UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2022

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File Number: 01-14010

Waters Corporation

(Exact name of registrant as specified in its charter)

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

34 Maple Street

Milford, Massachusetts 01757

(Address, including zip code, of principal executive offices)

(508) 478-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	WAT	New York Stock Exchange, Inc.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of the registrant’s common stock as of July 29, 2022: 59,875,919

WATERS CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

INDEX

	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) as of July 2, 2022 and December 31, 2021		3
Consolidated Statements of Operations (unaudited) for the three months ended July 2, 2022 and July 3, 2021		4
Consolidated Statements of Operations (unaudited) for the six months ended July 2, 2022 and July 3, 2021		5
Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended July 2, 2022 and July 3, 2021		6
Consolidated Statements of Cash Flows (unaudited) for the six months ended July 2, 2022 and July 3, 2021		7
Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended July 2, 2022 and July 3, 2021		8
Consolidated Statements of Stockholders’ Equity (unaudited) for the six months ended July 2, 2022 and July 3, 2021		9
Condensed Notes to Consolidated Financial Statements (unaudited)		10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3. Quantitative and Qualitative Disclosures About Market Risk		39
Item 4. Controls and Procedures		39
PART II OTHER INFORMATION
Item 1. Legal Proceedings		40
Item 1A. Risk Factors		40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 6. Exhibits		41
Signature		42

Item 1: Financial Statements

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

	July 2, 2022			December 31, 2021
	(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	418,897		$	501,234
Investments		897			68,051
Accounts receivable, net		639,451			612,648
Inventories		409,922			356,095
Other current assets		95,160			90,914
Total current assets		1,564,327			1,628,942
Property, plant and equipment, net		545,813			547,913
Intangible assets, net		225,101			242,401
Goodwill		428,005			437,865
Operating lease assets		86,102			84,734
Other assets		191,222			153,077
Total assets	$	3,040,570		$	3,094,932
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and debt	$	50,000		$	—
Accounts payable		97,980			96,799
Accrued employee compensation		44,956			101,192
Deferred revenue and customer advances		282,342			227,561
Current operating lease liabilities		25,199			27,906
Accrued income taxes		104,982			61,278
Accrued warranty		10,156			10,718
Other current liabilities		130,948			155,054
Total current liabilities		746,563			680,508
Long-term liabilities:
Long-term debt		1,434,374			1,513,870
Long-term portion of retirement benefits		51,675			64,027
Long-term income tax liabilities		247,950			319,547
Long-term operating lease liabilities		60,579			59,623
Other long-term liabilities		107,305			89,803
Total long-term liabilities		1,901,883			2,046,870
Total liabilities		2,648,446			2,727,378
Commitments and contingencies (Notes 6, 7, 8 and 12)
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at July 2, 2022 and December 31, 2021		—			—
Common stock, par value $0.01 per share, 400,000 shares authorized, 162,348 and 162,084 shares issued, 59,988 and 60,728 shares outstanding at July 2, 2022 and December 31, 2021, respectively		1,623			1,621
Additional paid-in capital		2,166,221			2,114,880
Retained earnings		8,125,527			7,800,832
Treasury stock, at cost, 102,360 and 101,356 shares at July 2, 2022 and December 31, 2021, respectively		(9,759,858	)		(9,437,914	)
Accumulated other comprehensive loss		(141,389	)		(111,865	)
Total stockholders’ equity		392,124			367,554
Total liabilities and stockholders’ equity	$	3,040,570		$	3,094,932

