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Waters Corporation
WAT
#781
Rank
$31.71 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
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$323.37
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๐Ÿญ Manufacturing๐Ÿ”ฌ Scientific & Technical Instruments
Categories
  1. Waters Corporation
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q1

Waters Corporation - 10-Q quarterly report FY2023 Q1


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form
10-Q
 
 
 
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2023
or
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                
to
                
.
Commission File Number:
01-14010
 
 
Waters Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
13-3668640
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
34 Maple Street
Milford, Massachusetts 01757
(Address, including zip code, of principal executive offices)
(
508)
 478-2000
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, par value $0.01 per share
 
WAT
 
New York Stock Exchange
, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large accelerated filer ☑  Accelerated filer ☐
    
Non-accelerated filer ☐  Smaller reporting company ☐
    
     Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Act).    Yes  ☐    No  ☑
Indicate the number of shares outstanding of the registrant’s common stock as of May 5, 2023:
59,033,571
 
 
 

Table of Contents

WATERS CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

INDEX

 

      Page 

PART I

  FINANCIAL INFORMATION  

Item 1.

  Financial Statements  
  Consolidated Balance Sheets (unaudited) as of April 1, 2023 and December 31, 2022   1 
  Consolidated Statements of Operations (unaudited) for the three months ended April 1, 2023 and April 2, 2022   2 
  Consolidated Statements of Comprehensive Income (unaudited) for the three months ended April 1, 2023 and April 2, 2022    3 
  Consolidated Statements of Cash Flows (unaudited) for the three months ended April 1, 2023 and April 2, 2022   4 
  Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended April 1, 2023 and April 2, 2022   5 
  Condensed Notes to Consolidated Financial Statements (unaudited)   6 

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations   20 

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk   30 

Item 4.

  Controls and Procedures   31 

PART II

  OTHER INFORMATION  

Item 1.

  Legal Proceedings   31 

Item 1A.

  Risk Factors   31 

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds   32 

Item 6.

  Exhibits   33 
  Signature   34 

Table of Contents
Item 1: Financial Statements
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
 
 
  
April 1, 2023
 
 
December 31, 2022
 
 
  
 
 
 
 
 
 
  
(In thousands, except per share data)
 
ASSETS
  
Current assets:
  
 
Cash and cash equivalents
  $486,070   $480,529 
Investments
   885    862 
Accounts receivable, net
   683,341    722,892 
Inventories
   499,422    455,710 
Other current assets
   103,981    103,910 
   
 
 
   
 
 
 
Total current assets
   1,773,699    1,763,903 
Property, plant and equipment, net
   590,207    582,217 
Intangible assets, net
   232,715    227,399 
Goodwill
   431,642    430,328 
Operating lease assets
   86,076    86,506 
Other assets
   192,481    191,100 
   
 
 
   
 
 
 
Total assets
  $3,306,820   $3,281,453 
   
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
          
Current liabilities:
          
Notes payable and debt
  $50,040   $50,000 
Accounts payable
   93,558    93,302 
Accrued employee compensation
   25,727    103,300 
Deferred revenue and customer advances
   306,865    227,908 
Current operating lease liabilities
   24,470    26,429 
Accrued income taxes
   150,689    132,545 
Accrued warranty
   12,311    11,949 
Other current liabilities
   138,290    140,304 
   
 
 
   
 
 
 
Total current liabilities
   801,950    785,737 
Long-term liabilities:
          
Long-term debt
   1,430,130    1,524,878 
Long-term portion of retirement benefits
   42,661    38,203 
Long-term income tax liabilities
   249,196    248,496 
Long-term operating lease liabilities
   62,257    62,108 
Other long-term liabilities
   120,803    117,543 
   
 
 
   
 
 
 
Total long-term liabilities
   1,905,047    1,991,228 
   
 
 
   
 
 
 
Total liabilities
   2,706,997    2,776,965 
Commitments and contingencies (Notes 6, 7 and 8)
          
Stockholders’ equity:
          
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at April 1, 2023 and December 31, 2022
   —      —   
Common stock, par value $0.01 per share, 400,000 shares authorized, 162,550 and 162,425 shares issued, 59,020 and 59,104 shares outstanding at April 1, 2023 and December 31, 2022, respectively
   1,626    1,624 
Additional
paid-in
capital
   2,214,963    2,199,824 
Retained earnings
   8,649,510    8,508,587 
Treasury stock, at cost, 103,530 and 103,321 shares at April 1, 2023 and December 31, 2022, respectively
   (10,133,480)    (10,063,975) 
Accumulated other comprehensive loss
   (132,796)    (141,572) 
   
 
 
   
 
 
 
Total stockholders’ equity
   599,823    504,488 
   
 
 
   
 
 
 
Total liabilities and stockholders’ equity
  $3,306,820   $3,281,453 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
1
Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
 
  
Three Months Ended
 
 
  
April 1, 2023
 
 
April 2, 2022
 
 
  
 
 
 
 
 
 
  
(In thousands, except per share data)
 
Revenues:
  
 
Product sales
  $436,457  $450,840 
Service sales
   248,217   239,732 
   
 
 
  
 
 
 
Total net sales
   684,674   690,572 
Costs and operating expenses:
         
Cost of product sales
   180,354   191,610 
Cost of service sales
   104,026   94,075 
Selling and administrative expenses
   181,956   157,475 
Research and development expenses
   42,691   40,472 
Purchased intangibles amortization
   1,479   1,673 
Acquired
in-process
research and development
   —     9,797 
   
 
 
  
 
 
 
Total costs and operating expenses
   510,506   495,102 
   
 
 
  
 
 
 
Operating income
   174,168   195,470 
Other income, net
   1,388
 
 
 
170 
Interest expense
  
 
(14,444
) 
 
 
(11,059
) 
Interest income
   4,061
 
 
 
2,114 
   
 
 
  
 
 
 
Income before income taxes
   165,173   186,695 
Provision for income taxes
   24,250
 
 
 
26,864 
   
 
 
  
 
 
 
Net income
  $140,923
 
 
$
159,831
 
   
 
 
  
 
 
 
Net income per basic common share
  
$
2.39  
$
2.64 
Weighted-average number of basic common shares
   59,023
 
 
 
60,580 
Net income per diluted common share
  
$
2.38  
$
2.62 
Weighted-average number of diluted common shares and equivalents
   59,317
 
 
 
60,952 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
2
Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
  
Three Months Ended
 
 
  
April 1, 2023
 
 
April 2, 2022
 
 
  
 
 
 
 
 
 
  
(In thousands)
 
Net income
  
$
140,923
 
 
$
159,831
 
Other comprehensive income (loss):
         
Foreign currency translation
   8,783   (6,169) 
Unrealized gains on investments before income taxes
   —   15 
Income tax expense
   —   (4) 
   
 
 
  
 
 
 
Unrealized gains on investments, net of tax
   —   11 
Retirement liability adjustment before reclassifications
   80   268 
Amounts reclassified to other income
   (83)   127 
   
 
 
  
 
 
 
Retirement liability adjustment before income taxes
   (3)   395 
Income tax expense

   (4)  (97) 
   
 
 
  
 
 
 
Retirement liability adjustment, net of tax
   (7)   298 
Other comprehensive income (loss)
   8,776   (5,860) 
   
 
 
  
 
 
 
Comprehensive income
  $149,699  $153,971 
   
 
 
  
 
 
 
T
he accompanying notes are an integral part of the interim consolidated financial statements.
 
