WAT 10-Q
Waters Corp /De/ (WAT)
Table of Contents
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| ☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer |
☐ | Smaller reporting company | ||||
| Emerging growth company | ||||||
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 September 30, 2023 and December 31, 2022 |
3 | |||||
| 4 | ||||||
| 5 | ||||||
| 6 | ||||||
| 7 | ||||||
| 8 | ||||||
| 9 | ||||||
| Condensed Notes to Consolidated Financial Statements (unaudited) | 10 | |||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28 | ||||
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 39 | ||||
| Item 4. |
Controls and Procedures | 40 | ||||
| PART II |
OTHER INFORMATION | |||||
| Item 1. |
Legal Proceedings | 40 | ||||
| Item 1A. |
Risk Factors | 40 | ||||
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 40 | ||||
| Item 6. |
Exhibits | 41 | ||||
| Signature | 42 | |||||
Table of Contents
September 30, 2023 |
December 31, 2022 |
|||||||
(In thousands, except per share data) |
||||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | $ | ||||||
| Investments |
||||||||
| Accounts receivable, net |
||||||||
| Inventories |
||||||||
| Other current assets |
||||||||
| |
|
|
|
|||||
| Total current assets |
||||||||
| Property, plant and equipment, net |
||||||||
| Intangible assets, net |
||||||||
| Goodwill |
||||||||
| Operating lease assets |
||||||||
| Other assets |
||||||||
| |
|
|
|
|||||
| Total assets |
$ | $ | ||||||
| |
|
|
|
|||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Notes payable and debt |
$ | $ | ||||||
| Accounts payable |
||||||||
| Accrued employee compensation |
||||||||
| Deferred revenue and customer advances |
||||||||
| Current operating lease liabilities |
||||||||
| Accrued income taxes |
||||||||
| Accrued warranty |
||||||||
| Other current liabilities |
||||||||
| |
|
|
|
|||||
| Total current liabilities |
||||||||
| Long-term liabilities: |
||||||||
| Long-term debt |
||||||||
| Long-term portion of retirement benefits |
||||||||
| Long-term income tax liabilities |
||||||||
| Long-term operating lease liabilities |
||||||||
| Other long-term liabilities |
||||||||
| |
|
|
|
|||||
| Total long-term liabilities |
||||||||
| |
|
|
|
|||||
| Total liabilities |
||||||||
| Commitments and contingencies (Notes 7, 8 and 9) |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, par value $ 2023 and December 31, 2022 |
||||||||
| Common stock, par value $ issued, respectively |
||||||||
| Additional paid-in capital |
||||||||
| Retained earnings |
||||||||
| Treasury stock, at cost, 2022, respectively |
( |
) | ( |
) | ||||
| Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total stockholders’ equity |
||||||||
| |
|
|
|
|||||
| Total liabilities and stockholders’ equity |
$ | $ | ||||||
| |
|
|
|
|||||
Three Months Ended |
||||||||
September 30, 2023 |
October 1, 2022 |
|||||||
(In thousands, except per share data) |
||||||||
Revenues: |
||||||||
Product sales |
$ | $ | ||||||
Service sales |
||||||||
Total net sales |
||||||||
Costs and operating expenses: |
||||||||
Cost of product sales |
||||||||
Cost of service sales |
||||||||
Selling and administrative expenses |
||||||||
Research and development expenses |
||||||||
Purchased intangibles amortization |
||||||||
Total costs and operating expenses |
||||||||
Operating income |
||||||||
Other income, net |
||||||||
Interest expense |
( |
) | ( |
) | ||||
Interest income |
||||||||
Income before income taxes |
||||||||
Provision for income taxes |
||||||||
Net income |
$ | $ | ||||||
Net income per basic common share |
$ | $ | ||||||
Weighted-average number of basic common shares |
||||||||
Net income per diluted common share |
$ | $ | ||||||
Weighted-average number of diluted common shares and equivalents |
||||||||
Nine Months Ended |
||||||||
September 30, 2023 |
October 1, 2022 |
|||||||
(In thousands, except per share data) |
||||||||
Revenues: |
||||||||
Product sales |
$ | $ | ||||||
Service sales |
||||||||
Total net sales |
||||||||
Costs and operating expenses: |
||||||||
Cost of product sales |
||||||||
Cost of service sales |
||||||||
Selling and administrative expenses |
||||||||
Research and development expenses |
||||||||
Purchased intangibles amortization |
||||||||
Acquired in-process research and development |
||||||||
Total costs and operating expenses |
||||||||
Operating income |
||||||||
Other income, net |
||||||||
Interest expense |
( |
) | ( |
) | ||||
Interest income |
||||||||
Income before income taxes |
||||||||
Provision for income taxes |
||||||||
Net income |
$ | $ | ||||||
Net income per basic common share |
$ | $ | ||||||
Weighted-average number of basic common shares |
||||||||
Net income per diluted common share |
$ | $ | ||||||
Weighted-average number of diluted common shares and equivalents |
||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||||||
(In thousands) |
(In thousands) |
|||||||||||||||
Net income |
$ | $ | $ | $ | ||||||||||||
Other comprehensive loss: |
||||||||||||||||
Foreign currency translation |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Unrealized gains on derivative instruments before reclassifications |
||||||||||||||||
Amounts reclassified to other income, net |
( |
) | ( |
) | ||||||||||||
Unrealized gains on derivative instruments before income taxes |
||||||||||||||||
Income tax expense |
( |
) | ( |
) | ||||||||||||
Unrealized gains on derivative instruments, net of tax |
||||||||||||||||
Unrealized gains on investments before income taxes |
||||||||||||||||
Income tax expense |
( |
) | ||||||||||||||
Unrealized gains on investments, net of tax |
||||||||||||||||
Retirement liability adjustment before reclassifications |
( |
) | ( |
