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Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the fiscal year ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     
Securities registered pursuant to Section 12(g) of the Act:
 
None
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  
        No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  
        No  
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 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. (Check one):
           
Large accelerated filer  
 
Accelerated filer  
 
        
Non-accelerated
 filer  
Smaller reporting company  
 
Emerging growth company  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
 12b-2
of the Act).    Yes  
         No  
State the aggregate market value of the registrant’s common stock held by
non-affiliates
of the registrant as of June 
29
, 2019: $14,554,561,947.
Indicate the number of shares outstanding of the registrant’s common stock as of February 21, 2020: 62,158,045
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement that will be filed for the 2020 Annual Meeting of Stockholders are incorporated by reference in Part III.
 

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
ANNUAL REPORT ON FORM
10-K
INDEX
                 
Item
No.
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
PART I
 
 
 
1.
 
 
 
 
1
 
 
1A.
 
 
 
 
12
 
 
1B.
 
 
 
 
19
 
 
2.
 
 
 
 
19
 
 
3.
 
 
 
 
20
 
 
4.
 
 
 
 
20
 
 
 
 
 
 
20
 
 
 
 
 
 
 
 
 
 
PART II
 
 
 
5.
 
 
 
 
22
 
 
6.
 
 
 
 
25
 
 
7.
 
 
 
 
26
 
 
7A.
 
 
 
 
43
 
 
8.
 
 
 
 
46
 
 
9.
 
 
 
 
96
 
 
9A.
 
 
 
 
96
 
 
9B.
 
 
 
 
96
 
 
 
 
 
 
 
 
 
 
PART III
 
 
 
10.
 
 
 
 
97
 
 
11.
 
 
 
 
97
 
 
12.
 
 
 
 
97
 
 
13.
 
 
 
 
98
 
 
14.
 
 
 
 
98
 
 
 
 
 
 
 
 
 
 
PART IV
 
 
 
15.
 
 
 
 
99
 
 
16.
 
 
 
 
103
 
 
 
 
 
 
104
 
 
 
 
 
 
 
 
 
 

