Item 2. Management

Management

’

s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

The Company has two operating segments: Waters

TM

and TA

TM

. Waters products and services primarily consist of high-performance liquid chromatography (“HPLC”), ultra-performance liquid chromatography (“UPLC

TM

” and, together with HPLC, referred to as “LC”), mass spectrometry (“MS”) and precision chemistry consumable products and related services. TA products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Company’s products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and government customers. These customers use the Company’s products to detect, identify, monitor and measure the chemical, physical and biological composition of materials and to predict the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids in various industrial, consumer goods and healthcare products.

COVID-19

Pandemic

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

COVID-19

pandemic that has led to volatility and uncertainty in the U.S. and international markets. The Company is actively managing its business to respond to the

COVID-19

impact; however, the Company cannot reasonably estimate the length or severity of the

COVID-19

pandemic, including the effect of the emergence of variants of the virus, or the related response, or the extent to which the disruption may materially impact the Company’s business, consolidated financial position, consolidated results of operations or consolidated cash flows in the future.

The COVID-19 pandemic has not had a material impact on the Company’s manufacturing facilities or those of the third parties to whom it outsources certain manufacturing processes, the distribution centers where the inventory is managed or the operations of its logistics and other service providers.

In the second quarter of 2022, the Company successfully managed a significant delay in the receipt of certain materials and components from a supplier that was directly related to the COVID-19 pandemic lockdown in China. The Company cannot provide any assurances that any further disruptions in its logistics and supply chains will not have a significant impact on its future financial results and cashflows.

The Company has taken decisive and appropriate actions throughout the

COVID-19

pandemic and continues to take proactive measures to guard the health of its global employee base and the safety of all customer interactions. The Company has implemented rigorous protocols to promote a safe work environment in all of its locations that are operational around the world and continues to closely monitor and update its multi-phase process for the safe return of employees to their physical workplaces as social distancing, governmental requirements, including capacity limitations, and other protocols allow.

The vast majority of the markets the Company serves, most notably the pharmaceutical, biomedical research, materials sciences, food/environmental and clinical markets, have continued to operate at various levels, and the Company is working closely with these customers to facilitate their seamless operation.

Financial Overview

The Company’s operating results are as follows for the three and six months ended July 2, 2022 and July 3, 2021 (dollars in thousands, except per share data):

		Three Months Ended												Six Months Ended
		July 2, 2022				July 3, 2021				% change				July 2, 2022				July 3, 2021				% change
Revenues:
Product sales		$	469,630			$	440,955				7	%		$	920,470			$	822,977				12	%
Service sales			244,689				240,692				2	%			484,421				467,215				4	%
Total net sales			714,319				681,647				5	%			1,404,891				1,290,192				9	%
Costs and operating expenses:
Cost of sales			307,206				280,254				10	%			592,891				534,401				11	%
Selling and administrative expenses			161,877				158,213				2	%			319,352				301,409				6	%
Research and development expenses			44,006				44,949				(2	%)			84,478				83,041				2	%
Purchased intangibles amortization			1,598				1,809				(12	%)			3,271				3,649				(10	%)
Acquired in-process research and development (Note 1)			—				—				—				9,797				—				—
Operating income			199,632				196,422				2	%			395,102				367,692				7	%
Operating income as a % of sales			27.9	%			28.8	%							28.1	%			28.5	%
Other income, net			1,535				9,321				(84	%)			1,705				18,680				(91	%)
Interest expense, net			(8,893	)			(8,329	)			7	%			(17,838	)			(15,174	)			18	%
Income before income taxes			192,274				197,414				(3	%)			378,969				371,198				2	%
Provision for income taxes			27,410				30,122				(9	%)			54,274				55,779				(3	%)
Net income		$	164,864			$	167,292				(1	%)		$	324,695			$	315,419				3	%
Net income per diluted common share		$	2.72			$	2.69				1	%		$	5.35			$	5.05				6	%
															** Percentage not meaningful

The Company’s net sales increased 5% and 9% in the second quarter and first half of 2022, respectively, as compared to the second quarter and first half of 2021. The sales growth in these periods was driven by strong customer demand across most major geographies, end markets, and product categories. Foreign currency translation decreased total sales growth by 5% in the second quarter and 4% in the first half of 2022 as the U.S. dollar strengthened significantly against all currencies in the world, which negatively impacted our sales and operating profits. In addition, the Company’s first half of 2022 included one less calendar day than the first half of 2021.

