10-Q 1 d310383d10q.htm 10-Q 10-Q
false2022Q3These 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. 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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 October 1, 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 file
s).    Yes  
☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in
Rule 12b-2
of the Exchange
Act.
 
Large accelerated filer      Accelerated filer  
       
Non-accelerated filer      Smaller reporting company  
       
         Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Act).    
Yes  ☐    No  
Indicate the number of shares outstanding of the registrant’s common stock as of October 28, 2022: 59,407,575
 
 
 

WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q
INDEX
 
 
  
 
  
Page
 
PART I
  
FINANCIAL INFORMATION
  
Item 1.
  
Financial Statements
  
  
  
 
3
 
  
  
 
4
 
  
  
 
5
 
  
  
 
6
 
  
  
 
7
 
  
  
 
8
 
  
  
 
9
 
  
  
 
10
 
Item 2.
  
  
 
28
 
Item 3.
  
  
 
39
 
Item 4.
  
  
 
39
 
PART II
  
OTHER INFORMATION
  
Item 1.
  
  
 
40
 
Item 1A.
  
  
 
40
 
Item 2.
  
  
 
40
 
Item 6.
  
  
 
41
 
  
  
 
42
 

Item 1: Financial Statements
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
 
  
October 1, 2022
 
 
December 31, 2021
 
 
  
 
 
 
 
 
 
  
(In thousands, except per share data)
 
ASSETS
  
 
Current assets:
                
Cash and cash equivalents
   $ 443,637     $ 501,234  
Investments
     876       68,051  
Accounts receivable, net
     600,924       612,648  
Inventories
     442,236       356,095  
Other current assets
     87,912       90,914  
    
 
 
   
 
 
 
Total current assets
     1,575,585       1,628,942  
Property, plant and equipment, net
     547,386       547,913  
Intangible assets, net
     213,429       242,401  
Goodwill
     420,257       437,865  
Operating lease assets
     86,285       84,734  
Other assets
     227,111       153,077  
    
 
 
   
 
 
 
Total assets
   $ 3,070,053     $ 3,094,932  
    
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Notes payable and debt
   $ 50,000     $     
Accounts payable
     96,567       96,799  
Accrued employee compensation
     64,554       101,192  
Deferred revenue and customer advances
     248,884       227,561  
Current operating lease liabilities
     24,231       27,906  
Accrued income taxes
     116,819       61,278  
Accrued warranty
     10,661       10,718  
Other current liabilities
     120,254       155,054  
    
 
 
   
 
 
 
Total current liabilities
     731,970       680,508  
Long-term liabilities:
                
Long-term debt
     1,494,626       1,513,870  
Long-term portion of retirement benefits
     48,798       64,027  
Long-term income tax liabilities
     248,111       319,547  
Long-term operating lease liabilities
     61,470       59,623  
Other long-term liabilities
     99,842       89,803  
    
 
 
   
 
 
 
Total long-term liabilities
     1,952,847       2,046,870  
    
 
 
   
 
 
 
Total liabilities
     2,684,817       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,
no
ne issued at October 1, 2022 and December 31, 2021
                  
Common stock, par value $0.01 per share, 400,000 shares authorized, 162,379 and 162,084 shares issued, 59,534 and 60,728 shares outstanding at October 1, 2022 and December 31, 2021, respectively
     1,624       1,621  
Additional
paid-in
capital
     2,181,558       2,114,880  
Retained earnings
     8,281,525       7,800,832  
Treasury stock, at cost, 102,845 and 101,356 shares at October 1, 2022 and December 31, 2021, respectively
     (9,915,081     (9,437,914
Accumulated other comprehensive loss
     (164,390     (111,865
    
 
 
   
 
 
 
Total stockholders’ equity
     385,236       367,554  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 3,070,053     $ 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
 
 
  
October 1, 2022
 
 
October 2, 2021
 
 
  
 
 
 
 
 
 
  
(In thousands, except per share data)
 
Revenues:
                
Product sales
   $ 464,923     $ 419,133  
Service sales
     243,632       240,100  
    
 
 
   
 
 
 
Total net sales
     708,555       659,233  
Costs and operating expenses:
                
Cost of product sales
     199,918       171,364  
Cost of service sales
     107,183       99,764  
Selling and administrative expenses
     164,417       152,545  
Research and development expenses
     43,435       41,986  
Purchased intangibles amortization
     1,592       1,759  
    
