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Table of Contents
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

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q

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.
3

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

|  | Three Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |
|  | (In thousands, except per share data) |
Revenues: |  |  |  |  |  |  |  |
Product sales |  | $ | 419,133 |  |  | $ | 376,239 |
Service sales |  |  | 240,100 |  |  |  | 217,545 |
Total net sales |  |  | 659,233 |  |  |  | 593,784 |
Costs and operating expenses: |  |  |  |  |  |  |  |
Cost of product sales |  |  | 171,364 |  |  |  | 166,330 |
Cost of service sales |  |  | 99,764 |  |  |  | 96,012 |
Selling and administrative expenses |  |  | 152,545 |  |  |  | 135,430 |
Research and development expenses |  |  | 41,986 |  |  |  | 34,971 |
Purchased intangibles amortization |  |  | 1,759 |  |  |  | 2,657 |
Total costs and operating expenses |  |  | 467,418 |  |  |  | 435,400 |
Operating income |  |  | 191,815 |  |  |  | 158,384 |
Other expense |  |  | (607 | ) |  |  | (1,039 | )
Interest expense |  |  | (11,081 | ) |  |  | (10,915 | )
Interest income |  |  | 2,548 |  |  |  | 4,007 |
Income before income taxes |  |  | 182,675 |  |  |  | 150,437 |
Provision for income taxes |  |  | 21,490 |  |  |  | 23,668 |
Net income |  | $ | 161,185 |  |  | $ | 126,769 |
Net income per basic common share |  | $ | 2.63 |  |  | $ | 2.04 |
Weighted-average number of basic common shares |  |  | 61,359 |  |  |  | 62,002 |
Net income per diluted common share |  | $ | 2.60 |  |  | $ | 2.03 |
Weighted-average number of diluted common shares and equivalents |  |  | 61,888 |  |  |  | 62,303 |

The accompanying notes are an integral part of the interim consolidated financial statements.
4

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

|  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |
|  | (In thousands, except per share data) |
Revenues: |  |  |  |  |  |  |  |
Product sales |  | $ | 1,242,110 |  |  | $ | 965,342 |
Service sales |  |  | 707,315 |  |  |  | 613,365 |
Total net sales |  |  | 1,949,425 |  |  |  | 1,578,707 |
Costs and operating expenses: |  |  |  |  |  |  |  |
Cost of product sales |  |  | 506,985 |  |  |  | 420,971 |
Cost of service sales |  |  | 298,544 |  |  |  | 265,149 |
Selling and administrative expenses |  |  | 453,954 |  |  |  | 400,614 |
Research and development expenses |  |  | 125,027 |  |  |  | 101,115 |
Purchased intangibles amortization |  |  | 5,408 |  |  |  | 7,900 |
Litigation provision |  |  | — |  |  |  | 1,180 |
Total costs and operating expenses |  |  | 1,389,918 |  |  |  | 1,196,929 |
Operating income |  |  | 559,507 |  |  |  | 381,778 |
Other income (expense), net |  |  | 18,073 |  |  |  | (2,149 | )
Interest expense |  |  | (34,054 | ) |  |  | (38,012 | )
Interest income |  |  | 10,347 |  |  |  | 12,046 |
Income before income taxes |  |  | 553,873 |  |  |  | 353,663 |
Provision for income taxes |  |  | 77,269 |  |  |  | 50,403 |
Net income |  | $ | 476,604 |  |  | $ | 303,260 |
Net income per basic common share |  | $ | 7.72 |  |  | $ | 4.89 |
Weighted-average number of basic common shares |  |  | 61,771 |  |  |  | 62,057 |
Net income per diluted common share |  | $ | 7.66 |  |  | $ | 4.86 |
Weighted-average number of diluted common shares and equivalents |  |  | 62,244 |  |  |  | 62,371 |

The accompanying notes are an integral part of the interim consolidated financial statements.
5

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

|  | Three Months Ended |  |  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |  |  | October 2, 2021 |  |  | September 26, 2020 |
|  | (In thousands) |  |  | (In thousands) |
Net income |  | $ | 161,185 |  |  | $ | 126,769 |  |  | $ | 476,604 |  |  | $ | 303,260 |
Other comprehensive (loss) income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation |  |  | (4,560 | ) |  |  | 601 |  |  |  | 1,256 |  |  |  | (7,156 | )
Unrealized gains on investments before income taxes |  |  | 17 |  |  |  | — |  |  |  | 2 |  |  |  | — |
Unrealized gains on investments, net of tax |  |  | 17 |  |  |  | — |  |  |  | 2 |  |  |  | — |
Retirement liability adjustment before reclassifications |  |  | (103 | ) |  |  | (654 | ) |  |  | 691 |  |  |  | (880 | )
Amounts reclassified to other income |  |  | 248 |  |  |  | 352 |  |  |  | 682 |  |  |  | 1,028 |
Retirement liability adjustment before income taxes |  |  | 145 |  |  |  | (302 | ) |  |  | 1,373 |  |  |  | 148 |
Income tax expense |  |  | (37 | ) |  |  | (85 | ) |  |  | (302 | ) |  |  | (197 | )
Retirement liability adjustment, net of tax |  |  | 108 |  |  |  | (387 | ) |  |  | 1,071 |  |  |  | (49 | )
Other comprehensive (loss) income |  |  | (4,435 | ) |  |  | 214 |  |  |  | 2,329 |  |  |  | (7,205 | )
Comprehensive income |  | $ | 156,750 |  |  | $ | 126,983 |  |  | $ | 478,933 |  |  | $ | 296,055 |

The accompanying notes are an integral part of the interim consolidated financial statements.
6

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

|  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |
|  | (In thousands) |
Cash flows from operating activities: |  |  |  |
Net income |  | $ | 476,604 |  |  | $ | 303,260 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |  |  |
Stock-based compensation |  |  | 21,949 |  |  |  | 27,715 |
Deferred income taxes |  |  | 9,219 |  |  |  | 1,089 |
Depreciation |  |  | 52,760 |  |  |  | 49,407 |
Amortization of intangibles |  |  | 45,166 |  |  |  | 41,684 |
Change in operating assets and liabilities: |  |  |  |  |  |  |  |
Decrease in accounts receivable |  |  | 23,472 |  |  |  | 96,955 |
Increase in inventories |  |  | (93,878 | ) |  |  | (8,139 | )
Increase in other current assets |  |  | (9,123 | ) |  |  | (16,776 | )
I ncrease in other assets |  |  | (6,116 | ) |  |  | (2,612 | )
(Decrease) increase in accounts payable and other current liabilities |  |  | (4,768 | ) |  |  | 46,721 |
Increase in deferred revenue and customer advances |  |  | 71,889 |  |  |  | 32,053 |
Decrease in other liabilities |  |  | (57,838 | ) |  |  | (48,332 | )
Net cash provided by operating activities |  |  | 529,336 |  |  |  | 523,025 |
Cash flows from investing activities: |  |  |  |  |  |  |  |
Additions to property, plant, equipment and software capitalization |  |  | (116,614 | ) |  |  | (125,340 | )
Business acquisitions, net of cash acquired |  |  | — |  |  |  | (76,664 | )
Investment in unaffiliated companies |  |  | (867 | ) |  |  | (3,850 | )
Payments for intellectual property licenses |  |  | (7,000 | ) |  |  | — |
Purchases of investments |  |  | (241,230 | ) |  |  | (22,458 | )
Maturities and sales of investments |  |  | 117,283 |  |  |  | 1,751 |
Net cash used in investing activities |  |  | (248,428 | ) |  |  | (226,561 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Proceeds from debt issuances |  |  | 510,000 |  |  |  | 315,000 |
Payments on debt |  |  | (250,000 | ) |  |  | (425,366 | )
Payments of debt issuance costs |  |  | (8,537 | ) |  |  | — |
Proceeds from stock plans |  |  | 55,000 |  |  |  | 28,421 |
Purchases of treasury shares |  |  | (492,695 | ) |  |  | (196,353 | )
Proceeds from derivative contracts |  |  | 2,325 |  |  |  | 10,330 |
Net cash used in financing activities |  |  | (183,907 | ) |  |  | (267,968 | )
Effect of exchange rate changes on cash and cash equivalents |  |  | (8,994 | ) |  |  | 10,723 |
Increase in cash and cash equivalents |  |  | 88,007 |  |  |  | 39,219 |
Cash and cash equivalents at beginning of period |  |  | 436,695 |  |  |  | 335,715 |
Cash and cash equivalents at end of period |  | $ | 524,702 |  |  | $ | 374,934 |

The accompanying notes are an integral part of the interim consolidated financial statements.
7

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

|  | Number of Common Shares |  |  | Common Stock |  |  | Additional Paid-In Capital |  |  | Retained Earnings |  |  | Treasury Stock |  |  | Accumulated Other Comprehensive Loss |  |  | Total Stockholders’ Deficit |
Balance June 27, 2020 |  |  | 161,273 |  |  | $ | 1,613 |  |  | $ | 1,959,498 |  |  | $ | 6,762,909 |  |  | $ | (8,788,872 | ) |  | $ | (126,890 | ) |  | $ | (191,742 | )
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 126,769 |  |  |  | — |  |  |  | — |  |  |  | 126,769 |
Other comprehensive income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 214 |  |  |  | 214 |
Issuance of common stock for employees: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Employee Stock Purchase Plan |  |  | 10 |  |  |  | — |  |  |  | 1,641 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,641 |
Stock options exercised |  |  | 97 |  |  |  | 1 |  |  |  | 12,040 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 12,041 |
Treasury stock |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (56 | ) |  |  | — |  |  |  | (56 | )
Stock-based compensation |  |  | 1 |  |  |  | — |  |  |  | 9,552 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 9,552 |
Balance September 26, 2020 |  |  | 161,381 |  |  | $ | 1,614 |  |  | $ | 1,982,731 |  |  | $ | 6,889,678 |  |  | $ | (8,788,928 | ) |  | $ | (126,676 | ) |  | $ | (41,581 | )

|  | Number of Common Shares |  |  | Common Stock |  |  | Additional Paid-In Capital |  |  | Retained Earnings |  |  | Treasury Stock |  |  | Accumulated Other Comprehensive Loss |  |  | Total Stockholders’ Equity |
Balance July 3, 2021 |  |  | 162,017 |  |  | $ | 1,620 |  |  | $ | 2,090,052 |  |  | $ | 7,423,408 |  |  | $ | (9,135,628 | ) |  | $ | (111,179 | ) |  | $ | 268,273 |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 161,185 |  |  |  | — |  |  |  | — |  |  |  | 161,185 |
Other comprehensive loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (4,435 | ) |  |  | (4,435 | )
Issuance of common stock for employees: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Employee Stock Purchase Plan |  |  | 8 |  |  |  | — |  |  |  | 2,567 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,567 |
Stock options exercised |  |  | 45 |  |  |  | 1 |  |  |  | 7,396 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 7,397 |
Treasury stock |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (146,051 | ) |  |  | — |  |  |  | (146,051 | )
Stock-based compensation |  |  | 5 |  |  |  | — |  |  |  | 6,286 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 6,286 |
Balance October 2, 2021 |  |  | 162,075 |  |  | $ | 1,621 |  |  | $ | 2,106,301 |  |  | $ | 7,584,593 |  |  | $ | (9,281,679 | ) |  | $ | (115,614 | ) |  | $ | 295,222 |

