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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2021
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
.
Commission File Number:
01-14010
 
 
Waters Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
13-3668640
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
34 Maple Street
Milford, Massachusetts 01757
(Address, including zip code, of principal executive offices)
(
508)
 
478-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
WAT
 
New York Stock Exchange, Inc.
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
  ☒ No  ☐ 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
  ☒ No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
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  ☒
Indicate the number of shares outstanding of the registrant’s common stock as of July 30, 2021: 
61,363,399
 
 
 

WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q
INDEX
 
 
 
 
  
Page
 
PART I
 
FINANCIAL INFORMATION
  
Item 1.
 
  
 
  
 
3
 
 
  
 
4
 
 
  
 
5
 
 
  
 
6
 
 
  
 
7
 
 
  
 
8
 
 
  
 
9
 
 
  
 
10
 
Item 2.
 
  
 
30
 
Item 3.
 
  
 
41
 
Item 4.
 
  
 
41
 
PART II
 
OTHER INFORMATION
  
Item 1.
 
  
 
42
 
Item 1A.
 
  
 
42
 
Item 2.
 
  
 
42
 
Item 6.
 
  
 
4
3
 
 
  
 
4
4
 

Item 1:
 Financial Statements
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
    
July 3, 2021
   
December 31, 2020
 
    
(In thousands, except per share data)
 
ASSETS
                
Current assets:
                
Cash and cash equivalents
   $ 460,056     $ 436,695  
Investments
     203,566       6,451  
Accounts receivable, net
     543,072       573,316  
Inventories
     348,770       304,281  
Other current assets
     83,086       80,290  
    
 
 
   
 
 
 
Total current assets
     1,638,550       1,401,033  
Property, plant and equipment, net
     527,135       494,003  
Intangible assets, net
     246,836       258,645  
Goodwill
     439,826       444,362  
Operating lease assets
     88,871       93,252  
Other assets
     162,429       148,625  
    
 
 
   
 
 
 
Total assets
   $ 3,103,647     $ 2,839,920  
    
 
 
   
 
 
 
     
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Notes payable and debt
   $ —       $ 150,000  
Accounts payable
     83,249       72,212  
Accrued employee compensation
     48,282       72,166  
Deferred revenue and customer advances
     284,765       198,240  
Current operating lease liabilities
     27,583       27,764  
Accrued income taxes
     52,583       76,558  
Accrued warranty
     10,810       10,950  
Other current liabilities
     173,746       197,093  
    
 
 
   
 
 
 
Total current liabilities
     681,018       804,983  
Long-term liabilities:
                
Long-term debt
     1,603,367       1,206,515  
Long-term portion of retirement benefits
     74,794       72,620  
Long-term income tax liabilities
     319,121       357,493  
Long-term operating lease liabilities
     61,404       68,197  
Other long-term liabilities
     95,670       97,968  
    
 
 
   
 
 
 
Total long-term liabilities
     2,154,356       1,802,793  
    
 
 
   
 
 
 
Total liabilities
     2,835,374       2,607,776  
     
Commitments and contingencies (Notes 6, 7 and 11)
                
     
Stockholders’ equity:
                
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at July 3, 2021 and December 31, 2020
     —         —    
Common stock, par value $0.01 per share, 400,000 shares authorized, 162,017 and 161,666 shares issued, 61,481 and 62,309 shares outstanding at July 3, 2021
and December 31, 2020, respectively
     1,620       1,617  
Additional
paid-in
capital
     2,090,052       2,029,465  
Retained earnings
     7,423,408       7,107,989  
Treasury stock, at cost, 100,536 and 99,357 shares at July 3, 2021 and December 31, 2020, respectively
     (9,135,628     (8,788,984
Accumulated other comprehensive loss
     (111,179     (117,943
    
 
 
   
 
 
 
Total stockholders’ equity
     268,273       232,144  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 3,103,647     $ 2,839,920  
    
 
 
   
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
3

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
    
Three Months Ended
 
    
July 3, 2021
   
June 27, 2020
 
    
(In thousands, except per share data)
 
Revenues:
                
Product sales
   $ 440,955     $ 314,920  
     
Service sales
     240,692       205,064  
    
 
 
   
 
 
 
     
Total net sales
     681,647       519,984  
     
Costs and operating expenses:
                
Cost of product sales
     176,745       134,802  
     
Cost of service sales
     103,509       78,332  
     
Selling and administrative expenses
     158,213       117,449  
     
Research and development expenses
     44,949       31,155  
     
Purchased intangibles amortization
     1,809       2,618  
     
Litigation provision
     —         514  
    
 
 
   
 
 
 
Total costs and operating expenses
     485,225       364,870  
    
 
 
   
 
 
 
Operating income
     196,422       155,114  
     
Other income (expense)
     9,321       (736
     
Interest expense
     (12,027     (13,018
     
Interest income
     3,698       4,003  
    
 
 
   
 
 
 
Income before income taxes
     197,414       145,363  
     
Provision for income taxes
     30,122       22,434  
    
 
 
   
 
 
 
Net income
   $ 167,292     $ 122,929  
    
 
 
   
 
 
 
     
Net income per basic common share
   $ 2.71     $ 1.98  
     
Weighted-average number of basic common shares
     61,685       61,944  
     
Net income per diluted common share
   $ 2.69     $ 1.98  
     
Weighted-average number of diluted common shares and equivalents
     62,157       62,184  
The accompanying notes are an integral part of the interim consolidated financial statements.
 
