WATERS CORPORATION
Business 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 government 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.
COVID-19
Pandemic
Both the Company's domestic and international operations have been and continue
to be affected by the ongoing global
COVID-19
pandemic that has led to volatility and uncertainty in the U.S. and
international markets. The Company is actively managing its business to respond
to the
COVID-19
impact; however, the Company cannot reasonably estimate the length or severity
of the
COVID-19
pandemic, including the effect of the emergence of variants of the virus, or the
related response, or the extent to which the disruption may materially impact
the Company's business, consolidated financial position, consolidated results of
operations or consolidated cash flows in the future.
During the six months ended July 3, 2021 , the
COVID-19
pandemic did not materially impact the Company's manufacturing facilities or
those of the third parties to whom it outsources certain manufacturing
processes, the distribution centers where its inventory is managed, or the
operations of its logistics and other service providers. The Company also did
not see material disruptions or delays in shipments of certain materials or
components of its products.
The Company has taken decisive and appropriate actions throughout the pandemic,
and continues to take proactive measures to guard the health of its global
employee base and the safety of all customer interactions. The Company has
implemented rigorous protocols to promote a safe work environment in all of its
locations that are operational around the world and continues to closely monitor
and update its multi-phase process for the safe return of employees to their
physical workplaces as social distancing, governmental requirements, including
capacity limitations, and other protocols allow.
The vast majority of the markets the Company serves, most notably the
pharmaceutical, biomedical research, materials sciences, food/environmental and
clinical markets, have continued to operate at various levels, and the Company
is working closely with these customers to facilitate their seamless operation.
The
COVID-19
pandemic continues to be fluid with uncertainties and risks remaining across the
global economy. During 2020, the Company took a proactive approach managing
through this unpredictability and implemented a series of cost reduction
actions, which included temporary salary reductions, furloughs and reductions in
non-essential
spending and other working capital reductions in order to preserve liquidity and
enhance financial flexibility. These cost reductions were completed by the end
of 2020; however, the Company's plan will be adjusted accordingly depending on
the pace of the recovery and any further governmental restrictions that may be
implemented. The 2020 cost actions reduced the Company's spending by
approximately $100 million with 58% of these savings being realized by the end
of the second quarter of 2020 and approximately 21% of the savings being
realized in each of the third and fourth quarters of 2020. The majority of these
cost saving actions were reinstated at the beginning of 2021 and as a result,
the Company expects a significant increase in its expenses and a negative impact
on its cash flows during the second half of 2021 from a normalization of these
costs.
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Table of Contents
Financial Overview
The Company's operating results are as follows for the three and six months
ended July 3, 2021 and June 27, 2020 (dollars in thousands, except per share
data):
Three Months Ended Six Months Ended
July 3, June 27, June 27,
2021 2020 % change July 3, 2021 2020 % change
Revenues:
Product sales $ 440,955 $ 314,920 40 % $ 822,977 $ 589,103 40 %
Service sales 240,692 205,064 17 % 467,215 395,820 18 %
Total net sales 681,647 519,984 31 % 1,290,192 984,923 31 %
Costs and operating expenses:
Cost of sales 280,254 213,134 31 % 534,401 423,778 26 %
Selling and administrative expenses 158,213 117,449 35 % 301,409 265,184 14 %
Research and development expenses 44,949 31,155 44 % 83,041 66,144 26 %
Purchased intangibles amortization 1,809 2,618 (31 %) 3,649 5,243 (30 %)
Litigation provision - 514 (100 %) - - -
Acquired
in-process
research and development - - - - 1,180 (100 %)
Operating income 196,422 155,114 27 % 367,692 223,394 65 %
Operating income as a % of sales 28.8 % 29.8 % 28.5 % 22.7 %
Other income (expense) 9,321 (736 ) * * 18,680 (1,110 ) * *
Interest expense, net (8,329 ) (9,015 ) (8 %) (15,174 ) (19,058 ) (20 %)
Income before income taxes 197,414 145,363 36 % 371,198 203,226 83 %
Provision for income taxes 30,122 22,434 34 % 55,779 26,735 109 %
Net income $ 167,292 $ 122,929 36 % $ 315,419 $ 176,491 79 %
Net income per diluted common share $ 2.69 $ 1.98 36 % $ 5.05 $ 2.83 78 %