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

3

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended
	July 2, 2022			July 3, 2021
	(In thousands, except per share data)
Revenues:
Product sales	$	469,630		$	440,955
Service sales		244,689			240,692
Total net sales		714,319			681,647
Costs and operating expenses:
Cost of product sales		202,356			176,745
Cost of service sales		104,850			103,509
Selling and administrative expenses		161,877			158,213
Research and development expenses		44,006			44,949
Purchased intangibles amortization		1,598			1,809
Total costs and operating expenses		514,687			485,225
Operating income		199,632			196,422
Other income, net		1,535			9,321
Interest expense		(11,419	)		(12,027	)
Interest income		2,526			3,698
Income before income taxes		192,274			197,414
Provision for income taxes		27,410			30,122
Net income	$	164,864		$	167,292
Net income per basic common share	$	2.74		$	2.71
Weighted-average number of basic common shares		60,206			61,685
Net income per diluted common share	$	2.72		$	2.69
Weighted-average number of diluted common shares and equivalents		60,510			62,157

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

4

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Six Months Ended
	July 2, 2022			July 3, 2021
	(In thousands, except per share data)
Revenues:
Product sales	$	920,470		$	822,977
Service sales		484,421			467,215
Total net sales		1,404,891			1,290,192
Costs and operating expenses:
Cost of product sales		393,966			335,621
Cost of service sales		198,925			198,780
Selling and administrative expenses		319,352			301,409
Research and development expenses		84,478			83,041
Purchased intangibles amortization		3,271			3,649
Acquired in-process research and development		9,797			—
Total costs and operating expenses		1,009,789			922,500
Operating income		395,102			367,692
Other income, net		1,705			18,680
Interest expense		(22,478	)		(22,973	)
Interest income		4,640			7,799
Income before income taxes		378,969			371,198
Provision for income taxes		54,274			55,779
Net income	$	324,695		$	315,419
Net income per basic common share	$	5.38		$	5.09
Weighted-average number of basic common shares		60,399			61,979
Net income per diluted common share	$	5.35		$	5.05
Weighted-average number of diluted common shares and equivalents		60,744			62,435

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

5

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	Three Months Ended						Six Months Ended
	July 2, 2022			July 3, 2021			July 2, 2022			July 3, 2021
	(In thousands)						(In thousands)
Net income	$	164,864		$	167,292		$	324,695		$	315,419
Other comprehensive (loss) income:
Foreign currency translation		(24,307	)		(9	)		(30,476	)		5,816
Unrealized gains (losses) on investments before income taxes		11			(5	)		26			(15	)
Income tax expense		(2	)		—			(6	)		—
Unrealized gains (losses) on investments, net of tax		9			(5	)		20			(15	)
Retirement liability adjustment before reclassifications		720			(260	)		988			794
Amounts reclassified to other income, net		120			218			247			434
Retirement liability adjustment before income taxes		840			(42	)		1,235			1,228
Income tax (expense) benefit		(206	)		83			(303	)		(265	)
Retirement liability adjustment, net of tax		634			41			932			963
Other comprehensive (loss) income		(23,664	)		27			(29,524	)		6,764
Comprehensive income	$	141,200		$	167,319		$	295,171		$	322,183

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

6

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended
	July 2, 2022			July 3, 2021
	(In thousands)
Cash flows from operating activities:
Net income	$	324,695		$	315,419
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		20,722			15,596
Deferred income taxes		(12,523	)		6,107
Depreciation		36,956			34,891
Amortization of intangibles		29,935			29,852
Acquired in-process research and development and other non-cash items		7,903			—
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable		(57,377	)		18,985
Increase in inventories		(65,070	)		(50,873	)
Increase in other current assets		(9,199	)		(10,600	)
Increase in other assets		4,658			(9,263	)
Increase (decrease) in accounts payable and other current liabilities		(32,197	)		(35,328	)
Increase in deferred revenue and customer advances		70,027			91,631
Decrease in other liabilities		(63,667	)		(44,973	)
Net cash provided by operating activities		254,863			361,444
Cash flows from investing activities:
Additions to property, plant, equipment and software capitalization		(74,746	)		(76,889	)
Proceeds from sale of equity investment, net		5,646			—
Payments for intellectual property licenses		(4,897	)		(7,000	)
Purchases of investments		(10,959	)		(215,140	)
Maturities and sales of investments		77,553			17,923
Net cash used investing activities		(7,403	)		(281,106	)
Cash flows from financing activities:
Proceeds from debt issuances		105,000			500,000
Payments on debt		(135,000	)		(250,000	)
Payments of debt issuance costs		—			(3,637	)
Proceeds from stock plans		30,914			45,036
Purchases of treasury shares		(321,944	)		(341,507	)
Proceeds from derivative contracts		10,849			1,917
Net cash used in financing activities		(310,181	)		(48,191	)
Effect of exchange rate changes on cash and cash equivalents		(19,616	)		(8,786	)
(Decrease) increase in cash and cash equivalents		(82,337	)		23,361
Cash and cash equivalents at beginning of period		501,234			436,695
Cash and cash equivalents at end of period	$	418,897		$	460,056