Instrument system sales increased 7% and 15% for the second quarter and first half of 2022, respectively, due to the broad-based increase in customer demand across all existing and newly introduced LC,

LC-MS

and Thermal Analysis instrument system sales. Foreign currency translation decreased instrument system sales growth by 5% and 4% in the second quarter and first half of 2022, respectively. Recurring revenues (combined sales of precision chemistry consumables and services) increased 3% and 4% for the second quarter and first half of 2022, respectively, with foreign currency translation decreasing sales growth by 5% for both the second quarter and the first half of the year.

Operating income increased 2% and 7% for the second quarter and first half of 2022, respectively. These increases were primarily a result of the increase in sales volumes and price increases being partially offset by an increase in electronic component and freight inflationary costs and the negative impact of foreign currency translation.

The Company generated $255 million and $361 million of net cash flows from operations in the first half of 2022 and 2021, respectively. This decrease in operating cash flow can primarily be attributed to the delay in the timing of shipments in the second quarter caused a delay in the receipt of certain materials and components from a supplier that was directly related to the COVID-19 pandemic lockdown in China, as well as an increase in inventory levels due to the higher sales volumes, higher material inflation cost and the

build-up

of safety stock in an attempt to mitigate future supply chain issues. Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $75 million and $77 million in the first half of 2022 and 2021, respectively.

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. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. During the first half of 2022 and 2021, the Company repurchased $312 million and $339 million of the Company’s outstanding common stock, respectively, under authorized share repurchase programs. The Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits.

Results of Operations

Sales by Geography

Geographic sales information is presented below for the three and six months ended July 2, 2022 and July 3, 2021 (dollars in thousands):

		Three Months Ended												Six Months Ended
		July 2, 2022				July 3, 2021				% change				July 2, 2022				July 3, 2021				% change
Net Sales:
Asia:
China		$	138,740			$	127,225				9	%		$	259,772			$	230,144				13	%
Japan			37,504				45,113				(17	%)			86,127				95,409				(10	%)
Asia Other			101,766				97,609				4	%			186,445				173,936				7	%
Total Asia			278,010				269,947				3	%			532,344				499,489				7	%
Americas:
United States			213,815				186,915				14	%			422,528				349,348				21	%
Americas Other			43,456				37,979				14	%			83,580				72,903				15	%
Total Americas			257,271				224,894				14	%			506,108				422,251				20	%
Europe			179,038				186,806				(4	%)			366,439				368,452				(1	%)
Total net sales		$	714,319			$	681,647				5	%		$	1,404,891			$	1,290,192				9	%

Geographically, the Company’s sales growth in the second quarter and first half of 2022 was broad-based across most major regions. Foreign currency translation decreased total sales growth by 5% in the second quarter and 4% in the first half of 2022 as the U.S. dollar strengthened significantly against all currencies in the world. The geographies that were the most negatively impacted by the strengthening of the U.S. dollar were Europe and Japan. The Company’s sales in these geographies typically represent over 30% of our sales in a period, and the weakening of the Euro and Japanese Yen lowered sales growth in Europe and Japan by 11% and 16% for the second quarter, respectively, and 9% and 13% for the first half, respectively.