4

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
    
Six Months Ended
 
    
July 3, 2021
   
June 27, 2020
 
    
(In thousands, except per share data)
 
Revenues:
                
Product sales
   $ 822,977     $ 589,103  
     
Service sales
     467,215       395,820  
    
 
 
   
 
 
 
     
Total net sales
     1,290,192       984,923  
     
Costs and operating expenses:
                
Cost of product sales
     335,621       254,641  
     
Cost of service sales
     198,780       169,137  
     
Selling and administrative expenses
     301,409       265,184  
     
Research and development expenses
     83,041       66,144  
     
Purchased intangibles amortization
     3,649       5,243  
     
Litigation provision
     —         1,180  
    
 
 
   
 
 
 
Total costs and operating expenses
     922,500       761,529  
    
 
 
   
 
 
 
Operating income
     367,692       223,394  
     
Other income (expense), net
     18,680       (1,110
     
Interest expense
     (22,973     (27,097
     
Interest income
     7,799       8,039  
    
 
 
   
 
 
 
     
Income before income taxes
     371,198       203,226  
     
Provision for income taxes
     55,779       26,735  
    
 
 
   
 
 
 
Net income
   $ 315,419     $ 176,491  
    
 
 
   
 
 
 
     
Net income per basic common share
   $ 5.09     $ 2.84  
     
Weighted-average number of basic common shares
     61,979       62,085  
     
Net income per diluted common share
   $ 5.05     $ 2.83  
     
Weighted-average number of diluted common shares and equivalents
     62,435       62,404  
The accompanying notes are an integral part of the interim consolidated financial statements.
 
5

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
    
Three Months Ended
   
Six Months Ended
 
    
July 3,

2021
   
June 27,

2020
   
July 3,

2021
   
June 27,

2020
 
    
(In thousands)
   
(In thousands)
 
Net income
   $ 167,292     $ 122,929     $ 315,419     $ 176,491  
         
Other comprehensive income (loss):
                                
         
Foreign currency translation
     (9     11,587       5,816       (7,757
         
Unrealized losses on investments before income taxes
     (5     —         (15     —    
    
 
 
   
 
 
   
 
 
   
 
 
 
Unrealized losses on investments, net of tax
     (5     —         (15     —    
         
Retirement liability adjustment before reclassifications
     (260 )     (522     794       (226
Amounts reclassified to other income
     218       336       434       676  
    
 
 
   
 
 
   
 
 
   
 
 
 
Retirement liability adjustment before income taxes
     (42 )     (186     1,228       450  
Income tax benefit (expense)
     83       126       (265     (112
    
 
 
   
 
 
   
 
 
   
 
 
 
Retirement liability adjustment, net of tax
     41       (60     963       338  
         
Other comprehensive income (loss)
     27       11,527       6,764       (7,419
    
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income
   $ 167,319     $ 134,456     $ 322,183     $ 169,072  
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
6

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
    
Six Months Ended
 
    
July 3, 2021
   
June 27, 2020
 
    
(In thousands)
 
Cash flows from operating activities:
        
Net income
   $ 315,419     $ 176,491  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Stock-based compensation
     15,596       18,122  
Deferred income taxes
     6,107       (777
Depreciation
     34,891       33,220  
Amortization of intangibles
     29,852       26,983  
Change in operating assets and liabilities:
                
Decrease in accounts receivable
     18,985       86,978  
Increase in inventories
     (50,873     (27,089
Increase in other current assets
     (10,600     (14,699
(Increase) decrease in other assets
     (9,263     8,238  
(Decrease) increase in accounts payable and other current liabilities
     (35,328     34,714  
Increase in deferred revenue and customer advances
     91,631       37,558  
Decrease in other liabilities
     (44,973     (29,293
    
 
 
   
 
 
 
Net cash provided by operating activities
     361,444       350,446  
Cash flows from investing activities:
                
Additions to property, plant, equipment and software capitalization
     (76,889     (97,029
Business acquisitions, net of cash acquired
     —         (76,664
Investment in unaffiliated companies
     —         (3,350
Payments for intellectual property licenses
     (7,000     —    
Purchases of investments
     (215,140     (16,828
Maturities and sales of investments
     17,923       1,536  
    
 
 
   
 
 
 
Net cash used in investing activities
     (281,106     (192,335
Cash flows from financing activities:
                
Proceeds from debt issuances
     500,000       315,000  
Payments on debt
     (250,000     (300,366
Payments of debt issuance costs
     (3,637     —    
Proceeds from stock plans
     45,036       14,739  
Purchases of treasury shares
     (341,507     (196,297
Proceeds from derivative contracts
     1,917       7,558  
    
 
 
   
 
 
 
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 and cash equivalents at beginning of period
     436,695       335,715  
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 460,056     $ 339,036  
    
 
 
   
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
7

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited, in thousands)
 
    
Number

of

Common

Shares
    
Common

Stock
    
Additional
Paid-In

Capital
    
Retained

Earnings
    
Treasury

Stock
   
Accumulated

Other

Comprehensive

Loss
   
Total
Stockholders’
Deficit
 
Balance March 28, 2020
     161,253      $ 1,613      $ 1,947,626      $ 6,639,980      $ (8,788,801   $ (138,417   $ (337,999
Net income
     —          —          —          122,929        —         —         122,929  
Other comprehensive income
     —          —          —          —          —         11,527       11,527  
Issuance of common stock for employees:
                                                            
Employee Stock Purchase Plan
     12        —          2,216        —          —         —         2,216  
Stock options exercised
     6        —          779        —          —         —         779  
Treasury stock
     —          —          —          —          (71     —         (71
Stock-based compensation
     2        —          8,877        —          —         —         8,877  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance June 27, 2020
     161,273      $ 1,613      $ 1,959,498      $ 6,762,909      $ (8,788,872   $ (126,890   $ (191,742
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
 