Table of Contents
PART I
 
Item 1:
 Business
 
General
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. Waters
TM
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. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA
TM
product line. 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 products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and governmental customers working in research and development, quality assurance and other laboratory applications. 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. The Company’s thermal analysis, rheometry and calorimetry 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.
Waters Corporation, organized as a Delaware corporation in 1991, is a holding company that owns all of the outstanding common stock of Waters Technologies Corporation, its operating subsidiary. Waters Corporation became a publicly-traded company with its initial public offering (“IPO”) in November 1995. Since the IPO, the Company has added two significant and complementary technologies to its range of products with the acquisitions of TA Instruments in May 1996 and Micromass Limited in September 1997.
Business Segments
The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: Waters and TA. The Waters operating segment is primarily in the business of designing, manufacturing, selling and servicing LC and MS instrument systems, columns and other precision chemistry consumables that can be integrated and used along with other analytical instruments. The TA operating segment is primarily in the business of designing, manufacturing, selling and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s two operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution; and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes.
Information concerning revenues and long-lived assets attributable to each of the Company’s products, services and geographic areas is set forth in Note 18 in the Notes to the Consolidated Financial Statements, which is incorporated herein by reference.
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Waters Products and Markets
High Performance and Ultra Performance Liquid Chromatography
HPLC is a standard technique used to identify and analyze the constituent components of a variety of chemicals and other materials. The Company believes that HPLC’s performance capabilities enable it to separate, identify and quantify a high proportion of all known chemicals. As a result, HPLC is used to analyze substances in a wide variety of industries for research and development purposes, quality control and process engineering applications.
The most significant
end-use
markets for HPLC are those served by the pharmaceutical and life science industries. In these markets, HPLC is used extensively to understand diseases, identify new drugs, develop manufacturing methods and assure the potency and purity of new pharmaceuticals. HPLC is also used in a variety of other applications, such as analyses of foods and beverages for nutritional labeling and compliance with safety regulations and the testing of water and air purity within the environmental testing industry, as well as applications in other industries, such as chemical and consumer products. Waters also has in vitro diagnostic (IVD) labelled products that are used as general-purpose instruments for clinical diagnostic applications, such as newborn screening and therapeutic drug management, in countries where these products are registered. HPLC is also used by universities, research institutions and governmental agencies, such as the United States Food and Drug Administration (“FDA”) and the United States Environmental Protection Agency (“EPA”) and their foreign counterparts that mandate safety and efficacy testing.
In 2004, Waters introduced a novel technology that the Company describes as ultra performance liquid chromatography that utilizes a packing material with small, uniform diameter particles and a specialized instrument, the ACQUITY UPLC
TM
, to accommodate the increased pressure and narrower chromatographic bands that are generated by these small and tightly packed particles. By using the ACQUITY UPLC, researchers and analysts are able to achieve more comprehensive chemical separations and faster analysis times in comparison with many analyses previously performed by HPLC. In addition, in using the ACQUITY UPLC, researchers have the potential to extend the range of applications beyond that of HPLC, enabling them to uncover more levels of scientific information. While offering significant performance advantages, the ACQUITY UPLC is also compatible with the Company’s software products and the general operating protocols of HPLC. For these reasons, the Company’s customers and field sales and support organizations are well positioned to utilize this new technology and instrument. In 2018, the Company introduced the ACQUITY ARC
TM
Bio System, a versatile, iron-free,
bio-inert,
quaternary liquid chromatograph specifically engineered to improve bioseparation analytical methods. The Company also introduced the ACQUITY
UPLC PLUS series in 2018, consisting of the
H-Class
PLUS,
H-Class
PLUS Bio and
I-Class
PLUS systems, which incorporate foundational enhancements into the legacy systems. In 2019, the Company introduced the ACQUITY
TM
Advanced Polymer Chromatography
TM
System, which is the first fully solvent-compatible UPLC system to perform size exclusion, gradient polymer elution and solvent compatible reversed-phase liquid chromatographic separations on a single platform. The
all-in-one
system gives research scientists greater analytical versatility and speed when conducting research on next-generation polymers.
Waters manufactures LC instruments that are offered in configurations that allow for varying degrees of automation, from component configured systems for academic teaching and research applications to fully automated systems for regulated and high sample throughput testing, and that have a variety of detection technologies, from optical-based ultra-violet (“UV”) absorbance, refractive index and fluorescence detectors to a suite of
MS-based
detectors, optimized for certain analyses.
The primary consumable products for LC are chromatography columns. These columns are packed with separation media used in the LC testing process and are typically replaced at regular intervals. The chromatography column contains one of several types of packing material, typically stationary phase particles made from silica or polymeric resins. As a pressurized sample is introduced to the column inlet and permeates through the packed column, it is separated into its constituent components.
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Waters HPLC columns can be used on Waters-branded and competitors’ LC systems. The Company believes that it is one of a few suppliers in the world that manufactures silica and polymeric resins, packs columns and distributes its own products. In doing so, the Company believes it can better ensure product consistency, a key attribute for its customers in quality control laboratories, and can react quickly to new customer requirements. The Company believes that its ACQUITY UPLC lines of columns are used primarily on its ACQUITY UPLC instrument systems and, furthermore, that its ACQUITY UPLC instruments primarily use ACQUITY UPLC columns. In 2018, the Company introduced the BioResolve
TM
RP mAb Polyphenyl columns, which improve the consistency and reliability of the overly complex separations of monoclonal antibodies and antibody-drug conjugates. In 2019, the Company introduced the BioResolv SCX mAb Columns and VanGuard
TM
FIT Cartridge technologies. These new cation exchange column lines with specialized consumables are designed to simplify and improve the characterization and monitoring of monoclonal antibody (mAb) therapeutics, as well as enable mAb charge-variant analyses as required by the World Health Organization, the FDA and the International Conference on Harmonization for confirming the efficacy and safety of biologics and biosimilars with discovery, development and manufacturing applications.
The Company’s precision chemistry consumable products also include environmental and nutritional safety testing products, including Certified Reference Materials (“CRM”s) and Proficiency Testing (“PT”) products. Laboratories around the world and across multiple industries use these products for quality control and proficiency testing and also purchase product support services required to help with their federal and state mandated accreditation requirements or with quality control over critical pharmaceutical analysis. In 2018, the Company introduced the VICAM
TM
BPATest
TM
, which provides a sensitive, precise determination of Bisphenol A in as little as ten minutes. VICAM also introduced a user-friendly lateral flow zearalenone strip test, the
Zearala-V
TM
AQUA
TM
in 2018.
Mass Spectrometry and Liquid Chromatography-Mass Spectrometry
MS is a powerful analytical technology that is used to identify unknown compounds, to quantify known materials and to elucidate the structural and chemical properties of molecules by measuring the masses of molecules that have been converted into ions.
The Company is a technology and market leader in the development, manufacture, sale and service of MS instruments and components. These instruments are typically integrated and used along with other complementary analytical instruments and systems, such as LC, chemical electrophoresis and gas chromatography. A wide variety of instrumental designs fall within the overall category of MS instrumentation, including devices that incorporate quadrupole, ion trap,
time-of-flight
(“Tof”), magnetic sector and ion mobility technologies. Furthermore, these technologies are often used in tandem
(MS-MS)
to maximize the speed and/or efficacy of certain experiments.
Currently, the Company offers a wide range of MS instrument systems utilizing various combinations of quadrupole, Tof and ion mobility designs. These instrument systems are used in drug discovery and development, as well as for environmental, clinical and nutritional safety testing. The overwhelming majority of mass spectrometers sold by the Company are designed to utilize an LC system and a liquid compatible interface (such as an electrospray ionization source) as the sample introduction device. These products supply a diverse market with a strong emphasis on the pharmaceutical, biomedical, clinical, food and beverage and environmental market segments worldwide.
MS is an increasingly important detection technology for LC. The Company’s
smaller-sized
mass spectrometers, such as the single quadrupole detector (“SQD”) and the tandem quadrupole detector (“TQD”), are often referred to as LC “detectors” and are typically sold as part of an LC system or as an LC system upgrade. Larger quadrupole systems, such as the Xevo
TM
TQ and Xevo
TQ-S
instruments, are used primarily for experiments performed for late-stage drug development, including clinical trial testing. Quadrupole
time-of-flight
(“Q-Tof”)
instruments, such as the Company’s SYNAPT
TM
G2-S,
are often used to analyze the role of proteins in disease
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processes, an application sometimes referred to as “proteomics”. In 2018, the Company introduced the DART QDa
TM
system with LiveID
TM
, a direct-from-sample analytical system that verifies sample authenticity or adulteration, specifically for food applications. The Company also introduced the Xevo
TQ-GC
mass spectrometer in 2018, which allows laboratories to meet and exceed low
part-per-billion
limits of detection when quantifying pesticide residues and other contaminants in food using
GC-MS/MS
methods set forth by worldwide regulatory agencies/authorities. In addition, the Company introduced the RenataDX
TM
screening system, a flow-injection tandem mass spectrometry system for rapid high-throughput analysis of extracted dried blood spots and other human biological matrices. In 2019, the Company introduced the BioAccord
TM
system, a liquid chromatography-mass spectrometry solution that expands access to high-resolution
time-of-flight
mass spectrometry capabilities. The system provides new levels of user experience with automated setup and self-diagnosis delivered through an intuitive user interface. Also in 2019, the Company introduced the Cyclic IMS system, which seamlessly integrates cyclic ion mobility technology into a high-performance research-grade
time-of-flight
mass spectrometer. In addition, the Company introduced the SYNAPT XS, a new highly flexible, high-resolution mass spectrometer for research and development labs focused on discovery applications. The Company also reinforced its tandem quadrupole mass spectrometry portfolio during the current year with upgrades to the Xevo
TQ-S
micro and the introduction of the new Xevo
TQ-S
cronos. The Xevo
TQ-S
micro features new performance enhancements that bring the quantitation of highly polar, ionic compounds in food to a higher level. The Xevo
TQ-S
cronos is a new, tandem quadrupole mass spectrometer purposely-built for routine quantitation of large numbers of small-molecule organic compounds over a wide concentration range. The Xevo
TQ-S
micro and the Xevo
TQ-S
cronos are also well suited to meet regulatory requirements for pesticide residue analysis, the monitoring for contaminants in processed foods, identifying drugs of abuse, and performing impurity profiling of pharmaceuticals.
LC and MS are typically embodied within an analytical system tailored for either a dedicated class of analyses or as a general purpose analytical device. An increasing percentage of the Company’s customers are purchasing LC and MS components simultaneously and it has become common for LC and MS instrumentation to be used within the same laboratory and operated by the same user. The descriptions of LC and MS above reflect the historical segmentation of these analytical technologies and the historical categorization of their respective practitioners. Increasingly in today’s instrument market, this segmentation and categorization is becoming obsolete as a high percentage of instruments used in the laboratory embody both LC and MS technologies as part of a single device. In response to this development and to further promote the high utilization of these hybrid instruments, the Company has organized its Waters operating segment to develop, manufacture, sell and service integrated
LC-MS
systems.
Based upon reports from independent marketing research firms and publicly-disclosed sales figures from competitors, the Company believes that it is one of the world’s largest manufacturers and distributors of LC and
LC-MS
instrument systems, chromatography columns and other consumables and related services.
The Company has been a developer and supplier of software-based products that interface with the Company’s instruments, as well as other suppliers’ instruments. The Company’s newest software technology, UNIFI
TM
, is a scientific information system that is the culmination of a multi-year effort to substantially bring all of Waters’ preexisting, distinct software systems under one operating system. UNIFI joins Waters’ suite of informatics products – Empower
TM
Chromatography Data Software, MassLynx
TM
Mass Spectrometry Software and NuGenesis
TM
Scientific Data Management System, each of which is used to support innovations within world-leading institutions. UNIFI is the industry’s first comprehensive software that seamlessly integrates UPLC chromatography, mass spectrometry and informatics data workflows. In 2018, the Company announced new analysis capabilities across a variety of molecules by integrating UNIFI acquired data from the Company’s
Vion
TM
IMS QTof
or Xevo
GS XS mass spectrometers with Molecular Discovery’s Mass-MetaSite and WebMetabase processing software.
Waters Service
Services provided by Waters enable customers to maximize technology productivity, support customer compliance activities and provide transparency into enterprise resource management efficiencies. The customer
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benefits from improved budget control, data-driven technology adoption and accelerated workflow at a site or on a global perspective. The Company considers its service offerings to be highly differentiated from our competition, as evidenced by a consistent increase in annual service revenues. The Company’s principal competitors in the service market include PerkinElmer, Inc., Agilent Technologies, Inc., Thermo Fisher Scientific Inc. and General Electric Company. These competitors can provide certain services on Waters instruments to varying degrees and always present competitive risk.
The servicing and support of instruments, software and accessories is an important source of revenue and represented over 35% of sales for Waters in 2019. These revenues are derived primarily through the sale of support plans, demand services, spare parts, customer performance validation services and customer training. Support plans typically involve scheduled instrument maintenance and an agreement to promptly repair a
non-functioning
instrument in return for a fee described in a contract that is priced according to the configuration of the instrument.
TA Products and Markets
Thermal Analysis, Rheometry and Calorimetry
Thermal analysis measures the physical or thermodynamic characteristics of materials as a function of temperature. Changes in temperature affect several characteristics of materials, such as their heat flow characteristics, physical state, weight, dimension and mechanical and electrical properties, which may be measured by one or more thermal analysis techniques, including calorimetry. Consequently, thermal analysis techniques are widely used in the development, production and characterization of materials in various industries, such as plastics, chemicals, automobiles, pharmaceuticals and electronics.
Rheometry instruments often complement thermal analyzers in characterizing materials. Rheometry characterizes the flow properties of materials and measures their viscosity, elasticity and deformation under different types of “loading” or other conditions. The information obtained under such conditions provides insight into a material’s behavior during processing, packaging, transport, usage and storage.
Thermal analysis, rheometry and calorimetry instruments are heavily used in material testing laboratories and, in many cases, provide information useful in predicting the suitability and stability of industrial polymers, fine chemicals, pharmaceuticals, water, metals and viscous liquids in various industrial, consumer goods and healthcare products, as well as for life science research. As with systems offered by Waters, a range of instrument configurations is available with increasing levels of sample handling and information processing automation. In addition, systems and accompanying software packages can be tailored for specific applications
In 2017, TA introduced the TAM Air microcalorimeter. Although designed to characterize the curing of cement, this instrument is an ideal platform for imaginative experimental design in a wide range of applications, including cement and concrete, material science, food, pharmaceuticals and environmental analysis. TA also introduced three new dilatometer product lines in its 800 platform, which are high precision systems designed to measure dimensional changes of a specimen brought about by dynamic thermal events in a wide range of applications, including material science, ceramics and metals. In 2017, TA introduced the Discovery SDT 650, which provides a true simultaneous measurement of weight change and differential heat flow using advanced technologies, such as dual sample TGA, modulated DSC and modulated and
hi-resolution
TGA. In addition, TA introduced the Discovery
HP-TGA750,
