WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended
	July 3, 2021			June 27, 2020
	(In thousands, except per share data)
Revenues:
Product sales	$	440,955		$	314,920

Service sales		240,692			205,064


Total net sales		681,647			519,984

Costs and operating expenses:
Cost of product sales		176,745			134,802

Cost of service sales		103,509			78,332

Selling and administrative expenses		158,213			117,449

Research and development expenses		44,949			31,155

Purchased intangibles amortization		1,809			2,618

Litigation provision		0			514

Total costs and operating expenses		485,225			364,870

Operating income		196,422			155,114

Other income (expense)		9,321			(736	)

Interest expense		(12,027	)		(13,018	)

Interest income		3,698			4,003

Income before income taxes		197,414			145,363

Provision for income taxes		30,122			22,434

Net income	$	167,292		$	122,929


Net income per basic common share	$	2.71		$	1.98

Weighted-average number of basic common shares		61,685			61,944

Net income per diluted common share	$	2.69		$	1.98

Weighted-average number of diluted common shares and equivalents		62,157			62,184

Three Months Ended


September 26, 2020

September 28, 2019


(In thousands, except per share data)

Revenues:

Product sales
   $ 376,239 $ 370,573
Service sales
   217,545 206,705


Total net sales
   593,784 577,278
Costs and operating expenses:

Cost of product sales
   166,330 149,793
Cost of service sales
   96,012 91,262
Selling and administrative expenses
   135,430 126,036
Research and development expenses
   34,971 34,333
Purchased intangibles amortization
   2,657 2,619


Total costs and operating expenses
   435,400 404,043


Operating income
   158,384 173,235
Other expense
   (1,039 ) (496 )
Interest expense
   (10,915 ) (11,456 )
Interest income
   4,007 3,455


Income before income taxes
   150,437 164,738
Provision for income taxes
   23,668 26,605


Net income
   $ 126,769 $ 138,133


Net income per basic common share
   $ 2.04 $ 2.09
Weighted-average number of basic common shares
   62,002 66,226
Net income per diluted common share
   $ 2.03 $ 2.07
Weighted-average number of diluted common shares and equivalents
   62,303 66,768

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

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Six Months Ended
	July 3, 2021			June 27, 2020
	(In thousands, except per share data)
Revenues:
Product sales	$	822,977		$	589,103

Service sales		467,215			395,820


Total net sales		1,290,192			984,923

Costs and operating expenses:
Cost of product sales		335,621			254,641

Cost of service sales		198,780			169,137

Selling and administrative expenses		301,409			265,184

Research and development expenses		83,041			66,144

Purchased intangibles amortization		3,649			5,243

Litigation provision		0			1,180

Total costs and operating expenses		922,500			761,529

Operating income		367,692			223,394

Other income (expense), net		18,680			(1,110	)

Interest expense		(22,973	)		(27,097	)

Interest income		7,799			8,039


Income before income taxes		371,198			203,226

Provision for income taxes		55,779			26,735

Net income	$	315,419		$	176,491


Net income per basic common share	$	5.09		$	2.84

Weighted-average number of basic common shares		61,979			62,085

Net income per diluted common share	$	5.05		$	2.83

Weighted-average number of diluted common shares and equivalents		62,435			62,404

Nine Months Ended


September 26, 2020

September 28, 2019


(In thousands, except per share data)

Revenues:

Product sales
   $ 965,342 $ 1,078,341
Service sales
   613,365 611,961


Total net sales
   1,578,707 1,690,302
Costs and operating expenses:

Cost of product sales
   420,971 439,158
Cost of service sales
   265,149 272,474
Selling and administrative expenses
   400,614 393,583
Research and development expenses
   101,115 105,883
Purchased intangibles amortization
   7,900 7,164
Litigation provision
   1,180 —
Total costs and operating expenses
   1,196,929 1,218,262


Operating income
   381,778 472,040
Other expense
   (2,149 ) (1,363 )
Interest expense
   (38,012 ) (34,467 )
Interest income
   12,046 17,641


Income before income taxes
   353,663 453,851
Provision for income taxes
   50,403 62,322
Net income
   $ 303,260 $ 391,529


Net income per basic common share
   $ 4.89 $ 5.68
Weighted-average number of basic common shares
   62,057 68,952
Net income per diluted common share
   $ 4.86 $ 5.63
Weighted-average number of diluted common shares and equivalents
   62,371 69,533

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

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 26, 2020			September 28, 2019			September 26, 2020			September 28, 2019			July 3, 2021			June 27, 2020			July 3, 2021			June 27, 2020
	(In thousands)						(In thousands)						(In thousands)						(In thousands)
Net income	$	126,769		$	138,133		$	303,260		$	391,529		$	167,292		$	122,929		$	315,419		$	176,491

Other comprehensive income (loss):

Foreign currency translation		601			(4,894	)		(7,156	)		(4,403	)		(9	)		11,587			5,816			(7,757	)
Unrealized (losses) gains on investments before income taxes		—			(8	)		—			3,046
Income tax benefit (expense)		—			2			—			(702	)

Unrealized (losses) gains on investments, net of tax		—			(6	)		—			2,344
Unrealized losses on investments before income taxes														(5	)		0			(15	)		0

Unrealized losses on investments, net of tax														(5	)		0			(15	)		0

Retirement liability adjustment before reclassifications		(654	)		267			(880	)		165			(260	)		(522	)		794			(226	)
Amounts reclassified to other income		352			88			1,028			271			218			336			434			676

Retirement liability adjustment before income taxes		(302	)		355			148			436			(42	)		(186	)		1,228			450
Income tax (expense) benefit		(85	)		60			(197	)		13
Income tax benefit (expense)														83			126			(265	)		(112	)

Retirement liability adjustment, net of tax		(387	)		415			(49	)		449			41			(60	)		963			338

Other comprehensive income (loss)		214			(4,485	)		(7,205	)		(1,610	)		27			11,527			6,764			(7,419	)

Comprehensive income	$	126,983		$	133,648		$	296,055		$	389,919		$	167,319		$	134,456		$	322,183		$	169,072

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

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


							Six Months Ended
	Nine Months Ended						July 3, 2021			June 27, 2020
	September 26, 2020			September 28, 2019			(In thousands)
Cash flows from operating activities:	(In thousands)
Net income	$	303,260		$	391,529		$	315,419		$	176,491
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		27,715			28,917			15,596			18,122
Deferred income taxes		1,089			1,817			6,107			(777	)
Depreciation		49,407			42,168			34,891			33,220
Amortization of intangibles		41,684			38,151			29,852			26,983
Change in operating assets and liabilities:
Decrease in accounts receivable		96,955			57,897			18,985			86,978
Increase in inventories		(8,139	)		(83,973	)		(50,873	)		(27,089	)
Increase in other current assets		(16,776	)		(6,259	)		(10,600	)		(14,699	)
Increase in other assets		(2,612	)		(9,302	)
Increase (decrease) in accounts payable and other current liabilities		46,721			(493	)
(Increase) decrease in other assets								(9,263	)		8,238
(Decrease) increase in accounts payable and other current liabilities								(35,328	)		34,714
Increase in deferred revenue and customer advances		32,053			34,926			91,631			37,558
Effect of the 2017 Tax Cuts & Jobs Act		—			(3,229	)
Decrease in other liabilities		(48,332	)		(40,957	)		(44,973	)		(29,293	)

Net cash provided by operating activities		523,025			451,192			361,444			350,446
Cash flows from investing activities:
Additions to property, plant, equipment and software capitalization		(125,340	)		(110,205	)		(76,889	)		(97,029	)
Business acquisitions, net of cash acquired		(76,664	)		—			0			(76,664	)
Investment in unaffiliated companies		(3,850	)		(7,250	)		0			(3,350	)
Payments for intellectual property licenses								(7,000	)		—
Purchases of investments		(22,458	)		(35,523	)		(215,140	)		(16,828	)
Maturities and sales of investments		1,751			978,419			17,923			1,536

Net cash (used in) provided by investing activities		(226,561	)		825,441
Net cash used in investing activities								(281,106	)		(192,335	)
Cash flows from financing activities:
Proceeds from debt issuances		315,000			600,362			500,000			315,000
Payments on debt		(425,366	)		(390,482	)		(250,000	)		(300,366	)
Payments of debt issuance costs		—			(2,932	)		(3,637	)		0
Proceeds from stock plans		28,421			34,311			45,036			14,739
Purchases of treasury shares		(196,353	)		(1,909,700	)		(341,507	)		(196,297	)
Proceeds from derivative contracts		10,330			6,900			1,917			7,558

Net cash used in financing activities		(267,968	)		(1,661,541	)		(48,191	)		(159,366	)
Effect of exchange rate changes on cash and cash equivalents		10,723			(6,723	)		(8,786	)		4,576

Increase (decrease) in cash and cash equivalents		39,219			(391,631	)
Increase in cash and cash equivalents								23,361			3,321
Cash and cash equivalents at beginning of period		335,715			796,280			436,695			335,715

Cash and cash equivalents at end of period	$	374,934		$	404,649		$	460,056		$	339,036

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

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited, in thousands)


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Deficit
Balance June 29, 2019		160,841	$	1,608	$	1,883,958	$	6,248,601	$	(7,462,826	)	$	(115,096	)	$	556,245
Net income		—		—		—		138,133		—			—			138,133
Other comprehensive loss		—		—		—		—		—			(4,485	)		(4,485	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		8		—		1,803		—		—			—			1,803
Stock options exercised		19		—		2,378		—		—			—			2,378
Treasury stock		—		—		—		—		(588,207	)		—			(588,207	)
Stock-based compensation		1		1		9,632		—		—			—			9,633

Balance September 28, 2019		160,869	$	1,609	$	1,897,771	$	6,386,734	$	(8,051,033	)	$	(119,581	)	$	115,500


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (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	)
Balance March 28, 2020																			161,253	$	1,613	$	1,947,626	$	6,639,980	$	(8,788,801	)	$	(138,417	)	$	(337,999	)
Net income		—		—		—		126,769		—			—			126,769			—		—		—		122,929		—			—			122,929
Other comprehensive income		—		—		—		—		—			214			214			—		—		—		—		—			11,527			11,527
Issuance of common stock for employees:
Employee Stock Purchase Plan		10		—		1,641		—		—			—			1,641			12		—		2,216		—		—			—			2,216
Stock options exercised		97		1		12,040		—		—			—			12,041			6		—		779		—		—			—			779
Treasury stock		—		—		—		—		(56	)		—			(56	)		—		—		—		—		(71	)		—			(71	)
Stock-based compensation		1				9,552		—		—			—			9,552			2		—		8,877		—		—			—			8,877

Balance September 26, 2020		161,381	$	1,614	$	1,982,731	$	6,889,678	$	(8,788,928	)	$	(126,676	)	$	(41,581	)
Balance June 27, 2020																			161,273	$	1,613	$	1,959,498	$	6,762,909	$	(8,788,872	)	$	(126,890	)	$	(191,742	)


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance April 3, 2021		161,859	$	1,619	$	2,054,076	$	7,256,116	$	(8,969,643	)	$	(111,206	)	$	230,962
Net income		—		—		—		167,292		—			—			167,292
Other comprehensive income		—		—		—		—		—			27			27
Issuance of common stock for employees:
Employee Stock Purchase Plan		22		—		5,156		—		—			—			5,156
Stock options exercised		135		1		23,584		—		—			—			23,585
Treasury stock		—		—		—		—		(165,985	)		—			(165,985	)
Stock-based compensation		1				7,236		—		—			—			7,236

Balance July 3, 2021		162,017	$	1,620	$	2,090,052	$	7,423,408	$	(9,135,628	)	$	(111,179	)	$	268,273

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’ Equity
Balance December 31, 2018		160,472	$	1,605	$	1,834,741	$	5,995,205		$	(6,146,322	)	$	(117,971	)	$	1,567,258
Net income		—		—		—		391,529			—			—			391,529
Other comprehensive loss		—		—		—		—			—			(1,610	)		(1,610	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		33		—		5,971		—			—			—			5,971
Stock options exercised		256		3		28,475		—			—			—			28,478
Treasury stock		—		—		—		—			(1,904,711	)		—			(1,904,711	)
Stock-based compensation		108		1		28,584		—			—			—			28,585

Balance September 28, 2019		160,869	$	1,609	$	1,897,771	$	6,386,734		$	(8,051,033	)	$	(119,581	)	$	115,500


	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Deficit			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	)		161,030	$	1,610	$	1,926,753	$	6,587,403		$	(8,612,576	)	$	(119,471	)	$	(216,281	)
Net income		—		—		—		303,260			—			—			303,260			—		—		—		176,491			—			—			176,491
Adoption of new accounting pronouncement		—		—		—		(985	)		—			—			(985	)		—		—		—		(985	)		—			—			(985	)
Other comprehensive loss		—		—		—		—			—			(7,205	)		(7,205	)		—		—		—		—			—			(7,419	)		(7,419	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		31				5,593		—			—			—			5,593			21		—		3,952		—			—			—			3,952
Stock options exercised		184		2		22,944		—			—			—			22,946			87		1		10,904		—			—			—			10,905
Treasury stock		—		—		—		—			(176,352	)		—			(176,352	)		—		—		—		—			(176,296	)		—			(176,296	)
Stock-based compensation		136		2		27,441		—			—			—			27,443			135		2		17,889		—			—			—			17,891

Balance September 26, 2020		161,381	$	1,614	$	1,982,731	$	6,889,678		$	(8,788,928	)	$	(126,676	)	$	(41,581	)
Balance June 27, 2020																				161,273	$	1,613	$	1,959,498	$	6,762,909		$	(8,788,872	)	$	(126,890	)	$	(191,742	)
																											��


	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		—		—		—		315,419		—			—			315,419
Other comprehensive income		—		—		—		—		—			6,764			6,764
Issuance of common stock for employees:
Employee Stock Purchase Plan		32				7,011		—		—			—			7,011
Stock options exercised		230		2		38,713		—		—			—			38,715
Treasury stock		—		—		—		—		(346,644	)		—			(346,644	)
Stock-based compensation		89		1		14,863		—		—			—			14,864

Balance July 3, 2021		162,017	$	1,620	$	2,090,052	$	7,423,408	$	(9,135,628	)	$	(111,179	)	$	268,273

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

Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1 Basis of Presentation and Summary of Significant Accounting Policies

Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC

” and, together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together

(“LC-MS”)

and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing.

LC-MS

instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA

product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.

The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s ~~third~~second fiscal quarters for ~~2020~~2021 and ~~2019~~2020 ended on ~~September 26,~~July 3, 2021 and June 27, 2020, ~~and September 28, 2019,~~ 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.