    
Number

of

Common

Shares
    
Common

Stock
    
Additional

Paid-In

Capital
    
Retained

Earnings
    
Treasury

Stock
   
Accumulated
Other
Comprehensive
Loss
   
Total
Stockholders’
Equity
 
Balance April 3, 2021
     161,859      $ 1,619      $ 2,054,076      $ 7,256,116      $ (8,969,643   $ (111,206   $ 230,962  
Net income
     —          —          —          167,292        —         —         167,292  
Other comprehensive income
     —          —          —          —          —         27       27  
Issuance of common stock for employees:
                                                            
Employee Stock Purchase Plan
     22        —          5,156        —          —         —         5,156  
Stock options exercised
     135        1        23,584        —          —         —         23,585  
Treasury stock
     —          —          —          —          (165,985     —         (165,985
Stock-based compensation
     1                 7,236        —          —         —         7,236  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance July 3, 2021
     162,017      $ 1,620      $ 2,090,052      $ 7,423,408      $ (9,135,628   $ (111,179   $ 268,273  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
8

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited, in thousands)
 
    
Number

of

Common

Shares
    
Common

Stock
    
Additional

Paid-In

Capital
    
Retained

Earnings
   
Treasury

Stock
   
Accumulated

Other

Comprehensive

Loss
   
Total

Stockholders’

Deficit
 
Balance December 31, 2019
     161,030      $ 1,610      $ 1,926,753      $ 6,587,403     $ (8,612,576   $ (119,471   $ (216,281
Net income
     —          —          —          176,491       —         —         176,491  
Adoption of new accounting pronouncement
     —          —          —          (985     —         —         (985
Other comprehensive loss
     —          —          —          —         —         (7,419     (7,419
Issuance of common stock for employees:
                                                           
Employee Stock Purchase Plan
     21        —          3,952        —         —         —         3,952  
Stock options exercised
     87        1        10,904        —         —         —         10,905  
Treasury stock
     —          —          —          —         (176,296     —         (176,296
Stock-based compensation
     135        2        17,889        —         —         —         17,891  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance June 27, 2020
     161,273      $ 1,613      $ 1,959,498      $ 6,762,909     $ (8,788,872   $ (126,890   $ (191,742
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Number

of

Common

Shares
    
Common

Stock
    
Additional

Paid-In

Capital
    
Retained

Earnings
    
Treasury

Stock
   
Accumulated

Other

Comprehensive

Loss
   
Total

Stockholders’

Equity
 
Balance December 31, 2020
     161,666      $ 1,617      $ 2,029,465      $ 7,107,989      $ (8,788,984   $ (117,943   $ 232,144  
Net income
     —          —          —          315,419        —         —         315,419  
Other comprehensive income
     —          —          —          —          —         6,764       6,764  
Issuance of common stock for employees:
                                                            
Employee Stock Purchase Plan
     32                 7,011        —          —         —         7,011  
Stock options exercised
     230        2        38,713        —          —         —         38,715  
Treasury stock
     —          —          —          —          (346,644     —         (346,644
Stock-based compensation
     89        1        14,863        —          —         —         14,864  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance July 3, 2021
     162,017      $ 1,620      $ 2,090,052      $ 7,423,408      $ (9,135,628   $ (111,179   $ 268,273  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
9

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1 Basis of Presentation and Summary of Significant Accounting Policies
Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC
TM
” and, together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together
(“LC-MS”)
and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing.
LC-MS
instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA
TM
product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.
The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s second fiscal quarters for 2021 and 2020 ended on July 3, 2021 and June 27, 2020, respectively.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form
10-Q
and do not include all of the information and footnote disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions.
It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 24, 2021.
Risks and Uncertainties
The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.
Both the Company’s domestic and international operations have been and continue to be affected by the ongoing global COVID-19 pandemic and the resulting volatility and uncertainty it has caused in the U.S. and international markets. The Company operates in over 35 countries, including those in regions most impacted by the COVID-19 pandemic. 
 
10

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Through the date of the issuance of these financial statements, the Company’s consolidated financial position, results of operations and cash flows have not been materially impacted and, thus, the Company concluded that no goodwill or long-lived asset impairment analyses were required. Further, there have been no violations of debt covenants. Any prolonged material disruption of the Company’s employees, suppliers, manufacturing, or customers could materially impact its consolidated financial position, results of operations or cash flows.
Translation of Foreign Currencies
The functional currency of each of the Company’s foreign operating subsidiaries is the local currency of its country of domicile, except for the Company’s subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity’s cash flows.
For the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets.
Cash, Cash Equivalents and Investments
Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of July 3, 2021 and December 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 the U.S. dollar at July 3, 2021 and December 31, 2020, respectively.
Accounts Receivable and Allowance for Credit Losses
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any off-balance sheet credit exposure related to its customers.
Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to
re-possess,
refurbish and
re-sell
the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss.
The following is a summary of the activity of the Company’s allowance for credit losses for the six months ended July 3, 2021 and June 27, 2020 (in thousands):
 
    
Balance at

Beginning

of Period
    
Impact of

CECL
Adoption
    
Additions
   
Deductions
   
Balance at
End of

Period
 
Allowance for Credit Losses
                                          
July 3, 2021
   $ 14,381      $ —        $ 3,042     $ (2,625   $ 14,798  
June 27, 2020
   $ 9,560      $ 985      $ 6,664     $ (3,901   $ 13,308  
 
