Item 1. Financial Statements

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

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

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

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

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

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

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

		Number of Common Shares				Common Stock				Additional Paid-In Capital				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Loss				Total Stockholders’ Equity
Balance April 3, 2021			161,859			$	1,619			$	2,054,076			$	7,256,116			$	(8,969,643	)		$	(111,206	)		$	230,962
Net income			—				—				—				167,292				—				—				167,292
Other comprehensive income			—				—				—				—				—				27				27
Issuance of common stock for employees:
Employee Stock Purchase Plan			22				—				5,156				—				—				—				5,156
Stock options exercised			135				1				23,584				—				—				—				23,585
Treasury stock			—				—				—				—				(165,985	)			—				(165,985	)
Stock-based compensation			1				—				7,236				—				—				—				7,236
Balance July 3, 2021			162,017			$	1,620			$	2,090,052			$	7,423,408			$	(9,135,628	)		$	(111,179	)		$	268,273

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

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

		Number of Common Shares				Common Stock				Additional Paid-In Capital				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Loss				Total Stockholders’ Equity
Balance December 31, 2020			161,666			$	1,617			$	2,029,465			$	7,107,989			$	(8,788,984	)		$	(117,943	)		$	232,144
Net income			—				—				—				315,419				—				—				315,419
Other comprehensive income			—				—				—				—				—				6,764				6,764
Issuance of common stock for employees:
Employee Stock Purchase Plan			32				—				7,011				—				—				—				7,011
Stock options exercised			230				2				38,713				—				—				—				38,715
Treasury stock			—				—				—				—				(346,644	)			—				(346,644	)
Stock-based compensation			89				1				14,863				—				—				—				14,864
Balance July 3, 2021			162,017			$	1,620			$	2,090,052			$	7,423,408			$	(9,135,628	)		$	(111,179	)		$	268,273

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

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

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1 Basis of Presentation and Summary of Significant Accounting Policies

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

TM

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

(“LC-MS”)

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

LC-MS

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

TM

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

The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s second fiscal quarters for 2022 and 2021 ended on July 2, 2022 and July 3, 2021, respectively.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form

10-Q

and do not include all of the information and footnote disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions.

It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2021, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 24, 2022.

Risks and Uncertainties

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

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

COVID-19

pandemic and the resulting volatility and uncertainty it has caused in the U.S. and international markets. The Company operates in over 35 countries, including those in regions most impacted by the

COVID-19

pandemic.

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

Through the date of the issuance of these financial statements, the Company’s consolidated financial position, results of operations and cash flows have not been materially impacted and, thus, the Company concluded that no interim goodwill or long-lived asset impairment analyses were required. Further, there have been no violations of debt covenants. Any prolonged material disruption to the Company’s employees, suppliers, manufacturing, or customers could result in a material impact to its consolidated financial position, results of operations or cash flows in the future.

Translation of Foreign Currencies

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

For the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive loss in the consolidated balance sheets.

Cash, Cash Equivalents and Investments

Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of July 2, 2022 and December 31, 2021, $399 million out of $420 million and $440 million out of $569 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $270 million out of $420 million and $298 million out of $569 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at July 2, 2022 and December 31, 2021, respectively.

Accounts Receivable and Allowance for Credit Losses

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

off-balance

sheet credit exposure related to its customers.

Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to

re-possess,

refurbish and

re-sell

the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss.

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

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

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

Other Investments

During the six months ended July 2, 2022, the Company sold an equity investment for $7 million in cash and recorded a gain on the sale of approximately $4 million in other income, net on the statement of operations. The Company also recorded an

other-than-temporary

impairment loss on an equity method investment still held at the reporting date of approximately $4 million within other income, net on the statement of operations as the company entered into a sale process and we adjusted the carrying value of our investment based on our portion of the total proceeds we expect to receive.

During the six months ended July 3, 2021, the Company recorded an unrealized gain on an equity security still held at the reporting date of approximately $10 million within other income on the income statement. This unrealized gain was recorded as an upward price adjustment to the carrying value of the investment due to an observable price change of a similar security issued during the current period.

Fair Value Measurements

In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of July 2, 2022 and December 31, 2021. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions.

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

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

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

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2021 (in thousands):

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

Fair Value of 401(k) Restoration Plan Assets

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

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

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

Fair Value of Contingent Consideration

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

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

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

Fair Value of Other Financial Instruments

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

Derivative Transactions

The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its

non-U.S.

dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.

The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.

Foreign Currency Exchange Contracts

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

Interest Rate Cross-Currency Swap Agreements

As of July 2, 2022, the Company had three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $560 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive loss in stockholders’ equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.