a benchtop high pressure TGA that utilizes a patented ultra-high resolution magnetic suspension balance and new high precision temperature control system. Late in 2017, TA introduced the Discovery DMA 850, which measures the viscoelastic mechanical properties of material under controlled conditions of temperature, environment and mechanical stimulus (stress or strain). The DMA 850 features frictionless air bearing supports and a linear optical encoder, which ensures stable, accurate, high-resolution displacement measurement across the full travel range and enables displacement control of 5 nm. In 2017, TA introduced the WinTest
TM
8.0 software package, which will be standard on all new ElectroForce
TM
products. In addition, TA introduced the ElectroForce DMA 3200 in 2017, which combines fatigue and dynamic mechanical analysis into a single mechanical test platform.
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In 2019, TA introduced a range of new instruments including the TMA 450, a Rheo-Raman
TM
capability for the DHR product line, and a High Sensitivity Pressure Cell for the
ARES-G2
Rheometer. The Discovery
TMA 450, precisely measures dimensional changes of materials from (150) to 1,000
o
C and handles virtually all sample configurations for testing in expansion, compression, flexure and tension modes. The Rheo-Raman capability for the DHR product line combines a Raman spectrometer with the DHR to enable simultaneous collection of rheology and Raman spectroscopy data. This combination allows for direct correlation between flow characteristics and the unique spectroscopic fingerprints of each material including information about its chemical and morphological structure. The High Sensitivity Pressure Cell for the
ARES-G2
Rheometer enables scientists to perform sensitive viscoelastic measurements under controlled atmospheric pressure and temperature and gain detailed understanding of complex fluid behavior in complex environments.
Also in 2019, TA introduced the MSF16 Multi-Specimen Fatigue Instrument. The MSF16 extends the capability of accelerated cyclic components and products under repeated loading, significantly accelerating fatigue analysis.
TA Service
Similar to Waters, the servicing and support of TA’s instruments is an important source of revenue and represented more than 25% of sales for TA in 2019. TA operates independently from the Waters operating segment, though many of its overseas offices are situated in Waters’ facilities to achieve operational efficiencies. TA has dedicated field sales and service operations. Service sales are primarily derived from the sale of support plans, replacement parts and billed labor fees associated with the repair, maintenance and upgrade of installed systems.
Global Customers
The Company typically has a broad and diversified customer base that includes pharmaceutical accounts, other industrial accounts, universities and governmental agencies. Purchase of the Company’s instrument systems is often dependent on its customers’ capital spending, or funding as in the cases of academic, governmental and research institutions, which often fluctuate from year to year. The pharmaceutical segment represents the Company’s largest sector and includes multinational pharmaceutical companies, generic drug manufacturers, contract research organizations (“CRO”s) and biotechnology companies. The Company’s other industrial customers include chemical manufacturers, polymer manufacturers, food and beverage companies and environmental testing laboratories. The Company also sells to universities and governmental agencies worldwide. The Company’s technical sales and support staff members work closely with its customers in developing and implementing applications that meet their full range of analytical requirements. During 2019, 57% of the Company’s net sales were to pharmaceutical accounts, 30% to other industrial accounts and 13% to academic institutions and governmental agencies.
The Company typically experiences an increase in sales in the fourth quarter, as a result of purchasing habits for capital goods of many customers who tend to exhaust their spending budgets by calendar year end. The Company does not rely on any single customer for a material portion of its sales. During fiscal years 2019, 2018 and 2017, no single customer accounted for more than 2% of the Company’s net sales.
Sales and Service
The Company has one of the largest direct sales and service organizations focused exclusively on the analytical workflows offered by the Company. Across these product technologies, using respective specialized sales and service workforces, the Company serves its customer base with 56 sales offices throughout the world as of December 31, 2019 and approximately 4,000, 3,900 and 3,800 field representatives in 2019, 2018 and 2017, respectively. This investment in sales and service personnel serves to maintain and expand the Company’s installed base of instruments. The Company’s sales representatives have direct responsibility for account relationships, while service representatives work in the field to install instruments, train customers and minimize
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instrument downtime.
In-house
and field-based technical support representatives work directly with customers, providing them assistance with applications and procedures on Company products. The Company provides customers with comprehensive information through various corporate and regional internet websites and product literature, and also makes consumable products available through electronic ordering facilities and a dedicated catalog.
Manufacturing and Distribution
The Company provides high product quality by overseeing each stage of the production of its instruments, columns and chemical reagents.
The Company currently assembles a portion of its LC instruments at its facility in Milford, Massachusetts, where it performs machining, assembly and testing. The Milford facility maintains quality management and environmental management systems in accordance with the requirements of ISO 9001:2015, ISO 13485:2016 and ISO 14001:2015, and adheres to applicable regulatory requirements (including the FDA Quality System Regulation and the European
In-Vitro
Diagnostic Directive). The Company outsources manufacturing of certain electronic components, such as computers, monitors and circuit boards, to outside vendors that meet the Company’s quality requirements. In addition, the Company outsources the manufacturing of certain LC instrument systems and components to well-established contract manufacturing firms in Singapore. The Company’s Singapore entity is ISO 9001:2015 certified and manages all Asian outsourced manufacturing as well as the distribution of all products from Asia. The Company may pursue outsourcing opportunities as they arise but believes it maintains adequate supply chain and manufacturing capabilities in the event of disruption or natural disasters.
The Company manufactures specialty Supercritical Fluid Chromatography (“SFC”) and Supercritical Fluid Extraction (“SFE”) products in its facility in Sharpsburg, Pennsylvania. The Sharpsburg facility is aligned with the policies and procedures for product manufacturing and distribution as adhered to in the Milford, Massachusetts facility and is under the same structural leadership organization.
The Company primarily manufactures and distributes its LC columns at its facilities in Taunton, Massachusetts and Wexford, Ireland. In February 2018, the Company’s Board of Directors approved expanding its Taunton location and anticipates spending an estimated $215 million to build and equip this new
state-of-the-art
manufacturing facility. The Company has incurred $85 million of costs on this facility through the end of 2019. The Taunton facility processes, sizes and treats silica and polymeric media that are packed into columns, solid phase extraction cartridges and bulk shipping containers in both Taunton and Wexford. The Wexford facility also manufactures and distributes certain data, instruments and software components for the Company’s LC, MS and TA product lines. The Company’s Taunton facility is certified to ISO 9001:2015. The Wexford facility is certified to ISO 9001:2015 and ISO 13485:2016/EN ISO 13485:2016. VICAM
TM
manufactures antibody-linked resins and magnetic beads that are packed into columns and kits in Milford, Massachusetts and Nixa, Missouri. The Company manufactures and distributes its Analytical Standards and Reagents and Environmental Resource Associates (“ERA”) product lines at its facility in Golden, Colorado, which is certified to ISO 9001:2015 and accredited to ISO/IEC 17025:2017, ISO/IEC 17034:16 and ISO Guide 34. Some ERA products are also manufactured in the Wexford, Ireland facility, which is also accredited to ISO/IEC 17025:2005, ISO/IEC 17034:2016.
The Company manufactures and distributes its MS products at its facilities in Wilmslow, England and Wexford, Ireland. Certain components or modules of the Company’s MS instruments are manufactured at its facility in Solihull, England and by long-standing outside contractors. Each stage of this supply chain is closely monitored by the Company to maintain high quality and performance standards. The instruments, components or modules are then returned to the Company’s facilities, where its engineers perform final assembly, calibrations to customer specifications and quality control procedures. The Company’s MS facilities are certified to ISO 9001:2015 and ISO 13485:2016/EN ISO 13485:2016 and adhere to applicable regulatory requirements (including the FDA Quality System Regulation and the European
In-Vitro
Diagnostic Directive).
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TA’s thermal analysis, rheometry and calorimetry products are manufactured and distributed at the Company’s New Castle, Delaware, Wakefield, Massachusetts, Eden Prairie, Minnesota, Lindon, Utah and Huellhorst, Germany facilities. Similar to MS, elements of TA’s products are manufactured by outside contractors and are then returned to the Company’s facilities for final assembly, calibration and quality control. The Company’s New Castle facility is certified to ISO 9001:2015 and ISO 17025:2005 standards and the Eden Prairie facility is certified to both ISO 9001:2015 and ISO/IEC 17025:2017 standards.
Raw Materials
The Company purchases a variety of raw materials, primarily consisting of high temperature alloy sheet metal and castings, forgings,
pre-plated
metals and electrical components from various vendors. The materials used by the Company’s operations are generally available from a number of sources and in sufficient quantities to meet current requirements subject to normal lead times.
The Company is subject to rules of the Securities and Exchange Commission (“SEC”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring disclosure as to whether certain materials (tantalum, tin, gold and tungsten), known as conflict minerals, which may be contained in the Company’s products, are mined from the Democratic Republic of the Congo and adjoining countries. In 2018, the Company was not able to determine with certainty the country of origin of some of the conflict minerals in its manufactured products. However, the Company does not have knowledge that any of its conflict minerals originated from the Democratic Republic of the Congo or adjoining countries. The Company is in the process of evaluating its 2019 supply chain, and the Company plans to file its 2019 Form SD with the SEC in May 2020. The results of this and future evaluations may impose additional costs and may introduce new risks related to the Company’s ability to verify the origin of any conflict minerals contained in its products.
In addition, the Company continues to monitor environmental health and safety regulations in countries in which it operates throughout the world, in particular, European Union and China Restrictions on the use of certain Hazardous Substances in electrical and electronic equipment (RoHS) and European Union Waste Electrical and Electronic Equipment directives. Further information regarding these regulations is available on the Company’s website,
www.waters.com
, under the caption “About Waters / Environmental Health & Safety”.
Research and Development
The Company maintains an active research and development program focused on the development and commercialization of products that extend, complement and update its existing product offering. The Company’s research and development expenditures for 2019, 2018 and 2017 were $143 million, $143 million and $133 million, respectively. In addition, in 2017, the Company incurred a $5 million charge for acquired
in-process
research and development related to milestone payments associated with a licensing arrangement for 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. This licensing arrangement is significantly related to new, biologically-focused applications, as well as other applications, and requires 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.
Nearly all of the Company’s LC products have been developed at the Company’s main research and development center located in Milford, Massachusetts, with input and feedback from the Company’s extensive field organizations and customers. The majority of the Company’s MS products are developed at facilities in England and most of the Company’s current materials characterization products are developed at the Company’s research and development center in New Castle, Delaware. At December 31, 2019, 2018 and 2017, there were 1,089, 1,011 and 1,004 employees, respectively, involved in the Company’s research and development efforts. The Company has increased research and development expenses from its continued commitment to invest significantly in new product development and existing product enhancements, and as a result of acquisitions.
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Despite the Company’s active research and development programs, there can be no assurance that the Company’s product development and commercialization efforts will be successful or that the products developed by the Company will be accepted by the marketplace.
Employees
The Company employed approximately 7,500 employees at December 31, 2019 and 7,200 at both December 31, 2018 and 2017, with approximately 39% of the Company’s employees located in the United States. The Company believes its employee relations are generally good. The Company’s employees are not unionized or affiliated with any internal or external labor organizations. The Company firmly believes that its future success largely depends upon its continued ability to attract and retain highly skilled employees.
Competition
The analytical instrument systems, supplies and services market is highly competitive. The Company encounters competition from several worldwide suppliers and other companies in both domestic and foreign markets for each of its three primary technologies. The Company competes in its markets primarily on the basis of product performance, reliability, service and, to a lesser extent, price. Competitors continuously introduce new products and have instrument businesses that are generally more diversified than the Company’s business. Some competitors have greater financial resources and broader distribution than the Company’s.
In the markets served by Waters, the Company’s principal competitors include: Agilent Technologies, Inc., Shimadzu Corporation, Bruker Corporation, Danaher Corporation and Thermo Fisher Scientific Inc. In the markets served by TA, the Company’s principal competitors include: PerkinElmer, Inc., Mettler-Toledo International Inc., NETZSCH-Geraetebau GmbH, Thermo Fisher Scientific Inc., Malvern PANalytical Ltd., a subsidiary of Spectris plc, and Anton-Paar GmbH.
The market for consumable LC products, including separation columns, is highly competitive and generally more fragmented than the analytical instruments market. The Company encounters competition in the consumable columns market from chemical companies that produce column sorbents and small specialized companies that primarily pack purchased sorbents into columns and subsequently package and distribute columns. The Company believes that it is one of the few suppliers that processes silica and polymeric resins, packs columns and distributes its own products. The Company competes in this market on the basis of performance, reproducibility, reputation and, to a lesser extent, price. In recent years, the Company’s principal competitors for consumable products have included: Danaher Corporation; Merck KGaA; Agilent Technologies, Inc.; General Electric Company and Thermo Fisher Scientific Inc. The ACQUITY UPLC instrument is designed to offer a predictable level of performance when used with ACQUITY UPLC columns and the Company believes that the expansion of the ACQUITY UPLC instrument base will enhance its chromatographic column business because of the high level of synergy between ACQUITY UPLC columns and the ACQUITY UPLC instruments.
Patents, Trademarks and Licenses
The Company owns a number of United States and foreign patents and has patent applications pending in the United States and abroad. Certain technology and software has been acquired or is licensed from third parties. The Company also owns a number of trademarks. The Company’s patents, trademarks and licenses are viewed as valuable assets to its operations. However, the Company believes that no one patent or group of patents, trademark or license is, in and of itself, essential to the Company such that its loss would materially affect the Company’s business as a whole.
Environmental Matters and Climate Change
The Company is subject to foreign and U.S. federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and
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water as well as handling and disposal practices for solid and hazardous wastes, and (ii) impose liability for the costs of cleaning up and certain damages resulting from sites of past spills, disposals or other releases of hazardous substances. The Company believes that it currently conducts its operations and has operated its business in the past in substantial compliance with applicable environmental laws. From time to time, Company operations have resulted or may result in noncompliance with environmental laws or liability for cleanup pursuant to environmental laws. The Company does not currently anticipate any material adverse effect on its operations, financial condition or competitive position as a result of its efforts to comply with environmental laws.
The Company is sensitive to the growing global debate with respect to climate change. An internal sustainability working group develops increasingly robust data with respect to the Company’s utilization of carbon producing substances in an effort to continuously reduce the Company’s carbon footprint. In 2019, the Company published a sustainability report identifying the various actions and behaviors the Company adopted in 2018 concerning its commitment to both the environment and the broader topic of social responsibility. See Item 1A, Risk Factors –
The effects of climate change could harm the Company’s business
, for more information on the potential significance of climate change legislation. See also Note 18 in the Notes to the Consolidated Financial Statements for financial information about geographic areas.
Available Information
The Company files or furnishes all required reports with the SEC. The Company is an electronic filer and the SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of the SEC electronic filing website is
http://www.sec.gov
. The Company also makes available, free of charge on its website, its annual report on Form
 10-K,
quarterly reports on Form
 10-Q,
current reports on Form
 8-K
and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The website address for Waters Corporation is
http://www.waters.com
and SEC filings can be found under the caption “Investors”.
