10-Q 1 d334628d10q.htm 10-Q 10-Q
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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 April 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)
(508478-2000
(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 April 29, 2022: 60,235,338
 
 
 

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 April 2, 2022 and December 31, 2021      3  
  Consolidated Statements of Operations (unaudited) for the three months ended April 2, 2022 and April 3, 2021      4  
  Consolidated Statements of Comprehensive Income (unaudited) for the three months ended April 2, 2022 and April 3, 2021      5  
  Consolidated Statements of Cash Flows (unaudited) for the three months ended April 2, 2022 and April 3, 2021      6  
  Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended April 2, 2022 and April 3, 2021      7  
  Condensed Notes to Consolidated Financial Statements (unaudited)      8  
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations      26  
Item 3.
  Quantitative and Qualitative Disclosures About Market Risk      36  
Item 4.
  Controls and Procedures      36  
PART II
    
Item 1.
  Legal Proceedings      37  
Item 1A.
  Risk Factors      37  
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds      37  
Item 6.
  Exhibits      38  
  Signature      39  

Item 1:
Financial Statements
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
    
April 2, 2022
   
December 31, 2021
 
              
    
(In thousands, except per share data)
 
ASSETS
        
Current assets:
                
Cash and cash equivalents
   $ 480,070     $ 501,234  
Investments
     23,025       68,051  
Accounts receivable, net
     607,262       612,648  
Inventories
     381,902       356,095  
Other current assets
     92,915       90,914  
    
 
 
   
 
 
 
Total current assets
     1,585,174       1,628,942  
Property, plant and equipment, net
     547,199       547,913  
Intangible assets, net
     236,408       242,401  
Goodwill
     435,807       437,865  
Operating lease assets
     86,944       84,734  
Other assets
     149,737       153,077  
    
 
 
   
 
 
 
Total assets
   $ 3,041,269     $ 3,094,932  
    
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts payable
     93,235       96,799  
Accrued employee compensation
     33,770       101,192  
Deferred revenue and customer advances
     315,086       227,561  
Current operating lease liabilities
     26,089       27,906  
Accrued income taxes
     82,634       61,278  
Accrued warranty
     10,212       10,718  
Other current liabilities
     126,803       155,054  
    
 
 
   
 
 
 
Total current liabilities
     687,829       680,508  
Long-term liabilities:
                
Long-term debt
     1,444,122       1,513,870  
Long-term portion of retirement benefits
     58,442       64,027  
Long-term income tax liabilities
     319,896       319,547  
Long-term operating lease liabilities
     61,129       59,623  
Other long-term liabilities
     94,914       89,803  
    
 
 
   
 
 
 
Total long-term liabilities
     1,978,503       2,046,870  
    
 
 
   
 
 
 
Total liabilities
     2,666,332       2,727,378  
     
Commitments and contingencies (Notes 6, 7, 8 and 11)
              
     
Stockholders’ equity:
                
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at April 2, 2022 and December 31, 2021
                  
Common stock, par value $0.01 per share, 400,000 shares authorized, 162,252 and 162,084 shares issued, 60,372 and 60,728 shares outstanding at April 2, 2022 and December 31, 2021, respectively
     1,623       1,621  
Additional
paid-in
capital
     2,138,426       2,114,880  
Retained earnings
     7,960,663       7,800,832  
Treasury stock, at cost, 101,880 and 101,356 shares at April 2, 2022 and December 31, 2021, respectively
     (9,608,050     (9,437,914
Accumulated other comprehensive loss
     (117,725     (111,865
    
 
 
   
 
 
 
Total stockholders’ equity
     374,937       367,554  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 3,041,269     $ 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
 
    
April 2, 2022
   
April 3, 2021
 
              
    
(In thousands, except per share data)
 
Revenues:
                
Product sales
   $ 450,840     $ 382,022  
Service sales
     239,732       226,523  
    
 
 
   
 
 
 
Total net sales
     690,572       608,545  
Costs and operating expenses:
                
Cost of product sales
     191,610       158,876  
Cost of service sales
     94,075       95,271  
Selling and administrative expenses
     157,475       143,196  
Research and development expenses
     40,472       38,092  
Purchased intangibles amortization
     1,673       1,840  
Acquired
in-process
research and development
     9,797       —    
    
 
 
   
 
 
 
Total costs and operating expenses
     495,102       437,275  
    
 
 
   
 
 
 