) | ||||||||||||
Amounts reclassified to other income, net |
( |
) | ( |
) | ||||||||||||
Retirement liability adjustment before income taxes |
( |
) | ( |
) | ||||||||||||
Income tax benefit (expense) |
( |
) | ( |
) | ||||||||||||
Retirement liability adjustment, net of tax |
( |
) | ( |
) | ||||||||||||
Other comprehensive loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Comprehensive income |
$ | $ | $ | $ | ||||||||||||
Nine Months Ended |
||||||||
September 30, 2023 |
October 1, 2022 |
|||||||
(In thousands) |
||||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by |
||||||||
| operating activities: |
||||||||
| Stock-based compensation |
||||||||
| Deferred income taxes |
( |
) | ||||||
| Depreciation |
||||||||
| Amortization of intangibles |
||||||||
| R ealized gain on sale of investment |
( |
) | ||||||
| Acquired in-process research and development and other non-cash items |
||||||||
| Change in operating assets and liabilities: |
||||||||
| Decrease (increase) in accounts receivable |
( |
) | ||||||
| Increase in inventories |
( |
) | ( |
) | ||||
| Increase in other current assets |
( |
) | ( |
) | ||||
| Increase in other assets |
( |
) | ( |
) | ||||
| Decrease in accounts payable and other current liabilities |
( |
) | ( |
) | ||||
| Increase in deferred revenue and customer advances |
||||||||
| Decrease in other liabilities |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net cash provided by operating activities |
||||||||
| Cash flows from investing activities: |
||||||||
| Additions to property, plant, equipment and software |
||||||||
| capitalization |
( |
) | ( |
) | ||||
| Business acquisitions, net of cash acquired |
( |
) | ||||||
| Proceeds from equity investments, net |
||||||||
| Payments for intellectual property licenses |
( |
) | ||||||
| Purchases of investments |
( |
) | ( |
) | ||||
| Maturities and sales of investments |
||||||||
| |
|
|
|
|||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities: |
||||||||
| Proceeds from debt issuances |
||||||||
| Payments on debt |
( |
) | ( |
) | ||||
| Payments of debt issuance costs |
( |
) | ||||||
| Proceeds from stock plans |
||||||||
| Purchases of treasury shares |
( |
) | ( |
) | ||||
| Proceeds from derivative contracts |
||||||||
| |
|
|
|
|||||
| Net cash provided by (used in) financing activities |
( |
) | ||||||
| Effect of exchange rate changes on cash and cash equivalents |
( |
) | ||||||
| |
|
|
|
|||||
| Decrease in cash and cash equivalents |
( |
) | ( |
) | ||||
| Cash and cash equivalents at beginning of period |
||||||||
| |
|
|
|
|||||
| Cash and cash equivalents at end of period |
$ | $ | ||||||
| |
|
|
|
|||||
Number of Common Shares |
Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Loss |
Total Stockholders’ Equity |
||||||||||||||||||||||
Balance July 2, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Net income |
— | — | — | — | — | |||||||||||||||||||||||
Other comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Issuance of common stock for employees: |
||||||||||||||||||||||||||||
Employee Stock Purchase Plan |
— | — | — | — | ||||||||||||||||||||||||
Stock options exercised |
— | — | — | — | ||||||||||||||||||||||||
Treasury stock |
— | — | — | — | ( |
) | — | ( |
) | |||||||||||||||||||
Stock-based compensation |
— | — | — | |||||||||||||||||||||||||
Balance October 1, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Number of Common Shares |
Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Loss |
Total Stockholders’ Equity |
||||||||||||||||||||||
Balance July 1, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Net income |
— | — | — | — | — | |||||||||||||||||||||||
Other comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Issuance of common stock for employees: |
||||||||||||||||||||||||||||
Employee Stock Purchase Plan |
— | — | — | — | ||||||||||||||||||||||||
Stock options exercised |
— | — | — | — | ||||||||||||||||||||||||
Treasury stock |
— | — | — | — | ( |
) | — | ( |
) | |||||||||||||||||||
Stock-based compensation |
— | — | — | |||||||||||||||||||||||||
Balance September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
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 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Net income |
— | — | — | — | — | |||||||||||||||||||||||
Other comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Issuance of common stock for employees: |
||||||||||||||||||||||||||||
Employee Stock Purchase Plan |
— | — | — | — | ||||||||||||||||||||||||
Stock options exercised |
— | — | — | |||||||||||||||||||||||||
Treasury stock |
— | — | — | — | ( |
) | — | ( |
) | |||||||||||||||||||
Stock-based compensation |
— | — | — | |||||||||||||||||||||||||
Balance October 1, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
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 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Net income |
— | — | — | — | — | |||||||||||||||||||||||
Other comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Issuance of common stock for employees: |
||||||||||||||||||||||||||||
Employee Stock Purchase Plan |
— | — | — | — | ||||||||||||||||||||||||
Stock options exercised |
— | — | — | |||||||||||||||||||||||||
Treasury stock |
— | — | — | — | ( |
) | — | ( |
) | |||||||||||||||||||
Stock-based compensation |
— | — | — | |||||||||||||||||||||||||
Balance September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Balance at Beginning of Period |
Additions |
Deductions |
Balance at End of Period |
|||||||||||||
Allowance for Credit Losses |
||||||||||||||||
September 30, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||
October 1, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||
