Waters 10-Q 2022-10-01

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 October 1, 2022

or

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

For the transition period from

to

.

Commission File Number:

01-14010

Waters Corporation

(Exact name of registrant as specified in its charter)

Delaware		13-3668640
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

34 Maple Street

Milford, Massachusetts 01757

(Address, including zip code, of principal executive offices)

(

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 file

s). Yes

☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in

Rule 12b-2

of the Exchange

Act.

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in

Rule 12b-2

of the Act).

Yes ☐ No

☒

Indicate the number of shares outstanding of the registrant’s common stock as of October 28, 2022: 59,407,575

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 October 1, 2022 and December 31, 2021			3
		Consolidated Statements of Operations (unaudited) for the three months ended October 1, 2022 and October 2, 2021			4
		Consolidated Statements of Operations (unaudited) for the nine months ended October 1, 2022 and October 2, 2021			5
		Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended October 1, 2022 and October 2, 2021			6
		Consolidated Statements of Cash Flows (unaudited) for the nine months ended October 1, 2022 and October 2, 2021			7
		Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended October 1, 2022 and October 2, 2021			8
		Consolidated Statements of Stockholders’ Equity (unaudited) for the nine months ended October 1, 2022 and October 2, 2021			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			39
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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

		October 1, 2022				December 31, 2021
		(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents		$	443,637			$	501,234
Investments			876				68,051
Accounts receivable, net			600,924				612,648
Inventories			442,236				356,095
Other current assets			87,912				90,914
Total current assets			1,575,585				1,628,942
Property, plant and equipment, net			547,386				547,913
Intangible assets, net			213,429				242,401
Goodwill			420,257				437,865
Operating lease assets			86,285				84,734
Other assets			227,111				153,077
Total assets		$	3,070,053			$	3,094,932
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and debt		$	50,000			$	—
Accounts payable			96,567				96,799
Accrued employee compensation			64,554				101,192
Deferred revenue and customer advances			248,884				227,561
Current operating lease liabilities			24,231				27,906
Accrued income taxes			116,819				61,278
Accrued warranty			10,661				10,718
Other current liabilities			120,254				155,054
Total current liabilities			731,970				680,508
Long-term liabilities:
Long-term debt			1,494,626				1,513,870
Long-term portion of retirement benefits			48,798				64,027
Long-term income tax liabilities			248,111				319,547
Long-term operating lease liabilities			61,470				59,623
Other long-term liabilities			99,842				89,803
Total long-term liabilities			1,952,847				2,046,870
Total liabilities			2,684,817				2,727,378
Commitments and contingencies (Notes 6, 7, 8 and 12)
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 5,000 shares authorized, no ne issued at October 1, 2022 and December 31, 2021			—				—
Common stock, par value $0.01 per share, 400,000 shares authorized, 162,379 and 162,084 shares issued, 59,534 and 60,728 shares outstanding at October 1, 2022 and December 31, 2021, respectively			1,624				1,621
Additional paid-in capital			2,181,558				2,114,880
Retained earnings			8,281,525				7,800,832
Treasury stock, at cost, 102,845 and 101,356 shares at October 1, 2022 and December 31, 2021, respectively			(9,915,081	)			(9,437,914	)
Accumulated other comprehensive loss			(164,390	)			(111,865	)
Total stockholders’ equity			385,236				367,554
Total liabilities and stockholders’ equity		$	3,070,053			$	3,094,932

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

		Three Months Ended
		October 1, 2022				October 2, 2021
		(In thousands, except per share data)
Revenues:
Product sales		$	464,923			$	419,133
Service sales			243,632				240,100
Total net sales			708,555				659,233
Costs and operating expenses:
Cost of product sales			199,918				171,364
Cost of service sales			107,183				99,764
Selling and administrative expenses			164,417				152,545
Research and development expenses			43,435				41,986
Purchased intangibles amortization			1,592				1,759
Total costs and operating expenses			516,545				467,418
Operating income			192,010				191,815
Other income (expense), net			895				(607	)
Interest expense			(12,420	)			(11,081	)
Interest income			2,896				2,548
Income before income taxes			183,381				182,675
Provision for income taxes			27,383				21,490
Net income		$	155,998			$	161,185
Net income per basic common share		$	2.61			$	2.63
Weighted-average number of basic common shares			59,801				61,359
Net income per diluted common share		$	2.60			$	2.60
Weighted-average number of diluted common shares and equivalents			60,081				61,888