11

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Other Investments
During the six months ended June 27, 2020, the Company made investments in unaffiliated companies of $3 million.
During the six months ended July 3, 2021, the Company recorded an unrealized gain on an equity security still held at the reporting date of approximately $10 million within other income (expense) on the income statement. This unrealized gain was recorded as an upward price adjustment to the carrying value of the investment due to an observable price change of a similar security issued during the current period.
During the three and six months ended June 27, 2020, the Company recorded an unrealized loss on an equity security still held at the reporting date of approximately $
1
 million within other income (expense) on the income statement. This unrealized loss was recorded as a downward price adjustment to the carrying value of the investment due to an observable price change of a similar security issued during the current period.
Fair Value Measurements
In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of July 3, 2021 and December 31, 2020. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
12

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at July 3, 2021 (in thousands):
 
    
Total at

July 3,
2021
    
Quoted Prices

in Active

Markets

for Identical

Assets

(Level 1)
    
Significant

Other

Observable

Inputs

(Level 2)
    
Significant

Unobservable

Inputs

(Level 3)
 
Assets:
                                   
U.S. Treasury securities
   $ 12,051      $ —        $ 12,051      $ —    
Corporate debt securities
     130,231        —          130,231        —    
Time deposits
     75,897        —          75,897        —    
Waters 401(k) Restoration Plan assets
     40,965        40,965        —          —    
Foreign currency exchange contracts
     223        —          223        —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 259,367      $ 40,965      $ 218,402      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
 
         
Liabilities:
                                   
Contingent consideration
   $ 1,266      $ —        $ —        $ 1,266  
Foreign currency exchange contracts
     142        —          142        —    
Interest rate cross-currency swap agreements
     22,457        —          22,457        —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 23,865      $ —        $ 22,599      $ 1,266  
    
 
 
    
 
 
    
 
 
    
 
 
 
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2020 (in thousands):
 
    
Total at

December 31,
2020
    
Quoted Prices

in Active

Markets

for Identical
Assets

(Level 1)
    
Significant

Other

Observable

Inputs

(Level 2)
    
Significant

Unobservable

Inputs

(Level 3)
 
Assets:
                                   
Time deposits
   $ 6,451      $ —        $ 6,451      $ —    
Waters 401(k) Restoration Plan assets
     38,988        38,988        —          —    
Foreign currency exchange contracts
     836        —          836        —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 46,275      $ 38,988      $ 7,287      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities:
                                   
Contingent consideration
   $ 1,185      $ —        $ —        $ 1,185  
Foreign currency exchange contracts
     185        —          185        —    
Interest rate cross-currency swap agreements
     44,996        —          44,996        —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 46,366      $ —        $ 45,181      $ 1,185  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
13

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Fair Value of 401(k) Restoration Plan Assets
The 401(k) Restoration Plan is a nonqualified defined contribution plan and the assets were held in registered mutual funds and have been classified as Level 1. The fair values of the assets in the plan are determined through market and observable sources from daily quoted prices on nationally recognized securities exchanges.
Fair Value of Cash Equivalents, Investments, Foreign Currency Exchange Contracts and Interest Rate Cross-Currency Swap Agreements
The fair values of the Company’s cash equivalents, investments and foreign currency exchange contracts are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources.
Fair Value of Contingent Consideration
The fair value of the Company’s liability for contingent consideration relates to earnout payments in connection with the December 2020 acquisition of Integrated Software Solutions (“ISS”) and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the estimated future results and a discount rate that reflects both the likelihood of achieving the estimated future results and the Company’s creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration.
The fair value of future contingent consideration payments related to the December 2020 acquisition of ISS was estimated to be $1 million at both July 3, 2021 and December 31, 2020. The fair value is based on the achievement of certain revenue and customer account milestones over the two years after the acquisition date.
Fair Value of Other Financial Instruments
The Company’s accounts receivable, accounts payable and variable interest rate debt are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s fixed interest rate debt was $1.3 billion and $910 million at July 3, 2021 and December 31, 2020, respectively. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $1.3 billion and $1.0 billion at July 3, 2021 and December 31, 2020, respectively, using Level 2 inputs.
Derivative Transactions
The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its
non-U.S.
dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.
The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.
 
14

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Foreign Currency Exchange Contracts
The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real.
Interest Rate Cross-Currency Swap Agreements
As of July 3, 2021, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $490 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive income in stockholders’ equity (deficit) until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.
The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):
 
    
July 3, 2021
    
December 31, 2020
 
    
Notional Value
    
Fair Value
    
Notional Value
    
Fair Value
 
Foreign currency exchange contracts:
                                   
Other current assets
   $ 21,000      $ 223      $ 66,690      $ 836  
Other current liabilities
   $ 40,030      $ 142      $ 20,000      $ 185  
Interest rate cross-currency swap agreements:
                                   
Other liabilities
   $ 490,000      $ (22,457    $ 560,000      $ (44,996
Accumulated other comprehensive loss
            $ 27,981               $ 44,996  
The following is a summary of the activity included in the consolidated statements of operations and statements of comprehensive income related to the foreign currency exchange contracts and interest rate cross-currency swap agreements (in thousands):
 
    
Financial
Statement
Classification
  
Three Months Ended
   
Six Months Ended
 
  
July 3,
2021
   
June 27,
2020
   
July 3,
2021
   
June 27,
2020
 
 
Foreign currency exchange contracts:
                                
Realized (losses) gains on closed contracts
   Cost of sales    $ (213   $ 1,823     $ 1,455     $ (1,157 )
Unrealized (losses) gains on open contracts
   Cost of sales      (569     (678     (1,323     646  
         
 
 
   
 
 
   
 
 
   
 
 
 
Cumulative net
pre-tax
(losses) gains
   Cost of sales    $ (782   $ 1,145     $ 132     $ (511
         
 
 
   
 
 
   
 
 
   
 
 
 
Interest rate cross-currency swap agreements:
                                
