WATERS CORP /DE/ [WAT] Filings

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

10-Q 1 d234312d10q.htm 10-Q 10-Q

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.

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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.

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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.

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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.

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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.

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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.

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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

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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