Forward-Looking Statements
Certain of the statements in this Form
10-K,
including the information incorporated by reference herein, may contain forward-looking statements with respect to future results and events, including any statements regarding, among other items, anticipated trends or growth in the Company’s business, including, but not limited to, the impact of new or proposed tariff or trade regulations or changes in the interpretation or enforcement of existing regulations; the impact of foreign currency translation on financial results; development of products by acquired businesses; the growth rate of sales and research and development expenses; the impact of costs associated with developing new technologies and bringing these new technologies to market; the impact of new product launches and the associated costs, such as the amortization expense related to software platforms; geographic sales mix of business; development of products by acquired businesses and the amount of contingent payments to the sellers of an acquired business; anticipated expenses, including interest expense, capitalized software costs and effective tax rates; the impact of the Tax Cuts and Jobs Act (the “2017 Tax Act”) in the U.S.; the impact and outcome of the Company’s various ongoing tax audit examinations; the achievement of contractual milestones to preserve foreign tax rates; the impact and outcome of litigation matters; the impact of the loss of intellectual property protection; the impact of new accounting standards and pronouncements; the adequacy of the Company’s supply chain and manufacturing capabilities and facilities; the impact of regulatory compliance; the Company’s expected cash flow, borrowing capacity, debt repayment and refinancing; the Company’s ability to fund working capital, capital expenditures, service debt, repay outstanding lines of credit, make authorized share repurchases, fund potential acquisitions and pay any adverse litigation or tax audit liabilities, particularly in the U.S.; future impairment charges; the Company’s contributions to defined benefit plans; the Company’s expectations regarding changes to its financial position; compliance with applicable environmental laws; and the impact of recent acquisitions on sales and earnings.
Many of these statements appear, in particular, in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form
10-K.
Statements that are not statements of historical
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fact may be deemed forward-looking statements. You can identify these forward-looking statements by the use of the words “feels”, “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “suggests”, “appears”, “estimates”, “projects”, “should” and similar expressions, whether in the negative or affirmative. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without limitation:
  Foreign currency exchange rate fluctuations that could adversely affect translation of the Company’s future sales, financial operating results and the condition of its
non-U.S.
operations, especially when a currency weakens against the U.S. dollar.
  Current global economic, sovereign and political conditions and uncertainties, particularly regarding the effect of new or proposed tariff or trade regulations; the United Kingdom’s exit from the European Union, as well as the Chinese government’s ongoing tightening of restrictions on procurement by government-funded customers; the Company’s ability to access capital and maintain liquidity in volatile market conditions; changes in timing and demand for the Company’s products among the Company’s customers and various market sectors, particularly if they should reduce capital expenditures or are unable to obtain funding, as in the cases of academic, governmental and research institutions; the effect of mergers and acquisitions on customer demand for the Company’s products; and the Company’s ability to sustain and enhance service.
  Negative industry trends; changes in the competitive landscape as a result of changes in ownership, mergers and continued consolidation among the Company’s competitors; introduction of competing products by other companies and loss of market share; pressures on prices from customers or resulting from competition; regulatory, economic and competitive obstacles to new product introductions; lack of acceptance of new products; expansion of our business in developing markets; spending by certain
end-markets;
ability to obtain alternative sources for components and modules; and the possibility that future sales of new products related to acquisitions, which trigger contingent purchase payments, may exceed the Company’s expectations.
  Increased regulatory burdens as the Company’s business evolves, especially with respect to the FDA and EPA, among others, as well as regulatory, environmental and logistical obstacles affecting the distribution of the Company’s products, including the impact, if any, of the coronavirus in China or elsewhere; completion of purchase order documentation by our customers; and the customers’ ability to obtain letters of credit or other financing alternatives.
  Risks associated with lawsuits, particularly involving claims for infringement of patents and other intellectual property rights.
  The impact and costs incurred from changes in accounting principles and practices; the impact and costs of changes in statutory or contractual tax rates in jurisdictions in which the Company operates, specifically as it relates to the 2017 Tax Act in the U.S.; shifts in taxable income among jurisdictions with different effective tax rates; and the outcome of and costs associated with ongoing and future tax audit examinations or changes in respective country legislation affecting the Company’s effective rates.
Certain of these and other factors are further described below in Item 1A, Risk Factors, of this Form
10-K.
Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements, whether because of these factors or for other reasons. All forward-looking statements speak only as of the date of this annual report on Form
10-K
and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by law, the Company does not assume any obligation to update any forward-looking statements.
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Item 1A:
 Risk Factors
The Company is subject to risks and uncertainties, including, but not limited to, the following:
The Company’s international operations may be negatively affected by political events, wars or terrorism and regulatory changes, related to either a specific country or a larger region. These potential political, currency and economic disruptions, as well as foreign currency exchange rate fluctuations, could have a material adverse effect on the Company’s results of operations or financial condition.
Approximately 71% and 72% of the Company’s net sales in 2019 and 2018, respectively, were outside of the United States and were primarily denominated in foreign currencies. In addition, the Company has considerable manufacturing operations in Ireland and the U.K., as well as significant subcontractors located in Singapore. As a result, a significant portion of the Company’s sales and operations are subject to certain risks, including adverse developments in the political, regulatory and economic environment, in particular, uncertainty regarding possible changes to foreign and domestic trade policy; the effect of the U.K.’s exit from the European Union as well as the financial difficulties and debt burden experienced by a number of European countries; the instability and potential impact of war or terrorism; the instability and possible dissolution of the Euro as a single currency; sudden movements in a country’s foreign exchange rates due to a change in a country’s sovereign risk profile or foreign exchange regulatory practices; tariffs and other trade barriers; the impact of public health epidemics, such as the coronavirus currently impacting China and elsewhere; difficulties in staffing and managing foreign operations; and associated adverse operational, contractual and tax consequences.
Additionally, the U.S. dollar value of the Company’s net sales, cost of sales, operating expenses, interest, taxes and net income varies with foreign currency exchange rate fluctuations. Significant increases or decreases in the value of the U.S. dollar relative to certain foreign currencies, particularly the Euro, Japanese yen and British pound, could have a material adverse effect or benefit on the Company’s results of operations or financial condition.
Global economic conditions may decrease demand for the Company’s products and harm the Company’s financial results.
The Company is a global business that may be adversely affected by changes in global economic conditions. These changes in global economic conditions, both inside and outside the U.S., may affect the demand for the Company’s products and services. This may result in a decline in sales in the future, increased rate of order cancellations or delays, increased risk of excess or obsolete inventories, longer sales cycles and potential difficulty in collecting sales proceeds. There can be no assurance regarding demand for the Company’s products and services in the future.
The Company’s financial results are subject to changes in customer demand, which may decrease for a number of reasons, many beyond the Company’s control.
The demand for the Company’s products is dependent upon the size of the markets for its LC,
LC-MS,
thermal analysis, rheometry and calorimetry products; the timing and level of capital spending and expenditures of the Company’s customers; changes in governmental regulations, particularly affecting drug, food and drinking water testing; funding available to academic, governmental and research institutions; general economic conditions and the rate of economic growth in the Company’s major markets; and competitive considerations. The Company typically experiences an increase in sales in its fourth quarter as a result of purchasing habits for capital goods by customers that tend to exhaust their spending budgets by calendar year end. However, there can be no assurance that the Company will effectively forecast customer demand and appropriately allocated research and development expenditures to products with high growth and high margin prospects. Additionally, there can be no assurance that the Company’s results of operations or financial condition will not be adversely impacted by a change in any of the factors listed above or the continuation of uncertain global economic conditions.
Additionally, the analytical instrument market may, from time to time, experience low sales growth. Approximately 57% and 56% of the Company’s net sales in 2019 and 2018, respectively, were to worldwide pharmaceutical and biotechnology companies, which may be periodically subject to unfavorable market conditions and consolidations. Unfavorable industry conditions could have a material adverse effect on the Company’s results of operations or financial condition.
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Disruption in worldwide financial markets could adversely impact the Company’s access to capital and financial condition.
Financial markets in the U.S., Europe and Asia have experienced times of extreme disruption, including, among other things, sharp increases in the cost of new capital, credit rating downgrades and bailouts, severely diminished capital availability and severely reduced liquidity in money markets. Financial and banking institutions have also experienced disruptions, resulting in large asset write-downs, higher costs of capital, rating downgrades and reduced desire to lend money. There can be no assurance that there will not be future deterioration or prolonged disruption in financial markets or financial institutions. Any future deterioration or prolonged disruption in financial markets or financial institutions in which the Company participates may impair the Company’s ability to access its existing cash, utilize its existing syndicated bank credit facility funded by such financial institutions, and impair its ability to access sources of new capital. The cost to the Company of any new capital raised and interest expense would increase if this were to occur.
Competitors may introduce more effective or less expensive products than the Company’s, which could result in decreased sales. The competitive landscape may transform as a result of potential changes in ownership, mergers and continued consolidations among the Company’s competitors, which could harm the Company’s business.
The analytical instrument market and, in particular, the portion related to the Company’s HPLC, UPLC,
LC-MS,
thermal analysis, rheometry and calorimetry product lines, is highly competitive and subject to rapid changes in technology. The Company encounters competition from several international instrument suppliers and other companies in both domestic and foreign markets. Some competitors have instrument businesses that are generally more diversified than the Company’s business, but are typically less focused on the Company’s chosen markets. Over the years, some competitors have merged with other competitors for various reasons, including increasing product line offerings, improving market share and reducing costs. There can be no assurance that the Company’s competitors will not introduce more effective and less costly products than those of the Company or that the Company will be able to increase its sales and profitability from new product introductions. There can be no assurance that the Company’s sales and marketing forces will compete successfully against the Company’s competitors in the future.
Strategies for organic growth require developing new technologies and bringing these new technologies to market, which could negatively impact the Company’s financial results.
The Company’s corporate strategy is fundamentally based on winning through organic innovation and deep application expertise. The Company is in the process of developing new products with recently acquired technologies. The future development of these new products will require a significant amount of spending over the next few years before significant, robust sales will be realized. Furthermore, these new products will be sold into both the
non-clinical
and clinical markets, and any new products requiring FDA clearance may take longer to bring to market. There can be no assurance given as to the timing of these new product launches and the ultimate realization of sales and profitability in the future.
The Company’s software or hardware may contain coding or manufacturing errors that could impact their function, performance and security, and result in other negative consequences.
Despite testing prior to the release and throughout the lifecycle of a product or service, the detection and correction of any errors in released software or hardware can be time consuming and costly. This could delay the development or release of new products or services, or new versions of products or services, create security vulnerabilities in the Company’s products or services, and adversely affect market acceptance of products or services. If the Company experiences errors or delays in releasing its software or hardware, or new versions thereof, its sales could be affected and revenues could decline. Errors in software or hardware could expose the Company to product liability, performance and warranty claims as well as harm to brand and reputation, which could impact future sales.
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The loss of key members of management and the risks inherent in succession planning could adversely affect the Company’s results of operations or financial condition.
The operation of the Company requires managerial and operational expertise. None of the Company’s key management employees, with the exception of the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, have an employment contract with the Company and there can be no assurance that such individuals will remain with the Company. If, for any reason, other such key personnel do not continue to be active in management, the Company’s results of operations or financial condition could be adversely affected.
Disruption of operations at the Company’s manufacturing facilities could harm the Company’s financial condition.
The Company manufactures LC instruments at facilities in Milford, Massachusetts and through a subcontractor in Singapore; precision chemistry separation columns at its facilities in Taunton, Massachusetts and Wexford, Ireland; MS products at its facilities in Wilmslow, England, Solihull, England and Wexford, Ireland; thermal analysis and rheometry products at its facilities in New Castle, Delaware and other instruments and consumables at various other locations as a result of the Company’s acquisitions. Any prolonged disruption to the operations at any of these facilities, whether due to labor difficulties, destruction of or damage to any facility or other reasons, could have a material adverse effect on the Company’s results of operations or financial condition.
Failure to adequately protect intellectual property could have materially adverse effects on the Company’s results of operations or financial condition.
There can be no assurance that any patents held by the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. Additionally, there could be successful claims against the Company by third-party patent holders with respect to certain Company products that may infringe the intellectual property rights of such third parties. The Company’s patents, including those licensed from others, expire on various dates. If the Company is unable to protect its intellectual property rights, it could have an adverse and material effect on the Company’s results of operations or financial condition.
The Company’s business would suffer if the Company were unable to acquire adequate sources of supply.
Most of the raw materials, components and supplies purchased by the Company are available from a number of different suppliers; however, a number of items are purchased from limited or single sources of supply and disruption of these sources could have, at a minimum, a temporary adverse effect on shipments and the financial results of the Company. A prolonged inability to obtain certain materials or components could have an adverse effect on the Company’s financial condition or results of operations and could result in damage to its relationships with its customers and, accordingly, adversely affect the Company’s business.
The Company’s sales would deteriorate if the Company’s outside contractors fail to provide necessary components or modules.
Certain components or modules of the Company’s LC and MS instruments are manufactured by outside contractors, including the manufacturing of LC instrument systems and related components by contract manufacturing firms in Singapore. Disruptions of service by these outside contractors could have an adverse effect on the supply chain and the financial results of the Company. A prolonged inability to obtain these components or modules could have an adverse effect on the Company’s financial condition or results of operations.
The Company’s business could be harmed by actions of distributors and other third parties that sell our products.
The Company sells some products through third parties, including distributors and value-added resellers. This exposes us to various risks, including competitive pressure, concentration of sales volumes, credit risks and compliance risks. We may rely on one or a few key distributors for a product or market and the loss of these