During the second quarter of 2022, sales increased 3% in Asia and 14% in the Americas, but decreased 4% in Europe, with the effect of foreign currency translation decreasing sales growth in Asia by 6% and in Europe by 11%. During the first half of 2022, sales increased 7% in Asia, 20% in the Americas, and decreased 1% in Europe, with the effect of foreign currency translation decreasing sales growth by 4% in Asia, and 9% in Europe. China sales increased 9% and 13% in the second quarter and first half of 2022, respectively, driven by strong customer demand for our products and services. The latest COVID-19 pandemic lockdown in China has made it difficult to conduct normal business operations in 2022 and may have a negative impact on the Company’s future sales growth if future lockdowns were to occur for a prolonged period. Sales increased 14% and 21% in the U.S. and 12% and 15% in India, respectively in the quarter and for the first half of 2022, while sales decreased by 17% and 10% in Japan due to foreign currency translation, which decreased sales growth by 16% and 13% in Japan, respectively in the second quarter and for the first half of 2022.

Sales by Trade Class

Net sales by customer class are presented below for the three and six months ended July 2, 2022 and July 3, 2021 (dollars 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

During the second quarter of 2022, sales to pharmaceutical customers increased 5%, driven by growth in most major regions, including 14% in China, 4% in India, and 12% in the Americas on strong customer demand. Foreign currency translation decreased pharmaceutical sales growth by 5% in the second quarter of 2022. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 3%, with foreign currency translation decreasing sales growth by 5% in the quarter. During the second quarter of 2022, combined sales to academic and government customers increased 10%, with foreign currency translation decreasing academic and government sales growth by 6%. Sales to our academic and government customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales can vary significantly from period to period.

During the first half of 2022, sales to pharmaceutical customers increased 10%, driven by growth in all regions on strong customer demand. Foreign currency translation decreased pharmaceutical sales growth by 4%. Combined sales to industrial customers increased 8%, with the effect of foreign currency translation decreasing sales growth by 4%. During the first half of 2022, combined sales to academic and government customers increased 5%, with foreign currency translation decreasing sales growth by 5%.

Waters Products and Services Net Sales

Net sales for Waters products and services were as follows for the three and six months ended July 2, 2022 and July 3, 2021 (dollars in thousands):

		Three Months Ended
		July 2, 2022				% of Total				July 3, 2021				% of Total				% change
Waters instrument systems		$	280,846				44	%		$	261,363				43	%			7	%
Chemistry consumables			131,947				21	%			126,459				21	%			4	%
Total Waters product sales			412,793				65	%			387,822				64	%			6	%
Waters service			222,359				35	%			219,502				36	%			1	%
Total Waters net sales		$	635,152				100	%		$	607,324				100	%			5	%

		Six Months Ended
		July 2, 2022				% of Total				July 3, 2021				% of Total				% change
Waters instrument systems		$	550,808				44	%		$	477,435				42	%			15	%
Chemistry consumables			257,565				21	%			245,433				21	%			5	%
Total Waters product sales			808,373				65	%			722,868				63	%			12	%
Waters service			439,935				35	%			426,334				37	%			3	%
Total Waters net sales		$	1,248,308				100	%		$	1,149,202				100	%			9	%

Waters products and service sales increased 5% and 9% in the second quarter and first half of 2022, respectively, with the effect of foreign currency translation decreasing Waters sales growth by 5% and 4% in the second quarter and first half of 2022, respectively. Waters instrument systems grew 7% and 15% for the second quarter and first half of 2022,

respectively, with foreign currency translation lowering sales growth by 5% and 4% for the second quarter and first half of 2022, respectively. The increase in the Waters instrument system sales can be attributed to the strong customer demand for our existing products as well as our newer Arc

TM

HPLC and ACQUITY

TM

Premier product introductions. The increase in Waters chemistry consumables sales was primarily due to the strong demand in the U.S., Europe, China and India, driven by the uptake in columns and application-specific testing kits to pharmaceutical customers. Waters service sales increased due to higher service demand billing, particularly in India and the United States. Waters recurring revenues were also negatively impacted by one less calendar day in the first half of the year.