 
 
   
 
 
 
Total costs and operating expenses
     516,545       467,418  
    
 
 
   
 
 
 
Operating income
     192,010       191,815  
Other income (expense), net
     895       (607
Interest expense
     (12,420     (11,081
Interest income
     2,896       2,548  
    
 
 
   
 
 
 
Income before income taxes
     183,381       182,675  
Provision for income taxes
     27,383       21,490  
    
 
 
   
 
 
 
Net income
   $ 155,998     $ 161,185  
    
 
 
   
 
 
 
Net income per basic common share
   $ 2.61     $ 2.63  
Weighted-average number of basic common shares
     59,801       61,359  
Net income per diluted common share
   $ 2.60     $ 2.60  
Weighted-average number of diluted common shares and equivalents
     60,081       61,888  
The accompanying notes are an integral part of the interim consolidated financial statements.
 
4

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
 
 
 
 
 
 
 
 
 
    
Nine Months Ended
 
    
October 1, 2022
   
October 2, 2021
 
              
    
(In thousands, except per share data)
 
Revenues:
                
Product sales
   $ 1,385,393     $ 1,242,110  
Service sales
     728,053       707,315  
    
 
 
   
 
 
 
Total net sales
     2,113,446       1,949,425  
Costs and operating expenses:
                
Cost of product sales
     593,884       506,985  
Cost of service sales
     306,108       298,544  
Selling and administrative expenses
     483,769       453,954  
Research and development expenses
     127,913       125,027  
Purchased intangibles amortization
     4,863       5,408  
Acquired
in-process
research and development
     9,797           
    
 
 
   
 
 
 
Total costs and operating expenses
     1,526,334       1,389,918  
    
 
 
   
 
 
 
Operating income
     587,112       559,507  
Other income, net
     2,600       18,073  
Interest expense
     (34,898     (34,054
Interest income
     7,536       10,347  
    
 
 
   
 
 
 
Income before income taxes
     562,350       553,873  
Provision for income taxes
     81,657       77,269  
    
 
 
   
 
 
 
Net income
   $ 480,693     $ 476,604  
    
 
 
   
 
 
 
Net income per basic common share
   $ 7.98     $ 7.72  
Weighted-average number of basic common shares
     60,200       61,771  
Net income per diluted common share
   $ 7.94     $ 7.66  
Weighted-average number of diluted common shares and equivalents
     60,521       62,244  
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
 
 
Nine Months Ended
 
 
  
October 1,
2022
 
 
October 2,
2021
 
 
October 1,
2022
 
 
October 2,
2021
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
(In thousands)
 
 
(In thousands)
 
Net income
   $ 155,998     $ 161,185     $ 480,693     $ 476,604  
Other comprehensive (loss) income:
                                
Foreign currency translation
     (23,779     (4,560     (54,255     1,256  
Unrealized gains on investments before income taxes
              17       26       2  
Income tax expense
              —         (6     —    
    
 
 
   
 
 
   
 
 
   
 
 
 
Unrealized gains on investments, net of tax
              17       20       2  
Retirement liability adjustment before reclassifications
     767       (103     1,755       691  
Amounts reclassified to other income, net
     254       248       501       682  
    
 
 
   
 
 
   
 
 
   
 
 
 
Retirement liability adjustment before income taxes
     1,021       145       2,256       1,373  
Income tax expense
     (243     (37     (546     (302
    
 
 
   
 
 
   
 
 
   
 
 
 
Retirement liability adjustment, net of tax
     778       108       1,710       1,071  
Other comprehensive (loss) income
     (23,001     (4,435     (52,525     2,329  
    
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income
  
$
132,997
 
 
$
156,750
 
 
$
428,168
 
 
$
478,933  
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
6

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
  
Nine Months Ended
 
 
  
October 1, 2022
 
 
October 2, 2021
 
 
  
 
 
 
 
 
 
  
(In thousands)
 
Cash flows from operating activities:
  
 
Net income
   $ 480,693     $ 476,604  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Stock-based compensation
     30,929       21,949  
Deferred income taxes
     (20,836     9,219  
Depreciation
     54,306       52,760  
Amortization of intangibles
     44,799       45,166  
Acquired
in-process
research and development and other
non-cash
items
     10,003           
Change in operating assets and liabilities:
                