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distributors could reduce our revenue or net earnings. Distributors may also face financial difficulties, including bankruptcy, which could harm our collection of accounts receivable. Violations of the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act or similar anti-bribery laws by distributors or other third-party intermediaries could materially impact our business. Risks related to our use of distributors may reduce sales, increase expenses and weaken our competitive position.
The Company may be harmed by improper conduct of any of our employees, agents or business partners.
We cannot provide assurance that our internal controls and compliance systems will always protect the Company from acts committed by employees, agents or business partners that would violate domestic and international laws, including laws governing payments to government officials, bribery, fraud, kickbacks and false claims, pricing, sales and marketing practices, conflicts of interest, competition, export and import compliance, money laundering and data privacy. In particular, the FCPA, the U.K. Bribery Act and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, and we operate in many parts of the world that have experienced governmental corruption to some degree. Any such improper actions or allegations of such acts could damage our reputation and subject us to civil or criminal investigations in the U.S. and in other jurisdictions and related shareholder lawsuits, could lead to substantial civil and criminal, monetary and
non-monetary
penalties and could cause us to incur significant legal and investigatory fees. In addition, the government may seek to hold us liable as a successor for violations committed by companies in which we invest or that we acquire. We also rely on our suppliers to adhere to our supplier standards of conduct and material violations of such standards of conduct could occur that could have a material effect on our business, reputation and financial statements.
The effects of climate change could harm the Company’s business.
The Company’s manufacturing processes for certain of its products involve the use of chemicals and other substances that are regulated under various international, federal, state and local laws governing the environment. In the event that any future climate change legislation would require that stricter standards be imposed by domestic or international environmental regulatory authorities with respect to the use and/or levels of possible emissions from such chemicals and/or other substances, the Company may be required to make certain changes and adaptations to its manufacturing processes. Any such changes could have a material adverse effect on the financial statements of the Company.
Another potential effect of climate change is an increase in the severity of global weather conditions. The Company’s manufacturing facilities are located in the U.S., U.K., Ireland and Germany. In addition, the Company manufactures a growing percentage of its HPLC, UPLC and MS products in both Singapore and Ireland. Severe weather and geological conditions or events, including earthquakes, hurricanes and/or tsunamis, could potentially cause significant damage to the Company’s manufacturing facilities in each of these countries. The effects of such damage and the resulting disruption of manufacturing operations and the impact of lost sales could have a material adverse impact on the financial results of the Company.
The Company’s financial results are subject to unexpected shifts in
pre-tax
income between tax jurisdictions, changing application of tax law and tax audit examinations.
The Company is subject to rates of income tax that range from 0% up to 34% in various jurisdictions in which it conducts business. In addition, the Company typically generates a substantial portion of its income in the fourth quarter of each fiscal year. Geographical shifts in income from previous quarters’ projections caused by factors including, but not limited to, changes in volume and product mix and fluctuations in foreign currency translation rates, could therefore have potentially significant favorable or unfavorable effects on the Company’s income tax expense, effective tax rate and results of operations.
Governments in the jurisdictions in which the Company operates implement changes to tax laws and regulations from time to time. Any changes in corporate income tax rates or regulations regarding transfer
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pricing or repatriation of dividends or capital, as well as changes in the interpretation of existing tax laws and regulations, in the jurisdictions in which the Company operates could adversely affect the Company’s cash flow and lead to increases in its overall tax burden, which would negatively affect the Company’s profitability.
The Company has a contractual tax rate in Singapore of 0% through March 2021, based upon the achievement and continued satisfaction of certain operational and financial milestones, which the Company expects to continue to meet. Currently, the Company has determined that it is more likely than not to realize the contractual tax rate in Singapore of 0% and has not recognized any uncertain tax position in its balance sheet related to the achievement of the contractual milestones in Singapore. In the event that it appears that the milestone targets will not be met, the Company will no longer be entitled to a 0% contractual tax rate benefit on income earned in Singapore dating back to the start date of the agreement (April 1, 2016), at which time all tax benefits previously recorded would be reversed and an income tax charge equal to the statutory tax of 17% on income earned during that period would be recorded.
As a global business, the Company is subject to tax audit examinations in various jurisdictions throughout the world. The Company must manage the cost and disruption of responding to governmental audits, investigation and proceedings. In addition, the impact of the settlement of pending or future tax audit examination could have an unfavorable effect on the Company’s income tax expense, effective tax rate and results of operations.
The Company’s financial condition and results of operations could be adversely affected if the Company is unable to maintain a sufficient level of cash flow.
The Company had $1.7 billion in debt and $337 million in cash, cash equivalents and investments as of December 31, 2019. As of December 31, 2019, the Company also had the ability to borrow an additional $1.2 billion from its existing, committed credit facility. All but a small portion of the Company’s debt was in the U.S. There is a substantial cash requirement in the U.S. to fund operations and capital expenditures, service debt interest obligations, finance potential U.S. acquisitions and continue authorized stock repurchase programs. As such, the Company’s financial condition and results of operations could be adversely impacted if the Company is unable to generate and maintain a sufficient level of cash flow to address these requirements through (1) cash from operations, (2) the Company’s ability to access its existing cash and revolving credit facility, (3) the ability to expand the Company’s borrowing capacity and (4) other sources of capital obtained at an acceptable cost.
Debt covenants, and the Company’s failure to comply with them, could negatively impact the Company’s capital and financial results.
The Company’s debt is subject to restrictive debt covenants that limit the Company’s ability to engage in certain activities that could otherwise benefit the Company. These debt covenants include restrictions on the Company’s ability to enter into certain contracts or agreements, which may limit the Company’s ability to make dividend or other payments, secure other indebtedness, enter into transactions with affiliates and consolidate, merge or transfer all or substantially all of the Company’s assets. The Company is also required to meet specified financial ratios under the terms of the Company’s debt agreements. The Company’s ability to comply with these financial restrictions and all other covenants is dependent on the Company’s future performance, which is subject to, but not limited to, prevailing economic conditions and other factors, including factors that are beyond the Company’s control, such as foreign exchange rates, interest rates, changes in technology and changes in the level of competition.
Disruption, cyber attack or unforeseen problems with the security, maintenance or upgrade of the Company’s information and
web-based
systems could have an adverse effect on the Company’s operations and financial condition.
The Company relies on its technology infrastructure and that of its software and banking partners, among other functions, to interact with suppliers, sell products and services, fulfill contract obligations, ship products, collect and make electronic wire and check based payments and otherwise conduct business. The Company’s technology
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infrastructure may be vulnerable to damage or interruption from, but not limited to, natural disasters, power loss, telecommunication failures, terrorist attacks, computer viruses, unauthorized access to customer or employee data, unauthorized access to and funds transfers from Company bank accounts and other attempts to harm the Company’s systems. Any prolonged disruption to the Company’s technology infrastructure, at any of its facilities, could have a material adverse effect on the Company’s results of operations or financial condition.
If the Company’s security measures are compromised or fail to adequately protect its technology infrastructure, research and development efforts or manufacturing operations, the Company’s products and services may be perceived as vulnerable or unreliable, the information [protected by] the Company’s controls and processes may be subject to unauthorized access, acquisition or modification, the Company’s brand and reputation could be damaged, the services that the Company provides to its customers could be disrupted, and customers may stop using the Company’s products and services, all of which could reduce the Company’s revenue and earnings, increase its expenses and expose the Company to legal claims and regulatory actions.
The Company is in the business of designing, manufacturing, selling and servicing analytical instruments to life science, pharmaceutical, biochemical, industrial, nutritional safety, and environmental, academic and governmental customers working in research and development, quality assurance and other laboratory applications, and the Company is also a developer and supplier of software-based products that support instrument systems. Many of the Company’s customers are in highly regulated industries. While the Company has invested time and resources implementing measures designed to protect the integrity and security of its technology infrastructure, research and development processes, manufacturing operations, products and services, and the internal and external data managed by the Company, there is a risk these measures will be defeated or compromised or that they are otherwise insufficient to protect against existing or emerging threats. The Company also has acquired companies, products, services and technologies over time and may face inherent risk when integrating these acquisitions into the Company. In addition, at times, the Company faces attempts by third parties to defeat its security measures or exploit vulnerabilities in its systems. These risks will increase as the Company continues to grow and expand geographically, and its systems, products and services become increasingly digital and sensor- and
web-based.
The Company could suffer significant damage to its brand and reputation if a security incident resulted in unauthorized access to, acquisition of, or modification to the Company’s technology infrastructure, research and development processes, manufacturing operations, its products and services as well as the internal and external data managed by the Company. Such an incident could disrupt the Company’s operations and customers could lose confidence in the Company’s ability to deliver quality and reliable products or services. This could negatively impact sales and could increase costs related to fixing and addressing these incidents and any vulnerabilities exposed by them, as well as to lawsuits, regulatory investigations, claims or legal liability including contractual liability, costs and expenses owed to customers and business partners.
Compliance failures could harm the Company’s business.
The Company is subject to regulation by various federal, state and foreign governments and agencies in areas including, among others, health and safety, import/export, privacy and data protection, FCPA and environmental laws and regulations. A portion of the Company’s operations are subject to regulation by the FDA and similar foreign regulatory agencies. These regulations are complex and govern an array of product activities, including design, development, labeling, manufacturing, promotion, sales and distribution. Any failure by the Company to comply with applicable governmental regulations could result in product recalls, the imposition of fines, restrictions on the Company’s ability to conduct or expand its operations or the cessation of all or a portion of its operations.
Regulators globally are increasingly imposing greater fines and penalties for privacy and data protection violations, and the European Union has enacted a broad data protection regulation with fines based on a percentage of global revenues. Changes in laws or regulations associated with enhanced protection of certain sensitive types of personal information, such as information related to health, could greatly increase the cost of
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compliance and the cost of providing the Company’s products or services. Any failure, or perceived failure, by the Company to comply with laws and regulations on privacy, data security or consumer protection, or other policies, public perception, standards, self-regulatory requirements or legal obligations, could result in lost or restricted business, proceedings, actions or fines brought against the Company or levied by governmental entities or others, or could otherwise adversely affect the business and harm the Company’s reputation.
Some of the Company’s operations are subject to domestic and international laws and regulations with respect to the manufacturing, handling, use or sale of toxic or hazardous substances. This requires the Company to devote substantial resources to maintain compliance with those applicable laws and regulations. If the Company fails to comply with such requirements in the manufacturing or distribution of its products, it could face civil and/or criminal penalties and potentially be prohibited from distributing or selling such products until they are compliant.
Some of the Company’s products are also subject to the rules of certain industrial standards bodies, such as the International Standards Organization. The Company must comply with these rules, as well as those of other agencies, such as the United States Occupational Safety and Health Administration. Failure to comply with such rules could result in the loss of certification and/or the imposition of fines and penalties, which could have a material adverse effect on the Company’s operations.
As a publicly-traded company, the Company is subject to the rules of the SEC and the New York Stock Exchange. In addition, the Company must comply with the Sarbanes-Oxley regulations, which require the Company to establish and maintain adequate internal control over financial reporting. The Company’s efforts to comply with such laws and regulations are time consuming and costly. While we continue to enhance our controls, we cannot be certain that we will be able to prevent future significant deficiencies or material weaknesses. Failure to comply with such regulations or having inadequate internal controls could have a material adverse effect on the Company’s financial condition and operations, which could cause investors to lose confidence in our reported financial information and could have a negative effect on the trading price of our stock and our access to capital.
The Company is subject to the rules of the SEC under the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring disclosure as to whether certain materials (tantalum, tin, gold and tungsten), known as conflict minerals, which may be contained in the Company’s products, are mined from the Democratic Republic of the Congo and adjoining countries. In 2018, the Company was not able to determine with certainty the country of origin of some of the conflict minerals in its manufactured products. However, the Company does not have knowledge that any of its conflict minerals originated from the Democratic Republic of the Congo or adjoining countries. The Company is in the process of evaluating its 2019 supply chain, and the Company plans to file its 2019 Form SD with the SEC in May 2020. The results of this and future evaluations may impose additional costs and may introduce new risks related to the Company’s ability to verify the origin of any conflict minerals contained in its products.
The Company’s financial condition and results of operations could be adversely affected by changes to the Company’s retirement plans or retirement plan assets.
The Company sponsors various retirement plans, both inside and outside the U.S. Any changes in regulations made by governments in countries in which the Company sponsors retirement plans could adversely impact the Company’s cash flows or results of operations. In connection with these retirement plans, the Company is exposed to market risks associated with changes in the various capital markets. For example, changes in long-term interest rates affect the discount rate that is used to measure the Company’s retirement plan obligations and related expense. In addition, changes in the market value of investments held by the retirement plans could materially impact the funded status of the retirement plans, and affect the related pension expense and level and timing of contributions required under applicable laws.
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Estimates and assumptions made in accounting for the Company’s results from operations are dependent on future results, which involve significant judgments and may be imprecise and may differ materially from actual results.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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. These estimates and assumptions must be made due to certain information used in preparation of our financial statements which is dependent on future events, cannot be calculated with a high degree of precision from data available or is not capable of being readily calculated based on generally accepted methodologies. The Company believes that the accounting related to revenue recognition, bad debts, inventory valuation, goodwill and intangible assets, income taxes, warranty and installation provisions, litigation, retirement plan obligations, stock-based compensation, business combinations and asset acquisitions, uncertain tax positions and contingencies involves significant judgments and estimates. Actual results for all estimates could differ materially from the estimates and assumptions used, which could have a material adverse effect on our financial condition and results of operations.
Item
1B:
    Unresolved Staff Comments
None.
Item 2:
    Properties
Waters Corporation operates 23 United States facilities and 67 international facilities, including field offices. The Company believes its facilities are suitable and adequate for its current production level and for reasonable growth over the next several years. The Company’s primary facilities are summarized in the table below.
Primary Facility Locations
                 