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

7

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(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 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

	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance April 2, 2022		162,252	$	1,623	$	2,138,426	$	7,960,663	$	(9,608,050	)	$	(117,725	)	$	374,937
Net income		—		—		—		164,864		—			—			164,864
Other comprehensive loss		—		—		—		—		—			(23,664	)		(23,664	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		11		—		3,559		—		—			—			3,559
Stock options exercised		81		—		14,523		—		—			—			14,523
Treasury stock		—		—		—		—		(151,808	)		—			(151,808	)
Stock-based compensation		4		—		9,713		—		—			—			9,713
Balance July 2, 2022		162,348	$	1,623	$	2,166,221	$	8,125,527	$	(9,759,858	)	$	(141,389	)	$	392,124

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

8

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(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, 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

	Number of Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance December 31, 2021		162,084	$	1,621	$	2,114,880	$	7,800,832	$	(9,437,914	)	$	(111,865	)	$	367,554
Net income		—		—		—		324,695		—			—			324,695
Other comprehensive loss		—		—		—		—		—			(29,524	)		(29,524	)
Issuance of common stock for employees:
Employee Stock Purchase Plan		19		—		5,886		—		—			—			5,886
Stock options exercised		150		1		25,614		—		—			—			25,615
Treasury stock		—		—		—		—		(321,944	)		—			(321,944	)
Stock-based compensation		95		1		19,841		—		—			—			19,842
Balance July 2, 2022		162,348	$	1,623	$	2,166,221	$	8,125,527	$	(9,759,858	)	$	(141,389	)	$	392,124

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

9

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1 Basis of Presentation and Summary of Significant Accounting Policies

Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high-performance liquid chromatography (“HPLC”), ultra-performance liquid chromatography (“UPLCTM” 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 TATM 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 second fiscal quarters for 2022 and 2021 ended on July 2, 2022 and July 3, 2021, 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, 2021, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 24, 2022.

Risks and Uncertainties

The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.

Both the Company’s domestic and international operations have been and continue to be affected by the ongoing global COVID-19 pandemic and the resulting volatility and uncertainty it has caused in the U.S. and international markets. The Company operates in over 35 countries, including those in regions most impacted by the COVID-19 pandemic.

10

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

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 to the Company’s employees, suppliers, manufacturing, or customers could result in a material impact to its consolidated financial position, results of operations or cash flows in the future.

Translation of Foreign Currencies

The functional currency of each of the Company’s foreign operating subsidiaries is the local currency of its country of domicile, except for the Company’s subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity’s cash flows.

For the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive loss 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 July 2, 2022 and December 31, 2021, $399 million out of $420 million and $440 million out of $569 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $270 million out of $420 million and $298 million out of $569 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at July 2, 2022 and December 31, 2021, respectively.

Accounts Receivable and Allowance for Credit Losses

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any off-balance sheet credit exposure related to its customers.

Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to re-possess, refurbish and re-sell the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss.