(Increase) decrease in accounts receivable
     (39,098     23,472  
Increase in inventories
     (113,211     (93,878
Increase in other current assets
     (6,861     (9,123
Increase in other assets
     (3,881     (6,116
Decrease in accounts payable and other current liabilities
     (4,952     (4,768
Increase in deferred revenue and customer advances
     47,060       71,889  
Decrease in other liabilities
     (65,999     (57,838
    
 
 
   
 
 
 
Net cash provided by operating activities
     412,952       529,336  
Cash flows from investing activities:
                
Additions to property, plant, equipment and software capitalization
     (113,737     (116,614
Proceeds from (investments in) equity investments, net
     8,903       (867
Payments for intellectual property licenses
     (7,535     (7,000
Purchases of investments
     (11,407     (241,230
Maturities and sales of investments
     77,993       117,283  
    
 
 
   
 
 
 
Net cash used in investing activities
     (45,783     (248,428
Cash flows from financing activities:
                
Proceeds from debt issuances
     165,000       510,000  
Payments on debt
     (135,000     (250,000
Payments of debt issuance costs
              (8,537
Proceeds from stock plans
     36,136       55,000  
Purchases of treasury shares
     (477,167
 
 
(492,695
Proceeds from derivative contracts
     12,844       2,325  
    
 
 
   
 
 
 
Net cash used in financing activities
     (398,187     (183,907
Effect of exchange rate changes on cash and cash equivalents
     (26,579
 
 
(8,994
    
 
 
   
 
 
 
(Decrease) increase in cash and cash equivalents
     (57,597     88,007  
Cash and cash equivalents at beginning of period
     501,234
 
 
 
436,695
 
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 443,637     $ 524,702  
    
 
 
   
 
 
 
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 July 3, 2021
     162,017      $ 1,620      $ 2,090,052      $ 7,423,408      $ (9,135,628   $ (111,179   $ 268,273  
Net income
     —          —          —          161,185        —         —         161,185  
Other comprehensive loss
     —          —          —          —          —         (4,435     (4,435
Issuance of common stock for employees:
                                                            
Employee Stock Purchase Plan
     8        —          2,567        —          —         —         2,567  
Stock options exercised
     45        1        7,396        —          —         —         7,397  
Treasury stock
     —          —          —          —          (146,051     —         (146,051
Stock-based compensation
     5                  6,286        —          —         —         6,286  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance October 2, 2021
     162,075      $ 1,621      $ 2,106,301      $ 7,584,593      $ (9,281,679   $ (115,614   $ 295,222  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
               
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
    
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Total
Stockholders’
Equity
 
Balance July 2, 2022
     162,348      $ 1,623      $ 2,166,221      $ 8,125,527      $ (9,759,858   $ (141,389   $ 392,124  
Net income
     —          —          —          155,998        —         —         155,998  
Other comprehensive loss
     —          —          —          —          —         (23,001     (23,001
Issuance of common stock for employees:
                                                            
Employee Stock Purchase Plan
     9        —          2,488        —          —         —         2,488  
Stock options exercised
     17        —          2,506        —          —         —         2,506  
Treasury stock
     —          —          —          —          (155,223     —         (155,223
Stock-based compensation
     5        1        10,343        —          —         —         10,344  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance October 1, 2022
     162,379      $ 1,624      $ 2,181,558      $ 8,281,525      $ (9,915,081   $ (164,390   $ 385,236  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
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
     —          —          —          476,604        —         —         476,604  
Other comprehensive income
     —          —          —          —          —         2,329       2,329  
Issuance of common stock for employees:
                                                            
Employee Stock Purchase Plan
     40        —          9,578        —          —         —         9,578  
Stock options exercised
     275        3        46,109        —          —         —         46,112  
Treasury stock
     —          —          —          —          (492,695     —         (492,695
Stock-based compensation
     94        1        21,149        —          —         —         21,150  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance October 2, 2021
     162,075      $ 1,621      $ 2,106,301      $ 7,584,593      $ (9,281,679   $ (115,614   $ 295,222  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
               
    
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
     —          —          —          480,693        —         —         480,693  
Other comprehensive loss
     —          —          —          —          —         (52,525     (52,525
Issuance of common stock for employees:
                                                            
Employee Stock Purchase Plan
     28        —          8,374        —          —         —         8,374  
Stock options exercised
     167        2        28,121        —          —         —         28,123  
Treasury stock
     —          —          —          —          (477,167     —         (477,167
Stock-based compensation
     100        1        30,183        —          —         —         30,184  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance October 1, 2022
     162,379      $ 1,624      $ 2,181,558      $ 8,281,525      $ (9,915,081   $ (164,390   $ 385,236  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an i
ntegral
part of the consolidated financial statements.
 
