Quarterly Report (10-q)

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

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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 October 2, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

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.

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 October 29, 2021: 61,036,269

Table of Contents

WATERS CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM

10-Q

INDEX


PART I	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements		3
	Consolidated Balance Sheets (unaudited) as of October 2, 2021 and December 31, 2020		3
	Consolidated Statements of Operations (unaudited) for the three months ended October 2, 2021 and September 26, 2020		4
	Consolidated Statements of Operations (unaudited) for the nine months ended October 2, 2021 and September 26, 2020		5
	Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended October 2, 2021 and September 26, 2020		6
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended October 2, 2021 and September 26, 2020		7
	Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited) for the three months ended October 2, 2021 and September 26, 2020		8
	Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited) for the nine months ended October 2, 2021 and September 26, 2020		9
	Condensed Notes to Consolidated Financial Statements (unaudited)		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		48
Item 4.	Controls and Procedures		49

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		49
Item 1A.	Risk Factors		50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50
Item 6.	Exhibits		51
	Signature		52

Table of Contents

Item 1:

Financial Statements

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)


	October 2, 2021			December 31, 2020
	(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	524,702		$	436,695
Investments		130,490			6,451
Accounts receivable, net		532,957			573,316
Inventories		388,756			304,281
Other current assets		81,171			80,290

Total current assets		1,658,076			1,401,033
Property, plant and equipment, net		530,061			494,003
Intangible assets, net		246,080			258,645
Goodwill		436,754			444,362
Operating lease assets		84,845			93,252
Other assets		160,099			148,625

Total assets	$	3,115,915		$	2,839,920

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and debt	$	—		$	150,000
Accounts payable		88,904			72,212
Accrued employee compensation		76,182			72,166
Deferred revenue and customer advances		262,758			198,240
Current operating lease liabilities		26,839			27,764
Accrued income taxes		61,404			76,558
Accrued warranty		10,496			10,950
Other current liabilities		145,306			197,093

Total current liabilities		671,889			804,983
Long-term liabilities:
Long-term debt		1,613,618			1,206,515
Long-term portion of retirement benefits		72,664			72,620
Long-term income tax liabilities		319,161			357,493
Long-term operating lease liabilities		58,381			68,197
Other long-term liabilities		84,980			97,968

Total long-term liabilities		2,148,804			1,802,793

Total liabilities		2,820,693			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 October 2, 2021 and December 31, 2020		—			—
Common stock, par value $0.01 per share, 400,000 shares authorized, 162,075 and 161,666 shares issued, 61,167 and 62,309 shares outstanding at October 2, 2021 and December 31, 2020, respectively		1,621			1,617
Additional paid-in capital		2,106,301			2,029,465
Retained earnings		7,584,593			7,107,989
Treasury stock, at cost, 100,908 and 99,357 shares at October 2, 2021 and December 31, 2020, respectively		(9,281,679	)		(8,788,984	)
Accumulated other comprehensive loss		(115,614	)		(117,943	)

Total stockholders’ equity		295,222			232,144

Total liabilities and stockholders’ equity	$	3,115,915		$	2,839,920

The accompanying notes are an integral part of the interim consolidated financial statements.

Table of Contents

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended
	October 2, 2021			September 26, 2020
	(In thousands, except per share data)
Revenues:
Product sales	$	419,133		$	376,239
Service sales		240,100			217,545

Total net sales		659,233			593,784
Costs and operating expenses:
Cost of product sales		171,364			166,330
Cost of service sales		99,764			96,012
Selling and administrative expenses		152,545			135,430
Research and development expenses		41,986			34,971
Purchased intangibles amortization		1,759			2,657

Total costs and operating expenses		467,418			435,400

Operating income		191,815			158,384
Other expense		(607	)		(1,039	)
Interest expense		(11,081	)		(10,915	)
Interest income		2,548			4,007

Income before income taxes		182,675			150,437
Provision for income taxes		21,490			23,668

Net income	$	161,185		$	126,769

Net income per basic common share	$	2.63		$	2.04
Weighted-average number of basic common shares		61,359			62,002
Net income per diluted common share	$	2.60		$	2.03
Weighted-average number of diluted common shares and equivalents		61,888			62,303

The accompanying notes are an integral part of the interim consolidated financial statements.

Table of Contents

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Nine Months Ended
	October 2, 2021			September 26, 2020
	(In thousands, except per share data)
Revenues:
Product sales	$	1,242,110		$	965,342
Service sales		707,315			613,365

Total net sales		1,949,425			1,578,707
Costs and operating expenses:
Cost of product sales		506,985			420,971
Cost of service sales		298,544			265,149
Selling and administrative expenses		453,954			400,614
Research and development expenses		125,027			101,115
Purchased intangibles amortization		5,408			7,900
Litigation provision		—			1,180

Total costs and operating expenses		1,389,918			1,196,929

Operating income		559,507			381,778
Other income (expense), net		18,073			(2,149	)
Interest expense		(34,054	)		(38,012	)
Interest income		10,347			12,046

Income before income taxes		553,873			353,663
Provision for income taxes		77,269			50,403

Net income	$	476,604		$	303,260

Net income per basic common share	$	7.72		$	4.89
Weighted-average number of basic common shares		61,771			62,057
Net income per diluted common share	$	7.66		$	4.86
Weighted-average number of diluted common shares and equivalents		62,244			62,371

The accompanying notes are an integral part of the interim consolidated financial statements.

Table of Contents

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Three Months Ended						Nine Months Ended
	October 2, 2021			September 26, 2020			October 2, 2021			September 26, 2020
	(In thousands)						(In thousands)
Net income	$	161,185		$	126,769		$	476,604		$	303,260
Other comprehensive (loss) income:
Foreign currency translation		(4,560	)		601			1,256			(7,156	)
Unrealized gains on investments before income taxes		17			—			2			—

Unrealized gains on investments, net of tax		17			—			2			—
Retirement liability adjustment before reclassifications		(103	)		(654	)		691			(880	)
Amounts reclassified to other income		248			352			682			1,028

Retirement liability adjustment before income taxes		145			(302	)		1,373			148
Income tax expense		(37	)		(85	)		(302	)		(197	)

Retirement liability adjustment, net of tax		108			(387	)		1,071			(49	)
Other comprehensive (loss) income		(4,435	)		214			2,329			(7,205	)

Comprehensive income	$	156,750		$	126,983		$	478,933		$	296,055

The accompanying notes are an integral part of the interim consolidated financial statements.