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

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

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

The following is a summary of the activity included in the consolidated statements of operations and statements of comprehensive income related to the foreign currency exchange contracts and interest rate cross-currency swap agreements (in thousands):

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

Stockholders’ Equity

In

January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a

two-year

period. This program replaced the remaining amounts available from the

pre-existing

program. During the six months ended July 2, 2022 and July 3, 2021, the Company repurchased 1.0 million and 1.2 million shares of the Company’s outstanding common stock at a cost of $312 million and $339 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $10 million and $8 million of common stock related to the vesting of restricted stock units during the six months ended July 2, 2022 and July 3, 2021, respectively. As of July 2, 2022, the Company had repurchased an aggregate of 14.1 million shares at a cost of $3.4 billion under the January 2019 repurchase program and had a total of $0.6 billion authorized for future repurchases. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023.

Product Warranty Costs

The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.

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

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

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

Other Items

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

In-Process

Research and Development and expensed in costs and operating expenses in the statement of operations.

2 Revenue Recognition

The Company’s deferred revenue liabilities on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.

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

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

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

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

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

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

3 Marketable Securities

The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):

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

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

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

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

4 Inventories

Inventories are classified as follows (in thousands):

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

5 Goodwill and Other Intangibles

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

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

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

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

The Company capitalized intangible assets in the amounts of $12 million and $19 mill

i

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

6 Debt

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

The interest rates applicable to the 2021 Credit Agreement are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (1) the prime rate in effect on such day, (2) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (3) the adjusted LIBO rate on such day (or if such day is not a business day, the immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 3 or 6 month adjusted LIBO rate or EURIBO rate for Euro-denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for LIBO rate or EURIBO rate loans. The facility fee on the 2021 Credit Agreement ranges between 7.5 and 25 basis

points per annum, based on the leverage ratio, of the amount of the revolving facility commitments and the outstanding term loan. The 2021 Credit Agreement requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the 2021 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.

As of both July 2, 2022 and December 31, 2021, the Company had a total of $1.3 billion of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for the Series H senior unsecured note. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.

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

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

		July 2, 2022				December 31, 2021
Senior unsecured notes - Series I - 3.13%, due May 2023		$	50,000			$	—
Total notes payable and debt, current			50,000				—
Senior unsecured notes - Series G - 3.92%, due June 2024			50,000				50,000
Senior unsecured notes - Series H - floating rate*, due June 2024			50,000				50,000
Senior unsecured notes - Series I - 3.13%, due May 2023			—				50,000
Senior unsecured notes - Series K - 3.44%, due May 2026			160,000				160,000
Senior unsecured notes - Series L - 3.31%, due September 2026			200,000				200,000
Senior unsecured notes - Series M - 3.53%, due September 2029			300,000				300,000
Senior unsecured notes - Series N - 1.68%, due March 2026			100,000				100,000
Senior unsecured notes - Series O - 2.25%, due March 2031			400,000				400,000
Credit agreement			180,000				210,000
Unamortized debt issuance costs			(5,626	)			(6,130	)
Total long-term debt			1,434,374				1,513,870
Total debt		$	1,484,374			$	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

July 2, 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 3.02% and 2.74% at July 2, 2022 and December 31, 2021, respectively. As of July 2, 2022, the Company was in compliance with all debt covenants.

The Company and its foreign subsidiaries also had available short-term lines of credit totaling $113 million and $121 million at July 2, 2022 and December 31, 2021, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of July 2, 2022 or December 31, 2021.

As of July 2, 2022, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $560 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.

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 July 2, 2022. The Company had a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones. The Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax rates rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the six months ended July 2, 2022 and July 3, 2021 by $10 million and $9 million, respectively, and increased the Company’s net income per diluted share by $0.16 and $0.14, respectively.

The Company’s effective tax rate for the three months ended July 2, 2022 and July 3, 2021 was 14.3% and 15.3%, respectively. The decrease in the effective income tax rate can be attributed to the impact of quarter-specific adjustments and differences in the proportionate amounts of

pre-tax

income recognized in jurisdictions with different effective

tax rates.

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

The Company’s effective tax rate for the six months ended July 2, 2022 and July 3, 2021 was 14.3% and 15.0%, respectively. The effective tax rate for the six months ended July 2, 2022 includes a $5 million tax benefit related to stock-based compensation. This income tax benefit decreased the effective tax rate by 1.4 percentage points for the six months ended July 2, 2022. The effective tax rate for the six months ended July 3, 2021 includes a $4 million income tax benefit related to stock-based compensation. This income tax benefit decreased the effective tax rate by 1.1 percentage points for the six months ended July 3, 2021. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of

pre-tax

income recognized in jurisdictions with different effective tax rates.