3
Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
 
 
 
 
 
 
 
 
   
Three Months Ended
 
   
April 1, 2023
  
April 2, 2022
 
   
(In thousands)
 
Cash flows from operating activities:
     
Net income
  $140,923  $159,831 
Adjustments to reconcile net income to net cash provided by operating activities:
         
Stock-based compensation
   12,805   10,933 
Deferred income taxes
   (5,078)  4,175 
Depreciation
   19,411   17,209 
Amortization of intangibles
   11,743   15,455 
Acquired
in-process
research and development and other
non-cash
items
   —      9,381 
Change in operating assets and liabilities:
         
Decrease (increase) in accounts receivable
   44,047   (907) 
Increase in inventories
   (42,621)   (26,832) 
Increase in other current assets
   (2,123)   (1,805) 
Decrease (increase) in other assets
   6,662   (13,491) 
Decrease in accounts payable and other current liabilities
   (71,257)   (69,548) 
Increase in deferred revenue and customer advances
   77,206   91,514 
Increase in other liabilities
   5,033   2,045 
   
 
 
  
 
 
 
Net cash provided by operating activities
   196,751   197,960 
Cash flows from investing activities:
         
Additions to property, plant, equipment and software capitalization
   (34,390)   (27,751) 
Proceeds from equity investments, net
   —      6,785 
Payments for intellectual property licenses
   —      (4,897) 
Purchases of investments
   (893)   (9,219) 
Maturities and sales of investments
   877   54,074 
   
 
 
  
 
 
 
Net cash (used in) provided by investing activities
   (34,406)   18,992 
Cash flows from financing activities:
         
Proceeds from debt issuances
   50,040   — 
Payments on debt
   (145,000)   (70,000) 
Proceeds from stock plans
   2,378   12,832 
Purchases of treasury shares
   (69,505)   (170,136) 
Proceeds from (payments for) derivative contracts
   2,876   (107) 
   
 
 
  
 
 
 
Net cash used in financing activities
   (159,211)   (227,411) 
Effect of exchange rate changes on cash and cash equivalents
   2,407   (10,705) 
   
 
 
  
 
 
 
Increase (decrease) in cash and cash equivalents
   5,541   (21,164) 
Cash and cash equivalents at beginning of period
   480,529   501,234 
   
 
 
  
 
 
 
Cash and cash equivalents at end of period
  $486,070  $480,070 
   
 
 
  
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
4
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, 2021
   162,084   $1,621   $2,114,880   $7,800,832   $(9,437,914)  $(111,865)  $367,554 
Net income
   —      —      —      159,831    —     —     159,831 
Other comprehensive loss
   —      —      —      —      —     (5,860)   (5,860) 
Issuance of common stock for employees:
                                 
Employee Stock Purchase Plan
   7    —      2,327    —      —     —     2,327 
Stock options exercised
   69    1    11,091    —      —     —     11,092 
Treasury stock
   —      —      —      —      (170,136)   —     (170,136) 
Stock-based compensation
   92    1    10,128    —      —     —     10,129 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Balance April 2, 2022
   162,252   $1,623   $2,138,426   $7,960,663   $(9,608,050)  $(117,725)  $374,937 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
 
 
  
Number

of

Common

Shares
 
  
Common

Stock
 
  
Additional

Paid-In

Capital
 
  
Retained

Earnings
 
  
Treasury

Stock
 
 
Accumulated

Other

Comprehensive

Loss
 
 
Total

Stockholders’

Equity
 
Balance December 31, 2022
   162,425   $1,624   $2,199,824   $8,508,587   $(10,063,975)  $(141,572)  $504,488 
Net income
   —      —      —      140,923    —     —     140,923 
Other comprehensive income
   —      —      —      —      —     8,776   8,776 
Issuance of common stock for employees:
                                 
Employee Stock Purchase Plan
   8    —      2,000    —      —     —     2,000 
Stock options exercised
   6    —      969    —      —     —     969 
Treasury stock
   —      —      —      —      (69,505)   —     (69,505) 
Stock-based compensation
   111    2    12,170    —      —     —     12,172 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Balance April 1, 2023
   162,550   $1,626   $2,214,963   $8,649,510   $(10,133,480)  $(132,796)  $599,823 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
5
Table of Contents
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 first fiscal quarters for 2023 and 2022 ended on April 1, 2023 and April 2, 2022, 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, 2022, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2023.
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.
 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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.
Acquisition Agreement
On February 14, 2023, the Company entered into an agreement to acquire all issued and outstanding equity interests of Wyatt Technology for $1.4 billion in cash at closing, subject to customary adjustments. Wyatt Technology is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories and services. The Company will finance this acquisition through cash on its balance sheet and existing borrowing capacity that is available on its revolving credit facility. The agreement contains certain customary termination rights, including the right of the sellers to terminate this transaction if it has not been completed by June 14, 2023, subject to automatic extension to August 14, 2023 if certain regulatory approvals are not obtained by such date. If this were to occur, the Company would be required to pay the sellers a
one-time
fee in the amount of $15 million if the agreement is validly terminated and not consummated in accordance with the closing conditions set forth in the agreement. This transaction is expected to close in the second quarter of 2023, subject to regulatory approvals and other customary closing conditions.
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 1, 2023 and December 31, 2022, $313 million out of $487 million and $472 million out of $481 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $188 million out of $487 million and $336 million out of $481 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at April 1, 2023 and December 31, 2022, 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

 
7
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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 1, 2023 and April 2, 2022 (in thousands):
 

 
  
Balance at
Beginning
of Period
 
  
Additions
 
  
Deductions
 
  
Balance at
End of
Period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Credit Losses
                    
April 1, 2023
  $14,311   $1,572   $(1,028)   $14,855 
April 2, 2022
  $13,228   $987   $(1,072)  $13,143 
Other Investments
During the three months ended April 1, 2023, the Company did not have any other investment activity. During the three months ended April 2, 2022, the Company recorded a realized gain of $
4 
million in other income, net in the consolidated statement of operations due to the sale of an equity investment as well as incurring
$4 
million in impairment losses on an equity investment.
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 1, 2023 and December 31, 2022. 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.
 