Table of Contents

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended
	October 2, 2021			September 26, 2020
	(In thousands)
Cash flows from operating activities:
Net income	$	476,604		$	303,260
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		21,949			27,715
Deferred income taxes		9,219			1,089
Depreciation		52,760			49,407
Amortization of intangibles		45,166			41,684
Change in operating assets and liabilities:
Decrease in accounts receivable		23,472			96,955
Increase in inventories		(93,878	)		(8,139	)
Increase in other current assets		(9,123	)		(16,776	)
I ncrease in other assets		(6,116	)		(2,612	)
(Decrease) increase in accounts payable and other current liabilities		(4,768	)		46,721
Increase in deferred revenue and customer advances		71,889			32,053
Decrease in other liabilities		(57,838	)		(48,332	)

Net cash provided by operating activities		529,336			523,025
Cash flows from investing activities:
Additions to property, plant, equipment and software capitalization		(116,614	)		(125,340	)
Business acquisitions, net of cash acquired		—			(76,664	)
Investment in unaffiliated companies		(867	)		(3,850	)
Payments for intellectual property licenses		(7,000	)		—
Purchases of investments		(241,230	)		(22,458	)
Maturities and sales of investments		117,283			1,751

Net cash used in investing activities		(248,428	)		(226,561	)
Cash flows from financing activities:
Proceeds from debt issuances		510,000			315,000
Payments on debt		(250,000	)		(425,366	)
Payments of debt issuance costs		(8,537	)		—
Proceeds from stock plans		55,000			28,421
Purchases of treasury shares		(492,695	)		(196,353	)
Proceeds from derivative contracts		2,325			10,330

Net cash used in financing activities		(183,907	)		(267,968	)
Effect of exchange rate changes on cash and cash equivalents		(8,994	)		10,723

Increase in cash and cash equivalents		88,007			39,219
Cash and cash equivalents at beginning of period		436,695			335,715

Cash and cash equivalents at end of period	$	524,702		$	374,934

The accompanying notes are an integral part of the interim consolidated financial statements.

Table of Contents

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 June 27, 2020		161,273	$	1,613	$	1,959,498	$	6,762,909	$	(8,788,872	)	$	(126,890	)	$	(191,742	)
Net income		—		—		—		126,769		—			—			126,769
Other comprehensive income		—		—		—		—		—			214			214
Issuance of common stock for employees:
Employee Stock Purchase Plan		10		—		1,641		—		—			—			1,641
Stock options exercised		97		1		12,040		—		—			—			12,041
Treasury stock		—		—		—		—		(56	)		—			(56	)
Stock-based compensation		1		—		9,552		—		—			—			9,552

Balance September 26, 2020		161,381	$	1,614	$	1,982,731	$	6,889,678	$	(8,788,928	)	$	(126,676	)	$	(41,581	)


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance July 3, 2021		162,017	$	1,620	$	2,090,052	$	7,423,408	$	(9,135,628	)	$	(111,179	)	$	268,273
Net income		—		—		—		161,185		—			—			161,185
Other comprehensive loss		—		—		—		—		—			(4,435	)		(4,435	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		8		—		2,567		—		—			—			2,567
Stock options exercised		45		1		7,396		—		—			—			7,397
Treasury stock		—		—		—		—		(146,051	)		—			(146,051	)
Stock-based compensation		5		—		6,286		—		—			—			6,286

Balance October 2, 2021		162,075	$	1,621	$	2,106,301	$	7,584,593	$	(9,281,679	)	$	(115,614	)	$	295,222

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

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		—		—		—		303,260			—			—			303,260
Adoption of new accounting pronouncement		—		—		—		(985	)		—			—			(985	)
Other comprehensive loss		—		—		—		—			—			(7,205	)		(7,205	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		31		—		5,593		—			—			—			5,593
Stock options exercised		184		2		22,944		—			—			—			22,946
Treasury stock		—		—		—		—			(176,352	)		—			(176,352	)
Stock-based compensation		136		2		27,441		—			—			—			27,443

Balance September 26, 2020		161,381	$	1,614	$	1,982,731	$	6,889,678		$	(8,788,928	)	$	(126,676	)	$	(41,581	)


	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		—		—		—		476,604		—			—			476,604
Other comprehensive income		—		—		—		—		—			2,329			2,329
Issuance of common stock for employees:
Employee Stock Purchase Plan		40				9,578		—		—			—			9,578
Stock options exercised		275		3		46,109		—		—			—			46,112
Treasury stock		—		—		—		—		(492,695	)		—			(492,695	)
Stock-based compensation		94		1		21,149		—		—			—			21,150

Balance October 2, 2021		162,075	$	1,621	$	2,106,301	$	7,584,593	$	(9,281,679	)	$	(115,614	)	$	295,222

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

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

” 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

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 third fiscal quarters for 2021 and 2020 ended on October 2, 2021 and September 26, 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

Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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.

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.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

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 October 2, 2021 and December 31, 2020, $371 million out of $655 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, $240 million out of $655 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 October 2, 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 nine months ended October 2, 2021 and September 26, 2020 (in thousands):


	Balance at Beginning of Period		Impact of CECL Adoption		Additions		Deductions			Balance at End of Period
Allowance for Credit Losses
October 2, 2021	$	14,381	$	—	$	3,388	$	(4,107	)	$	13,662
September 26, 2020	$	9,560	$	985	$	7,826	$	(5,784	)	$	12,587

Other Investments

During the nine months ended October 2, 2021 and September 26, 2020, the Company made investments in unaffiliated companies of $1 million and $4 million, respectively.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

During the nine months ended October 2, 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 nine months ended September 26, 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 October 2, 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.

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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 October 2, 2021 (in thousands):


	Total at October 2, 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	$	12,043	$	—	$	12,043	$	—
Corporate debt securities		83,045		—		83,045		—
Time deposits		35,803		—		35,803		—
Waters 401(k) Restoration Plan assets		38,587		38,587		—		—
Foreign currency exchange contracts		93		—		93		—

Total	$	169,571	$	38,587	$	130,984	$	—

Liabilities:
Contingent consideration	$	1,307	$	—	$	—	$	1,307
Foreign currency exchange contracts		375		—		375		—
Interest rate cross-currency swap agreements		12,322		—		12,322		—

Total	$	14,004	$	—	$	12,697	$	1,307

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

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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, foreign currency exchange contracts and interest rate cross-currency swap agreements 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 achievement of certain revenue and customer account milestones over the two years after the acquisition date 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 October 2, 2021 and December 31, 2020.

Fair Value of Other Financial Instruments

The Company’s accounts receivable and accounts payable are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s variable interest rate debt approximates fair value due to the variable nature of the interest rate. The carrying value of the Company’s fixed interest rate debt was

$1.3 billion and $910 million at October 2, 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 $963 million at October 2, 2021 and December 31, 2020, respectively, using Level 2 inputs.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

Derivative Transactions

The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its

non-U.S.

dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.

The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.

Foreign Currency Exchange Contracts

The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real.