Operating income
     195,470       171,270  
Other income, net
     170       9,359  
Interest expense
     (11,059     (10,946
Interest income
     2,114       4,101  
    
 
 
   
 
 
 
Income before income taxes
     186,695       173,784  
Provision for income taxes
     26,864       25,657  
    
 
 
   
 
 
 
Net income
   $ 159,831     $ 148,127  
    
 
 
   
 
 
 
Net income per basic common share
   $ 2.64     $ 2.38  
Weighted-average number of basic common shares
     60,580       62,260  
Net income per diluted common share
   $ 2.62     $ 2.37  
Weighted-average number of diluted common shares and equivalents
     60,952       62,632  
The accompanying notes are an integral part of the interim consolidated financial statements.
 
4

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
    
Three Months Ended
 
    
April 2, 2022
   
April 3, 2021
 
              
    
(In thousands)
 
Net income
   $ 159,831     $ 148,127  
     
Other comprehensive (loss) income:
                
     
Foreign currency translation
     (6,169     5,825  
     
Unrealized gains (losses) on investments before income taxes
     15       (10
Income tax expense
     (4     —    
    
 
 
   
 
 
 
Unrealized gains (losses) on investments, net of tax
     11       (10
     
Retirement liability adjustment before reclassifications
     268       1,054  
Amounts reclassified to other income
     127       216  
    
 
 
   
 
 
 
Retirement liability adjustment before income taxes
     395       1,270  
Income tax expense
     (97     (348
    
 
 
   
 
 
 
Retirement liability adjustment, net of tax
     298       922  
     
Other comprehensive (loss) income
     (5,860     6,737  
    
 
 
   
 
 
 
Comprehensive income
   $ 153,971     $ 154,864  
    
 
 
   
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
5

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
    
Three Months Ended
 
    
April 2, 2022
   
April 3, 2021
 
              
    
(In thousands)
 
Cash flows from operating activities:
        
Net income
   $ 159,831     $ 148,127  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Stock-based compensation
     10,933       8,305  
Deferred income taxes
     4,175       2,787  
Depreciation
     17,209       16,343  
Amortization of intangibles
     15,455       15,013  
Acquired
in-process
research and development and other
non-cash
items
     9,381       —    
Change in operating assets and liabilities:
                
(Increase) decrease in accounts receivable
     (907     7,945  
Increase in inventories
     (26,832     (30,544
Increase in other current assets
     (1,805     (3,080
Increase in other assets
     (13,491     (4,219
Decrease in accounts payable and other current liabilities
     (69,548     (29,758
Increase in deferred revenue and customer advances
     91,514       89,048  
Increase (decrease) in other liabilities
     2,045       (1,563
    
 
 
   
 
 
 
Net cash provided by operating activities
     197,960       218,404  
Cash flows from investing activities:
                
Additions to property, plant, equipment and software capitalization
     (27,751     (39,503
Proceeds from sale of equity investment
     6,785       —    
Payments for intellectual property licenses
     (4,897     —    
Purchases of investments
     (9,219     (122,640
Maturities and sales of investments
     54,074       3,139  
    
 
 
   
 
 
 
Net cash provided by (used in) investing activities
     18,992       (159,004
Cash flows from financing activities:
                
Proceeds from debt issuances
     —         500,000  
Payments on debt
     (70,000     (150,000
Payments of debt issuance costs
     —         (3,637
Proceeds from stock plans
     12,832       16,295  
Purchases of treasury shares
     (170,136     (173,305
Payments for derivative contracts
     (107     (578
    
 
 
   
 
 
 
Net cash (used in) provided by financing activities
     (227,411     188,775  
Effect of exchange rate changes on cash and cash equivalents
     (10,705     (1,087
    
 
 
   
 
 
 
(Decrease) increase in cash and cash equivalents
     (21,164     247,088  
Cash and cash equivalents at beginning of period
     501,234       436,695  
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 480,070     $ 683,783  
    
 
 
   
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
6

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
     —          —          —          148,127        —         —         148,127  
Other comprehensive income
     —          —          —          —          —         6,737       6,737  
Issuance of common stock for employees:
                                                            
Employee Stock Purchase Plan
     11        —          1,855        —          —         —         1,855  
Stock options exercised
     95        1        15,129        —          —         —         15,130  
Treasury stock
     —          —          —          —          (180,659     —         (180,659
Stock-based compensation
     87        1        7,627        —          —         —         7,628  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance April 3, 2021
     161,859      $ 1,619      $ 2,054,076      $ 7,256,116      $ (8,969,643   $ (111,206   $ 230,962  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
               
