WATERS CORP /DE/ [WAT] Filings

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

10-Q 1 d310383d10q.htm 10-Q 10-Q

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

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

For the transition period from

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.

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

Table of Contents

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 October 1, 2022 and December 31, 2021		3
	Consolidated Statements of Operations (unaudited) for the three months ended October 1, 2022 and October 2, 2021		4
	Consolidated Statements of Operations (unaudited) for the nine months ended October 1, 2022 and October 2, 2021		5
	Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended October 1, 2022 and October 2, 2021		6
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended October 1, 2022 and October 2, 2021		7
	Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended October 1, 2022 and October 2, 2021		8
	Consolidated Statements of Stockholders’ Equity (unaudited) for the nine months ended October 1, 2022 and October 2, 2021		9
	Condensed Notes to Consolidated Financial Statements (unaudited)		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		39
Item 4.	Controls and Procedures		39

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		40
Item 1A.	Risk Factors		40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 6.	Exhibits		41
	Signature		42

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

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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.

Table of Contents

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

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

(“LC-MS”)

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

LC-MS

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

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

The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s third 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.

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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.

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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

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

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at 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.

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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.

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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
	Financial Statement Classification	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

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

Product Warr

nty Cost

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

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.

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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

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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.

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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

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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.

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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

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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	%