9

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1 Basis of Presentation and Summary of Significant Accounting P
olicies
Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high-performance liquid chromatography (“HPLC”), ultra-performance liquid chromatography (“UPLC
TM
” and, together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together
(“LC-MS”)
and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing.
LC-MS
instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA
TM
product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.
The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s third fiscal quarters for 2022 and 2021 ended on October 1, 2022 and October 2, 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)
 
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 October 1, 2022 and December 31, 2021, $409 million out of $445 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 $445 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 October 1, 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 nine months ended October 1, 2022 and October 2, 2021 (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Balance at
Beginning
of Period
    
Additions
    
Deductions
    
Balance at End
of Period
 
Allowance for Credit Losses
                                   
October 1, 2022
   $ 13,228      $ 4,980      $ (4,973    $ 13,235  
October 2, 2021
   $ 14,381      $ 3,388      $ (4,107    $ 13,662  
Other Investments
During the nine months ended October 1, 2022, the Company sold equity investments for $10 million in cash and recorded gains on the sales of approximately $7 million in other income, net on the statement of operations. The Company also incurred $6 million in losses on equity investments recorded within other income, net on the statement of operations.
During the nine months ended October 2, 2021, the Company recorded an unrealized gain on an equity security still held at the reporting date of approximately $10 million within other income, net on the statement of operations. 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.
Fair Value Measurements
In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of October 1, 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 October 1, 2022 (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Total at
October 1,
2022
    
Quoted Prices
in Active
Markets

for Identical
Assets

(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs

(Level 3)
 
Assets:
                                   
Time deposits
     876        —          876        —    
Waters 401(k) Restoration Plan assets
     24,099        24,099        —          —    
Foreign currency exchange contracts
     278        —          278        —    
Interest rate cross-currency swap agreements
     62,223        —          62,223        —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 87,476      $ 24,099      $ 63,377      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities:
                                   
Contingent consideration
   $ 1,469      $ —        $ —        $ 1,469  
Foreign currency exchange contracts
     63        —          63        —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 1,532      $ —        $ 63      $ 1,469  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Total at
December 31,
2021
    
Quoted Prices
in Active
Markets

for Identical
Assets

(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs

(Level 3)
 
Assets:
                                   
U.S. Treasury securities
   $ 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 October 1, 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 October 1, 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 $1.1 billion and $1.3 billion at October 1, 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 and
Yen-denominated
net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.
Foreign Currency Exchange Contracts
The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real.
Interest Rate Cross-Currency Swap Agreements
As of October 1, 2022, the Company had three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $585 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated and
Yen-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):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
October 1, 2022
    
December 31, 2021
 
    
Notional Value
    
Fair Value
    
Notional Value
    
Fair Value
 
Foreign currency exchange contracts:
                                   
Other current assets
   $ 42,690      $ 278      $ 55,309      $ 504  
Other current liabilities
   $ 17,000      $ 63      $ 9,000      $ 195  
Interest rate cross-currency swap agreements:
                                   
Other assets
   $ 585,000      $ 62,223      $ —        $ —    
Other liabilities
     —          —          230,000        5,363  
Accumulated other comprehensive income (loss)
            $ 57,869               $ (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
Statement
Classification
  
Three Months Ended
 
  
Nine Months Ended
 
 
  
October 1,
2022
 
  
October 2,
2021
 
  
October 1,
2022
 
  
October 2,
2021
 
Foreign currency exchange contracts:
                                
Realized (losses) gains on closed contracts
   Cost of sales    $ (3,811   $ (774   $ (6,603   $ 681  
Unrealized gains (losses) on open contracts
  
Cost of sales
     461       (933     (93     (2,256
         
 
 
   
 
 
   
 
 
   
 
 
 