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, ~~2019,~~2020, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February ~~25, 2020.~~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 ~~adversely~~ affected by the ongoing global COVID-19 pandemic ~~of a novel strain of coronavirus~~

~~(“COVID-19”)~~

and the resulting volatility and uncertainty it has caused in the U.S. and international markets. ~~In March 2020,~~The Company operates in over 35 countries, including those in regions most impacted by the ~~World Health Organization declared~~

COVID-19 pandemic.

~~a pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, President~~

Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~Trump announced a National Emergency relating to the disease. Since then,~~

~~COVID-19~~

~~has continued to spread throughout the U.S. and globally. The~~

~~COVID-19~~

pandemic has caused significant volatility and uncertainty in U.S. and international markets, which has disrupted and is expected to continue to disrupt the Company’s business and could result in a prolonged economic downturn.

~~It is unclear whether increases in the number of infections will continue and amplify as certain areas of the economy are~~

~~re-opened~~

~~and restrictions are eased, or whether so called “second waves” of~~

~~COVID-19~~

~~infections will be experienced in the U.S. and globally. The Company operates in over 35 countries, including those in the regions most impacted by the~~

~~COVID-19~~

~~pandemic.~~

~~In the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019, the Company experienced a decline in net sales of 7% due in large part to the~~

~~COVID-19~~

~~pandemic and related economic uncertainty; however, through~~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

~~interim~~

goodwill or long-lived asset impairment analyses were required. Further, there have been no violations of debt covenants. Any prolonged material disruption toof the Company’s employees, suppliers, manufacturing, or customers could ~~result in a material~~materially impact to its consolidated financial position, results of operations or cash ~~flows in the future.~~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 ~~most of~~ 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.

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 ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019, $359~~2020, $353 million out of ~~$397~~$664 million and ~~$249~~$364 million out of ~~$337~~$443 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, ~~$262~~$267 million out of ~~$397~~$664 million and ~~$176~~$254 million out of ~~$337~~$443 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~2020, respectively.

Accounts Receivable and Allowance for Credit Losses

The Company adopted new accounting guidance regarding the accounting for credit losses as of January 1, 2020 using a modified retrospective transition approach that was applied to the trade receivable balance as of January 1, 2020. This new accounting guidance required the Company to move from an incurred loss model to a current expected credit loss (“CECL”) model. Upon adoption, the Company recorded a net decrease of approximately $1 million to the Company’s stockholders’ deficit as of January 1, 2020. The adoption of this standard did not have a material impact on the Company’s balance sheets, results of operations or cash flows.

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

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

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.

~~Any recovery of amounts that were written off prior to adoption of the new CECL standard that are received after adoption are recorded in income in the period in which they are received.~~

The following is a summary of the activity of the Company’s allowance for ~~doubtful accounts~~credit losses for the

~~nine~~ six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ (in thousands)~~. The September 26, 2020 balance is calculated using the CECL method and the September 28, 2019 balance is calculated using the incurred loss method under legacy GAAP:~~:

Balance at
Beginning
of Period

Impact of
CECL
Adoption

Additions

Deduction

Balance at
End of
Period

Allowance for Doubtful Accounts

September 26, 2020
   $ 9,560    $ 985    $ 7,826    $ (5,784 ) $ 12,587
September 28, 2019
   $ 7,663    $ —      $ 6,014    $ (5,461 ) $ 8,216


	Balance at Beginning of Period		Impact of CECL Adoption		Additions		Deductions			Balance at End of Period
Allowance for Credit Losses
July 3, 2021	$	14,381	$	—	$	3,042	$	(2,625	)	$	14,798
June 27, 2020	$	9,560	$	985	$	6,664	$	(3,901	)	$	13,308

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

Other Investments

During the ~~nine~~six months ended ~~September 26,~~June 27, 2020, ~~and September 28, 2019,~~ the Company made investments in unaffiliated companies of ~~$4 million and $7 million, respectively.~~$3 million.

During the ~~nine~~six months ended ~~September 26,~~July 3, 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 three and six months ended June 27, 2020, the Company recorded an unrealized loss on an equity security still held at the reporting date of approximately $1$

million within other ~~expense~~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 ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019.~~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 ~~September 26, 2020~~July 3, 2021 (in thousands):


	Total at September 26, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total at July 3, 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									$	12,051	$	0	$	12,051	$	0
Corporate debt securities										130,231		0		130,231		0
Time deposits	$	22,136	$	—	$	22,136	$	—		75,897		0		75,897		0
Waters 401(k) Restoration Plan assets		34,466		34,466		—		—		40,965		40,965		0		0
Foreign currency exchange contracts		832		—		832		—		223		0		223		0

Total	$	57,434	$	34,466	$	22,968	$	—	$	259,367	$	40,965	$	218,402	$	0


Liabilities:
Contingent consideration	$	2,903	$	—	$	—	$	2,903	$	1,266	$	0	$	0	$	1,266
Foreign currency exchange contracts		390		—		390		—		142		0		142		0
Interest rate cross-currency swap agreements		15,190		—		15,190		—		22,457		0		22,457		0

Total	$	18,483	$	—	$	15,580	$	2,903	$	23,865	$	0	$	22,599	$	1,266

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, ~~2019~~2020 (in thousands):


	Total at December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		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	$	1,642	$	—	$	1,642	$	—	$	6,451	$	—	$	6,451	$	—
Waters 401(k) Restoration Plan assets		30,158		30,158		—		—		38,988		38,988		—		—
Foreign currency exchange contracts		16		—		16		—		836		—		836		—
Interest rate cross-currency swap agreements		4,485				4,485

Total	$	36,301	$	30,158	$	6,143	$	—	$	46,275	$	38,988	$	7,287	$	—

Liabilities:
Contingent consideration	$	2,557	$	—	$	—	$	2,557	$	1,185	$	—	$	—	$	1,185
Foreign currency exchange contracts		1,028		—		1,028		—		185		—		185		—
Interest rate cross-currency swap agreements										44,996		—		44,996		—

Total	$	3,585	$	—	$	1,028	$	2,557	$	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.

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

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 and foreign currency exchange contracts 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 ~~July 2014~~December 2020 acquisition of ~~Medimass Research, Development and Service Kft.~~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 estimated future results 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. ~~Although there is no contractual limit, the~~

The fair value of future contingent consideration payments related to the December 2020 acquisition of ISS was estimated to be $3$1 million at both ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~2020. The fair value is based on the ~~Company’s best estimate, as the earnout is based on future sales~~achievement of certain ~~products, some of which are currently in development, through 2034.~~revenue and customer account milestones over the two years after the acquisition date.

Fair Value of Other Financial Instruments

The Company’s accounts receivable, accounts payable and variable interest rate debt are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s fixed interest rate debt was $1.3 billion and $910 million ~~and $1.0 billion~~ at ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~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 ~~$938 million~~$1.3 billion and $1.0 billion at ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~2020, respectively, using Level 2 inputs.

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.

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

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.

~~Table of Contents~~

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

Interest Rate Cross-Currency Swap Agreements

As of ~~September 26, 2020,~~July 3, 2021, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of ~~$560~~$490 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) ~~equity~~ 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.

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):


	September 26, 2020					December 31, 2019					July 3, 2021					December 31, 2020
	Notional Value		Fair Value			Notional Value		Fair Value			Notional Value		Fair Value			Notional Value		Fair Value
Foreign currency exchange contracts:
Other current assets	$	57,380	$	832		$	119,576	$	16		$	21,000	$	223		$	66,690	$	836
Other current liabilities	$	65,536	$	390		$	29,495	$	1,028		$	40,030	$	142		$	20,000	$	185
Interest rate cross-currency swap agreements:
Other (liabilities) assets	$	560,000	$	(15,190	)	$	560,000	$	4,485
Accumulated other comprehensive loss (income)			$	15,190				$	(4,485	)
Other liabilities											$	490,000	$	(22,457	)	$	560,000	$	(44,996	)
Accumulated other comprehensive loss													$	27,981				$	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


September 26,
2020

September 28,
2019

September 26,
2020

September 28,
2019

Foreign currency exchange contracts:
Realized gains (losses) on closed contracts
   Cost of sales    $ 1,113    $ (3,340 )    $ (45 )

$ (5,858 )
Unrealized gains (losses) on open contracts
   Cost of sales    808    (633 )    1,455    (1,040 )








Cumulative net
pre-tax
gains (losses)
   Cost of sales    $ 1,921    $ (3,973 )    $ 1,410    $ (6,898 )








Interest rate cross-currency swap agreements:

Interest earned
   Interest income    $ 3,777    $ 2,698    $ 11,275    $ 7,848
Unrealized gains on open contracts
   Stockholders’ deficit    $ 19,582    $ 15,847    $ 19,675    $ 15,852

~~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 September 26, 2020 and September 28, 2019, the Company repurchased 0.8 million and 8.6 million shares of the Company’s outstanding common stock at a cost of $167 million and $1.9 billion, respectively, under the January 2019 authorization and other previously announced programs. As of September 26, 2020, the Company had repurchased an aggregate of 11.1 million shares at a cost of $2.5 billion under the January 2019 repurchase program and had a total of $1.5 billion authorized for future repurchases. In addition, the Company repurchased $10 million and $8 million of common stock related to the vesting of restricted stock units during the nine months ended September 26, 2020 and September 28, 2019, respectively. While the Company believes that it has the financial flexibility to fund these share repurchases given current cash levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by the

~~COVID-19~~

~~pandemic.~~


	Financial Statement Classification	Three Months Ended						Six Months Ended
		July 3, 2021			June 27, 2020			July 3, 2021			June 27, 2020
		July 3, 2021			June 27, 2020			July 3, 2021			June 27, 2020
Foreign currency exchange contracts:
Realized (losses) gains on closed contracts	Cost of sales	$	(213	)	$	1,823		$	1,455		$	(1,157	)
Unrealized (losses) gains on open contracts	Cost of sales		(569	)		(678	)		(1,323	)		646

Cumulative net pre-tax (losses) gains	Cost of sales	$	(782	)	$	1,145		$	132		$	(511	)

Interest rate cross-currency swap agreements:
Interest earned	Interest income	$	3,373		$	3,784		$	7,200		$	7,498
Unrealized (losses) gains on open contracts	Stockholders’ equity (deficit)	$	(4,229	)	$	(5,615	)	$	17,015		$	(93	)

Table of Contents

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

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 six months ended July 3, 2021 and June 27, 2020, the Company repurchased 1.2 million and 0.8 million shares of the Company’s outstanding common stock at a cost of $339 million and $167 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $8 million and $9 million of common stock related to the vesting of restricted stock units during the six months ended July 3, 2021 and June 27, 2020, respectively. As of July 3, 2021, the Company had repurchased an aggregate of 12.3 million shares at a cost of $2.8 billion under the January 2019 repurchase program and had a total of $1.2 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.

The Company had $5 million of treasury stock purchases that were accrued and unsettled at July 3, 2021. These transactions were settled in July 2021, during the Company’s third quarter. 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. ~~There were 0~~The Company did 0t have any unsettled treasury stock purchases as of ~~September 26,~~December 31, 2020 ~~while the Company had accrued $18 million for such purchases as of September 28, 2019, which settled in the subsequent quarter.~~or June 27, 2020.

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~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ (in thousands):

Balance at

Beginning

of Period

Accruals for

Warranties

Settlements

Made

Balance at

End of

Period

Accrued warranty liability:

September 26, 2020    $ 11,964    $ 5,442    $ (7,145 )    $ 10,261
September 28, 2019    $ 12,300    $ 5,271    $ (6,094 )    $ 11,477


	Balance at Beginning of Period		Accruals for Warranties		Settlements Made			Balance at End of Period
Accrued warranty liability:
July 3, 2021	$	10,950	$	4,719	$	(4,859	)	$	10,810
June 27, 2020	$	11,964	$	3,577	$	(5,428	)	$	10,113

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~~six months ended ~~September 26,~~June 27, 2020, the Company incurred $6$21 million ~~and $27 million, respectively,~~ of severance-related costs, lease termination costs and other related costs. The Company ~~expects~~did not incur any restructuring charges during the six months ended July 3, 2021.

Other Items

During the three and six months ended July 3, 2021, the Company executed a settlement agreement to ~~incur an additional $4~~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 $

million in guaranteed payments, including minimum royalty payments, which was recognized within other income in our consolidated statement of ~~costs for~~operations. During the ~~remainder~~three and six months ended July 3, 2021, the Company received $3 million in guaranteed payments, net of ~~the year.~~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.

Table of Contents

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~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ (in thousands):


	September 26, 2020			September 28, 2019			July 3, 2021			June 27, 2020
Balance at the beginning of the period	$	213,695		$	204,257		$	239,759		$	213,695
Recognition of revenue included in balance at beginning of the period		(177,667	)		(174,929	)		(159,393	)		(141,297	)
Revenue deferred during the period, net of revenue recognized		213,895			206,093			251,065			195,444

Balance at the end of the period	$	249,923		$	235,421		$	331,431		$	267,842

The Company classified ~~$39~~$47 million and ~~$38~~$42 million of deferred revenue and customer advances in other long-term liabilities at ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~2020, respectively.

~~Table of Contents~~

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

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):


	September 26, 2020		July 3, 2021
Deferred revenue and customer advances expected to be recognized in:
One year or less	$	211,348	$	284,765
13-24 months		22,452
13 -24 months				28,343
25 months and beyond		16,123		18,323

Total	$	249,923	$	331,431

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):


									July 3, 2021
									Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
U.S. Treasury securities									$	12,050	$	1	$	—		$	12,051
Corporate debt securities										130,246		3		(18	)		130,231
Time deposits										75,897		—		—			75,897

Total									$	218,193	$	4	$	(18	)	$	218,179

Amounts included in:
Cash equivalents									$	14,614	$	0	$	(1	)	$	14,613
Investments										203,579		4		(17	)		203,566

Total									$	218,193	$	4	$	(18	)	$	218,179


	September 26, 2020								December 31, 2020
	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value		Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
Time deposits		22,136		—		—		22,136		6,451		—		—			6,451

Total	$	22,136	$	—	$	—	$	22,136	$	6,451	$	—	$	—		$	6,451

Amounts included in:
Investments		22,136		—		—		22,136		6,451		—		—			6,451

Total	$	22,136	$	—	$	—	$	22,136	$	6,451	$	—	$	—		$	6,451

December 31, 2019


Amortized

Cost

Unrealized

Gain

Unrealized

Loss

Fair

Value

Time deposits
   1,642    —      —      1,642








Total    $ 1,642    $ —      $ —      $ 1,642








Amounts included in:

Cash equivalents    $ 213    $ —      $ —      $ 213
Investments    1,429    —      —      1,429








Total    $ 1,642    $ —      $ —      $ 1,642

Table of Contents

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

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

September 26, 2020

December 31, 2019

Due in one year or less
   $ 22,136    $ 1,642




Total    $ 22,136    $ 1,642

~~Table of Contents~~

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


	July 3, 2021		December 31, 2020
Due in one year or less	$	203,368	$	6,451
Due after one year through three years		14,811		—

Total	$	218,179	$	6,451

4 Inventories

Inventories are classified as follows (in thousands):


	September 26, 2020		December 31, 2019		July 3, 2021		December 31, 2020
Raw materials	$	134,527	$	126,850	$	149,562	$	133,490
Work in progress		20,183		15,457		23,224		18,678
Finished goods		172,236		178,244		175,984		152,113

Total inventories	$	326,946	$	320,551	$	348,770	$	304,281

5 ~~Acquisitions~~

On January 15, 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.

