in 2017 and 2016, respectively. Net capitalized software included in intangible assets totaled $153 million and $132 million at December 31, 2017 and 2016, respectively. See Note 7, “Goodwill and Other Intangibles”. The Company capitalizes internal software development costs for internal use in accordance with the accoun ting standards for goodwill and other intangible assets. Capitalized internal software development costs are amortized over the period of economic benefit, which approximates a straight-line basis over ten years. Net capitalized internal software included in property, plant and equipment totaled $3 million at both December 31, 2017 and 2016. Other Investments The Company accounts for its investments that represent less than twenty percent ownership, and for which the Company does not have significant influence, using the accounting standards for investments in debt and equity securities. Investments for which the Company does not have the ability to exercise significant influence, and for which there is not a readily determinable market value, are accounted for under the cost method of accounting. The Company periodically evaluates the car rying value of its investments accounted for under the cost method of accounting and carries them at the lower of cost or estimated net realizable value. For investments in which the Company owns or controls between twenty and forty-nine percent of the vot ing shares, or over which it exerts significant influence over operating and financial policies, the equity method of accounting is used. The Company’s share of net income or losses of equity investments is included in the consolidated statements of operat ions and was not ma terial in any period presented. During the year ended December 31, 2017, the Company made a $7 million investment in a developer of analytical system solutions used to make measurements, predict stability and accelerate product discovery in the routine analytic, process monitoring and quality control release processes for life science and biopharmaceutical markets. This investment w as accounted for under the cost method of accounting. During the year ended December 31, 2016, the Compa ny sold an equity investment that was accounted for using the equity method of accounting and was included in other assets in the consolidated balance sheet for $4 million in cash. Fair Value Measurements In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of December 31, 2017 and 2016. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions. The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2017 (in thousands):
|  |  |  |  |  |  | Quoted Prices |  |  |  |  |  |
|  |  |  |  |  |  | in Active |  | Significant |  |  |
|  |  |  |  |  |  | Markets |  | Other |  | Significant
|  |  |  | Total at |  | for Identical |  | Observable |  | Unobservable
|  |  |  | December 31, |  | Assets |  | Inputs |  | Inputs
|  |  |  | 2017 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |  |  |  |  |  |  |  |
| U.S. Treasury securities |  | $ | 591,988 |  | $ | - |  | $ | 591,988 |  | $ | -
| Foreign government securities |  |  | 6,952 |  |  | - |  |  | 6,952 |  |  | -
| Corporate debt securities |  |  | 1,975,160 |  |  | - |  |  | 1,975,160 |  |  | -
| Time deposits |  |  | 371,511 |  |  | - |  |  | 371,511 |  |  | -
| Equity securities |  |  | 147 |  |  | - |  |  | 147 |  |  | -
| Waters 401(k) Restoration Plan assets |  |  | 35,645 |  |  | 35,645 |  |  | - |  |  | -
| Foreign currency exchange contracts |  |  | 566 |  |  | - |  |  | 566 |  |  | -
|  | Total |  | $ | 2,981,969 |  | $ | 35,645 |  | $ | 2,946,324 |  | $ | -
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
| Contingent consideration |  | $ | 3,247 |  | $ | - |  | $ | - |  | $ | 3,247
| Foreign currency exchange contracts |  |  | 182 |  |  | - |  |  | 182 |  |  | -
|  | Total |  | $ | 3,429 |  | $ | - |  | $ | 182 |  | $ | 3,247
The following table represents the Company’s assets and liabilities measured at fair value on a recu rring basis at December 31, 2016 (in thousands):
|  |  |  |  |  |  | Quoted Prices |  |  |  |  |  |
|  |  |  |  |  |  | in Active |  | Significant |  |  |
|  |  |  |  |  |  | Markets |  | Other |  | Significant
|  |  |  | Total at |  | for Identical |  | Observable |  | Unobservable
|  |  |  | December 31, |  | Assets |  | Inputs |  | Inputs
|  |  |  | 2016 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |  |  |  |  |  |  |  |
| U.S. Treasury securities |  | $ | 570,313 |  | $ | - |  | $ | 570,313 |  | $ | -
| Foreign government securities |  |  | 17,991 |  |  | - |  |  | 17,991 |  |  | -
| Corporate debt securities |  |  | 1,643,838 |  |  | - |  |  | 1,643,838 |  |  | -
| Time deposits |  |  | 199,906 |  |  | - |  |  | 199,906 |  |  | -
| Equity securities |  |  | 147 |  |  | - |  |  | 147 |  |  | -
| Waters 401(k) Restoration Plan assets |  |  | 30,954 |  |  | 30,954 |  |  | - |  |  | -
| Foreign currency exchange contracts |  |  | 60 |  |  | - |  |  | 60 |  |  | -
|  | Total |  | $ | 2,463,209 |  | $ | 30,954 |  | $ | 2,432,255 |  | $ | -
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
| Contingent consideration |  | $ | 3,007 |  | $ | - |  | $ | - |  | $ | 3,007
| Foreign currency exchange contracts |  |  | 730 |  |  | - |  |  | 730 |  |  | -
|  | Total |  | $ | 3,737 |  | $ | - |  | $ | 730 |  | $ | 3,007