Location
 
Function (1)
 
 
Owned/Leased
 
Golden, CO
   
M, R, S, D, A
     
Leased
 
New Castle, DE
   
M, R, S, D, A
     
Owned
 
Franklin, MA
   
D
     
Leased
 
Milford, MA
   
M, R, S, A
     
Owned
 
Taunton, MA
   
M, R
     
Owned
 
Cambridge, MA
   
R, S
     
Leased
 
Wakefield, MA
   
M, R, S, D, A
     
Leased
 
Eden Prairie, MN
   
M, R, S, D, A
     
Leased
 
Nixa, MO
   
M, S, D, A
     
Leased
 
Sharpsburg, PA
   
M, R, S, D, A
     
Leased
 
Lindon, UT
   
M, R, S, D, A
     
Leased
 
Newcastle, England
   
R, S, D, A
     
Leased
 
Solihull, England
   
M,A
     
Owned
 
Wilmslow, England
   
M, R, S, D, A
     
Owned
 
St. Quentin, France
   
S, A
     
Leased
 
Bochum, Germany
   
R, S, A
     
Leased
 
Huellhorst, Germany
   
M, R, S, D, A
     
Owned
 
Budapest, Hungary
   
R
     
Leased
 
Wexford, Ireland
   
M, R, D, A
     
Owned
 
Etten-Leur, Netherlands
   
S, D, A
     
Owned
 
Brasov, Romania
   
R, A
     
Leased
 
Singapore
   
R, S, D, A
     
Leased
 
 
(1) M = Manufacturing; R = Research; S = Sales and Service; D = Distribution; A = Administration
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The Company operates and maintains 11 field offices in the United States and 56 field offices abroad in addition to sales offices in the primary facilities listed above. The Company’s field office locations are listed below.
Field Office Locations (2)
             
United States
 
International
             
Costa Mesa, CA
 
Australia
 
India
 
Portugal
Pleasanton, CA
 
Austria
 
Ireland
 
Poland
Wood Dale, IL
 
Belgium
 
Israel
 
Puerto Rico
Carmel, IN
 
Brazil
 
Italy
 
Spain
Columbia, MD
 
Canada
 
Japan
 
Sweden
Beverly, MA
 
Czech Republic
 
Korea
 
Switzerland
Durham, NC
 
Denmark
 
Malaysia
 
Taiwan
Morrisville, NC
 
Finland
 
Mexico
 
United Kingdom
Parsippany, NJ
 
France
 
Netherlands
 
Plymouth Meeting, PA
 
Germany
 
Norway
 
Bellaire, TX
 
Hungary
 
People’s Republic of China
 
 
(2) The Company operates more than one field office within certain states and foreign countries.
Item 3:
     Legal Proceedings
From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. The Company believes it has meritorious arguments in its current litigation matters and believes any outcome, either individually or in the aggregate, will not be material to the Company’s financial position or results of operations.
Item 4:
     Mine Safety Disclosures
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Officers of the Company are elected annually by the Board of Directors and hold office at the discretion of the Board of Directors. The following persons serve as executive officers of the Company:
Christopher J. O’Connell, 53, has served as a Director of the Company since September 2015, when he assumed the position of President and Chief Executive Officer of the Company. In December 2017, Mr. O’Connell was appointed as the Chairman of the Board of Directors of the Company. Mr. O’Connell served as Executive Vice President and President of Restorative Therapies Group of Medtronic plc from August 2009 to August 2015. From 1994 to August 2009, Mr. O’Connell served in the following positions at Medtronic plc: Senior Vice President and President of Medtronic Diabetes, President of Medtronic Physio-Control, Vice President of Sales and Marketing for the Cardiac Rhythm Management business, Vice President/General Manager of the Patient Management Business, Vice President of Corporate Strategy, Director of Investor Relations and Corporate Development Associate.
Keeley Aleman, 43, was appointed Senior Vice President, General Counsel and Secretary in October of 2019. Ms. Aleman joined Waters Corporation in 2006 as the Assistant General Counsel and held various legal roles focusing on business transactions, commercial strategies, international development, compliance, corporate governance and organizational matters. Prior to joining Waters Corporation she held corporate associate positions at Goodwin Procter, LLP, and Testa, Hurwitz & Thibeault, LLP.
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Sherry L. Buck, 56, was appointed Senior Vice President and Chief Financial Officer in January 2017. Previously, Ms. Buck served as the Vice President, Chief Financial Officer of Libbey Inc. since August 2012. From 1993 to 2012, Ms. Buck held several positions at Whirlpool Corporation, including Vice President, Finance/Chief Financial Officer, Global Product and Enterprise Cost Leadership; Vice President, Finance—US; Vice President, Cost Leadership; Vice President, Finance—International; and Vice President, Business Performance Management.
Robert G. Carson, 46, was appointed Senior Vice President, Corporate Development in February 2018. Prior to joining Waters Corporation, he held several positions during his 16 years at Medtronic plc, including Vice President and General Manager, Pacemaker Business from January 2017 to January 2018. In addition, Mr. Carson spent nearly 12 years in Medtronic’s spinal implants and biologics business, serving as Vice President and General Manager from July 2016 to January 2017, Vice President of Global Marketing & Strategy from April 2015 to July 2016 and Vice President & Therapy Segment Leader from October 2012 to April 2015. Mr. Carson began his career with Banc of America Securities.
Dr. Michael C. Harrington, 59, was appointed Senior Vice President, Global Markets in February 2016. Dr. Harrington joined Waters Corporation in 1987 and has held several senior positions with Waters Corporation, including Vice President, Europe and Asia Pacific Operations, Senior Director of US Sales Operations, Director of US Chemistry Sales and General Manager of Phase Separations. Prior to joining Waters Corporation, Dr. Harrington held senior sales positions at Celsis, Inc.
Jonathan M. Pratt, 50, was appointed Senior Vice President and President, TA Instruments in August 2019. Prior to joining Waters Corporation, Mr. Pratt was President of Beckman Coulter Life Sciences. Additionally, he held senior positions at Pall Corporation, where he was President of its Food & Beverage, Laboratory and ForteBio businesses.
Francis Kim, 53, was appointed Senior Vice President, Global Operations in February 2018. Mr. Kim previously served as Vice President of Global Quality Assurance since November 2016. Prior to joining Waters Corporation, he held several positions during his 20 years at Medtronic plc, including Vice President of Quality, Restorative Therapies Group from May 2015 to November 2016 and Vice President of Quality, Regulatory and Clinical Affairs, Surgical Technologies Division from January 2011 to May 2015. On February 17, 2020, Mr. Kim notified the Company that he will be resigning his position on March 16, 2020.
Ian S. King, 63, was appointed Senior Vice President, Global Products in July 2017. Mr. King joined Waters in 1982 and previously served as Senior Vice President, Instrument Technology; Vice President, Separations Technologies; and Vice President and General Manager of Consumable Division, as well as a variety of scientific and management positions in Waters Corporation’s international subsidiaries. Prior to joining Waters Corporation, Mr. King worked at Edinburgh University as a research scientist.
Elizabeth B. Rae, 62, was appointed Senior Vice President, Global Human Resources in February 2016 and was Vice President of Human Resources since October 2005 and Vice President of Worldwide Compensation and Benefits since January 2002. Ms. Rae joined Waters Corporation in January 1996 as Director of Worldwide Compensation. Prior to joining Waters Corporation, she held senior human resources positions in retail, healthcare and financial services companies.
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Table of Contents
PART II
Item 5:
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
 