The accompanying notes are an integral part of the consolidated financial statements.
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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.
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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
.
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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 |
|  | 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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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.
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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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The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):

|  | October 2, 2021 |  |  | December 31, 2020 |
Due in one year or less |  | $ | 128,149 |  |  | $ | 6,451 |
Due after one year through three years |  |  | 2,742 |  |  |  | — |
Total |  | $ | 130,891 |  |  | $ | 6,451 |

4 Inventories
Inventories are classified as follows (in thousands):

|  | October 2, 2021 |  |  | December 31, 2020 |
Raw materials |  | $ | 158,529 |  |  | $ | 133,490 |
Work in progress |  |  | 25,296 |  |  |  | 18,678 |
Finished goods |  |  | 204,931 |  |  |  | 152,113 |
Total inventories |  | $ | 388,756 |  |  | $ | 304,281 |

5 Goodwill and Other Intangibles
The carrying amount of goodwill was $437 million and $444 million at October 2, 2021 and December 31, 2020, respectively. The effect of foreign currency translation decreased goodwill by $7 million.
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):

|  | October 2, 2021 |  |  | December 31, 2020 |
|  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Weighted- Average Amortization Period |  |  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Weighted- Average Amortization Period |
Capitalized software |  | $ | 576,988 |  |  | $ | 419,736 |  |  |  | 5 years |  |  | $ | 584,452 |  |  | $ | 409,847 |  |  |  | 5 years |
Purchased intangibles |  |  | 202,094 |  |  |  | 162,895 |  |  |  | 11 years |  |  |  | 205,585 |  |  |  | 160,342 |  |  |  | 11 years |
Trademarks |  |  | 9,680 |  |  |  | — |  |  |  | — |  |  |  | 9,680 |  |  |  | — |  |  |  | — |
Licenses |  |  | 12,616 |  |  |  | 5,944 |  |  |  | 7 years |  |  |  | 5,923 |  |  |  | 5,697 |  |  |  | 6 years |
Patents and other intangibles |  |  | 99,906 |  |  |  | 66,629 |  |  |  | 8 years |  |  |  | 90,699 |  |  |  | 61,808 |  |  |  | 8 years |
Total |  | $ | 901,284 |  |  | $ | 655,204 |  |  |  | 7 years |  |  | $ | 896,339 |  |  | $ | 637,694 |  |  |  | 7 years |

During the nine months ended October 2, 2021, the Company paid $7 million in connection with an existing licensing arrangement. The payment was tied to the commercial launch of Waters
™
SELECT SERIES
™
MRT, a high-resolution mass spectrometer and was capitalized as an intangible asset on our consolidated balance sheet in 2021. The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $36 million and $27 million, respectively, in the nine months ended October 2, 2021 due to the effects of foreign
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currency translation. Amortization expense for intangible assets was $15 million for both the three months ended October 2, 2021 and September 26, 2020. Amortization expense for intangible assets was $45 million and $42 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. Amortization expense for intangible assets is estimated to be $62 million per year for each of the next five years.
6 Debt
On September 17, 2021, the Company entered into an amended and restated credit agreement (the “2021 Credit Agreement”), which amended the Company’s existing credit agreement entered into in 2017 (the “2017 Credit Agreement”). The 2021 Credit Agreement provides for a $1.8 billion revolving facility (the “2021 Credit Facility”) and converted the $300 million term loan under the 2017 Credit Agreement into part of the new revolving facility. As of October 2, 2021, the 2021 Credit Facility had a total of $310 million outstanding. As of December 31, 2020, the revolving credit facility and the term loan governed by the 2017 Credit Agreement had a total of $100 million and $300 million, respectively, outstanding. The 2021 Credit Facility matures on September 17, 2026 and requires no scheduled prepayments before that date.
The interest rates applicable to the 2021 Credit Agreement are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (1) the prime rate in effect on such day, (2) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (3) the adjusted LIBO rate on such day (or if such day is not a business day, the immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 3 or 6 month adjusted LIBO rate or EURIBO rate for Euro-denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for LIBO rate or EURIBO rate loans. The facility fee on the 2021 Credit Agreement ranges between 7.5 and 25 basis points per annum, based on the leverage ratio, of the amount of the revolving facility commitments and the outstanding term loan. The 2021 Credit Agreement requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the 2021 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.
In March 2021, the Company issued the following senior unsecured notes:

Senior Unsecured Notes |  | Term |  |  | Interest Rate |  |  | Face Value (in millions) |  |  | Maturity Date |
Series N |  |  | 5 years |  |  |  | 1.68 | % |  | $ | 100 |  |  |  | March 2026 |
Series O |  |  | 10 years |  |  |  | 2.25 | % |  | $ | 400 |  |  |  | March 2031 |

The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes. Interest on the Series N and O Senior Notes is payable semi-annually. The Company may prepay some or all of the Senior Notes at any time in an amount not less than 10% of the aggregate principal amount of the Senior Notes then outstanding, plus the applicable make-whole amount for Series N and O Senior Notes, in each case, upon no more than 60 nor less than 20 days’ written notice to the holders of the Senior Notes. In the event of a change in control (as defined in the note purchase agreement) of the Company, the Company may be required to prepay the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. Other provisions for these senior unsecured notes are similar to the existing senior unsecured notes, as described below.
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As of October 2, 2021 and December 31, 2020, the Company had a total of $1.3 billion and $1.0 billion, respectively, of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for the Series H senior unsecured note. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.
The Company had the following outstanding debt at October 2, 2021 and December 31, 2020 (in thousands):

|  | October 2, 2021 |  |  | December 31, 2020 |
Senior unsecured notes—Series E—3.97%, due March 2021 |  |  | — |  |  |  | 50,000 |
Senior unsecured notes—Series F—3.40%, due June 2021 |  |  | — |  |  |  | 100,000 |
Total notes payable and debt, current |  |  | — |  |  |  | 150,000 |
Senior unsecured notes—Series G—3.92%, due June 2024 |  |  | 50,000 |  |  |  | 50,000 |
Senior unsecured notes—Series H—floating rate*, due June 2024 |  |  | 50,000 |  |  |  | 50,000 |
Senior unsecured notes—Series I — 3.13%, due May 2023 |  |  | 50,000 |  |  |  | 50,000 |
Senior unsecured notes—Series K—3.44%, due May 2026 |  |  | 160,000 |  |  |  | 160,000 |
Senior unsecured notes—Series L—3.31%, due September 2026 |  |  | 200,000 |  |  |  | 200,000 |
Senior unsecured notes—Series M—3.53%, due September 2029 |  |  | 300,000 |  |  |  | 300,000 |
Senior unsecured notes—Series N—1.68%, due March 2026 |  |  | 100,000 |  |  |  | — |
Senior unsecured notes—Series O—2.25%, due March 2031 |  |  | 400,000 |  |  |  | — |
Credit agreement |  |  | 310,000 |  |  |  | 400,000 |
Unamortized debt issuance costs |  |  | (6,382 | ) |  |  | (3,485 | )
Total long-term debt |  |  | 1,613,618 |  |  |  | 1,206,515 |
Total debt |  | $ | 1,613,618 |  |  | $ | 1,356,515 |

* | Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.25%.

As of October 2, 2021 and December 31, 2020, the Company had a total amount available to borrow under the 2021 or 2017 Credit Agreement of $1.5 billion and $1.4 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.67% and 2.92% at October 2, 2021 and December 31, 2020, respectively. As of October 2, 2021, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $122 million and $109 million at October 2, 2021 and December 31, 2020, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of October 2, 2021 or December 31, 2020.
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As of October 2, 2021, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $340 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.
7 Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of October 2, 2021. The Company had a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones. The Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax rates rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the nine months ended October 2, 2021 and September 26, 2020 by $13 million and $12 million, respectively, and increased the Company’s net income per diluted share by $0.20
for both periods.
The Company’s effective tax rate for the three months ended October 2, 2021 and September 26, 2020 was 11.8% and 15.7%, respectively. The decrease in the effective income tax rate can be attributed to the impact of quarter-specific adjustments and differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
The Company’s effective tax rate for the nine months ended October 2, 2021 and September 26, 2020 was 14.0% and 14.3%, respectively. The effective tax rate for the nine months ended October 2, 2021 includes a $6 million tax benefit related to stock-based compensation. This income tax benefit decreased the effective tax rate by 1.1 percentage points for the nine months ended October 2, 2021. The effective tax rate for the nine months ended September 26, 2020 includes a $6 million income tax benefit related to certain restructuring charges and a $3 million tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 1.8 percentage points and 0.9 percentage points, respectively, for the nine months ended September 26, 2020. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
The Company accounts for its uncertain tax return positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
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The following is a summary of the activity of the Company’s gross unrecognized tax benefits, excluding interest and penalties, for the nine months ended October 2, 2021 and September 26, 2020 (in thousands):

|  | October 2, 2021 |  |  | September 26, 2020 |
Balance at the beginning of the period |  | $ | 28,666 |  |  | $ | 27,790 |
Net reductions for settlement of tax audits |  |  | (878 | ) |  |  | — |
Net reductions for lapse of statutes taken during the period |  |  | (292 | ) |  |  | (427 | )
Net additions for tax positions taken during the current period |  |  | 966 |  |  |  | 907 |
Balance at the end of the period |  | $ | 28,462 |  |  | $ | 28,270 |