The Company accounts for its uncertain tax return positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting 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 six months ended July 2, 2022 and July 3, 2021 were $29 million. With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2016. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities. As of July 2, 2022, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of $18 million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.

8 Other Commitments and Contingencies

The Company licenses certain technology and software from third parties in the course of ordinary business. Future minimum license fees payable under existing license agreements as of July 2, 2022 are immaterial for the years ended December 31, 2022 and thereafter. The Company enters into licensing arrangements with third parties that require future milestone or royalty payments contingent upon future events. Upon the achievement of certain milestones in existing agreements, the Company could make additional future payments of up to $2 million.

The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company’s costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.

9 Stock-Based Compensation

The Company maintains various stockholder-approved, stock-based compensation plans which allow for the issuance of incentive or

non-qualified

stock options, stock appreciation rights, restricted stock or other types of awards (e.g. restricted stock units and performance stock units).

In May 2020, the Company’s stockholders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of July 2, 2022, the 2020 Plan had 6.4 million shares available for grant in the form of incentive or

non-qualified

stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units or other types of awards (e.g. restricted stock units and performance stock units). The Company issues new shares of common stock upon exercise of stock options or restricted stock unit conversion. Under the 2020 Plan, the exercise price for stock options may not

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

be less than the fair market value of the underlying stock at the date of grant. The 2020 Plan is scheduled to terminate on May 13, 2030. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock, restricted stock units and performance stock units may be issued under the 2020 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of July 2, 2022, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding under the 2020 Plan.

The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations, based on their grant date fair values. The Company recognizes the expense using the straight-line 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 six months ended July 2, 2022 and July 3, 2021 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock purchase plan (in thousands):

		Three Months Ended								Six Months Ended
		July 2, 2022				July 3, 2021				July 2, 2022				July 3, 2021
Cost of sales		$	915			$	727			$	1,942			$	1,360
Selling and administrative expenses			7,264				5,274				15,433				11,694
Research and development expenses			1,610				1,290				3,347				2,542
Total stock-based compensation		$	9,789			$	7,291			$	20,722			$	15,596

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 six months ended July 2, 2022 and July 3, 2021 are as follows:

		Six Months Ended
Options Issued and Significant Assumptions Used to Estimate Option Fair Values		July 2, 2022				July 3, 2021
Options issued in thousands			127				159
Risk-free interest rate			1.9	%			0.8	%
Expected life in years			6				6
Expected volatility			30.9	%			32.5	%
Expected dividends			—				—

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

		Six Months Ended
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant		July 2, 2022				July 3, 2021
Exercise price		$	321.91			$	280.92
Fair value		$	107.76			$	91.42

The following table summarizes stock option activity for the plans for the six months ended July 2, 2022 (in thousands, except per share data):

		Number of Shares				Exercise Price per Share										Weighted-Average Exercise Price per Share
Outstanding at December 31, 2021			691			$	88.71			to		$	371.64			$	202.24
Granted			127			$	314.98			to		$	364.59			$	321.91
Exercised			(150	)		$	88.71			to		$	279.90			$	170.44
Canceled			(18	)		$	203.37			to		$	364.59			$	250.27
Outstanding at July 2, 2022			650			$	88.71			to		$	371.64			$	231.63

Restricted Stock

During the six months ended July 2, 2022, the Company granted three thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $364.59.

Restricted Stock Units

The following table summarizes the unvested restricted stock unit award activity for the six months ended July 2, 2022 (in thousands, except per share data):

		Shares				Weighted-Average Grant Date Fair Value per Share
Unvested at December 31, 2021			245			$	234.97
Granted			94			$	323.65
Vested			(71	)		$	220.07
Forfeited			(16	)		$	256.66
Unvested at July 2, 2022			252			$	270.87

Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period.

Performance Stock Units

The Company’s performance stock units are equity compensation awards with a market vesting condition based on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded. Beginning with the grants made in 2020, the vesting conditions for performance stock units now include a performance condition based on future

sales growth.