~~Andrew Alliance offers lab workflow automation solutions with the combination of its software platform and smart, connected laboratory equipment and accessories.~~

The Company allocated $7 million of the purchase price to intangible assets comprised of developed technology, trade name and customer relationships. The developed technology and customer relationships will be amortized over ten years and the trade name will be amortized over 3 years. The Company allocated $72 million of the purchase price to goodwill, which is not deductible for tax purposes. The principal factor that resulted in recognition of goodwill in the acquisition was that the purchase price was based, in part, on cash flow projections assuming the integration of any acquired technology, distribution channels and products with the Company’s products, which are higher than if the acquired companies’ technology, customer access or products were utilized on a stand-alone basis. The goodwill also includes value assigned to assembled workforce, which cannot be recognized as an intangible asset.

In addition, the sellers provided the Company with customary representations, warranties and indemnification, which would be settled in the future if and when a breach of the contractual representation or warranty condition occurs.

The fair values of the assets and liabilities acquired were determined using various income-approach valuation techniques, which use Level 3 inputs. The following table presents the fair values as of the acquisition date, as determined by the Company, of 100% of the assets and liabilities owned and recorded in connection with the acquisition of Andrew Alliance (in thousands):

Cash
   $ 713
Accounts receivable and current other assets
   806
Inventory
   669
Prepaid and other assets
   611
Property, plant and equipment, net
   757
Operating lease assets
   847
Intangible assets
   6,960
Goodwill
   71,632


Total assets acquired
   82,995
Accrued expenses and other liabilities
   2,093


Total consideration
   80,902


Fair value of minority investment
   3,525


Cash consideration paid
   $ 77,377

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

~~The impact of the Andrew Alliance acquisition on the Company’s revenues and net income during the quarter was immaterial. The~~

~~year-to-date~~

~~forma effect on the ongoing operations of the Company as though this acquisition had occurred at the beginning of the periods covered by this report was also immaterial.~~

6 Goodwill and Other Intangibles

The carrying amount of goodwill was ~~$431~~$440 million and ~~$356~~$444 million at ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~2020, respectively. The ~~acquisition of Andrew Alliance increased goodwill by $72 million while the~~ effect of foreign currency translation decreased goodwill by $3$4 million.

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


	September 26, 2020						December 31, 2019						July 3, 2021							December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period		Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period		Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period			Gross Carrying Amount		Accumulated Amortization		Weighted- Average Amortization Period
Capitalized software	$	542,127	$	378,999		5 years	$	481,986	$	333,255		5 years	$	578,641	$	418,409		5	years	$	584,452	$	409,847		5	years
Purchased intangibles		209,877		159,747		11 years		200,523		151,722		11 years		203,421		162,312		11	years		205,585		160,342		11	years
Trademarks and IPR&D		13,702		—		—		13,782		—		—
Trademarks														9,680		—		—			9,680		—		—
Licenses		5,600		5,345		6 years		5,669		5,298		6 years		12,882		5,803		7	years		5,923		5,697		6	years
Patents and other intangibles		86,972		59,019		8 years		83,035		54,517		8 years		94,043		65,307		8	years		90,699		61,808		8	years

Total	$	858,278	$	603,110		7 years	$	784,995	$	544,792		7 years	$	898,667	$	651,831		7	years	$	896,339	$	637,694		7	years

In June 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 as of July 3, 2021.

The gross carrying value of intangible assets and accumulated amortization for intangible assets ~~increased~~decreased by ~~$25~~$

million and ~~$17~~$

million, respectively, in the ~~nine~~

six

months ended ~~September 26, 2020~~ July

2021

due to the effects of foreign currency translation. Amortization expense for intangible assets was ~~$15~~$

million and ~~$13~~$

million for the

three

months ended ~~September 26, 2020~~ July

2021

and ~~September 28, 2019,~~June

2020

, respectively. Amortization expense for intangible assets was $

million and $

million for the ~~nine~~

six

months ended ~~September 26, 2020~~ July

2021

and ~~September 28, 2019,~~June

2020

, respectively. Amortization expense for intangible assets is estimated to be ~~$55~~$

million per year for each of the next

five

years.

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

6 Debt

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.

In November 2017, the Company entered into a credit agreement (the “2017 Credit Agreement”) that provides for a $1.5 billion revolving facility and a $300 million term loan.

As of ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~2020, the revolving facility and term loan had a total of ~~$615~~$300 million and ~~$625~~$400 million, respectively, outstanding and mature on November 30, 2022 and require no scheduled prepayments before that date.

The interest rates applicable to the 2017 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, 2, 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 2017 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 2017 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 2017 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.

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

As of ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~2020, the Company had a total of ~~$960 million~~$1.3 billion and ~~$1.1~~$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.

In February 2019, certain defined terms related to the subsidiary guarantors were amended in the 2017 Credit Agreement and senior unsecured note agreements. In addition, the Company amended the senior unsecured note agreements to allow the Company to elect an increase in the permitted leverage ratio from 3.50:1 to 4.0:1, for a period of three consecutive quarters, for a material acquisition of $400 million or more. During the period of time where the leverage ratio exceeds 3.50:1, the interest payable on the senior unsecured notes shall increase by 0.50%. The debt covenants in the senior unsecured note agreements were also modified to address the change in accounting guidance for leases.

Table of Contents

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

The Company had the following outstanding debt at ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019~~2020 (in thousands):

September 26, 2020

December 31, 2019

Foreign subsidiary lines of credit
   $ —   $ 366
Senior unsecured notes
–
Series B
–
5.00%, due February 2020
   —   100,000
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
   150,000 100,366
Senior unsecured notes
–
Series E
–
3.97%, due March 2021
   —   50,000
Senior unsecured notes
–
Series F
–
3.40%, due June 2021
   —   100,000
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
Credit agreement
   615,000 625,000
Unamortized debt issuance costs
   (3,663 ) (4,203 )


Total long-term debt    1,421,337 1,580,797


Total debt
   $ 1,571,337 $ 1,681,163


	July 3, 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		0			100,000

Total notes payable and debt, current		0			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		300,000			400,000
Unamortized debt issuance costs		(6,633	)		(3,485	)

Total long-term debt		1,603,367			1,206,515

Total debt	$	1,603,367		$	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 ~~both September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~2020, the Company had a total amount available to borrow under the 2017 Credit Agreement of ~~$1.2~~$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 ~~2.68%~~2.71% and ~~3.39%~~2.92% at ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~2020, respectively. As of ~~September 26, 2020,~~July 3, 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 ~~$108~~$122 million and ~~$105~~$109 million at ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~2020, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. ~~The weighted-average interest rate applicable to these short-term borrowings was 1.48% for December 31, 2019.~~ None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of ~~September 26,~~July 3, 2021 or December 31, 2020.

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

87 Income Taxes

a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual ~~milestones, which~~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 ~~Company expects to meet.~~period April 1, 2021 through March 31, 2026. The effect of applying the ~~contractual~~concessionary income tax ~~rate~~rates rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ by ~~$12~~$9 million and ~~$15~~$7 million, respectively, and increased the Company’s net income per diluted share by ~~$0.20~~$0.14 and ~~$0.21,~~$0.11, respectively.

The Company’s effective tax rate for the three months ended ~~September 26,~~July 3, 2021 and June 27, 2020 was 15.3% and ~~September 28, 2019 was 15.7% and 16.1%~~15.4%, respectively. The decrease in the effective income tax rate can be attributed to differences in the proportionate amounts of

pre-tax

income recognized in jurisdictions with different effective tax rates.

Table of Contents

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

The Company’s effective tax rate for the ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 was 15.0% and ~~September 28, 2019 was 14.3% and 13.7%~~13.2%, respectively.

The effective tax rate for the ~~nine~~six months ended ~~September 26,~~July 3, 2021 includes a $4 million tax benefit related to stock-based compensation. This income tax benefit decreased the effective tax rate by 1.1 percentage points for the six months ended July 3, 2021. The effective tax rate for the six months ended June 27, 2020 includes a $6$5 million income tax benefit related to certain restructuring charges and a $3$2 million tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by ~~1.8~~2.4 percentage points and ~~0.9~~1.2 percentage points, respectively, for the ~~nine~~six months ended ~~September 26,~~June 27, 2020. The effective tax rate for the nine months ended September 28, 2019 includes a $3 million income tax benefit related to the finalization of certain regulations relating to the Tax Cuts and Jobs Act of 2017 and a $7 million income tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 0.7 percentage points and 1.5 percentage points, respectively, for the nine months ended September 28, 2019. 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 ~~reporting~~ 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.

The following is a summary of the activity of the Company’s gross unrecognized tax benefits, excluding interest and penalties, for the ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ (in thousands):


	September 26, 2020			September 28, 2019			July 3, 2021			June 27, 2020
Balance at the beginning of the period	$	27,790		$	26,108		$	28,666		$	27,790
Net reductions for settlement of tax audits								(593	)		0
Net reductions for lapse of statutes taken during the period		(427	)		(173	)		(198	)		(252	)
Net additions for tax positions taken during the current period		907			1,314			653			536

Balance at the end of the period	$	28,270		$	27,249		$	28,528		$	28,074

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, ~~2014.~~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 ~~September 26, 2020,~~July 3, 2021, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of less than $1 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.

~~Table of Contents~~

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

98 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 ~~September 26, 2020,~~July 3, 2021, the 2020 Plan had ~~6.5~~6.6 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 ~~September 26, 2020,~~July 3, 2021, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding under the 2020 Plan.

Table of Contents

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 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~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ 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				Three Months Ended				Six Months Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Cost of sales	$	645	$	531	$	1,850	$	1,673	$	727	$	635	$	1,360	$	1,205
Selling and administrative expenses		7,747		7,766		22,472		23,293		5,274		7,352		11,694		14,725
Research and development expenses		1,201		1,365		3,393		3,951		1,290		939		2,542		2,192

Total stock-based compensation	$	9,593	$	9,662	$	27,715	$	28,917	$	7,291	$	8,926	$	15,596	$	18,122

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

~~Table of Contents~~

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

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~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ are as follows:


	Six Months Ended
Options Issued and Significant Assumptions Used to Estimate Option Fair Values	July 3, 2021			June 27, 2020
Options issued in thousands		159			227
Risk-free interest rate		0.8	%		1.4	%
Expected life in years		6			6
Expected volatility		32.5	%		26.5	%
Expected dividends		0			—


	Six Months Ended
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	July 3, 2021		June 27, 2020
Exercise price	$	280.92	$	216.08
Fair value	$	91.42	$	61.70

Table of Contents

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

Nine Months Ended

Options Issued and Significant Assumptions Used to Estimate Option Fair Values

September 26,
2020

September 28,
2019

Options issued in thousands
   267    139
Risk-free interest rate
   1.2 %    2.5 %
Expected life in years
   6    5
Expected volatility
   27.8 %    24.3 %
Expected dividends
   —      —

Nine Months Ended

Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant

September 26,
2020

September 28,
2019

Exercise price
   $ 215.12    $ 231.30
Fair value
   $ 62.93    $ 61.85

The following table summarizes stock option activity for the plans for the ~~nine~~six months ended ~~September 26, 2020~~July 3, 2021 (in thousands, except per share data):


	Number of Shares			Exercise Price per Share					Weighted-Average Exercise Price per Share		Number of Shares			Exercise Price per Share					Weighted-Average Exercise Price per Share
Outstanding at December 31, 2019		1,455		$	61.63	to	$	238.52	$	158.61
Outstanding at December 31, 2020												1,067		$	75.94	to	$	238.52	$	179.59
Granted		267		$	188.63	to	$	235.06	$	215.12		159		$	250.15	to	$	346.56	$	280.92
Exercised		(184	)	$	61.63	to	$	208.47	$	124.58		(230	)	$	99.22	to	$	238.52	$	168.39
Canceled		(150	)	$	128.93	to	$	238.52	$	176.27		(228	)	$	139.51	to	$	224.37	$	194.59

Outstanding at September 26, 2020		1,388		$	75.94	to	$	238.52	$	172.08
Outstanding at July 3, 2021												768		$	75.94	to	$	346.56	$	199.21

Restricted Stock

During the ~~nine~~six months ended ~~September 26, 2020,~~July 3, 2021, the Company granted ~~six~~four thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was ~~$229.67.~~$250.15.

Restricted Stock Units

The following table summarizes the unvested restricted stock unit award activity for the ~~nine~~six months ended ~~September 26, 2020~~July 3, 2021 (in thousands, except per share data):


	Shares			Weighted - Average Grant Date Fair Value per Share		Shares			Weighted-Average Grant Date Fair Value per Share
Unvested at December 31, 2019		260		$	184.70
Unvested at December 31, 2020							271		$	202.00
Granted		119		$	206.99		88		$	282.94
Vested		(87	)	$	162.12		(81	)	$	182.26
Forfeited		(18	)	$	187.90		(14	)	$	220.23

Unvested at September 26, 2020		274		$	201.34
Unvested at July 3, 2021							264		$	234.07

Restricted stock units are generally granted annually in February and vest in equal annual installments over a

five-year

period.

