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.

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.

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

		Three Months Ended
		April 1, 2023				April 2, 2022
		(In thousands)
Net income		$	140,923			$	159,831
Other comprehensive income (loss):
Foreign currency translation			8,783				(6,169	)
Unrealized gains on investments before income taxes			—				15
Income tax expense			—				(4	)
Unrealized gains on investments, net of tax			—				11
Retirement liability adjustment before reclassifications			80				268
Amounts reclassified to other income			(83	)			127
Retirement liability adjustment before income taxes			(3	)			395
Income tax expense			(4	)			(97	)
Retirement liability adjustment, net of tax			(7	)			298
Other comprehensive income (loss)			8,776				(5,860	)
Comprehensive income		$	149,699			$	153,971

T

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

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.

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.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1 Basis of Presentation and Summary of Significant Accounting Policies

Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high-performance liquid chromatography (“HPLC”), ultra-performance liquid chromatography (“UPLC

TM

” and, together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together

(“LC-MS”)

and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing.

LC-MS

instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA

TM

product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.

The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s first fiscal quarters for 2023 and 2022 ended on April 1, 2023 and April 2, 2022, respectively.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form

10-Q

and do not include all of the information and footnote disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions.

It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2022, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2023.

Risks and Uncertainties

The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.

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

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any

off-balance

sheet credit exposure related to its customers.

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

re-possess,

refurbish and

re-sell

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

The following is a summary of the activity of the Company’s allowance for credit losses for the three months ended April 1, 2023 and April 2, 2022 (in thousands):

		Balance at Beginning of Period				Additions				Deductions				Balance at End of Period
Allowance for Credit Losses
April 1, 2023		$	14,311			$	1,572			$	(1,028	)		$	14,855
April 2, 2022		$	13,228			$	987			$	(1,072	)		$	13,143

Other Investments

During the three months ended April 1, 2023, the Company did not have any other investment activity. During the three months ended April 2, 2022, the Company recorded a realized gain of $

million in other income, net in the consolidated statement of operations due to the sale of an equity investment as well as incurring

$4

million in impairment losses on an equity investment.

Fair Value Measurements

In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of April 1, 2023 and December 31, 2022. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at April 1, 2023 (in thousands):

		Total at April 1, 2023				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Time deposits		$	885			$	—			$	885			$	—
Waters 401(k) Restoration Plan assets			28,310				28,310				—				—
Foreign currency exchange contracts			121				—				121				—
Interest rate cross-currency swap agreements			13,880				—				13,880				—
Total		$	43,196			$	28,310			$	14,886			$	—
Liabilities:
Foreign currency exchange contracts		$	67			$	—			$	67			$	—
Interest rate cross-currency swap agreements			6,756				—				6,756				—
Total		$	6,823			$	—			$	6,823			$	—

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2022 (in thousands):

		Total at December 31, 2022				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Time deposits		$	862			$	—			$	862			$	—
Waters 401(k) Restoration Plan assets			25,532				25,532				—				—
Foreign currency exchange contracts			231				—				231				—
Interest rate cross-currency swap agreements			19,163				—				19,163				—
Total		$	45,788			$	25,532			$	20,256			$	—
Liabilities:
Contingent consideration		$	1,509			$	—			$	—			$	1,509
Foreign currency exchange contracts			98				—				98				—
Interest rate cross-currency swap agreements			4,783				—				4,783				—
Total		$	6,390			$	—			$	4,881			$	1,509

Fair Value of 401(k) Restoration Plan Assets

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

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

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

The fair values of the Company’s cash equivalents, investments, foreign currency exchange contracts and interest rate cross-currency swap agreements are determined through market and observable sources and have been classified as Level

. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources.

Fair Value of Other Financial Instruments

The Company’s accounts receivable and accounts payable are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s variable interest rate debt approximates fair value due to the variable nature of the interest rate. The carrying value of the Company’s fixed interest rate debt was $1.3

billion at both April 1, 2023 and December 31, 2022. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be

$1.1

billion at both April 1, 2023 and December 31, 2022, using Level 2 inputs.