Total at September 30, 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 |
$ | $ | — | $ | $ | — | ||||||||||
Waters 401(k) Restoration Plan assets |
— | — | ||||||||||||||
Foreign currency exchange contracts |
— | — | ||||||||||||||
Interest rate cross-currency swap agreements |
— | — | ||||||||||||||
Interest rate swap cash flow hedge |
— | — | ||||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||
Liabilities: |
||||||||||||||||
Foreign currency exchange contracts |
$ | $ | — | $ | $ | — | ||||||||||
Interest rate cross-currency swap agreements |
— | — | ||||||||||||||
Interest rate swap cash flow hedge |
— | — | ||||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||
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 |
$ | $ | — | $ | $ | — | ||||||||||
Waters 401(k) Restoration Plan assets |
— | — | ||||||||||||||
Foreign currency exchange contracts |
— | — | ||||||||||||||
Interest rate cross-currency swap agreements |
— | — | ||||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||
Liabilities: |
||||||||||||||||
Contingent consideration |
$ | $ | — | $ | — | $ | ||||||||||
Foreign currency exchange contracts |
— | — | ||||||||||||||
Interest rate cross-currency swap agreements |
— | — | ||||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||
September 30, 2023 |
December 31, 2022 |
|||||||||||||||
Notional |
Fair Value |
Notional |
Fair Value |
|||||||||||||
Foreign currency exchange contracts: |
||||||||||||||||
Other current assets |
$ | $ | $ | $ | ||||||||||||
Other current liabilities |
$ | $ | $ | $ | ||||||||||||
Interest rate cross-currency swap agreements: |
||||||||||||||||
Other assets |
$ | $ | $ | $ | ||||||||||||
Other liabilities |
$ | $ | $ | $ | ||||||||||||
Accumulated other comprehensive income |
$ | $ | ||||||||||||||
Interest rate swap cash flow hedges: |
||||||||||||||||
Other assets |
$ | $ | $ | — | $ | — | ||||||||||
Other liabilities |
$ | $ | $ | — | $ | — | ||||||||||
Accumulated other comprehensive income |
$ | $ | — | |||||||||||||
Financial Statement Classification |
Three Months Ended |
Nine Months Ended |
||||||||||||||||||
September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||||||||||
| Foreign currency exchange contracts: |
|
|||||||||||||||||||
| Realized losses |
||||||||||||||||||||
| on closed contracts |
Cost of sales | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||
| Unrealized gains (losses) |
||||||||||||||||||||
| on open contracts |
Cost of sales | ( |
) | ( |
) | |||||||||||||||
| Cumulative net pre-tax |
||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||
| losses |
Cost of sales | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||
| |
|
|
|
|
|
|
|
|||||||||||||
| Interest rate cross-currency swap agreements: |
|
|||||||||||||||||||
| Interest earned |
Interest income | $ | $ | $ | $ | |||||||||||||||
| Unrealized gains |
Other comprehensive | |||||||||||||||||||
| on open contracts |
income | $ | $ | $ | $ | |||||||||||||||
| Interest rate swap cash flow hedges: |
|
|||||||||||||||||||
| Interest earned |
Interest income | $ | $ | — | $ | $ | — | |||||||||||||
| Unrealized gains |
Other comprehensive | |||||||||||||||||||
| on open contracts |
income | $ | $ | — | $ | $ | — | |||||||||||||
Balance at Beginning of Period |
Accruals for Warranties |
Settlements Made |
Balance at End of Period |
|||||||||||||
| Accrued warranty liability: |
||||||||||||||||
| September 30, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||
| October 1, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||
September 30, 2023 |
October 1, 2022 |
|||||||
| Balance at the beginning of the period |
$ | $ | ||||||
| Recognition of revenue included in balance at beginning of the period |
( |
) | ( |
) | ||||
| Revenue deferred during the period, net of revenue recognized |
||||||||
| |
|
|
|
|||||
| Balance at the end of the period |
$ | $ | ||||||
| |
|
|
|
|||||
September 30, 2023 |
||||
| Deferred revenue and customer advances expected to be recognized in: |
||||
| |
$ | |||
| |
||||
| |
||||
| |
|
|||
| Total |
$ | |||
| |
|
|||
September 30, 2023 |
December 31, 2022 |
|||||||
| Raw materials |
$ | $ | ||||||
| Work in progress |
||||||||
| Finished goods |
||||||||
| |
|
|
|
|||||
| Total inventories |
$ | $ | ||||||
| |
|
|
|
|||||
| Purchase Price |
||||
| Cash paid |
$ | |||
| Less: cash acquired |
( |
) | ||
| |
|
|||
| Net cash consideration |
||||
| |
|
|||
| Identifiable Net Assets (Liabilities) Acquired |
||||
| Accounts receivable |
||||
| Inventory |
||||
| Prepaid and other assets |
||||
| Property, plant and equipment |
||||
| Operating lease assets |
||||
| Intangible assets |
||||
| Accounts payable and accrued expenses |
( |
) | ||
| Operating lease liabilities |
( |
) | ||
| Tax liabilities |
( |
) | ||
| Deferred revenue |
( |
) | ||
| Other liabilities |
( |
) | ||
| |
|
|||
| Total identifiable net assets acquired |
||||
| Goodwill |
||||
| |
|
|||
| Net cash consideration |
$ | |||
| |
|
Amount |
Weighted-Average Life |
|||||||
| Developed technology |
$ | |||||||
| Customer relationships |
||||||||
| Trade name |
||||||||
| |
|
|||||||
| Total |
$ |
|||||||
| |
|
|||||||
September 30, 2023 |
October 1, 2022 |
|||||||
| Revenue |
$ | $ | ||||||
| Net income |
||||||||
September 30, 2023 |
December 31, 2022 |
|||||||||||||||||||||||||||||||
Weighted- |
Weighted- |
|||||||||||||||||||||||||||||||
Gross |
Average |
Gross |
Average |
|||||||||||||||||||||||||||||
Carrying |
Accumulated |
Amortization |
Carrying |
Accumulated |
Amortization |
|||||||||||||||||||||||||||
Amount |
Amortization |
Period |
Amount |
Amortization |
Period |
|||||||||||||||||||||||||||
| Capitalized software |
$ | $ | years | $ | $ | years | ||||||||||||||||||||||||||