~~Table of Contents~~

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

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 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~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ are as follows:

Nine Months Ended

Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair
Values

September 26,
2020

September 28,
2019

Performance stock units issued (in thousands)
   58 13
Risk-free interest rate
   1.3 % 2.4 %
Expected life in years
   2.9 2.8
Expected volatility
   25.1 % 23.5 %
Average volatility of peer companies
   26.1 % 26.2 %
Correlation coefficient
   36.6 % 34.2 %
Expected dividends
   —   —

Table of Contents

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


	Six Months Ended
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values	July 3, 2021			June 27, 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		0			—

The following table summarizes the unvested performance stock unit award activity for the ~~nine~~six months ended ~~September 26, 2020~~July 3, 2021 (in thousands, except per share data):

Shares

Weighted-Average

Fair Value per
Share

Unvested at December 31, 2019
   105    $ 233.11
Granted
   58    $ 190.45
Vested
   (36 )    $ 184.51
Forfeited
   (25 )    $ 231.35



Unvested at September 26, 2020
   102    $ 226.44

~~Table of Contents~~


	Shares			Weighted-Average Fair Value per Share
Unvested at December 31, 2020		95		$	230.36
Granted		41		$	315.98
Vested		(5	)	$	242.94
Forfeited		(39	)	$	229.78

Unvested at July 3, 2021		92		$	268.08

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

109 Earnings Per Share

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


								Three Months Ended July 3, 2021
								Net Income (Numerator)		Weighted- Average Shares (Denominator)		Per Share Amount
Net income per basic common share								$	167,292		61,685	$	2.71
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities									0		472		(0.02	)

Net income per diluted common share								$	167,292		62,157	$	2.69

	Three Months Ended September 26, 2020
	Net Income		Weighted- Average Shares		Per Share			Three Months Ended June 27, 2020
	(Numerator)		(Denominator)		Amount			Net Income (Numerator)		Weighted- Average Shares (Denominator)		Per Share Amount
Net income per basic common share	$	126,769		62,002	$	2.04		$	122,929		61,944	$	1.98
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		301		(0.01	)		—		240		—

Net income per diluted common share	$	126,769		62,303	$	2.03		$	122,929		62,184	$	1.98

Three Months Ended September 28, 2019


Net Income

Weighted-
Average Shares

Per Share


(Numerator)

(Denominator)

Amount

Net income per basic common share
   $ 138,133    66,226    $ 2.09
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   —      542    (0.02 )






Net income per diluted common share
   $ 138,133    66,768    $ 2.07

Table of Contents

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


								Six Months Ended July 3, 2021
								Net Income (Numerator)		Weighted- Average Shares (Denominator)		Per Share Amount
Net income per basic common share								$	315,419		61,979	$	5.09
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities									0		456		(0.04	)

Net income per diluted common share								$	315,419		62,435	$	5.05

	Nine Months Ended September 26, 2020
	Net Income		Weighted- Average Shares		Per Share			Six Months Ended June 27, 2020
	(Numerator)		(Denominator)		Amount			Net Income (Numerator)		Weighted- Average Shares (Denominator)		Per Share Amount
Net income per basic common share	$	303,260		62,057	$	4.89		$	176,491		62,085	$	2.84
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		314		(0.03	)		0		319		(0.01	)

Net income per diluted common share	$	303,260		62,371	$	4.86		$	176,491		62,404	$	2.83

Nine Months Ended September 28, 2019


Net Income

Weighted-
Average Shares

Per Share


(Numerator)

(Denominator)

Amount

Net income per basic common share
   $ 391,529    68,952    $ 5.68
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   —      581    (0.05 )






Net income per diluted common share
   $ 391,529    69,533    $ 5.63

For the three and ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020, the Company had ~~0.4~~fewer than 1 million ~~and 0.5 million~~ stock

options ~~respectively,~~

that were antidilutive due to having higher exercise prices than the Company’s average stock price during the applicable period. ~~For both the three and nine months ended September 28, 2019, the Company had 0.1 million stock options that were antidilutive.~~ 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 Loss on Investments			Accumulated Other Comprehensive Loss

Balance at December 31, 2020	$	(98,082	)	$	(19,861	)	$	0		$	(117,943	)
Other comprehensive income (loss), net of tax		5,816			963			(15	)		6,764

Balance at July 3, 2021	$	(92,266	)	$	(18,898	)	$	(15	)	$	(111,179	)

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

11 ~~Accumulated Other Comprehensive Income~~

~~The components of accumulated other comprehensive~~

~~loss~~

~~are detailed as follows (in thousands):~~

Currency Translation

Unrealized

Loss

on Retirement Plans

Accumulated Other
Comprehensive Loss

Balance at December 31, 2019

$
(104,066
)

$
(15,405
)

$
(119,471
)
Other comprehensive loss, net of tax


(7,156
)


(49
)


(7,205
)







Balance at September 26, 2020

$
(111,222
)

$
(15,454
)

$
(126,676
)

12 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~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ is as follows (in thousands):

Three Months Ended


September 26, 2020

September 28, 2019


U.S.

U.S. Retiree

Non-U.S.

U.S.

U.S. Retiree

Non-U.S.


Pension

Healthcare

Pension

Pension

Healthcare

Pension


Plans

Plan

Plans

Plans

Plan

Plans

Service cost

$
—


$
197

$
1,140

$
—


$
124

$
1,081

Interest cost


—



180

353

—



194

426

Expected return on plan assets


—



(214
)

(476
)

—



(177
)

(535
)
Net amortization:

Prior service credit


—



(4
)

(41
)

—



(5
)

(38
)
Net actuarial loss


—



—

397

—



—

132

Net periodic pension cost

$
—


$
159

$
1,373

$
—


$
136

$
1,066

Nine Months Ended


September 26, 2020

September 28, 2019


U.S.

U.S. Retiree

Non-U.S.

U.S.

U.S. Retiree

Non-U.S.


Pension

Healthcare

Pension

Pension

Healthcare

Pension


Plans

Plan

Plans

Plans

Plan

Plans

Service cost

$
—


$
499

$
3,334

$
—


$
374

$
3,238

Interest cost


—



533

1,036

23



583

1,291

Expected return on plan assets


—



(653
)

(1,386
)

—



(531
)

(1,616
)
Net amortization:

Prior service credit


—



(14
)

(122
)

—



(15
)

(113
)
Net actuarial loss


—



—

1,164

—



—

399

Net periodic pension cost

$
—


$
365

$
4,026

$
23


$
411

$
3,199

~~In 2019, the Company completed the termination of the Waters Retirement Restoration Plan.~~


	Three Months Ended
	July 3, 2021						June 27, 2020
	U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Service cost	$	232		$	1,147		$	151		$	1,095
Interest cost		139			312			177			338
Expected return on plan assets		(255	)		(464	)		(220	)		(454	)
Net amortization:
Prior service credit		(4	)		(39	)		(5	)		(41	)
Net actuarial loss		0			261			—			382

Net periodic pension cost	$	112		$	1,217		$	103		$	1,320


	Six Months Ended
	July 3, 2021						June 27, 2020
	U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans			U.S. Retiree Healthcare Plan			Non-U.S. Pension Plans
Service cost	$	465		$	2,307		$	302		$	2,194
Interest cost		278			627			353			683
Expected return on plan assets		(510	)		(930	)		(439	)		(910	)
Net amortization:
Prior service credit		(9	)		(80	)		(10	)		(81	)
Net actuarial loss		0			523			—			767

Net periodic pension cost	$	224		$	2,447		$	206		$	2,653

During fiscal year ~~2020,~~2021, the Company expects to contribute a total of approximately $3 million to $6 million to the Company’s defined benefit plans.

~~Table of Contents~~

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

1312 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 2 operating segments: Waters

and TA

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 ~~1 reportable~~1reportable segment of the Company.

Table of Contents

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

Net sales for the Company’s products and services are as follows for the three and ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ (in thousands):


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Product net sales:
Waters instrument systems	$	225,790	$	223,859	$	550,018	$	647,248	$	261,363	$	181,399	$	477,435	$	324,228
Chemistry consumables		108,175		100,256		300,525		299,801		126,459		95,105		245,433		192,350
TA instrument systems		42,274		46,458		114,799		131,292		53,133		38,416		100,109		72,525

Total product sales		376,239		370,573		965,342		1,078,341		440,955		314,920		822,977		589,103

Service net sales:
Waters service		199,501		188,031		562,843		556,128		219,502		189,205		426,334		363,342
TA service		18,044		18,674		50,522		55,833		21,190		15,859		40,881		32,478

Total service sales		217,545		206,705		613,365		611,961		240,692		205,064		467,215		395,820


Total net sales	$	593,784	$	577,278	$	1,578,707	$	1,690,302	$	681,647	$	519,984	$	1,290,192	$	984,923

Net sales are attributable to geographic areas based on the region of destination. Geographic sales information is presented below for the three and ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ (in thousands):


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Net Sales:
Asia:
China	$	115,666	$	111,657	$	252,713	$	314,544	$	127,225	$	89,816	$	230,144	$	137,047
Japan		44,779		46,840		131,098		136,302		45,113		41,230		95,409		86,319
Asia Other		75,737		79,278		219,660		226,276		97,609		77,163		173,936		143,923

Total Asia		236,182		237,775		603,471		677,122		269,947		208,209		499,489		367,289
Americas:
United States		172,267		164,164		465,093		487,261		186,915		148,928		349,348		292,826
Americas Other		27,180		32,294		81,312		97,840		37,979		25,854		72,903		54,132

Total Americas		199,447		196,458		546,405		585,101		224,894		174,782		422,251		346,958
Europe		158,155		143,045		428,831		428,079		186,806		136,993		368,452		270,676

Total net sales	$	593,784	$	577,278	$	1,578,707	$	1,690,302	$	681,647	$	519,984	$	1,290,192	$	984,923

Net sales by customer class are as follows for the three and six months ended July 3, 2021 and June 27, 2020 (in thousands):


	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Pharmaceutical	$	416,705	$	311,018	$	776,853	$	583,581
Industrial		202,579		152,110		385,852		295,464
Academic and government		62,363		56,856		127,487		105,878

Total net sales	$	681,647	$	519,984	$	1,290,192	$	984,923

Table of Contents

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

~~Net sales by customer class are as follows for the three and nine months ended September 26, 2020 and September 28, 2019 (in thousands):~~

Three Months Ended

Nine Months Ended


September 26,
2020

September 28,
2019

September 26,
2020

September 28,
2019

Pharmaceutical
   $ 343,001    $ 328,227    $ 926,582    $ 972,884
Industrial
   179,128    171,352    474,592    502,679
Academic and governmental
   71,655    77,699    177,533    214,739








Total net sales
   $ 593,784    $ 577,278    $ 1,578,707    $ 1,690,302

Net sales for the Company recognized at a point in time versus over time are as follows for the three and ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ (in thousands):


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Net sales recognized at a point in time:
Instrument systems	$	268,064	$	270,317	$	664,817	$	778,540	$	314,496	$	219,815	$	577,544	$	396,753
Chemistry consumables		108,175		100,256		300,525		299,801		126,459		95,105		245,433		192,350
Service sales recognized at a point in time (time & materials)		92,145		75,240		238,754		232,806		88,832		78,867		168,119		146,609
Total net sales recognized at a point in time										529,787		393,787		991,096		735,712

Total net sales recognized at a point in time		468,384		445,813		1,204,096		1,311,147

Net sales recognized over time:
Service and software maintenance sales recognized over time (contracts)		125,400		131,465		374,611		379,155		151,860		126,197		299,096		249,211

Total net sales	$	593,784	$	577,278	$	1,578,707	$	1,690,302	$	681,647	$	519,984	$	1,290,192	$	984,923

1413 Recent Accounting Standard Changes and Developments

Recently Adopted Accounting Standards

In June 2016, accounting guidance was issued that modifies the recognition of credit losses related to financial assets, such as debt securities, trade receivables, net investments in leases,

off-balance

sheet credit exposures, and other financial assets that have the contractual right to receive cash. ~~Current~~Prior guidance ~~requires~~required the recognition of a credit loss when it iswas considered probable that a loss event ~~has~~had occurred. The ~~new~~current guidance requires the measurement of expected credit losses to be based upon relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the asset. As such, expected credit losses may be recognized sooner under the new guidance due to the broader range of information that will be required to determine credit loss estimates. The new guidance also amends the current other-than-temporary impairment model used for debt securities classified as

available-for-sale.

When the fair value of an

available-for-sale

debt security is below its amortized cost, the new guidance requires the total unrealized loss to be bifurcated into its credit and

non-credit

components. Any expected credit losses or subsequent recoveries will be recognized in earnings and any changes not considered credit related will continue to be recognized within other comprehensive income. This guidance is effective for annual and interim periods beginning after December 15, 2019. On January 1, 2020 the Company adopted this new standard using a modified retrospective method for all financial assets measured at amortized cost which only impacted the Company’s allowance on trade accounts receivable. The Company did not have any significant

off-balance

sheet credit exposures which would be impacted by the new guidance. Results for reporting periods beginning after January 1, 2020 are presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease of $1

million to stockholders’ deficit as of January 1, 2020 for the cumulative effect of adopting the new standard due to converting to the current expected credit loss model for the allowance recorded against trade accounts receivables. This accounting standard did not have ana material impact on the Company’s results of operations and cash flows.

~~Table of Contents~~

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

In January 2017, accounting guidance was issued that simplifies the accounting for goodwill impairment. The guidance eliminates step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations and cash flows.

In August 2018, accounting guidance was issued that modifies the disclosure requirements of fair value measurements. The amendments remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosure and add disclosure requirements identified as relevant. This guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

In August 2018, accounting guidance was issued that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments remove disclosures that are no longer

Table of Contents

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

considered cost beneficial, clarify the specific requirements of disclosure and add disclosure requirements identified as relevant. This guidance is effective for annual and interim periods ending after December 15, 2020. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

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 August 2018, accounting guidance was issued that modifies the disclosure requirements of retirement benefit plans. The amendments remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosure and add disclosure requirement identified as relevant. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.

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 and early adoption is permitted. The Company does not expect that the adoption of this standard will 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 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.

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 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.

In March 2020, the U.S. federal government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the

~~COVID-19~~

outbreak which, among other things, contains numerous income tax provisions. While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s consolidated financial statements or related disclosures.

Table of Contents

Item 2:

Management’s Discussion and Analysis of Financial Condition and

~~Results of Operations~~

~~Business and Financial Overview~~

~~The Company has two operating segments: Waters~~

~~and TA~~

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

” and, together with HPLC, referred to as “LC”), mass spectrometry (“MS”) and precision chemistry consumable products and related services. TA products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Company’s products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and governmental 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.

~~Both the Company’s domestic and international operations have been and continue to be adversely affected by the ongoing global pandemic of a novel strain of coronavirus~~

~~(“COVID-19”)~~

~~and the resulting volatility and uncertainty it has caused 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 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.