In the second quarter of 2022, Waters sales increased 16% in the Americas and 2% in Asia, with sales in China increasing 8%, while sales in Europe and Japan decreased by 4% and 17%, respectively. Foreign currency translation decreased Waters sales growth by 10% in Europe and 15% in Japan.

In the first half of 2022, Waters sales decreased 1% in Europe, and sales increased 22% in the Americas and 5% in Asia, with sales in China increasing 11%. Foreign currency translation decreased Waters sales growth by 8% in Europe and 4% in Asia.

TA Product and Services Net Sales

Net sales for TA products and services were as follows for the three and six months ended July 2, 2022 and July 3, 2021 (dollars in thousands):

		Three Months Ended
		July 2, 2022				% of Total				July 3, 2021				% of Total				% change
TA instrument systems		$	56,837				72	%		$	53,133				71	%			7	%
TA service			22,330				28	%			21,190				29	%			5	%
Total TA net sales		$	79,167				100	%		$	74,323				100	%			7	%

		Six Months Ended
		July 2, 2022				% of Total				July 3, 2021				% of Total				% change
TA instrument systems		$	112,097				72	%		$	100,109				71	%			12	%
TA service			44,486				28	%			40,881				29	%			9	%
Total TA net sales		$	156,583				100	%		$	140,990				100	%			11	%

TA instrument system and service sales growth in the second quarter and first half of 2022 was broad-based across most major geographies increasing 7% and 11%, respectively, and was primarily driven by strong customer demand for our thermal analysis instruments and services. The increase in TA service sales was primarily due to the sales of service plans and billings to a higher installed base of customers. The effect of foreign currency translation decreased TA’s sales growth by 5% and 4% in the second quarter and first half of 2022, respectively.

Cost of Sales

Cost of sales increased 10% and 11% for the second quarter and first half of 2022, respectively. The increase in cost of sales in these periods is primarily due to the increase in sales volume as well as an increase in electronic component and freight inflationary costs. Cost of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix, product costs of instrument systems and amortization of software platforms. At current foreign currency exchange rates, the Company expects foreign currency translation to significantly decrease gross profit for the remainder of 2022.

Selling and Administrative Expenses

Selling and administrative expenses increased 2% and 6% for the second quarter and first half of 2022, respectively. The increase in selling and administrative expenses in these periods can be attributed to the salary merit and additional compensation due to an increase in the number of employees. In addition, the effect of foreign currency translation decreased selling and administrative expenses by 4% and 3% for the second quarter and first half of 2022, respectively.

As a percentage of net sales, selling and administrative expenses were 22.7% for both the second quarter and first half of 2022 and 23.2% and 23.4% for the second quarter and first half of 2021, respectively.

Research and Development Expenses

Research and development expenses decreased 2% in the second quarter of 2022, while increasing by 2% in the first half of 2022. The impact of foreign currency exchange decreased expenses by 3% in the second quarter of 2022 and 2% in the first half of 2022.

Acquired

In-Process

Research & Development

During the first half of 2022, the Company completed an asset acquisition in which the CDMS technology assets of 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, we anticipate that 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 as part of costs and operating expenses in the statement of operations.

Other Income, net

During the first half of 2022, the Company sold an equity investment for $7 million in cash and recorded a gain on 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 first half of 2021, the Company recorded an unrealized gain of $10 million due to an observable change in the fair value of an existing investment the Company does not have the ability to exercise significant influence over.

Interest Expense, net

The net interest expense in the second quarter and first half of 2022 increased by approximately $1 million and $3 million, respectively, as compared to the same periods in the prior year. The increase in both periods can be primarily attributable to the lower interest income benefit from the lower notional amount of interest rate cross currency swap agreements.

Provision for 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 first half of 2022 and 2021 by $10 million and $9 million, respectively, and increased the Company’s net income per diluted share by $0.16 and $0.14 for the first half of 2022 and 2021, respectively.

The Company’s effective tax rate for the second quarter of 2022 and 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, as discussed below, and differences in the proportionate amounts

of pre-tax income

recognized in jurisdictions with different effective tax rates.