With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2015. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities. As of October 2, 2021, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of $18 million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.
8 Stock-Based Compensation
The Company maintains various stockholder-approved, stock-based compensation plans which allow for the issuance of incentive or
non-qualified
stock options, stock appreciation rights, restricted stock or other types of awards (e.g. restricted stock units and performance stock units).
In May 2020, the Company’s stockholders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of October 2, 2021, the 2020 Plan had 6.7 million shares available for grant in the form of incentive or
non-qualified
stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units or other types of awards (e.g. restricted stock units and performance stock units). The Company issues new shares of common stock upon exercise of stock options or restricted stock unit conversion. Under the 2020 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 2020 Plan is scheduled to terminate on May 13, 2030. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock, restricted stock units and performance stock units may be issued under the 2020 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of October 2, 2021, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding under the 2020 Plan.
The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations, based on their grant date fair values. The Company recognizes the expense using the straight-line attribution method. The stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest; therefore, the amount of expense has been reduced for estimated forfeitures. Forfeitures are estimated based on historical experience. If actual results differ significantly from these estimates, stock-based compensation expense and the​​​​​​​
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Company’s results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.​​​​​​​
The consolidated statements of operations for the three and nine months ended October 2, 2021 and September 26, 2020 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock purchase plan (in thousands):

|  | Three Months Ended |  |  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |  |  | October 2, 2021 |  |  | September 26, 2020 |
Cost of sales |  | $ | 468 |  |  | $ | 645 |  |  | $ | 1,828 |  |  | $ | 1,850 |
Selling and administrative expenses |  |  | 4,116 |  |  |  | 7,747 |  |  |  | 15,810 |  |  |  | 22,472 |
Research and development expenses |  |  | 1,769 |  |  |  | 1,201 |  |  |  | 4,311 |  |  |  | 3,393 |
Total stock-based compensation |  | $ | 6,353 |  |  | $ | 9,593 |  |  | $ | 21,949 |  |  | $ | 27,715 |

Stock Options
In determining the fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of
non-qualified
stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury
zero-coupon
issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the nine months ended October 2, 2021 and September 26, 2020 are as follows:

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

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

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The following table summarizes stock option activity for the plans for the nine months ended October 2, 2021 (in thousands, except per share data):

|  | Number of Shares |  |  | Exercise Price per Share |  |  | Weighted-Average Exercise Price per Share |
Outstanding at December 31, 2020 |  |  | 1,067 |  |  | $ | 75.94 to $ 238.52 |  |  | $ | 179.59 |
Granted |  |  | 160 |  |  | $ | 250.15 to $ 371.64 |  |  | $ | 281.23 |
Exercised |  |  | (275 | ) |  | $ | 99.22 to $ 238.52 |  |  | $ | 167.89 |
Canceled |  |  | (251 | ) |  | $ | 139.51 to $ 280.80 |  |  | $ | 197.05 |
Outstanding at October 2, 2021 |  |  | 701 |  |  | $ | 75.94 to $ 371.64 |  |  | $ | 200.84 |

Restricted Stock
During the nine months ended October 2, 2021, the Company granted four thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $254.51.
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the nine months ended October 2, 2021 (in thousands, except per share data):

|  | Shares |  |  | Weighted-Average Grant Date Fair Value per Share |
Unvested at December 31, 2020 |  |  | 271 |  |  | $ | 202.00 |
Granted |  |  | 88 |  |  | $ | 283.10 |
Vested |  |  | (86 | ) |  | $ | 183.94 |
Forfeited |  |  | (22 | ) |  | $ | 221.64 |
Unvested at October 2, 2021 |  |  | 251 |  |  | $ | 234.90 |

Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period.
Performance Stock Units
The Company’s performance stock units are equity compensation awards with a market vesting condition based on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded. Beginning with the grants made in 2020, the vesting conditions for performance stock units now include a performance condition based on future sales growth.
In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied
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volatility is the most appropriate
indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on the performance period of the underlying performance stock units. The risk-free interest rate is the yield currently available on U.S. Treasury
zero-coupon
issues with a remaining term approximating the expected term used as the input to the Monte Carlo simulation model. The correlation coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each other during the performance period. The relevant data used to determine the value of the performance stock units granted during the nine months ended October 2, 2021 and September 26, 2020 are as follows:

|  | Nine Months Ended |
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values |  | October 2, 2021 |  |  | September 26, 2020 |
Performance stock units issued (in thousands) |  |  | 41 |  |  |  | 58 |
Risk-free interest rate |  |  | 0.2 | % |  |  | 1.3 | %
Expected life in years |  |  | 2.9 |  |  |  | 2.9 |
Expected volatility |  |  | 38.7 | % |  |  | 25.1 | %
Average volatility of peer companies |  |  | 34.7 | % |  |  | 26.1 | %
Correlation coefficient |  |  | 45.8 | % |  |  | 36.6 | %
Expected dividends |  |  | — |  |  |  | — |

The following table summarizes the unvested performance stock unit award activity for the nine months ended October 2, 2021 (in thousands, except per share data):

|  | Shares |  |  | Weighted-Average Fair Value per Share |
Unvested at December 31, 2020 |  |  | 95 |  |  | $ | 230.36 |
Granted |  |  | 41 |  |  | $ | 315.98 |
Vested |  |  | (5 | ) |  | $ | 242.94 |
Forfeited |  |  | (44 | ) |  | $ | 199.22 |
Unvested at October 2, 2021 |  |  | 87 |  |  | $ | 285.73 |

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

|  | Three Months Ended October 2, 2021 |
|  | Net Income |  |  | Weighted- Average Shares |  |  | Per Share |
|  | (Numerator) |  |  | (Denominator) |  |  | Amount |
Net income per basic common share |  | $ | 161,185 |  |  |  | 61,359 |  |  | $ | 2.63 |
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities |  |  | — |  |  |  | 529 |  |  |  | (0.03 | )
Net income per diluted common share |  | $ | 161,185 |  |  |  | 61,888 |  |  | $ | 2.60 |

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

|  | Three Months Ended September 26, 2020 |
|  | Net Income (Numerator) |  |  | Weighted- Average Shares (Denominator) |  |  | Per Share Amount |
Net income per basic common share |  | $ | 126,769 |  |  |  | 62,002 |  |  | $ | 2.04 |
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities |  |  | — |  |  |  | 301 |  |  |  | (0.01 | )
Net income per diluted common share |  | $ | 126,769 |  |  |  | 62,303 |  |  | $ | 2.03 |

|  | Nine Months Ended October 2, 2021 |
|  | Net Income (Numerator) |  |  | Weighted- Average Shares (Denominator) |  |  | Per Share Amount |
Net income per basic common share |  | $ | 476,604 |  |  |  | 61,771 |  |  | $ | 7.72 |
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities |  |  | — |  |  |  | 473 |  |  |  | (0.06 | )
Net income per diluted common share |  | $ | 476,604 |  |  |  | 62,244 |  |  | $ | 7.66 |

|  | Nine Months Ended September 26, 2020 |
|  | Net Income (Numerator) |  |  | Weighted- Average Shares (Denominator) |  |  | Per Share Amount |
Net income per basic common share |  | $ | 303,260 |  |  |  | 62,057 |  |  | $ | 4.89 |
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities |  |  | — |  |  |  | 314 |  |  |  | (0.03 | )
Net income per diluted common share |  | $ | 303,260 |  |  |  | 62,371 |  |  | $ | 4.86 |

For the three and nine months ended October 2, 2021 and September 26, 2020, the Company had fewer than one million stock options that were antidilutive due to having higher exercise prices than the Company’s average stock price during the applicable period. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.
10 Accumulated Other Comprehensive Income
The components of accumulated other comprehensive loss are detailed as follows (in thousands):

|  | Currency Translation |  |  | Unrealized Gain (Loss) on Retirement Plans |  |  | Unrealized Gain on Investments |  |  | Accumulated Other Comprehensive Loss |
Balance at December 31, 2020 |  | $ | (98,082 | ) |  | $ | (19,861 | ) |  | $ | — |  |  | $ | (117,943 | )
Other comprehensive income (loss), net of tax |  |  | 1,256 |  |  |  | 1,071 |  |  |  | 2 |  |  |  | 2,329 |
Balance at October 2, 2021 |  | $ | (96,826 | ) |  | $ | (18,790 | ) |  | $ | 2 |  |  | $ | (115,614 | )