11

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

The following is a summary of the activity of the Company’s allowance for credit losses for the six months ended July 2, 2022 and July 3, 2021 (in thousands):

	Balance at Beginning							Balance at End of
	of Period		Additions		Deductions			Period
Allowance for Credit Losses
July 2, 2022	$	13,228	$	3,690	$	(3,571	)	$	13,347
July 3, 2021	$	14,381	$	3,042	$	(2,625	)	$	14,798

Other Investments

During the six months ended July 2, 2022, the Company sold an equity investment for $7 million in cash and recorded a gain on the sale of approximately $4 million in other income, net on the statement of operations. The Company also recorded an other-than-temporary impairment loss on an equity method investment still held at the reporting date of approximately $4 million within other income, net on the statement of operations as the company entered into a sale process and we adjusted the carrying value of our investment based on our portion of the total proceeds we expect to receive.

During the six months ended 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 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.

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 July 2, 2022 and December 31, 2021. 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.

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at July 2, 2022 (in thousands):

			Quoted Prices
			in Active		Significant
			Markets		Other		Significant
	Total at		for Identical		Observable		Unobservable
	July 2,		Assets		Inputs		Inputs
	2022		(Level 1)		(Level 2)		(Level 3)
Assets:
Time deposits		897		—		897		—
Waters 401(k) Restoration Plan assets		26,560		26,560		—		—
Foreign currency exchange contracts		76		—		76		—
Interest rate cross-currency swap agreements		31,173		—		31,173		—
Total	$	58,706	$	26,560	$	32,146	$	—
Liabilities:
Contingent consideration	$	1,428	$	—	$	—	$	1,428
Foreign currency exchange contracts		322		—		322		—
Interest rate cross-currency swap agreements		58		—		58		—
Total	$	1,808	$	—	$	380	$	1,428

12

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 December 31, 2021 (in thousands):

			Quoted Prices
			in Active		Significant
			Markets		Other		Significant
	Total at		for Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2021		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Treasury securities	$	13,917	$	—	$	13,917		—
Corporate debt securities		39,121		—		39,121		—
Time deposits		19,030		—		19,030	$	—
Waters 401(k) Restoration Plan assets		38,729		38,729		—		—
Foreign currency exchange contracts		504		—		504		—
Total	$	111,301	$	38,729	$	72,572	$	—
Liabilities:
Contingent consideration	$	1,347	$	—	$	—	$	1,347
Foreign currency exchange contracts		195		—		195		—
Interest rate cross-currency swap agreements		5,363		—		5,363		—
Total	$	6,905	$	—	$	5,558	$	1,347

Fair Value of 401(k) Restoration Plan Assets

The 401(k) Restoration Plan is a nonqualified defined contribution plan and the assets were held in registered mutual funds and have been classified as Level 1. The fair values of the assets in the plan are determined through market and observable sources from daily quoted prices on nationally recognized securities exchanges.

Fair Value of Cash Equivalents, Investments, Foreign Currency Exchange Contracts and Interest Rate Cross-Currency Swap Agreements

The fair values of the Company’s cash equivalents, investments, foreign currency exchange contracts and interest rate cross-currency swap agreements are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources.

Fair Value of Contingent Consideration

The fair value of the Company’s liability for contingent consideration relates to earnout payments in connection with the December 2020 acquisition of Integrated Software Solutions (“ISS”) and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the achievement of certain revenue and customer account milestones over the two years after the acquisition date and a discount rate that reflects both the likelihood of achieving the estimated future results and the Company’s creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration.

The fair value of future contingent consideration payments related to the December 2020 acquisition of ISS was estimated to be $1 million at both July 2, 2022 and December 31, 2021.

13

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

Fair Value of Other Financial Instruments

The Company’s accounts receivable and accounts payable are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s variable interest rate debt approximates fair value due to the variable nature of the interest rate. The carrying value of the Company’s fixed interest rate debt was $1.3 billion at both July 2, 2022 and December 31, 2021. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $1.2 billion and $1.3 billion at July 2, 2022 and December 31, 2021, 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.