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

		Nine Months Ended
		October 1, 2022				October 2, 2021
		(In thousands, except per share data)
Revenues:
Product sales		$	1,385,393			$	1,242,110
Service sales			728,053				707,315
Total net sales			2,113,446				1,949,425
Costs and operating expenses:
Cost of product sales			593,884				506,985
Cost of service sales			306,108				298,544
Selling and administrative expenses			483,769				453,954
Research and development expenses			127,913				125,027
Purchased intangibles amortization			4,863				5,408
Acquired in-process research and development			9,797				—
Total costs and operating expenses			1,526,334				1,389,918
Operating income			587,112				559,507
Other income, net			2,600				18,073
Interest expense			(34,898	)			(34,054	)
Interest income			7,536				10,347
Income before income taxes			562,350				553,873
Provision for income taxes			81,657				77,269
Net income		$	480,693			$	476,604
Net income per basic common share		$	7.98			$	7.72
Weighted-average number of basic common shares			60,200				61,771
Net income per diluted common share		$	7.94			$	7.66
Weighted-average number of diluted common shares

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Management

’

s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

The Company has two operating segments: Waters

TM

and TA

TM

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

TM

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

COVID-19

Pandemic

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

COVID-19

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

COVID-19

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

COVID-19

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

The

COVID-19

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

During the second quarter of 2022, the Company successfully managed a significant delay in the receipt of certain materials and components from a supplier that was directly related to the

COVID-19

pandemic lockdown in China, and while the Company did not experience these significant delays in the third quarter of 2022, the Company cannot provide any assurances that any further disruptions in its logistics and supply chains will not have a significant impact on its future financial results and cashflows.

The Company has taken decisive and appropriate actions throughout the

COVID-19

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

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

Financial Overview

The Company’s operating results are as follows for the three and nine months ended October 1, 2022 and October 2, 2021 (dollars in thousands, except per share data):

		Three Months Ended												Nine Months Ended
		October 1, 2022				October 2, 2021				% change				October 1, 2022				October 2, 2021				% change
Revenues:
Product sales		$	464,923			$	419,133				11	%		$	1,385,393			$	1,242,110				12	%
Service sales			243,632				240,100				1	%			728,053				707,315				3	%
Total net sales			708,555				659,233				7	%			2,113,446				1,949,425				8	%
Costs and operating expenses:
Cost of sales			307,101				271,128				13	%			899,992				805,529				12	%
Selling and administrative expenses			164,417				152,545				8	%			483,769				453,954				7	%
Research and development expenses			43,435				41,986				3	%			127,913				125,027				2	%
Purchased intangibles amortization			1,592				1,759				(9	%)			4,863				5,408				(10	%)
Acquired in-process research and development			—				—				—				9,797				—				*	*
Operating income			192,010				191,815				—				587,112				559,507				5	%
Operating income as a % of sales			27.1	%			29.1	%							27.8	%			28.7	%
Other income, net			895				(607	)			(247	%)			2,600				18,073				(86	%)
Interest expense, net			(9,524	)			(8,533	)			12	%			(27,362	)			(23,707	)			15	%
Income before income taxes			183,381				182,675				—				562,350				553,873				2	%
Provision for income taxes			27,383				21,490				27	%			81,657				77,269				6	%
Net income		$	155,998			$	161,185				(3	%)		$	480,693			$	476,604				1	%
Net income per diluted common share		$	2.60			$	2.60				—			$	7.94			$	7.66				4	%

**	Percentage not meaningful

The Company’s net sales increased 7% and 8% in the third quarter and first nine months of 2022, respectively, as compared to the third quarter and first nine months of 2021. The sales growth in these periods was driven by strong customer demand across most major geographies, end markets, and product categories. Foreign currency translation decreased total sales growth by 8% in the third quarter and 6% in the first nine months of 2022 as the U.S. dollar strengthened significantly against all currencies in the world, which negatively impacted our sales and operating profits. In addition, the Company’s first nine months of 2022 included one less calendar day than the first nine months of 2021.