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
11 Retirement Plans
The Company sponsors various retirement plans. The components of net periodic benefit cost other than the service cost component are included in other expense in the consolidated statements of operations. The summary of the components of net periodic pension costs for the plans for the three and nine months ended October 2, 2021 and September 26, 2020 is as follows (in thousands):

|  | Three Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |
|  | U.S. Retiree Healthcare Plan |  |  | Non-U.S. Pension Plans |  |  | U.S. Retiree Healthcare Plan |  |  | Non-U.S. Pension Plans |
Service cost |  | $ | 198 |  |  | $ | 1,140 |  |  | $ | 197 |  |  | $ | 1,140 |
Interest cost |  |  | 141 |  |  |  | 309 |  |  |  | 180 |  |  |  | 353 |
Expected return on plan assets |  |  | (248 | ) |  |  | (459 | ) |  |  | (214 | ) |  |  | (476 | )
Settlement loss |  |  | — |  |  |  | 102 |  |  |  | — |  |  |  | — |
Net amortization: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Prior service (credit) cost |  |  | (5 | ) |  |  | 13 |  |  |  | (4 | ) |  |  | (41 | )
Net actuarial loss |  |  | 8 |  |  |  | 130 |  |  |  | — |  |  |  | 397 |
Net periodic pension cost |  | $ | 94 |  |  | $ | 1,235 |  |  | $ | 159 |  |  | $ | 1,373 |

|  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |
|  | U.S. Retiree Healthcare Plan |  |  | Non-U.S. Pension Plans |  |  | U.S. Retiree Healthcare Plan |  |  | Non-U.S. Pension Plans |
Service cost |  | $ | 663 |  |  | $ | 3,447 |  |  | $ | 499 |  |  | $ | 3,334 |
Interest cost |  |  | 419 |  |  |  | 936 |  |  |  | 533 |  |  |  | 1,036 |
Expected return on plan assets |  |  | (758 | ) |  |  | (1,389 | ) |  |  | (653 | ) |  |  | (1,386 | )
Settlement loss |  |  | — |  |  |  | 102 |  |  |  | — |  |  |  | — |
Net amortization: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Prior service credit |  |  | (14 | ) |  |  | (67 | ) |  |  | (14 | ) |  |  | (122 | )
Net actuarial loss |  |  | 8 |  |  |  | 653 |  |  |  | — |  |  |  | 1,164 |
Net periodic pension cost |  | $ | 318 |  |  | $ | 3,682 |  |  | $ | 365 |  |  | $ | 4,026 |

During fiscal year 2021, the Company expects to contribute a total of approximately $3 million to $6 million to the Company’s defined benefit plans.
12 Business Segment Information
The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: Waters
TM
and TA
TM
.
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The Waters operating segment is primarily in the business of designing, manufacturing, selling and servicing LC and MS instruments, columns and other precision chemistry consumables that can be integrated and used along with other analytical instruments. The TA operating segment is primarily in the business of designing, manufacturing, selling and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s two operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution; and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information
regarding the one reportable segment of the Company.
Net sales for the Company’s products and services are as follows for the three and nine months ended October 2, 2021 and September 26, 2020 (in thousands):

|  | Three Months Ended |  |  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |  |  | October 2, 2021 |  |  | September 26, 2020 |
Product net sales: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Waters instrument systems |  | $ | 240,475 |  |  | $ | 225,790 |  |  | $ | 717,910 |  |  | $ | 550,018 |
Chemistry consumables |  |  | 123,045 |  |  |  | 108,175 |  |  |  | 368,478 |  |  |  | 300,525 |
TA instrument systems |  |  | 55,613 |  |  |  | 42,274 |  |  |  | 155,722 |  |  |  | 114,799 |
Total product sales |  |  | 419,133 |  |  |  | 376,239 |  |  |  | 1,242,110 |  |  |  | 965,342 |
Service net sales: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Waters service |  |  | 218,291 |  |  |  | 199,501 |  |  |  | 644,625 |  |  |  | 562,843 |
TA service |  |  | 21,809 |  |  |  | 18,044 |  |  |  | 62,690 |  |  |  | 50,522 |
Total service sales |  |  | 240,100 |  |  |  | 217,545 |  |  |  | 707,315 |  |  |  | 613,365 |
Total net sales |  | $ | 659,233 |  |  | $ | 593,784 |  |  | $ | 1,949,425 |  |  | $ | 1,578,707 |

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

|  | Three Months Ended |  |  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |  |  | October 2, 2021 |  |  | September 26, 2020 |
Net Sales: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asia: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
China |  | $ | 115,886 |  |  | $ | 115,666 |  |  | $ | 346,030 |  |  | $ | 252,713 |
Japan |  |  | 44,293 |  |  |  | 44,779 |  |  |  | 139,702 |  |  |  | 131,098 |
Asia Other |  |  | 94,423 |  |  |  | 75,737 |  |  |  | 268,359 |  |  |  | 219,660 |
Total Asia |  |  | 254,602 |  |  |  | 236,182 |  |  |  | 754,091 |  |  |  | 603,471 |
Americas: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
United States |  |  | 194,776 |  |  |  | 172,267 |  |  |  | 544,124 |  |  |  | 465,093 |
Americas Other |  |  | 36,225 |  |  |  | 27,180 |  |  |  | 109,128 |  |  |  | 81,312 |
Total Americas |  |  | 231,001 |  |  |  | 199,447 |  |  |  | 653,252 |  |  |  | 546,405 |
Europe |  |  | 173,630 |  |  |  | 158,155 |  |  |  | 542,082 |  |  |  | 428,831 |
Total net sales |  | $ | 659,233 |  |  | $ | 593,784 |  |  | $ | 1,949,425 |  |  | $ | 1,578,707 |

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
Net sales by customer class are as follows for the three and nine months ended October 2, 2021 and September 26, 2020 (in thousands):

|  | Three Months Ended |  |  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |  |  | October 2, 2021 |  |  | September 26, 2020 |
Pharmaceutical |  | $ | 398,338 |  |  | $ | 343,001 |  |  | $ | 1,175,191 |  |  | $ | 926,582 |
Industrial |  |  | 196,032 |  |  |  | 179,128 |  |  |  | 581,884 |  |  |  | 474,592 |
Academic and government |  |  | 64,863 |  |  |  | 71,655 |  |  |  | 192,350 |  |  |  | 177,533 |
Total net sales |  | $ | 659,233 |  |  | $ | 593,784 |  |  | $ | 1,949,425 |  |  | $ | 1,578,707 |

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

|  | Three Months Ended |  |  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |  |  | October 2, 2021 |  |  | September 26, 2020 |
Net sales recognized at a point in time: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Instrument systems |  | $ | 296,088 |  |  | $ | 268,064 |  |  | $ | 873,632 |  |  | $ | 664,817 |
Chemistry consumables |  |  | 123,045 |  |  |  | 108,175 |  |  |  | 368,478 |  |  |  | 300,525 |
Service sales recognized at a point in time (time & materials) |  |  | 85,093 |  |  |  | 92,145 |  |  |  | 253,212 |  |  |  | 238,754 |
Total net sales recognized at a point in time |  |  | 504,226 |  |  |  | 468,384 |  |  |  | 1,495,322 |  |  |  | 1,204,096 |
Net sales recognized over time: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service and software maintenance sales recognized over time (contracts) |  |  | 155,007 |  |  |  | 125,400 |  |  |  | 454,103 |  |  |  | 374,611 |
Total net sales |  | $ | 659,233 |  |  | $ | 593,784 |  |  | $ | 1,949,425 |  |  | $ | 1,578,707 |

13 Recent Accounting Standard Changes and Developments
Recently Adopted Accounting Standards
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
In December 2019, accounting guidance was issued that simplifies the accounting for income taxes by removing certain exceptions within the current guidance, including the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendment also improves consistent application by clarifying and amending existing guidance related to aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step up in the tax basis of goodwill. This guidance is effective for annual and interim periods beginning after December 15, 2020. The Company adopted this standard on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
In January 2020, accounting guidance
was issued that clarifies the accounting guidance for equity method investments, joint ventures, and derivatives and hedging. The update clarifies the interaction between different sections of the accounting guidance that could be applicable and helps clarify which guidance should be applied in certain situations which should increase relevance and comparability of financial statement information. This guidance is effective for annual and interim periods beginning after December 15, 2020. The Company adopted this standard on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
Recently Issued Accounting Standards
In March 2020, accounting guidance was issued that facilitates the effects of reference rate reform
on financial reporting. The amendments in the update provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January of 2021, an update was issued to clarify that certain optional expedients and exceptions under the reference rate reform guidance for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in the reference rate reform guidance, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This temporary guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company may elect to apply this guidance for all contract modifications or eligible hedging relationships during that time period subject to certain criteria. The Company is still evaluating the impact of reference rate reform and whether this guidance will be adopted.
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Item 2:
Management
’
s Discussion and Analysis of Financial Condition and
Results of Operations
Business Overview
The Company has two operating segments: Waters
TM
and TA
TM
. Waters products and services primarily consist of high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC
TM
” and, together with HPLC, referred to as “LC”), mass spectrometry (“MS”) and precision chemistry consumable products and related services. TA products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Company’s products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and government customers. These customers use the Company’s products to detect, identify, monitor and measure the chemical, physical and biological composition of materials and to predict the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids in various industrial, consumer goods and healthcare products.
COVID-19
Pandemic
Both the Company’s domestic and international operations have been and continue to be affected by the ongoing global
COVID-19
pandemic that has led to volatility and uncertainty in the U.S. and international markets. The Company is actively managing its business to respond to the
COVID-19
impact; however, the Company cannot reasonably estimate the length or severity of the
COVID-19
pandemic, including the effect of the emergence of variants of the virus, or the related response, or the extent to which the disruption may materially impact the Company’s business, consolidated financial position, consolidated results of operations or consolidated cash flows in the future.
The
COVID-19
pandemic has not materially impacted the Company’s manufacturing facilities or those of the third parties to whom it outsources certain manufacturing processes, the distribution centers where its inventory is managed, or the operations of its logistics and other service providers. The Company also did not see material disruptions or delays in shipments of certain materials or components of its products. However, the current logistic and supply chain issues being experienced throughout the world have made it more difficult for us to manage our operations and as such we cannot provide any assurances that any further disruptions in the logistics and supply chains will not have a material impact on our future financial results and cashflows.
The Company has taken decisive and appropriate actions throughout the
COVID-19
pandemic, and continues to take proactive measures to guard the health of its global employee base and the safety of all customer interactions. The Company has implemented rigorous protocols to promote a safe work environment in all of its locations that are operational around the world and continues to closely monitor and update its multi-phase process for the safe return of employees to their physical workplaces as social distancing, governmental requirements, including capacity limitations, and other protocols allow.
The vast majority of the markets the Company serves, most notably the pharmaceutical, biomedical research, materials sciences, food/environmental and clinical markets, have continued to operate at various levels, and the Company is working closely with these customers to facilitate their seamless operation.
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The
COVID-19
pandemic continues to be fluid with uncertainties and risks across the global economy. During 2020, the Company took a proactive approach managing through this unpredictability and implemented a series of cost reduction actions, which included temporary salary reductions, furloughs and reductions in
non-essential
spending and other working capital reductions in order to preserve liquidity and enhance financial flexibility. These cost reductions were completed by the end of 2020; however, the Company’s plan will be adjusted accordingly depending on the pace of the recovery and any further governmental restrictions that may be implemented. The 2020 cost actions reduced the Company’s spending by approximately $100 million with 79% of these savings being realized by the end of the third quarter of 2020 and approximately 21% of the savings being realized in the fourth quarter of 2020. The majority of these cost saving actions were reinstated at the beginning of 2021 and as a result, the Company expects a significant increase in its expenses and a negative impact on its cash flows during the fourth quarter of 2021 from a normalization of these costs.
Financial Overview
The Company’s operating results are as follows for the three and nine months ended October 2, 2021 and September 26, 2020 (dollars in thousands, except per share data):