Foreign Currency Exchange Contracts

The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real.

Interest Rate Cross-Currency Swap Agreements

As of July 2, 2022, the Company had three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $560 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 loss in stockholders’ 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.

14

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

The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):

	July 2, 2022				December 31, 2021
	Notional Value		Fair Value		Notional Value		Fair Value
Foreign currency exchange contracts:
Other current assets	$	17,000	$	76	$	55,309	$	504
Other current liabilities	$	42,640	$	322	$	9,000	$	195
Interest rate cross-currency swap agreements:
Other assets	$	520,000	$	31,173	$	—	$	—
Other liabilities		40,000		58		230,000		5,363
Accumulated other comprehensive income (loss)			$	26,761			$	(15,944	)

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	Three Months Ended						Six Months Ended
	Statement	July 2, 2022			July 3, 2021			July 2, 2022			July 3, 2021
	Classification
Foreign currency exchange contracts:
Realized (losses) gains on closed contracts	Cost of sales	$	(1,292	)	$	(213	)	$	(2,791	)	$	1,455
Unrealized losses on open contracts	Cost of sales		(66	)		(569	)		(555	)		(1,323	)
Cumulative net pre-tax (losses) gains	Cost of sales	$	(1,358	)	$	(782	)	$	(3,346	)	$	132
Interest rate cross-currency swap agreements:
Interest earned	Interest income	$	2,077		$	3,373		$	3,852		$	7,200
Unrealized gains (losses) on open contracts	Other comprehensive income	$	30,516		$	(4,229	)	$	42,704		$	17,015

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 2, 2022 and July 3, 2021, the Company repurchased 1.0 million and 1.2 million shares of the Company’s outstanding common stock at a cost of $312 million and $339 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $10 million and $8 million of common stock related to the vesting of restricted stock units during the six months ended July 2, 2022 and July 3, 2021, respectively. As of July 2, 2022, the Company had repurchased an aggregate of 14.1 million shares at a cost of $3.4 billion under the January 2019 repurchase program and had a total of $0.6 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.

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.

15

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

The following is a summary of the activity of the Company’s accrued warranty liability for the six months ended July 2, 2022 and July 3, 2021 (in thousands):

	Balance at							Balance at
	Beginning		Accruals for		Settlements			End of
	of Period		Warranties		Made			Period
Accrued warranty liability:
July 2, 2022	$	10,718	$	4,084	$	(4,646	)	$	10,156
July 3, 2021	$	10,950	$	4,719	$	(4,859	)	$	10,810

Other Items

During the six months ended July 2, 2022, the Company completed an asset acquisition in which the charge detection mass spectrometry technology (“CDMS technology”) assets of Megadalton Solutions, Inc. (“Megadalton”) were acquired for approximately $10 million in total purchase price, of which $5 million was paid at closing and the remaining $4 million will be paid in the future at various dates through 2029. This CDMS technology makes it possible to analyze extremely large proteins and protein complexes used in cell and gene therapies that would otherwise be difficult to analyze with conventional mass spectrometry. Once this technology is further developed, it will extend the capabilities of our mass spectrometry portfolio for a broader set of applications and as such the cost of this technology asset has been accounted for as Acquired In-Process Research and Development and expensed in costs and operating expenses in the statement of operations.

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.

The following is a summary of the activity of the Company’s deferred revenue and customer advances for the six months ended July 2, 2022 and July 3, 2021 (in thousands):

	July 2, 2022			July 3, 2021
Balance at the beginning of the period	$	273,598		$	239,759
Recognition of revenue included in balance at beginning of the period		(173,606	)		(159,393	)
Revenue deferred during the period, net of revenue recognized		240,928			251,065
Balance at the end of the period	$	340,920		$	331,431

The Company classified $60 million and $46 million of deferred revenue and customer advances in other long-term liabilities at July 2, 2022 and December 31, 2021, respectively.