Instrument system sales increased 14% for both the third quarter and first nine months of 2022, due to the broad-based increase in customer demand across all existing and newly introduced LC,

LC-MS

and Thermal Analysis instrument system sales. Foreign currency translation decreased instrument system sales growth by 7% and 5% in the third quarter and first nine months of 2022, respectively. Recurring revenues (combined sales of precision chemistry consumables and services) increased 2% and 4% for the third quarter and first nine months of 2022, respectively, with foreign currency translation decreasing sales growth by 8% and 5% in the third quarter and the first nine months of the year, respectively.

Operating income was flat and grew 5% for the third quarter and first nine months of 2022, respectively. The Company’s operating income in the third quarter of 2022 was flat with the prior year as sales volume and pricing increases were offset by higher electronic component and freight inflationary costs and the negative effect of foreign currency translation. The operating income increase for the first nine months was primarily a result of the increase in sales volumes and price increases being partially offset by an increase in electronic component and freight inflationary costs and the negative impact of foreign currency translation.

The Company generated $413 million and $529 million of net cash flows from operations in the first nine months of 2022 and 2021, respectively. This decrease in operating cash flow can primarily be attributed to the increase in inventory levels due to the higher sales volumes, higher material inflation cost and the

build-up

of safety stock in an attempt to mitigate future supply chain issues. Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $114 million and $117 million in the first nine months of 2022 and 2021, respectively.

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

two-year

period. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. During the first nine months of 2022 and 2021, the Company repurchased $467 million and $484 million of the Company’s outstanding common stock, respectively, under authorized share repurchase programs. The Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits.

Results of Operations

Sales by Geography

Geographic sales information is presented below for the three and nine months ended October 1, 2022 and October 2, 2021 (dollars in thousands):

		Three Months Ended												Nine Months Ended
		October 1, 2022				October 2, 2021				% change				October 1, 2022				October 2, 2021				% change
Net Sales:
Asia:
China		$	140,080			$	115,886				21	%		$	399,852			$	346,030				16	%
Japan			37,095				44,293				(16	%)			123,222				139,702				(12	%)
Asia Other			102,759				94,423				9	%			289,204				268,359				8	%
Total Asia			279,934				254,602				10	%			812,278				754,091				8	%
Americas:
United States			216,380				194,776				11	%			638,908				544,124				17	%
Americas Other			40,029				36,225				11	%			123,609				109,128				13	%
Total Americas			256,409				231,001				11	%			762,517				653,252				17	%
Europe			172,212				173,630				(1	%)			538,651				542,082				(1	%)
Total net sales		$	708,555			$	659,233				7	%		$	2,113,446			$	1,949,425				8	%

Geographically, the Company’s sales growth in the third quarter and first nine months of 2022 was broad-based across most major regions. Foreign currency translation decreased total sales growth by 8% in the third quarter and 6% in the first nine months of 2022 as the U.S. dollar strengthened significantly against all currencies in the world. The geographies that were the most negatively impacted by the strengthening of the U.S. dollar were Europe and Japan. The Company’s sales in these geographies typically represent over 30% of our sales in a period, and the weakening of the Euro and Japanese Yen lowered sales growth in Europe and Japan by 15% and 22% for the third quarter, respectively, and 11% and 16% for the first nine months, respectively.

During the third quarter of 2022, sales increased 10% in Asia and 11% in the Americas, but decreased 1% in Europe, with the effect of foreign currency translation decreasing sales growth in Asia by 8% and in Europe by 15%. During the first nine months of 2022, sales increased 8% in Asia, 17% in the Americas, and decreased 1% in Europe, with the effect of foreign currency translation decreasing sales growth by 6% in Asia, and 11% in Europe. China sales increased 21% and 16% in the third quarter and first nine months of 2022, respectively, driven by strong customer demand for our products and services. Foreign currency translation decreased China sales growth by 2% in the third quarter of 2022. The latest

COVID-19

pandemic lockdown in China has made it difficult to conduct normal business operations in 2022 and may have a negative impact on the Company’s future sales growth if future lockdowns were to occur for a prolonged period. Sales increased 11% and 17% in the U.S. and 11% and 13% in India, respectively in the quarter

and for the first nine months of 2022, while sales decreased by 16% and 12% in Japan due to foreign currency translation, which decreased sales growth by 22% and 16% in Japan, respectively in the third quarter and for the first nine months of 2022.