Interest earned
   Interest income    $ 3,373     $ 3,784     $ 7,200     $ 7,498  
Unrealized (losses) gains on open contracts
   Stockholders’ equity (deficit)    $ (4,229   $ (5,615   $ 17,015     $ (93
 
15

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Stockholders’ Equity
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a
two-year
period. This program replaced the remaining amounts available from the
pre-existing
program. During the six months ended July 3, 2021 and June 27, 2020, the Company repurchased 1.2 million and 0.8 million shares of the Company’s outstanding common stock at a cost of $339 million and $167 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $8 million and $9 million of common stock related to the vesting of restricted stock units during the six months ended July 3, 2021 and June 27, 2020, respectively. As of July 3, 2021, the Company had repurchased an aggregate of 12.3 million shares at a cost of $2.8 billion under the January 2019 repurchase program and had a total of $1.2 billion authorized for future repurchases. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023.
The Company had $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.
Product Warranty Costs
The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.
The following is a summary of the activity of the Company’s accrued warranty liability for the six months ended July 3, 2021 and June 27, 2020 (in thousands): 
 
    
Balance at

Beginning

of Period
    
Accruals for

Warranties
    
Settlements

Made
    
Balance at

End of

Period
 
Accrued warranty liability:
                                   
July 3, 2021
   $ 10,950      $ 4,719      $ (4,859    $ 10,810  
June 27, 2020
   $ 11,964      $ 3,577      $ (5,428    $ 10,113  
Restructuring
In January 2020, the Company made organizational changes to better align its resources with its growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 3% of the Company’s employees. During the six months ended June 27, 2020, the Company incurred $21 million of severance-related costs, lease termination costs and other related costs. The Company did not incur any restructuring charges during the six months ended July 3, 2021.
Other Items
During the three and six months ended July 3, 2021, the Company executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation and Bruker 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 was recognized within other income in our consolidated statement of operations. During the three and six months ended July 3, 2021, the Company received $3 million in guaranteed payments, net of applicable withholding taxes. 
2 Revenue Recognition
The Company’s deferred revenue liabilities on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.
 
16

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The following is a summary of the activity of the Company’s deferred revenue and customer advances for the six months ended July 3, 2021 and June 27, 2020 (in thousands):
 
    
July 3, 2021
    
June 27, 2020
 
Balance at the beginning of the period
   $ 239,759      $ 213,695  
Recognition of revenue included in balance at beginning of the period
     (159,393      (141,297
Revenue deferred during the period, net of revenue recognized
     251,065        195,444  
    
 
 
    
 
 
 
Balance at the end of the period
   $ 331,431      $ 267,842  
    
 
 
    
 
 
 
The Company classified $47 million and $42 million of deferred revenue and customer advances in other long-term liabilities at July 3, 2021 and December 31, 2020, respectively.
The amount of deferred revenue and customer advances equals the transaction price allocated to unfulfilled performance obligations for the period presented. Such amounts are expected to be recognized in the future as follows (in thousands):
 
    
July 3, 2021
 
Deferred revenue and customer advances expected to be recognized in:
        
One year or less
   $ 284,765  
13
-24
months
     28,343  
25
months and beyond
     18,323  
    
 
 
 
Total
   $ 331,431  
    
 
 
 
3 Marketable Securities
The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):
 
    
July 3, 2021
 
    
Amortized

Cost
    
Unrealized

Gain
    
Unrealized

Loss
    
Fair

Value
 
U.S. Treasury securities
   $ 12,050      $ 1      $ —        $ 12,051  
Corporate debt securities
     130,246        3        (18      130,231  
Time deposits
     75,897        —          —          75,897  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 218,193      $ 4      $ (18    $ 218,179  
    
 
 
    
 
 
    
 
 
    
 
 
 
Amounts included in:
                                   
Cash equivalents
   $ 14,614      $ —        $ (1    $ 14,613  
Investments
     203,579        4        (17      203,566  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 218,193      $ 4      $ (18    $ 218,179  
    
 
 
    
 
 
    
 
 
    
 
 
 
   
    
December 31, 2020
 
    
Amortized

Cost
    
Unrealized

Gain
    
Unrealized

Loss
    
Fair

Value
 
Time deposits
     6,451        —          —          6,451  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 6,451      $ —        $ —        $ 6,451  
    
 
 
    
 
 
    
 
 
    
 
 
 
Amounts included in:
                                   
Investments
     6,451        —          —          6,451  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 6,451      $ —        $ —        $ 6,451  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
17

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STAEMENTS (unaudited) – (Continued)
 
The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):
 
    
July 3, 2021
    
December 31, 2020
 
Due in one year or less
   $ 203,368      $ 6,451  
Due after one year through three years
     14,811        —    
    
 
 
    
 
 
 
Total
   $ 218,179      $ 6,451  
    
 
 
    
 
 
 
4 Inventories
Inventories are classified as follows (in thousands):
 
    
July 3, 2021
    
December 31, 2020
 
Raw materials
   $ 149,562      $ 133,490  
Work in progress
     23,224        18,678  
Finished goods
     175,984        152,113  
    
 
 
    
 
 
 
Total inventories
   $ 348,770      $ 304,281  
    
 
 
    
 
 
 
5 Goodwill and Other Intangibles
The carrying amount of goodwill was $440 million and $444 million at July 3, 2021 and December 31, 2020, respectively. The effect of foreign currency translation decreased goodwill by $4 million.
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):
 
    
July 3, 2021
    
December 31, 2020
 
    
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Weighted-
Average
Amortization
Period
    
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Weighted-
Average
Amortization
Period
 
