10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

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.

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

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

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.

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.

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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

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

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.

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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.

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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

” 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

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

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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

SEC Form 10-Q filed by Waters Corporation