    
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
     —          —          —          159,831        —         —         159,831  
Other comprehensive loss
     —          —          —          —          —         (5,860     (5,860
Issuance of common stock for employees:
                                                            
Employee Stock Purchase Plan
     7        —          2,327        —          —         —         2,327  
Stock options exercised
     69        1        11,091        —          —         —         11,092  
Treasury stock
     —          —          —          —          (170,136     —         (170,136
Stock-based compensation
     92        1        10,128        —          —         —         10,129  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance April 2, 2022
     162,252      $ 1,623      $ 2,138,426      $ 7,960,663      $ (9,608,050   $ (117,725   $ 374,937  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
7

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1 Basis of Presentation and Summary of Significant Accounting Policies
Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC
TM
” and, together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together
(“LC-MS”)
and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing.
LC-MS
instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA
TM
product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.
The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s first fiscal quarters for 2022 and 2021 ended on April 2, 2022 and April 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.
 
8

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
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 April 2, 2022 and December 31, 2021, $431 million out of $503 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, $324 million out of $503 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 April 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.
 
9

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 three months ended April 2, 2022 and April 3, 2021(in thousands):
 
    
Balance at
Beginning
of Period
    
Additions
    
Deductions
    
Balance at End
of

Period
 
Allowance for Credit Losses
                                   
April 2, 2022
   $ 13,228      $ 987      $ (1,072    $ 13,143  
April 3, 2021
   $ 14,381      $ 775      $ (1,561    $ 13,595  
Other Investments
During the three months ended April 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 three months ended April 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 April 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.
 
10

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 April 2, 2022 (in thousands):
 
           
Quoted Prices
               
           
in Active
    
Significant
        
           
Markets
    
Other
    
Significant
 
    
Total at
    
for Identical
    
Observable
    
Unobservable
 
    
April 2,
    
Assets
    
Inputs
    
Inputs
 
    
2022
    
(Level 1)
    
(Level 2)
    
(Level 3)
 
Assets:
                                   
U.S. Treasury securities
   $ 4,796      $ —        $ 4,796      $ —    
Corporate debt securities
     5,605        —          5,605        —    
Time deposits
     14,624        —          14,624        —    
Waters 401(k) Restoration Plan assets
     32,953        32,953        —          —    
Foreign currency exchange contracts
     9        —          9        —    
Interest rate cross-currency swap agreements
     8,163        —          8,163        —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $      66,150      $ 32,953      $ 33,197      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities:
                                   
Contingent consideration
   $ 1,388      $ —        $ —        $ 1,388  
Foreign currency exchange contracts
     190        —          190        —    
Interest rate cross-currency swap agreements
     635        —          635        —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 2,213      $ —        $ 825      $ 1,388  
    
 
 
    
 
 
    
 
 
    
 
 
 
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  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
11

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Fair Value of 401(k) Restoration Plan Assets
The 401(k) Restoration Plan is a nonqualified defined contribution plan and the assets were held in registered mutual funds and have been classified as Level 1. The fair values of the assets in the plan are determined through market and observable sources from daily quoted prices on nationally recognized securities exchanges.
Fair Value of Cash Equivalents, Investments, Foreign Currency Exchange Contracts and Interest Rate Cross-Currency Swap Agreements
The fair values of the Company’s cash equivalents, investments, foreign currency exchange contracts and interest rate cross-currency swap agreements are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources.
Fair Value of Contingent Consideration
The fair value of the Company’s liability for contingent consideration relates to earnout payments in connection with the December 2020 acquisition of Integrated Software Solutions (“ISS”) and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the achievement of certain revenue and customer account milestones over the two years after the acquisition date and a discount rate that reflects both the likelihood of achieving the estimated future results and the Company’s creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration.
The fair value of future contingent consideration payments related to the December 2020 acquisition of ISS was estimated to be $1 million at both April 2, 2022 and December 31, 2021.
Fair Value of Other Financial Instruments
The Company’s accounts receivable and accounts payable are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s variable interest rate debt approximates fair value due to the variable nature of the interest rate. The carrying value of the Company’s fixed interest rate debt was $1.3 billion and $1.3 billion at April 2, 2022 and December 31, 2021, respectively. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $1.2 billion and $1.3 billion at April 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.
 