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, Investment and Foreign Currency Exchange Contracts T he 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, typical ly 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 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 t he 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 contingen t consideration payments was estimated to be $3 million at both December 31, 2017 and December 31, 2016, 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 cash, 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 $610 million at December 31, 2017 and 2016. The fair value of the Company’s fixed interest rate deb t 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 $608 million and $603 million at December 31, 2017 and 2016, 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 subsidi aries purchase or sell products or services in a currency other than its own currency. The Company’s principal strategy in managing exposure to changes in foreign currency exchange rates is to naturally hedge the foreign-currency-denominated liabilities o n 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. The Company does not spec ifically enter into any derivatives that hedge foreign-currency-denominated 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 inter company 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 th e 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 p ound, Mexic an peso and Brazilian real. At December 31, 2017, 2016 and 2015, the Company held foreign currency exchange contracts with notional amounts totaling $147 million, $120 million and $116 million, respectively. The Company’s foreign currency exchange contracts included in the consolidated balance sheets are classi fied as follows (in thousands):
|  |  | December 31, 2017 |  | December 31, 2016
Other current assets |  | $ | 566 |  | $ | 60
Other current liabilities |  | $ | 182 |  | $ | 730
The following is a summary of the activity included in cost of sales in the statements of operations related to the foreign currency exc hange contracts (in thousands):
|  |  | Year Ended December 31,
|  |  | 2017 |  | 2016 |  | 2015
Realized gains (losses) on closed contracts |  | $ | 3,894 |  | $ | (10,401) |  | $ | (2,601)
Unrealized gains (losses) on open contracts |  |  | 1,054 |  |  | (883) |  |  | 742
| Cumulative net pre-tax gains (losses) |  | $ | 4,948 |  | $ | (11,284) |  | $ | (1,859)
Stockholders’ Equity In May 2017, the Company’s Board of Directors authorized the Company to repurchase up to $1 billion of its outstanding common stock over a three-year period. During 2017, 2016 and 2015, the Company repurchased 1.8 million, 2.3 million and 2.6 million shares of the Company’s outstanding common stock at a cost of $323 million, $318 million and $327 million, respectively, under the Ma y 20 17 authorization and other previously announced programs. As of December 31, 2017, the Company repurchased an aggregate of 5.5 million shares at a cost of $750 million under the May 2014 repurchase program, which is now completed. As of December 31, 2017, the Company repurchased an aggregate of 1.1 million shares at a cost of $200 million under the May 2017 repurchas e program and has a total of $800 million authorized for future repurchases. In addition, the Company repurchased $10 million, $8 million and $7 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2017, 2016 and 2015, respectively. The Company believes that it has the financial flexibility to fund these share rep urchases given current cash 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. Revenue Recognition Sales of products and services are generally recorded based on product shipment and performance of service, respectively. The Company’s deferred revenue on the consolidated balance sheets consists of the obligation on instrument service contracts and customer payments received in advance, prior to shipment of the instrument. Revenue is recognized when all of the following revenue recognition criteria are met: persuasive evidence of an arrangement exists; delivery or performance h as occurred; the vendor’s fee is fixed or determinable; collectibility is reasonably assured and, if applicable, upon acceptance when acceptance criteria with contractual cash holdback are specified. Shipping and handling costs invoiced to the customer are included in net sales, while the costs associated with shipping and handling are included in cost of sales. Product shipments and service contracts are not recorded as revenue until a valid purchase order or master agreement is received, specifying fixed terms and prices. The Company generally recognizes product revenue when legal title has transferred and risk of loss passes to the customer. The Company generally structures its sales arrangements as shipping point or international equivalent and, accordi ngly, recognizes revenue upon shipment. In some cases, destination-based shipping terms are included in sales arrangements, in which cases revenue is generally recognized when the products arrive at the customer site. The Company’s method of revenue recog nition for certain products requiring installation is accounted for in accordance with multiple-element revenue recognition accounting standards. With respect to the installation obligations, the larger of the contractual cash holdback or the best estimate of selling price of the installation service is deferred when the product is shipped and revenue is recognized as a multiple-element arrangement when installation is complete. The Company determines the best estimate of selling price of installation based upon a number of factors, including hourly service billing rates and estimated installation hours. Instrument service contracts are typically billed at the beginning of the maintenance period. The amount of the service contract is amortized ratably to revenue over the instrument maintenance period. There are no deferred costs associated with the service contract, as the cost of the service is recorded when the service is performed. No revenue is recognized until all revenue recognition criteria have bee n met. Sales of standalone software are accounted for in accordance with the accounting standards for software revenue recognition. The Company’s software arrangements typically include software licenses and maintenance contracts. Software license revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fe e is fixed or determinable, collection is probable, and there are no significant post-delivery obligations remaining. The revenue associated with the software ma intenance contract is recognized ratably over the maintenance term. Unspecified rights to software upgrades are typically sold as part of the maintenance contract on a when-and-if-available basis. The Company uses the residual method to allocate software r evenue when a transaction includes multiple elements and vendor specific objective evidence of fair value of undelivered elements exists. Under the residual method, the fair value of the undelivered element (maintenance) is deferred and the remaining porti on of the arrangement fee is allocated to the delivered element (software license) and recognized as revenue. Returns and customer credits are infrequent and are recorded as a reduction to sales. Rights of return are not included in sales arrangements. R evenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. Discounts from list prices are recorded as a reduction to sales. 