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

	July 2, 2022
Deferred revenue and customer advances expected to be recognized in:
One year or less	$	282,342
13-24 months		36,568
25 months and beyond		22,010
Total	$	340,920

16

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

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 2, 2022
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value
Time deposits		897		—		—		897
Total	$	897	$	—	$	—	$	897
Amounts included in:
Investments		897		—		—		897
Total	$	897	$	—	$	—	$	897

	December 31, 2021
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		Loss			Value
U.S. Treasury securities	$	13,929	$	—	$	(12	)	$	13,917
Corporate debt securities		39,135		—		(14	)		39,121
Time deposits		19,030		—		—			19,030
Total	$	72,094	$	—	$	(26	)	$	72,068
Amounts included in:
Cash equivalents	$	4,017	$	—	$	—		$	4,017
Investments		68,077		—		(26	)		68,051
Total	$	72,094	$	—	$	(26	)	$	72,068

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

	July 2, 2022		December 31, 2021
Due in one year or less	$	897	$	71,066
Due after one year through three years		—		1,002
Total	$	897	$	72,068

4 Inventories

Inventories are classified as follows (in thousands):

	July 2, 2022		December 31, 2021
Raw materials	$	180,658	$	165,240
Work in progress		24,285		19,726
Finished goods		204,979		171,129
Total inventories	$	409,922	$	356,095

5 Goodwill and Other Intangibles

The carrying amount of goodwill was $428 million and $438 million at July 2, 2022 and December 31, 2021, respectively. The effect of foreign currency translation decreased goodwill by $10 million.

17

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

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

	July 2, 2022						December 31, 2021
					Weighted-						Weighted-
	Gross				Average		Gross				Average
	Carrying		Accumulated		Amortization		Carrying		Accumulated		Amortization
	Amount		Amortization		Period		Amount		Amortization		Period
Capitalized software	$	555,602	$	411,492		5 years	$	575,658	$	420,862		5 years
Purchased intangibles		196,887		162,839		11 years		201,302		163,752		11 years
Trademarks		9,680		—		—		9,680		—		—
Licenses		11,484		6,091		7 years		12,635		6,199		7 years
Patents and other intangibles		101,679		69,809		8 years		102,353		68,414		8 years
Total	$	875,332	$	650,231		7 years	$	901,628	$	659,227		7 years

The Company capitalized intangible assets in the amounts of $12 million and $19 million in the three months ended July 2, 2022 and July 3, 2021, respectively, and $24 million and $27 million in the six months ended July 2, 2022 and July 3, 2021, respectively. The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $50 million and $38 million, respectively, in the six months ended July 2, 2022 due to the effects of foreign currency translation. Amortization expense for intangible assets was $15 million for both the three months ended July 2, 2022 and July 3, 2021. Amortization expense for intangible assets was $30 million for both the six months ended July 2, 2022 and July 3, 2021. Amortization expense for intangible assets is estimated to be $62 million per year for each of the next five years.

6 Debt

The Company entered into a credit agreement in September 2021 (the “2021 Credit Agreement”) governing the Company’s five-year, $1.8 billion revolving facility (the “2021 Credit Facility”) that expires in September 2026. As of July 2, 2022 and December 31, 2021, the 2021 Credit Facility had a total of $180 million and $210 million outstanding, respectively.

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

As of both July 2, 2022 and December 31, 2021, the Company had a total of $1.3 billion 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.

18

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

The Company had the following outstanding debt at July 2, 2022 and December 31, 2021 (in thousands):

	July 2, 2022			December 31, 2021
Senior unsecured notes - Series I - 3.13%, due May 2023	$	50,000		$	—
Total notes payable and debt, current		50,000			—
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
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			100,000
Senior unsecured notes - Series O - 2.25%, due March 2031		400,000			400,000
Credit agreement		180,000			210,000
Unamortized debt issuance costs		(5,626	)		(6,130	)