Interest Rate Cross-Currency Swap Agreements

As of October 2, 2021, the Company had entered

into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $340 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.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

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):


	October 2, 2021				December 31, 2020
	Notional Value		Fair Value		Notional Value		Fair Value
Foreign currency exchange contracts:
Other current assets	$	19,000	$	93	$	66,690	$	836
Other current liabilities	$	46,772	$	375	$	20,000	$	185
Interest rate cross-currency swap agreements:
Other liabilities	$	340,000	$	12,322	$	560,000	$	44,996
Accumulated other comprehensive loss			$	20,219			$	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					Nine Months Ended
	Financial Statement Classification	October 2, 2021			September 26, 2020		October 2, 2021			September 26, 2020
Foreign currency exchange contracts:
Realized (losses) gains on closed contracts	Cost of sales	$	(774	)	$	1,113	$	681		$	(45	)
Unrealized (losses) gains on open contracts	Cost of sales		(933	)		808		(2,256	)		1,455

Cumulative net pre-tax (losses) gains	Cost of sales	$	(1,707	)	$	1,921	$	(1,575	)	$	1,410

Interest rate cross-currency swap agreements:
Interest earned	Interest income	$	2,305		$	3,777	$	9,505		$	11,275
Unrealized gains on open contracts	Other comprehensive income	$	7,762		$	19,582	$	24,777		$	19,675

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 nine months ended October 2, 2021 and September 26, 2020, the Company repurchased 1.5 million and 0.8 million shares of the Company’s outstanding common stock at a cost of $484 million and $167 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $9 million and $10 million of common stock related to the vesting of restricted stock units during the nine months ended October 2, 2021 and September 26, 2020, respectively. As of October 2, 2021, the Company had repurchased an aggregate of 12.7 million shares at a cost of $3.0 billion under the January 2019 repurchase program and had a total of $1.0 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.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

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 October 2, 2021.

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 nine months ended October 2, 2021 and September 26, 2020 (in thousands):


	Balance at Beginning of Period		Accruals for Warranties		Settlements Made			Balance at End of Period
Accrued warranty liability:
October 2, 2021	$	10,950	$	6,537	$	(6,991	)	$	10,496
September 26, 2020	$	11,964	$	5,442	$	(7,145	)	$	10,261

Restructuring

In January 2020, the Company made organizational changes to better align its resources with its growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 3%

of the Company’s employees. During the three and nine months ended September 26, 2020, the Company incurred $6 million and

$27

million of severance-related costs, lease termination costs and other related costs. Restructuring charges incurred during the three and nine months ended October 2, 2021 were immaterial.

Other Items

During the nine months ended October 2, 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 nine months ended October 2, 2021, the Company received

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.

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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 nine months ended October 2, 2021 and September 26, 2020 (in thousands):


	October 2, 2021			September 26, 2020
Balance at the beginning of the period	$	239,759		$	213,695
Recognition of revenue included in balance at beginning of the period		(197,279	)		(177,667	)
Revenue deferred during the period, net of revenue recognized		264,184			213,895

Balance at the end of the period	$	306,664		$	249,923

The Company classified $44 million and $42 million of deferred revenue and customer advances in other long-term liabilities at October 2, 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):


	October 2, 2021
Deferred revenue and customer advances expected to be recognized in:
One year or less	$	262,758
13-24 months		25,076
25 months and beyond		18,830

Total	$	306,664

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):


	October 2, 2021
	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
U.S. Treasury securities	$	12,040	$	3	$	—		$	12,043
Corporate debt securities		83,045		8		(8	)		83,045
Time deposits		35,803		—		—			35,803

Total	$	130,888	$	11	$	(8	)	$	130,891

Amounts included in:
Cash equivalents	$	401	$	—	$	—		$	401
Investments		130,487		11		(8	)		130,490

Total	$	130,888	$	11	$	(8	)	$	130,891


	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

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):


	October 2, 2021		December 31, 2020
Due in one year or less	$	128,149	$	6,451
Due after one year through three years		2,742		—

Total	$	130,891	$	6,451

4 Inventories

Inventories are classified as follows (in thousands):


	October 2, 2021		December 31, 2020
Raw materials	$	158,529	$	133,490
Work in progress		25,296		18,678
Finished goods		204,931		152,113

Total inventories	$	388,756	$	304,281

5 Goodwill and Other Intangibles

The carrying amount of goodwill was $437 million and $444 million at October 2, 2021 and December 31, 2020, respectively. The effect of foreign currency translation decreased goodwill by $7 million.

The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):


	October 2, 2021						December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period		Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period
Capitalized software	$	576,988	$	419,736		5 years	$	584,452	$	409,847		5 years
Purchased intangibles		202,094		162,895		11 years		205,585		160,342		11 years
Trademarks		9,680		—		—		9,680		—		—
Licenses		12,616		5,944		7 years		5,923		5,697		6 years
Patents and other intangibles		99,906		66,629		8 years		90,699		61,808		8 years

Total	$	901,284	$	655,204		7 years	$	896,339	$	637,694		7 years

During the nine months ended October 2, 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 in 2021. The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $36 million and $27 million, respectively, in the nine months ended October 2, 2021 due to the effects of foreign

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

currency translation. Amortization expense for intangible assets was $15 million for both the three months ended October 2, 2021 and September 26, 2020. Amortization expense for intangible assets was $45 million and $42 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. Amortization expense for intangible assets is estimated to be $62 million per year for each of the next five years.

6 Debt

On September 17, 2021, the Company entered into an amended and restated credit agreement (the “2021 Credit Agreement”), which amended the Company’s existing credit agreement entered into in 2017 (the “2017 Credit Agreement”). The 2021 Credit Agreement provides for a $1.8 billion revolving facility (the “2021 Credit Facility”) and converted the $300 million term loan under the 2017 Credit Agreement into part of the new revolving facility. As of October 2, 2021, the 2021 Credit Facility had a total of $310 million outstanding. As of December 31, 2020, the revolving credit facility and the term loan governed by the 2017 Credit Agreement had a total of $100 million and $300 million, respectively, outstanding. The 2021 Credit Facility matures on September 17, 2026 and requires no scheduled prepayments before that date.

The interest rates applicable to the 2021 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, 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 2021 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 2021 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 2021 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.

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.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

As of October 2, 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.

The Company had the following outstanding debt at October 2, 2021 and December 31, 2020 (in thousands):


	October 2, 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		310,000			400,000
Unamortized debt issuance costs		(6,382	)		(3,485	)

Total long-term debt		1,613,618			1,206,515

Total debt	$	1,613,618		$	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 October 2, 2021 and December 31, 2020, the Company had a total amount available to borrow under the 2021 or 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 2.67% and 2.92% at October 2, 2021 and December 31, 2020, respectively. As of October 2, 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 October 2, 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 October 2, 2021 or December 31, 2020.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

As of October 2, 2021, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $340 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 October 2, 2021. The Company had 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 nine months ended October 2, 2021 and September 26, 2020 by $13 million and $12 million, respectively, and increased the Company’s net income per diluted share by $0.20

for both periods.