** Percentage not meaningful
Despite the various ongoing challenges caused by the COVID-19 pandemic, the Company's net sales increased 31% in both the second quarter and first half of 2021 as compared to the second quarter and first half of 2020. The sales growth in the 2021 periods was driven by strong sales growth across all major geographies, end markets, and product categories. Overall, sales benefited from stronger demand for our products and services across all major geographies as a result of our customers continuing to resume laboratory and manufacturing operations, particularly inChina where sales grew 42% and 68% in the second quarter and first half of 2021, respectively. Foreign currency translation increased total sales by 4% in both the second quarter and first half of 2021. In addition, the Company's first half of 2021 included five more calendar days than the first half of 2020. Instrument system sales increased 43% and 46% for the second quarter and first half of 2021, respectively, due to customer demand continuing to increase to pre-pandemic levels as customer laboratories and manufacturing facilities continued to return to normal operations. This strength was broad-based, particularly in LC, LC-MS and TA instrument system sales. Foreign currency translation increased instrument system sales by 3% and 4% in the second quarter and first half of 2021, respectively. Recurring revenues (combined sales of precision chemistry consumables and services) increased 22% and 21% for the second quarter and first half of 2021, respectively, with foreign currency translation increasing sales by 4% in both the quarter and first half of the year. In the first half of 2021, recurring revenues benefited from five additional calendar days as compared to the first half of 2020. Geographically, the Company's sales growth in the second quarter and first half of 2021 was broad-based across all major regions. During the second quarter of 2021, sales increased 30% inAsia , 29% in theAmericas , and 36% inEurope , with the effect of foreign currency translation increasing sales in those regions by 2%, 1%, and 11%, respectively. During the first half of 2021, sales increased 36% inAsia , 22% in theAmericas , and 36% inEurope , with the effect of foreign currency translation increasing sales in those regions by 2%, 1%, and 11%, respectively. In the second quarter and first half of 2021,China sales increased 42% and 68%, respectively, driven by stronger demand due to customers resuming laboratory and manufacturing operations as well as the pent-up demand caused by the 32% decline inChina's sales in the first half of 2020 when the negative impact of the pandemic lockdowns was occurring. Foreign currency translation increasedChina sales growth by 5% and 6% in the quarter and first half of 2021, respectively. Sales increased 26% in theU.S. , 9% inJapan and 47% inIndia in the quarter. Foreign currency translation decreased sales growth by 2% inJapan and 11% inIndia in the second quarter of 2021. 31 -------------------------------------------------------------------------------- Table of Contents During the second quarter of 2021, sales to pharmaceutical customers increased 34%, driven by growth in all regions, including 48% inChina , 49% inIndia , and 33% inEurope as strong customer demand continued to recover to pre-pandemic levels. Foreign currency translation increased pharmaceutical sales growth by 3%. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 33%, with the effect of foreign currency translation increasing sales growth by 5%. During the second quarter of 2021, combined sales to academic and government customers increased 10%, as customers continued to ramp up their spending in the first half of the year following lower spending levels throughout 2020 due to the COVID-19 pandemic. Foreign currency translation increased academic and government sales growth by 3%. Sales to our academic and government customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales can vary significantly from period to period. During the first half of 2021, sales to pharmaceutical customers increased 33%, driven by growth in all regions as strong customer demand continued to recover to pre-pandemic levels. Foreign currency translation increased pharmaceutical sales growth by 4%. Combined sales to industrial customers increased 31%, with the effect of foreign currency translation increasing sales growth by 5%. During the first half of 2021, combined sales to academic and government customers increased 20%, as customers ramped up their spending in the first half of the year following lower spending levels throughout 2020 due to the COVID-19 pandemic. Foreign currency translation increased academic and government sales growth by 3%. Operating income increased 27% and 65% for the second quarter and first half of 2021, respectively. These increases were primarily a result of the increase in sales volumes caused by our customers continuing to resume laboratory and manufacturing operations throughout the world. Both the quarter and year-to-date operating income increases were partially offset by the restoration of expenses that had been decreased in the 2020 periods which consisted of a series of cost reduction actions that included salary reductions, furloughs and reductions in non-essential spending that increased operating income by approximately$54 million in 2020. In addition, operating income in the second quarter and first half of 2020 also included$3 million and$21 million , respectively, of severance-related costs in connection with a reduction in workforce and lease termination costs. The Company generated$361 million and$350 million of net cash flows from operations in the first half of 2021 and 2020, respectively. This increase in operating cash flow was primarily a result of the increase in sales volumes being offset by the$54 million benefit from the reduction in expenses from the COVID-19 pandemic cost actions implemented and working capital improvement during the second quarter of 2020. Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of$77 million and$97 million in the first half of 2021 and 2020, respectively. The cash flows from investing activities in the first half of 2021 also included$28 million of capital expenditures related to the expansion of the Company's precision chemistry consumable operations in theU.S. The Company has incurred$182 million on this facility through the end of the first half of 2021 and anticipates spending a total of$215 million to build and equip this new state-of-the-art manufacturing facility. InMarch 2021 , the Company issued senior unsecured notes with an aggregate principal amount of$500 million . The Series N$100 million notes have a five-year term and a fixed interest rate of 1.68%. The Series O$400 million notes have a 10-year term and a fixed interest rate of 2.25%. InJanuary 2019 , the Company's Board of Directors authorized the Company to repurchase up to$4 billion of its outstanding common stock over a two-year period. During the first half of 2021 and 2020, the Company repurchased$339 million and$167 million of the Company's outstanding common stock, respectively, under authorized share repurchase programs. While the Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company's sales and profits. InDecember 2020 , the Company's Board of Directors authorized the extension of the share repurchase program throughJanuary 21, 2023 . 32 -------------------------------------------------------------------------------- Table of Contents Results of Operations Sales by Geography Geographic sales information is presented below for the three and six months endedJuly 3, 2021 andJune 27, 2020 (dollars in thousands): Three Months Ended Six Months Ended June 27, June 27, July 3, 2021 2020 % change July 3, 2021 2020 % change Net Sales: Asia: China$ 127,225 $ 89,816 42 %$ 230,144 $ 137,047 68 % Japan 45,113 41,230 9 % 95,409 86,319 11 % Asia Other 97,609 77,163 26 % 173,936 143,923 21 % Total Asia 269,947 208,209 30 % 499,489 367,289 36 % Americas: United States 186,915 148,928 26 % 349,348 292,826 19 % Americas Other 37,979 25,854 47 % 72,903 54,132 35 % Total Americas 224,894 174,782 29 % 422,251 346,958 22 % Europe 186,806 136,993 36 % 368,452 270,676 36 % Total net sales$ 681,647 $ 519,984 31 %$ 1,290,192 $ 984,923 31 % In the second quarter and first half of 2021, sales benefited from stronger demand for our products and services across all major geographies and customer classes as a result of our customers continuing to resume laboratory and manufacturing operations, as well as the pent-up demand from 2020 caused by the pandemic, particularly inChina , where sales grew 42% and 68%, respectively. The sales strength was broad-based, driven by continued growth in recurring revenues and the strong sales growth in instruments, particularly in LC and LC-MS instrument system sales which grew double-digits across all major geographies. Recurring revenues sales growth was favorably impacted by the five additional calendar days in the first half of 2021 as compared to the first half of 2020. Sales byTrade Class Net sales by customer class are presented below for the three and six months endedJuly 3, 2021 andJune 27, 2020 (dollars in thousands): Three Months Ended Six Months Ended June 27, June 27, July 3, 2021 2020 % change July 3, 2021 2020 % change Pharmaceutical$ 416,705 $ 311,018 34 %$ 776,853 $ 583,581 33 % Industrial 202,579 152,110 33 % 385,852 295,464 31 % Academic and government 62,363 56,856 10 % 127,487 105,878 20 % Total net sales$ 681,647 $ 519,984 31 %$ 1,290,192 $ 984,923 31 % In the second quarter and first half of 2021, the increase in sales to pharmaceutical customers was broad-based with double-digit sales growth across all major geographies, primarily due to stronger demand for our products and services as a result of our customers continuing to resume laboratory and manufacturing operations. Sales also benefited from the demand from certain pharmaceutical customers involved with COVID-19 diagnostic testing and the increase in the development of new drugs and therapies. Foreign currency translation increased sales to pharmaceutical customers by 3% in the second quarter and 4% in the first half of 2021. Sales to industrial and academic and government 33 -------------------------------------------------------------------------------- Table of Contents customers increased double-digits in both the second quarter and first half of 2021, primarily due to customers continuing to resume laboratory and manufacturing operations during the year. Foreign currency translation increased sales to industrial customers by 5% in both the second quarter and first half of 2021, and increased sales to academic and government customers by 3% in both the second quarter and first half of 2021. Waters Products and ServicesNet Sales Net sales for Waters products and services were as follows for the three and six months endedJuly 3, 2021 andJune 27, 2020 (dollars in thousands): Three Months Ended % of % of July 3, 2021 Total June 27, 2020 Total % change Waters instrument systems$ 261,363 43 %$ 181,399 39 % 44 % Chemistry consumables 126,459 21 % 95,105 20 % 33 % Total Waters product sales 387,822 64 % 276,504 59 % 40 % Waters service 219,502 36 % 189,205 41 % 16 % Total Waters net sales$ 607,324 100 %$ 465,709 100 % 30 % Six Months Ended % of % of July 3, 2021 Total June 27, 2020 Total % change Waters instrument systems$ 477,435 42 %$ 324,228 37 % 47 % Chemistry consumables 245,433 21 % 192,350 22 % 28 % Total Waters product sales 722,868 63 % 516,578 59 % 40 % Waters service 426,334 37 % 363,342 41 % 17 % Total Waters net sales$ 1,149,202 100 %$ 879,920 100 % 31 % Waters products and service sales increased 30% and 31% in the second quarter and first half of 2021, respectively, with