Item 1. Financial Statements

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.

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.

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.

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.

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.

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.

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.

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

.

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.

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.

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.

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

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.

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.

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.

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

The Company had $20 million of treasury stock purchases that were accrued and unsettled at December 31, 2019. These transactions were settled in January 2020. The Company did not have any unsettled treasury stock purchases as of December 31, 2020 or October 2, 2021.

Product Warranty Costs

The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.

The following is a summary of the activity of the Company’s accrued warranty liability for the nine months ended October 2, 2021 and September 26, 2020 (in thousands):

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

Restructuring

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

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

$27

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

Other Items

During the nine months ended October 2, 2021, the Company executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation and Bruker Daltronik GmbH regarding their timsTOF product line. In connection with the settlement, the Company is entitled to receive

$10

million in guaranteed payments, including minimum royalty payments, which was recognized within other income in our consolidated statement of operations. During the nine months ended October 2, 2021, the Company received

$3

million in guaranteed payments, net of applicable withholding taxes.

2 Revenue Recognition

The Company’s deferred revenue liabilities on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.

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

The following is a summary of the activity of the Company’s deferred revenue and customer advances for the nine months ended October 2, 2021 and September 26, 2020 (in thousands):

		October 2, 2021				September 26, 2020
Balance at the beginning of the period		$	239,759			$	213,695
Recognition of revenue included in balance at beginning of the period			(197,279	)			(177,667	)
Revenue deferred during the period, net of revenue recognized			264,184				213,895
Balance at the end of the period		$	306,664			$	249,923

The Company classified $44 million and $42 million of deferred revenue and customer advances in other long-term liabilities at October 2, 2021 and December 31, 2020, respectively.

The amount of deferred revenue and customer advances equals the transaction price allocated to unfulfilled performance obligations for the period presented. Such amounts are expected to be recognized in the future as follows (in thousands):

		October 2, 2021
Deferred revenue and customer advances expected to be recognized in:
One year or less		$	262,758
13-24 months			25,076
25 months and beyond			18,830
Total		$	306,664

3 Marketable Securities

The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):

		October 2, 2021
		Amortized Cost				Unrealized Gain				Unrealized Loss				Fair Value
U.S. Treasury securities		$	12,040			$	3			$	—			$	12,043
Corporate debt securities			83,045				8				(8	)			83,045
Time deposits			35,803				—				—				35,803
Total		$	130,888			$	11			$	(8	)		$	130,891
Amounts included in:
Cash equivalents		$	401			$	—			$	—			$	401
Investments			130,487				11				(8	)			130,490
Total		$	130,888			$	11			$	(8	)		$	130,891
		December 31, 2020
		Amortized Cost				Unrealized Gain				Unrealized Loss				Fair Value
Time deposits			6,451				—				—				6,451
Total		$	6,451			$	—			$	—			$	6,451
Amounts included in:
Investments			6,451				—				—				6,451
Total		$	6,451			$	—			$	—			$	6,451

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

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

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

4 Inventories

Inventories are classified as follows (in thousands):

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

5 Goodwill and Other Intangibles

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

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

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

During the nine months ended October 2, 2021, the Company paid $7 million in connection with an existing licensing arrangement. The payment was tied to the commercial launch of Waters

™

SELECT SERIES

™

MRT, a high-resolution mass spectrometer and was capitalized as an intangible asset on our consolidated balance sheet in 2021. The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $36 million and $27 million, respectively, in the nine months ended October 2, 2021 due to the effects of foreign

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

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

6 Debt

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

The interest rates applicable to the 2021 Credit Agreement are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (1) the prime rate in effect on such day, (2) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (3) the adjusted LIBO rate on such day (or if such day is not a business day, the immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 3 or 6 month adjusted LIBO rate or EURIBO rate for Euro-denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for LIBO rate or EURIBO rate loans. The facility fee on the 2021 Credit Agreement ranges between 7.5 and 25 basis points per annum, based on the leverage ratio, of the amount of the revolving facility commitments and the outstanding term loan. The 2021 Credit Agreement requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the 2021 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.

In March 2021, the Company issued the following senior unsecured notes:

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

The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes. Interest on the Series N and O Senior Notes is payable semi-annually. The Company may prepay some or all of the Senior Notes at any time in an amount not less than 10% of the aggregate principal amount of the Senior Notes then outstanding, plus the applicable make-whole amount for Series N and O Senior Notes, in each case, upon no more than 60 nor less than 20 days’ written notice to the holders of the Senior Notes. In the event of a change in control (as defined in the note purchase agreement) of the Company, the Company may be required to prepay the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. Other provisions for these senior unsecured notes are similar to the existing senior unsecured notes, as described below.