Derivative Transactions

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

non-U.S.

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

The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its euro-denominated and

yen-denominated

net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.

Foreign Currency Exchange Contracts

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

Interest Rate Cross-Currency Swap Agreements

As of April 1, 2023, the Company had three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $585 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its euro-denominated and

yen-denominated

net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated other comprehensive loss in stockholders’ equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

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

		April 1, 2023								December 31, 2022
		Notional Value				Fair Value				Notional Value				Fair Value
Foreign currency exchange contracts:
Other current assets		$	31,461			$	121			$	42,047			$	231
Other current liabilities		$	16,968			$	67			$	13,450			$	98
Interest rate cross-currency swap agreements:
Other assets		$	400,000			$	13,880			$	400,000			$	19,163
Other liabilities		$	185,000			$	6,756			$	185,000			$	4,783
Accumulated other comprehensive income						$	2,770							$	10,026

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

		Financial Statement Classification		Three Months Ended
		April 1, 2023				April 2, 2022
Foreign currency exchange contracts:
Realized gains (losses) on closed contracts		Cost of sales		$	30			$	(1,499	)
Unrealized losses on open contracts		Cost of sales			(78	)			(489	)
Cumulative net pre-tax losses		Cost of sales		$	(48	)		$	(1,988	)
Interest rate cross-currency swap agreements:
Interest earned		Interest income		$	2,655			$	1,775
Unrealized (losses) gains on contracts, net		Accumulated other comprehensive loss		$	(7,256	)		$	12,188

Stockholders’ Equity

In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $

billion of its outstanding common stock over a

two-year

period. This program

replaced the remaining amounts available from the pre-existing program. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. In December 2022, the Company’s Board of Directors amended and extended this repurchase program’s term by

one year

such that it shall now expire on

January 21, 2024

and

increased the total authorization level to $

4.8

billion, an increase of $

million. During the three months ended April 1, 2023 and April 2, 2022, the Company repurchased

0.2 million and 0.5

million shares of the Company’s outstanding common stock at a cost of $

58 million and $160

million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $

11 million and $10

million of common stock related to the vesting of restricted stock units during the three months ended April 1, 2023 and April 2, 2022, respectively. As of April 1, 2023, the Company had repurchased an aggregate of

15.2

million shares at a cost of $

3.8

billion under the January 2019 repurchase program and had a total of $1.0 billion authorized for future repurchases. While the Company believes that it has the financial flexibility to fund these share repurchases, as well as to invest in research, technology and business acquisitions, given current cash levels and debt borrowing capacity, it has temporarily suspended its share repurchases due to its recently announced agreement to acquire Wyatt Technology.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

Product Warranty Costs

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

The following is a summary of the activity of the Company’s accrued warranty liability for the

three

months ended April 1, 2023 and April 2, 2022 (in thousands):

		Balance at Beginning of Period				Accruals for Warranties				Settlements Made				Balance at End of Period
Accrued warranty liability:
April 1, 2023		$	11,949			$	2,177			$	(1,815	)		$	12,311
April 2, 2022		$	10,718			$	1,916			$	(2,422	)		$	10,212

2 Revenue Recognition

The Company’s deferred revenue liabilities

i

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

The following is a summary of the activity of the Company’s deferred revenue and customer advances for the three months ended April 1, 2023 and April 2, 2022 (in thousands):

		April 1, 2023				April 2, 2022
Balance at the beginning of the period		$	285,175			$	273,598
Recognition of revenue included in balance at beginning of the period			(105,222	)			(103,355	)
Revenue deferred during the period, net of revenue recognized			193,286				198,036
Balance at the end of the period		$	373,239			$	368,279

The Company classified $66 million and $57 million of deferred revenue and customer advances in other long-term liabilities at April 1, 2023 and December 31, 2022, respectively.