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 supplie r s, 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 re asonableness at least quarterly. The following is a summary of the activity of the Company’s accrued warranty liability for the years ended December 31, 2017, 2016 and 2015 (in thousands):
|  |  | Balance at |  |  |  |  |  | Balance at
|  |  | Beginning |  | Accruals for |  | Settlements |  | End of
|  |  | of Period |  | Warranties |  | Made |  | Period
Accrued warranty liability: |  |  |  |  |  |  |  |  |  |  |  |
| 2017 |  | $ | 13,391 |  | $ | 8,746 |  | $ | (9,111) |  | $ | 13,026
| 2016 |  | $ | 13,349 |  | $ | 9,755 |  | $ | (9,713) |  | $ | 13,391
| 2015 |  | $ | 13,266 |  | $ | 8,390 |  | $ | (8,307) |  | $ | 13,349
Advertising Costs All advertising costs are expensed as incurred and are included in selling and administrative expenses in the consolidated statements of operations. Advertising expenses were $6 million for 2017 and were $11 million for both 2016 and 2015. Research and Development Expenses Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, facilities costs, overhead costs, contract services and other outside costs. Research and development expenses are expensed as incurred. During 2017 and 201 5, the Company incurred $5 million and $4 million charge s, respectively, for acquired in-process research and development related to the licensing of certain intellectual property relating to mass spectrometry technologies yet to be commercialized and for which there was no future alternative use as of the acquisition date. These licensing arrangements are significantly related to new, biologi cally-focused applications, as well as other applications, and require the Company to make additional future payments of up to $7 million if certain milestones are achieved, as well as royalties on future net sales. Stock-Based Compensation The Company has two stock-based compensation plans, which are described in Note 12, “Stock-Based Compensation”. Earnings Per Share In accordance with the earnings per share accounting standards, the Company presents two earnings per share (“EPS”) amounts. Income per basic common share is based on income available to common shareholders and the weighted-average number of common shares outstanding during the periods presented. Income per diluted common share includes additional dilution from potential common stock, such as stock issuable pursuant to the exercise of stock options outstanding. Retirement Plans The Company sponsors various retirement plans, which a re described in Note 15, “Retirement Plans”. Comprehensive Income The Company accounts for comprehensive income in accordance with the accounting standards for comprehensive income, which establish the accounting rules for reporting and displaying comprehensive income. These standards require that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Recently Adopted Accounting Standards In July 2015, accounting guidance was issued which clarifies the measurement of inventory. The new guidance requires inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for annual and interim periods beginning after December 15, 2016. The Company adopted thi s standard as of January 1, 2017 and this standard did not have a material effect on the Company’s financial position, results of operations and cash flows. In March 2016, accounting guidance was issued which simplifies the accounting for share-based paym ent transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance was effective for annual and interim reporting periods beginning after Decembe r 15, 2016. The new guidance is required to be adopted on a prospective basis for the statement of operations and the Company has elected to retrospectively apply the cash flow aspects of this new guidance. In addition, the Company has elected to continue to estimate forfeitures at the time of grant and update forfeiture estimates throughout the requisite service period. The Company adopted this standard as of January 1, 2017 and recognized an excess tax benefit related to stock-based compensation which dec reased income tax expense for 2017 by $20 million and added $0.24 to net income per diluted share. These excess tax benefits were previously recorded in equity and there were no cumulative-effect adjustments to retained earnings as a result of the adoption of this standard. In addition, the Company reclassified $14 million and $13 million of excess tax benefits related to stock-based compensation from cash flows from financing activities to cash flows from operating activities for 2016 and 2015, respectivel y. Recently Issued Accounting Standards In May 2014, amended accounting guidance was issued regarding the recognition of revenue from contracts with customers. The objective of this guidance is to significantly enhance comparability and clarify principles of revenue recognition practices across entities, industries, jurisdictions and capital markets. This guidance was originally effective for annual and interim reporting periods beginning after December 15, 2016; however, the Financial Accounting Standards Board (“FASB”) amended the standard in A ugust 2015 to delay the effective period date by one year to annual and interim periods beginning after December 15, 2017. Adopti on prior to December 