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

In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation model. The Company uses implied volatility on its publicly traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on the performance period of the underlying performance stock units. The risk-free interest rate is the yield currently available on U.S. Treasury

zero-coupon

issues with a remaining term approximating the expected term used as the input to the Monte Carlo simulation model. The correlation coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each other during the performance period. The relevant data used to determine the value of the performance stock units granted during the six months ended July 2, 2022 and July 3, 2021 are as follows:

		Six Months Ended
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values		July 2, 2022				July 3, 2021
Performance stock units issued (in thousands)			40				41
Risk-free interest rate			1.6	%			0.2	%
Expected life in years			2.9				2.9
Expected volatility			25.4	%			38.7	%
Average volatility of peer companies			34.5	%			34.7	%
Correlation coefficient			43.0	%			45.8	%
Expected dividends			—				—

The following table summarizes the unvested performance stock unit award activity for the six months ended July 2, 2022 (in thousands, except per share data):

		Shares				Weighted-Average Fair Value per Share
Unvested at December 31, 2021			87			$	285.73
Granted			40			$	313.21
Vested			(24	)		$	308.71
Forfeited			10			$	370.15
Unvested at July 2, 2022			113			$	298.05

10 Earnings Per Share

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

		Three Months Ended July 2, 2022
		Net Income				Weighted- Average Shares				Per Share
		(Numerator)				(Denominator)				Amount
Net income per basic common share		$	164,864				60,206			$	2.74
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities			—				304				(0.02	)
Net income per diluted common share		$	164,864				60,510			$	2.72

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

		Three Months Ended July 3, 2021
		Net Income				Weighted- Average Shares				Per Share
		(Numerator)				(Denominator)				Amount
Net income per basic common share		$	167,292				61,685			$	2.71
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities			—				472				(0.02	)
Net income per diluted common share		$	167,292				62,157			$	2.69

		Six Months Ended July 2, 2022
		Net Income				Weighted- Average Shares				Per Share
		(Numerator)				(Denominator)				Amount
Net income per basic common share		$	324,695				60,399			$	5.38
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities			—				345				(0.03	)
Net income per diluted common share		$	324,695				60,744			$	5.35

		Six Months Ended July 3, 2021
		Net Income				Weighted- Average Shares				Per Share
		(Numerator)				(Denominator)				Amount
Net income per basic common share		$	315,419				61,979			$	5.09
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities			—				456				(0.04	)
Net income per diluted common share		$	315,419				62,435			$	5.05

For the three and six months ended July 2, 2022 and July 3, 2021, the Company had fewer than one million stock options that were antidilutive due to having higher exercise prices than the Company’s average stock price during the applicable period. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.

11 Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are detailed as follows (in thousands):

		Currency Translation				Unrealized Gain (Loss) on Retirement Plans				Unrealized Gain (Loss) on Investments				Accumulated Other Comprehensive Loss
Balance at December 31, 2021		$	(99,985	)		$	(11,860	)		$	(20	)		$	(111,865	)
Other comprehensive (loss) income, net of tax			(30,476	)			932				20				(29,524	)
Balance at July 2, 2022		$	(130,461	)		$	(10,928	)		$	—			$	(141,389	)

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

12 Retirement Plans

The Company sponsors various retirement plans. The components of net periodic benefit cost other than the service cost component are included in other income, net in the consolidated statements of operations. The summary of the components of net periodic pension costs for the plans for the three and six months ended July 2, 2022 and July 3, 2021 is as follows (in thousands):

		Three Months Ended
		July 2, 2022								July 3, 2021
		U.S. Retiree				Non-U.S.				U.S. Retiree				Non-U.S.
		Healthcare				Pension				Healthcare				Pension
		Plan				Plans				Plan				Plans
Service cost		$	226			$	1,003			$	232			$	1,147
Interest cost			146				341				139				312
Expected return on plan assets			(269	)			(496	)			(255	)			(464	)
Net amortization:
Prior service credit			(5	)			(32	)			(4	)			(39	)
Net actuarial loss			—				157				—				261
Net periodic pension cost		$	98			$	973			$	112			$	1,217

		Six Months Ended
		July 2, 2022								July 3, 2021
		U.S. Retiree				Non-U.S.				U.S. Retiree				Non-U.S.
		Healthcare				Pension				Healthcare				Pension
		Plan				Plans				Plan				Plans
Service cost		$	452			$	2,085			$	465			$	2,307
Interest cost			291				707				278				627
Expected return on plan assets			(538	)			(1,030	)			(510	)			(930	)
Net amortization:
Prior service credit			(10	)			(69	)			(9	)			(80	)
Net actuarial loss			—				326				—				523
Net periodic pension cost		$	195			$	2,019			$	224			$	2,447

During fiscal year 2022, the Company expects to contribute a total of approximately $3 million to $6 million to the Company’s defined benefit plans.

13 Business Segment Information

The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: Waters

TM

and TA

TM

.