~~To date, the~~

~~COVID-19~~

pandemic has not materially impacted our manufacturing facilities or those of the third parties to whom we outsource certain manufacturing processes, the distribution centers where our inventory is managed or the operations of our logistics and other service providers. We have also not seen material disruptions or delays in shipments of certain materials or components of our products.

At every stage of the pandemic, we have taken decisive and appropriate actions, including a mandatory remote work policy for all employees with the exception of those in manufacturing, distribution, and certain laboratory environments, as well as restrictions on

~~non-essential~~

travel and visitors into our facilities. We have engaged a medical advisor to guide our policy deployment, and we continue to take proactive measures to guard the health of our global employee base, and the safety of all customer interactions. We have implemented rigorous protocols to promote a safe work environment in all of our locations around the world and during the quarter we began implementation of the second phase of a multi-phase process for the safe return of employees to our physical workplaces as social distancing, governmental requirements and other protocols allow.

The vast majority of the markets we serve, most notably the pharmaceutical, biomedical research, food/environmental and clinical markets, have continued to operate at various levels, and we are working closely with these customers to facilitate their seamless operation. Over the last several years, we have executed on a digital workplace strategy focused on providing modern connectivity and collaboration tools to our employees. Our strategic technology investments have enabled us to swiftly meet remote working needs as the

~~COVID-19~~

situation has escalated and evolved. From a customer-facing perspective, we are leveraging digital demand generation activities, including virtual demos across all regions in which we operate, remote instrument installations, virtual sales seminars, online product training, and a rapid acceleration in

~~one-on-one~~

~~communications over emails, phone and video conferencing.~~

~~While we initially anticipated that the~~

~~COVID-19~~

pandemic would have the biggest impact on the Company’s financial results in the second quarter of 2020, and future quarters would improve as countries lifted their business restrictions, the new outbreaks of

~~COVID-19~~

~~in the U.S. and elsewhere have demonstrated that the~~

~~COVID-19~~

pandemic continues to be fluid with uncertainties and risks remaining across the global economy. The Company is taking a proactive approach to managing through this unpredictability and has implemented a series of cost reduction actions that include salary reductions, furloughs and reductions in

~~non-essential~~

spending and other working capital reductions in order to preserve liquidity and enhance financial flexibility. A significant portion of these cost reduction actions were completed at the end of July 2020, and the Company’s costs of sales and operating expenses are expected to gradually increase to more normal levels as we move through the remainder of 2020. These cost reductions reflect our core assumption that business conditions improve through the remainder of 2020 and into 2021; however, our plan will be adjusted accordingly depending on the pace of the recovery.

~~Table of Contents~~

~~The Company’s operating results are as follows for the three and nine months ended September 26, 2020 and September 28, 2019 (dollars in thousands, except per share data):~~

Three Months Ended

Nine Months Ended


September 26,
2020

September 28,
2019

% change

September 26,
2020

September 28,
2019

% change

Revenues:

Product sales
   $ 376,239 $ 370,573

2%

$ 965,342 $ 1,078,341

(10%
)
Service sales
   217,545 206,705

5%

613,365 611,961

—



Total net sales
   593,784 577,278

3%

1,578,707 1,690,302

(7%
)
Costs and operating expenses:

Cost of sales
   262,342 241,055

9%

686,120 711,632

(4%
)
Selling and administrative expenses
   135,430 126,036

7%

400,614 393,583

2%

Research and development expenses
   34,971 34,333

2%

101,115 105,883

(5%
)
Purchased intangibles amortization
   2,657 2,619

1%

7,900 7,164

10%

Litigation provision
   —   —

—

1,180 —

—



Operating income
   158,384 173,235

(9%
)
381,778 472,040

(19%
)
Operating income as a % of sales


26.7%

30.0%

24.2%

27.9%

Other expense
   (1,039 ) (496 )

109%

(2,149 ) (1,363 )

58%

Interest expense, net
   (6,908 ) (8,001 )

(14%
)
(25,966 ) (16,826 )

54%



Income before income taxes
   150,437 164,738

(9%
)
353,663 453,851

(22%
)
Provision for income taxes
   23,668 26,605

(11%
)
50,403 62,322

(19%
)


Net income
   $ 126,769 $ 138,133

(8%
)
$ 303,260 $ 391,529

(23%
)


Net income per diluted common share
   $ 2.03 $ 2.07

(2%
)
$ 4.86 $ 5.63

(14%
)

In the third quarter of 2020, the Company’s sales increased 3% as compared to the third quarter of 2019. This increase in sales can be attributed to the increased demand for the Company’s products and services as business conditions improved as the interruption in business activities caused by the

~~COVID-19~~

pandemic across the world in 2020 were somewhat alleviated as our customers began to resume laboratory and manufacturing operations. Foreign currency translation increased sales by 1% for the third quarter of 2020.

~~For the first nine months of 2020, sales decreased by 7% as compared to the first nine months of 2019, as the response to the~~

~~COVID-19~~

pandemic caused interruptions in business activities and uncertainties that resulted in our customers reducing purchases of our products and services. Foreign currency translation decreased sales by 1%

~~year-to-date~~

~~in 2020.~~

~~The Company’s~~

~~year-to-date~~

sales in 2020 have one less calendar day as compared to the prior year. The Company will have two more calendar days in the fourth quarter of 2020 as compared to the fourth quarter of 2019. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year. The Company’s acquisition of Andrew Alliance (as defined below) did not have a material impact on sales on either the quarter or

~~year-to-date~~

~~in 2020.~~

Instrument system sales decreased 1% and 15% for the third quarter and first nine months of 2020, respectively, as a result of weaker demand for our products by our customers due to interruption of business activities and the uncertainty caused by the

~~COVID-19~~

~~pandemic. Foreign currency translation in the third quarter was neutral and decreased instrument system sales by 1% for the first nine months of 2020.~~

Recurring revenues (combined sales of precision chemistry consumables and services) increased 6% and were flat for the third quarter and first nine months of 2020, respectively, also due to the interruption of business activities and the uncertainty caused by the

~~COVID-19~~

pandemic. Chemistry consumable sales increased 8% and were flat in the third quarter and first nine months of 2020, respectively, while service sales increased 5% and were flat in the third quarter and first nine months of 2020, respectively. In the third quarter, both chemistry consumable and service sales benefited from the increased demand for our products and services as our customers began to reopen laboratory and manufacturing operations. Recurring revenues were positively impacted by foreign currency translation, which increased sales by 1% in the third quarter; however, foreign currency translation negatively impacted sales by 1%

~~year-to-date~~

~~in 2020.~~

~~Table of Contents~~

In the third quarter of 2020, the Company’s sales in Europe increased 11% with foreign currency translation adding 6% to Europe’s sales growth. The Americas’ sales grew 2%, as a 5% sales growth in the U.S. was partially offset by a decline in sales in Americas Other. Asia’s sales declined by 1% as China’s 4% sales growth was offset by declines in Japan as well as the other geographies in Asia.

~~Year-to-date,~~

~~the sales declines were broad-based across the world and were due to the weaker demand and disruption of business activities caused by the~~

~~COVID-19~~

~~lockdowns, except in Europe where sales were flat as compared to the prior year. Foreign currency translation was neutral to Europe’s sales~~

~~year-to-date.~~

~~The Americas’ sales declined 7%~~

~~year-to-date~~

~~and Asia’s sales declined 11% with foreign currency translation negatively impacting sales by 1%.~~

~~The~~

~~year-to-date~~

sales decline in Asia was primarily driven by the 20% decrease in sales in China. Sales in China increased 4% in the third quarter of 2020, improving from the 32% decline experienced in the first half of 2020, as the

~~COVID-19~~

~~business restrictions in China were slowly lifted. Excluding China’s sales, the Company’s~~

~~year-to-date~~

~~sales declined 4% with foreign currency translation negatively impacting sales by 1%.~~

Sales to our pharmaceutical and industrial customers in the third quarter improved as compared to the first half of 2020, as the demand for our products and services increased as these customers began to resume laboratory and manufacturing operations after the

~~COVID-19~~

~~lockdowns. Sales to pharmaceutical customers increased 5% in the third quarter and decreased 5%~~

~~year-to-date,~~

~~as the decline was primarily driven by the disruption in business activities caused by~~

~~COVID-19,~~

~~and the effect of foreign currency translation increasing sales by 1% for the third quarter and decreasing sales by 1%~~

~~year-to-date.~~

~~Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 5% in the third quarter and declined 6%~~

~~year-to-date,~~

~~primarily due to lower demand caused by the~~

~~COVID-19~~

~~pandemic, with the effect of foreign currency translation increasing sales by 2% for the third quarter and being neutral~~

~~year-to-date.~~

~~In addition, TA’s sales declined 7% and 12% in the third quarter and first nine months of 2020, respectively.~~

Sales to academic and governmental customers declined by 8% and 17% in the third quarter and first nine months of 2020, respectively, as the demand for our products and services declined as the academic and governmental institutions adjusted their spending to mitigate the effects of the

~~COVID-19~~

~~pandemic. The most significant decline in academic and governmental sales in both the third quarter and~~

~~year-to-date~~

occurred in China where sales declined 32% and 42%, respectively, as the government mandated spending reductions. Foreign currency translation decreased academic and governmental sales by 1% for both the third quarter and first nine months of 2020. Sales to our academic and governmental 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.

Operating income decreased 9% and 19% for the third quarter and first nine months of 2020, respectively. The third quarter operating income decrease can be attributed to the change in sales mix, unfavorable manufacturing absorption and unfavorable foreign currency translation. The

~~year-to-date~~

~~decline in operating income can be attributed to the decline in sales volumes caused by the~~

~~COVID-19~~

~~pandemic, unfavorable manufacturing absorption and unfavorable foreign currency translation. Both the quarter and~~

~~year-to-date~~

~~operating income declines were somewhat mitigated by a series of cost reduction actions that included salary reductions, furloughs and reductions in~~

~~non-essential~~

~~spending that increased operating income by approximately $22 million in the third quarter and $81 million~~

~~year-to-date~~

versus our operating plan. 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 and exit costs. The Company’s plan was to reduce its expenses by approximately $100 million during 2020 to improve its financial position and liquidity to mitigate the impact of the decline in sales caused by

~~COVID-19.~~

~~The Company was able to realize approximately 85% of the cost action and restructuring savings~~

~~year-to-date~~

and the Company anticipates the remaining 15% of this savings plan will be achieved in the fourth quarter and the Company expects its spending to gradually return to more normal levels. This plan reflects our core assumption that business conditions improve throughout the remainder of 2020 and into 2021; however, this plan will be adjusted accordingly depending on the pace of recovery.

The Company generated $523 million and $451 million of net cash flows from operations in the first nine months of 2020 and 2019, respectively. This increase in operating cash flow was primarily a result of the $81 million reduction in expense from the cost actions implemented and working capital improvement during the third quarter of 2020.

~~Table of Contents~~

Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $125 million and $110 million in the first nine months of 2020 and 2019, respectively. 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. This acquisition is not expected to have a material effect on the Company’s sales and expenses. The cash flows from investing activities in the first nine months of 2020 also included $50 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $131 million on this facility through the end of the first nine months of 2020 and anticipates spending a total of $215 million to build and equip this new

~~state-of-the-art~~

~~manufacturing facility. Due to the uncertain business conditions caused by the~~

~~COVID-19~~

~~pandemic, in the second and third quarters of 2020 the Company temporarily slowed down the remaining construction and buildout of this facility.~~

~~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. During the first nine months of 2020 and 2019, the Company repurchased $167 million and $1.9 billion of the Company’s outstanding common stock, respectively, under authorized share repurchase programs. While the Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by the

~~COVID-19~~

~~pandemic.~~

Results of Operations

Business Overview

The Company has two operating segments: Waters

and TA

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

” and, together with HPLC, referred to as “LC”), mass spectrometry (“MS”) and precision chemistry consumable products and related services. TA products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Company’s products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and government customers. These customers use the Company’s products to detect, identify, monitor and measure the chemical, physical and biological composition of materials and to predict the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids in various industrial, consumer goods and healthcare products.

COVID-19

Pandemic

Both the Company’s domestic and international operations have been and continue to be affected by the ongoing global

COVID-19

pandemic that has led to volatility and uncertainty in the U.S. and international markets. The Company is actively managing its business to respond to the

COVID-19

impact; however, the Company cannot reasonably estimate the length or severity of the

COVID-19

pandemic, including the effect of the emergence of variants of the virus, or the related response, or the extent to which the disruption may materially impact the Company’s business, consolidated financial position, consolidated results of operations or consolidated cash flows in the future.

During the six months ended July 3, 2021, the

COVID-19

pandemic did not materially impact 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.

The Company has taken decisive and appropriate actions throughout the 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.

The

COVID-19

pandemic continues to be fluid with uncertainties and risks remaining 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 58% of these savings being realized by the end of the second quarter of 2020 and approximately 21% of the savings being realized in each of the third and fourth quarters 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 second half of 2021 from a normalization of these costs.

Table of Contents

Financial Overview

The Company’s operating results are as follows for the three and six months ended July 3, 2021 and June 27, 2020 (dollars in thousands, except per share data):


	Three Months Ended									Six Months Ended
	July 3, 2021			June 27, 2020			% change			July 3, 2021			June 27, 2020			% change
Revenues:
Product sales	$	440,955		$	314,920			40	%	$	822,977		$	589,103			40	%
Service sales		240,692			205,064			17	%		467,215			395,820			18	%

Total net sales		681,647			519,984			31	%		1,290,192			984,923			31	%
Costs and operating expenses:
Cost of sales		280,254			213,134			31	%		534,401			423,778			26	%
Selling and administrative expenses		158,213			117,449			35	%		301,409			265,184			14	%
Research and development expenses		44,949			31,155			44	%		83,041			66,144			26	%
Purchased intangibles amortization		1,809			2,618			(31	%)		3,649			5,243			(30	%)
Litigation provision		—			514			(100	%)		—			—			—
Acquired in-process research and development		—			—			—			—			1,180			(100	%)

Operating income		196,422			155,114			27	%		367,692			223,394			65	%
Operating income as a % of sales		28.8	%		29.8	%					28.5	%		22.7	%

Other income (expense)		9,321			(736	)		*	*		18,680			(1,110	)		*	*
Interest expense, net		(8,329	)		(9,015	)		(8	%)		(15,174	)		(19,058	)		(20	%)

Income before income taxes		197,414			145,363			36	%		371,198			203,226			83	%
Provision for income taxes		30,122			22,434			34	%		55,779			26,735			109	%

Net income	$	167,292		$	122,929			36	%	$	315,419		$	176,491			79	%


Net income per diluted common share	$	2.69		$	1.98			36	%	$	5.05		$	2.83			78	%

**	Percentage not meaningful

Despite the various ongoing challenges caused by the

COVID-19

pandemic, the Company’s net sales increased 31% in both the second quarter and first half of 2021 as compared to the second quarter and first half of 2020. The sales growth in the 2021 periods was driven by strong sales growth across all major geographies, end markets, and product categories. Overall, sales benefited 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, particularly in China where sales grew 42% and 68% in the second quarter and first half of 2021, respectively. Foreign currency translation increased total sales by 4% in both the second quarter and first half of 2021. In addition, the Company’s first half of 2021 included five more calendar days than the first half of 2020.