12

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.
Interest Rate Cross-Currency Swap Agreements
As of April 2, 2022, the Company had three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $550 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.
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):
 
    
April 2, 2022
    
December 31, 2021
 
    
Notional Value
    
Fair Value
    
Notional Value
    
Fair Value
 
Foreign currency exchange contracts:
                                   
Other current assets
   $ 10,509      $ 9      $ 55,309      $ 504  
Other current liabilities
   $ 46,882      $ 190      $ 9,000      $ 195  
         
Interest rate cross-currency swap agreements:
                                   
Other assets
   $ 470,000      $ 8,163      $         $     
Other liabilities
     80,000        635        230,000        5,363  
Accumulated other comprehensive loss
            $ 3,755               $ 15,944  
 
13

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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
 
    
April 2, 2022
    
April 3, 2021
 
 
Foreign currency exchange contracts:
                 
Realized (losses) gains on closed contracts
   Cost of sales    $ (1,499    $ 1,667  
Unrealized losses on open contracts
   Cost of sales      (489      (753
         
 
 
    
 
 
 
Cumulative net
pre-tax
(losses) gains
   Cost of sales    $ (1,988    $ 914  
         
 
 
    
 
 
 
Interest rate cross-currency swap agreements:
                 
Interest earned
   Interest income    $ 1,775      $ 3,827  
Unrealized gains on contracts, net
   Accumulated other comprehensive loss    $ 12,188      $ 21,244  
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 three months ended April 2, 2022 and April 3, 2021, the Company repurchased 0.5 million and 0.6 million shares of the Company’s outstanding common stock at a cost of $160 million and $173 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 three months ended April 2, 2022 and April 3, 2021, respectively. As of April 2, 2022, the Company had repurchased an aggregate of 13.6 million shares at a cost of $3.3 billion under the January 2019 repurchase program and had a total of $0.7 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.
The following is a summary of the activity of the Company’s accrued warranty liability for the three months ended April 2, 2022 and April 3, 2021 (in thousands):
 
    
Balance at
Beginning
of Period
    
Accruals for
Warranties
    
Settlements

Made
    
Balance at
End of

Period
 
Accrued warranty liability:
                                   
April 2, 2022
   $ 10,718      $ 1,916      $ (2,422    $ 10,212  
April 3, 2021
   $ 10,950      $ 2,337      $ (2,582    $ 10,705  
Other Items
During the three months ended April 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
 
14

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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 three months ended April 2, 2022 and April 3, 2021 (in thousands):
 
    
April 2, 2022
    
April 3, 2021
 
Balance at the beginning of the period
   $ 273,598      $ 239,759  
Recognition of revenue included in balance at beginning of the period
     (103,355      (94,078
Revenue deferred during the period, net of revenue recognized
     198,036        182,384  
    
 
 
    
 
 
 
Balance at the end of the period
   $ 368,279      $ 328,065  
    
 
 
    
 
 
 
The Company classified $53 million and $47 million of deferred revenue and customer advances in other long-term liabilities at April 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):
 
    
April 2, 2022
 
Deferred revenue and customer advances expected to be recognized in:
        
One year or less
   $ 315,086  
13-24
months
     32,877  
25 months and beyond
     20,316  
    
 
 
 
Total
   $ 368,279  
    
 
 
 
 
15

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):
 
    
April 2, 2022
 
    
Amortized
    
Unrealized
    
Unrealized
    
Fair
 
    
Cost
    
Gain
    
Loss
    
Value
 
U.S. Treasury securities
   $ 4,802      $ —        $ (6    $ 4,796  
Corporate debt securities
     5,610        —          (5      5,605  
Time deposits
     14,624        —          —          14,624  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 25,036      $ —        $ (11    $ 25,025  
    
 
 
    
 
 
    
 
 
    
 
 
 
Amounts included in:
                                   
Cash equivalents
   $ 2,000      $ —        $ —        $ 2,000  
Investments
     23,036        —          (11      23,025  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 25,036      $ —        $ (11    $ 25,025  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
    
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):
 
    
April 2, 2022
    
December 31, 2021
 
Due in one year or less
   $ 25,025      $ 71,066  
Due after one year through three years
     —          1,002  
    
 
 
    
 
 
 
Total
   $ 25,025      $ 72,068  
    
 
 
    
 
 
 
4 Inventories
Inventories are classified as follows (in thousands):
 
    
April 2, 2022
    
December 31, 2021
 
Raw materials
   $ 168,324      $ 165,240  
Work in progress
     24,087        19,726  
Finished goods
     189,491        171,129  
    
 
 
    
 
 
 
Total inventories
   $ 381,902      $ 356,095  
    
 
 
    
 
 
 
5 Goodwill and Other Intangibles
The carrying amount of goodwill was $436 million and $438 million at April 2, 2022 and December 31, 2021, respectively. The effect of foreign currency translation decreased goodwill by $2 million.
 