15, 2016 was not permitted. In March 2016, the FASB clarified the implementation guidance on principal ver sus agent considerations and, in April 2016, clarification was made regarding certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, additional guidance was issued related to disclosure of remaining perfo rmance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes collected from customers. The Company did not early adopt this accounting standard and will apply th e modified-retrospective method. T he 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 2016, accounting guidance was issued which pr imarily affects the classification and measurement of certain financial instruments, principally equity investments and certain financial liabilities. Under the new guidance, there will no longer be an available-for-sale classification for equity securitie s with readily determinable fair values. Changes to the fair value of equity investments will be recognized through earnings. Equity investments carried at cost should be adjusted for changes in observable prices, as applicable, and qualitatively assessed for impairment annually. Changes to the fair value of financial liabilities under the fair value option due to instrument specific credit risk will be recognized separately in other comprehensive income. The new guidance also requires financial assets and financial liabilities to be presented separately and grouped by measurement category in the notes to the financial statements. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption of certa in provisions of this guidance is permitted. The Company currently does not expect that the adoption of this standard will have a material effect on the Company’s financial position, results of operations and cash flows. In February 2016, accounting guida nce 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 will require lessees to present the assets and liabilities t hat arise from leases on their balance sheets. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company expects that the adoption of this standard will have a materia l effect on the Company’s balance sheet; however, it is not expected to have an overall material impact on the Company’s results of operations and cash flows. Please see Note 11, “Other Commitments and Contingencies”, for additional informa tion. 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 financial a ssets that have the contractual right to receive cash. Current guidance requires the recognition of a credit loss when it is considered p robable that a loss event has oc curred. 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 th e 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 ava ilable-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 an d 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. The Company currently does not expect that the adopti on of this standard will have a material effect on the Company’s financial position, results of operations and cash flows. In August 2016, accounting guidance was issued that clarifies the classification of certain cash flows. The new guidance addresses e ight specific areas where current accounting guidance is either unclear or does not specifically address classification issues. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Company’s cash flows. In October 2016, accounting guidance was issued regarding intra-entity transfers of assets other than inventory. The new guidan ce eliminates the deferral of tax effects on intra-entity transfers other than inventory and requires an entity to recognize the income tax consequences when the transfer occurs. This guidance is effective for annual and interim periods beginning after Dec ember 15, 2017 and early adoption is permitted. The Company does not believe 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 2017, accounting guidance was issued that clarifies the definition of a business. The new guidance provides a more robust framework to use in determining when a set of assets and activities is a business, thus narrowing the definition and the amount of transactions accounted for as bu siness combinations. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early application is permitted under certain circumstances. The Company will apply this guidance prospectively to any business combination transactions that take place after adoption of this new guidance. 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 hypo thetical purchase price allocation. This guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company currently does not expect that the adoption of this standard will have a material e ffect on the Company’s financial position, results of operations and cash flows. In March 2017, accounting guidance was issued regarding the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires that an employer disaggregate the service cost component from other components of net benefit cost, with service cost reported in the same line items as other compensation costs and the other components of net benefit costs presented outside income from op erations. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Company’s fi nancial position, results of operations and cash flows. Please see Note 15, “Retirement Plans”, for additional information. 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 will be shortened to end at the earliest call date. This guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is p ermitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows. In May 2017, accounting guidance was issued that clarifies the accou nting for a change to the terms or conditions of a share-based payment award. The standard provides more specific guidance for determining when a change to an award requires modification accounting and when it should be deemed purely administrative in natu re. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Company’s financia l position, resul ts of operations and cash flows.

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