Instrument system sales increased 43% and 46% for the second quarter and first half 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 was broad-based, particularly in LC,

LC-MS

and TA instrument system sales. Foreign currency translation increased instrument system sales by 3% and 4% in the second quarter and first half of 2021, respectively. Recurring revenues (combined sales of precision chemistry consumables and services) increased 22% and 21% for the second quarter and first half of 2021, respectively, with foreign currency translation increasing sales by 4% in both the quarter and first half of the year. In the first half of 2021, recurring revenues benefited from five additional calendar days as compared to the first half of 2020.

Geographically, the Company’s sales growth in the second quarter and first half of 2021 was broad-based across all major regions. During the second quarter of 2021, sales increased 30% in Asia, 29% in the Americas, and 36% in Europe, with the effect of foreign currency translation increasing sales in those regions by 2%, 1%, and 11%, respectively. During the first half of 2021, sales increased 36% in Asia, 22% in the Americas, and 36% in Europe, with the effect of foreign currency translation increasing sales in those regions by 2%, 1%, and 11%, respectively.

In the second quarter and first half of 2021, China sales increased 42% and 68%, respectively, driven by stronger demand due to customers resuming laboratory and manufacturing operations as well as the

pent-up

demand caused by the 32% decline in China’s sales in the first half of 2020 when the negative impact of the pandemic lockdowns was occurring. Foreign currency translation increased China sales growth by 5% and 6% in the quarter and first half of 2021, respectively. Sales increased 26% in the U.S., 9% in Japan and 47% in India in the quarter. Foreign currency translation decreased sales growth by 2% in Japan and 11% in India in the second quarter of 2021.

Table of Contents

During the second quarter of 2021, sales to pharmaceutical customers increased 34%, driven by growth in all regions, including 48% in China, 49% in India, and 33% in Europe 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, which include material characterization, food, environmental and fine chemical markets, increased 33%, with the effect of foreign currency translation increasing sales growth by 5%. During the second quarter of 2021, combined sales to academic and government customers increased 10%, as customers continued to ramp up their spending in the first half 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 3%. 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 half of 2021, sales to pharmaceutical customers increased 33%, 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 4%. Combined sales to industrial customers increased 31%, with the effect of foreign currency translation increasing sales growth by 5%. During the first half of 2021, combined sales to academic and government customers increased 20%, as customers ramped up their spending in the first half 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 3%.

Operating income increased 27% and 65% for the second quarter and first half 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 $54 million in 2020. In addition, operating income in the second quarter and first half of 2020 also included $3 million and $21 million, respectively, of severance-related costs in connection with a reduction in workforce and lease termination costs.

The Company generated $361 million and $350 million of net cash flows from operations in the first half 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 $54 million benefit from the reduction in expenses from the COVID-19 pandemic cost actions implemented and working capital improvement during the second quarter of 2020.

Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $77 million and $97 million in the first half of 2021 and 2020, respectively. The cash flows from investing activities in the first half of 2021 also included $28 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $182 million on this facility through the end of the first half of 2021 and anticipates spending a total of $215 million to build and equip this new

state-of-the-art

manufacturing facility.

In March 2021, the Company issued senior unsecured notes with an aggregate principal amount of $500 million. The Series N $100 million notes have a five-year term and a fixed interest rate of 1.68%. The Series O $400 million notes have a 10-year term and a fixed interest rate of 2.25%.

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. During the first half of 2021 and 2020, the Company repurchased $339 million and $167 million of the Company’s outstanding common stock, respectively, under authorized share repurchase programs. While the Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023.

Table of Contents

Results of Operations

Sales by Geography

Geographic sales information is presented below for the three and ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ (dollars in thousands):


	Three Months Ended							Nine Months Ended							Three Months Ended							Six Months Ended
	September 26, 2020		September 28, 2019		% change			September 26, 2020		September 28, 2019		% change			July 3, 2021		June 27, 2020		% change			July 3, 2021		June 27, 2020		% change
Net Sales:
Asia:
China	$	115,666	$	111,657		4%		$	252,713	$	314,544		(20%	)	$	127,225	$	89,816		42	%	$	230,144	$	137,047		68	%
Japan		44,779		46,840		(4%	)		131,098		136,302		(4%	)		45,113		41,230		9	%		95,409		86,319		11	%
Asia Other		75,737		79,278		(4%	)		219,660		226,276		(3%	)		97,609		77,163		26	%		173,936		143,923		21	%

Total Asia		236,182		237,775		(1%	)		603,471		677,122		(11%	)		269,947		208,209		30	%		499,489		367,289		36	%
Americas:
United States		172,267		164,164		5%			465,093		487,261		(5%	)		186,915		148,928		26	%		349,348		292,826		19	%
Americas Other		27,180		32,294		(16%	)		81,312		97,840		(17%	)		37,979		25,854		47	%		72,903		54,132		35	%

Total Americas		199,447		196,458		2%			546,405		585,101		(7%	)		224,894		174,782		29	%		422,251		346,958		22	%
Europe		158,155		143,045		11%			428,831		428,079		—			186,806		136,993		36	%		368,452		270,676		36	%

Total net sales	$	593,784	$	577,278		3%		$	1,578,707	$	1,690,302		(7%	)	$	681,647	$	519,984		31	%	$	1,290,192	$	984,923		31	%

In the ~~third~~second quarter and first half of ~~2020, the Company’s~~2021, sales ~~increased 3%~~benefited from stronger demand for our products and services across all major geographies and customer classes as ~~compared~~a result of our customers continuing to ~~the third quarter of 2019. This increase in sales in the third quarter can be attributed to an improvement in business conditions~~resume laboratory and manufacturing operations, as well as the ~~interruption in business activities~~

pent-up

demand from 2020 caused by the

~~COVID-19~~

pandemic, ~~improved as customers began to return from lockdowns. In the third quarter of 2020, the Company’s sales increased 5% in the U.S., 4%~~particularly in China, where sales grew 42% and ~~11%~~68%, respectively. The sales strength was broad-based, driven by continued growth in ~~Europe. Foreign currency translation added 6% to Europe’s~~recurring revenues and the strong sales growth in instruments, particularly in LC and

LC-MS

instrument system sales which grew double-digits across all major geographies. Recurring revenues sales growth was favorably impacted by the ~~third quarter of 2020. The Company’s sales decreased 4%~~five additional calendar days in ~~both Asia Other and Japan and 16% in Americas Other as the impact of the~~

~~COVID-19~~

~~pandemic continued affecting the business activities in these areas of the world.~~

~~For~~ the first ~~nine months~~half of ~~2020, sales decreased 7%~~2021 as compared to the first ~~nine months~~half of ~~2019, as the response to the~~

~~COVID-19~~

~~year-to-date.~~

~~The~~

~~year-to-date~~

~~sales declines occurred in all geographies and were a result of the weaker demand and disruption of business activities caused by the~~

~~COVID-19~~

~~lockdowns, except in Europe where sales were flat~~

~~year-to-date~~

~~as compared to the prior year. The most significant decline in sales~~

~~year-to-date~~

~~occurred in China, where sales declined 20%, as well as declines of 5% in the U.S., 4% in Japan and 17% in Americas Other.~~

2020.

~~Table of Contents~~

Sales by Trade Class

Net sales by customer class are presented below for the three and ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ (dollars in thousands):


	Three Months Ended						Nine Months Ended						Three Months Ended							Six Months Ended
	September 26, 2020		September 28, 2019		% change		September 26, 2020		September 28, 2019		% change		July 3, 2021		June 27, 2020		% change			July 3, 2021		June 27, 2020		% change
Pharmaceutical	$	343,001	$	328,227		5%	$	926,582	$	972,884		(5%)	$	416,705	$	311,018		34	%	$	776,853	$	583,581		33	%
Industrial		179,128		171,352		5%		474,592		502,679		(6%)		202,579		152,110		33	%		385,852		295,464		31	%
Academic and governmental		71,655		77,699		(8%)		177,533		214,739		(17%)
Academic and government														62,363		56,856		10	%		127,487		105,878		20	%

Total net sales	$	593,784	$	577,278		3%	$	1,578,707	$	1,690,302		(7%)	$	681,647	$	519,984		31	%	$	1,290,192	$	984,923		31	%

~~Sales~~

In the second quarter and first half of 2021, the increase in sales to pharmaceutical customers ~~increased 5% in the third quarter as our customer demand improved during the quarter as customers began~~was broad-based with double-digit sales growth across all major geographies, primarily due to ~~return from the lockdowns.~~

~~Year-to-date,~~

~~sales declined 5% and can be attributed to the disruption in business activities caused by~~

~~COVID-19,~~

~~despite increased~~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 ~~who are~~ involved

with COVID-19

diagnostic

testing and the increase in the development of new drugs and therapies. Foreign currency translation increased sales to pharmaceutical customers by 1%3% in the ~~third~~second quarter and 4% in the first half of ~~2020 and decreased sales by 1%~~

~~year-to-date.~~

2021. Sales to industrial and academic and government

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customers increased double-digits in both the ~~third~~second quarter ~~grew 5% as customer demand increased as~~and first half of 2021, primarily due to customers ~~began~~continuing to resume laboratory and manufacturing operations asduring the

~~COVID-19~~

~~lockdowns were lifted. Sales~~ year. Foreign currency translation increased sales to industrial customers

~~year-to-date~~

~~declined 6%. Sales to industrial customers were significantly impacted~~ by 5% in both the ~~TA sales declines of 7% and 12% for the third~~second quarter and first ~~nine months~~half of ~~2020, respectively. The decreases in~~2021, and increased sales to academic and ~~governmental~~government customers ~~were broad-based across all product classes as academic~~by 3% in both the second quarter and ~~governmental customers adjusted their spending to mitigate the effects~~first half of ~~the~~

~~COVID-19~~2021.

~~pandemic.~~

Waters Products and Services Net Sales

Net sales for Waters products and services were as follows for the three and ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ (dollars in thousands):


	Three Months Ended										Three Months Ended
	September 26, 2020		% of Total		September 28, 2019		% of Total		% change		July 3, 2021		% of Total			June 27, 2020		% of Total			% change
Waters instrument systems	$	225,790		42%	$	223,859		44%		1%	$	261,363		43	%	$	181,399		39	%		44	%
Chemistry consumables		108,175		21%		100,256		19%		8%		126,459		21	%		95,105		20	%		33	%

Total Waters product sales		333,965		63%		324,115		63%		3%		387,822		64	%		276,504		59	%		40	%
Waters service		199,501		37%		188,031		37%		6%		219,502		36	%		189,205		41	%		16	%

Total Waters net sales	$	533,466		100%	$	512,146		100%		4%	$	607,324		100	%	$	465,709		100	%		30	%


	Six Months Ended
	July 3, 2021		% of Total			June 27, 2020			% of Total			% change
Waters instrument systems	$	477,435		42	%	$	324,228			37	%		47	%
Chemistry consumables		245,433		21	%		192,350			22	%		28	%

Total Waters product sales		722,868		63	%		516,578	��		59	%		40	%
Waters service		426,334		37	%		363,342			41	%		17	%

Total Waters net sales	$	1,149,202		100	%	$	879,920			100	%		31	%

~~Table of Contents~~

Nine Months Ended


September 26, 2020

% of
Total

September 28, 2019

% of
Total

% change

Waters instrument systems
   $ 550,018

39%

   $ 647,248

43%



(15%)

Chemistry consumables
   300,525

21%

   299,801

20%



—











Total Waters product sales
   850,543

60%

   947,049

63%



(10%)

Waters service
   562,843

40%

   556,128

37%



1%











Total Waters net sales
   $ 1,413,386

100%

   $ 1,503,177

100%



(6%)

Waters products and service sales increased 30% and 31% in the second quarter and first half of 2021, respectively, with the effect of foreign currency translation increasing Waters sales by 3% and 4% ~~for~~in the second quarter and first half of 2021, respectively. Chemistry consumables sales increased double-digits in both the quarter and ~~declined 6%~~first half of the year driven by the strong demand in China, where sales grew 45%

~~year-to-date.~~year-to-date,

in addition to increased demand in the U.S., Europe, Japan, 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, particularly in China and Europe. Waters recurring revenues also benefited by five additional calendar days in the first half of the year. Waters instrument system sales (LC and MS technology-based) increased 1% in ~~the quarter~~all major geographical regions primarily due to higher sales as ~~the weaker~~a result of stronger demand for our products and services byas our customers ~~due~~continued to resume laboratory and manufacturing operations throughout the ~~disruption~~world.

In the second quarter of 2021, Waters sales growth was broad-based and ~~uncertainty caused by~~

~~the COVID-19 pandemic~~

~~were partially alleviated as customers began to return to their workplaces as the lockdowns were lifted. Precision chemistry consumables sales~~ increased 34% in Europe, 27% in the ~~quarter by 8%~~Americas and ~~were driven by the increase~~30% in ~~demand in all geographies~~Asia, with ~~Asia’s chemistry~~ sales ~~increasing 17% for the quarter. Chemistry sales~~

~~year-to-date~~

were flat. Waters service sales increased 6% and 1% in the third quarter and first nine months of 2020, respectively, on an increase in service demand billings as customers began to return to work after business restrictions were lifted. Waters recurring revenues were also negatively impacted by one less calendar day in the first nine months of 2020 and the negative impact of foreign currency translation, which lowered sales by 1%

~~year-to-date~~

~~and increased sales by 1% in the third quarter of 2020.~~

~~In the third quarter of 2020, Waters sales increased 13% in Europe, 5% in the U.S. and 2%~~ in China ~~as customer demand improved.~~growing 44%. Foreign currency translation increased ~~Europe’s sales growth by 5%. All other geographies’ sales declined during the quarter.~~

~~Year-to-date,~~

Waters sales by 11% and 4% in Europe ~~increased 2% while all other geographies’ sales declined~~

~~year-to-date~~

~~with~~and China, respectively, and 1% in both the ~~most significant decline in sales occurring in China, which was down 21%~~

~~year-to-date.~~Americas and Asia.