 
The Company’s common stock is registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is listed on the New York Stock Exchange under the symbol “WAT”. As of February 21, 2020, the Company had 80 common stockholders of record. The Company has not declared or paid any dividends on its common stock in its past three fiscal years and does not intend to pay cash dividends in the foreseeable future. Any future determination to pay cash dividends will be made at the discretion of the Board of Directors and will depend on restrictions and other factors the Board of Directors may deem relevant. The Company has not made any sales of unregistered equity securities in the years ended December 31, 2019, 2018 or 2017.
Securities Authorized for Issuance under Equity Compensation Plans
Equity compensation plan information is incorporated by reference from Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this document and should be considered an integral part of this Item 5.
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Table of Contents
Stock Price Performance Graph
The following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.
The following graph compares the cumulative total return on $100 invested as of December 31, 2014 (the last day of public trading of the Company’s common stock in fiscal year 2014) through December 31, 2019 (the last day of public trading of the common stock in fiscal year 2019) in the Company’s common stock, the NYSE Market Index, the SIC Code 3826 Index and the S&P 500 Index. The return of the indices is calculated assuming reinvestment of dividends during the period presented. The Company has not paid any dividends since its IPO. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN SINCE DECEMBER 31, 2014
AMONG WATERS CORPORATION, NYSE MARKET INDEX, SIC CODE 3826 INDEX – LABORATORY ANALYTICAL INSTRUMENTS AND S&P 500 INDEX
 
                                                 
 
2014
 
 
2015
 
 
2016
 
 
2017
 
 
2018
 
 
2019
 
WATERS CORPORATION
  $
100.00
    $
119.39
    $
119.22
    $
171.39
    $
167.36
    $
207.28
 
NYSE MARKET INDEX
  $
100.00
    $
95.91
    $
107.36
    $
127.46
    $
116.06
    $
145.66
 
SIC CODE INDEX
  $
100.00
    $
111.14
    $
102.42
    $
156.71
    $
165.13
    $
205.80
 
S&P 500 INDEX
  $
100.00
    $
101.38
    $
113.51
    $
138.29
    $
132.23
    $
173.86
 
 
 
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Purchases of Equity Securities by the Issuer
The following table provides information about purchases by the Company during the three months ended December 31, 2019 of equity securities registered by the Company under the Exchange Act (in thousands, except per share data):
                                 
Period
 
Total
Number of
Shares
Purchased (1)
 
 
Average
Price Paid
per Share
 
 
Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs (2)
 
 
Maximum Dollar
Value of Shares
that May Yet Be
Purchased Under
the Programs (2)
 
September 29, 2019 to October 26, 2019
   
646
    $
217.06
     
646
    $
2,112,901
 
October 27, 2019 to November 23, 2019
   
797
    $
214.93
     
797
    $
1,941,602
 
November 24, 2019 to December 31, 2019
   
1,092
    $
228.96
     
1,092
    $
1,691,643
 
                                 
Total
   
2,535
    $
221.52
     
2,535
    $
1,691,643
 
                                 
 
 
 
(1) The Company’s repurchase activity related to the vesting of restricted stock units during the three months ended December 31, 2019 was insignificant.
 
 
(2) In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock in open market or private transactions over a
two-year
period. This new program replaced the remaining amounts available under the
pre-existing
authorization.
 
 
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Item 6:
Selected Financial Data
 
 
The following table sets forth selected historical consolidated financial and operating data for the periods indicated. The statement of operations and balance sheet data is derived from financial statements for the years 2019, 2018, 2017, 2016 and 2015. The Company’s financial statements as of December 31, 2019 and 2018, and for each of the three years in the period ended December 31, 2019 are included in Part II, Item 8, Financial Statements and Supplementary Data, of this Form
10-K.
                                         
In thousands, except per share
and employees data
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
STATEMENT OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
  $
2,406,596
    $
2,419,929
    $
2,309,078
    $
2,167,423
    $
2,042,332
 
Income from operations before income taxes
  $
678,239
    $
682,146
    $
641,097
    $
600,114
    $
541,918
 
Net income*
  $
592,198
    $
593,794
    $
20,311
    $
521,503
    $
469,275
 
Net income per basic common share*
  $
8.76
    $
7.71
    $
0.25
    $
6.46
    $
5.70
 
Weighted-average number of basic common shares
   
67,627
     
76,992
     
79,793
     
80,786
     
82,336
 
Net income per diluted common share*
  $
8.69
    $
7.65
    $
0.25
    $
6.41
    $
5.65
 
Weighted-average number of diluted common shares and equivalents
   
68,166
     
77,618
     
80,604
     
81,417
     
83,087
 
BALANCE SHEET AND OTHER DATA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and investments
  $
337,144
    $
1,735,224
    $
3,393,701
    $
2,813,032
    $
2,399,263
 
Working capital, including current maturities of debt**
  $
721,157
    $
2,214,232
    $
3,663,977
    $
3,115,124
    $
2,649,457
 
Total assets**
  $
2,557,055
    $
3,727,426
    $
5,324,354
    $
4,662,059
    $
4,268,677
 
Long-term debt
  $
1,580,797
    $
1,148,172
    $
1,897,501
    $
1,701,966
    $
1,493,027
 
Stockholders’ (deficit) equity***
  $
(216,281
)   $
1,567,258
    $
2,233,788
    $
2,301,949
    $
2,058,851
 
Employees
   
7,467
     
7,246
     
7,020
     
6,899
     
6,594
 
 
 
 
* The provision for income taxes for 2017 includes a $550 million estimate for the impact of the enactment of the 2017 Tax Act, which was signed into law on December 22, 2017. The $550 million income tax provision reduced net income per share by $6.82. The $550 million income tax provision primarily consists of an estimated transition tax, as well as estimated income tax provisions for state and withholding taxes and a provision associated with the remeasurement of the Company’s deferred tax assets and liabilities from 35% to the new U.S. corporate income tax rate of 21%.
 
 
The Company adopted new accounting guidance related to stock-based compensation in 2017. The new accounting guidance requires the excess tax benefits or deficiencies related to stock-based compensation to be reflected in the consolidated statements of operations as a component of the provision for income taxes, whereas they were previously recognized in equity. This aspect of the new accounting guidance was required to be adopted on a prospective basis for the statement of operations and retroactive restatement was not permitted. In 2019, 2018 and 2017, the Company recognized an excess tax benefit, which decreased income tax expense by $9 million, $9 million and $20 million, respectively, and added $0.14, $0.11 and $0.24, respectively, to net income per diluted share.
In addition, in December 2018, the Company settled a pension plan obligation by making
lump-sum
cash payments and purchasing annuity contracts for participants to permanently extinguish the pension plan’s obligations. As a result, the Company recorded a $46 million charge, which consisted of a $6 million cash contribution to the plan and a $40 million
non-cash
charge related to the reversal of unrecognized actuarial losses recorded in accumulated other comprehensive income in the stockholders’ equity. The $46 million
pre-tax
charge reduced net income per diluted share by $0.39.
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** In January 2019, the company adopted new accounting guidance related to the accounting for leases. The new guidance requires lessees to present the assets and liabilities that arise from leases on their balance sheets. The standard required using a modified retrospective transition approach to be applied to leases existing as of, or entered into after, January 1, 2019. As a result, the Company recorded a $93 million
right-of-use
asset as of December 31, 2019. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows and stockholder’s (deficit) equity.
 
 
*** In 2018, the Company adopted new accounting guidance which 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. The Company adopted this standard as of January 1, 2018 with a $4 million charge to beginning retained earnings in the consolidated balance sheet.
 
 
Item 7:
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
 
Business and Financial Overview
The Company has two operating segments: Waters
TM
and TA
TM
. Waters products and services primarily consist of high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC
TM
” and together with HPLC, referred to as “LC”), mass spectrometry (“MS”) and precision chemistry consumable products and related services. TA products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Company’s products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and governmental customers. These customers use the Company’s products to detect, identify, monitor and measure the chemical, physical and biological composition of materials and to predict the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids in various industrial, consumer goods and healthcare products.
The Company’s operating results are as follows for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands, except per share data):
                                         
 
Year Ended December 31,
   
% change
 
 
2019
 
 
2018
 
 
2017
 
 
2019 vs.
2018
 
 
2018 vs.
2017
 
Revenues:
   
     
     
   
 
 
 
 
 
Product sales
  $
1,567,189
    $
1,604,993
    $
1,552,349
   
 
(2
%)
 
 
3
%
Service sales
   
839,407
     
814,936
     
756,729
   
 
3
%
 
 
8
%
                                         
Total net sales
   
2,406,596
     
2,419,929
     
2,309,078
   
 
(1
%)
 
 
5
%
Costs and operating expenses:
   
     
     
   
 
 
 
 
 
Cost of sales
   
1,010,700
     
992,564
     
947,067
   
 
2
%
 
 
5
%
Selling and administrative expenses
   
534,791
     
536,902
     
544,363
   
 
—  
 
 
 
(1
%)
Research and development expenses
   
142,955
     
143,403
     
132,593
   
 
—  
 
 
 
8
%
Purchased intangibles amortization
   
9,693
     
7,712
     
6,743
   
 
26
%
 
 
14
%
Litigation (settlement) provision
   
—  
     
(426
)    
11,114
   
 
100
%
 
 
(104
%)
Acquired
in-process
research and development
   
—  
     
—  
     
5,000
   
 
—  
 
 
 
(100
%)
                                         
Operating income
   
708,457
     
739,774
     
662,198
   
 
(4
%)
 
 
12
%
Operating income as a % of sales
 
 
29.4
%
 
 
30.6
%
 
 
28.7
%
 
 
 
 
 
 
Other expense
   
(3,586
)    
(47,794
)    
(340
)  
 
**
 
 
**
Interest expense, net
   
(26,632
)    
(9,834
)    
(20,761
)  
 
171
%
 
 
(53
%)
                                         
Income before income taxes
   
678,239
     
682,146
     
641,097
   
 
(1
%)
 
 
6
%
Provision for income taxes
   
86,041
     
88,352
     
620,786
   
 
(3
%)
 
 
(86
%)
                                         
Net income
  $
592,198
    $
593,794
    $
20,311
   
 
—  
 
 
 
**
                                         
Net income per diluted common share
  $
8.69
    $
7.65
    $
0.25
   
 
14
%
 
 
**
 
 
 