Capitalized software
   $ 578,641      $ 418,409        5        years      $ 584,452      $ 409,847        5        years  
Purchased intangibles
     203,421        162,312        11        years        205,585        160,342        11        years  
Trademarks
     9,680        —          —                   9,680        —          —             
Licenses
     12,882        5,803        7        years        5,923        5,697        6        years  
Patents and other intangibles
     94,043        65,307        8        years        90,699        61,808        8        years  
    
 
 
    
 
 
                      
 
 
    
 
 
                   
Total
   $ 898,667      $ 651,831        7        years      $ 896,339      $ 637,694        7        years  
    
 
 
    
 
 
                      
 
 
    
 
 
                   
In June 2021, the Company paid $7 million in connection with an existing licensing arrangement. The payment was tied to the commercial launch of Waters
SELECT SERIES
MRT, a high-resolution mass spectrometer and was capitalized as an intangible asset on our consolidated balance sheet as of July 3, 2021. 
The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $
21
 million and $
15
 million, respectively, in the
six
months ended July 
3
,
2021
due to the effects of foreign currency translation. Amortization expense for intangible assets was $
15
 million and $
14
 million for the
three
months ended July 
3
,
2021
and June 
27
,
2020
, respectively. Amortization expense for intangible assets was $
30
 million and $
27
 million for the
six
months ended July 
3
,
2021
and June 
27
,
2020
, respectively. Amortization expense for intangible assets is estimated to be $
62
 million per year for each of the next
five
years.
 
18

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STAEMENTS (unaudited) – (Continued)
 
6 Debt
In March 2021, the Company issued the following senior unsecured notes:
 
Senior
Unsecured Notes
  
Term
    
Interest Rate
   
Face Value
(in millions)
    
Maturity
Date
 
Series N
     5 years        1.68   $ 100        March 2026  
Series O
     10 years        2.25   $ 400        March 2031  
The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes. Interest on the Series N and O Senior Notes is payable semi-annually. The Company may prepay some or all of the Senior Notes at any time in an amount not less than 10% of the aggregate principal amount of the Senior Notes then outstanding, plus the applicable make-whole amount for Series N and O Senior Notes, in each case, upon no more than 60 nor less than 20 days’ written notice to the holders of the Senior Notes. In the event of a change in control (as defined in the note purchase agreement) of the Company, the Company may be required to prepay the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. Other provisions for these senior unsecured notes are similar to the existing senior unsecured notes, as described below.
In November 2017, the Company entered into a credit agreement (the “2017 Credit Agreement”) that provides for a $1.5 billion revolving facility and a $300 million term loan. As of July 3, 2021 and December 31, 2020, the revolving facility and term loan had a total of $300 million and $400 million, respectively, outstanding and mature on November 30, 2022 and require no scheduled prepayments before that date.
The interest rates applicable to the 2017 Credit Agreement are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (1) the prime rate in effect on such day, (2) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (3) the adjusted LIBO rate on such day (or if such day is not a business day, the immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 2, 3 or 6 month adjusted LIBO rate or EURIBO rate for Euro-denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for LIBO rate or EURIBO rate loans. The facility fee on the 2017 Credit Agreement ranges between 7.5 and 25 basis points per annum, based on the leverage ratio, of the amount of the revolving facility commitments and the outstanding term loan. The 2017 Credit Agreement requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the 2017 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.
As of July 3, 2021 and December 31, 2020, the Company had a total of $1.3 billion and $1.0 billion, respectively, of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for the Series H senior unsecured note. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.
In February 2019, certain defined terms related to the subsidiary guarantors were amended in the 2017 Credit Agreement and senior unsecured note agreements. In addition, the Company amended the senior unsecured note agreements to allow the Company to elect an increase in the permitted leverage ratio from 3.50:1 to 4.0:1, for a period of three consecutive quarters, for a material acquisition of $400 million or more. During the period of time where the leverage ratio exceeds 3.50:1, the interest payable on the senior unsecured notes shall increase by 0.50%. The debt covenants in the senior unsecured note agreements were also modified to address the change in accounting guidance for leases.
 
19

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STAEMENTS (unaudited) – (Continued)
 
The Company had the following outstanding debt at July 3, 2021 and December 31, 2020 (in thousands):
 
    
July 3, 2021
    
December 31, 2020
 
Senior unsecured notes—Series E—3.97%, due March 2021
     —          50,000  
Senior unsecured notes—Series F—3.40%, due June 2021
     —          100,000  
    
 
 
    
 
 
 
Total notes payable and debt, current
     —          150,000  
Senior unsecured notes—Series G—3.92%, due June 2024
     50,000        50,000  
Senior unsecured notes—Series H—floating rate*, due June 2024
     50,000        50,000  
Senior unsecured notes—Series I—3.13%, due May 2023
     50,000        50,000  
Senior unsecured notes—Series K—3.44%, due May 2026
     160,000        160,000  
Senior unsecured notes—Series L—3.31%, due September 2026
     200,000        200,000  
Senior unsecured notes—Series M—3.53%, due September 2029
     300,000        300,000  
Senior unsecured notes—Series N—1.68%, due March 2026
     100,000        —    
Senior unsecured notes—Series O—2.25%, due March 2031
     400,000        —    
Credit agreement
     300,000        400,000  
Unamortized debt issuance costs
     (6,633      (3,485
    
 
 
    
 
 
 
Total long-term debt
     1,603,367        1,206,515  
    
 
 
    
 
 
 
Total debt
   $ 1,603,367      $ 1,356,515  
    
 
 
    
 
 
 
 
*
Series H senior unsecured notes bear interest at a
3-month
LIBOR for that floating rate interest period plus 1.25%.
As of July 3, 2021 and December 31, 2020, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1.5 billion and $1.4 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.71% and 2.92% at July 3, 2021 and December 31, 2020, respectively. As of July 3, 2021, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $122 million and $109 million at July 3, 2021 and December 31, 2020, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of July 3, 2021 or December 31, 2020.
As of July 3, 2021, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $490 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.
7 Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of July 3, 2021. The Company ha
d
 a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones. The Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax rates rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the six months ended July 3, 2021 and June 27, 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 three months ended July 3, 2021 and June 27, 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.
 