~~Year-to-date~~

~~the impact~~

Table of ~~foreign currency on Europe’s sales were neutral.~~Contents

TA Product and Services Net Sales

Net sales for TA products and services were as follows for the three and ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~ (dollars in thousands):


	Three Months Ended											Three Months Ended
	September 26, 2020		% of Total		September 28, 2019		% of Total		% change			July 3, 2021		% of Total			June 27, 2020		% of Total			% change
TA instrument systems	$	42,274		70%	$	46,458		71%		(9%	)	$	53,133		71	%	$	38,416		71	%		38	%
TA service		18,044		30%		18,674		29%		(3%	)		21,190		29	%		15,859		29	%		34	%

Total TA net sales	$	60,318		100%	$	65,132		100%		(7%	)	$	74,323		100	%	$	54,275		100	%		37	%


	Nine Months Ended											Six Months Ended
	September 26, 2020		% of Total		September 28, 2019		% of Total		% change			July 3, 2021		% of Total			June 27, 2020		% of Total			% change
TA instrument systems	$	114,799		69%	$	131,292		70%		(13%	)	$	100,109		71	%	$	72,525		69	%		38	%
TA service		50,522		31%		55,833		30%		(10%	)		40,881		29	%		32,478		31	%		26	%

Total TA net sales	$	165,321		100%	$	187,125		100%		(12%	)	$	140,990		100	%	$	105,003		100	%		34	%

~~The decline in~~

TA instrument system and service sales growth in the ~~third~~second quarter and first ~~nine months~~half of ~~2020~~2021 was broad-based across all major geographies increasing 37% and 34%, respectively, and was primarily driven by stronger demand as a result of our customers continuing to resume laboratory and manufacturing operations.

In the second quarter and first half 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 ~~lower customer demand due~~customers continuing to resume their operations after the restrictions caused

by COVID-19 during

~~pandemic.~~2020, as well as sales of service plans and billings to a higher installed base of customers. The effect of foreign currency translation ~~had a minimal impact on both~~increased TA’s sales by 5% and 4% in the ~~third~~second quarter and ~~the~~ first ~~nine months~~half of ~~2020.~~

~~TA sales declined in all major regions in the third quarter and~~

~~year-to-date,~~

~~except for the U.S. and China where sales grew 3% and 16%, during the third quarter of 2020,~~2021, respectively.

~~Table of Contents~~

Cost of Sales

Cost of sales for the ~~third~~second quarter and first half of ~~2020~~2021 increased 9%31% and 26%, respectively, primarily due to the increase in sales ~~volume, change~~volumes during the year, as well as the restoration in ~~sales mix, unfavorable manufacturing absorption~~2021 of expenses that had been reduced as a result of the COVID-19 pandemic that consisted of salary reductions, furloughs and ~~unfavorable foreign currency exchange. Cost of sales~~reductions

~~year-to-date~~

~~decreased 4% on the lower sales volume, change~~ in ~~sales mix, unfavorable manufacturing absorption and unfavorable foreign currency exchange.~~ 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 ~~be neutral to~~increase gross profit slightly for the remainder of ~~2020.~~2021. To date, the Company has not had significant issues with its supply chain; however, the prolonged impact

COVID-19 on

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 7%35% and 2%14% for the ~~third~~second quarter and first ~~nine months~~half of ~~2020,~~2021, respectively. The increase in selling and administrative expenses in these periods can be attributed to the salary merit and incentive compensation increases ~~along with~~compared to 2020 which was impacted by the ~~severance-related costs in connection with a~~$33 million reduction in ~~workforce~~expenses from salary reductions, furloughs and ~~lease-termination and exit costs. Severance and lease termination and exit costs were $6 million and $27 million for the third quarter and~~reductions

~~year-to-date~~

in ~~2020, respectively. Offsetting these increases in selling and administrative expenses were $16 million and $54 million of savings, in the third quarter and~~

~~year-to-date,~~

~~respectively, which includes~~

~~COVID-19~~

~~and restructuring cost saving actions that reduced planned salaries and~~

non-essential

spending. In addition, the effect of foreign currency translation increased selling and administrative expenses by 2%3% for both the ~~third~~second quarter and ~~was neutral~~first half of 2021.

~~year-to-date.~~

As a percentage of net sales, selling and administrative expenses were ~~22.8%~~23.2% and ~~25.4%~~23.4% for the ~~third quarter of 2020 and~~

~~year-to-date,~~

~~respectively, and 22.3% and 23.7% for the third~~second quarter and first ~~nine months~~half of ~~2019,~~2021, and 22.6% and 26.9% for the second quarter and first half of 2020, respectively.

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Research and Development Expenses

Research and development expenses increased 2%44% and 26% in the ~~third~~second quarter and ~~decreased 5%~~

~~year-to-date~~

first half of 2021, respectively. The increase in ~~2020. The research and development~~expense in these periods was impacted by the $9 million reduction in expenses ~~for the third quarter and~~

~~year-to-date~~

~~include $5 million and $14 million, respectively, of cost action savings~~ from salary reductions, furloughs and reductions

non-essential spending

~~spending.~~in 2020. The

~~year-to-date~~

impact of foreign currency exchange was ~~neutral.~~neutral in the second quarter of 2021 and decreased expenses by approximately 1% in the first half of 2021.

Other Income (Expense), net

In the second quarter 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 half 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

The decrease in net interest expense in the ~~third~~second quarter and first half of ~~2020 can be attributed~~2021 was primarily attributable to ~~lower~~ interest ~~rates as compared to the prior year. The increase in net interest expense~~

~~year-to-date~~earned on higher cash, cash equivalents and investment balances.

~~in 2020 can be attributed to higher debt balances in 2020 compared to 2019.~~

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 ~~September 26, 2020.~~July 3, 2021. The Company ~~has~~had a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual ~~milestones, which~~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 ~~Company expects to continue to meet.~~period April 1, 2021 through March 31, 2026. The effect of applying the ~~contractual~~concessionary income tax ~~rate~~rates rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the ~~nine~~first six months of 2021 and 2020 ~~and 2019~~ by ~~$12~~$9 million and ~~$15~~$7 million, respectively, and increased the Company’s net income per diluted share by ~~$0.20~~$0.14 and ~~$0.21,~~$0.11, respectively.

The Company’s effective tax rate for the ~~third~~second quarter of 2021 and 2020 was 15.3% and ~~2019 was 15.7% and 16.1%~~15.4%, respectively. The decrease in the effective income tax rate can be attributed to 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~~six months of 2021 and 2020 was 15.0% and ~~2019 was 14.3% and 13.7%~~13.2%, respectively. The effective tax rate for the first ~~nine~~six months of ~~September 26,~~July 3, 2021 includes a $4 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 six months of July 3, 2021. The effective tax rate for the first six months of June 27, 2020 includes a $6$5 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 first~~

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Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows (in thousands):


	Nine Months Ended						Six Months Ended
	September 26, 2020			September 28, 2019			July 3, 2021			June 27, 2020
Net income	$	303,260		$	391,529		$	315,419		$	176,491
Depreciation and amortization		91,091			80,319			64,743			60,203
Stock-based compensation		27,715			28,917			15,596			18,122
Deferred income taxes		1,089			1,817			6,107			(777	)
Change in accounts receivable		96,955			57,897			18,985			86,978
Change in inventories		(8,139	)		(83,973	)		(50,873	)		(27,089	)
Change in accounts payable and other current liabilities		46,721			(493	)		(35,328	)		34,714
Change in deferred revenue and customer advances		32,053			34,926			91,631			37,558
Effect of the 2017 Tax Cuts & Jobs Act		—			(3,229	)
Other changes		(67,720	)		(56,518	)		(64,836	)		(35,754	)

Net cash provided by operating activities		523,025			451,192			361,444			350,446
Net cash (used in) provided by investing activities		(226,561	)		825,441
Net cash used in investing activities								(281,106	)		(192,335	)
Net cash used in financing activities		(267,968	)		(1,661,541	)		(48,191	)		(159,366	)
Effect of exchange rate changes on cash and cash equivalents		10,723			(6,723	)		(8,786	)		4,576

Increase (decrease) in cash and cash equivalents	$	39,219		$	(391,631	)
Increase in cash and cash equivalents							$	23,361		$	3,321

Cash Flow from Operating Activities

Net cash provided by operating activities was ~~$523~~$361 million and ~~$451~~$350 million during the ~~nine~~first six months ~~ended September 26,~~of 2021 and 2020, ~~and September 28, 2019,~~ respectively. This increase in operating cash flow was primarily a result of higher sales volumes in the ~~$54 million reduction in expense from~~first six months of 2021 compared to the ~~cost actions and working capital reductions implemented in~~first six 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 7673 days at ~~September 26, 2020~~July 3, 2021 as compared to 8087 days at ~~September 28, 2019.~~June 27, 2020.

~~The changes in inventory were primarily attributable to the reduction in the inventory build plan to adjust inventory levels for lower anticipated sales volume due to the~~

~~COVID-19~~

~~pandemic.~~

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 half of 2021 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 ~~$227~~$281 million and $192 million in the ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020, ~~compared to net cash provided by investing activities that totaled $825 million in the nine months ended September 28, 2019.~~respectively. Additions to fixed assets and capitalized software were ~~$125~~$77 million and ~~$110~~$97 million in the ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020, ~~and September 28, 2019,~~ respectively. In February 2018, the Company’s Board of Directors approved expanding its precision chemistry consumable manufacturing operations in 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 ~~$50~~$31 million of costs associated with the construction of this facility during the ~~nine~~six months ended ~~September 26, 2020.~~July 3, 2021. The Company has incurred ~~$131~~$182 million on this facility through the end of the ~~third~~second quarter of ~~2020. Due to the uncertain business conditions caused by the~~

~~COVID-19~~

~~pandemic, the Company temporarily slowed down the completion of the remaining construction and buildout of this facility.~~2021.

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During the ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020, ~~and September 28, 2019,~~ the Company purchased ~~$22~~$215 million and ~~$36~~$17 million of investments, respectively, while $2$18 million and ~~$978~~$2 million of investments matured, respectively, and were used for financing activities described below.

OnIn January ~~15,~~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

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~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020, ~~and September 28, 2019,~~ the Company’s net debt borrowings increased by ~~$110~~$250 million and ~~$210~~$15 million, respectively. As of ~~September 26, 2020,~~July 3, 2021, the Company had a total of $1.6 billion in outstanding debt, which consisted of ~~$960 million~~$1.3 billion in outstanding senior unsecured notes and ~~$615~~$300 million borrowed under a term loan under the credit agreement dated November 2017 (“2017 Credit Agreement”). As of ~~September 26, 2020,~~July 3, 2021, the Company had a total amount available to borrow under the 2017 Credit Agreement of ~~$1.2~~$1.5 billion after outstanding letters of credit. As of ~~September 26, 2020,~~July 3, 2021, the Company was in compliance with all debt covenants.

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 six months of 2021, $70 million of the Company’s interest rate cross-currency swaps had matured and resulted in total payments of $4 million upon settlement. As of July 3, 2021, the Company had a total of $490 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 ~~first half of~~six months ended July 3, 2021 and June 27, 2020, ~~and 2019,~~ the Company repurchased ~~$167~~$339 million and ~~$1.9 billion,~~$167 million, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased ~~$10~~$8 million and $8$9 million of common stock related to the vesting of restricted stock units during both the ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020, respectively. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023.

The Company had $5 million of treasury stock purchases that were accrued and ~~September 28, 2019, respectively.~~

unsettled at July 3, 2021. These transactions were settled in July 2021, during the Company’s third quarter. 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 June 27, 2020.

The Company received ~~$28~~$45 million and ~~$34~~$15 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~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020, ~~and September 28, 2019,~~ respectively.

The Company had cash, ~~and~~ cash equivalents and investments of ~~$397~~$664 million as of ~~September 26, 2020.~~July 3, 2021. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with ~~$359~~$353 million held by foreign subsidiaries at ~~September 26, 2020,~~July 3, 2021, of which ~~$262~~$267 million was held in currencies other than U.S. dollars. While the Company believes it has sufficient levels of cash flow and access to its existing cash and cash equivalents, as well as the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, to fund operations and capital expenditures, service debt interest, finance potential acquisitions and continue the authorized stock repurchase program in the U.S., we have temporarily suspended our share repurchases due to the uncertain business conditions caused by the

~~COVID-19~~

~~pandemic.~~

Management believes, ~~despite the impact of~~

~~COVID-19~~

~~on our business,~~ 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, ~~2019,~~2020, as filed with the SEC on February ~~25, 2020.~~24, 2021. The Company reviewed its contractual obligations and commercial commitments as of ~~September 26, 2020~~July 3, 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.~~10-K,

with the exception of the recently issued senior unsecured notes as described in Note 6, “Debt.”

Table of Contents

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 ~~2020,~~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 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, ~~2019,~~2020, as filed with the SEC on February ~~25, 2020,~~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~~six months ended ~~September 26, 2020.~~July 3, 2021. The Company did not make any changes in those policies during the ~~nine~~six months ended ~~September 26, 2020.~~July 3, 2021.

New Accounting Pronouncements

Please refer to Note ~~14,~~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

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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, 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 pandemic, increased risks of cyber attacks resulting from our temporary remote working model, disruptions in our manufacturing capabilities or to our supply chain, 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 ~~U.K. voting to~~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 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.

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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, ~~2019,~~2020, as filed with the SEC on February ~~25, 2020.~~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 ~~September 26, 2020,~~July 3, 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 ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019, $359~~2020, $353 million out of ~~$397~~$664 million and ~~$249~~$364 million out of ~~$337~~$443 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, ~~$262~~$267 million out of ~~$397~~$664 million and ~~$176~~$254 million out of ~~$337~~$443 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019,~~2020, respectively. As of ~~September 26, 2020,~~July 3, 2021, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.

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 ~~September 26, 2020~~July 3, 2021 would decrease by approximately ~~$18~~$25 million, of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders’ ~~(deficit)~~ equity.

There have been no other material changes in the Company’s market risk during the ~~nine~~six months ended ~~September 26, 2020.~~July 3, 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, ~~2019,~~2020, as filed with the SEC on February ~~25, 2020.~~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 ~~September 26, 2020~~July 3, 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 ~~September 26, 2020~~July 3, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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 ~~September 26, 2020~~July 3, 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, ~~2019,~~2020, as filed with the SEC on February ~~25, 2020.~~24, 2021.