The Company’s effective tax rate for the first half of 2022 and 2021 was 14.3% and 15.0%, respectively. The effective tax rate for the first half of 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 first half of July 2, 2022. The effective tax rate for the first half of 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 first half of 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.

Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows (in thousands):

		Six Months Ended
		July 2, 2022				July 3, 2021
Net income		$	324,695			$	315,419
Depreciation and amortization			66,891				64,743
Stock-based compensation			20,722				15,596
Deferred income taxes			(12,523	)			6,107
Acquired in-process research and development and other non-cash items			7,903				—
Change in accounts receivable			(57,377	)			18,985
Change in inventories			(65,070	)			(50,873	)
Change in accounts payable and other current liabilities			(32,197	)			(35,328	)
Change in deferred revenue and customer advances			70,027				91,631
Other changes			(68,208	)			(64,836	)
Net cash provided by operating activities			254,863				361,444
Net cash used in investing activities			(7,403	)			(281,106	)
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 Flow from Operating Activities

Net cash provided by operating activities was $255 million and $361 million during the first half of 2022 and 2021, respectively. This decrease in operating cash flow was primarily a result of higher inventory levels due to higher sales volumes and higher incentive compensation payments in the first half of 2022 compared to the first half of 2021. The changes within net cash provided by operating activities include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the changes in net income:

	•		The changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales. Days sales outstanding increased to 81 days at July 2, 2022 as compared to 73 days at July 3, 2021. This increase is days sales outstanding is primarily due to delays in the timing of shipments to our customers from a supply chain issue caused by the COVID-19 pandemic lockdowns in China.

	•		The increase in inventory can be primarily attributed to higher material costs as well as an increase in safety stock levels to help mitigate any future supply chain issues.

	•		The changes in accounts payable and other current liabilities were a result of the timing of payments to vendors, as well as the annual payment of management incentive compensation.

	•		Net cash provided from deferred revenue and customer advances results from annual increases in new service contracts as a higher installed base of customers renew annual service contracts.

	•		Other changes were attributable to variation in the timing of various provisions, expenditures, prepaid income taxes and accruals in other current assets, other assets and other liabilities.

Cash Flow from Investing Activities

Net cash used in investing activities totaled $7 million and $281 million in the first half of 2022 and 2021, respectively. Additions to fixed assets and capitalized software were $75 million and $77 million in the first half July 2, 2022 and July 3, 2021, respectively. The cash flows from investing activities in 2022 also included $17 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the United States. The Company has incurred costs of $215 million on this facility through the end of the first half of 2022 and anticipates spending approximately $30 million to complete this new

state-of-the-art

facility in 2022.

During the first half of 2022 and 2021, the Company purchased $11 million and $215 million of investments, respectively, while $78 million and $18 million of investments matured, respectively, and were used for financing activities described below.

During the first half of 2022, the Company paid $5 million for the CDMS technology and intellectual property right asset from Megadalton, and the Company is required to make an additional $4 million of guaranteed payments at various dates in the future through 2029. The total purchase price of approximately $10 million was accounted for as Acquired

In-Process

Research and Development and expensed as part of costs and operating expenses in the statement of operations in the first half of 2022.

Cash Flow from Financing Activities

The Company entered into a credit agreement in September 2021 governing the Company’s five-year, $1.8 billion revolving facility that matures in September 2026. As of July 2, 2022, the Company had a total of $1.5 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $180 million borrowed under the 2021 Credit Agreement. During the first half of 2022 and 2021, the Company’s net debt borrowings decreased by $30 million and increased by $250 million, respectively.

As of July 2, 2022, the Company has entered into three-year interest rate cross-currency swap derivative agreements with a notional value $560 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. As a result of entering into these agreements, the Company anticipates lowering net interest expense by approximately $7 million in 2022.