8
Table of Contents
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 April 1, 2023 (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Total at
April 1,
2023
   
Quoted Prices
in Active
Markets

for Identical
Assets

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

(Level 3)
 
Assets:
                    
Time deposits
  $885   $—     $885   $—   
Waters 401(k) Restoration Plan assets
   28,310    28,310    —      —   
Foreign currency exchange contracts
   121    —      121    —   
Interest rate cross-currency swap agreements
   13,880    —      13,880    —   
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $43,196   $28,310   $14,886   $—   
   
 
 
   
 
 
   
 
 
   
 
 
 
Liabilities:
                    
Foreign currency exchange contracts
  
$
67   
$
—     
$
67   
$
—   
Interest rate cross-currency swap agreements
   6,756    —      6,756    —   
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $6,823   $—     $6,823   $—   
   
 
 
   
 
 
   
 
 
   
 
 
 
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2022 (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Total at
December 31,
2022
   
Quoted Prices
in Active
Markets

for Identical
Assets

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

(Level 3)
 
Assets:
                    
Time deposits
  
$
862   
$
—     
$
862   
$
—   
Waters 401(k) Restoration Plan assets
   25,532    25,532    —      —   
Foreign currency exchange contracts
   231    —      231    —   
Interest rate cross-currency swap agreements
   19,163    —      19,163    —   
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $45,788   $25,532   $20,256   $—   
   
 
 
   
 
 
   
 
 
   
 
 
 
Liabilities:
                    
Contingent consideration
  $1,509   $—     $—     $1,509 
Foreign currency exchange contracts
   98    —      98    —   
Interest rate cross-currency swap agreements
   4,783    —      4,783    —   
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $6,390   $—     $4,881   $1,509 
   
 
 
   
 
 
   
 
 
   
 
 
 
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.
 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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 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 April 1, 2023 and December 31, 2022. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be
$1.1 
billion at both April 1, 2023 and December 31, 2022, using Level 2 inputs.

Derivative Transactions

The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its
non-U.S.
dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.
The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its euro-denominated and
yen-denominated
net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.
Foreign Currency Exchange Contracts
The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the euro, Japanese yen, British pound, Mexican peso and Brazilian real.
Interest Rate Cross-Currency Swap Agreements
As of April 1, 2023, the Company had three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $585 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its euro-denominated and
yen-denominated
net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated other 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.

10
Table of Contents
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):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
April 1, 2023
   
December 31, 2022
 
   
Notional Value
   
Fair Value
   
Notional Value
   
Fair Value
 
Foreign currency exchange contracts:
                    
Other current assets
  $31,461   $121   $42,047   $231 
Other current liabilities
  $16,968   $67   $13,450   $98 
Interest rate cross-currency swap agreements:
                    
Other assets
  $400,000   $13,880   $400,000   $19,163 
Other liabilities
  $185,000   $6,756   $185,000   $4,783 
Accumulated other comprehensive income
       $2,770        $10,026 
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 1, 2023
 
  
April 2, 2022
 
Foreign currency exchange contracts:
  
  
Realized gains (losses) on closed contracts
 Cost of sales  $30   $(1,499) 
Unrealized losses on open contracts
 Cost of sales   (78)    (489) 
 
 
 
 
 
 
 
 
 
 
 
Cumulative net
pre-tax
losses
 Cost of sales  $(48)   $(1,988) 
     
 
 
   
 
 
 
Interest rate cross-currency swap agreements:
          
Interest earned
 Interest income $2,655  $1,775 
Unrealized (losses)
gains
on contracts, net
 Accumulated other
comprehensive loss		  $(7,256)   $12,188 
Stockholders’ Equity
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $
4
 billion of its outstanding common stock over a
two-year
 
period. This program
 replaced the remaining amounts available from the pre-existing program. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. In December 2022, the Company’s Board of Directors amended and extended this repurchase program’s term by 
one year
such that it shall now expire on 
January 21, 2024
 
and
increased the total
authorization level to $
4.8
 billion, an increase of $
750
 million. During the three months ended April 1, 2023 and April 2, 2022, the Company repurchased 
0.2 million and 0.5
 million shares of the Company’s outstanding common stock at a cost of $
58 million and $160
 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $
11 million and $10
 million of common stock related to the vesting of restricted stock units during the three months ended April 1, 2023 and April 2, 2022, respectively. As of April 1, 2023, the Company had repurchased an aggregate of 
15.2
 million shares at a cost of $
3.8
 
billion under the January 2019 repurchase program and had a total of $1.0 billion authorized for future repurchases. While the Company believes that it has the financial flexibility to fund these share repurchases, as well as to invest in research, technology and business acquisitions, given current cash levels and debt borrowing capacity, it has temporarily suspended its share repurchases due to its recently announced agreement to acquire Wyatt Technology. 
 
1
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

 
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 1, 2023 and April 2, 2022 (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Balance at
Beginning
of Period
   
Accruals for
Warranties
   
Settlements
Made
   
Balance at
End of
Period
 
Accrued warranty liability:
                    
April 1, 2023
  $11,949   $2,177   $(1,815)   $12,311 
April 2, 2022
  $10,718   $1,916   $(2,422)   $10,212 
2 Revenue Recognition
The Company’s deferred revenue liabilities
i
n 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 1, 2023 and April 2, 2022 (in thousands):
 
 
 
 
 
 
 
 
 
 
   
April 1, 2023
   
April 2, 2022
 
Balance at the beginning of the period
  $285,175   $273,598 
Recognition of revenue included in balance at beginning of the period
   (105,222)    (103,355) 
Revenue deferred during the period, net of revenue recognized
   193,286    198,036 
   
 
 
   
 
 
 
Balance at the end of the period
  $373,239   $368,279 
   
 
 
   
 
 
 
The Company classified $66 million and $57 million of deferred revenue and customer advances in other long-term liabilities at April 1, 2023 and December 31, 2022, 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 1, 2023
 
Deferred revenue and customer advances expected to be recognized in:
     
One year or less
  $306,865 
13-24
months
   40,785 
25 months and beyond
   25,589 
   
 
 
 
Total
  $373,239 
   
 
 
 
 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
3 Marketable Securities
The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets consist of time deposits that mature in one year or less with an amortized cost and a fair value of $0.9 million at both April 1, 2023 and December 31, 2022.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4 Inventories
Inventories are classified as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
   
April 1, 2023
   
December 31, 2022
 
Raw materials
  $217,120   $205,760 
Work in progress
   24,380    19,899 
Finished goods
   257,922    230,051 
   
 
 
   
 
 
 
Total inventories
  $499,422   $455,710 
   
 
 
   
 
 
 
5 Goodwill and Other Intangibles
The carrying amount of goodwill was $432 million and $430 million at April 1, 2023 and December 31, 2022, respectively. The effect of foreign currency translation
increased
 goodwill by $2 million.
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):

 
  
April 1, 2023
 
  
December 31, 2022
 
 
  