|  | Three Months Ended |  |  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |  |  | % change |  |  | October 2, 2021 |  |  | September 26, 2020 |  |  | % change |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Product sales |  | $ | 419,133 |  |  | $ | 376,239 |  |  |  | 11 | % |  | $ | 1,242,110 |  |  | $ | 965,342 |  |  |  | 29 | %
Service sales |  |  | 240,100 |  |  |  | 217,545 |  |  |  | 10 | % |  |  | 707,315 |  |  |  | 613,365 |  |  |  | 15 | %
Total net sales |  |  | 659,233 |  |  |  | 593,784 |  |  |  | 11 | % |  |  | 1,949,425 |  |  |  | 1,578,707 |  |  |  | 23 | %
Costs and operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of sales |  |  | 271,128 |  |  |  | 262,342 |  |  |  | 3 | % |  |  | 805,529 |  |  |  | 686,120 |  |  |  | 17 | %
Selling and administrative expenses |  |  | 152,545 |  |  |  | 135,430 |  |  |  | 13 | % |  |  | 453,954 |  |  |  | 400,614 |  |  |  | 13 | %
Research and development expenses |  |  | 41,986 |  |  |  | 34,971 |  |  |  | 20 | % |  |  | 125,027 |  |  |  | 101,115 |  |  |  | 24 | %
Purchased intangibles amortization |  |  | 1,759 |  |  |  | 2,657 |  |  |  | (34 | %) |  |  | 5,408 |  |  |  | 7,900 |  |  |  | (32 | %)
Litigation provision |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,180 |  |  |  | (100 | %)
Operating income |  |  | 191,815 |  |  |  | 158,384 |  |  |  | 21 | % |  |  | 559,507 |  |  |  | 381,778 |  |  |  | 47 | %
Operating income as a % of sales |  |  | 29.1 | % |  |  | 26.7 | % |  |  |  |  |  |  | 28.7 | % |  |  | 24.2 | % |  |  |  |
Other expense |  |  | (607 | ) |  |  | (1,039 | ) |  |  | (42 | %) |  |  | 18,073 |  |  |  | (2,149 | ) |  |  | * | *
Interest expense, net |  |  | (8,533 | ) |  |  | (6,908 | ) |  |  | 24 | % |  |  | (23,707 | ) |  |  | (25,966 | ) |  |  | (9 | %)
Income before income taxes |  |  | 182,675 |  |  |  | 150,437 |  |  |  | 21 | % |  |  | 553,873 |  |  |  | 353,663 |  |  |  | 57 | %
Provision for income taxes |  |  | 21,490 |  |  |  | 23,668 |  |  |  | (9 | %) |  |  | 77,269 |  |  |  | 50,403 |  |  |  | 53 | %
Net income |  | $ | 161,185 |  |  | $ | 126,769 |  |  |  | 27 | % |  | $ | 476,604 |  |  | $ | 303,260 |  |  |  | 57 | %
Net income per diluted common share |  | $ | 2.60 |  |  | $ | 2.03 |  |  |  | 28 | % |  | $ | 7.66 |  |  | $ | 4.86 |  |  |  | 58 | %

** Percentage not meaningful
The Company’s net sales increased 11% and 23% in the third quarter and first nine months of 2021, respectively, as compared to the third quarter and first nine months of 2020. The sales growth in the 2021 periods was driven by strong sales growth across most major geographies, end markets, and product categories. Overall, sales benefited
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from stronger demand for our products and services across all major geographies as a result of our customers continuing to resume laboratory and manufacturing operations except in China, where the Company’s sales were flat due to third-party shipping logistic execution issues and in Japan. Foreign currency translation had minimal impact on total sales in the third quarter and increased sales by 2% in the first nine months of 2021. In addition, the Company’s first nine months of 2021 included five more calendar days than the first nine months of 2020.
Instrument system sales increased 10% and 31% for the third quarter and first nine months of 2021, respectively, due to customer demand continuing to increase to
pre-pandemic
levels as customer laboratories and manufacturing facilities continued to return to normal operations. This strength in the first nine months was broad-based, particularly in LC,
LC-MS
and TA instrument system sales. Foreign currency translation had minimal impact on instrument system sales in the third quarter and increased sales by 2% in the first nine months of 2021. Recurring revenues (combined sales of precision chemistry consumables and services) increased 11% and 18% for the third quarter and first nine months of 2021, respectively, with foreign currency translation being neutral in the quarter and increasing sales by 3% in the first nine months of the year. In the first nine months of 2021, recurring revenues benefited from five additional calendar days as compared to the first nine months of 2020.
Geographically, the Company’s sales growth in the third quarter and first nine months of 2021 was broad-based. During the third quarter of 2021, sales increased 8% in Asia, 16% in the Americas, and 10% in Europe, with the effect of foreign currency translation increasing sales in Europe by 2%. During the first nine months of 2021, sales increased 25% in Asia, 20% in the Americas, and 26% in Europe, with the effect of foreign currency translation increasing sales by 1% in both Asia and the Americas, and 7% in Europe.
In the third quarter and first nine months of 2021, China sales were flat and increased 37%, respectively, driven by stronger demand due to customers resuming laboratory and manufacturing operations as well as the
pent-up
demand caused by the 20% decline in China’s sales in the first nine months of 2020 when the negative impact of the
COVID-19
pandemic lockdowns was occurring. China’s sales growth in the third quarter was negatively impacted by the third-party shipping logistic issues in China that resulted in flat sales growth. Foreign currency translation increased China sales growth by 3% and 5% in the quarter and first nine months of 2021, respectively. Sales increased 13% in the U.S. and 32% in India, while sales decreased by 1% in Japan in the quarter. Foreign currency translation decreased sales growth by 10% in India and 4% in Japan in the third quarter of 2021.
During the third quarter of 2021, sales to pharmaceutical customers increased 16%, driven by growth in all regions, including 14% in China, 41% in India, 16% in the Americas and 10% in Europe as strong customer demand continued to recover to
pre-pandemic
levels. Foreign currency translation had minimal impact on pharmaceutical sales growth in the quarter. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 9%, with the effect of foreign currency translation having minimal impact on sales growth in the quarter. During the third quarter of 2021, combined sales to academic and government customers decreased 9%, with foreign currency translation increasing academic and government sales by 2%. Sales to our academic customers declined 15% while sales to our government customers increased by 1%. Sales to our academic and government customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales can vary significantly from period to period.
During the first nine months of 2021, sales to pharmaceutical customers increased 27%, driven by growth in all regions as strong customer demand continued to recover to
pre-pandemic
levels. Foreign currency translation increased pharmaceutical sales growth by 3%. Combined sales to industrial customers increased 23%, with the effect of foreign currency translation increasing sales growth by 4%. During the first nine months of 2021, combined sales to academic and government customers increased 8%, as customers ramped up their spending in the first nine months of the year following lower spending levels throughout 2020 due to the
COVID-19
pandemic. Foreign currency translation increased academic and government sales growth by 2%.
Operating income increased 21% and 47% for the third quarter and first nine months of 2021, respectively. These increases were primarily a result of the increase in sales volumes caused by our customers continuing to resume laboratory and manufacturing operations throughout the world. Both the quarter and
year-to-date
operating income increases were partially offset by the restoration of expenses that had been decreased in the 2020 periods which consisted of a series of cost reduction actions that included salary reductions, furloughs and reductions in
non-essential
spending that increased operating income by approximately $81 million in 2020. In addition, operating income in the third quarter and first nine months of 2020 also included $6 million and $27 million, respectively, of severance-related costs in connection with a reduction in workforce and lease termination costs.
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The Company generated $529 million and $523 million of net cash flows from operations in the first nine months of 2021 and 2020, respectively. This increase in operating cash flow was primarily a result of the increase in sales volumes being offset by the $81 million benefit from the reduction in expenses from the
COVID-19
pandemic cost actions implemented and working capital improvement during the first nine months of 2020.
Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $117 million and $125 million in the first nine months of 2021 and 2020, respectively. The cash flows from investing activities in the first nine months of 2021 and 2020 also included $40 million and $50 million, respectively, of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $191 million on this facility through the end of the first nine months of 2021 and anticipates spending a total of $215 million to build and equip this new
state-of-the-art
manufacturing facility.
On September 17, 2021, the Company entered into an amended and restated credit agreement (the “2021 Credit Agreement”), which amended the Company’s existing credit agreement entered into in 2017 (the “2017 Credit Agreement”). The 2021 Credit Agreement provides for a $1.8 billion revolving facility (the “2021 Credit Facility”) and converted the $300 million term loan under the 2017 Credit Agreement into part of the new revolving facility. As of October 2, 2021, the 2021 Credit Facility had a total of $310 million outstanding. As of December 31, 2020, the revolving credit facility and the term loan governed by the 2017 Credit Agreement had a total of $100 million and $300 million, respectively, outstanding. The 2021 Credit Facility matures on September 17, 2026 and requires no scheduled prepayments before that date.
In March 2021, the Company issued senior unsecured notes with an aggregate principal amount of $500 million. The Series N $100 million notes have a five-year term and a fixed interest rate of 1.68%. The Series O $400 million notes have
a 10-year
term and a fixed interest rate of 2.25%.
Results of Operations
Sales by Geography
Geographic sales information is presented below for the three and nine months ended October 2, 2021 and September 26, 2020 (dollars in thousands):