Sales by Trade Class

Net sales by customer class are presented below for the three and nine months ended October 1, 2022 and October 2, 2021 (dollars in thousands):

		Three Months Ended								Nine Months Ended
		October 1, 2022				October 2, 2021				October 1, 2022				October 2, 2021
Pharmaceutical		$	405,959			$	398,338			$	1,258,902			$	1,175,191
Industrial			223,968				196,032				641,882				581,884
Academic and government			78,628				64,863				212,662				192,350
Total net sales		$	708,555			$	659,233			$	2,113,446			$	1,949,425

During the third quarter of 2022, sales to pharmaceutical customers increased 2%, driven by growth in most major regions, partially offset by the negative impact from foreign currency translation which decreased pharmaceutical sales by 7%. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 14%, with foreign currency translation decreasing sales growth by 8% in the quarter. During the third quarter of 2022, combined sales to academic and government customers increased 21%, with foreign currency translation decreasing academic and government sales growth by 8%. 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 2022, sales to pharmaceutical customers increased 7%, driven by growth in most major regions on strong customer demand. Foreign currency translation decreased pharmaceutical sales growth by 5%. Combined sales to industrial customers increased 10%, with the effect of foreign currency translation decreasing sales growth by 5%. During the first nine months of 2022, combined sales to academic and government customers increased 11%, with foreign currency translation decreasing sales growth by 5%.

Waters Products and Services Net Sales

Net sales for Waters products and services were as follows for the three and nine months ended October 1, 2022 and October 2, 2021 (dollars in thousands):

		Three Months Ended
		October 1, 2022				% of Total				October 2, 2021				% of Total				% change
Waters instrument systems		$	274,869				44	%		$	240,475				41	%			14	%
Chemistry consumables			128,096				21	%			123,045				21	%			4	%
Total Waters product sales			402,965				65	%			363,520				62	%			11	%
Waters service			220,436				35	%			218,291				38	%			1	%
Total Waters net sales		$	623,401				100	%		$	581,811				100	%			7	%

		Nine Months Ended
		October 1, 2022				% of Total				October 2, 2021				% of Total				% change
Waters instrument systems		$	825,677				44	%		$	717,910				41	%			15	%
Chemistry consumables			385,661				21	%			368,478				22	%			5	%
Total Waters product sales			1,211,338				65	%			1,086,388				63	%			12	%
Waters service			660,371				35	%			644,625				37	%			2	%
Total Waters net sales		$	1,871,709				100	%		$	1,731,013				100	%			8	%

Waters products and service sales increased 7% and 8% in the third quarter and first nine months of 2022, respectively, with the effect of foreign currency translation decreasing Waters sales growth by 7% and 5% in the third quarter and first nine months of 2022, respectively. Waters instrument systems grew 14% and 15% for the third quarter and first nine months of 2022, respectively, with foreign currency translation lowering sales growth by 7% and 5% for the third quarter and first nine months of 2022, respectively. The increase in the Waters instrument system sales can be attributed to the strong customer demand for our existing products as well as our newer Arc

TM

HPLC, ACQUITY

TM

Premier and XEVO

TM

TQ Absolute product introductions. The increase in Waters chemistry consumables sales was primarily due to the strong demand in most major geographies, driven by the uptake in columns and application-specific testing kits to pharmaceutical customers and partially offset by the negative impact from foreign currency translation which decreased sales by 6%. Waters service sales increased due to higher service demand billing, particularly in China and the United States. Waters recurring revenues were also negatively impacted by one less calendar day in the first nine months of the year.

In the third quarter of 2022, Waters sales increased 9% in the Americas and 10% in Asia, with sales in China increasing 22%, while sales in Europe and Japan decreased by 1% and 16%, respectively. Foreign currency translation decreased Waters sales growth by 1% in the Americas, 8% in Asia, 2% in China, 15% in Europe and 22% in Japan.

In the first nine months of 2022, Waters sales decreased 1% in Europe, while sales increased 18% in the Americas and 7% in Asia, with sales in China increasing 14%. Foreign currency translation decreased Waters sales growth by 10% in Europe, 6% in Asia and 1% in China.