Gross
Carrying
Amount
 
  
Accumulated
Amortization
 
  
Weighted-
Average
Amortization
Period
 
  
Gross
Carrying
Amount
 
  
Accumulated
Amortization
 
  
Weighted-
Average
Amortization
Period
 
Capitalized software
  $610,668   $455,952    5years   $589,604   $441,414    5years 
Purchased intangibles
   198,395    168,787    11years    197,805    166,735    11years 
Trademarks
   9,680    —      —      9,680    —      —   
Licenses
   14,339    7,186    6years    14,070    6,729    6years 
Patents and other intangibles
   106,660    75,102    8years    104,139    73,021    8years 
   
 
 
   
 
 
        
 
 
   
 
 
      
Total
  $939,742   $707,027    7years   $915,298   $687,899    7years 
   
 
 
   
 
 
        
 
 
   
 
 
      
The Company capitalized $14 million and $12
 million of intangible assets in the three months ended April 1, 2023 and April 2, 2022, respectively. The gross carrying value of intangible assets and accumulated amortization for intangible assets increased by $
10 million and $8
 million, respectively, in the three months ended April 1, 2023 due to the effects of foreign currency translation. Amortization expense for intangible assets was $
12 million and $15 million for the three months ended April 1, 2023 and April 2, 2022, respectively. Amortization expense for intangible assets is estimated to
be
$49 million per year for each of the next five years.
6 Debt
The Company has a five-year, $1.8 billion revolving facility (the “Credit Facility”) that expires in September 2026. On March 3, 2023, the Company amended the Credit Facility to increase the borrowing capacity by $200 million to an aggregate total borrowing capacity of $2.0
 billion, which did not affect the maturity date of September 17, 2026. The amendment also replaced all references in the Credit Facility to LIBOR with Term SOFR as the benchmark rate. As of April 1, 2023 and December 31, 2022, the Credit Facility had a total of $
175 million and $270 million outstanding, respectively.
 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

The interest rates applicable under the Credit Facility 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 Term SOFR rate for a one—month interest period as published two U.S. Government Securities Business Days prior to such day (or if such day is not a U.S. Government Securities Business Day, the immediately preceding U.S. Government Securities Business Day), plus 1% annum) or the applicable 1, 3 or 6 month adjusted Term SOFR 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 Term SOFR or EURIBO rate loans. The facility fee on the Credit Facility 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 Credit Facility 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 Credit Facility includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.
As
 of both April 1, 2023 and December 31, 2022, 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.
 
T
he
 
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.

The Company had the following outstanding debt at April 1, 2023 and December 31, 2022 (in thousands):
 

 
  
April 1, 2023
 
  
December 31, 2022
 
 
 
 
 
 
 
 
 
 
Foreign subsidiary lines of credit
  $40   $—   
Senior unsecured notes—Series I
 
- 
3.13%, due May 2023
  
50,000   
50,000 
   
 
 
   
 
 
 
Total notes payable and debt, current
   50,040    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 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
   175,000    270,000 
Unamortized debt issuance costs
   (4,870)    (5,122) 
   
 
 
   
 
 
 
Total long-term debt
   1,430,130    1,524,878 
   
 
 
   
 
 
 
Total debt
  $1,480,170   $1,574,878 
   
 
 
   
 
 
 
 
*
Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus
 
1.25%.
As of April 1, 2023 and December 31, 2022, the Company had a total amount available to borrow under the Credit Facility of $1.8 billion and $1.5 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 3.50% and 3.54% at April 1, 2023 and December 31, 2022, respectively. As of April 1, 2023, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $114 million and $
113
 
m
illion at April 1, 2023 and December 31, 2022, 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 April 1, 2023 or December 31, 2022. 
 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
As of April 1, 2023, the Company had entered into
three-year
interest rate cross-currency swap derivative agreements with an aggregate notional value of $
585
 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its euro-denominated and
yen-denominated
net asset investments.
7 Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 25% and 17%, respectively, as of April 1, 2023. The Company has a 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 rate rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the Company’s net income for the three months
 ended
April
 
1, 2023 and April 2, 2022
by $3 million and 
$5 million, respectively, and increased the Company’s net income per diluted share by $0.05 and $0.08, respectively.
The Company’s effective tax rate
 for the 
three
months
 
en
de
d
 April 
1
,
2023
and April 
2
,
2022
was
14.7
% and
14.4
%, respectively. The income tax provision includes a
 
$
2
million and a $
4
million income tax benefit related to stock-based compensation for the three months ended April 1, 2023 and April 2, 2022, respectively. 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, at April 1, 2023 and April 2, 2022 were $30 million and $
29 
million, respectively. 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, 2017. 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 April 1, 2023, 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 April 1, 2023 are immaterial for the years ended December 31, 2023 and thereafter. 
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.
 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
9 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Three Months Ended April 1, 2023
 
   
Net Income
(Numerator)
   
Weighted-
Average Shares
(Denominator)
   
Per Share
Amount
 
Net income per basic common share
  $140,923    59,023   $2.39 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   —      294    (0.01) 
   
 
 
   
 
 
   
 
 
 
Net income per diluted common share
  $140,923    59,317   $2.38 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Three Months Ended April 2, 2022
 
   
Net Income
(Numerator)
   
Weighted-
Average Shares
(Denominator)
   
Per Share
Amount
 
Net income per basic common share
  $159,831    60,580   $2.64 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   —      372    (0.02) 
   
 
 
   
 
 
   
 
 
 
Net income per diluted common share
  $159,831    60,952   $2.62 
   
 
 
   
 
 
   
 
 
 
For the three months ended April 1, 2023 and April 2, 2022, the Company had 140 thousand and 12 thousand stock options that were antidilutive, respectively, due to having higher exercise prices than the Company’s average stock price during the period. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method. 
10 Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are detailed as follows (in thousands):
 
 
  
Currency Translation
 
  
Unrealized Gain (Loss)
on Retirement Plans
 
  
Accumulated Other
Comprehensive Loss
 
Balance at December 31, 2022
  $(146,120)   $4,548   $(141,572) 
Other comprehensive (loss) income, net of tax
   8,783    (7)    8,776 
   
 
 
   
 
 
   
 
 
 
Balance at April 1, 2023
  $(137,337)   $4,541   $(132,796) 
   
 
 
   
 
 
   
 
 
 
11 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
.
 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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.