The Waters operating segment is primarily in the business of designing, manufacturing, selling and servicing LC and MS instruments, columns and other precision chemistry consumables that can be integrated and used along with other analytical instruments. The TA operating segment is primarily in the business of designing, manufacturing, selling and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s two operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution; and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the one reportable segment of the Company.

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

Net sales for the Company’s products and services are as follows for the three and six months ended July 2, 2022 and July 3, 2021 (in thousands):

		Three Months Ended								Six Months Ended
		July 2, 2022				July 3, 2021				July 2, 2022				July 3, 2021
Product net sales:
Waters instrument systems		$	280,846			$	261,363			$	550,808			$	477,435
Chemistry consumables			131,947				126,459				257,565				245,433
TA instrument systems			56,837				53,133				112,097				100,109
Total product sales			469,630				440,955				920,470				822,977
Service net sales:
Waters service			222,359				219,502				439,935				426,334
TA service			22,330				21,190				44,486				40,881
Total service sales			244,689				240,692				484,421				467,215
Total net sales		$	714,319			$	681,647			$	1,404,891			$	1,290,192

Net sales are attributable to geographic areas based on the region of destination. Geographic sales information is presented below for the three and six months ended July 2, 2022 and July 3, 2021 (in thousands):

		Three Months Ended								Six Months Ended
		July 2, 2022				July 3, 2021				July 2, 2022				July 3, 2021
Net Sales:
Asia:
China		$	138,740			$	127,225			$	259,772			$	230,144
Japan			37,504				45,113				86,127				95,409
Asia Other			101,766				97,609				186,445				173,936
Total Asia			278,010				269,947				532,344				499,489
Americas:
United States			213,815				186,915				422,528				349,348
Americas Other			43,456				37,979				83,580				72,903
Total Americas			257,271				224,894				506,108				422,251
Europe			179,038				186,806				366,439				368,452
Total net sales		$	714,319			$	681,647			$	1,404,891			$	1,290,192

Net sales by customer class are as follows for the three and six months ended July 2, 2022 and July 3, 2021 (in thousands):

		Three Months Ended								Six Months Ended
		July 2, 2022				July 3, 2021				July 2, 2022				July 3, 2021
Pharmaceutical		$	437,171			$	416,705			$	852,943			$	776,853
Industrial			208,517				202,579				417,914				385,852
Academic and government			68,631				62,363				134,034				127,487
Total net sales		$	714,319			$	681,647			$	1,404,891			$	1,290,192

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

Net sales for the Company recognized at a point in time versus over time are as follows for the three and six months ended July 2, 2022 and July 3, 2021 (in thousands):

		Three Months Ended								Six Months Ended
		July 2, 2022				July 3, 2021				July 2, 2022				July 3, 2021
Net sales recognized at a point in time:
Instrument systems		$	337,683			$	314,496			$	662,905			$	577,544
Chemistry consumables			131,947				126,459				257,565				245,433
Service sales recognized at a point in time (time & materials)			91,571				88,832				177,350				168,119
Total net sales recognized at a point in time			561,201				529,787				1,097,820				991,096
Net sales recognized over time:
Service and software maintenance sales recognized over time (contracts)			153,118				151,860				307,071				299,096
Total net sales		$	714,319			$	681,647			$	1,404,891			$	1,290,192

14 Recent Accounting Standard Changes and Developments

Recently Issued Accounting Standards

In March 2020, accounting guidance was issued that facilitates the effects of reference rate reform on financial reporting. The amendments in the update provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January of 2021, an update was issued to clarify that certain optional expedients and exceptions under the reference rate reform guidance for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in the reference rate reform guidance, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This temporary guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company may elect to apply this guidance for all contract modifications or eligible hedging relationships during that time period subject to certain criteria. The Company does not believe that it has material reference rate exposure which would require utilizing the guidance under this accounting pronouncement and if adopted does not believe that this standard would have a material impact on the Company’s financial position, results of operations and cash flows.

In October 2021, accounting guidance was issued that requires acquirers in a business combination to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The new guidance requires that at the acquisition date, the acquirer should account for the related revenue contracts in accordance with 606 as if it had originated the contracts. This guidance differs from current GAAP which requires an acquirer to recognize assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with 606, at fair value on the acquisition date. This guidance is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those years. The amendments within this update should be applied prospectively to business combinations on or after the effective date of the amendments. Early adoption of the amendment is permitted, including adoption in an interim period. The applicability of this standard is dependent on there being a business combination activity and therefore the Company will evaluate the impact of this guidance when and if there is applicable activity.