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

As of October 2, 2021 and December 31, 2020, the Company had a total of $1.3 billion and $1.0 billion, respectively, of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for the Series H senior unsecured note. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.

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

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

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

As of October 2, 2021 and December 31, 2020, the Company had a total amount available to borrow under the 2021 or 2017 Credit Agreement of $1.5 billion and $1.4 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.67% and 2.92% at October 2, 2021 and December 31, 2020, respectively. As of October 2, 2021, the Company was in compliance with all debt covenants.

The Company and its foreign subsidiaries also had available short-term lines of credit totaling $122 million and $109 million at October 2, 2021 and December 31, 2020, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of October 2, 2021 or December 31, 2020.

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

As of October 2, 2021, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $340 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.

7 Income Taxes

The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of October 2, 2021. The Company had a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones. The Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax rates rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the nine months ended October 2, 2021 and September 26, 2020 by $13 million and $12 million, respectively, and increased the Company’s net income per diluted share by $0.20

for both periods.

The Company’s effective tax rate for the three months ended October 2, 2021 and September 26, 2020 was 11.8% and 15.7%, respectively. The decrease in the effective income tax rate can be attributed to the impact of quarter-specific adjustments and differences in the proportionate amounts of

pre-tax

income recognized in jurisdictions with different effective tax rates.

The Company’s effective tax rate for the nine months ended October 2, 2021 and September 26, 2020 was 14.0% and 14.3%, respectively. The effective tax rate for the nine months ended October 2, 2021 includes a $6 million tax benefit related to stock-based compensation. This income tax benefit decreased the effective tax rate by 1.1 percentage points for the nine months ended October 2, 2021. The effective tax rate for the nine months ended September 26, 2020 includes a $6 million income tax benefit related to certain restructuring charges and a $3 million tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 1.8 percentage points and 0.9 percentage points, respectively, for the nine months ended September 26, 2020. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of

pre-tax

income recognized in jurisdictions with different effective tax rates.

The Company accounts for its uncertain tax return positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.

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

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

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

With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2015. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities. As of October 2, 2021, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of $18 million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.

8 Stock-Based Compensation

The Company maintains various stockholder-approved, stock-based compensation plans which allow for the issuance of incentive or

non-qualified

stock options, stock appreciation rights, restricted stock or other types of awards (e.g. restricted stock units and performance stock units).

In May 2020, the Company’s stockholders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of October 2, 2021, the 2020 Plan had 6.7 million shares available for grant in the form of incentive or

non-qualified

stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units or other types of awards (e.g. restricted stock units and performance stock units). The Company issues new shares of common stock upon exercise of stock options or restricted stock unit conversion. Under the 2020 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 2020 Plan is scheduled to terminate on May 13, 2030. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock, restricted stock units and performance stock units may be issued under the 2020 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of October 2, 2021, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding under the 2020 Plan.

The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations, based on their grant date fair values. The Company recognizes the expense using the straight-line attribution method. The stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest; therefore, the amount of expense has been reduced for estimated forfeitures. Forfeitures are estimated based on historical experience. If actual results differ significantly from these estimates, stock-based compensation expense and the​​​​​​​

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

Company’s results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.​​​​​​​

The consolidated statements of operations for the three and nine months ended October 2, 2021 and September 26, 2020 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock purchase plan (in thousands):

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

Stock Options

In determining the fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of

non-qualified

stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury

zero-coupon

issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the nine months ended October 2, 2021 and September 26, 2020 are as follows:

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

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

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

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

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

Restricted Stock

During the nine months ended October 2, 2021, the Company granted four thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $254.51.

Restricted Stock Units

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

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

Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period.

Performance Stock Units

The Company’s performance stock units are equity compensation awards with a market vesting condition based on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded. Beginning with the grants made in 2020, the vesting conditions for performance stock units now include a performance condition based on future sales growth.

In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied

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

volatility is the most appropriate

indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on the performance period of the underlying performance stock units. The risk-free interest rate is the yield currently available on U.S. Treasury

zero-coupon

issues with a remaining term approximating the expected term used as the input to the Monte Carlo simulation model. The correlation coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each other during the performance period. The relevant data used to determine the value of the performance stock units granted during the nine months ended October 2, 2021 and September 26, 2020 are as follows:

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

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

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

9 Earnings Per Share

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

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

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	)

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

.

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

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

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

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.