the effect of foreign currency translation increasing Waters sales by 3% and 4% in the second quarter and first half of 2021, respectively. Chemistry consumables sales increased double-digits in both the quarter and first half of the year driven by the strong demand inChina , where sales grew 45% year-to-date, in addition to increased demand in theU.S. ,Europe ,Japan , andIndia driven by the uptake in columns and application-specific testing kits to pharmaceutical customers. Waters service sales increased due to higher service demand billings as COVID-19 business closures and restrictions began to ease, particularly inChina andEurope . Waters recurring revenues also benefited by five additional calendar days in the first half of the year. Waters instrument system sales (LC and MS technology-based) increased in all major geographical regions primarily due to higher sales as a result of stronger demand for our products and services as our customers continued to resume laboratory and manufacturing operations throughout the world. In the second quarter of 2021, Waters sales growth was broad-based and increased 34% inEurope , 27% in theAmericas and 30% inAsia , with sales inChina growing 44%. Foreign currency translation increased Waters sales by 11% and 4% inEurope andChina , respectively, and 1% in both theAmericas andAsia . 34 -------------------------------------------------------------------------------- Table of Contents TA Product and ServicesNet Sales Net sales for TA products and services were as follows for the three and six months endedJuly 3, 2021 andJune 27, 2020 (dollars in thousands): Three Months Ended % of % of July 3, 2021 Total June 27, 2020 Total % change TA instrument systems$ 53,133 71 %$ 38,416 71 % 38 % TA service 21,190 29 % 15,859 29 % 34 % Total TA net sales$ 74,323 100 %$ 54,275 100 % 37 % Six Months Ended % of % of July 3, 2021 Total June 27, 2020 Total % change TA instrument systems$ 100,109 71 %$ 72,525 69 % 38 % TA service 40,881 29 % 32,478 31 % 26 % Total TA net sales$ 140,990 100 %$ 105,003 100 % 34 % TA instrument system and service sales growth in the second quarter and first half of 2021 was broad-based across all major geographies increasing 37% and 34%, respectively, and was primarily driven by stronger demand as a result of our customers continuing to resume laboratory and manufacturing operations. In the second quarter and first half of 2021, the increase in TA instrument system sales was primarily driven by strength in all major regions and the increase in TA service sales was mostly due to customers continuing to resume their operations after the restrictions caused by COVID-19 during 2020, as well as sales of service plans and billings to a higher installed base of customers. The effect of foreign currency translation increased TA's sales by 5% and 4% in the second quarter and first half of 2021, respectively. Cost of Sales Cost of sales for the second quarter and first half of 2021 increased 31% and 26%, respectively, primarily due to the increase in sales volumes during the year, as well as the restoration in 2021 of expenses that had been reduced as a result of the COVID-19 pandemic that consisted of salary reductions, furloughs and reductions in non-essential spending. Cost of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix, product costs of instrument systems and amortization of software platforms. At current foreign currency exchange rates, the Company expects foreign currency translation to increase gross profit slightly for the remainder of 2021. To date, the Company has not had significant issues with its supply chain; however, the prolonged impact of COVID-19 on businesses could negatively impact our suppliers' ability to deliver goods to us, as well as possibly increase the cost of those goods used in our manufacturing operations. Selling and Administrative Expenses Selling and administrative expenses increased 35% and 14% for the second quarter and first half of 2021, respectively. The increase in selling and administrative expenses in these periods can be attributed to the salary merit and incentive compensation increases compared to 2020 which was impacted by the$33 million reduction in expenses from salary reductions, furloughs and reductions in non-essential spending. In addition, the effect of foreign currency translation increased selling and administrative expenses by 3% for both the second quarter and first half of 2021. As a percentage of net sales, selling and administrative expenses were 23.2% and 23.4% for the second quarter and first half of 2021, and 22.6% and 26.9% for the second quarter and first half of 2020, respectively. 35 -------------------------------------------------------------------------------- Table of Contents Research and Development Expenses Research and development expenses increased 44% and 26% in the second quarter and first half of 2021, respectively. The increase in expense in these periods was impacted by the$9 million reduction in expenses from salary reductions, furloughs and reductions in non-essential spending in 2020. The impact of foreign currency exchange was neutral in the second quarter of 2021 and decreased expenses by approximately 1% in the first half of 2021. Other Income (Expense), net In the second quarter of 2021, the Company executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation andBruker Daltronik GmbH regarding their timsTOF product line. In connection with the settlement, the Company is entitled to receive$10 million in guaranteed payments, including minimum royalty