The Company’s effective tax rate for the three months ended October 2, 2021 and September 26, 2020 was 11.8% and 15.7%, respectively. The decrease in the effective income tax rate can be attributed to the impact of quarter-specific adjustments and 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 nine months ended October 2, 2021 and September 26, 2020 was 14.0% and 14.3%, respectively. The effective tax rate for the nine months ended October 2, 2021 includes a $6 million tax benefit related to stock-based compensation. This income tax benefit decreased the effective tax rate by 1.1 percentage points for the nine months ended October 2, 2021. The effective tax rate for the nine months ended September 26, 2020 includes a $6 million income tax benefit related to certain restructuring charges and a $3 million tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 1.8 percentage points and 0.9 percentage points, respectively, for the nine months ended September 26, 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.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

The following is a summary of the activity of the Company’s gross unrecognized tax benefits, excluding interest and penalties, for the nine months ended October 2, 2021 and September 26, 2020 (in thousands):


	October 2, 2021			September 26, 2020
Balance at the beginning of the period	$	28,666		$	27,790
Net reductions for settlement of tax audits		(878	)		—
Net reductions for lapse of statutes taken during the period		(292	)		(427	)
Net additions for tax positions taken during the current period		966			907

Balance at the end of the period	$	28,462		$	28,270

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 October 2, 2021, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of $18 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 October 2, 2021, the 2020 Plan had 6.7 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 October 2, 2021, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding under the 2020 Plan.

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

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

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 nine months ended October 2, 2021 and September 26, 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				Nine Months Ended
	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Cost of sales	$	468	$	645	$	1,828	$	1,850
Selling and administrative expenses		4,116		7,747		15,810		22,472
Research and development expenses		1,769		1,201		4,311		3,393

Total stock-based compensation	$	6,353	$	9,593	$	21,949	$	27,715

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 nine months ended October 2, 2021 and September 26, 2020 are as follows:


	Nine Months Ended
Options Issued and Significant Assumptions Used to Estimate Option Fair Values	October 2, 2021			September 26, 2020
Options issued in thousands		160			267
Risk-free interest rate		0.8	%		1.2	%
Expected life in years		6			6
Expected volatility		32.4	%		27.8	%
Expected dividends		—			—


	Nine Months Ended
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	October 2, 2021		September 26, 2020
Exercise price	$	281.23	$	215.12
Fair value	$	91.46	$	62.93

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

The following table summarizes stock option activity for the plans for the nine months ended October 2, 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		160		$	250.15 to $ 371.64	$	281.23
Exercised		(275	)	$	99.22 to $ 238.52	$	167.89
Canceled		(251	)	$	139.51 to $ 280.80	$	197.05

Outstanding at October 2, 2021		701		$	75.94 to $ 371.64	$	200.84

Restricted Stock

During the nine months ended October 2, 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 $254.51.

Restricted Stock Units

The following table summarizes the unvested restricted stock unit award activity for the nine months ended October 2, 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		$	283.10
Vested		(86	)	$	183.94
Forfeited		(22	)	$	221.64

Unvested at October 2, 2021		251		$	234.90

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

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

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 nine months ended October 2, 2021 and September 26, 2020 are as follows:


	Nine Months Ended
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values	October 2, 2021			September 26, 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 nine months ended October 2, 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		(44	)	$	199.22

Unvested at October 2, 2021		87		$	285.73

9 Earnings Per Share

Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):


	Three Months Ended October 2, 2021
	Net Income		Weighted- Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	161,185		61,359	$	2.63
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		529		(0.03	)

Net income per diluted common share	$	161,185		61,888	$	2.60

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)


	Three Months Ended September 26, 2020
	Net Income (Numerator)		Weighted- Average Shares (Denominator)		Per Share Amount
Net income per basic common share	$	126,769		62,002	$	2.04
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		301		(0.01	)

Net income per diluted common share	$	126,769		62,303	$	2.03


	Nine Months Ended October 2, 2021
	Net Income (Numerator)		Weighted- Average Shares (Denominator)		Per Share Amount
Net income per basic common share	$	476,604		61,771	$	7.72
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		473		(0.06	)

Net income per diluted common share	$	476,604		62,244	$	7.66


	Nine Months Ended September 26, 2020
	Net Income (Numerator)		Weighted- Average Shares (Denominator)		Per Share Amount
Net income per basic common share	$	303,260		62,057	$	4.89
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		314		(0.03	)

Net income per diluted common share	$	303,260		62,371	$	4.86

For the three and nine months ended October 2, 2021 and September 26, 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 Gain on Investments		Accumulated Other Comprehensive Loss
Balance at December 31, 2020	$	(98,082	)	$	(19,861	)	$	—	$	(117,943	)
Other comprehensive income (loss), net of tax		1,256			1,071			2		2,329

Balance at October 2, 2021	$	(96,826	)	$	(18,790	)	$	2	$	(115,614	)

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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 nine months ended October 2, 2021 and September 26, 2020 is as follows (in thousands):


	Three Months Ended
	October 2, 2021						September 26, 2020
	U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Service cost	$	198		$	1,140		$	197		$	1,140
Interest cost		141			309			180			353
Expected return on plan assets		(248	)		(459	)		(214	)		(476	)
Settlement loss		—			102			—			—
Net amortization:
Prior service (credit) cost		(5	)		13			(4	)		(41	)
Net actuarial loss		8			130			—			397

Net periodic pension cost	$	94		$	1,235		$	159		$	1,373


	Nine Months Ended
	October 2, 2021						September 26, 2020
	U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Service cost	$	663		$	3,447		$	499		$	3,334
Interest cost		419			936			533			1,036
Expected return on plan assets		(758	)		(1,389	)		(653	)		(1,386	)
Settlement loss		—			102			—			—
Net amortization:
Prior service credit		(14	)		(67	)		(14	)		(122	)
Net actuarial loss		8			653			—			1,164

Net periodic pension cost	$	318		$	3,682		$	365		$	4,026

During fiscal year 2021, the Company expects to contribute a total of approximately $3 million to $6 million to the Company’s defined benefit plans.

12 Business Segment Information

The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: Waters

and TA

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

The Waters operating segment is primarily in the business of designing, manufacturing, selling and servicing LC and MS instruments, columns and other precision chemistry consumables that can be integrated and used along with other analytical instruments. The TA operating segment is primarily in the business of designing, manufacturing, selling and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s two operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution; and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information

regarding the one reportable segment of the Company.