Cumulative net
pre-tax
losses
   Cost of sales    $ (3,350   $ (1,707   $ (6,696   $ (1,575
         
 
 
   
 
 
   
 
 
   
 
 
 
Interest rate cross-currency swap agreements:
                                
Interest earned
  
Interest income
   $ 2,362     $ 2,305     $ 6,214     $ 9,505  
Unrealized gains on open contracts
  
Other comprehensive income
   $ 31,108     $ 7,762     $ 73,812     $ 24,777  
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. In Dec
e
mber 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. During both the nine
months ended October 1, 2022 and October 2, 2021, the Company repurchased 1.5 million shares of the Company’s outstanding common stock at a cost of $467 million and $484 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $11 million and $9 million of common stock related to the vesting of restricted stock units during the nine months ended October 1, 2022 and October 2, 2021, respectively. As of October 1, 2022, the Company had repurchased an aggregate of 14.6 million shares at a cost of $3.6 billion under the January 2019 repurchase program and had a total of $418 million authorized for future repurchase
s.
Product Warr
a
nty Cost
s
The Compan
y 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 en
g
ages 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 nine months ended October 1, 2022 and October 2, 2021 (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Balance at
Beginning
of Period
    
Accruals for
Warranties
    
Settlements
Made
    
Balance at
End of
Period
 
Accrued warranty liability:
                                   
October 1, 2022
   $ 10,718      $ 6,606      $ (6,663    $ 10,661  
October 2, 2021
   $ 10,950      $ 6,537      $ (6,991    $ 10,496  
Other Items
During the nine months ended October 1, 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 nine months ended October 1, 2022 and October 2, 2021 (in thousands):
 
 
 
 
 
 
 
 
 
 
    
October 1, 2022
    
October 2, 2021
 
Balance at the beginning of the period
   $ 273,598      $ 239,759  
Recognition of revenue included in balance at beginning of the period
     (213,527      (197,279
Revenue deferred during the period, net of revenue recognized
     243,853        264,184  
    
 
 
    
 
 
 
Balance at the end of the period
   $ 303,924      $ 306,664  
    
 
 
    
 
 
 
The Company classified $55 million and $46 million of deferred revenue and customer advances in other long-term liabilities at October 1, 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):
 
 
 
 
 
 
    
October 1, 2022
 
Deferred revenue and customer advances expected to be recognized in:
        
One year or less
   $ 248,884  
13
-24
months
     31,632  
25 months and beyond
     23,408  
    
 
 
 
Total
   $ 303,924  
    
 
 
 
 
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):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
October 1, 2022
 
    
Amortized
Cost
    
Unrealized
Gain
    
Unrealized
Loss
    
Fair
Value
 
Time deposits
     876        —          —          876  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 876      $ —        $ —        $ 876  
    
 
 
    
 
 
    
 
 
    
 
 
 
Amounts included in:
                                   
Investments
     876        —          —          876  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 876      $ —        $ —        $ 876  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
December 31, 2021
 
    
Amortized
Cost
    
Unrealized
Gain
    
Unrealized
Loss
    
Fair
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):
 
 
 
 
 
 
 
 
 
 
    
October 1, 2022
    
December 31, 2021
 
Due in one year or less
   $ 876      $ 71,066  
Due after one year through three years
     —          1,002  
    
 
 
    
 
 
 
Total
   $ 876      $ 72,068  
    
 
 
    
 
 
 
4 Inventories
Inventories are classified as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
    
October 1, 2022
    
December 31, 2021
 
Raw materials
   $ 186,958      $ 165,240  
Work in progress
     23,577        19,726  
Finished goods
     231,701        171,129  
    
 
 
    
 
 
 
Total inventories
   $ 442,236      $ 356,095  
    
 
 
    
 
 
 
5 Goodwill and Other Intangibles
The carrying amount of goodwill was $420 million and $438 million at October 1, 2022 and December 31, 2021, respectively. The effect of foreign currency translation decreased goodwill by $18 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):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
October 1, 2022
    
December 31, 2021
 
    
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Weighted-
Average
Amortization
Period
    
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Weighted-
Average
Amortization
Period
 