payments, which were recognized within other income in our consolidated statement of operations. In the first quarter and first half of 2021, the Company recorded an unrealized gain of$10 million due to an observable change in the fair value of an existing investment the Company does not have the ability to exercise significant influence over. Interest Expense, Net The decrease in net interest expense in the second quarter and first half of 2021 was primarily attributable to interest earned on higher cash, cash equivalents and investment balances. Provision for Income Taxes The four principal jurisdictions in which the Company manufactures are theU.S. ,Ireland , theU.K. andSingapore , where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as ofJuly 3, 2021 . The Company had a contractual tax rate of 0% on qualifying activities inSingapore throughMarch 2021 , based upon the achievement of certain contractual milestones. The Company has a new Development and Expansion Incentive inSingapore that provides a concessionary income tax rate of 5% on certain types of income for the periodApril 1, 2021 throughMarch 31, 2026 . The effect of applying the concessionary income tax rates rather than the statutory tax rate to income from qualifying activities inSingapore increased the Company's net income for the first six months of 2021 and 2020 by$9 million and$7 million , respectively, and increased the Company's net income per diluted share by$0.14 and$0.11 , respectively. The Company's effective tax rate for the second quarter of 2021 and 2020 was 15.3% and 15.4%, respectively. The decrease in the effective income tax rate can be attributed to differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates. The Company's effective tax rate for the first six months of 2021 and 2020 was 15.0% and 13.2%, respectively. The effective tax rate for the first six months ofJuly 3, 2021 includes a$4 million tax benefit related to stock-based compensation. This income tax benefit decreased the effective tax rate by 1.1 percentage points for the first six months ofJuly 3, 2021 . The effective tax rate for the first six months ofJune 27, 2020 includes a$5 million income tax benefit related to certain restructuring charges and a$2 million income tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 2.4 percentage points and 1.2 percentage points, respectively, for the first six months ofJune 27, 2020 . The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates. 36 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Condensed Consolidated Statements of Cash Flows (in thousands): Six Months Ended July 3, 2021 June 27, 2020 Net income$ 315,419 $ 176,491 Depreciation and amortization 64,743 60,203 Stock-based compensation 15,596 18,122 Deferred income taxes 6,107 (777 ) Change in accounts receivable 18,985 86,978 Change in inventories (50,873 ) (27,089 ) Change in accounts payable and other current liabilities (35,328 ) 34,714 Change in deferred revenue and customer advances 91,631 37,558 Other changes (64,836 )
(35,754 )
Net cash provided by operating activities 361,444
350,446
Net cash used in investing activities (281,106 ) (192,335 ) Net cash used in financing activities (48,191 ) (159,366 ) Effect of exchange rate changes on cash and cash equivalents (8,786 ) 4,576 Increase in cash and cash equivalents$ 23,361
$ 3,321
Cash Flow from Operating Activities Net cash provided by operating activities was$361 million and$350 million during the first six months of 2021 and 2020, respectively. This increase in operating cash flow was primarily a result of higher sales volumes in the first six months of 2021 compared to the first six months of 2020. The changes within net cash provided by operating activities include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the changes in net income:
• The changes in accounts receivable were primarily attributable to timing
of payments made by customers and timing of sales. Days sales outstanding
decreased to 73 days at
2020.
• The changes in accounts payable and other current liabilities were a
result of the timing of payments to vendors, as well as the annual
payment of management incentive compensation. The Company also paid
million of tax payments in the first half of 2021 associated with 2017
tax reform.
• Net cash provided from deferred revenue and customer advances results
from annual increases in new service contracts as a higher installed base
of customers renew annual service contracts.
• Other changes were attributable to variation in the timing of various
provisions, expenditures, prepaid income taxes and accruals in other
current assets, other assets and other liabilities.
Cash Flow from Investing Activities
Net cash used in investing activities totaled $281 million and $192 million in
the six months ended July 3, 2021 and June 27, 2020 , respectively. Additions to
fixed assets and capitalized software were $77 million and $97 million in the
six months ended July 3, 2021 and June 27, 2020 , respectively. In February 2018 ,
the Company's Board of Directors approved expanding its precision chemistry
consumable manufacturing operations in the U.S. The Company anticipates spending
an estimated $215 million to build and equip this new
state-of-the-art
manufacturing facility, which will be paid for with existing cash, investments
and debt capacity. The Company incurred $31 million of costs associated with the
construction of this facility during the six months ended July 3, 2021 . The
Company has incurred $182 million on this facility through the end of the second
quarter of 2021.