TA Product and Services Net Sales

Net sales for TA products and services were as follows for the three and nine months ended October 1, 2022 and October 2, 2021 (dollars in thousands):

		Three Months Ended
		October 1, 2022				% of Total				October 2, 2021				% of Total				% change
TA instrument systems		$	61,958				73	%		$	55,613				72	%			11	%
TA service			23,196				27	%			21,809				28	%			6	%
Total TA net sales		$	85,154				100	%		$	77,422				100	%			10	%

		Nine Months Ended
		October 1, 2022				% of Total				October 2, 2021				% of Total				% change
TA instrument systems		$	174,055				72	%		$	155,722				71	%			12	%
TA service			67,682				28	%			62,690				29	%			8	%
Total TA net sales		$	241,737				100	%		$	218,412				100	%			11	%

TA instrument system and service sales growth in the third quarter and first nine months of 2022 was broad-based across most major geographies increasing 10% and 11%, respectively, and was primarily driven by strong customer demand for our thermal analysis instruments and services. The increase in TA instrument system sales in the third quarter of 2022 was driven by strength in China and the Americas, while the increase in TA service sales was primarily due to the sales of service plans and billings to a higher installed base of customers. The effect of foreign currency translation decreased TA’s sales growth by 8% and 5% in the third quarter and first nine months of 2022, respectively.

Cost of Sales

Cost of sales increased 13% and 12% for the third quarter and first nine months of 2022, respectively. The increase in cost of sales in these periods is primarily due to the increase in sales volume as well as an increase in electronic component and freight inflationary costs. Cost of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix, product costs of instrument systems and amortization of software platforms. At current foreign currency exchange rates, the Company expects foreign currency translation to significantly decrease gross profit for the remainder of 2022 and into the first half of 2023.

Selling and Administrative Expenses

Selling and administrative expenses increased 8% and 7% for the third quarter and first nine months of 2022, respectively. The increase in selling and administrative expenses in these periods can be attributed to the salary merit and additional compensation due to an increase in the number of employees. In addition, the effect of foreign currency translation decreased selling and administrative expenses by 7% and 4% for the third quarter and first nine months of 2022, respectively.

As a percentage of net sales, selling and administrative expenses were 23.2% and 22.9% for the third quarter and first nine months of 2022, respectively, and 23.1% and 23.3% for the third quarter and first nine months of 2021, respectively.

Research and Development Expenses

Research and development expenses increased 3% and 2% in the third quarter and first nine months of 2022, respectively. The impact of foreign currency exchange decreased expenses by 4% and 3% in the third quarter and first nine months of 2022, respectively.

Acquired

In-Process

Research & Development

During the first nine months of 2022, the Company completed an asset acquisition in which the CDMS technology assets of Megadalton were acquired for approximately $10 million in total purchase price of which $5 million was

paid at closing and the remaining $4 million will be paid in the future at various dates through 2029. This CDMS technology makes it possible to analyze extremely large proteins and protein complexes used in cell and gene therapies that would otherwise be difficult to analyze with conventional mass spectrometry. Once this technology is further developed, we anticipate that it will extend the capabilities of our mass spectrometry portfolio for a broader set of applications and as such the cost of this technology asset has been accounted for as Acquired

In-Process

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

Other Income (Expense), net

During the first nine months of 2022, the Company sold equity investments for $10 million in cash and recorded gains on the sales of approximately $7 million in other income, net on the statement of operations. The Company also incurred $6 million in losses on equity investments within other income, net on the statement of operations.

During the first nine months of 2021, the Company executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation and Bruker Daltronik GmbH regarding their timsTOF product line. In connection with the settlement, the Company is entitled to receive $10 million in guaranteed payments, including minimum royalty payments. During the first nine months of 2021, the Company recorded an unrealized gain of $10 million due to an observable change in the fair value of an existing investment the Company does not have the ability to exercise significant influence over. the Company recorded an unrealized gain of $10 million due to an observable change in the fair value of an existing investment the Company does not have the ability to exercise significant influence over.

Interest Expense, net

The net interest expense in the third quarter and first nine months of 2022 increased $1 million and increased $4 million, respectively, as compared to the same periods in the prior year. The increase in the first nine months of 2022 can be primarily attributed to the lower interest income benefit from the lower notional amount of interest rate cross currency swap agreements.

Provision for Income Taxes

The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of October 1, 2022. The Company had a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones. The Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax rates rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the first nine months of 2022 and 2021 by $15 million and $13 million, respectively, and increased the Company’s net income per diluted share by $0.25 and $0.20 for the first nine months of 2022 and 2021, respectively.

The Company’s effective tax rate for the third quarter of 2022 and 2021 was 14.9% and 11.8%, respectively. The increase in the effective income tax rate can be attributed to the impact of favorable quarter-specific adjustments in the prior 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 2022 and 2021 was 14.5% and 14.0%, 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.

Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows (in thousands):

		Nine Months Ended
		October 1, 2022				October 2, 2021
Net income		$	480,693			$	476,604
Depreciation and amortization			99,105				97,926
Stock-based compensation			30,929				21,949
Deferred income taxes			(20,836	)			9,219
Acquired in-process research and development and other non-cash items			10,003				—
Change in accounts receivable			(39,098	)			23,472
Change in inventories			(113,211	)			(93,878	)
Change in accounts payable and other current liabilities			(4,952	)			(4,768	)
Change in deferred revenue and customer advances			47,060				71,889
Other changes			(76,741	)			(73,077	)
Net cash provided by operating activities			412,952				529,336
Net cash used in investing activities			(45,783	)			(248,428	)
Net cash used in financing activities			(398,187	)			(183,907	)
Effect of exchange rate changes on cash and cash equivalents			(26,579	)			(8,994	)
(Decrease) increase in cash and cash equivalents		$	(57,597	)		$	88,007

Cash Flow from Operating Activities

Net cash provided by operating activities was $413 million and $529 million during the first nine months of 2022 and 2021, respectively. This decrease in operating cash flow was primarily a result of higher inventory levels due to higher sales volumes and higher incentive compensation payments in the first nine months of 2022 compared to the first nine months of 2021. The changes within net cash provided by operating activities include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the changes in net income:

	•		The changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales. Days sales outstanding increased to 77 days at October 1, 2022 as compared to 74 days at October 2, 2021. This increase is days sales outstanding is primarily due to delays in the timing of shipments to our customers from a supply chain issue caused by the COVID-19 pandemic lockdowns in China that occurred late in the second quarter of 2022.

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

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

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

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

Cash Flow from Investing Activities

Net cash used in investing activities totaled $46 million and $248 million in the first nine months of 2022 and 2021, respectively. Additions to fixed assets and capitalized software were $114 million and $117 million in the first nine months October 1, 2022 and October 2, 2021, respectively. The cash flows from investing activities in 2022 also included $24 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the United States. The Company has incurred costs of $221 million on this facility through the end of the first nine months of 2022, and anticipates spending approximately $30 million to complete this new

state-of-the-art

facility in 2022.

During the first nine months of 2022 and 2021, the Company purchased $11 million and $241 million of investments, respectively, while $78 million and $117 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 the first nine months of 2022.

During the first nine months of 2022, the Company received $10 million in proceeds and made $1 million of investments in certain equity investments.

Cash Flow from Financing Activities

The Company entered into a credit agreement in September 2021 governing the Company’s five-year, $1.8 billion revolving facility that matures in September 2026. As of October 1, 2022, the Company had a total of $1.5 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $240 million borrowed under the 2021 Credit Agreement. During the first nine months of 2022 and 2021, the Company’s net debt borrowings increased by $30 million and increased by $260 million, respectively.

As of October 1, 2022, the Company has entered into three-year interest rate cross-currency swap derivative agreements with a notional value $585 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated and

Yen-denominated

net asset investments. As a result of entering into these agreements, the Company anticipates lowering net interest expense by approximately $9 million in 2022.

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

two-year

period. This new program replaced the remaining amounts available from the

pre-existing

program. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. During the first nine months of 2022 and 2021, the Company repurchased $467 million and $484 million, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased $11 million and $9 million of common stock related to the vesting of restricted stock units during the first nine months of 2022 and 2021, respectively.

The Company received $36 million and $55 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 2022 and 2021, respectively.

The Company had cash, cash equivalents and investments of $445 million as of October 1, 2022. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $409 million held by foreign subsidiaries at October 1, 2022, of which $270 million was held in currencies other than U.S. dollars.

Contractual Obligations, Commercial Commitments, Contingent Liabilities and Dividends

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

10-K

for the year ended December 31, 2021, as filed with the SEC on February 24, 2022. The Company reviewed its contractual obligations and commercial commitments as of October 1, 2022 and determined that there were no material changes outside the ordinary course of business from the information set forth in the Annual Report on Form

10-K.

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

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

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

Off-Balance

Sheet Arrangements

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

off-balance

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

The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company’s costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.