|  | Three Months Ended |  |  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |  |  | % change |  |  | October 2, 2021 |  |  | September 26, 2020 |  |  | % change |
Net Sales: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asia: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
China |  | $ | 115,886 |  |  | $ | 115,666 |  |  |  | — |  |  | $ | 346,030 |  |  | $ | 252,713 |  |  |  | 37 | %
Japan |  |  | 44,293 |  |  |  | 44,779 |  |  |  | (1 | %) |  |  | 139,702 |  |  |  | 131,098 |  |  |  | 7 | %
Asia Other |  |  | 94,423 |  |  |  | 75,737 |  |  |  | 25 | % |  |  | 268,359 |  |  |  | 219,660 |  |  |  | 22 | %
Total Asia |  |  | 254,602 |  |  |  | 236,182 |  |  |  | 8 | % |  |  | 754,091 |  |  |  | 603,471 |  |  |  | 25 | %
Americas: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
United States |  |  | 194,776 |  |  |  | 172,267 |  |  |  | 13 | % |  |  | 544,124 |  |  |  | 465,093 |  |  |  | 17 | %
Americas Other |  |  | 36,225 |  |  |  | 27,180 |  |  |  | 33 | % |  |  | 109,128 |  |  |  | 81,312 |  |  |  | 34 | %
Total Americas |  |  | 231,001 |  |  |  | 199,447 |  |  |  | 16 | % |  |  | 653,252 |  |  |  | 546,405 |  |  |  | 20 | %
Europe |  |  | 173,630 |  |  |  | 158,155 |  |  |  | 10 | % |  |  | 542,082 |  |  |  | 428,831 |  |  |  | 26 | %
Total net sales |  | $ | 659,233 |  |  | $ | 593,784 |  |  |  | 11 | % |  | $ | 1,949,425 |  |  | $ | 1,578,707 |  |  |  | 23 | %

In the third quarter and first nine months of 2021, sales benefited from stronger demand for our products and services across most major geographies and customer classes as a result of our customers continuing to resume laboratory and manufacturing operations, as well as the
pent-up
demand from 2020 caused by the
COVID-19
pandemic. The sales strength was broad-based, driven by continued growth in recurring revenues and the strong sales growth in instruments, particularly in LC instrument system sales. Recurring revenues sales growth was favorably impacted by the five additional calendar days in the first nine months of 2021 as compared to the first nine months of 2020.
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Sales by Trade Class
Net sales by customer class are presented below for the three and nine months ended October 2, 2021 and September 26, 2020 (dollars in thousands):

|  | Three Months Ended |  |  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |  |  | % change |  |  | October 2, 2021 |  |  | September 26, 2020 |  |  | % change |
Pharmaceutical |  | $ | 398,338 |  |  | $ | 343,001 |  |  |  | 16 | % |  | $ | 1,175,191 |  |  | $ | 926,582 |  |  |  | 27 | %
Industrial |  |  | 196,032 |  |  |  | 179,128 |  |  |  | 9 | % |  |  | 581,884 |  |  |  | 474,592 |  |  |  | 23 | %
Academic and government |  |  | 64,863 |  |  |  | 71,655 |  |  |  | (9 | %) |  |  | 192,350 |  |  |  | 177,533 |  |  |  | 8 | %
Total net sales |  | $ | 659,233 |  |  | $ | 593,784 |  |  |  | 11 | % |  | $ | 1,949,425 |  |  | $ | 1,578,707 |  |  |  | 23 | %

In the third quarter and first nine months of 2021, the increase in sales to pharmaceutical customers was broad-based with double-digit sales growth across all major geographies, primarily due to stronger demand for our products and services as a result of our customers continuing to resume laboratory and manufacturing operations. Sales also benefited from the demand from certain pharmaceutical customers involved
with COVID-19
diagnostic testing and the increase in the development of new drugs and therapies. Foreign currency translation had minimal impact on sales to pharmaceutical customers in the third quarter and increased sales by 3% in the first nine months of 2021. Sales to industrial customers increased 9% and 23% in the third quarter and first nine months of 2021, respectively, primarily due to customers continuing to resume laboratory and manufacturing operations during the year. Foreign currency translation increased sales to industrial customers by 4% in the first nine months of 2021. Sales to academic and government customers decreased 9% in the third quarter and increased 8% in the first nine months of 2021, with foreign currency translation increasing sales by 2% in both the third quarter and first nine months of 2021.
Waters Products and Services Net Sales
Net sales for Waters products and services were as follows for the three and nine months ended October 2, 2021 and September 26, 2020 (dollars in thousands):

|  | Three Months Ended |
|  | October 2, 2021 |  |  | % of Total |  |  | September 26, 2020 |  |  | % of Total |  |  | % change |
Waters instrument systems |  | $ | 240,475 |  |  |  | 41 | % |  | $ | 225,790 |  |  |  | 42 | % |  |  | 7 | %
Chemistry consumables |  |  | 123,045 |  |  |  | 21 | % |  |  | 108,175 |  |  |  | 21 | % |  |  | 14 | %
Total Waters product sales |  |  | 363,520 |  |  |  | 62 | % |  |  | 333,965 |  |  |  | 63 | % |  |  | 9 | %
Waters service |  |  | 218,291 |  |  |  | 38 | % |  |  | 199,501 |  |  |  | 37 | % |  |  | 9 | %
Total Waters net sales |  | $ | 581,811 |  |  |  | 100 | % |  | $ | 533,466 |  |  |  | 100 | % |  |  | 9 | %

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|  | Nine Months Ended |
|  | October 2, 2021 |  |  | % of Total |  |  | September 26, 2020 |  |  | % of Total |  |  | % change |
Waters instrument systems |  | $ | 717,910 |  |  |  | 41 | % |  | $ | 550,018 |  |  |  | 39 | % |  |  | 31 | %
Chemistry consumables |  |  | 368,478 |  |  |  | 22 | % |  |  | 300,525 |  |  |  | 21 | % |  |  | 23 | %
Total Waters product sales |  |  | 1,086,388 |  |  |  | 63 | % |  |  | 850,543 |  |  |  | 60 | % |  |  | 28 | %
Waters service |  |  | 644,625 |  |  |  | 37 | % |  |  | 562,843 |  |  |  | 40 | % |  |  | 15 | %
Total Waters net sales |  | $ | 1,731,013 |  |  |  | 100 | % |  | $ | 1,413,386 |  |  |  | 100 | % |  |  | 22 | %

Waters products and service sales increased 9% and 22% in the third quarter and first nine months of 2021, respectively, with the effect of foreign
currency translation increasing Waters sales by 2% in the first nine months of 2021. Chemistry consumables sales increased double-digits in both the quarter and first nine months of the year due to the strong demand in the U.S., Europe, China, and India driven by the uptake in columns and application-specific testing kits to pharmaceutical customers. Waters service sales increased due to higher service demand billings as
COVID-19
business closures and restrictions began to ease. Waters recurring revenues also benefited by five additional calendar days in the first nine months of the year. Waters instrument system sales (LC and MS technology-based) increased in the quarter across most major geographical regions, primarily due to higher sales as a result of stronger demand for our products and services as our customers continued to resume laboratory and manufacturing operations throughout the world.
In the third quarter of 2021, Waters sales growth increased 7% in Europe, 15% in the Americas and 6% in Asia, with sales in China decreasing 1% as a result of third-party shipping logistic execution issues. Foreign currency translation increased Waters sales by 1% in both Europe and the Americas, and 3% in China.
TA Product and Services Net Sales
Net sales for TA products and services were as follows for the three and nine months ended October 2, 2021 and September 26, 2020 (dollars in thousands):

|  | Three Months Ended |
|  | October 2, 2021 |  |  | % of Total |  |  | September 26, 2020 |  |  | % of Total |  |  | % change |
TA instrument systems |  | $ | 55,613 |  |  |  | 72 | % |  | $ | 42,274 |  |  |  | 70 | % |  |  | 32 | %
TA service |  |  | 21,809 |  |  |  | 28 | % |  |  | 18,044 |  |  |  | 30 | % |  |  | 21 | %
Total TA net sales |  | $ | 77,422 |  |  |  | 100 | % |  | $ | 60,318 |  |  |  | 100 | % |  |  | 28 | %

|  | Nine Months Ended |
|  | October 2, 2021 |  |  | % of Total |  |  | September 26, 2020 |  |  | % of Total |  |  | % change |
TA instrument systems |  | $ | 155,722 |  |  |  | 71 | % |  | $ | 114,799 |  |  |  | 69 | % |  |  | 36 | %
TA service |  |  | 62,690 |  |  |  | 29 | % |  |  | 50,522 |  |  |  | 31 | % |  |  | 24 | %
Total TA net sales |  | $ | 218,412 |  |  |  | 100 | % |  | $ | 165,321 |  |  |  | 100 | % |  |  | 32 | %