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During the six months ended July 3, 2021 and June 27, 2020 , the Company
purchased $215 million and $17 million of investments, respectively, while
$18 million and $2 million of investments matured, respectively, and were used
for financing activities described below.
In January of 2020, the Company acquired all of the outstanding stock of Andrew
Alliance, S.A. and its two operating subsidiaries, Andrew Alliance USA, Inc. and
Andrew Alliance France , SASU (collectively "Andrew Alliance "), for $80 million ,
net of cash acquired. The Company had an equity investment in Andrew Alliance
that was valued at $4 million and included as part of the total consideration.
Cash Flow from Financing Activities
In March 2021 , the Company issued senior unsecured notes with an aggregate
principal amount of $500 million . The Series N $100 million notes have a
five-year term and a fixed interest rate of 1.68%. The Series O $400 million
notes have
a 10-year term
and a fixed interest rate of 2.25% The Company used the proceeds from the
issuance of these senior unsecured notes to repay other outstanding debt and for
general corporate purposes. During the six months ended July 3, 2021 and
June 27, 2020 , the Company's net debt borrowings increased by $250 million and
$15 million , respectively. As of July 3, 2021 , the Company had a total of
$1.6 billion in outstanding debt, which consisted of $1.3 billion in outstanding
senior unsecured notes and $300 million borrowed under a term loan under the
credit agreement dated November 2017 ("2017 Credit Agreement"). As of July 3,
2021 , the Company had a total amount available to borrow under the 2017 Credit
Agreement of $1.5 billion after outstanding letters of credit. As of July 3,
2021 , the Company was in compliance with all debt covenants.
In 2018 and 2019, the Company entered into a total of $560 million of
U.S. -to-Euro
interest rate cross-currency swap agreements that hedge the Company's net
investment in its Euro denominated net assets. As a result of entering into
these agreements, the Company anticipates lowering net interest expense by
approximately $12 million annually over the three-year term of the agreements.
During the first six months of 2021, $70 million of the Company's interest rate
cross-currency swaps had matured and resulted in total payments of $4 million
upon settlement. As of July 3, 2021 , the Company had a total of $490 million of
interest rate cross-currency swaps agreements outstanding.
In January 2019 , the Company's Board of Directors authorized the Company to
repurchase up to $4 billion of its outstanding common stock over a
two-year
period. This new program replaced the remaining amounts available from the
pre-existing
program. During the six months ended July 3, 2021 and June 27, 2020 , the Company
repurchased $339 million and $167 million , respectively, of the Company's
outstanding common stock under authorized share repurchase programs. In
addition, the Company repurchased $8 million and $9 million of common stock
related to the vesting of restricted stock units during both the six months
ended July 3, 2021 and June 27, 2020 , respectively. In December 2020 , the
Company's Board of Directors authorized the extension of the share repurchase
program through January 21, 2023 .
The Company had $5 million of treasury stock purchases that were accrued and
unsettled at July 3, 2021 . These transactions were settled in July 2021 , during
the Company's third quarter. The Company had $20 million of treasury stock
purchases that were accrued and unsettled at December 31, 2019 . These
transactions were settled in January 2020 . The Company did not have any
unsettled treasury stock purchases as of December 31, 2020 or June 27, 2020 .
The Company received $45 million and $15 million of proceeds from the exercise
of stock options and the purchase of shares pursuant to the Company's employee
stock purchase plan during the six months ended July 3, 2021 and June 27, 2020 ,
respectively.
The Company had cash, cash equivalents and investments of $664 million as of
July 3, 2021 . The majority of the Company's cash and cash equivalents are
generated from foreign operations, with $353 million held by foreign
subsidiaries at July 3, 2021 , of which $267 million was held in currencies other
than U.S. dollars.
Management believes, as of the date of this report, that the Company's financial
position, along with expected future cash flows from earnings based on
historical trends and the ability to raise funds from external sources and the
borrowing capacity from existing, committed credit facilities, will be
sufficient to service debt and fund working capital and capital spending
requirements, authorized share repurchase amounts and potential acquisitions for
at least the next twelve months.
Contractual Obligations, Commercial Commitments, Contingent Liabilities and
Dividends
A summary of the Company's contractual obligations and commercial commitments is
included in the Company's Annual Report on Form
10-K
for the year ended December 31, 2020 , as filed with the SEC on February 24,
2021 . The Company reviewed its contractual obligations and commercial
commitments as of July 3, 2021 and determined that there were no material
changes outside the ordinary course of business from the information set forth
in the Annual Report on Form
10-K,
with the exception of the recently issued senior unsecured notes as described in
Note 6, "Debt."