| Purchased intangibles |
years | years | ||||||||||||||||||||||||||||||
| Trademarks |
— | — | — | — | ||||||||||||||||||||||||||||
| Licenses |
years | years | ||||||||||||||||||||||||||||||
| Patents and other intangibles |
years | years | ||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Total |
$ | $ | years | $ | $ | years | ||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Senior Unsecured Notes |
Term |
Interest Rate |
Face Value (in millions) |
Maturity Date |
||||||||||||
| Series P |
% | $ | 2028 | |||||||||||||
| Series Q |
% | $ | 2030 | |||||||||||||
September 30, 2023 |
December 31, 2022 |
|||||||
Senior unsecured notes - Series I - |
||||||||
Senior unsecured notes - Series G - |
— | |||||||
Total notes payable and debt, current |
||||||||
Senior unsecured notes - Series G - |
— | |||||||
Senior unsecured notes - Series H - floating rate*, due June 2024 |
||||||||
Senior unsecured notes - Series K - |
||||||||
Senior unsecured notes - Series L - |
||||||||
Senior unsecured notes - Series M - |
||||||||
Senior unsecured notes - Series N - |
||||||||
Senior unsecured notes - Series O - |
||||||||
Senior unsecured notes - Series P - |
||||||||
Senior unsecured notes - Series Q - |
||||||||
Credit agreement |
||||||||
Unamortized debt issuance costs |
( |
) | ( |
) | ||||
Total long-term debt |
||||||||
Total debt |
$ | $ | ||||||
| * | Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus |
Three Months Ended September 30, 2023 |
||||||||||||
Net Income (Numerator) |
Weighted- Average Shares (Denominator) |
Per Share Amount |
||||||||||
Net income per basic common share |
$ | $ | ||||||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities |
( |
) | ||||||||||
Net income per diluted common share |
$ | $ | ||||||||||
Three Months Ended October 1, 2022 |
||||||||||||
Net Income (Numerator) |
Weighted- Average Shares (Denominator) |
Per Share Amount |
||||||||||
Net income per basic common share |
$ | $ | ||||||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities |
( |
) | ||||||||||
Net income per diluted common share |
$ | $ | ||||||||||
Nine Months Ended September 30, 2023 |
||||||||||||
Net Income (Numerator) |
Weighted- Average Shares (Denominator) |
Per Share Amount |
||||||||||
Net income per basic common share |
$ | $ | ||||||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities |
( |
) | ||||||||||
Net income per diluted common share |
$ | $ | ||||||||||
Nine Months Ended October 1, 2022 |
||||||||||||
Net Income (Numerator) |
Weighted- Average Shares (Denominator) |
Per Share Amount |
||||||||||
Net income per basic common share |
$ | $ | ||||||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities |
( |
) | ||||||||||
Net income per diluted common share |
$ | $ | ||||||||||
Currency Translation |
Unrealized Gain (Loss) on Retirement Plans |
Unrealized Gain (Loss) on Derivative Instruments |
Accumulated Other Comprehensive Loss |
|||||||||||||
Balance at December 31, 2022 |
$ | ( |
) | $ | $ | $ | ( |
) | ||||||||
Other comprehensive (loss) income, net of tax |
( |
) | ( |
) | ( |
) | ||||||||||
Balance at September 30, 2023 |
$ | ( |
) | $ | $ | $ | ( |
) | ||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||||||
Product net sales: |
||||||||||||||||
Waters instrument systems |
$ | $ | $ | $ | ||||||||||||
Chemistry consumables |
||||||||||||||||
TA instrument systems |
||||||||||||||||
Total product sales |
||||||||||||||||
Service net sales: |
||||||||||||||||
Waters service |
||||||||||||||||
TA service |
||||||||||||||||
Total service sales |
||||||||||||||||
Total net sales |
$ | $ | $ | $ | ||||||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||||||
Net Sales: |
||||||||||||||||
Asia: |
||||||||||||||||
China |
$ | $ | $ | $ | ||||||||||||
Japan |
||||||||||||||||
Asia Other |
||||||||||||||||
Total Asia |
||||||||||||||||
Americas: |
||||||||||||||||
United States |
||||||||||||||||
Americas Other |
||||||||||||||||
Total Americas |
||||||||||||||||
Europe |
||||||||||||||||
Total net sales |
$ | $ | $ | $ | ||||||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||||||
Pharmaceutical |
$ | $ | $ | $ | ||||||||||||
Industrial |
||||||||||||||||
Academic and government |
||||||||||||||||
Total net sales |
$ | $ | $ | $ | ||||||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2023 |
October 1, 2022 |
September 30, 2023 |
October 1, 2022 |
|||||||||||||
Net sales recognized at a point in time: |
||||||||||||||||
Instrument systems |
$ | $ | $ | $ | ||||||||||||
Chemistry consumables |
||||||||||||||||
Service sales recognized at a point in time (time & materials) |
||||||||||||||||
Total net sales recognized at a point in time |
||||||||||||||||
Net sales recognized over time: |
||||||||||||||||
Service and software maintenance sales recognized over time (contracts) |
||||||||||||||||
Total net sales |
$ | $ | $ | $ | ||||||||||||
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.
Wyatt Acquisition
On May 16, 2023, the Company completed the acquisition of Wyatt Technology, LLC and its three operating subsidiaries, Wyatt Technology Europe GmbH, Wyatt Technology France and Wyatt Technology UK Ltd. (collectively, “Wyatt”), for a total purchase price of $1.3 billion in cash. Wyatt is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories, and services. The acquisition will expand Waters’ portfolio and increase exposure to large molecule applications. The Company financed this transaction with a combination of cash on its balance sheet and borrowings under its revolving credit facility. The Company’s financial results for the three and nine months ended September 30, 2023 include the financial results of the Wyatt acquisition from the acquisition date.