20

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STAEMENTS (unaudited) – (Continued)
 
The Company’s effective tax rate for the six months ended July 3, 2021 and June 27, 2020 was 15.0% and 13.2%, respectively. The effective tax rate for the six months ended July 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 six months ended July 3, 2021. The effective tax rate for the six months ended June 27, 2020 includes a $5 million income tax benefit related to certain restructuring charges and a $2 million 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 six months ended June 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.
The Company accounts for its uncertain tax return positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
The following is a summary of the activity of the Company’s gross unrecognized tax benefits, excluding interest and penalties, for the six months ended July 3, 2021 and June 27, 2020 (in thousands):
 
    
July 3, 2021
   
June 27, 2020
 
Balance at the beginning of the period
   $ 28,666     $ 27,790  
Net reductions for settlement of tax audits
     (593     —    
Net reductions for lapse of statutes taken during the period
     (198     (252
Net additions for tax positions taken during the current period
     653       536  
    
 
 
   
 
 
 
Balance at the end of the period
   $ 28,528     $ 28,074  
    
 
 
   
 
 
 
With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2015. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities. As of July 3, 2021, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of less than $1 million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.
8 Stock-Based Compensation
The Company maintains various stockholder-approved, stock-based compensation plans which allow for the issuance of incentive or
non-qualified
stock options, stock appreciation rights, restricted stock or other types of awards (e.g. restricted stock units and performance stock units).
In May 2020, the Company’s stockholders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of July 3, 2021, the 2020 Plan had 6.6 million shares available for grant in the form of incentive or
non-qualified
stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units or other types of awards (e.g. restricted stock units and performance stock units). The Company issues new shares of common stock upon exercise of stock options or restricted stock unit conversion. Under the 2020 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 2020 Plan is scheduled to terminate on May 13, 2030. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock, restricted stock units and performance stock units may be issued under the 2020 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of July 3, 2021, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding under the 2020 Plan.
 
21

The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations, based on their grant date fair values. The Company recognizes the expense using the straight-line attribution method. The stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest; therefore, the amount of expense has been reduced for estimated forfeitures. Forfeitures are estimated based on historical experience. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.
The consolidated statements of operations for the three and six months ended July 3, 2021 and June 27, 2020 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock purchase plan (in thousands):
 
    
Three Months Ended
    
Six Months Ended
 
    
July 3, 2021
    
June 27, 2020
    
July 3, 2021
    
June 27, 2020
 
Cost of sales
   $ 727      $ 635      $ 1,360      $ 1,205  
Selling and administrative expenses
     5,274        7,352        11,694        14,725  
Research and development expenses
     1,290        939        2,542        2,192  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total stock-based compensation
   $ 7,291      $ 8,926      $ 15,596      $ 18,122  
    
 
 
    
 
 
    
 
 
    
 
 
 
Stock Options
In determining the fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of
non-qualified
stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury
zero-coupon
issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the six months ended July 3, 2021 and June 27, 2020 are as follows:
 
    
Six Months Ended
 
Options Issued and Significant Assumptions Used to Estimate Option Fair Values
  
July 3, 2021
   
June 27, 2020
 
Options issued in thousands
     159       227  
Risk-free interest rate
     0.8     1.4
Expected life in years
     6       6  
Expected volatility
     32.5     26.5
Expected dividends
     —         —    
 
    
Six Months Ended
 
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant
  
July 3, 2021
    
June 27, 2020
 
Exercise price
   $ 280.92      $ 216.08  
Fair value
   $ 91.42      $ 61.70  
 
22

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STAEMENTS (unaudited) – (Continued)
 
The following table summarizes stock option activity for the plans for the six months ended July 3, 2021 (in thousands, except per share data):
 
    
Number of Shares
    
Exercise Price per Share
    
Weighted-Average

Exercise Price per
Share
 
Outstanding at December 31, 2020
     1,067      $ 75.94        to      $ 238.52      $ 179.59  
Granted
     159      $ 250.15        to      $ 346.56      $ 280.92  
Exercised
     (230    $ 99.22        to      $ 238.52      $ 168.39  
Canceled
     (228    $ 139.51        to      $ 224.37      $ 194.59  
    
 
 
                                     
Outstanding at July 3, 2021
     768      $ 75.94        to      $ 346.56      $ 199.21  
    
 
 
                                     
Restricted Stock
During the six months ended July 3, 2021, the Company granted four thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $250.15.
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the six months ended July 3, 2021 (in thousands, except per share data):
 
    
Shares
    
Weighted-Average

Grant Date Fair
Value per Share
 
Unvested at December 31, 2020
     271      $ 202.00  
Granted
     88      $ 282.94  
Vested
     (81    $ 182.26  
Forfeited
     (14    $ 220.23  
    
 
 
          
Unvested at July 3, 2021
     264      $ 234.07  
    
 
 
          
Restricted stock units are generally granted annually in February and vest in equal annual installments over a
five-year
period.
Performance Stock Units
The Company’s performance stock units are equity compensation awards with a market vesting condition based on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded. Beginning with the grants made in 2020, the vesting conditions for performance stock units now include a performance condition based on future sales growth.
In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on the performance period of the underlying performance stock units. The risk-free interest rate is the yield currently available on U.S. Treasury
zero-coupon
issues with a remaining term approximating the expected term used as the input to the Monte Carlo simulation model. The correlation coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each other during the performance period. The relevant data used to determine the value of the performance stock units granted during the six months ended July 3, 2021 and June 27, 2020 are as follows:
 