TA instrument system and service sales growth in the third quarter and first nine months of 2021 was broad-based across all major geographies increasing 28% and 32%, respectively, and was primarily driven by stronger demand as a result of our customers continuing to resume laboratory and manufacturing operations.
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In the third quarter and first nine months of 2021, the increase in TA instrument system sales was primarily driven by strength in all major regions and the increase in TA service sales was mostly due to customers continuing to resume their operations after the restrictions caused
by COVID-19 during
2020, as well as sales of service plans and billings to a higher installed base of customers. The effect of foreign currency translation increased TA’s sales by 1% and 3% in the third quarter and first nine months of 2021, respectively.
Cost of Sales
Cost of sales for the third quarter and first nine months of 2021 increased 3% and 17%, respectively, primarily due to the increase in sales volumes during the year, as well as the restoration in 2021 of expenses that had been reduced as a result of the
COVID-19
pandemic that consisted of salary reductions, furloughs and reductions
in non-essential spending.
Cost of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix, product costs of instrument systems and amortization of software platforms. At current foreign currency exchange rates, the Company expects foreign currency translation to decrease gross profit slightly for the remainder of 2021. To date, the Company has not had significant issues with its supply chain; however, the prolonged impact
of COVID-19 on
businesses could negatively impact our suppliers’ ability to deliver goods to us, as well as possibly increase the cost of those goods used in our manufacturing operations.
Selling and Administrative Expenses
Selling and administrative expenses increased 13% for both the third quarter and first nine months of 2021. The increase in selling and administrative expenses in these periods can be attributed to the salary merit and incentive compensation increases compared to 2020, which was impacted by the reduction in expenses from salary reductions, furloughs and reductions
in non-essential
spending of $16 million and $54 million for the third quarter and first nine months of 2020, respectively. The third quarter and first nine months of 2020 also included severance and lease termination and exit costs of $6 million and $27 million, respectively. Severance and lease termination and exit costs incurred during the third quarter and first nine months of 2021 were immaterial. In addition, the effect of foreign currency translation increased selling and administrative expenses by 1% and 2% for the third quarter and first nine months of 2021, respectively.
As a percentage of net sales, selling and administrative expenses were 23.1% and 23.3% for the third quarter and first nine months of 2021, and 22.8% and 25.4% for the third quarter and first nine months of 2020, respectively.
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Research and Development Expenses
Research and development expenses increased 20% and 24% in the third quarter and first nine months of 2021, respectively. The increase in expense in these periods was impacted by the reduction in expenses from salary reductions, furloughs and reductions
in non-essential spending
of $5 million and $14 million for the third quarter and first nine months of 2020, respectively. The impact of foreign currency exchange decreased expenses by 1% in the third quarter of 2021 and was neutral in the first nine months of 2021.
Other Income (Expense), net
In the second quarter and for the first nine months of 2021, the Company executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation and Bruker Daltronik GmbH regarding their timsTOF product line. In connection with the settlement, the Company is entitled to receive $10 million in guaranteed payments, including minimum royalty payments, which were recognized within other income in our consolidated statement of operations. In the first quarter and first nine months of 2021, the Company recorded an unrealized gain of $10 million due to an observable change in the fair value of an existing investment the Company does not have the ability to exercise significant influence over.
Interest Expense, Net
Net interest expense in the third quarter of 2021 increased as compared to the third quarter of 2020, primarily due to lower interest income earned on cash and investments. Net interest expense for the first nine months of 2021 decreased compared to the first nine months of 2020, primarily due to lower interest expense on lower average debt balances, offset by lower interest income on cash and investments.
Provision for Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of October 2, 2021. The Company had a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones. The Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax rates rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the first nine months of 2021 and 2020 by $13 million and $12 million, respectively, and increased the Company’s net income per diluted share by $0.20 for both periods.
The Company’s effective tax rate for the third quarter of 2021 and 2020 was 11.8% and 15.7%, respectively. The decrease in the effective income tax rate can be attributed to the impact of quarter-specific adjustments and differences in the proportionate amounts
of pre-tax income
recognized in jurisdictions with different effective tax rates.
The Company’s effective tax rate for the first nine months of 2021 and 2020 was 14.0% and 14.3%, respectively. The effective tax rate for the first nine months of October 2, 2021 includes a $6 million tax benefit related to stock-based compensation. This income tax benefit decreased the effective tax rate by 1.1 percentage points for the first nine months of October 2, 2021. The effective tax rate for the first nine months of September 26, 2020 includes a $6 million income
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tax benefit related to certain restructuring charges and a $3 million income tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 1.8 percentage points and 0.9 percentage points, respectively, for the first nine months of September 26, 2020. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
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Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):

|  | Nine Months Ended |
|  | October 2, 2021 |  |  | September 26, 2020 |
Net income |  | $ | 476,604 |  |  | $ | 303,260 |
Depreciation and amortization |  |  | 97,926 |  |  |  | 91,091 |
Stock-based compensation |  |  | 21,949 |  |  |  | 27,715 |
Deferred income taxes |  |  | 9,219 |  |  |  | 1,089 |
Change in accounts receivable |  |  | 23,472 |  |  |  | 96,955 |
Change in inventories |  |  | (93,878 | ) |  |  | (8,139 | )
Change in accounts payable and other current liabilities |  |  | (4,768 | ) |  |  | 46,721 |
Change in deferred revenue and customer advances |  |  | 71,889 |  |  |  | 32,053 |
Other changes |  |  | (73,077 | ) |  |  | (67,720 | )
Net cash provided by operating activities |  |  | 529,336 |  |  |  | 523,025 |
Net cash used in investing activities |  |  | (248,428 | ) |  |  | (226,561 | )
Net cash used in financing activities |  |  | (183,907 | ) |  |  | (267,968 | )
Effect of exchange rate changes on cash and cash equivalents |  |  | (8,994 | ) |  |  | 10,723 |
Increase in cash and cash equivalents |  | $ | 88,007 |  |  | $ | 39,219 |

Cash Flow from Operating Activities
Net cash provided by operating activities was $529 million and $523 million during the first nine months of 2021 and 2020, respectively. This increase in operating cash flow was primarily a result of higher sales volumes in the first nine months of 2021 compared to the first nine months of 2020. The changes within net cash provided by operating activities include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the changes in net income:

| • |  | The changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales. Days sales outstanding decreased to 71 days at October 2, 2021 as compared to 76 days at September 26, 2020.

| • |  | The changes in accounts payable and other current liabilities were a result of the timing of payments to vendors, as well as the annual payment of management incentive compensation. The Company also paid $38 million of tax payments in the first nine months of 2021 and 2020 associated with 2017 tax reform.

| • |  | Net cash provided from deferred revenue and customer advances results from annual increases in new service contracts as a higher installed base of customers renew annual service contracts.

| • |  | Other changes were attributable to variation in the timing of various provisions, expenditures, prepaid income taxes and accruals in other current assets, other assets and other liabilities.

Cash Flow from Investing Activities
Net cash used in investing activities totaled $248 million and $227 million in the first nine months of October 2, 2021 and September 26, 2020, respectively. Additions to fixed assets and capitalized software were $117 million and $125 million in the nine months ended October 2, 2021 and September 26, 2020, respectively. In February 2018, the Company’s Board of Directors approved expanding its precision chemistry consumable manufacturing operations in
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the U.S. The Company anticipates spending an estimated $215 million to build and equip this new
state-of-the-art
manufacturing facility, which will be paid for with existing cash, investments and debt capacity. The Company incurred $40 million and $50 million of costs associated with the construction of this facility during the nine months ended October 2, 2021 and September 26, 2020, respectively. The Company has incurred $191 million on this facility through the end of the third quarter of 2021.
During the nine months ended October 2, 2021 and September 26, 2020, the Company purchased $241 million and $22 million of investments, respectively, while $117 million and $2 million of investments matured, respectively, and were used for financing activities described below.
In January of 2020, the Company acquired all of the outstanding stock of Andrew Alliance, S.A. and its two operating subsidiaries, Andrew Alliance USA, Inc. and Andrew Alliance France, SASU (collectively “Andrew Alliance”), for $80 million, net of cash acquired. The Company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration.
Cash Flow from Financing Activities
On September 17, 2021, the Company amended the existing credit agreement from November 2017, providing for a
5-year
$1.8 billion revolving facility, which includes a letter of credit
sub-facility.
All commitments under the amended agreement mature on September 17, 2026. In March 2021, the Company issued senior unsecured notes with an aggregate principal amount of $500 million. The Series N $100 million notes have a five-year term and a fixed interest rate of 1.68%. The Series O $400 million notes have
a 10-year term
and a fixed interest rate of 2.25% The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes. During the nine months ended October 2, 2021 and September 26, 2020, the Company’s net debt borrowings increased by $260 million and decreased by $110 million, respectively. As of October 2, 2021, the Company had a total of $1.6 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $310 million borrowed under a term loan under the credit agreement dated September 2021 (“2021 Credit Agreement”).
In 2018 and 2019, the Company entered into a total of $560 million of
U.S.-to-Euro
interest rate cross-currency swap agreements that hedge the Company’s net investment in its Euro denominated net assets. As a result of entering into these agreements, the Company anticipates lowering net interest expense by approximately $12 million annually over the three-year term of the agreements. During the first nine months of 2021, $220 million of the Company’s interest rate cross-currency swaps had matured and resulted in total payments of $5 million upon settlement. As of October 2, 2021, the Company had a total of $340 million of interest rate cross-currency swaps agreements outstanding.
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a
two-year
period. This new program replaced the remaining amounts available from the
pre-existing
program. During the nine months ended October 2, 2021 and September 26, 2020, the Company repurchased $484 million and $167 million, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased $9 million and $10 million of common stock related to the vesting of restricted stock units during both the nine months ended October 2, 2021 and September 26, 2020, respectively. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023.
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The Company 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 October 2, 2021, December 31, 2020 or September 26, 2020.
The Company received $55 million and $28 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan during the nine months ended October 2, 2021 and September 26, 2020, respectively.
The Company had cash, cash equivalents and investments of $655 million as of October 2, 2021. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $371 million held by foreign subsidiaries at October 2, 2021, of which $240 million was held in currencies other than U.S. dollars.
Management believes, as of the date of this report, that the Company’s financial position, along with expected future cash flows from earnings based on historical trends and the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, will be sufficient to service debt and fund working capital and capital spending requirements, authorized share repurchase amounts and potential acquisitions for at least the next twelve months.
Contractual Obligations, Commercial Commitments, Contingent Liabilities and Dividends
A summary of the Company’s contractual obligations and commercial commitments is included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020, as filed with the SEC on February 24, 2021. The Company reviewed its contractual obligations and commercial commitments as of October 2, 2021 and determined that there were no material changes outside the ordinary course of business from the information set forth in the Annual Report on Form
10-K,
with the exception of the recently issued senior unsecured notes as described in Note 6, “Debt.”
From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. The Company believes that it has meritorious arguments in its current litigation matters and that any outcome, either individually or in the aggregate, will not be material to the Company’s financial position or results of operations.
During fiscal year 2021, the Company expects to contribute a total of approximately $3 million to $6 million to its defined benefit plans, excluding the U.S. defined benefit pension plans.
The Company has not paid any dividends and has no plans, at this time, to pay any dividends in the future.
Off-Balance
Sheet Arrangements
The Company has not created, and is not party to, any special-purpose or
off-balance
sheet entities for the purpose of raising capital, incurring debt or operating parts of its business that are not consolidated (to the extent of the Company’s ownership interest therein) into the consolidated financial statements. The Company has not entered into any transactions with
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unconsolidated entities whereby it has subordinated retained interests, derivative instruments or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company.
The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company’s costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.
Critical Accounting Policies and Estimates
In the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020, as filed with the SEC on February 24, 2021, the Company’s most critical accounting policies and estimates upon which its financial status depends were identified as those relating to revenue recognition, loss provisions on accounts receivable and inventory, valuation of long-lived assets, intangible assets and goodwill, income taxes, uncertain tax positions, warranty, litigation, pension and other postretirement benefit obligations, stock-based compensation and business combinations and asset acquisitions. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the nine months ended October 2, 2021. The Company did not make any changes in those policies during the nine months ended October 2, 2021.
New Accounting Pronouncements
Please refer to Note 13, Recent Accounting Standard Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.
Special Note Regarding Forward-Looking Statements
Certain of the statements in this Quarterly Report on Form
10-Q,
including the information incorporated by reference herein, may contain forward-looking statements with respect to future results and events, including any statements regarding, among other items, anticipated trends or growth in the Company’s business, including, but not limited to, the impact of the ongoing
COVID-19
pandemic; the impact of new or proposed tariff or trade regulations or changes in the interpretation or enforcement of existing regulations; the impact of foreign currency translation on financial results; development of products by acquired businesses; the growth rate of sales and research and development expenses; the impact of costs associated with developing new technologies and bringing these new technologies to market; the impact of new product launches and the associated costs, such as the amortization expense related to software platforms; geographic sales mix of business; development of products by acquired businesses and the amount of contingent payments to the sellers of an acquired business; anticipated expenses,
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including interest expense, capitalized software costs and effective tax rates; the impact of the 2017 Tax Act in the U.S.; the impact and outcome of the Company’s various ongoing tax audit examinations; the achievement of contractual milestones to preserve foreign tax rates; the impact and outcome of litigation matters; the impact of the loss of intellectual property protection; the impact of new accounting standards and pronouncements; the adequacy of the Company’s supply chain and manufacturing capabilities and facilities; the impact of regulatory compliance; the Company’s expected cash flow, borrowing capacity, debt repayment and refinancing; the Company’s ability to fund working capital, capital expenditures, service debt, repay outstanding lines of credit, make authorized share repurchases, fund potential acquisitions and pay any adverse litigation or tax audit liabilities, particularly in the U.S.; future impairment charges; the Company’s contributions to defined benefit plans; the Company’s expectations regarding changes to its financial position; compliance with applicable environmental laws; and the impact of recent acquisitions on sales and earnings.
Many of these statements appear, in particular, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form
10-Q.
Statements that are not statements of historical fact may be deemed forward-looking statements. You can identify these forward-looking statements by the use of the words “feels”, “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “suggests”, “appears”, “estimates”, “projects”, “should” and similar expressions, whether in the negative or affirmative. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without limitation:

| • |  | Risks related to the effects of the COVID-19 pandemic on our business, including: portions of our global workforce being unable to work fully and/or effectively due to working remotely, illness, quarantines, government actions, facility closures or other reasons related to the COVID-19 pandemic, increased risks of cyber attacks resulting from our temporary remote working model, disruptions in our manufacturing capabilities or to our supply chain and distribution network, volatility and uncertainty in global capital markets limiting our ability to access capital, customers being unable to make timely payment for purchases and volatility in demand for our products.

| • |  | Foreign currency exchange rate fluctuations that could adversely affect translation of the Company’s future sales, financial operating results and the condition of its non-U.S. operations, especially when a currency weakens against the U.S. dollar.

| • |  | Current global economic, sovereign and political conditions and uncertainties, particularly regarding the effect of the COVID-19 pandemic; new or proposed tariffs or trade regulations or changes in the interpretation or enforcement of existing regulations; the United Kingdom’s exit from the European Union as well as the Chinese government’s ongoing tightening of restrictions on procurement by government-funded customers; the Company’s ability to access capital and maintain liquidity in volatile market conditions; changes in timing and demand for the Company’s products among the Company’s customers and various market sectors or geographies, particularly if they should reduce capital expenditures or are unable to obtain funding, as in the cases of governmental, academic and research institutions; the effect of mergers and acquisitions on customer demand for the Company’s products; and the Company’s ability to sustain and enhance service.

| • |  | Negative industry trends; changes in the competitive landscape as a result of changes in ownership, mergers and continued consolidation among the Company’s competitors; introduction of competing products by other companies and loss of market share; pressures on prices from customers or resulting from competition; regulatory, economic and

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| competitive obstacles to new product introductions; lack of acceptance of new products; expansion of our business in developing markets; spending by certain end-markets; ability to obtain alternative sources for components and modules; and the possibility that future sales of new products related to acquisitions, which trigger contingent purchase payments, may exceed the Company’s expectations.

| • |  | Increased regulatory burdens as the Company’s business evolves, especially with respect to the United States Food and Drug Administration and the United States Environmental Protection Agency, among others, as well as regulatory, environmental and logistical obstacles affecting the distribution of the Company’s products, completion of purchase order documentation by our customers and ability of customers to obtain letters of credit or other financing alternatives.

| • |  | Risks associated with lawsuits, particularly involving claims for infringement of patents and other intellectual property rights.

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

Certain of these and other factors are discussed under the heading “Risk Factors” under Part I, Item 1A of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020, as filed with the SEC on February 24, 2021. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements, whether because of these factors or for other reasons. All forward-looking statements speak only as of the date of this Quarterly Report on Form
10-Q
and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by law, the Company does not assume any obligation to update any forward-looking statements.
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of interest rate fluctuations from the investments of cash generated from operations. Investments with maturities greater than 90 days are classified as investments, and are held primarily in U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities. As of October 2, 2021, the Company estimates that a hypothetical adverse change of 100 basis points across all maturities would not have a material effect on the fair market value of its portfolio.
The Company is also exposed to the risk of exchange rate fluctuations. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of October 2, 2021 and December 31, 2020, $371 million out of $655 million and $364 million out of $443 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $240 million out of $655 million and $254 million out of $443 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at October 2, 2021 and December 31, 2020, respectively. As of October 2, 2021, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.
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Assuming a hypothetical adverse change of 10% in
year-end
exchange rates (a strengthening of the U.S. dollar), the fair market value of the Company’s cash, cash equivalents and investments held in currencies other than the U.S. dollar as of October 2, 2021 would decrease by approximately $25 million, of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders’ equity.
There have been no other material changes in the Company’s market risk during the nine months ended October 2, 2021. For information regarding the Company’s market risk, refer to Item 7A of Part II of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020, as filed with the SEC on February 24, 2021.
Item 4:
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s chief executive officer and chief financial officer (principal executive officer and principal financial officer), with the participation of management, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form
10-Q.
Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of October 2, 2021 (1) to ensure that information required to be disclosed by the Company, including its consolidated subsidiaries, in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, to allow timely decisions regarding the required disclosure and (2) to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
No change was identified in the Company’s internal control over financial reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the quarter ended October 2, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II:
Other Information
Item 1:
Legal Proceedings
There have been no material changes in the Company’s legal proceedings during the three months ended October 2, 2021 as described in Item 3 of Part I of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020, as filed with the SEC on February 24, 2021.
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Item 1A:
Risk Factors
Information regarding risk factors of the Company is set forth under the heading “Risk Factors” under Part I, Item 1A in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020, as filed with the SEC on February 24, 2021. The Company reviewed its risk factors as of October 2, 2021 and determined that there were no material changes from the ones set forth in the Form
10-K.
Note, however, the discussion of certain factors under the subheading “Special Note Regarding Forward-Looking Statements” in Part I, Item 2 of this Quarterly Report on Form
10-Q.
These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial may have a material adverse effect on the Company’s business, financial condition and operating results.
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
The following table provides information about purchases by the Company during the three months ended October 2, 2021 of equity securities registered by the Company under the Exchange Act (in thousands, except per share data):

Period |  | Total Number of Shares Purchased (1) |  |  | Average Price Paid per Share |  |  | Total Number of Shares Purchased as Part of Publicly Announced Programs |  |  | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs (2) |
July 4, 2021 to July 31, 2021 |  |  | 130 |  |  | $ | 373.27 |  |  |  | 130 |  |  | $ | 1,137,305 |
August 1, 2021 to August 28, 2021 |  |  | 107 |  |  | $ | 404.75 |  |  |  | 107 |  |  | $ | 1,094,259 |
August 29, 2021 to October 2, 2021 |  |  | 135 |  |  | $ | 401.66 |  |  |  | 133 |  |  | $ | 1,040,647 |
Total |  |  | 372 |  |  | $ | 392.61 |  |  |  | 370 |  |  | $ | 1,040,647 |

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

(2) | In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock in open market or private transactions over a two-year period. This program replaced the remaining amounts available under the pre-existing authorization. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. The size and timing of these purchases, if any, will depend on price, market and business conditions and other factors.

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Item 6:
Exhibits

Exhibit Number |  | Description of Document
10.1 |  | Amendment and Restatement Agreement, dated as of September 17, 2021, by and among the Company, Waters Technologies Corporation, TA Instruments—Waters L.L.C., Waters Asia Limited, Environmental Resource Associates, Inc., the lenders party thereto, the issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent. (1)
31.1 |  | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 |  | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 |  | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)
32.2 |  | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)
101 |  | The following materials from Waters Corporation’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Cash Flows (unaudited) and (vi) Condensed Notes to Consolidated Financial Statements (unaudited).
104 |  | Cover Page Interactive Date File (formatted in iXBRL and contained in Exhibit 101).

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

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

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

W ATERS C ORPORATION /s/ Amol Chaubal
Amol Chaubal Senior Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)

Date: November 4, 2021
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