Financial Overview
The Company’s operating results are as follows for the three and nine months ended September 30, 2023 and October 1, 2022 (dollars in thousands, except per share data):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, 2023 |
October 1, 2022 |
% change |
September 30, 2023 |
October 1, 2022 |
% change |
|||||||||||||||||||
| Revenues: |
||||||||||||||||||||||||
| Product sales |
$ | 448,081 | $ | 464,923 | (4 | %) | $ | 1,362,464 | $ | 1,385,393 | (2 | %) | ||||||||||||
| Service sales |
263,611 | 243,632 | 8 | % | 774,478 | 728,053 | 6 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total net sales |
711,692 | 708,555 | — | 2,136,942 | 2,113,446 | 1 | % | |||||||||||||||||
| Costs and operating expenses: |
||||||||||||||||||||||||
| Cost of sales |
291,407 | 307,101 | (5 | %) | 876,863 | 899,992 | (3 | %) | ||||||||||||||||
| Selling and administrative expenses |
186,748 | 164,417 | 14 | % | 555,657 | 483,769 | 15 | % | ||||||||||||||||
| Research and development expenses |
41,995 | 43,435 | (3 | %) | 130,559 | 127,913 | 2 | % | ||||||||||||||||
| Purchased intangibles amortization |
12,116 | 1,592 | 661 | % | 20,410 | 4,863 | 320 | % | ||||||||||||||||
| Acquired in-process research and development |
— | — | — | — | 9,797 | (100 | %) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Operating income |
179,426 | 192,010 | (7 | %) | 553,453 | 587,112 | (6 | %) | ||||||||||||||||
| Operating income as a % of sales |
25.2 | % | 27.1 | % | 25.9 | % | 27.8 | % | ||||||||||||||||
| Other income, net |
328 | 895 | (63 | %) | 1,364 | 2,600 | (48 | %) | ||||||||||||||||
| Interest expense, net |
(26,559 | ) | (9,524 | ) | 179 | % | (56,174 | ) | (27,362 | ) | 105 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income before income taxes |
153,195 | 183,381 | (16 | %) | 498,643 | 562,350 | (11 | %) | ||||||||||||||||
| Provision for income taxes |
18,643 | 27,383 | (32 | %) | 72,614 | 81,657 | (11 | %) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income |
$ | 134,552 | $ | 155,998 | (14 | %) | $ | 426,029 | $ | 480,693 | (11 | %) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income per diluted common share |
$ | 2.27 | $ | 2.60 | (13 | %) | $ | 7.19 | $ | 7.94 | (9 | %) | ||||||||||||
28
Table of Contents
The Company’s net sales increased less than one percent in the third quarter of 2023, as compared to the third quarter of 2022, with foreign currency translation having an insignificant impact on sales growth. For the first nine months of 2023, the Company’s net sales increased 1% with the effect of foreign currency translation decreasing sales growth by 2% as compared to the first nine months of 2022. In both the third quarter and first nine months of 2023, the Company’s net sales were negatively impacted by a significant reduction in sales in China due to lower customer demand for our products. Excluding China, the Company’s net sales increased 7% and 5% for the third quarter and first nine months of 2023, respectively. The Wyatt acquisition increased sales growth by 4% and 2% for the third quarter and first nine months of 2023, respectively.
For the first nine months of 2023, the Company had the same amount of calendar days when compared to the first nine months of 2022. At current foreign currency exchange rates, the Company expects that foreign currency translation will be negative to sales for the remainder of 2023.
Instrument system sales decreased 5% and 4% for the third quarter and first nine months of 2023, respectively, as sales growth in the U.S., Latin America and Europe was offset by weaker customer demand in Asia (primarily in China). Instrument system sales in China declined 32% and 23% in the third quarter and first nine months of 2023, respectively, due to lower customer demand for our products. Excluding China, the Company’s instrument system sales increased 4% and 3% in the third quarter and first nine months of 2023, respectively. The decline in China’s instrument sales can be attributed to the decline in customer demand. The Wyatt acquisition increased instrument system sales growth by 7% and 3%, for the third quarter and first nine months of 2023, respectively. Foreign currency translation increased instrument system sales growth by 1% in the third quarter of 2023 and decreased instrument system sales growth by 1% in the first nine months of 2023.
Recurring revenues (combined sales of precision chemistry consumables and services) increased 6% and 5% for the third quarter and first nine months of 2023, respectively, with foreign currency translation having a minimal impact on sales growth in the third quarter and decreasing sales growth by 2% for the first nine months of 2023. Service revenues grew 8% and 6% for the third quarter and first nine months of 2023, respectively. Wyatt’s service revenues added 3% and 1% to service revenue growth for the third quarter and first nine months of 2023, respectively. Chemistry sales growth was flat and increased 3% for the third quarter and first nine months of 2023, respectively. Chemistry sales were significantly impacted by the lower customer demand in China for our products. Excluding the impact of China, the Company’s chemistry sales grew 9% and 6%, for the third quarter and first nine months of 2023, respectively.
Operating income decreased 7% and 6% for the third quarter and first nine months of 2023, respectively, primarily due to higher salary expenses related to merit compensation and an increase in severance-related costs associated with a workforce reduction, partially offset by lower incentive compensation costs. In July 2023, the Company made organizational changes to better align its resources with its growth and innovation strategies, resulting in a worldwide workforce reduction that has impacted approximately 5% of the Company’s employees. The Company incurred approximately $23 million and $27 million of severance-related costs in the third quarter and first nine months of 2023, respectively. The Company paid $12 million and $14 million of severance-related costs in the third quarter and first nine months of 2023, respectively, with the majority of the remaining costs to be paid in the fourth quarter of 2023 and the first half of 2024. The Company estimates that the savings from this reduction in workforce will be approximately $48 million on an annual basis. In addition, the Company’s operating income was impacted by the Wyatt acquisition due diligence and integration costs of $1 million and $13 million for the third quarter and first nine months of 2023, respectively, and the Wyatt acquisition related bonus expense of $8 million and $11 million for the third quarter and first nine months of 2023, respectively. The negative effect of foreign currency translation lowered operating income by approximately $2 million and $18 million for the third quarter and first nine months of 2023, respectively.
The Company generated $373 million and $413 million of net cash from operating activities in the first nine months of 2023 and 2022, respectively. Net cash used in investing activities included $1.3 billion for the Wyatt acquisition in the first nine months of 2023 and capital expenditures related to property, plant, equipment and software capitalization of $119 million and $114 million in the first nine months of 2023 and 2022, respectively.