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

		April 1, 2023
Deferred revenue and customer advances expected to be recognized in:
One year or less		$	306,865
13-24 months			40,785
25 months and beyond			25,589
Total		$	373,239

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

3 Marketable Securities

The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets consist of time deposits that mature in one year or less with an amortized cost and a fair value of $0.9 million at both April 1, 2023 and December 31, 2022.

4 Inventories

Inventories are classified as follows (in thousands):

		April 1, 2023				December 31, 2022
Raw materials		$	217,120			$	205,760
Work in progress			24,380				19,899
Finished goods			257,922				230,051
Total inventories		$	499,422			$	455,710

5 Goodwill and Other Intangibles

The carrying amount of goodwill was $432 million and $430 million at April 1, 2023 and December 31, 2022, respectively. The effect of foreign currency translation

increased

goodwill by $2 million.

The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):

		April 1, 2023												December 31, 2022
		Gross Carrying Amount				Accumulated Amortization				Weighted- Average Amortization Period				Gross Carrying Amount				Accumulated Amortization				Weighted- Average Amortization Period
Capitalized software		$	610,668			$	455,952				5years			$	589,604			$	441,414				5years
Purchased intangibles			198,395				168,787				11years				197,805				166,735				11years
Trademarks			9,680				—				—				9,680				—				—
Licenses			14,339				7,186				6years				14,070				6,729				6years
Patents and other intangibles			106,660				75,102				8years				104,139				73,021				8years
Total		$	939,742			$	707,027				7years			$	915,298			$	687,899				7years

The Company capitalized $14 million and $12

million of intangible assets in the three months ended April 1, 2023 and April 2, 2022, respectively. The gross carrying value of intangible assets and accumulated amortization for intangible assets increased by $

10 million and $8

million, respectively, in the three months ended April 1, 2023 due to the effects of foreign currency translation. Amortization expense for intangible assets was $

12 million and $15 million for the three months ended April 1, 2023 and April 2, 2022, respectively. Amortization expense for intangible assets is estimated to

be

$49 million per year for each of the next five years.

6 Debt

The Company has a five-year, $1.8 billion revolving facility (the “Credit Facility”) that expires in September 2026. On March 3, 2023, the Company amended the Credit Facility to increase the borrowing capacity by $200 million to an aggregate total borrowing capacity of $2.0

billion, which did not affect the maturity date of September 17, 2026. The amendment also replaced all references in the Credit Facility to LIBOR with Term SOFR as the benchmark rate. As of April 1, 2023 and December 31, 2022, the Credit Facility had a total of $

175 million and $270 million outstanding, respectively.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

The interest rates applicable under the Credit Facility are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (1) the prime rate in effect on such day, (2) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (3) the adjusted Term SOFR rate for a one—month interest period as published two U.S. Government Securities Business Days prior to such day (or if such day is not a U.S. Government Securities Business Day, the immediately preceding U.S. Government Securities Business Day), plus 1% annum) or the applicable 1, 3 or 6 month adjusted Term SOFR or EURIBO rate for euro—denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for Term SOFR or EURIBO rate loans. The facility fee on the Credit Facility ranges between 7.5 and 25 basis points per annum, based on the leverage ratio, of the amount of the revolving facility commitments and the outstanding term loan. The Credit Facility requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the Credit Facility includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.

As

of both April 1, 2023 and December 31, 2022, the Company had a total of $

1.3

billion of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi—annually each year. Interest on the floating rate senior unsecured notes is payable quarterly.

T

he

Company may prepay all or some of the senior unsecured notes at any time in an amount not less than

%

of the aggregate principal amount outstanding, plus the applicable make—whole amount or prepayment premium for the Series H senior unsecured note. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal

to 100% of the principal amount thereof, plus accrued and unpaid interest.

These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than

3.50

:

1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than

3.50

:1

as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.