Net sales for the Company’s products and services are as follows for the three months ended April 1, 2023 and April 2, 2022 (in thousands):
 
 
 
 
 
 
 
 
 
 
   
Three Months Ended
 
   
April 1, 2023
   
April 2, 2022
 
Product net sales:
          
Waters instrument systems
  $244,211   $269,962 
Chemistry consumables
   133,515    125,618 
TA instrument systems
   58,731    55,260 
   
 
 
   
 
 
 
Total product sales
   436,457    450,840 
Service net sales:
          
Waters service
   224,349    217,576 
TA service
   23,868    22,156 
   
 
 
   
 
 
 
Total service sales
   248,217    239,732 
   
 
 
   
 
 
 
Total net sales
  $684,674   $690,572 
   
 
 
   
 
 
 
Net sales are attributable to geographic areas based on the region of destination. Geographic sales information is presented below for the three months ended April 1, 2023 and April 2, 2022 (in thousands):
 
 
  
Three Months Ended
 
 
  
April 1, 2023
 
  
April 2, 2022
 
Net Sales:
          
Asia:
          
China
  $116,065   $121,032 
Japan
   46,494    48,623 
Asia Other
   90,522    84,679 
   
 
 
   
 
 
 
Total Asia
   253,081    254,334 
Americas:
          
United States
   202,305    208,713 
Americas Other
   44,116    40,124 
   
 
 
   
 
 
 
Total Americas
   246,421    248,837 
Europe
   185,172    187,401 
   
 
 
   
 
 
 
Total net sales
  $684,674   $690,572 
   
 
 
   
 
 
 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Net sales by customer class are as follows for the three months ended April 1, 2023 and April 2, 2022 (in thousands):
 
 
 
 
 
 
 
 
 
 
   
Three Months Ended
 
   
April 1, 2023
   
April 2, 2022
 
Pharmaceutical
  $384,898   $415,772 
Industrial
   209,650    209,397 
Academic and government
   90,126    65,403 
   
 
 
   
 
 
 
Total net sales
  $684,674   $690,572 
   
 
 
   
 
 
 
Net sales for the Company recognized at a point in time versus over time are as follows for the three months ended April 1, 2023 and April 2, 2022 (in thousands):
 
 
 
 
 
 
 
 
 
 
   
Three Months Ended
 
   
April 1, 2023
   
April 2, 2022
 
Net sales recognized at a point in time:
          
Instrument systems
  $302,942   $325,222 
Chemistry consumables
   133,515    125,618 
Service sales recognized at a point in time (time & materials)
   88,207    85,778 
   
 
 
   
 
 
 
Total net sales recognized at a point in time
   524,664    536,618 
Net sales recognized over time:
          
Service and software maintenance sales recognized over time (contracts)
   160,010    153,954 
   
 
 
   
 
 
 
Total net sales
  $684,674   $690,572 
   
 
 
   
 
 
 
12 Recent Accounting Standard Changes and Developments
Recently Adopted Accounting Standards
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 Company adopted this standard on January 1, 2023. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
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
 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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. In December 2022, an update was issued because the cessation date for overnight LIBOR rates being published was extended to June 30, 2023, which was beyond the current expiration date of this guidance. The update extended the sunset date to December 31, 2024. 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.
 
 
19

Table of Contents

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

The Company has two operating segments: WatersTM and TATM. Waters products and services primarily consist of high-performance liquid chromatography (“HPLC”), ultra-performance liquid chromatography (“UPLCTM” 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.

 

20

Table of Contents

Financial Overview

The Company’s operating results are as follows for the three months ended April 1, 2023 and April 2, 2022 (dollars in thousands, except per share data):

 

   Three Months Ended 
   April 1, 2023  April 2, 2022  % change 

Revenues:

    

Product sales

  $436,457  $450,840   (3%) 

Service sales

   248,217   239,732   4% 
  

 

 

  

 

 

  

 

 

 

Total net sales

   684,674   690,572   (1%) 

Costs and operating expenses:

    

Cost of sales

   284,380   285,685   —   

Selling and administrative expenses

   181,956   157,475   16% 

Research and development expenses

   42,691   40,472   5% 

Purchased intangibles amortization

   1,479   1,673   (12%) 

Acquired in-process research and development

   —     9,797   ** 
  

 

 

  

 

 

  

 

 

 

Operating income

   174,168   195,470   (11%) 

Operating income as a % of sales

   25.4%   28.3%  

Other income, net

   1,388   170   ** 

Interest expense, net

   (10,383)   (8,945)   16% 
  

 

 

  

 

 

  

 

 

 

Income before income taxes

   165,173   186,695   (12%) 

Provision for income taxes

   24,250   26,864   (10%) 
  

 

 

  

 

 

  

 

 

 

Net income

  $140,923  $159,831   (12%) 
  

 

 

  

 

 

  

 

 

 

Net income per diluted common share

  $2.38  $2.62   (9%) 

 

**

Percentage not meaningful

The Company’s net sales decreased 1% in the first quarter of 2023 driven by weaker customer demand for our instrument systems as compared to the first quarter of 2022. Foreign currency translation decreased total sales growth by 4% in the first quarter of 2023 as the significant U.S. dollar strengthening that began in March of 2022 annualized, negatively impacting our sales and operating profits. In addition, the Company’s first quarter of 2023 had one less calendar day than the first quarter of 2022. At current foreign currency exchange rates, the Company expects that foreign currency translation would be neutral to sales for the remainder of 2023. Over the two-year period comparing the first quarter of 2023 to the first quarter of 2021, the Company’s net sales grew 6% annually.

Instrument system sales decreased 7% primarily on weaker customer demand in the U.S., Europe and China in the first quarter of 2023 as compared to the instrument system sales increase of 24% in the first quarter of 2022, which was broad-based across all existing and newly introduced LC, LC-MS and Thermal Analysis instrument systems. Foreign currency translation decreased instrument system sales growth by 4% in the first quarter of 2023. Recurring revenues (combined sales of precision chemistry consumables and services) increased 4% in the first quarter of 2023, with foreign currency translation decreasing sales growth by 4%.

Operating income was $174 million in the first quarter of 2023, a decrease of 11% as compared to $195 million in the first quarter of 2022. This decrease was primarily a result of higher salary expenses related to merit compensation and additional headcount increases, Wyatt acquisition due diligence costs and the negative effect of foreign currency translation which lowered operating income by approximately $16 million and $4 million during the first quarter of 2023 and 2022, respectively.

The Company generated $197 million and $198 million of net cash flows provided by operating activities in the first quarter of 2023 and 2022, respectively.

Net cash used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $34 million and $28 million in the first quarter of 2023 and 2022, respectively.

 

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On February 14, 2023, the Company entered into an agreement to acquire all issued and outstanding equity interests of Wyatt Technology for $1.4 billion in cash at closing, subject to customary adjustments. Wyatt Technology is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories and services. The Company will finance this acquisition through cash on its balance sheet and existing borrowing capacity that is available on its revolving credit facility. The agreement contains certain customary termination rights, including the right of the sellers to terminate this transaction if it has not been completed by June 14, 2023, subject to automatic extension to August 14, 2023 if certain regulatory approvals are not obtained by such date. If this were to occur, the Company would be required to pay the sellers a one-time fee in the amount of $15 million if the agreement is validly terminated and not consummated in accordance with the closing conditions set forth in the agreement. This transaction is expected to close in the second quarter of 2023, subject to regulatory approvals and other customary closing conditions.

