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Basis of Presentation and Summary of Significant Accounting Policies | 3 Months Ended
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Mar. 28, 2020
Accounting Policies [Abstract] |
Basis of Presentation and Summary of Significant Accounting Policies | 1 Basis of Presentation and Summary of Significant Accounting Policies Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC TM ” and together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together (“LC-MS”) and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing. LC-MS instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA TM product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments. The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s first fiscal quarters for 2020 and 2019 ended on March 28, 2020 and March 30, 2019, respectively. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form 10-Q and do not include all of the information and footnote disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated. The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions. It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 25, 2020. Risks and Uncertainties The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies. Both the Company’s domestic and international operations have been and continue to be affected by the ongoing global pandemic of a novel strain of coronavirus (“COVID-19”) and the resulting volatility and uncertainty it has caused in the U.S. and international markets. In March 2020, the World Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, President Trump announced a National Emergency relating to the disease. The COVID-19 pandemic has caused significant volatility and uncertainty in U.S. and international markets, which could result in a prolonged economic downturn that has disrupted and is expected to continue to disrupt the Company’s business. The Company operates in over 35 countries, including many of the regions most impacted by the COVID-19 pandemic. In the three months ended March 28, 2020 as compared to the three months ended March 30, 2019, the Company experienced a decline in net sales of 10% due in large part to the COVID-19 pandemic and related economic uncertainty; however, through the date of the issuance of these financial statements, the Company’s consolidated financial position, results of operations and cash flows have not been materially impacted and, thus, the Company concluded that no goodwill or long-lived asset impairment analyses were required. Further, there have been no violations of debt covenants. Any prolonged material disruption 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 most of the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets. Cash, Cash Equivalents and Investments Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of March 28, 2020 and December 31, 2019, $221 million out of $394 million and $249 million out of $337 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $156 million out of $394 million and $176 million out of $337 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at March 28, 2020 and December 31, 2019, respectively. Accounts Receivable and Allowance for Credit Losses The Company adopted new accounting guidance regarding the accounting for credit losses as of January 1, 2020 using a modified retrospective transition approach that was applied to the trade receivable balance as of, January 1, 2020. This new accounting guidance required the Company to move from an incurred loss model to a current expected credit loss (“CECL”) model. Upon adoption, the Company recorded a net decrease of approximately $1 million to the Company’s stockholders’ deficit as of January 1, 2020. The adoption of this standard did not have a material impact on the Company’s balance sheets, results of operations or cash flows. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any off-balance sheet credit exposure related to its customers. Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized , then the fair value of the collateral is calculated and adjusted for the cost to re-possess, refurbish and re-sell the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss. Any recovery of amounts that were written off prior to adoption of the new CECL standard that are received after adoption are recorded in income in the period in which they are received. The following is a summary of the activity of the Company’s allowance for doubtful accounts for the three months ended March 28, 2020 and March 30, 2019 (in thousands). The March 28, 2020 balance is calculated using the CECL method and the March 30, 2019 balance is calculated using the incurred loss method under legacy GAAP:
|  | Balance at Beginning of Period |  |  | Impact of CECL A doption |  |  | Additions |  |  | Deduction |  |  | Balance at End of Period |
Allowance for Doubtful Accounts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
March 28, 2020 |  | $ | 9,560 |  |  | $ | 985 |  |  | $ | 3,506 |  |  | $ | (1,749 | ) |  | $ | 12,302 |
March 30, 2019 |  | $ | 7,663 |  |  | $ | — |  |  | $ | 2,159 |  |  | $ | (2,324 | ) |  | $ | 7,498 |
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 March 28, 2020 and December 31, 2019. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions. The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at March 28, 2020 (in thousands):
|  |  |  |  | Quoted Prices |  |  |  |  |  |  |
|  |  |  |  | in Active |  |  | Significant |  |  |  |
|  |  |  |  | Markets |  |  | Other |  |  | Significant |
|  | Total at |  |  | for Identical |  |  | Observable |  |  | Unobservable |
|  | March 28, |  |  | Assets |  |  | Inputs |  |  | Inputs |
|  | 2020 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits |  |  | 3,810 |  |  |  | — |  |  |  | 3,810 |  |  |  | — |
Waters 401(k) Restoration Plan assets |  |  | 29,165 |  |  |  | 29,165 |  |  |  | — |  |  |  | — |
Foreign currency exchange contracts |  |  | 1,028 |  |  |  | — |  |  |  | 1,028 |  |  |  | — |
Interest rate cross-currency swap agreements |  |  | 10,007 |  |  |  | — |  |  |  | 10,007 |  |  |  | — |
Total |  | $ | 44,010 |  |  | $ | 29,165 |  |  | $ | 14,845 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | 2,672 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,672 |
Foreign currency exchange contracts |  |  | 715 |  |  |  | — |  |  |  | 715 |  |  |  | — |
Total |  | $ | 3,387 |  |  | $ | — |  |  | $ | 715 |  |  | $ | 2,672 |
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2019 (in thousands):
|  |  |  |  | Quoted Prices |  |  |  |  |  |  |
|  |  |  |  | in Active |  |  | Significant |  |  |  |
|  |  |  |  | Markets |  |  | Other |  |  | Significant |
|  | Total at |  |  | for Identical |  |  | Observable |  |  | Unobservable |
|  | December 31, |  |  | Assets |  |  | Inputs |  |  | Inputs |
|  | 2019 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits |  |  | 1,642 |  |  |  | — |  |  |  | 1,642 |  |  |  | — |
Waters 401(k) Restoration Plan assets |  |  | 30,158 |  |  |  | 30,158 |  |  |  | — |  |  |  | — |
Foreign currency exchange contracts |  |  | 16 |  |  |  | — |  |  |  | 16 |  |  |  | — |
Interest rate cross-currency swap agreements |  |  | 4,485 |  |  |  |  |  |  |  | 4,485 |  |  |  |  |
Total |  | $ | 36,301 |  |  | $ | 30,158 |  |  | $ | 6,143 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | 2,557 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,557 |
Foreign currency exchange contracts |  |  | 1,028 |  |  |  | — |  |  |  | 1,028 |  |  |  | — |
Total |  | $ | 3,585 |  |  | $ | — |  |  | $ | 1,028 |  |  | $ | 2,557 |
Fair Value of 401(k) Restoration Plan Assets The 401(k) Restoration Plan is a nonqualified defined contribution plan and the assets were held in registered mutual funds and have been classified as Level 1. The fair values of the assets in the plan are determined through market and observable sources from daily quoted prices on nationally recognized securities exchanges. Fair Value of Cash Equivalents, Investments, Foreign Currency Exchange Contracts and Interest Rate Cross-Currency Swap Agreements The fair values of the Company’s cash equivalents, investments and foreign currency exchange contracts are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources. Fair Value of Contingent Consideration The fair value of the Company’s liability for contingent consideration relates to earnout payments in connection with the July 2014 acquisition of Medimass Research, Development and Service Kft. and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the estimated future results and a discount rate that reflects both the likelihood of achieving the estimated future results and the Company’s creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Although there is no contractual limit, the fair value of future contingent consideration payments was estimated to be $3 million at both March 28, 2020 and December 31, 2019 , based on the Company’s best estimate, as the earnout is based on future sales of certain products, some of which are currently in development, through 2034. Fair Value of Other Financial Instruments The Company’s accounts receivable, accounts payable and variable interest rate debt are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s fixed interest rate debt was $910 mi llion and $1.0 b illion at March 28, 2020 and December 31, 2019, respectively. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $910 million and $1.0 billion at March 28, 2020 and December 31, 2019, respectively, using Level 2 inputs. Derivative Transactions The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its non-U.S. dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency. The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows. Foreign Currency Exchange Contracts The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real. Interest Rate Cross-Currency Swap Agreements As of March 28, 2020, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $560 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive income in stockholders’ (deficit) equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations. The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):