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

		April 1, 2023				December 31, 2022
Foreign subsidiary lines of credit		$	40			$	—
Senior unsecured notes—Series I - 3.13%, due May 2023			50,000				50,000
Total notes payable and debt, current			50,040				50,000
Senior unsecured notes—Series G - 3.92%, due June 2024			50,000				50,000
Senior unsecured notes—Series H - floating rate*, due June 2024			50,000				50,000
Senior unsecured notes—Series K - 3.44%, due May 2026			160,000				160,000
Senior unsecured notes—Series L - 3.31%, due September 2026			200,000				200,000
Senior unsecured notes—Series M - 3.53%, due September 2029			300,000				300,000
Senior unsecured notes—Series N - 1.68%, due March 2026			100,000				100,000
Senior unsecured notes—Series O - 2.25%, due March 2031			400,000				400,000
Credit agreement			175,000				270,000
Unamortized debt issuance costs			(4,870	)			(5,122	)
Total long-term debt			1,430,130				1,524,878
Total debt		$	1,480,170			$	1,574,878

*	Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.25%.

As of April 1, 2023 and December 31, 2022, the Company had a total amount available to borrow under the Credit Facility of $1.8 billion and $1.5 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 3.50% and 3.54% at April 1, 2023 and December 31, 2022, respectively. As of April 1, 2023, the Company was in compliance with all debt covenants.

The Company and its foreign subsidiaries also had available short-term lines of credit totaling $114 million and $

m

illion at April 1, 2023 and December 31, 2022, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of April 1, 2023 or December 31, 2022.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

As of April 1, 2023, the Company had entered into

three-year

interest rate cross-currency swap derivative agreements with an aggregate notional value of $

million to hedge the variability in the movement of foreign currency exchange rates on a portion of its euro-denominated and

yen-denominated

net asset investments.

7 Income Taxes

The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 25% and 17%, respectively, as of April 1, 2023. The Company has a Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax rate rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the Company’s net income for the three months

ended

April

1, 2023 and April 2, 2022

by $3 million and

$5 million, respectively, and increased the Company’s net income per diluted share by $0.05 and $0.08, respectively.

The Company’s effective tax rate

for the

three

months

en

de

d

April

,

2023

and April

,

2022

was

14.7

% and

14.4

%, respectively. The income tax provision includes a

$

million and a $

million income tax benefit related to stock-based compensation for the three months ended April 1, 2023 and April 2, 2022, respectively. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates.

The Company accounts for its uncertain tax return positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.

The Company’s gross unrecognized tax benefits, excluding interest and penalties, at April 1, 2023 and April 2, 2022 were $30 million and $

million, respectively. With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2017. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities. As of April 1, 2023, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of $

million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.

8 Other Commitments and Contingencies

The Company licenses certain technology and software from third parties in the course of ordinary business. Future minimum license fees payable under existing license agreements as of April 1, 2023 are immaterial for the years ended December 31, 2023 and thereafter.

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

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

9 Earnings Per Share

Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):

		Three Months Ended April 1, 2023
		Net Income (Numerator)				Weighted- Average Shares (Denominator)				Per Share Amount
Net income per basic common share		$	140,923				59,023			$	2.39
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities			—				294				(0.01	)
Net income per diluted common share		$	140,923				59,317			$	2.38

		Three Months Ended April 2, 2022
		Net Income (Numerator)				Weighted- Average Shares (Denominator)				Per Share Amount
Net income per basic common share		$	159,831				60,580			$	2.64
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities			—				372				(0.02	)
Net income per diluted common share		$	159,831				60,952			$	2.62

For the three months ended April 1, 2023 and April 2, 2022, the Company had 140 thousand and 12 thousand stock options that were antidilutive, respectively, due to having higher exercise prices than the Company’s average stock price during the period. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.