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. In December 2022, the Company’s Board of Directors amended and extended this repurchase program’s term by one year such that it shall now expire on January 21, 2024 and increased the total authorization level by $750 million to $4.8 billion. During the three months ended April 1, 2023 and April 2, 2022, the Company repurchased $58 million and $160 million of the Company’s outstanding common stock, respectively, under the share repurchase programs. While the Company believes that it has the financial flexibility to fund these share repurchases, as well as to invest in research, technology and business acquisitions, given current cash levels and debt borrowing capacity, it has temporarily suspended its share repurchases due to its recently announced agreement to acquire Wyatt Technology.

On March 3, 2023, the Company entered into an agreement to amend the credit agreement governing its revolving credit facility (the “2023 Amendment”). The 2023 Amendment increases the borrowing capacity by $200 million to an aggregate total borrowing capacity of $2.0 billion.

Results of Operations

Sales by Geography

Geographic sales information is presented below for the three months ended April 1, 2023 and April 2, 2022 (dollars in thousands):

 

   Three Months Ended 
   April 1, 2023   April 2, 2022   % change 

Net Sales:

      

Asia:

      

China

  $116,065   $121,032    (4%) 

Japan

   46,494    48,623    (4%) 

Asia Other

   90,522    84,679    7% 
  

 

 

   

 

 

   

 

 

 

Total Asia

   253,081    254,334    —   

Americas:

      

United States

   202,305    208,713    (3%) 

Americas Other

   44,116    40,124    10% 
  

 

 

   

 

 

   

 

 

 

Total Americas

   246,421    248,837    (1%) 

Europe

   185,172    187,401    (1%) 
  

 

 

   

 

 

   

 

 

 

Total net sales

  $684,674   $690,572    (1%) 
  

 

 

   

 

 

   

 

 

 

 

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Geographically, the Company’s sales decline in the first quarter of 2023 can be attributed to the sales growth in Asia Other and Americas Other being offset by lower customer demand for our instrument systems in the U.S., Europe and China. Sales growth in the first quarter of 2023 was negatively impacted by foreign currency translation across most major regions, decreasing total sales growth by 4% in the first quarter of 2023 as the impact of the U.S. dollar strengthening that began in March 2022 annualized. The geographies that were the most negatively impacted by the strengthening of the U.S. dollar in the first quarter of 2023 were Europe and Japan, as the weakening of the euro and Japanese yen lowered sales growth in Europe and Japan by 4% and 13%, respectively, in the quarter.

Sales by Trade Class

Net sales by customer class are presented below for the three months ended April 1, 2023 and April 2, 2022 (dollars in thousands):

 

   Three Months Ended 
   April 1, 2023   April 2, 2022   % change 

Pharmaceutical

  $384,898   $415,772    (7%) 

Industrial

   209,650    209,397    —   

Academic and government

   90,126    65,403    38% 
  

 

 

   

 

 

   

 

 

 

Total net sales

  $684,674   $690,572    (1%) 
  

 

 

   

 

 

   

 

 

 

Sales to pharmaceutical customers decreased 7% in the first quarter of 2023 primarily due to a slower release of capital budgets by our customers and foreign currency translation decreasing pharmaceutical sales growth by 3%. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, were flat in the first quarter of 2023, with foreign currency translation decreasing sales growth by 3%. Combined sales to academic and government customers increased 38% in the first quarter of 2023, with foreign currency translation decreasing academic and government sales growth by 7%. 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.

Waters Products and Services Net Sales

Net sales for Waters products and services were as follows for the three months ended April 1, 2023 and April 2, 2022 (dollars in thousands):

 

   Three Months Ended 
   April 1, 2023   % of
Total		  April 2, 2022   % of
Total		  % change 

Waters instrument systems

  $244,211    41%  $269,962    44%   (10%) 

Chemistry consumables

   133,515    22%   125,618    21%   6% 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total Waters product sales

   377,726    63%   395,580    65%   (5%) 

Waters service

   224,349    37%   217,576    35%   3% 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total Waters net sales

  $602,075    100%  $613,156    100%   (2%) 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Waters products and service sales decreased 2% in the first quarter of 2023, with the effect of foreign currency translation decreasing Waters sales growth by 4%. Waters instrument system sales decreased 10% in the first quarter of 2023 due to weaker customer demand in the U.S., Europe and China. The increase in Waters chemistry consumables sales was primarily due to the continued strong demand in most major geographies, driven by the uptake in columns and application-specific testing kits to pharmaceutical customers, partially offset by the negative impact from foreign currency translation which decreased sales growth by 4%. Waters service sales increased in the first quarter of 2023 due to higher service demand billing, particularly in China and Europe, partially offset by the negative impact from foreign currency translation which decreased service sales growth by 5%.

 

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TA Product and Services Net Sales

Net sales for TA products and services were as follows for the three months ended April 1, 2023 and April 2, 2022 (dollars in thousands):

 

   Three Months Ended 
   April 1, 2023   % of
Total		  April 2, 2022   % of
Total		  % change 

TA instrument systems

  $58,731    71%  $55,260    71%   6% 

TA service

   23,868    29%   22,156    29%   8% 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total TA net sales

  $82,599    100%  $77,416    100%   7% 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

TA instrument system and service sales increased 6% and 8% in the first quarter of 2023, respectively, with foreign currency translation decreasing instrument system and service sales growth by 4% and 2%, respectively. The sales growth was primarily driven by strong customer demand for our thermal analysis instruments and services, particularly in the U.S. and Europe.

Cost of Sales

Cost of sales were flat in the first quarter of 2023 compared to the first quarter of 2022, primarily due to the change in sales mix and the favorable impact from foreign currency translation which decreased costs by 1%. 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 be neutral to gross profit during 2023.

Selling and Administrative Expenses

Selling and administrative expenses increased 16% in the first quarter of 2023. This increase includes the Wyatt acquisition due diligence costs, which increased expenses by 6%. The remaining increase is attributed to investment in headcount to support higher-growth adjacencies, annual merit compensation increases, normalization of travel expenses to pre-COVID levels and timing of investments associated with product launch. The effect of foreign currency translation decreased selling and administrative expenses by 3% in the first quarter of 2023.

As a percentage of net sales, selling and administrative expenses were 26.6% and 22.8% for the first quarter of 2023 and 2022, respectively.

Research and Development Expenses

Research and development expenses increased 5% in the first quarter of 2023. The increase in research and development expenses in the first quarter of 2023 was impacted by additional headcount, higher salary expenses attributable to merit compensation increases and costs associated with new products and the development of new technology initiatives. The impact of foreign currency exchange decreased expenses by 4% in the first quarter of 2023.

Acquired In-Process Research & Development

In 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.