|  | March 28, 2020 |  |  | December 31, 2019 |
|  | Notional Value |  |  | Fair Value |  |  | Notional Value |  |  | Fair Value |
Foreign currency exchange contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other current assets |  | $ | 69,627 |  |  | $ | 1,028 |  |  | $ | 119,576 |  |  | $ | 16 |
Other current liabilities |  | $ | 24,000 |  |  | $ | 715 |  |  | $ | 29,495 |  |  | $ | 1,028 |
Interest rate cross-currency swap agreements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other assets |  | $ | 560,000 |  |  | $ | 10,007 |  |  | $ | 560,000 |  |  | $ | 4,485 |
Accumulated other comprehensive income |  |  |  |  |  | $ | (10,007 | ) |  |  |  |  |  | $ | (4,485 | )
The following is a summary of the activity included in the statements of comprehensive income related to the foreign currency exchange contracts (in thousands):
|  | Financial Statement Classification |  | Three Months Ended |
| March 28, 2020 |  |  | March 30, 2019 |
Foreign currency exchange contracts: |  |  |  |  |  |  |  |
Realized (losses) gains on closed contracts |  | Cost of sales |  | $ | (2,981 | ) |  | $ | 525 |
Unrealized gains (losses) on open contracts |  | Cost of sales |  |  | 1,325 |  |  |  | (542 | )
Cumulative net pre-tax losses |  | Cost of sales |  | $ | (1,656 | ) |  | $ | (17 | )
Interest rate cross-currency swap agreements: |  |  |  |  |  |  |  |
Interest earned |  | Interest income |  | $ | 3,714 |  |  | $ | 2,227 |
Unrealized gains on contracts |  | Stockholders’ equity |  | $ | 5,522 |  |  | $ | 7,120 |
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 March 28, 2020 and March 30, 2019, the Company repurchased 0.8 million and 3.3 million shares of the Company’s outstanding common stock at a cost of $167 million and $747 million, respectively, under the January 2019 authorization and other previously announced programs. As of March 28, 2020, the Company had repurchased an aggregate of 11.1 million shares at a cost of $2.5 billion under the January 2019 repurchase program and had a total of $1.5 billion authorized for future repurchases. In addition, the Company repurchased $9 million and $8 million of common stock related to the vesting of restricted stock units during the three months ended March 28, 2020 and March 30, 2019, respectively. Whi le t he Company believes that it has the financial flexibility to fund these share repurchases given current cash levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions , t he Company has temporarily suspended share repurchases until there is a more stable and predictable business environment. The Company had $20 million of treasury stock purchases that were accrued and unsettled at December 31, 2019. These transactions were settled in January 2020. There were no unsettled treasury stock purchases as of March 28, 2020, while the Company had accrued $25 million for such purchases as of March 30, 2019, which settled in the subsequent quarter. Product Warranty Costs The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly. The following is a summary of the activity of the Company’s accrued warranty liability for the three months ended March 28, 2020 and March 30, 2019 (in thousands):
|  | Balance at |  |  |  |  |  |  |  |  | Balance at |
|  | Beginning |  |  | Accruals for |  |  | Settlements |  |  | End of |
|  | of Period |  |  | Warranties |  |  | Made |  |  | Period |
Accrued warranty liability: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
March 28, 2020 |  | $ | 11,964 |  |  | $ | 1,671 |  |  | $ | (2,619 | ) |  | $ | 11,016 |
March 30, 2019 |  | $ | 12,300 |  |  | $ | 1,500 |  |  | $ | (2,338 | ) |  | $ | 11,462 |
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, the Company incurred $18 million of severance-related costs, lease termination costs and other related costs. The Company expects to incur an additional $5 million of co s ts for the remainder of the year.

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- Definition The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
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