The Company funded the Wyatt acquisition with a combination of cash on hand and borrowings under our revolving credit facility. The Company’s outstanding debt on September 30, 2023 was $2.5 billion, a change of $1.0 billion from the end of the first quarter of 2023. The Company estimates that its interest expense for the full year 2023 will be approximately $80 million. As a result of the Wyatt acquisition, the Company temporarily suspended its share buyback program in the first quarter 2023.
29
Table of Contents
Results of Operations
Sales by Geography
Geographic sales information is presented below for the three and nine months ended September 30, 2023 and October 1, 2022 (dollars in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, 2023 |
October 1, 2022 |
% change |
September 30, 2023 |
October 1, 2022 |
% change |
|||||||||||||||||||
| Net Sales: |
||||||||||||||||||||||||
| Asia: |
||||||||||||||||||||||||
| China |
$ | 102,081 | $ | 140,080 | (27 | %) | $ | 333,127 | $ | 399,852 | (17 | %) | ||||||||||||
| Japan |
40,069 | 37,095 | 8 | % | 123,943 | 123,222 | 1 | % | ||||||||||||||||
| Asia Other |
96,078 | 102,759 | (7 | %) | 288,862 | 289,204 | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Asia |
238,228 | 279,934 | (15 | %) | 745,932 | 812,278 | (8 | %) | ||||||||||||||||
| Americas: |
||||||||||||||||||||||||
| United States |
231,773 | 216,380 | 7 | % | 673,033 | 638,908 | 5 | % | ||||||||||||||||
| Americas Other |
43,706 | 40,029 | 9 | % | 131,794 | 123,609 | 7 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Americas |
275,479 | 256,409 | 7 | % | 804,827 | 762,517 | 6 | % | ||||||||||||||||
| Europe |
197,985 | 172,212 | 15 | % | 586,183 | 538,651 | 9 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total net sales |
$ | 711,692 | $ | 708,555 | — | $ | 2,136,942 | $ | 2,113,446 | 1 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Geographically, the Company’s sales growth in the third quarter and first nine months of 2023 was broad-based across most major regions, with the exception of China, which declined 27% and 17%, respectively. The decline in China was primarily driven by lower demand for our instrument systems and chemistry products. Excluding China, the Company’s net sales increased 7% and 5% for the third quarter and first nine months of 2023, respectively. Foreign currency translation had minimal impact on sales growth in the third quarter and decreased sales growth by 2% in the first nine months of 2023.
During the third quarter of 2023, sales increased 7% in the U.S. and 15% in Europe, while decreasing 15% in Asia driven by weakness in China and the negative effect of currency translation on sales in Japan. In the third quarter of 2023, foreign currency translation increased sales growth in Europe by 7% and decreased sales growth in Asia by 4%. This decline in Asia was primarily driven by the 8% decline in sales in Japan due to foreign currency translation. Wyatt’s sales contributed 9% of sales growth in the U.S. and 5% of sales growth in Europe in the third quarter of 2023. During the first nine months of 2023, sales increased 5% in the U.S. and 9% in Europe, while decreasing 8% in Asia driven by weakness in China, with the effect of foreign currency translation increasing sales growth in Europe by 1% and decreasing sales growth in Asia by 4%, which includes a 9% decrease in sales in Japan resulting from foreign currency translation.
30
Table of Contents
Sales by Trade Class
Net sales by customer class are presented below for the three and nine months ended September 30, 2023 and October 1, 2022 (dollars in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, 2023 |
October 1, 2022 |
% change |
September 30, 2023 |
October 1, 2022 |
% change |
|||||||||||||||||||
| Pharmaceutical |
$ | 421,535 | $ | 405,959 | 4 | % | $ | 1,233,177 | $ | 1,258,902 | (2 | %) | ||||||||||||
| Industrial |
209,449 | 223,968 | (6 | %) | 648,754 | 641,882 | 1 | % | ||||||||||||||||
| Academic and government |
80,708 | 78,628 | 3 | % | 255,011 | 212,662 | 20 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total net sales |
$ | 711,692 | $ | 708,555 | — | $ | 2,136,942 | $ | 2,113,446 | 1 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
During the third quarter of 2023, sales to pharmaceutical customers increased 4%, as growth in the U.S. and Europe was offset by weakness in China, with foreign currency translation increasing pharmaceutical sales growth by 1% and Wyatt contributing 6% to the Company’s pharmaceutical sales growth. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, decreased 6% in the third quarter of 2023, with foreign currency translation having minimal impact on sales growth and Wyatt contributing 1% to industrial sales growth. Combined sales to academic and government customers increased 3% in the third quarter of 2023, with foreign currency translation having minimal impact on sales growth and Wyatt contributing 5% to the Company’s academic and government sales growth. Sales to our academic and government customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales can vary significantly from period to period.
During the first nine months of 2023, sales to pharmaceutical customers decreased 2%, primarily driven by weakness in customer demand in China, with foreign currency translation decreasing pharmaceutical sales growth by 2%. Combined sales to industrial customers increased 1%, with foreign currency translation decreasing sales growth by 1%. Combined sales to academic and government customers increased 20%, with foreign currency translation decreasing sales growth by 2%.