Other Income, net

During the first quarter of 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 incurred $4 million in losses on an equity investment within other income, net on the statement of operations.

 

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Interest Expense, net

Net interest expense in the first quarter of 2023 increased $1 million, which was primarily attributable to higher debt levels and higher interest rates on our variable rate debt balances.

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%, 25% and 17%, respectively, as of April 1, 2023. The Company has a 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 rate rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income by $3 million and $5 million and increased the Company’s net income per diluted share by $0.05 and $0.08 for the first quarter of 2023 and 2022, respectively.

The Company’s effective tax rate for the first quarter of 2023 and 2022 was 14.7% and 14.4%, respectively. The income tax provision includes a $2 million and a $4 million income tax benefit related to stock-based compensation for the first quarter of 2023 and 2022, respectively. 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.

 

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Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows (in thousands):

 

   Three Months Ended 
   April 1, 2023   April 2, 2022 

Net income

  $140,923   $159,831 

Depreciation and amortization

   31,154    32,664 

Stock-based compensation

   12,805    10,933 

Deferred income taxes

   (5,078)    4,175 

Acquired in-process research and development and other non-cash items

   —      9,381 

Change in accounts receivable

   44,047    (907) 

Change in inventories

   (42,621)    (26,832) 

Change in accounts payable and other current liabilities

   (71,257)    (69,548) 

Change in deferred revenue and customer advances

   77,206    91,514 

Other changes

   9,572    (13,251) 
  

 

 

   

 

 

 

Net cash provided by operating activities

   196,751    197,960 

Net cash (used in) provided by investing activities

   (34,406)    18,992 

Net cash used in financing activities

   (159,211)    (227,411) 

Effect of exchange rate changes on cash and cash equivalents

   2,407    (10,705) 
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

  $5,541   $(21,164) 
  

 

 

   

 

 

 

Cash Flow from Operating Activities

Net cash provided by operating activities was $197 million and $198 million during the first quarter of 2023 and 2022, respectively. The decrease in 2023 operating cash flow was primarily a result of lower net income and higher inventory levels, offset by higher cash collections in 2023 compared to 2022. 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 was 91 days at April 1, 2023 and 81 days at April 2, 2022.

 

 • 

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

 

 • 

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 $34 million in the first quarter of 2023 and net cash provided by investing activities totaled $19 million in the first quarter of 2022. Additions to fixed assets and capitalized software were $34 million and $28 million in the first three months of 2023 and 2022, respectively. The cash flows from investing activities in 2023 and 2022 include $4 million and $6 million, respectively, of capital expenditures related to the major expansion of the Company’s precision chemistry consumable operations in the United States. The Company has incurred costs of $236 million on this facility through the end of the first quarter of 2023 and anticipates spending approximately $16 million to complete this new state-of-the-art facility for the remainder of 2023.

During the first three months of 2023 and 2022, the Company purchased $1 million and $9 million of investments, respectively, while $1 million and $54 million of investments matured, respectively, and were used for financing activities described below.

 

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During the first quarter 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 2022.

On February 14, 2023, the Company entered into an agreement to acquire all issued and outstanding equity interests of Wyatt Technology for $1.4 billion in cash at closing, subject to customary adjustments. Wyatt Technology is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories and services. The Company will finance this acquisition through cash on its balance sheet and existing borrowing capacity that is available on its revolving credit facility. The agreement contains certain customary termination rights, including the right of the sellers to terminate this transaction if it has not been completed by June 14, 2023, subject to automatic extension to August 14, 2023 if certain regulatory approvals are not obtained by such date. If this were to occur, the Company would be required to pay the sellers a one-time fee in the amount of $15 million if the agreement is validly terminated and not consummated in accordance with the closing conditions set forth in the agreement. This transaction is expected to close in the second quarter of 2023, subject to regulatory approvals and other customary closing conditions.

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. On March 3, 2023 the Company entered into an agreement to amend such credit agreement. The 2023 Amendment increases the borrowing capacity by $200 million to an aggregate borrowing capacity of $2.0 billion. As of April 1, 2023, the Company had a total of $1.5 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $175 million borrowed under its credit agreement. The Company’s net debt borrowings decreased by $95 million and $70 million during the three months ended 2023 and 2022, respectively.

As of April 1, 2023, the Company has entered into three-year interest rate cross-currency swap derivative agreements with a notional value $585 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its euro-denominated and yen-denominated net asset investments. As a result of entering into these agreements, the Company lowered net interest expense by approximately $3 million and $2 million in the first quarter of 2023 and 2022, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $10 million in 2023.

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. In December 2022, the Company’s Board of Directors amended and extended this repurchase program’s term by one year such that it shall now expire on January 21, 2024 and increased the total authorization level to $4.8 billion, an increase of $750 million. During the three months ended April 1, 2023 and April 2, 2022, the Company repurchased $58 million and $160 million of the Company’s outstanding common stock, respectively, under the share repurchase program. In addition, the Company repurchased $11 million and $10 million of common stock related to the vesting of restricted stock units during the three months ended April 1, 2023 and April 2, 2022, respectively. While the Company believes that it has the financial flexibility to fund these share repurchases, as well as to invest in research, technology and business acquisitions, given current cash levels and debt borrowing capacity, it has temporarily suspended its share repurchases due to its recently announced agreement to acquire Wyatt Technology.

The Company received $2 million and $13 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 three months of 2023 and 2022, respectively.

The Company had cash, cash equivalents and investments of $487 million as of April 1, 2023. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $313 million held by foreign subsidiaries at April 1, 2023, of which $188 million was held in currencies other than U.S. dollars.

 

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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, 2022, as filed with the SEC on February 27, 2023. The Company reviewed its contractual obligations and commercial commitments as of April 1, 2023 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 2023, the Company expects to contribute a total of approximately $3 million to $6 million to its defined benefit 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, 2022, as filed with the SEC on February 27, 2023, the Company’s most critical accounting policies and estimates upon which its financial status depends were identified as those relating to revenue recognition, valuation of long-lived assets, intangible assets and goodwill, income taxes, uncertain tax positions, litigation 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 three months ended April 1, 2023. The Company did not make any changes in those policies during the three months ended April 1, 2023.