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 new program replaced the remaining amounts available from the

pre-existing

program. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. During the first half of 2022 and 2021, the Company repurchased $312 million and $339 million, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased $10 million and $8 million of common stock related to the vesting of restricted stock units during the first half of 2022 and 2021, respectively.

The Company received $31 million and $45 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan during the first half 2022 and 2021, respectively.

The Company had cash, cash equivalents and investments of $420 million as of July 2, 2022. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $399 million held by foreign subsidiaries at July 2, 2022, of which $270 million was held in currencies other than U.S. dollars.

Contractual Obligations, Commercial Commitments, Contingent Liabilities and Dividends

A summary of the Company’s contractual obligations and commercial commitments is included in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2021, as filed with the SEC on February 24, 2022. The Company reviewed its contractual obligations and commercial commitments as of July 2, 2022 and determined that there were no material changes outside the ordinary course of business from the information set forth in the Annual Report on Form

10-K.

From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. The Company believes that it has meritorious arguments in its current litigation matters and that any outcome, either individually or in the aggregate, will not be material to the Company’s financial position or results of operations.

During fiscal year 2022, the Company expects to contribute a total of approximately $3 million to $6 million to its defined benefit plans, excluding the U.S. defined benefit pension plans.

The Company has not paid any dividends and has no plans, at this time, to pay any dividends in the future.

Off-Balance

Sheet Arrangements

The Company has not created, and is not party to, any special-purpose or

off-balance

sheet entities for the purpose of raising capital, incurring debt or operating parts of its business that are not consolidated (to the extent of the Company’s ownership interest therein) into the consolidated financial statements. The Company has not entered into any transactions with unconsolidated entities whereby it has subordinated retained interests, derivative instruments or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company.

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.

Critical Accounting Policies and Estimates

In the Company’s Annual Report on Form

10-K

for the year ended December 31, 2021, as filed with the SEC on February 24, 2022, the Company’s most critical accounting policies and estimates upon which its financial status depends were identified as those relating to revenue recognition, loss provisions on accounts receivable and inventory, valuation of long-lived assets, intangible assets and goodwill, income taxes, uncertain tax positions, warranty, litigation, pension and other postretirement benefit obligations, stock-based compensation and business combinations and asset acquisitions. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the six months ended July 2, 2022. The Company did not make any changes in those policies during the six months ended July 2, 2022.

New Accounting Pronouncements

Please refer to Note 14, Recent Accounting Standard Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.

Special Note Regarding Forward-Looking Statements

Certain of the statements in this Quarterly Report on Form

10-Q,

including the information incorporated by reference herein, may contain forward-looking statements with respect to future results and events, including any statements regarding, among other items, anticipated trends or growth in the Company’s business, including, but not limited to, the impact of the ongoing

COVID-19

pandemic; the impact of new or proposed tariff or trade regulations or changes in the interpretation or enforcement of existing regulations; the impact of foreign currency translation on financial results; development of products by acquired businesses; the growth rate of sales and research and development expenses; the impact of costs associated with developing new technologies and bringing these new technologies to market; the impact of new product launches and the associated costs, such as the amortization expense related to software platforms; geographic sales mix of business; development of products by acquired businesses and the amount of contingent payments to the sellers of an acquired business; anticipated expenses, including interest expense, capitalized software costs and effective tax rates; the impact of the 2017 Tax Act in the U.S.; the impact and outcome of the Company’s various ongoing tax audit examinations; the achievement of contractual milestones to preserve foreign tax rates; the impact and outcome of litigation matters; the impact of the loss of intellectual property protection; the impact of new accounting standards and pronouncements; the adequacy of the Company’s supply chain and manufacturing capabilities and facilities; the impact of regulatory compliance; the Company’s expected cash flow, borrowing capacity, debt repayment and refinancing; the Company’s ability to fund working capital, capital expenditures, service debt, repay outstanding lines of credit, make authorized share repurchases, fund potential acquisitions and pay any adverse litigation or tax audit liabilities, particularly in the U.S.; future impairment charges; the Company’s contributions to defined benefit plans; the Company’s expectations regarding changes to its financial position; compliance with applicable environmental laws; and the impact of recent acquisitions on sales and earnings.