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From time to time, the Company and its subsidiaries are involved in various
litigation matters arising in the ordinary course of business. The Company
believes that it has meritorious arguments in its current litigation matters and
that any outcome, either individually or in the aggregate, will not be material
to the Company's financial position or results of operations.
During fiscal year 2021, the Company expects to contribute a total of
approximately $3 million to $6 million to its defined benefit plans, excluding
the U.S. defined benefit pension plans.
The Company has not paid any dividends and has no plans, at this time, to pay
any dividends in the future.
Off-Balance
Sheet Arrangements
The Company has not created, and is not party to, any special-purpose or
off-balance
sheet entities for the purpose of raising capital, incurring debt or operating
parts of its business that are not consolidated (to the extent of the Company's
ownership interest therein) into the consolidated financial statements. The
Company has not entered into any transactions with unconsolidated entities
whereby it has subordinated retained interests, derivative instruments or other
contingent arrangements that expose the Company to material continuing risks,
contingent liabilities or any other obligation under a variable interest in an
unconsolidated entity that provides financing, liquidity, market risk or credit
risk support to the Company.
The Company enters into standard indemnification agreements in its ordinary
course of business. Pursuant to these agreements, the Company indemnifies, holds
harmless and agrees to reimburse the indemnified party for losses suffered or
incurred by the indemnified party, generally the Company's business partners or
customers, in connection with patent, copyright or other intellectual property
infringement claims by any third party with respect to its current products, as
well as claims relating to property damage or personal injury resulting from the
performance of services by the Company or its subcontractors. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited. Historically, the Company's costs
to defend lawsuits or settle claims relating to such indemnity agreements have
been minimal and management accordingly believes the estimated fair value of
these agreements is immaterial.
Critical Accounting Policies and Estimates
In the Company's Annual Report on Form
10-K
for the year ended December 31, 2020 , as filed with the SEC on February 24,
2021 , the Company's most critical accounting policies and estimates upon which
its financial status depends were identified as those relating to revenue
recognition, loss provisions on accounts receivable and inventory, valuation of
long-lived assets, intangible assets and goodwill, income taxes, uncertain tax
positions, warranty, litigation, pension and other postretirement benefit
obligations, stock-based compensation and business combinations and asset
acquisitions. The Company reviewed its policies and determined that those
policies remain the Company's most critical accounting policies for the six
months ended July 3, 2021 . The Company did not make any changes in those
policies during the six months ended July 3, 2021 .
New Accounting Pronouncements
Please refer to Note 13, Recent Accounting Standard Changes and Developments, in
the Condensed Notes to Consolidated Financial Statements.
Special Note Regarding Forward-Looking Statements
Certain of the statements in this Quarterly Report on Form
10-Q,
including the information incorporated by reference herein, may contain
forward-looking statements with respect to future results and events, including
any statements regarding, among other items, anticipated trends or growth in the
Company's business, including, but not limited to, the impact of the ongoing
COVID-19
pandemic; the impact of new or proposed tariff or trade regulations or changes
in the interpretation or enforcement of existing regulations; the impact of
foreign currency translation on financial results; development of products by
acquired businesses; the growth rate of sales and research and development
expenses; the impact of costs associated with developing new technologies and
bringing these new technologies to market; the impact of new product launches
and the associated costs, such as the amortization expense related to
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software platforms; geographic sales mix of business; development of products by
acquired businesses and the amount of contingent payments to the sellers of an
acquired business; anticipated expenses, including interest expense, capitalized
software costs and effective tax rates; the impact of the 2017 Tax Act in the
U.S. ; the impact and outcome of the Company's various ongoing tax audit
examinations; the achievement of contractual milestones to preserve foreign tax
rates; the impact and outcome of litigation matters; the impact of the loss of
intellectual property protection; the impact of new accounting standards and
pronouncements; the adequacy of the Company's supply chain and manufacturing
capabilities and facilities; the impact of regulatory compliance; the Company's
expected cash flow, borrowing capacity, debt repayment and refinancing; the
Company's ability to fund working capital, capital expenditures, service debt,
repay outstanding lines of credit, make authorized share repurchases, fund
potential acquisitions and pay any adverse litigation or tax audit liabilities,
particularly in the U.S. ; future impairment charges; the Company's contributions
to defined benefit plans; the Company's expectations regarding changes to its
financial position; compliance with applicable environmental laws; and the
impact of recent acquisitions on sales and earnings.
Many of these statements appear, in particular, under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part I, Item 2 of this Quarterly Report on Form
10-Q.
