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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
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
.
Commission File Number:
01-14010
 
 
Waters Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
13-3668640
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
34 Maple Street
Milford, Massachusetts 01757
(Address, including zip code, of principal executive offices)
(
508)
 478-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, par value $0.01 per share
 
WAT
 
New York Stock Exchange, Inc.
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
       
Non-accelerated
filer
     Smaller reporting company  
       
         Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Act).    Yes  ☐    No  
Indicate the number of shares outstanding of the registrant’s common stock as of October 29, 2021: 61,036,269
 
 
 

WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q
INDEX
 
PART I
  
FINANCIAL INFORMATION
  
Page
 
Item 1.         3  
        3  
        4  
        5  
        6  
        7  
        8  
        9  
        10  
Item 2.         34  
Item 3.         48  
Item 4.         49  
PART II
  
OTHER INFORMATION
  
Item 1.         49  
Item 1A.         50  
Item 2.         50  
Item 6.         51  
        52  

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.
 
3

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.
 
4

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.
 
5

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.
 
6

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.
 
7

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited, in thousands)
 
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
    
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Total
Stockholders’
Deficit
 
Balance 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.
 
8

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited, in thousands)
 
                                                         
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Total
Stockholders’
Deficit
 
Balance December 31, 2019
     161,030      $ 1,610      $ 1,926,753      $ 6,587,403     $ (8,612,576   $ (119,471   $ (216,281
Net income
     —          —          —          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.
 
9

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1 Basis of Presentation and Summary of Significant Accounting Policies
Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC
TM
” and, together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together
(“LC-MS”)
and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing.
LC-MS
instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA
TM
product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.
The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s 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
.
 
10

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.
 
11

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.
 
12

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.
 
13

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  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
14

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.
 
15

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.
 
16

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
 
   
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.
 
17

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
$3 
million in guaranteed payments, net of applicable withholding taxes.
2 Revenue Recognition
The Company’s deferred revenue liabilities on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.
 
18

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
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
19

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