Many of these statements appear, in particular, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form

10-Q.

Statements that are not statements of historical fact may be deemed forward-looking statements. You can identify these forward-looking statements by the use of the words “feels”, “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “suggests”, “appears”, “estimates”, “projects”, “should” and similar expressions, whether in the negative or affirmative. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without limitation:

	•		Risks related to the effects of the COVID-19 pandemic on our business, including: portions of our global workforce being unable to work fully and/or effectively due to working remotely, illness, quarantines, government actions, facility closures or other reasons related to the COVID-19 pandemic, increased risks of cyber attacks resulting from our temporary remote working model, disruptions in our manufacturing capabilities or to our supply chain and distribution network, including the impact from the lockdown in China, volatility and uncertainty in global capital markets limiting our ability to access capital, customers being unable to make timely payment for purchases, volatility in demand for our products and current global economic, sovereign and political conditions and uncertainties regarding the effect of the COVID-19 pandemic.

	•		Foreign currency exchange rate fluctuations that could adversely affect translation of the Company’s future sales, financial operating results and the condition of its non-U.S. operations, especially when a currency weakens against the U.S. dollar.

	•		Current global economic, sovereign and political conditions and uncertainties; new or proposed tariffs or trade regulations or changes in the interpretation or enforcement of existing regulations; the United Kingdom’s exit from the European Union as well as the Chinese government’s ongoing tightening of restrictions on procurement by government-funded customers; the Company’s ability to access capital and maintain liquidity in volatile market conditions; rising interest rates; changes in timing and demand for the Company’s products among the Company’s customers and various market sectors or geographies, particularly if they should reduce capital expenditures or are unable to obtain funding, as in the cases of governmental, academic and research institutions; the effect of mergers and acquisitions on customer demand for the Company’s products; and the Company’s ability to sustain and enhance service.

	•		Negative industry trends; changes in the competitive landscape as a result of changes in ownership, mergers and continued consolidation among the Company’s competitors; introduction of competing products by other companies and loss of market share; pressures on prices from customers or resulting from competition; regulatory, economic and competitive obstacles to new product introductions; lack of acceptance of new products; expansion of our business in developing markets; spending by certain end-markets; ability to obtain alternative sources for components and modules; and the possibility that future sales of new products related to acquisitions, which trigger contingent purchase payments, may exceed the Company’s expectations.

	•		Increased regulatory burdens as the Company’s business evolves, especially with respect to the United States Food and Drug Administration and the United States Environmental Protection Agency, among others, as well as regulatory, environmental and logistical obstacles affecting the distribution of the Company’s products, completion of purchase order documentation by our customers and ability of customers to obtain letters of credit or other financing alternatives.

	•		Risks associated with lawsuits, particularly involving claims for infringement of patents and other intellectual property rights.

	•		The impact and costs incurred from changes in accounting principles and practices; the impact and costs of changes in statutory or contractual tax rates in jurisdictions in which the Company operates, specifically as it relates to the 2017 Tax Act in the U.S.; shifts in taxable income among jurisdictions with different effective tax rates; and the outcome of and costs associated with ongoing and future tax audit examinations or changes in respective country legislation affecting the Company’s effective rates.

	•		The impact and costs of war, in particular as a result of the ongoing conflict between Russia and Ukraine, and the possibility of further escalation resulting in a new geopolitical and regulatory instability.

Certain of these and other factors are discussed under the heading “Risk Factors” under Part I, Item 1A of the Company’s Annual Report on Form

10-K

for the year ended December 31, 2021, as filed with the SEC on February 24, 2022. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements, whether because of these factors or for other reasons. All forward-looking statements speak only as of the date of this Quarterly Report on Form

10-Q

and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by law, the Company does not assume any obligation to update any forward-looking statements.