10 Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) are detailed as follows (in thousands):

		Currency Translation				Unrealized Gain (Loss) on Retirement Plans				Accumulated Other Comprehensive Loss
Balance at December 31, 2022		$	(146,120	)		$	4,548			$	(141,572	)
Other comprehensive (loss) income, net of tax			8,783				(7	)			8,776
Balance at April 1, 2023		$	(137,337	)		$	4,541			$	(132,796	)

11 Business Segment Information

The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: Waters

TM

and TA

TM

.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

The Waters operating segment is primarily in the business of designing, manufacturing, selling and servicing LC and MS instruments, columns and other precision chemistry consumables that can be integrated and used along with other analytical instruments. The TA operating segment is primarily in the business of designing, manufacturing, selling and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s

two

operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution; and regulatory environments. Because of these similarities, the

two

segments have been aggregated into

one

reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the

one

reportable segment of the Company.

Net sales for the Company’s products and services are as follows for the three months ended April 1, 2023 and April 2, 2022 (in thousands):

		Three Months Ended
		April 1, 2023				April 2, 2022
Product net sales:
Waters instrument systems		$	244,211			$	269,962
Chemistry consumables			133,515				125,618
TA instrument systems			58,731				55,260
Total product sales			436,457				450,840
Service net sales:
Waters service			224,349				217,576
TA service			23,868				22,156
Total service sales			248,217				239,732
Total net sales		$	684,674			$	690,572

Net sales are attributable to geographic areas based on the region of destination. Geographic sales information is presented below for the three months ended April 1, 2023 and April 2, 2022 (in thousands):

		Three Months Ended
		April 1, 2023				April 2, 2022
Net Sales:
Asia:
China		$	116,065			$	121,032
Japan			46,494				48,623
Asia Other			90,522				84,679
Total Asia			253,081				254,334
Americas:
United States			202,305				208,713
Americas Other			44,116				40,124
Total Americas			246,421				248,837
Europe			185,172				187,401
Total net sales		$	684,674			$	690,572

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

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

		Three Months Ended
		April 1, 2023				April 2, 2022
Pharmaceutical		$	384,898			$	415,772
Industrial			209,650				209,397
Academic and government			90,126				65,403
Total net sales		$	684,674			$	690,572

Net sales for the Company recognized at a point in time versus over time are as follows for the three months ended April 1, 2023 and April 2, 2022 (in thousands):

		Three Months Ended
		April 1, 2023				April 2, 2022
Net sales recognized at a point in time:
Instrument systems		$	302,942			$	325,222
Chemistry consumables			133,515				125,618
Service sales recognized at a point in time (time & materials)			88,207				85,778
Total net sales recognized at a point in time			524,664				536,618
Net sales recognized over time:
Service and software maintenance sales recognized over time (contracts)			160,010				153,954
Total net sales		$	684,674			$	690,572

12 Recent Accounting Standard Changes and Developments

Recently Adopted Accounting Standards

In October 2021, accounting guidance was issued that requires acquirers in a business combination to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The new guidance requires that at the acquisition date, the acquirer should account for the related revenue contracts in accordance with 606 as if it had originated the contracts. This guidance differs from current GAAP which requires an acquirer to recognize assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with 606, at fair value on the acquisition date. This guidance is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those years. The Company adopted this standard on January 1, 2023. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

Recently Issued Accounting Standards

In March 2020, accounting guidance was issued that facilitates the effects of reference rate reform on financial reporting. The amendments in the update provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January of 2021, an update was issued to clarify that certain optional expedients and exceptions under the reference rate reform

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

guidance for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in the reference rate reform guidance, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This temporary guidance is effective for all entities as of March 12, 2020, through December 31, 2022. In December 2022, an update was issued because the cessation date for overnight LIBOR rates being published was extended to June 30, 2023, which was beyond the current expiration date of this guidance. The update extended the sunset date to December 31, 2024. The Company may elect to apply this guidance for all contract modifications or eligible hedging relationships during that time period subject to certain criteria. The Company does not believe that it has material reference rate exposure which would require utilizing the guidance under this accounting pronouncement and if adopted does not believe that this standard would have a material impact on the Company’s financial position, results of operations and cash flows.

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