16

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):
 
    
April 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
   $ 576,013      $ 424,114        5 years      $ 575,658      $ 420,862        5 years  
Purchased intangibles
     200,284        164,372        11 years        201,302        163,752        11 years  
Trademarks
     9,680        —          —          9,680        —          —    
Licenses
     12,339        6,285        7 years        12,635        6,199        7 years  
Patents and other intangibles
     102,493        69,630        8 years        102,353        68,414        8 years  
    
 
 
    
 
 
             
 
 
    
 
 
          
Total
   $ 900,809      $ 664,401        7 years      $ 901,628      $ 659,227        7 years  
    
 
 
    
 
 
             
 
 
    
 
 
          
The Company capitalized $12 million and $8 million of intangible assets in the three months ended April 2, 2022 and April 3, 2021, respectively. The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $13 million and $10 million, respectively, in the three months ended April 2, 2022 due to the effects of foreign currency translation. Amortization expense for intangible assets was $15 million for both the three months ended April 2, 2022 and April 3, 2021. Amortization expense for intangible assets is estimated to be $64 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 April 2, 2022 and December 31, 2021, the 2021 Credit Facility had a total of $140 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 April 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
.
 
17

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The Company had the following outstanding debt at April 2, 2022 and December 31, 2021 (in thousands):
 
    
April 2, 2022
    
December 31, 2021
 
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        100,000  
Senior unsecured notes - Series O - 2.25%, due March 2031
     400,000        400,000  
Credit agreement
     140,000        210,000  
Unamortized debt issuance costs
     (5,878      (6,130
    
 
 
    
 
 
 
Total long-term debt
     1,444,122        1,513,870  
    
 
 
    
 
 
 
Total debt
   $ 1,444,122      $ 1,513,870  
    
 
 
    
 
 
 
 
*
Series H senior unsecured notes bear interest at a
3-month
LIBOR for that floating rate interest period plus 1.25%.
As of April 2, 2022 and December 31, 2021, the Company had a total amount available to borrow under the 2021 Credit Agreement of $1.7 billion and $1.6 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.88% and 2.74% at April 2, 2022 and December 31, 2021, respectively. As of April 2, 2022, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $120 million and $121 million at April 2, 2022 and December 31, 2021, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of April 2, 2022 or December 31, 2021.
As of April 2, 2022, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $550 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.
7 Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of April 2, 2022. The Company had a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones. The Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax rates rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the Company’s net income for the three months ended April 2, 2022 and April 3, 2021 by $5 million and $4 million, respectively, and increased the Company’s net income per diluted share by $0.08 and $0.06, respectively.
The Company’s effective tax rate for the three months ended April 2, 2022 and April 3, 2021 was 14.4% and 14.8%, respectively. The income tax provision includes a $4 million and a $2 million income tax benefit related to stock-based compensation for the three months ended April 2, 2022 and April 3, 2021, respectively. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
The Company accounts for its uncertain tax return positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting
 
18

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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 Company’s gross unrecognized tax benefits, excluding interest and penalties, for both the three months ended April 2, 2022 and April 3, 2021 were $29 million. 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, 2016. 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 April 2, 2022, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of $18 million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.
8 Other Commitments and Contingencies
The Company licenses certain technology and software from third parties in the course of ordinary business. Future minimum license fees payable under existing license agreements as of April 2, 2022 are immaterial for the years ended December 31, 2022 and thereafter. The Company enters into licensing arrangements with third parties that require future milestone or royalty payments contingent upon future events. Upon the achievement of certain milestones in existing agreements, the Company could make additional future payments of up to $2 million.
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.
9 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 April 2, 2022, the 2020 Plan had 6.4 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 April 2, 2022, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding under the 2020 Plan.
The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations, based on their grant date fair values. The Company recognizes the expense using the straight-line​​​​​​​
 
19

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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 months ended April 2, 2022 and April 3, 2021 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
 