31
Table of Contents
Waters Products and Services Net Sales
Net sales for Waters products and services were as follows for the three and nine months ended September 30, 2023 and October 1, 2022 (dollars in thousands):
| Three Months Ended | ||||||||||||||||||||
| September 30, 2023 |
% of Total |
October 1, 2022 | % of Total |
% change | ||||||||||||||||
| Waters instrument systems |
$ | 262,142 | 42 | % | $ | 274,869 | 44 | % | (5 | %) | ||||||||||
| Chemistry consumables |
128,650 | 20 | % | 128,096 | 21 | % | — | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Waters product sales |
390,792 | 62 | % | 402,965 | 65 | % | (3 | %) | ||||||||||||
| Waters service |
238,556 | 38 | % | 220,436 | 35 | % | 8 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Waters net sales |
$ | 629,348 | 100 | % | $ | 623,401 | 100 | % | 1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Nine Months Ended |
||||||||||||||||||||
| September 30, 2023 |
% of Total |
October 1, 2022 | % of Total |
% change | ||||||||||||||||
| Waters instrument systems |
$ | 786,293 | 42 | % | $ | 825,677 | 44 | % | (5 | %) | ||||||||||
| Chemistry consumables |
398,084 | 21 | % | 385,661 | 21 | % | 3 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Waters product sales |
1,184,377 | 63 | % | 1,211,338 | 65 | % | (2 | %) | ||||||||||||
| Waters service |
700,281 | 37 | % | 660,371 | 35 | % | 6 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Waters net sales |
$ | 1,884,658 | 100 | % | $ | 1,871,709 | 100 | % | 1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Waters products and service sales increased 1% for both the third quarter and first nine months of 2023, with the effect of foreign currency translation having minimal impact on sales growth in the third quarter, while decreasing Waters sales growth by 1% in the first nine months of 2023. The Wyatt acquisition increased Waters products and service sales by approximately 5% and 2% for the third quarter and first nine months of 2023, respectively. Waters instrument system sales decreased by 5% for both the third quarter and first nine months of 2023 due to weaker customer demand in China. Waters instrument system sales in China declined 35% and 25% for the third quarter and first nine months of 2023, respectively. Foreign currency translation had minimal impact on Waters instrument system sales growth in the third quarter while decreasing sales growth by 1% for the first nine months of 2023. Wyatt’s instrument system sales contributed 8% and 4% to Waters instrument system sales growth for the third quarter and first nine months of 2023, respectively.
Waters chemistry consumables sales were significantly impacted by the lower customer demand in China for our products. Excluding the impact of China, the Company’s chemistry sales grew 9% and 6% for the third quarter and first nine months of 2023, respectively. This sales growth 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 chemistry sales growth by 1% and 2% in the third quarter and first nine months of 2023, respectively.
Waters service sales increased in the third quarter and first nine months of 2023 due to higher service demand billing, partially offset by the negative impact from foreign currency translation, which decreased service sales growth by 2% in the first nine months of 2023. Wyatt service revenues added 3% and 2% to Waters service revenue growth for the third quarter and first nine months of 2023, respectively.
32
Table of Contents
TA Product and Services Net Sales
Net sales for TA products and services were as follows for the three and nine months ended September 30, 2023 and October 1, 2022 (dollars in thousands):
| Three Months Ended | ||||||||||||||||||||
| September 30, 2023 |
% of Total |
October 1, 2022 | % of Total |
% change | ||||||||||||||||
| TA instrument systems |
$ | 57,289 | 70 | % | $ | 61,958 | 73 | % | (8 | %) | ||||||||||
| TA service |
25,055 | 30 | % | 23,196 | 27 | % | 8 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total TA net sales |
$ | 82,344 | 100 | % | $ | 85,154 | 100 | % | (3 | %) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Nine Months Ended |
||||||||||||||||||||
| September 30, 2023 |
% of Total |
October 1, 2022 | % of Total |
% change | ||||||||||||||||
| TA instrument systems |
$ | 178,087 | 71 | % | $ | 174,055 | 72 | % | 2 | % | ||||||||||
| TA service |
74,197 | 29 | % | 67,682 | 28 | % | 10 | % | ||||||||||||
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| Total TA net sales |
$ | 252,284 | 100 | % | $ | 241,737 | 100 | % | 4 | % | ||||||||||
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TA sales declined 3% for the third quarter of 2023 due to lower customer demand for TA products and services while TA sales grew 4% for the first nine months of 2023. For the third quarter, TA’s sales geographically were weak in the U.S., China and Asia Other, declining 8%, 5% and 13%, respectively, but were strong in Europe and Japan, which grew 7% and 19%, respectively. Foreign currency translation increased sales by 3% in Asia Other and 9% in Europe, while decreasing sales by 1% in China and 11% in Japan. For the first nine months of 2023, TA sales growth was broad-based across most major geographies, except for China and Asia Other, which declined 11% and 15%, respectively. The sales growth for the first nine months of 2023 was primarily driven by strong customer demand for our thermal analysis instruments and service, particularly in the U.S. and Europe. Foreign currency translation increased sales by 1% for the third quarter and decreased sales by 1% for the first nine months of 2023.
Cost of Sales
Cost of sales decreased by 5% and 3% in the third quarter and first nine months of 2023, respectively. The decrease in cost of sales in these periods is primarily due to the change in sales mix and the lower material and freight costs for both the third quarter and first nine months of 2023. 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 14% and 15% in the third quarter and first nine months of 2023, respectively. The increase in these periods is primarily driven by severance-related costs in connection with a reduction in workforce, which increased expenses by 14% and 5%; the Wyatt acquisition due diligence and integration costs, which increased expenses by 1% and 3%; and the Wyatt acquisition-related bonus expense, which increased expenses by 5% and 2%, in each case, for the third quarter and first nine months of 2023, respectively. These increases were partially offset by lower incentive compensation costs. The effect of foreign currency translation increased selling and administrative expenses by 2% for the third quarter and decreased expenses by 1% for the first nine months of 2023.
As a percentage of net sales, selling and administrative expenses were 26.2% and 26.0% for the third quarter and first nine months of 2023, respectively, and 23.2% and 22.9% for the third quarter and first nine months of 2022, respectively.
Research and Development Expenses
Research and development expenses decreased 3% in the third quarter and increased 2% in the first nine months of 2023. The decrease in third quarter research and development expenses was driven by lower incentive compensation costs, which were offset by annual merit increases and costs associated with the development of new product and technology initiatives. The impact of foreign currency exchange increased expenses by 1% for the third quarter and decreased expenses by 2% for the first nine months of 2023.
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Purchased Intangibles Amortization
The increase in purchased intangible amortization of $11 million and $16 million in the third quarter and first nine months of 2023, respectively, can be attributed to the Wyatt acquisition intangible assets.
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 nine months of 2022, the Company sold an equity investment for $10 million in cash and recorded a gain on the sale of approximately $7 million in other income, net on the statement of operations. The Company also incurred $6 million in losses on an equity investment within other income, net on the statement of operations.