Statements that are not statements of historical fact may be deemed
forward-looking statements. You can identify these forward-looking statements by
the use of the words "feels", "believes", "anticipates", "plans", "expects",
"may", "will", "would", "intends", "suggests", "appears", "estimates",
"projects", "should" and similar expressions, whether in the negative or
affirmative. These statements are subject to various risks and uncertainties,
many of which are outside the control of the Company, including, and without
limitation:
• Risks related to the effects of the
COVID-19
pandemic on our business, including: portions of our global workforce being
unable to work fully and/or effectively due to working remotely, illness,
quarantines, government actions, facility closures or other reasons related
to the pandemic, increased risks of cyber attacks resulting from our
temporary remote working model, disruptions in our manufacturing capabilities
or to our supply chain, volatility and uncertainty in global capital markets
limiting our ability to access capital, customers being unable to make timely
payment for purchases and volatility in demand for our products.
• Foreign currency exchange rate fluctuations that could adversely affect
translation of the Company's future sales, financial operating results and
the condition of its
non-U.S.
operations, especially when a currency weakens against the
• Current global economic, sovereign and political conditions and
uncertainties, particularly regarding the effect of the
COVID-19
pandemic; new or proposed tariffs or trade regulations or changes in the
interpretation or enforcement of existing regulations; the
exit from the
tightening of restrictions on procurement by government-funded customers; the
Company's ability to access capital and maintain liquidity in volatile market
conditions; changes in timing and demand for the Company's products among the
Company's customers and various market sectors or geographies, particularly
if they should reduce capital expenditures or are unable to obtain funding,
as in the cases of governmental, academic and research institutions; the
effect of mergers and acquisitions on customer demand for the Company's
products; and the Company's ability to sustain and enhance service.
• Negative industry trends; changes in the competitive landscape as a result of
changes in ownership, mergers and continued consolidation among the Company's
competitors; introduction of competing products by other companies and loss
of market share; pressures on prices from customers or resulting from
competition; regulatory, economic and competitive obstacles to new product
introductions; lack of acceptance of new products; expansion of our business
in developing markets; spending by certain
end-markets;
ability to obtain alternative sources for components and modules; and thepossibility 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
States
environmental and logistical obstacles affecting the distribution of the
Company's products, completion of purchase order documentation by our
customers and ability of customers to obtain letters of credit or other
financing alternatives.
• Risks associated with lawsuits, particularly involving claims for
infringement of patents and other intellectual property rights.
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• 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
jurisdictions with different effective tax rates; and the outcome of and
costs associated with ongoing and future tax audit examinations or changes in
respective country legislation affecting the Company's effective rates.
Certain of these and other factors are discussed under the heading "Risk Factors" under Part I, Item 1A of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC onFebruary 24, 2021 . Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements, whether because of these factors or for other reasons. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by law, the Company does not assume any obligation to update any forward-looking statements. Item 3: Quantitative and Qualitative Disclosures About Market RiskThe Company is exposed to the risk of interest rate fluctuations from the investments of cash generated from operations. Investments with maturities greater than 90 days are classified as investments, and are held primarily inU.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities. As ofJuly 3, 2021 , the Company estimates that a hypothetical adverse change of 100 basis points across all maturities would not have a material effect on the fair market value of its portfolio. The Company is also exposed to the risk of exchange rate fluctuations. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than theU.S. dollar. As ofJuly 3, 2021 andDecember 31, 2020 ,$353 million out of$664 million and$364 million out of$443 million , respectively, of the Company's total cash, cash equivalents and investments were held by foreign subsidiaries. In addition,$267 million out of$664 million and$254 million out of$443 million of cash, cash equivalents and investments were held in currencies other than theU.S. dollar atJuly 3, 2021 andDecember 31, 2020 , respectively. As ofJuly 3, 2021 , the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles. Assuming a hypothetical adverse change of 10% in year-end exchange rates (a strengthening of theU.S. dollar), the fair market value of the Company's cash, cash equivalents and investments held in currencies other than theU.S. dollar as ofJuly 3, 2021 would decrease by approximately$25 million , of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders' equity. There have been no other material changes in the Company's market risk during the six months endedJuly 3, 2021 . For information regarding the Company's market risk, refer to Item 7A of Part II of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC onFebruary 24, 2021 . Item 4: Controls and Procedures Evaluation of Disclosure Controls and ProceduresThe Company's chief executive officer and chief financial officer (principal executive officer and principal financial officer), with the participation of management, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures were effective as ofJuly 3, 2021 (1) to ensure that information required to be disclosed by the Company, including its consolidated subsidiaries, in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its chief executive officer and chief financial officer, to allow timely decisions regarding the required disclosure and (2) to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms. Changes in Internal Control Over Financial Reporting No change was identified in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter endedJuly 3, 2021 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 41
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