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Basis of Presentation and Summary of Significant Accounting Policies (Policies)

3 Months Ended

Apr. 02, 2022

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

Basis of Accounting

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.

Principles of Consolidation

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.

Use of Estimates

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.

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

Translation of Foreign Currencies

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

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

Cash, Cash Equivalents and Investments

Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of April 2, 2022 and December 31, 2021, $431 million out of $503 million and $440 million out of $569 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $324 million out of $503 million and $298 million out of $569 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at April 2, 2022 and December 31, 2021, respectively.

Accounts Receivable and Allowance for Credit Losses

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

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

re-possess,

refurbish and

re-sell

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

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


	Balance at Beginning of Period		Additions		Deductions			Balance at End of Period
Allowance for Credit Losses
April 2, 2022	$	13,228	$	987	$	(1,072	)	$	13,143
April 3, 2021	$	14,381	$	775	$	(1,561	)	$	13,595

Income Taxes

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.

Other Investments

During the three months ended April 2, 2022, the Company sold an equity investment for $7 million in cash and recorded a gain on the sale of approximately $4 million in other income, net on the statement of operations. The Company also recorded an other than temporary impairment loss on an equity method investment still held at the reporting date of approximately $4 million within other income, net on the statement of operations as the company entered into a sale process and we adjusted the carrying value of our investment based on our portion of the total proceeds we expect to receive.

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

Fair Value Measurements

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

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


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

Total	$	66,150	$	32,953	$	33,197	$	—

Liabilities:
Contingent consideration	$	1,388	$	—	$	—	$	1,388
Foreign currency exchange contracts		190		—		190		—
Interest rate cross-currency swap agreements		635		—		635		—

Total	$	2,213	$	—	$	825	$	1,388

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


			Quoted Prices
			in Active		Significant
			Markets		Other		Significant
	Total at		for Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2021		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Treasury securities	$	13,917	$	—	$	13,917		—
Corporate debt securities		39,121		—		39,121		—
Time deposits		19,030		—		19,030	$	—
Waters 401(k) Restoration Plan assets		38,729		38,729		—		—
Foreign currency exchange contracts		504		—		504		—

Total	$	111,301	$	38,729	$	72,572	$	—

Liabilities:
Contingent consideration	$	1,347	$	—	$	—	$	1,347
Foreign currency exchange contracts		195		—		195		—
Interest rate cross-currency swap agreements		5,363		—		5,363		—

Total	$	6,905	$	—	$	5,558	$	1,347

Fair Value of 401(k) Restoration Plan Assets

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

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

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

Fair Value of Contingent Consideration

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

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

Fair Value of Other Financial Instruments

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

Derivative Transactions

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

non-U.S.

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

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

Foreign Currency Exchange Contracts

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

Interest Rate Cross-Currency Swap Agreements

As of April 2, 2022, the Company had three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $550 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive loss in stockholders’ equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.

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


	April 2, 2022				December 31, 2021
	Notional Value		Fair Value		Notional Value		Fair Value
Foreign currency exchange contracts:
Other current assets	$	10,509	$	9	$	55,309	$	504
Other current liabilities	$	46,882	$	190	$	9,000	$	195

Interest rate cross-currency swap agreements:
Other assets	$	470,000	$	8,163	$	—	$	—
Other liabilities		80,000		635		230,000		5,363
Accumulated other comprehensive loss			$	3,755			$	15,944

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


	Financial Statement Classification	Three Months Ended
		April 2, 2022			April 3, 2021
		April 2, 2022			April 3, 2021
Foreign currency exchange contracts:
Realized (losses) gains on closed contracts	Cost of sales	$	(1,499	)	$	1,667
Unrealized losses on open contracts	Cost of sales		(489	)		(753	)

Cumulative net pre-tax (losses) gains	Cost of sales	$	(1,988	)	$	914

Interest rate cross-currency swap agreements:
Interest earned	Interest income	$	1,775		$	3,827
Unrealized gains on contracts, net	Accumulated other comprehensive loss	$	12,188		$	21,244

Stockholders' Equity

Stockholders’ Equity

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

two-year

period. This program replaced the remaining amounts available from the

pre-existing

program. During the three months ended April 2, 2022 and April 3, 2021, the Company repurchased 0.5 million and 0.6 million shares of the Company’s outstanding common stock at a cost of $160 million and $173 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $10 million and $8 million of common stock related to the vesting of restricted stock units during the three months ended April 2, 2022 and April 3, 2021, respectively. As of April 2, 2022, the Company had repurchased an aggregate of 13.6 million shares at a cost of $3.3 billion under the January 2019 repurchase program and had a total of $0.7 billion authorized for future repurchases. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023.

Product Warranty Costs

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

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


	Balance at Beginning of Period		Accruals for Warranties		Settlements Made			Balance at End of Period
Accrued warranty liability:
April 2, 2022	$	10,718	$	1,916	$	(2,422	)	$	10,212
April 3, 2021	$	10,950	$	2,337	$	(2,582	)	$	10,705

Stock-Based Compensation

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 months ended April 2, 2022 and April 3, 2021 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock purchase plan (in thousands):


	Three Months Ended
	April 2, 2022		April 3, 2021
Cost of sales	$	1,027	$	633
Selling and administrative expenses		8,169		6,420
Research and development expenses		1,737		1,252

Total stock-based compensation	$	10,933	$	8,305

Stock Options

In determining the fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of

non-qualified

stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury

zero-coupon

issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the three months ended April 2, 2022 and April 3, 2021 are as follows:


	Three Months Ended
Options Issued and Significant Assumptions Used to Estimate Option Fair Values	April 2, 2022			April 3, 2021
Options issued in thousands		127			139
Risk-free interest rate		1.9	%		0.8	%
Expected life in years		6			6
Expected volatility		30.9	%		33.1	%
Expected dividends		—			—


	Three Months Ended
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant	April 2, 2022		April 3, 2021
Exercise price	$	321.91	$	277.32
Fair value	$	107.76	$	91.63

Earnings Per Share

The effect of dilutive securities was calculated using the treasury stock method.

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.

New Accounting Pronouncements

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.

Revenue Recognition

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

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


	April 2, 2022			April 3, 2021
Balance at the beginning of the period	$	273,598		$	239,759
Recognition of revenue included in balance at beginning of the period		(103,355	)		(94,078	)
Revenue deferred during the period, net of revenue recognized		198,036			182,384

Balance at the end of the period	$	368,279		$	328,065

The Company classified $53 million and $47 million of deferred revenue and customer advances in other long-term liabilities at April 2, 2022 and December 31, 2021, respectively.

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


	April 2, 2022
Deferred revenue and customer advances expected to be recognized in:
One year or less	$	315,086
13-24 months		32,877
25 months and beyond		20,316

Total	$	368,279

Other Items

During the three months ended April 2, 2022, the Company completed an asset acquisition in which the charge detection mass spectrometry technology (“CDMS technology”) assets of Megadalton Solutions, Inc. (“Megadalton”) were acquired for approximately $10 million in total purchase price, of which $5 million was paid at closing and the

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.