Capitalized software
   $ 525,196      $ 391,250        5 years      $ 575,658      $ 420,862        5 years  
Purchased intangibles
     193,056        160,972        11 years        201,302        163,752        11 years  
Trademarks
     9,680        —          —          9,680        —          —    
Licenses
     12,739        5,848        6 years        12,635        6,199        7 years  
Patents and other intangibles
     100,255        69,427        8 years        102,353        68,414        8 years  
    
 
 
    
 
 
             
 
 
    
 
 
          
Total
   $ 840,926      $ 627,497        7 years      $ 901,628      $ 659,227        7 years  
    
 
 
    
 
 
             
 
 
    
 
 
          
The Company capitalized intangible assets in the amounts of $14 million and $18 million in the three months ended October 1, 2022 and October 2, 2021, respectively, and $38 million and $45 million in the nine months ended October 1, 2022 and October 2, 2021, respectively. The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $98 million and $76 million, respectively, in the nine months ended October 1, 2022 due to the effects of foreign currency translation. Amortization expense for intangible assets was $15 million for
both 
the three months ended October 1, 2022 and October 2, 2021. Amortization expense for intangible assets was $45 million for both the nine months ended October 1, 2022 and October 2, 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 October 1, 2022 and December 31, 2021, the 2021 Credit Facility had a total of $240 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 October 1, 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
18

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

 
for
 any period of four consecutive fiscal quarters and a leverage ratio test of not more than
3.50
:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.
The
Company had the following
outstanding
debt at October 1, 2022 and December 31, 2021 (in thousands):
 
 
 
 
 
 
 
 
 
 
    
October 1, 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
     240,000        210,000  
Unamortized debt issuance costs
     (5,374      (6,130
    
 
 
    
 
 
 
Total long-term debt
     1,494,626        1,513,870  
    
 
 
    
 
 
 
Total debt
   $ 1,544,626      $ 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 both October 1, 2022 and December 31, 2021, the Company had a total amount available to borrow under the 2021 Credit Agreement of $1.6 billion after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 3.24% and 2.74% at October 1, 2022 and December 31, 2021, respectively. As of October 1, 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 $111 million and $121 million at October 1, 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 October 1, 2022 or December 31, 2021.
As of October 1, 2022, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $585 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated and
Yen-denominated
net asset investments.
7 Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of October 1, 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 from qualifying activities in Singapore increased the Company’s net income for the nine months ended October 1, 2022 and October 2, 2021 by $15 million and $13 million, respectively, and increased the Company’s net income per diluted share by $0.25 and $0.20, respectively.
The Company’s effective tax rate for the three months ended October 1, 2022 and October 2, 2021 was 14.9% and 11.8%, respectively. The increase in the effective income tax rate can be attributed to the impact of favorable quarter-specific adjustments in the prior year and differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
 
19

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The Company’s effective tax rate for the nine months ended October 1, 2022 and October 2, 2021 was 14.5% and 14.0%, respectively. The differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
The Company accounts for its uncertain tax return positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
The Company’s gross unrecognized tax benefits, excluding interest and penalties, for both the nine months ended October 1, 2022 and October 2, 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 October 1, 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 October 1, 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 October 1, 2022, the 2020 Plan had 6.5 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
 
20

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
2020 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of October 1, 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 attribution method. The stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest; therefore, the amount of expense has been reduced for estimated forfeitures. Forfeitures are estimated based on historical experience. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.
The consolidated statements of operations for the three and nine months ended October 1, 2022 and October 2, 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
    
Nine Months Ended
 
    
October 1, 2022
    
October 2, 2021
    
October 1, 2022
    
October 2, 2021
 
Cost of sales
   $ 478      $ 468      $ 2,420      $ 1,828  
Selling and administrative expenses
     8,174        4,116        23,607        15,810  
Research and development expenses
     1,555        1,769        4,902        4,311  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total stock-based compensation
   $ 10,207      $ 6,353      $ 30,929      $ 21,949  
    
 
 
    
 
 
    
 
 
    
 
 
 
Stock Options
In determining the fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of
non-qualified
stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury
zero-coupon
issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the nine months ended October 1, 2022 and October 2, 2021 are as follows:
 
 
 
 
 
 
 
 
 
 
    
Nine Months Ended
 
Options Issued and Significant Assumptions Used to Estimate Option Fair Values
  
October 1, 2022
   
October 2, 2021
 
Options issued in thousands
     138       160  
Risk-free interest rate
     2.0     0.8