** Percentage not meaningful
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Table of Contents
The Company’s net sales decreased approximately 1% in 2019 as compared to 2018, and increased 5% in 2018 as compared to 2017. Foreign currency translation decreased sales by 2% in 2019 and increased sales by 1% in 2018. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year.
Instrument system sales decreased 4% and increased 2% in 2019 and 2018, respectively. In 2019, the decrease in instrument system sales was primarily driven by weaker demand for our products by our customers due to uncertainty caused by macroeconomic conditions and governmental policy changes. In 2018, the increase in instrument system sales was primarily driven by an increase in demand for LC and TA’s instrument systems. Foreign currency translation decreased instrument system sales by 1% in 2019 and increased instrument system sales by 1% in 2018. Recurring revenues (combined sales of precision chemistry consumables and services) increased 3% and 8% in 2019 and 2018, respectively, as a result of a larger installed base of customers and higher billing demand for service sales. Recurring revenues were impacted by foreign currency, which decreased sales by 2% in 2019 and increased sales by 2% in 2018.
Geographically, the decline in the Company’s sales in 2019 was a result of increased sales in the U.S., Canada, Japan and the rest of Asia being offset by a decrease in sales in other geographies on weaker demand for our products due to uncertainty caused by macroeconomic conditions, primarily from Brexit as well as Latin America, and governmental policy changes in China. In addition, the effect of foreign currency translation negatively impacted sales by 2% overall. The Company’s sales growth in 2018 was primarily driven by the 7% sales growth in Asia, with China’s sales growing 15%.
Sales in Europe decreased 4% in 2019 and increased 4% in 2018. In 2019, Europe sales were impacted by weak demand in Western Europe caused by the political uncertainties of Brexit and the effect of foreign currency translation, which reduced sales by 4% in 2019 and increased sales by 3% in 2018.
Sales in the Americas decreased 1% in 2019 and increased 3% in 2018. The Americas sales in 2019 were negatively impacted by macroeconomic conditions in Latin America, and the 2018 Americas sales growth can be attributed to the increase in sales after the lower customer demand stemming from the 2017 natural disasters in the U.S., Mexico and Puerto Rico.
Sales to pharmaceutical customers were flat in 2019 and grew 5% in 2018. Sales to pharmaceutical customers in 2019 were negatively impacted by the lower customer demand in China for our instrument systems as a result of changes in governmental policy and lower sales in Latin America. Despite the sales declines in China and Latin America, the need for global access to prescription drugs and the testing of newer and complex biologic drugs increased in the rest of the world.
Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, declined 2% in 2019 and grew 2% in 2018. The 2019 industrial customer sales were negatively impacted by a 6% decline in TA instrument system sales and a 1% decline from the effect of foreign currency translation.
Combined sales to academic and governmental customers increased 2% in 2019 and 8% in 2018, with the effect of foreign currency translation decreasing sales by 1% in 2019 and increasing sales by 1% in 2018. Sales to academic and governmental customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales growth rates can vary significantly from period to period.
Operating income was $708 million in 2019, a decrease of 4% as compared to 2018. This decrease can be attributed to lower sales volume, the effect of foreign currency translation and $10 million of severance-related costs in connection with a reduction in workforce that occurred in early 2019, offset by lower variable incentive compensation costs.
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Table of Contents
Operating income increased 12% in 2018 as compared to 2017. This increase was primarily a result of the effect of higher sales volume achieved in 2018, as well as the effect of approximately $33 million of facility closure, litigation and intellectual property payment charges from 2017 that did not recur in 2018.
The Company’s effective tax rates were 12.7%, 13.0% and 96.8% for 2019, 2018 and 2017, respectively. Net income per diluted share was $8.69, $7.65 and $0.25 in 2019, 2018 and 2017, respectively. In 2018, the Company settled a pension plan obligation and incurred a $46 million expense which reduced the net income per diluted share by $0.39. In 2017, The Company incurred a $550 million income tax provision related to the 2017 Tax Cuts and Jobs Act (“2017 Tax Act”) which reduced the net income per diluted share by $6.82, and excluding the 2017 Tax Act income tax provision, the Company’s effective tax rate in 2017 would have been 11.0%.
The Company generated $643 million, $604 million and $698 million of net cash flows from operations in 2019, 2018 and 2017, respectively. The increase in operating cash flow in 2019 was primarily a result of payments made in 2018 that did not recur, including $103 million of income tax payments made in the U.S. relating to the Company’s estimated 2017 transition tax liability and 2018 estimated tax payments, a $15 million litigation settlement payment and $11 million of contributions to certain defined benefit pension plans. Included in the 2019 net cash flow from operations is $29 million of income tax payments made in the U.S. in relation to the 2017 transition tax liability. Over the next three years, the Company is required to make annual U.S. federal tax payments of approximately $38 million to tax authorities in connection with the Company’s estimated remaining transition tax liabilities of $404 million under the 2017 Tax Act. The final 60% of the total liability is required to be paid over a three-year period beginning in 2023.
Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $164 million, $96 million and $85 million in 2019, 2018 and 2017, respectively. In 2019, $68 million of capital expenditures paid related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $85 million of costs for this facility through the end of 2019. In 2018, the Company acquired the sole intellectual property rights to the Desorption Electrospray Ionization (“DESI”) imaging technology for $30 million in cash and a future contractual obligation to pay a minimum royalty of $3 million over the remaining life of the patent. DESI is a mass spectrometry imaging technique that is used to develop medical therapies.
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a
two-year
period. During 2019, 2018 and 2017, the Company repurchased 11.1 million, 6.8 million and 1.8 million shares of the Company’s outstanding common stock at a cost of $2.5 billion, $1.3 billion and $323 million, respectively, under the January 2019 authorization and other previously announced programs. As of December 31, 2019, the Company has a total of $1.7 billion authorized for future repurchases. The Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits.
In September 2019, the Company issued fixed interest rate senior unsecured notes with an aggregate principal amount of $500 million, of which $200 million of the outstanding notes matures in seven years and the remaining $300 million matures in 10 years. The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes.
During 2019 and 2018, the Company entered into $260 million and $300 million, respectively, of
U.S.-to-Euro
interest rate cross-currency swap agreements that hedge the Company’s net investment in its Euro denominated net assets, bringing the total currency interest rate cross-currency swap agreement notional value to $560 million at December 31, 2019. As a result of entering into these agreements, the Company lowered its net interest expense by $12 million and $3 million during 2019 and 2018, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $15 million in 2020, $11 million in 2021 and $1 million in 2022 as the three-year term of the agreements expire.
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Table of Contents
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. The Company expects to incur approximately $25 million of severance costs, lease termination costs and other related costs during 2020.
In January 2020, the Company entered into a definitive agreement to acquire Andrew Alliance, an innovator in specialty laboratory automation technology, including software and robotics for approximately $80 million. This acquisition is not expected to have a material effect on the Company sales and expenses in 2020.
Results of Operations
Sales by Geography
Geographic sales information is presented below for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):
                                         
 
Year Ended December 31,
   
% change
 
 
2019
 
 
2018
 
 
2017
 
 
2019 vs.
2018
 
 
2018 vs.
2017
 
Net Sales:
   
     
     
     
     
 
Asia:
   
     
     
   
 
 
 
 
 
China
  $
439,557
    $
443,321
    $
387,059
   
 
(1
%)
 
 
15
%
Japan
   
180,707
     
173,357
     
167,258
   
 
4
%
 
 
4
%
Asia Other
   
318,848
     
305,613
     
308,300
   
 
4
%
 
 
(1
%)
                                         
Total Asia
   
939,112
     
922,291
     
862,617
   
 
2
%
 
 
7
%
Americas:
   
     
     
   
 
 
 
 
 
United States
   
692,277
     
683,596
     
669,274
   
 
1
%
 
 
2
%
Americas Other
   
137,964
     
151,581
     
140,715
   
 
(9
%)
 
 
8
%
                                         
Total Americas
   
830,241
     
835,177
     
809,989
   
 
(1
%)
 
 
3
%
Europe
   
637,243
     
662,461
     
636,472
   
 
(4
%)
 
 
4
%
                                         
Total net sales
  $
2,406,596
    $
2,419,929
    $
2,309,078
   
 
(1
%)
 
 
5
%
                                         
 
 
In 2019, sales in China were negatively impacted by economic uncertainty caused by certain regulatory changes in our food and pharmaceutical markets. The 4% increase in sales in Japan was driven by instrument systems, primarily to pharmaceutical and academic and governmental customers, as well as foreign currency translation, which increased Japan’s sales by 2% in 2019. Sales growth in Asia Other was due primarily to pharmaceutical and academic and governmental customer classes in 2019. Sales in the U.S. increased by 1% despite large pharmaceutical customers slowing capital spending on our instrument systems. Sales declines in the rest of the Americas and Europe were broad-based across all product and customer classes due to macroeconomic conditions and political instability, except in Europe where sales to academic and governmental customers grew 8%. Sales in Europe were also negatively impacted by the effect of foreign currency translation, which decreased sales 4% in 2019.
In 2018, sales in China increased across all product lines and were driven by double-digit increases in sales to pharmaceutical, academic and governmental customers. The effect of foreign currency translation increased sales in Japan by 2% in 2018 and sales growth was also driven by increased sales to pharmaceutical and industrial customers. The sales decline in Asia Other in 2018 was a result of lower customer demand in India and weaker sales to environmental customers in the first quarter of 2018. In 2018, sales growth in Europe was driven by TA’s products and services and recurring revenues to pharmaceutical and industrial customers. In addition, the effect of foreign currency translation increased sales in Europe by 3% in 2018. Sales growth in the U.S. in 2018 was driven by recurring revenues and TA instruments. Sales in the rest of the Americas had double-digit sales growth for instrument systems and double-digit sales growth for pharmaceutical customers, which was offset by a decline in sales to industrial customers.
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Net sales by customer class are presented below for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):
                                         
 
Year Ended December 31,
   
% change
 
 
2019
 
 
2018
 
 
2017
 
 
2019 vs.
2018
 
 
2018 vs.
2017
 
Pharmaceutical
  $
1,365,275
    $
1,365,731
    $
1,294,668
   
 
—  
 
 
 
5
%
Industrial
   
719,377
     
737,144
     
721,088
   
 
(2
%)
 
 
2
%
Academic and governmental
   
321,944
     
317,054
     
293,322
   
 
2
%
 
 
8
%
                                         
Total net sales
  $
2,406,596
    $
2,419,929
    $
2,309,078
   
 
(1
%)
 
 
5
%
                                         
 
 
In 2019, sales to pharmaceutical customers were negatively impacted by the effect of foreign currency translation, which decreased sales to pharmaceutical customers by 2%, as well as a slower release of capital budgets by our customers due to uncertain macroeconomic conditions due to Brexit and regulatory changes in our food and pharmaceutical markets in China. Offsetting those declines was an increase in the need for global access to prescription drugs and the testing of newer and complex biologic drugs. The decline in sales to industrial customers in 2019 was due to weaker demand for our
LC-MS
instruments and also a 4% decline in TA sales. The increase in sales to academic and governmental customers was primarily due to higher instrument system sales.
In 2018, sales to pharmaceutical customers were driven by recurring revenues, with double-digit growth in China, Canada and Latin America. Sales growth for the industrial market in 2018 was driven by TA products and services, and
mid-single-digit
sales growth in Europe, Japan and India. The increase in sales to academic and governmental customers in 2018 was broad-based across all product classes and geographies, with double-digit growth in China, India and Canada.
Waters Products and Services Net Sales
Net sales for Waters products and services are as follows for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):
                                                                 
 
Year Ended December 31,