23

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STAEMENTS (unaudited) – (Continued)
 
    
Six Months Ended
 
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values
  
July 3,
2021
   
June 27,
2020
 
Performance stock units issued (in thousands)
     41       58  
Risk-free interest rate
     0.2     1.3
Expected life in years
     2.9       2.9  
Expected volatility
     38.7     25.1
Average volatility of peer companies
     34.7     26.1
Correlation coefficient
     45.8     36.6
Expected dividends
     —         —    
The following table summarizes the unvested performance stock unit award activity for the six months ended July 3, 2021 (in thousands, except per share data):
 
    
Shares
    
Weighted-Average

Fair Value per
Share
 
Unvested at December 31, 2020
     95      $ 230.36  
Granted
     41      $ 315.98  
Vested
     (5    $ 242.94  
Forfeited
     (39    $ 229.78  
    
 
 
          
Unvested at July 3, 2021
     92      $ 268.08  
    
 
 
          
9 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
 
    
Three Months Ended July 3, 2021
 
    
Net Income
(Numerator)
    
Weighted-
Average Shares
(Denominator)
    
Per Share
Amount
 
Net income per basic common share
   $ 167,292        61,685      $ 2.71  
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
     —          472        (0.02
    
 
 
    
 
 
    
 
 
 
Net income per diluted common share
   $ 167,292        62,157      $ 2.69  
    
 
 
    
 
 
    
 
 
 
   
    
Three Months Ended June 27, 2020
 
    
Net Income
(Numerator)
    
Weighted-
Average Shares
(Denominator)
    
Per Share
Amount
 
Net income per basic common share
   $ 122,929        61,944      $ 1.98  
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
     —          240        —    
    
 
 
    
 
 
    
 
 
 
Net income per diluted common share
   $ 122,929        62,184      $ 1.98  
    
 
 
    
 
 
    
 
 
 
 
24

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
    
Six Months Ended July 3, 2021
 
    
Net Income

(Numerator)
    
Weighted-
Average Shares

(Denominator)
    
Per Share

Amount
 
Net income per basic common share
   $ 315,419        61,979      $ 5.09  
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
     —          456        (0.04
    
 
 
    
 
 
    
 
 
 
Net income per diluted common share
   $ 315,419        62,435      $ 5.05  
    
 
 
    
 
 
    
 
 
 
   
    
Six Months Ended June 27, 2020
 
    
Net Income

(Numerator)
    
Weighted-

Average Shares

(Denominator)
    
Per Share

Amount
 
Net income per basic common share
   $ 176,491        62,085      $ 2.84  
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
     —          319        (0.01
    
 
 
    
 
 
    
 
 
 
Net income per diluted common share
   $ 176,491        62,404      $ 2.83  
    
 
 
    
 
 
    
 
 
 
For the three and six months ended July 3, 2021 and June 27, 2020, the Company had fewer than one million stock options that were antidilutive due to having higher exercise prices than the Company’s average stock price during the applicable period. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.
10 Accumulated Other Comprehensive Income
The components of accumulated other comprehensive loss are detailed as follows (in thousands):
 
 
  
Currency
Translation
 
  
Unrealized Gain
(Loss) on
Retirement Plans
 
  
Unrealized Loss
on Investments
 
  
Accumulated Other
Comprehensive
Loss
 
Balance at December 31, 2020
   $ (98,082    $ (19,861    $ —        $ (117,943
Other comprehensive income (loss), net of tax
     5,816        963        (15      6,764  
    
 
 
    
 
 
    
 
 
    
 
 
 
Balance at July 3, 2021
   $ (92,266    $ (18,898    $ (15    $ (111,179
    
 
 
    
 
 
    
 
 
    
 
 
 
 
25

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
11 Retirement Plans
The Company sponsors various retirement plans. The components of net periodic benefit cost other than the service cost component are included in other expense in the consolidated statements of operations. The summary of the components of net periodic pension costs for the plans for the three and six months ended July 3, 2021 and June 27, 2020 is as follows (in thousands):
 
    
Three Months Ended
 
    
July 3, 2021
    
June 27, 2020
 
    
U.S. Retiree

Healthcare

Plan
    
Non-U.S.

Pension

Plans
    
U.S. Retiree

Healthcare

Plan
    
Non-U.S.

Pension

Plans
 
Service cost
   $ 232      $ 1,147      $ 151      $ 1,095  
Interest cost
     139        312        177        338  
Expected return on plan assets
     (255      (464      (220      (454
Net amortization:
                                   
Prior service credit
     (4      (39      (5      (41
Net actuarial loss
     —          261        —          382  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net periodic pension cost
   $ 112      $ 1,217      $ 103      $ 1,320  
    
 
 
    
 
 
    
 
 
    
 
 
 
   
    
Six Months Ended
 
    
July 3, 2021
    
June 27, 2020
 
    
U.S. Retiree

Healthcare

Plan
    
Non-U.S.

Pension

Plans
    
U.S. Retiree

Healthcare

Plan
    
Non-U.S.

Pension

Plans
 
Service cost
   $ 465      $ 2,307      $ 302      $ 2,194  
Interest cost
     278        627        353        683  
Expected return on plan assets
     (510      (930      (439      (910
Net amortization:
                                   
Prior service credit
     (9      (80      (10      (81
Net actuarial loss
     —          523        —          767  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net periodic pension cost