New Accounting Pronouncements

Please refer to Note 12, Recent Accounting Standard Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

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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 forward-looking statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without limitation:

 

 • 

foreign currency exchange rate fluctuations potentially affecting translation of the Company’s future non-U.S. operating results, particularly when a foreign currency weakens against the U.S. dollar;

 

 • 

current global economic, sovereign and political conditions and uncertainties, including the effect of new or proposed tariff or trade regulations, changes in inflation and interest rates, the impacts 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 new geopolitical and regulatory instability, the United Kingdom’s exit from the European Union and the Chinese government’s ongoing tightening of restrictions on procurement by government-funded customers;

 

 • 

the Company’s ability to access capital, maintain liquidity and service the Company’s debt in volatile market conditions;

 

 • 

risks related to the effects of the ongoing COVID-19 pandemic on our business, financial condition, results of operations and prospects;

 

 • 

changes in timing and demand for the Company’s products among the Company’s customers and various market sectors, particularly as a result of fluctuations in their expenditures or ability to obtain funding, as in the cases of academic, governmental and research institutions;

 

 • 

the introduction of competing products by other companies and loss of market share, as well as pressures on prices from customers and/or competitors;

 

 • 

changes in the competitive landscape as a result of changes in ownership, mergers and continued consolidation among the Company’s competitors;

 

 • 

regulatory, economic and competitive obstacles to new product introductions, lack of acceptance of new products and inability to grow organically through innovation;

 

 • 

rapidly changing technology and product obsolescence;

 

 • 

risks associated with previous or future acquisitions, strategic investments, joint ventures and divestitures, including risks associated with contingent purchase price payments and expansion of our business into new or developing markets;

 

 • 

risks associated with unexpected disruptions in operations;

 

 • 

failure to adequately protect the Company’s intellectual property, infringement of intellectual property rights of third parties and inability to obtain licenses on commercially reasonable terms;

 

 • 

the Company’s ability to acquire adequate sources of supply and its reliance on outside contractors for certain components and modules, as well as disruptions to its supply chain;

 

 • 

risks associated with third-party sales intermediaries and resellers;

 

 • 

the impact and costs in connection with shifts in taxable income in jurisdictions with different effective tax rates, the outcome of ongoing and future tax examinations and changes in legislation affecting the Company’s effective tax rate;

 

 • 

the Company’s ability to attract and retain qualified employees and management personnel;

 

 • 

risks associated with cybersecurity and technology, including attempts by third parties to defeat the security measures of the Company and its third-party partners;

 

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 • 

increased regulatory burdens as the Company’s business evolves, especially with respect to the U.S. Food and Drug Administration and U.S. Environmental Protection Agency, among others, and in connection with government contracts;

 

 • 

regulatory, environmental and logistical obstacles affecting the distribution of the Company’s products, completion of purchase order documentation and the ability of customers to obtain letters of credit or other financing alternatives;

 

 • 

risks associated with litigation and other legal and regulatory proceedings; and

 

 • 

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 Tax Cuts and Jobs Act in the U.S.; and shifts in taxable income among jurisdictions with different effective tax rates.

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, 2022, as filed with the SEC on February 27, 2023. 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.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to the risk of interest rate fluctuations from the investments of cash generated from operations. Investments with maturities greater than 90 days are classified as investments and are held primarily in U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities. As of April 1, 2023, the Company estimates that a hypothetical adverse change of 100 basis points across all maturities would not have a material effect on the fair market value of its portfolio.

The Company is also exposed to the risk of exchange rate fluctuations. 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 1, 2023 and December 31, 2022, $313 million out of $487 million and $472 million out of $481 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $188 million out of $487 million and $336 million out of $481 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at April 1, 2023 and December 31, 2022, respectively. As of April 1, 2023, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.

Assuming a hypothetical adverse change of 10% in year-end exchange rates (a strengthening of the U.S. dollar), the fair market value of the Company’s cash, cash equivalents and investments held in currencies other than the U.S. dollar as of April 1, 2023 would decrease by approximately $19 million, of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders’ equity.

There have been no other material changes in the Company’s market risk during the three months ended April 1, 2023. For information regarding the Company’s market risk, refer to Item 7A of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 27, 2023.

 

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Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer (principal executive officer and principal financial officer), with the participation of management, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of April 1, 2023 (1) to ensure that information required to be disclosed by the Company, including its consolidated subsidiaries, in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, to allow timely decisions regarding the required disclosure and (2) to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

No change was identified in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended April 1, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II: Other Information

Item 1: Legal Proceedings

There have been no material changes in the Company’s legal proceedings during the three months ended April 1, 2023 as described in Item 3 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 27, 2023.

Item 1A: Risk Factors

Information regarding risk factors of the Company is set forth under the heading “Risk Factors” under Part I, Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 27, 2023. The Company reviewed its risk factors as of April 1, 2023 and determined that there were no material changes from the ones set forth in the Form 10-K. Note, however, the discussion of certain factors under the subheading “Special Note Regarding Forward-Looking Statements” in Part I, Item 2 of this Quarterly Report on Form 10-Q. These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial may have a material adverse effect on the Company’s business, financial condition and operating results.

 

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Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

The following table provides information about purchases by the Company during the three months ended April 1, 2023 of equity securities registered by the Company under the Exchange Act (in thousands, except per share data):

 

Period

  Total Number
of Shares
Purchased (1)		   Average
Price Paid
per Share		   Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs		   Maximum Dollar
Value of Shares that
May Yet Be
Purchased Under
the Programs (2)		 

January 1, 2023 to January 28, 2023

   173   $335.27    173   $1,011,207 

January 29, 2023 to February 25, 2023

   18   $313.01    —     $1,011,207 

February 26, 2023 to April 1, 2023

   18   $306.11    —     $1,011,207 
  

 

 

     

 

 

   

Total

   209   $330.84    173   $1,011,207 
  

 

 

     

 

 

   

 

(1)

The Company repurchased approximately 36 thousand shares of common stock at a cost of $11 million related to the vesting of restricted stock during the first three months of 2023.

(2)

In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock in open market or private transactions over a two-year period. This program replaced the remaining amounts available under the pre-existing authorization. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. In December 2022, the Company’s Board of Directors amended and extended this repurchase program’s term by one year such that it shall now expire on January 21, 2024 and increased the total authorization to $4.8 billion, an increase of $750 million. The size and timing of these purchases, if any, will depend on our stock price and market and business conditions, as well as other factors.

 

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Item 6: Exhibits

 

Exhibit
Number		  

Description of Document

  2.1  Share Purchase Agreement, dated as of February 14, 2023, by and among Wyatt Technology Corporation, Waters Technologies Corporation, the shareholders named therein and Geofrey Wyatt in his capacity as representative of the shareholders (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 15, 2023).
10.1  Amendment and Incremental Commitment Agreement, dated as of March 3, 2023, by and among the Company, Waters Technologies Corporation, TA Instruments – Waters L.L.C., Waters Asia Limited, Environmental Resource Associates, Inc., the lenders party thereto, the issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 7, 2023).
31.1  Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2  Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1  Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)
32.2  Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)
101  The following materials from Waters Corporation’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Cash Flows (unaudited) and (vi) Condensed Notes to Consolidated Financial Statements (unaudited).
104  Cover Page Interactive Date File (formatted in iXBRL and contained in Exhibit 101).

 

(*)

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filing, except to the extent the Company specifically incorporates it by reference.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

WATERS CORPORATION

/s/Amol Chaubal

Amol Chaubal

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

(Principal Accounting Officer)

Date: May 9, 2023

 

34

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