Critical Accounting Policies and Estimates

In the Company’s Annual Report on Form

10-K

for the year ended December 31, 2021, as filed with the SEC on February 24, 2022, the Company’s most critical accounting policies and estimates upon which its financial status depends were identified as those relating to revenue recognition, loss provisions on accounts receivable and inventory, valuation of long-lived assets, intangible assets and goodwill, income taxes, uncertain tax positions, warranty, litigation, pension and other postretirement benefit obligations, stock-based compensation and business combinations and asset acquisitions. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the nine months ended October 1, 2022. The Company did not make any changes in those policies during the nine months ended October 1, 2022.

New Accounting Pronouncements

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

Special Note Regarding Forward-Looking Statements

Certain of the statements in this Quarterly Report on Form

10-Q,

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

COVID-19

pandemic; the impact of new or proposed tariff or trade regulations or changes in the interpretation or enforcement of existing regulations; the impact of foreign currency translation on financial results; development of products by acquired businesses; the growth rate of sales and research and development expenses; the impact of costs associated with developing new technologies and bringing these new technologies to market; the impact of new product launches and the associated costs, such as the amortization expense related to software platforms; geographic sales mix of business; development of products by acquired businesses and the amount of contingent payments to the sellers of an acquired business; anticipated expenses, including interest expense, capitalized software costs and effective tax rates; the impact of the 2017 Tax Act in the U.S.; the impact and outcome of the Company’s various ongoing tax audit examinations; the achievement of contractual milestones to preserve foreign tax rates; the impact and outcome of litigation matters; the impact of the loss of intellectual property protection; the impact of new accounting standards and pronouncements; the adequacy of the Company’s supply chain and manufacturing capabilities and facilities; the impact of regulatory compliance; the Company’s expected cash flow, borrowing capacity, debt repayment and refinancing; the Company’s ability to fund working capital, capital

expenditures, service debt, repay outstanding lines of credit, make authorized share repurchases, fund potential acquisitions and pay any adverse litigation or tax audit liabilities, particularly in the U.S.; future impairment charges; the Company’s contributions to defined benefit plans; the Company’s expectations regarding changes to its financial position; compliance with applicable environmental laws; and the impact of recent acquisitions on sales and earnings.

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

10-Q.

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

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

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

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

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

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

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

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

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

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

10-K

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

10-Q

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

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 October 1, 2022, 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 October 1, 2022 and December 31, 2021, $409 million out of $445 million and $440 million out of $569 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $270 million out of $445 million and $298 million out of $569 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at October 1, 2022 and December 31, 2021, respectively. As of October 1, 2022, 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 October 1, 2022 would decrease by approximately $30 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 October 1, 2022. 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, 2021, as filed with the SEC on February 24, 2022.

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 Securities Exchange Act of 1934, as amended (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 October 1, 2022 (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 October 1, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II:

Other Information

Item 1: Legal Proceedings

There have been no material changes in the Company’s legal proceedings during the three months ended October 1, 2022 as described in Item 3 of Part I of the Company’s Annual Report on Form

10-K

for the year ended December 31, 2021, as filed with the SEC on February 24, 2022.

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, 2021, as filed with the SEC on February 24, 2022. The Company reviewed its risk factors as of October 1, 2022 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

The following table provides information about purchases by the Company during the three months ended October 1, 2022 of equity securities registered by the Company under the Exchange Act (in thousands, except per share data):

Period		Total Number of Shares Purchased (1)				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Programs				Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs (2)
July 3, 2022 to July 30, 2022			129			$	340.09				129			$	528,840
July 31, 2022 to August 27, 2022			157			$	335.11				157			$	476,337
August 28, 2022 to October 1, 2022			199			$	295.79				197			$	418,055
Total			485			$	320.30				483			$	418,055

(1)	The Company repurchased approximately two thousand shares of common stock at a cost of less than $1 million related to the vesting of restricted stock during the three months ended October 1, 2022.

(2)

In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock in open market or private transactions over a two-year period. This program replaced the remaining amounts available under the pre-existing authorization. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. 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.

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 October 1, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Cash Flows (unaudited) and (vi) Condensed Notes to Consolidated Financial Statements (unaudited).
104		Cover Page Interactive Date File (formatted in iXBRL and contained in Exhibit 101).

(*)

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

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.

W ATERS C ORPORATION
/s/ Amol Chaubal
Amol Chaubal
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)

Date: November 3, 2022