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, ~~2019,~~2020, as filed with the SEC on February ~~25, 2020.~~24, 2021. The Company reviewed its risk factors as of ~~September 26, 2020~~July 3, 2021 and determined that there were no material changes from the ones set forth in the Form

~~10-K,~~10-K.

~~other than those included below.~~ Note, however, the discussion 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 also may materially adversely affect the Company’s business, financial condition and operating results.

~~The Company’s business has been and may continue to be negatively affected by outbreaks of disease, such as epidemics or pandemics, including the ongoing~~

~~COVID-19~~

~~pandemic~~

Outbreaks of disease, such as epidemics or pandemics, have and could continue to negatively affect the Company’s business. Both the Company’s domestic and international operations have been and continue to be adversely affected by the ongoing global

~~COVID-19~~

~~pandemic and the resulting volatility and uncertainty it has caused in the U.S. and international markets. In March 2020, the World Health Organization declared~~

~~COVID-19~~

~~a pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, President Trump announced a National Emergency relating to the disease. Since then,~~

~~COVID-19~~

~~has continued to spread throughout the U.S. and globally. The~~

~~COVID-19~~

~~pandemic. Many countries, including the U.S., have implemented measures such as quarantine,~~

~~shelter-in-place,~~

curfew and similar isolation measures, including government orders and other restrictions on the conduct of business operations. Such measures have had and are expected to continue to have adverse impacts on the U.S. and foreign economies of uncertain severity and duration and have had and may continue to have a negative impact on the Company’s operations, including the Company’s sales, supply chain and cash flow. Certain jurisdictions have experienced increased numbers of

~~COVID-19~~

~~infections following the~~

~~re-openings~~

of their economies and easing of restrictions, which, in some cases, has required closings of certain business activity and the imposition of other restrictions in response. It is unclear whether the increases in the number of infections will continue and amplify or whether any

~~so-called~~

~~“second waves” of~~

~~COVID-19~~

infections will be experienced in the United States or elsewhere and, if so, what the impact of that would be on human health and safety, the economy and our business. Additionally, the widespread pandemic has caused and is expected to continue to cause significant disruption of global financial markets, which may reduce the Company’s ability to access capital.

~~The~~

~~COVID-19~~

pandemic also has the potential to significantly impact our supply chain if our manufacturing facilities or those of third parties to whom we outsource certain manufacturing processes, the distribution centers where our inventory is managed or the operations of our logistics and other service providers are disrupted, temporarily closed or experience worker shortages. We may also see disruptions or delays in shipments of certain materials or components of our products.

~~As a result of the ongoing~~

~~COVID-19~~

pandemic, the Company has transitioned the majority of its workforce to a temporary remote working model, which may result in the Company experiencing lower workforce efficiency and productivity, which in turn may adversely affect the Company’s business, results of operations and financial condition. As company employees work from home and access the Company’s system remotely, the Company may be subject to heightened security risks, including the risks of cyber attacks. Additionally, if any of the Company’s key management employees are unable to perform their duties for a period of time, including as the result of illness, the Company’s business, results of operations and financial condition could be adversely affected.

~~Table of Contents~~

~~The Company cannot reasonably estimate the length or severity of the~~

~~COVID-19~~

~~pandemic or the related response, or the extent to which the disruption may continue to impact the Company’s business, financial position, results of operations and cash flows. Ultimately, the~~

~~COVID-19~~

~~pandemic could have a material adverse impact on the Company’s business, financial positions, results of operations and cash flows.~~

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 ~~September 26, 2020~~July 3, 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)

June 28, 2020 to July 25, 2020
   —      $ —      —      $ 1,524,905
July 26, 2020 to August 22, 2020
   —      $ —      —      $ 1,524,905
August 23, 2020 to September 26, 2020
   —      $ —      —      $ 1,524,905





Total
   —      $ —      —      $ 1,524,905


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)
April 4, 2021 to May 1, 2021		188	$	301.59		188	$	1,295,113
May 2, 2021 to May 29, 2021		153	$	314.28		153	$	1,247,189
May 30, 2021 to July 3, 2021		183	$	334.37		183	$	1,185,905

Total		524	$	316.76		524	$	1,185,905

(1)	The Company repurchased ~~less~~fewer than one 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 ~~September 26, 2020.~~July 3, 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 ~~new~~ program replaced the remaining amounts available under the

pre-existing

authorization. ~~During the second quarter of~~In December 2020, the ~~Company has temporarily suspended its~~Company’s Board of Directors authorized the extension of the share ~~repurchases due to the uncertain business conditions caused by the~~

~~COVID-19~~

~~pandemic.~~repurchase program through January 21, 2023.

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Item 6:

Exhibits


Exhibit Number		Description of Document

10.1		~~President~~Employment Offer Letter, dated April 16, 2021, between Waters Corporation and ~~Chief Executive Employment Agreement~~Amol Chaubal (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended ~~June 27, 2020~~April 3, 2021 (File No. ~~001-14010)~~ 001-140010)).

10.2		Change of ~~Control/Severance~~Control Agreement, dated ~~July 14, 2020~~April 16, 2021, between Waters Corporation and ~~Udit Batra~~Amol Chaubal (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended ~~June 27, 2020~~April 3, 2021 (File No. ~~001-14010)~~001-140010)).

10.3		Transition and Consulting Agreement, dated April 16, 2021, between Waters Corporation and Michael C. Harrington (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 3, 2021 (File No. 001-140010)).

10.4		Transition and Consulting Agreement, dated April 19, 2021, between Waters Corporation and Ian S. King (incorporated by reference to Exhibit 10.25 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 3, 2021 (File No. 001-140010)).

10.5		Letter Agreement, dated April 18, 2021, between Waters Corporation and Jonathan M. Pratt (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 3, 2021 (File No. 001-140010)).

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 ~~September 26, 2020,~~July 3, 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).

(*)

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

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SIGNATURES

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

ATERS

ORPORATION

W~~ATERS~~ C~~ORPORATION~~

~~/s/ Sherry L. Buck~~

~~Sherry L. Buck~~

/s/ Amol Chaubal

Amol Chaubal

Senior Vice President and

Chief Financial Officer

(Principal Financial Officer)

(Principal Accounting Officer)

Date: ~~October 28, 2020~~August 5, 2021

4644


Delaware		13-3668640
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


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.


Large accelerated filer	☑☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐


		Emerging growth company	☐


	September 26, 2020			December 31, 2019			July 3, 2021			December 31, 2020
	(In thousands, except per share data)						(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	374,934		$	335,715		$	460,056		$	436,695
Investments		22,136			1,429			203,566			6,451
Accounts receivable, net		494,432			587,734			543,072			573,316
Inventories		326,946			320,551			348,770			304,281
Other current assets		73,225			67,062			83,086			80,290

Total current assets		1,291,673			1,312,491			1,638,550			1,401,033
Property, plant and equipment, net		469,721			417,342			527,135			494,003
Intangible assets, net		255,168			240,203			246,836			258,645
Goodwill		431,078			356,128			439,826			444,362
Operating lease assets		86,757			93,358			88,871			93,252
Other assets		144,889			137,533			162,429			148,625

Total assets	$	2,679,286		$	2,557,055		$	3,103,647		$	2,839,920

LIABILITIES AND STOCKHOLDERS’ DEFICIT

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and debt	$	150,000		$	100,366		$	0		$	150,000
Accounts payable		60,357			49,001			83,249			72,212
Accrued employee compensation		46,015			43,467			48,282			72,166
Deferred revenue and customer advances		211,348			176,360			284,765			198,240
Current operating lease liabilities		26,745			27,125			27,583			27,764
Accrued income taxes		60,444			45,967			52,583			76,558
Accrued warranty		10,261			11,964			10,810			10,950
Other current liabilities		157,018			137,084			173,746			197,093

Total current liabilities		722,188			591,334			681,018			804,983
Long-term liabilities:
Long-term debt		1,421,337			1,580,797			1,603,367			1,206,515
Long-term portion of retirement benefits		65,003			59,159			74,794			72,620
Long-term income tax liabilities		356,953			394,562			319,121			357,493
Long-term operating lease liabilities		62,471			66,881			61,404			68,197
Other long-term liabilities		92,915			80,603			95,670			97,968

Total long-term liabilities		1,998,679			2,182,002			2,154,356			1,802,793

Total liabilities		2,720,867			2,773,336			2,835,374			2,607,776
Commitments and contingencies (Notes 7, 8 and 12)
Stockholders’ deficit:
Preferred stock, par value $0.01 per share, 5,000 shares authorized, NaN issued at September 26, 2020 and December 31, 2019		—			—
Common stock, par value $0.01 per share, 400,000 shares authorized, 161,381 and 161,030 shares issued, 62,024 and 62,587 shares outstanding at September 26, 2020 and December 31, 2019, respectively		1,614			1,610

Commitments and contingencies (Notes 6, 7 and 11)								0			0

Stockholders’ equity:
Preferred stock, par value $0.01 per share, 5,000 shares authorized, 0ne issued at July 3, 2021 and December 31, 2020								0			0—
Common stock, par value $0.01 per share, 400,000 shares authorized, 162,017 and 161,666 shares issued, 61,481 and 62,309 shares outstanding at July 3, 2021 and December 31, 2020, respectively								1,620			1,617
Additional paid-in capital		1,982,731			1,926,753			2,090,052			2,029,465
Retained earnings		6,889,678			6,587,403			7,423,408			7,107,989
Treasury stock, at cost, 99,357 and 98,443 shares at September 26, 2020 and December 31, 2019, respectively		(8,788,928	)		(8,612,576	)
Treasury stock, at cost, 100,536 and 99,357 shares at July 3, 2021 and December 31, 2020, respectively								(9,135,628	)		(8,788,984	)
Accumulated other comprehensive loss		(126,676	)		(119,471	)		(111,179	)		(117,943	)

Total stockholders’ deficit		(41,581	)		(216,281	)
Total stockholders’ equity								268,273			232,144

Total liabilities and stockholders’ deficit	$	2,679,286		$	2,557,055
Total liabilities and stockholders’ equity							$	3,103,647		$	2,839,920


			Page
PART I		FINANCIAL INFORMATION
Item 1.	~~Page~~

		~~Item 1.~~	Financial Statements
			Consolidated Balance Sheets (unaudited) as of ~~September 26, 2020~~July 3, 2021 and December 31, ~~2019~~2020			3
			3
		Consolidated Statements of Operations (unaudited) for the three months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~		4
			4
		Consolidated Statements of Operations (unaudited) for the ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~		5
			5
		Consolidated Statements of Comprehensive Income (unaudited) for the three and ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~		6
			6
		Consolidated Statements of Cash Flows (unaudited) for the ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~		7
			7
		Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited) for the three months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~		8
			8
		Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited) for the ~~nine~~six months ended ~~September 26,~~July 3, 2021 and June 27, 2020 ~~and September 28, 2019~~		9
			9
		Condensed Notes to Consolidated Financial Statements (unaudited)		10	10
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			30	30
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			42	41
		Item 4.		Controls and Procedures			42
		41

PART II		OTHER INFORMATION
Item 1.		Legal Proceedings		42
		~~Item 1.~~	~~Legal Proceedings~~			43
		Item 1A.		Risk Factors			43	42
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			44	42
		Item 6.		Exhibits			4 3		45
		Signature		4 4	~~Signature~~			46


	Balance at Beginning of Period		Impact of CECL Adoption		Additions		Deduction			Balance at End of Period
Allowance for Doubtful Accounts
September 26, 2020	$	9,560	$	985	$	7,826	$	(5,784	)	$	12,587
September 28, 2019	$	7,663	$	—	$	6,014	$	(5,461	)	$	8,216

	Financial Statement Classification	Three Months Ended					Nine Months Ended
		September 26, 2020		September 28, 2019			September 26, 2020			September 28, 2019
		September 26, 2020		September 28, 2019			September 26, 2020			September 28, 2019
Foreign currency exchange contracts:
Realized gains (losses) on closed contracts	Cost of sales	$	1,113	$	(3,340	)	$	(45	)	$	(5,858	)
Unrealized gains (losses) on open contracts	Cost of sales		808		(633	)		1,455			(1,040	)

Cumulative net pre-tax gains (losses)	Cost of sales	$	1,921	$	(3,973	)	$	1,410		$	(6,898	)

Interest rate cross-currency swap agreements:
Interest earned	Interest income	$	3,777	$	2,698		$	11,275		$	7,848
Unrealized gains on open contracts	Stockholders’ deficit	$	19,582	$	15,847		$	19,675		$	15,852


Cash	$	713
Accounts receivable and current other assets		806
Inventory		669
Prepaid and other assets		611
Property, plant and equipment, net		757
Operating lease assets		847
Intangible assets		6,960
Goodwill		71,632

Total assets acquired		82,995
Accrued expenses and other liabilities		2,093

Total consideration		80,902

Fair value of minority investment		3,525

Cash consideration paid	$	77,377


	September 26, 2020			December 31, 2019
Foreign subsidiary lines of credit	$	—		$	366
Senior unsecured notes – Series B – 5.00%, due February 2020		—			100,000
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			100,366
Senior unsecured notes – Series E – 3.97%, due March 2021		—			50,000
Senior unsecured notes – Series F – 3.40%, due June 2021		—			100,000
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
Credit agreement		615,000			625,000
Unamortized debt issuance costs		(3,663	)		(4,203	)

Total long-term debt		1,421,337			1,580,797

Total debt	$	1,571,337		$	1,681,163


	Three Months Ended September 28, 2019
	Net Income		Weighted- Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	138,133		66,226	$	2.09
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		542		(0.02	)

Net income per diluted common share	$	138,133		66,768	$	2.07


	Nine Months Ended September 28, 2019
	Net Income		Weighted- Average Shares		Per Share
	(Numerator)		(Denominator)		Amount
Net income per basic common share	$	391,529		68,952	$	5.68
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities		—		581		(0.05	)

Net income per diluted common share	$	391,529		69,533	$	5.63


	Currency Translation			Unrealized Loss on Retirement Plans			Accumulated Other Comprehensive Loss
Balance at December 31, 2019	$	(104,066	)	$	(15,405	)	$	(119,471	)
Other comprehensive loss, net of tax		(7,156	)		(49	)		(7,205	)

Balance at September 26, 2020	$	(111,222	)	$	(15,454	)	$	(126,676	)


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)
June 28, 2020 to July 25, 2020		—	$	—		—	$	1,524,905
July 26, 2020 to August 22, 2020		—	$	—		—	$	1,524,905
August 23, 2020 to September 26, 2020		—	$	—		—	$	1,524,905

Total		—	$	—		—	$	1,524,905