Net sales for the Company’s products and services are as follows for the three and nine months ended October 2, 2021 and September 26, 2020 (in thousands):


	Three Months Ended				Nine Months Ended
	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Product net sales:
Waters instrument systems	$	240,475	$	225,790	$	717,910	$	550,018
Chemistry consumables		123,045		108,175		368,478		300,525
TA instrument systems		55,613		42,274		155,722		114,799

Total product sales		419,133		376,239		1,242,110		965,342
Service net sales:
Waters service		218,291		199,501		644,625		562,843
TA service		21,809		18,044		62,690		50,522

Total service sales		240,100		217,545		707,315		613,365

Total net sales	$	659,233	$	593,784	$	1,949,425	$	1,578,707

Net sales are attributable to geographic areas based on the region of destination. Geographic sales information is presented below for the three and nine months ended October 2, 2021 and September 26, 2020 (in thousands):


	Three Months Ended				Nine Months Ended
	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net Sales:
Asia:
China	$	115,886	$	115,666	$	346,030	$	252,713
Japan		44,293		44,779		139,702		131,098
Asia Other		94,423		75,737		268,359		219,660

Total Asia		254,602		236,182		754,091		603,471
Americas:
United States		194,776		172,267		544,124		465,093
Americas Other		36,225		27,180		109,128		81,312

Total Americas		231,001		199,447		653,252		546,405
Europe		173,630		158,155		542,082		428,831

Total net sales	$	659,233	$	593,784	$	1,949,425	$	1,578,707

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

Net sales by customer class are as follows for the three and nine months ended October 2, 2021 and September 26, 2020 (in thousands):


	Three Months Ended				Nine Months Ended
	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Pharmaceutical	$	398,338	$	343,001	$	1,175,191	$	926,582
Industrial		196,032		179,128		581,884		474,592
Academic and government		64,863		71,655		192,350		177,533

Total net sales	$	659,233	$	593,784	$	1,949,425	$	1,578,707

Net sales for the Company recognized at a point in time versus over time are as follows for the three and nine months ended October 2, 2021 and September 26, 2020 (in thousands):


	Three Months Ended				Nine Months Ended
	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net sales recognized at a point in time:
Instrument systems	$	296,088	$	268,064	$	873,632	$	664,817
Chemistry consumables		123,045		108,175		368,478		300,525
Service sales recognized at a point in time (time & materials)		85,093		92,145		253,212		238,754

Total net sales recognized at a point in time		504,226		468,384		1,495,322		1,204,096
Net sales recognized over time:
Service and software maintenance sales recognized over time (contracts)		155,007		125,400		454,103		374,611

Total net sales	$	659,233	$	593,784	$	1,949,425	$	1,578,707

13 Recent Accounting Standard Changes and Developments

Recently Adopted Accounting Standards

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

In December 2019, accounting guidance was issued that simplifies the accounting for income taxes by removing certain exceptions within the current guidance, including the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendment also improves consistent application by clarifying and amending existing guidance related to aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step up in the tax basis of goodwill. This guidance is effective for annual and interim periods beginning after December 15, 2020. The Company adopted this standard on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

In January 2020, accounting guidance

was issued that clarifies the accounting guidance for equity method investments, joint ventures, and derivatives and hedging. The update clarifies the interaction between different sections of the accounting guidance that could be applicable and helps clarify which guidance should be applied in certain situations which should increase relevance and comparability of financial statement information. This guidance is effective for annual and interim periods beginning after December 15, 2020. The Company adopted this standard on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

Recently Issued Accounting Standards

In March 2020, accounting guidance was issued that facilitates the effects of reference rate reform

on financial reporting. The amendments in the update provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January of 2021, an update was issued to clarify that certain optional expedients and exceptions under the reference rate reform guidance for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in the reference rate reform guidance, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This temporary guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company may elect to apply this guidance for all contract modifications or eligible hedging relationships during that time period subject to certain criteria. The Company is still evaluating the impact of reference rate reform and whether this guidance will be adopted.

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Item 2:

Management

’

s Discussion and Analysis of Financial Condition and

Results of Operations

Business Overview

The Company has two operating segments: Waters

and TA

. Waters products and services primarily consist of high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC

” 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.

The

COVID-19

pandemic has not materially impacted 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. However, the current logistic and supply chain issues being experienced throughout the world have made it more difficult for us to manage our operations and as such we cannot provide any assurances that any further disruptions in the logistics and supply chains will not have a material impact on our future financial results and cashflows.

The Company has taken decisive and appropriate actions throughout the

COVID-19

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.

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The

COVID-19

pandemic continues to be fluid with uncertainties and risks 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 79% of these savings being realized by the end of the third quarter of 2020 and approximately 21% of the savings being realized in the fourth quarter 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 fourth quarter of 2021 from a normalization of these costs.

Financial Overview

The Company’s operating results are as follows for the three and nine months ended October 2, 2021 and September 26, 2020 (dollars in thousands, except per share data):


	Three Months Ended									Nine Months Ended
	October 2, 2021			September 26, 2020			% change			October 2, 2021			September 26, 2020			% change
Revenues:
Product sales	$	419,133		$	376,239			11	%	$	1,242,110		$	965,342			29	%
Service sales		240,100			217,545			10	%		707,315			613,365			15	%

Total net sales		659,233			593,784			11	%		1,949,425			1,578,707			23	%
Costs and operating expenses:
Cost of sales		271,128			262,342			3	%		805,529			686,120			17	%
Selling and administrative expenses		152,545			135,430			13	%		453,954			400,614			13	%
Research and development expenses		41,986			34,971			20	%		125,027			101,115			24	%
Purchased intangibles amortization		1,759			2,657			(34	%)		5,408			7,900			(32	%)
Litigation provision		—			—			—			—			1,180			(100	%)

Operating income		191,815			158,384			21	%		559,507			381,778			47	%
Operating income as a % of sales		29.1	%		26.7	%					28.7	%		24.2	%
Other expense		(607	)		(1,039	)		(42	%)		18,073			(2,149	)		*	*
Interest expense, net		(8,533	)		(6,908	)		24	%		(23,707	)		(25,966	)		(9	%)

Income before income taxes		182,675			150,437			21	%		553,873			353,663			57	%
Provision for income taxes		21,490			23,668			(9	%)		77,269			50,403			53	%

Net income	$	161,185		$	126,769			27	%	$	476,604		$	303,260			57	%

Net income per diluted common share	$	2.60		$	2.03			28	%	$	7.66		$	4.86			58	%

** Percentage not meaningful

The Company’s net sales increased 11% and 23% in the third quarter and first nine months of 2021, respectively, as compared to the third quarter and first nine months of 2020. The sales growth in the 2021 periods was driven by strong sales growth across most major geographies, end markets, and product categories. Overall, sales benefited

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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 except in China, where the Company’s sales were flat due to third-party shipping logistic execution issues and in Japan. Foreign currency translation had minimal impact on total sales in the third quarter and increased sales by 2% in the first nine months of 2021. In addition, the Company’s first nine months of 2021 included five more calendar days than the first nine months of 2020.