Interest Expense, net
The increase in interest expense for both the third quarter and first nine months of 2023 can be primarily attributed to the additional borrowings by the Company to fund the Wyatt acquisition. The Company estimates that its interest expense for the full year 2023 will be approximately $80 million.
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 September 30, 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 $11 million and $15 million and increased the Company’s net income per diluted share by $0.18 and $0.25 for the third quarter of 2023 and 2022, respectively.
The Company’s effective tax rate for the third quarter of 2023 and 2022 was 12.2% and 14.9%, respectively. The decrease in the effective tax rate can be primarily attributed to the impact of discrete tax benefits in the current year and differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates.
The Company’s effective tax rate for the first nine months of 2023 and 2022 was 14.6% and 14.5%, respectively. The differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates.
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Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):
| Nine Months Ended | ||||||||
| September 30, 2023 | October 1, 2022 | |||||||
| Net income |
$ | 426,029 | $ | 480,693 | ||||
| Depreciation and amortization |
117,845 | 99,105 | ||||||
| Stock-based compensation |
32,224 | 30,929 | ||||||
| Deferred income taxes |
267 | (20,836 | ) | |||||
| Acquired in-process research and development and other non-cash items |
— | 10,003 | ||||||
| Change in accounts receivable |
100,327 | (39,098 | ) | |||||
| Change in inventories |
(81,415 | ) | (113,211 | ) | ||||
| Change in accounts payable and other current liabilities |
(130,065 | ) | (4,952 | ) | ||||
| Change in deferred revenue and customer advances |
38,959 | 47,060 | ||||||
| Other changes |
(131,484 | ) | (76,741 | ) | ||||
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| Net cash provided by operating activities |
372,687 | 412,952 | ||||||
| Net cash used in investing activities |
(1,404,321 | ) | (45,783 | ) | ||||
| Net cash provided by (used in) financing activities |
885,438 | (398,187 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents |
2,081 | (26,579 | ) | |||||
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| Decrease in cash and cash equivalents |
$ | (144,115 | ) | $ | (57,597 | ) | ||
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Cash Flow from Operating Activities
Net cash provided by operating activities was $373 million and $413 million during the first nine months of 2023 and 2022, respectively. The decrease in 2023 operating cash flow was primarily a result of lower net income, higher inventory levels, higher income tax payments and the payment of acquired Wyatt liabilities, 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 the timing of payments made by customers and timing of sales. Days sales outstanding was 81 days at September 30, 2023 and 77 days at October 1, 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. |
| • | An increase in income tax payments of $79 million as compared to the prior year and the payment of $26 million in Wyatt acquired liabilities. |
| • | 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 $1.4 billion and $46 million in the first nine months of 2023 and 2022, respectively. Additions to fixed assets and capitalized software were $119 million and $114 million in the first nine months of 2023 and 2022, respectively. The cash flows from investing activities in 2023 and 2022 include $12 million and $24 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 $245 million on this facility inception-to-date through the end of the first nine months of 2023 and anticipates completing this new state-of-the-art facility in 2023.
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During the first nine months of 2023 and 2022, the Company purchased $2 million and $11 million of investments, respectively, while $2 million and $78 million of investments matured, respectively, and were used for financing activities described below.
During the first nine months 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.
During the first nine months of 2022, the Company received $10 million in proceeds from equity investments and made $1 million of investments in equity investments.
On May 16, 2023, the Company completed the acquisition of Wyatt for a total purchase price of $1.3 billion in cash. Wyatt is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories, and services. The acquisition will expand Waters’ portfolio and increase exposure to large molecule applications.
Cash Flow from Financing Activities
The Company had 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, in anticipation of closing of the Wyatt acquisition, 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. As of September 30, 2023, the Company had a total of $2.5 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $1.2 billion borrowed under its credit agreement. The Company’s net debt borrowings increased by $0.9 billion and $30 million during the first nine months of 2023 and 2022, respectively, primarily to fund the Wyatt acquisition.
As of September 30, 2023, the Company had entered into interest rate cross-currency swap derivative agreements with durations up to three years with an aggregate notional value of $625 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 $8 million and $6 million during the first nine months 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 first nine months of September 30, 2023 and October 1, 2022, the Company repurchased $58 million and $467 million of the Company’s outstanding common stock, respectively, under the share repurchase program. In addition, the Company repurchased $12 million and $11 million of common stock related to the vesting of restricted stock units during the first nine months of September 30, 2023 and October 1, 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 acquisition of Wyatt.
The Company received $18 million and $36 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 nine months of 2023 and 2022, respectively.
The Company had cash, cash equivalents and investments of $337 million as of September 30, 2023. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $307 million held by foreign subsidiaries at September 30, 2023, of which $196 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 September 30, 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 nine months ended September 30, 2023. The Company did not make any changes in those policies during the nine months ended September 30, 2023.
New Accounting Pronouncements
Please refer to Note 13, Recent Accounting Standard Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.
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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”). 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 in the Middle East, 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; |
| • | the ability to realize the expected benefits related to the Company’s various cost-saving initiatives; |
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| • | risks associated with cybersecurity and technology, including attempts by third parties to defeat the security measures of the Company and its third-party partners; |
| • | 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 September 30, 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 September 30, 2023 and December 31, 2022, $307 million out of $337 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, $196 million out of $337 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 September 30, 2023 and December 31, 2022, respectively. As of September 30, 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 September 30, 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 nine months ended September 30, 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 September 30, 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 September 30, 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 nine months ended September 30, 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 September 30, 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.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
During the three months ended September 30, 2023, the Company purchased 205 and 2,269 shares at a cost of $57 thousand and $634 thousand with average prices paid of $280.25 and $279.44 during fiscal July and September, respectively, of equity securities registered by the Company under the Exchange Act.
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 level to $4.8 billion, an increase of $750 million. As of September 30, 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. 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 | |
| 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 September 30, 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 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: November 7, 2023
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