    
April 2, 2022
    
April 3, 2021
 
Cost of sales
   $ 1,027      $ 633  
Selling and administrative expenses
     8,169        6,420  
Research and development expenses
     1,737        1,252  
    
 
 
    
 
 
 
Total stock-based compensation
   $ 10,933      $ 8,305  
    
 
 
    
 
 
 
Stock Options
In determining the fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of
non-qualified
stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury
zero-coupon
issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the three months ended April 2, 2022 and April 3, 2021 are as follows:​​​​​​​
 
    
Three Months Ended
 
Options Issued and Significant Assumptions Used to Estimate
Option Fair Values                                                                        
  
April 2, 2022
   
April 3, 2021
 
Options issued in thousands
     127       139  
Risk-free interest rate
     1.9     0.8
Expected life in years
     6       6  
Expected volatility
     30.9     33.1
Expected dividends
              —    
 
    
Three Months Ended
 
Weighted-Average Exercise Price and Fair Value of Options on
the Date of Grant                                                                              
  
April 2, 2022
    
April 3, 2021
 
Exercise price
   $ 321.91      $ 277.32  
Fair value
   $ 107.76      $ 91.63  
 
20

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The following table summarizes stock option activity for the plans for the three months ended April 2, 2022 (in thousands, except per share data):
 
    
Number of Shares
    
Exercise Price per Share
    
Weighted-Average

Exercise Price per

Share
 
Outstanding at December 31, 2021
     691      $ 88.71 to $371.64      $ 202.24  
Granted
     127      $ 314.98 to $364.59      $ 321.91  
Exercised
     (69    $ 88.71 to $279.90      $ 160.49  
Canceled
     (6    $ 203.37 to $279.90      $ 235.95  
    
 
 
                   
Outstanding at April 2, 2022
     743      $ 88.71 to $371.64      $ 226.30  
    
 
 
                   
Restricted Stock
During the three months ended April 2, 2022, the Company granted three thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $364.59.
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the three months ended April 2, 2022 (in thousands, except per share data):
 
    
Shares
    
Weighted-Average

Grant Date Fair
Value per Share
 
Unvested at December 31, 2021
     245      $ 234.97  
Granted
     94      $ 323.65  
Vested
     (68    $ 217.21  
Forfeited
     (3    $ 228.76  
    
 
 
          
Unvested at April 2, 2022
     268      $ 270.65  
    
 
 
          
Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period.
Performance Stock Units
The Company’s performance stock units are equity compensation awards with a market vesting condition based on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded. Beginning with the grants made in 2020, the vesting conditions for performance stock units now include a performance condition based on future sales growth.
In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied 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.
 
21

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The relevant data used to determine the value of the performance stock units granted during the three months ended April 2, 2022 and April 3, 2021 are as follows:
 
    
Three Months Ended
 
Performance Stock Units Issued and Significant Assumptions Used
to Estimate Fair Values                                                                         
  
April 2, 2022
   
April 3, 2021
 
Performance stock units issued (in thousands)
     40       41  
Risk-free interest rate
     1.6     0.2
Expected life in years
     2.9       2.9  
Expected volatility
     25.4     38.7
Average volatility of peer companies
     34.5     34.7
Correlation coefficient
     43.0     45.8
Expected dividends
              —    
The following table summarizes the unvested performance stock unit award activity for the three months ended April 2, 2022 (in thousands, except per share data):
 
    
Shares
    
Weighted-Average

Fair Value per
Share
 
Unvested at December 31, 2021
     87      $ 285.73  
Granted
     40      $ 325.12  
Vested
     (24    $ 308.71  
Forfeited
     11      $ 396.67  
    
 
 
          
Unvested at April 2, 2022
     114      $ 305.42  
    
 
 
          
10 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
 
    
Three Months Ended April 2, 2022
 
    
Net Income
    
Weighted-
Average Shares
    
Per Share
 
    
(Numerator)
    
(Denominator)
    
Amount
 
Net income per basic common share
   $ 159,831        60,580      $ 2.64  
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
     —          372        (0.02
    
 
 
    
 
 
    
 
 
 
Net income per diluted common share
   $ 159,831        60,952      $ 2.62  
    
 
 
    
 
 
    
 
 
 
 
    
Three Months Ended April 3, 2021
 
    
Net Income
    
Weighted-
Average Shares
    
Per Share
 
    
(Numerator)
    
(Denominator)
    
Amount
 
Net income per basic common share
   $ 148,127        62,260      $ 2.38  
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
               372        (0.01