Instrument system sales increased 10% and 31% for the third quarter and first nine months 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 in the first nine months was broad-based, particularly in LC,

LC-MS

and TA instrument system sales. Foreign currency translation had minimal impact on instrument system sales in the third quarter and increased sales by 2% in the first nine months of 2021. Recurring revenues (combined sales of precision chemistry consumables and services) increased 11% and 18% for the third quarter and first nine months of 2021, respectively, with foreign currency translation being neutral in the quarter and increasing sales by 3% in the first nine months of the year. In the first nine months of 2021, recurring revenues benefited from five additional calendar days as compared to the first nine months of 2020.

Geographically, the Company’s sales growth in the third quarter and first nine months of 2021 was broad-based. During the third quarter of 2021, sales increased 8% in Asia, 16% in the Americas, and 10% in Europe, with the effect of foreign currency translation increasing sales in Europe by 2%. During the first nine months of 2021, sales increased 25% in Asia, 20% in the Americas, and 26% in Europe, with the effect of foreign currency translation increasing sales by 1% in both Asia and the Americas, and 7% in Europe.

In the third quarter and first nine months of 2021, China sales were flat and increased 37%, respectively, driven by stronger demand due to customers resuming laboratory and manufacturing operations as well as the

pent-up

demand caused by the 20% decline in China’s sales in the first nine months of 2020 when the negative impact of the

COVID-19

pandemic lockdowns was occurring. China’s sales growth in the third quarter was negatively impacted by the third-party shipping logistic issues in China that resulted in flat sales growth. Foreign currency translation increased China sales growth by 3% and 5% in the quarter and first nine months of 2021, respectively. Sales increased 13% in the U.S. and 32% in India, while sales decreased by 1% in Japan in the quarter. Foreign currency translation decreased sales growth by 10% in India and 4% in Japan in the third quarter of 2021.

During the third quarter of 2021, sales to pharmaceutical customers increased 16%, driven by growth in all regions, including 14% in China, 41% in India, 16% in the Americas and 10% in Europe as strong customer demand continued to recover to

pre-pandemic

levels. Foreign currency translation had minimal impact on pharmaceutical sales growth in the quarter. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 9%, with the effect of foreign currency translation having minimal impact on sales growth in the quarter. During the third quarter of 2021, combined sales to academic and government customers decreased 9%, with foreign currency translation increasing academic and government sales by 2%. Sales to our academic customers declined 15% while sales to our government customers increased by 1%. 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 nine months of 2021, sales to pharmaceutical customers increased 27%, 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 3%. Combined sales to industrial customers increased 23%, with the effect of foreign currency translation increasing sales growth by 4%. During the first nine months of 2021, combined sales to academic and government customers increased 8%, as customers ramped up their spending in the first nine months 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 2%.

Operating income increased 21% and 47% for the third quarter and first nine months 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 $81 million in 2020. In addition, operating income in the third quarter and first nine months of 2020 also included $6 million and $27 million, respectively, of severance-related costs in connection with a reduction in workforce and lease termination costs.

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The Company generated $529 million and $523 million of net cash flows from operations in the first nine months 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 $81 million benefit from the reduction in expenses from the

COVID-19

pandemic cost actions implemented and working capital improvement during the first nine months of 2020.

Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $117 million and $125 million in the first nine months of 2021 and 2020, respectively. The cash flows from investing activities in the first nine months of 2021 and 2020 also included $40 million and $50 million, respectively, of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $191 million on this facility through the end of the first nine months of 2021 and anticipates spending a total of $215 million to build and equip this new

state-of-the-art

manufacturing facility.

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%.

Results of Operations

Sales by Geography

Geographic sales information is presented below for the three and nine months ended October 2, 2021 and September 26, 2020 (dollars in thousands):


	Three Months Ended							Nine Months Ended
	October 2, 2021		September 26, 2020		% change			October 2, 2021		September 26, 2020		% change
Net Sales:
Asia:
China	$	115,886	$	115,666		—		$	346,030	$	252,713		37	%
Japan		44,293		44,779		(1	%)		139,702		131,098		7	%
Asia Other		94,423		75,737		25	%		268,359		219,660		22	%

Total Asia		254,602		236,182		8	%		754,091		603,471		25	%
Americas:
United States		194,776		172,267		13	%		544,124		465,093		17	%
Americas Other		36,225		27,180		33	%		109,128		81,312		34	%

Total Americas		231,001		199,447		16	%		653,252		546,405		20	%
Europe		173,630		158,155		10	%		542,082		428,831		26	%

Total net sales	$	659,233	$	593,784		11	%	$	1,949,425	$	1,578,707		23	%

In the third quarter and first nine months of 2021, sales benefited from stronger demand for our products and services across most 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

COVID-19

pandemic. The sales strength was broad-based, driven by continued growth in recurring revenues and the strong sales growth in instruments, particularly in LC instrument system sales. Recurring revenues sales growth was favorably impacted by the five additional calendar days in the first nine months of 2021 as compared to the first nine months of 2020.

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Sales by Trade Class

Net sales by customer class are presented below for the three and nine months ended October 2, 2021 and September 26, 2020 (dollars in thousands):


	Three Months Ended							Nine Months Ended
	October 2, 2021		September 26, 2020		% change			October 2, 2021		September 26, 2020		% change
Pharmaceutical	$	398,338	$	343,001		16	%	$	1,175,191	$	926,582		27	%
Industrial		196,032		179,128		9	%		581,884		474,592		23	%
Academic and government		64,863		71,655		(9	%)		192,350		177,533		8	%

Total net sales	$	659,233	$	593,784		11	%	$	1,949,425	$	1,578,707		23	%

In the third quarter and first nine months 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 had minimal impact on sales to pharmaceutical customers in the third quarter and increased sales by 3% in the first nine months of 2021. Sales to industrial customers increased 9% and 23% in the third quarter and first nine months of 2021, respectively, primarily due to customers continuing to resume laboratory and manufacturing operations during the year. Foreign currency translation increased sales to industrial customers by 4% in the first nine months of 2021. Sales to academic and government customers decreased 9% in the third quarter and increased 8% in the first nine months of 2021, with foreign currency translation increasing sales by 2% in both the third quarter and first nine months of 2021.

Waters Products and Services Net Sales

Net sales for Waters products and services were as follows for the three and nine months ended October 2, 2021 and September 26, 2020 (dollars in thousands):


	Three Months Ended
	October 2, 2021		% of Total			September 26, 2020		% of Total			% change
	October 2, 2021		% of Total			September 26, 2020		% of Total			% change
Waters instrument systems	$	240,475		41	%	$	225,790		42	%		7	%
Chemistry consumables		123,045		21	%		108,175		21	%		14	%

Total Waters product sales		363,520		62	%		333,965		63	%		9	%
Waters service		218,291		38	%		199,501		37	%		9	%

Total Waters net sales	$	581,811		100	%	$	533,466		100	%		9	%

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	Nine Months Ended
	October 2, 2021		% of Total			September 26, 2020		% of Total			% change
	October 2, 2021		% of Total			September 26, 2020		% of Total			% change
Waters instrument systems	$	717,910		41	%	$	550,018		39	%		31	%
Chemistry consumables		368,478		22	%		300,525		21	%		23	%

Total Waters product sales		1,086,388		63	%		850,543		60	%		28	%
Waters service		644,625		37	%		562,843		40	%		15	%

Total Waters net sales	$	1,731,013		100	%	$	1,413,386		100	%		22	%

Waters products and service sales increased 9% and 22% in the third quarter and first nine months of 2021, respectively, with the effect of foreign

currency translation increasing Waters sales by 2% in the first nine months of 2021. Chemistry consumables sales increased double-digits in both the quarter and first nine months of the year due to the strong demand in the U.S., Europe, China, and India 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. Waters recurring revenues also benefited by five additional calendar days in the first nine months of the year. Waters instrument system sales (LC and MS technology-based) increased in the quarter across most 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 third quarter of 2021, Waters sales growth increased 7% in Europe, 15% in the Americas and 6% in Asia, with sales in China decreasing 1% as a result of third-party shipping logistic execution issues. Foreign currency translation increased Waters sales by 1% in both Europe and the Americas, and 3% in China.

TA Product and Services Net Sales

Net sales for TA products and services were as follows for the three and nine months ended October 2, 2021 and September 26, 2020 (dollars in thousands):


	Three Months Ended
	October 2, 2021		% of Total			September 26, 2020		% of Total			% change
	October 2, 2021		% of Total			September 26, 2020		% of Total			% change
TA instrument systems	$	55,613		72	%	$	42,274		70	%		32	%
TA service		21,809		28	%		18,044		30	%		21	%

Total TA net sales	$	77,422		100	%	$	60,318		100	%		28	%


	Nine Months Ended
	October 2, 2021		% of Total			September 26, 2020		% of Total			% change
	October 2, 2021		% of Total			September 26, 2020		% of Total			% change
TA instrument systems	$	155,722		71	%	$	114,799		69	%		36	%
TA service		62,690		29	%		50,522		31	%		24	%

Total TA net sales	$	218,412		100	%	$	165,321		100	%		32	%

TA instrument system and service sales growth in the third quarter and first nine months of 2021 was broad-based across all major geographies increasing 28% and 32%, respectively, and was primarily driven by stronger demand as a result of our customers continuing to resume laboratory and manufacturing operations.

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In the third quarter and first nine months 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 1% and 3% in the third quarter and first nine months of 2021, respectively.

Cost of Sales

Cost of sales for the third quarter and first nine months of 2021 increased 3% and 17%, 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 decrease 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 13% for both the third quarter and first nine months of 2021. 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 reduction in expenses from salary reductions, furloughs and reductions

in non-essential

spending of $16 million and $54 million for the third quarter and first nine months of 2020, respectively. The third quarter and first nine months of 2020 also included severance and lease termination and exit costs of $6 million and $27 million, respectively. Severance and lease termination and exit costs incurred during the third quarter and first nine months of 2021 were immaterial. In addition, the effect of foreign currency translation increased selling and administrative expenses by 1% and 2% for the third quarter and first nine months of 2021, respectively.

As a percentage of net sales, selling and administrative expenses were 23.1% and 23.3% for the third quarter and first nine months of 2021, and 22.8% and 25.4% for the third quarter and first nine months of 2020, respectively.

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Research and Development Expenses

Research and development expenses increased 20% and 24% in the third quarter and first nine months of 2021, respectively. The increase in expense in these periods was impacted by the reduction in expenses from salary reductions, furloughs and reductions

in non-essential spending

of $5 million and $14 million for the third quarter and first nine months of 2020, respectively. The impact of foreign currency exchange decreased expenses by 1% in the third quarter of 2021 and was neutral in the first nine months of 2021.

Other Income (Expense), net

In the second quarter and for the first nine months of 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 were recognized within other income in our consolidated statement of operations. In the first quarter and first nine months 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

Net interest expense in the third quarter of 2021 increased as compared to the third quarter of 2020, primarily due to lower interest income earned on cash and investments. Net interest expense for the first nine months of 2021 decreased compared to the first nine months of 2020, primarily due to lower interest expense on lower average debt balances, offset by lower interest income on cash and investments.

Provision for 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 October 2, 2021. The Company had 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 first nine months of 2021 and 2020 by $13 million and $12 million, respectively, and increased the Company’s net income per diluted share by $0.20 for both periods.

The Company’s effective tax rate for the third quarter of 2021 and 2020 was 11.8% and 15.7%, respectively. The decrease in the effective income tax rate can be attributed to the impact of quarter-specific adjustments and 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 nine months of 2021 and 2020 was 14.0% and 14.3%, respectively. The effective tax rate for the first nine months of October 2, 2021 includes a $6 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 nine months of October 2, 2021. The effective tax rate for the first nine months of September 26, 2020 includes a $6 million income

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tax benefit related to certain restructuring charges and a $3 million income tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 1.8 percentage points and 0.9 percentage points, respectively, for the first nine months of September 26, 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.

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Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows (in thousands):


	Nine Months Ended
	October 2, 2021			September 26, 2020
Net income	$	476,604		$	303,260
Depreciation and amortization		97,926			91,091
Stock-based compensation		21,949			27,715
Deferred income taxes		9,219			1,089
Change in accounts receivable		23,472			96,955
Change in inventories		(93,878	)		(8,139	)
Change in accounts payable and other current liabilities		(4,768	)		46,721
Change in deferred revenue and customer advances		71,889			32,053
Other changes		(73,077	)		(67,720	)

Net cash provided by operating activities		529,336			523,025
Net cash used in investing activities		(248,428	)		(226,561	)
Net cash used in financing activities		(183,907	)		(267,968	)
Effect of exchange rate changes on cash and cash equivalents		(8,994	)		10,723

Increase in cash and cash equivalents	$	88,007		$	39,219

Cash Flow from Operating Activities

Net cash provided by operating activities was $529 million and $523 million during the first nine months of 2021 and 2020, respectively. This increase in operating cash flow was primarily a result of higher sales volumes in the first nine months of 2021 compared to the first nine 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 71 days at October 2, 2021 as compared to 76 days at September 26, 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 $38 million of tax payments in the first nine months of 2021 and 2020 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 $248 million and $227 million in the first nine months of October 2, 2021 and September 26, 2020, respectively. Additions to fixed assets and capitalized software were $117 million and $125 million in the nine months ended October 2, 2021 and September 26, 2020, respectively. In February 2018, the Company’s Board of Directors approved expanding its precision chemistry consumable manufacturing operations in

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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 $40 million and $50 million of costs associated with the construction of this facility during the nine months ended October 2, 2021 and September 26, 2020, respectively. The Company has incurred $191 million on this facility through the end of the third quarter of 2021.

During the nine months ended October 2, 2021 and September 26, 2020, the Company purchased $241 million and $22 million of investments, respectively, while $117 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

On September 17, 2021, the Company amended the existing credit agreement from November 2017, providing for a

5-year

$1.8 billion revolving facility, which includes a letter of credit

sub-facility.

All commitments under the amended agreement mature on September 17, 2026. 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 nine months ended October 2, 2021 and September 26, 2020, the Company’s net debt borrowings increased by $260 million and decreased by $110 million, respectively. As of October 2, 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 $310 million borrowed under a term loan under the credit agreement dated September 2021 (“2021 Credit Agreement”).

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 nine months of 2021, $220 million of the Company’s interest rate cross-currency swaps had matured and resulted in total payments of $5 million upon settlement. As of October 2, 2021, the Company had a total of $340 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 nine months ended October 2, 2021 and September 26, 2020, the Company repurchased $484 million and $167 million, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased $9 million and $10 million of common stock related to the vesting of restricted stock units during both the nine months ended October 2, 2021 and September 26, 2020, respectively. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023.

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The Company received $55 million and $28 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 nine months ended October 2, 2021 and September 26, 2020, respectively.

The Company had cash, cash equivalents and investments of $655 million as of October 2, 2021. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $371 million held by foreign subsidiaries at October 2, 2021, of which $240 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 October 2, 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.”

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

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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 nine months ended October 2, 2021. The Company did not make any changes in those policies during the nine months ended October 2, 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 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,

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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

COVID-19

pandemic, increased risks of cyber attacks resulting from our temporary remote working model, disruptions in our manufacturing capabilities or to our supply chain and distribution network, 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 U.S. dollar.

•

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 United Kingdom’s exit from the European Union as well as the Chinese government’s ongoing tightening of restrictions on procurement by government-funded customers; the Company’s ability to access capital and maintain liquidity in volatile market conditions; changes in timing and demand for the Company’s products among the Company’s customers and various market sectors 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

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competitive obstacles to new product introductions; lack of acceptance of new products; expansion of our business in developing markets; spending by certain

end-markets;

ability to obtain alternative sources for components and modules; and the possibility that future sales of new products related to acquisitions, which trigger contingent purchase payments, may exceed the Company’s expectations.

•

Increased regulatory burdens as the Company’s business evolves, especially with respect to the United States Food and Drug Administration and the United States Environmental Protection Agency, among others, as well as regulatory, 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.

•

The impact and costs incurred from changes in accounting principles and practices; the impact and costs of changes in statutory or contractual tax rates in jurisdictions in which the Company operates, specifically as it relates to the 2017 Tax Act in the U.S.; shifts in taxable income among jurisdictions with different effective tax rates; and the outcome of and costs associated with ongoing and future tax audit examinations or changes in respective country legislation affecting the Company’s effective rates.

Certain of these and other factors are discussed under the heading “Risk Factors” under Part I, Item 1A of 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. 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 Risk

The 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 in U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities. As of October 2, 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 the U.S. dollar. As of October 2, 2021 and December 31, 2020, $371 million out of $655 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, $240 million out of $655 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 October 2, 2021 and December 31, 2020, respectively. As of October 2, 2021, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.

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Assuming a hypothetical adverse change of 10% in

year-end

exchange rates (a strengthening of the U.S. dollar), the fair market value of the Company’s cash, cash equivalents and investments held in currencies other than the U.S. dollar as of October 2, 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 nine months ended October 2, 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 ended December 31, 2020, as filed with the SEC on February 24, 2021.

Item 4:

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The 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 of October 2, 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 the SEC’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 ended October 2, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II:

Other Information

Item 1:

Legal Proceedings

There have been no material changes in the Company’s legal proceedings during the three months ended October 2, 2021 as described in Item 3 of Part I of 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.

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Item 1A:

Risk Factors

Information regarding risk factors of the Company is set forth under the heading “Risk Factors” under Part I, Item 1A 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 risk factors as of October 2, 2021 and determined that there were no material changes from the ones set forth in the Form

10-K.

Note, however, the discussion of certain factors under the subheading “Special Note Regarding Forward-Looking Statements” in Part I, Item 2 of this Quarterly Report on Form

10-Q.

These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial may have a material adverse effect on the Company’s business, financial condition and operating results.

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

The following table provides information about purchases by the Company during the three months ended October 2, 2021 of equity securities registered by the Company under the Exchange Act (in thousands, except per share data):


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs (2)
July 4, 2021 to July 31, 2021		130	$	373.27		130	$	1,137,305
August 1, 2021 to August 28, 2021		107	$	404.75		107	$	1,094,259
August 29, 2021 to October 2, 2021		135	$	401.66		133	$	1,040,647

Total		372	$	392.61		370	$	1,040,647

(1)	The Company repurchased approximately two thousand shares of common stock at a cost of less than $1 million related to the vesting of restricted stock during the three months ended October 2, 2021.

(2)

In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock in open market or private transactions over a

two-year

period. This program replaced the remaining amounts available under the

pre-existing

authorization. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. The size and timing of these purchases, if any, will depend on price, market and business conditions and other factors.

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Item 6:

Exhibits


Exhibit Number		Description of Document

10.1		Amendment and Restatement Agreement, dated as of September 17, 2021, by and among the Company, Waters Technologies Corporation, TA Instruments—Waters L.L.C., Waters Asia Limited, Environmental Resource Associates, Inc., the lenders party thereto, the issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent. (1)

31.1		Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)

32.2		Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)

101		The following materials from Waters Corporation’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Cash Flows (unaudited) and (vi) Condensed Notes to Consolidated Financial Statements (unaudited).

104		Cover Page Interactive Date File (formatted in iXBRL and contained in Exhibit 101).

(1)	Incorporated by reference to the Registrant’s Report on Form 8-K dated September 20, 2021 (File No. 001-14010).

(*)

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filing, except to the extent the Company specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ATERS

ORPORATION

/s/ Amol Chaubal

Amol Chaubal

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

(Principal Accounting Officer)

Date: November 4, 2021

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