Waters 10-Q 2023-07-01

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended July 1, 2023

or

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

For the transition period from

to

.

Commission File Number:

01-14010

Waters Corporation

(Exact name of registrant as specified in its charter)

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

34 Maple Street

Milford, Massachusetts 01757

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

(

)

478-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share		WAT		New York Stock Exchange, Inc.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

non-accelerated

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

Rule 12b-2

of the Exchange Act.

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

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

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

Rule 12b-2

of the Act). Yes ☐ No ☒

Indicate the number of shares outstanding of the registrant’s common stock as of July 28, 2023: 59,102,922

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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 July 1, 2023 and December 31, 2022			3
		Consolidated Statements of Operations (unaudited) for the three months ended July 1, 2023 and July 2, 2022			4
		Consolidated Statements of Operations (unaudited) for the six months ended July 1, 2023 and July 2, 2022			5
		Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended July 1, 2023 and July 2, 2022			6
		Consolidated Statements of Cash Flows (unaudited) for the six months ended July 1, 2023 and July 2, 2022			7
		Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended July 1, 2023 and July 2, 2022			8
		Consolidated Statements of Stockholders’ Equity (unaudited) for the six months ended July 1, 2023 and July 2, 2022			9
		Condensed Notes to Consolidated Financial Statements (unaudited)			10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			37
Item 4.		Controls and Procedures			37
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			38
Item 1A.		Risk Factors			38
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 6.		Exhibits			39
		Signature			40

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

		July 1, 2023				December 31, 2022
		(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents		$	329,693			$	480,529
Investments			885				862
Accounts receivable, net			693,436				722,892
Inventories			536,828				455,710
Other current assets			120,342				103,910
Total current assets			1,681,184				1,763,903
Property, plant and equipment, net			615,211				582,217
Intangible assets, net			649,731				227,399
Goodwill			1,313,501				430,328
Operating lease assets			92,412				86,506
Other assets			196,157				191,100
Total assets		$	4,548,196			$	3,281,453
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and debt		$	50,000			$	50,000
Accounts payable			81,918				93,302
Accrued employee compensation			35,522				103,300
Deferred revenue and customer advances			324,665				227,908
Current operating lease liabilities			25,908				26,429
Accrued income taxes			121,294				132,545
Accrued warranty			12,409				11,949
Other current liabilities			157,671				140,304
Total current liabilities			809,387				785,737
Long-term liabilities:
Long-term debt			2,580,198				1,524,878
Long-term portion of retirement benefits			43,565				38,203
Long-term income tax liabilities			154,376				248,496
Long-term operating lease liabilities			66,856				62,108
Other long-term liabilities			122,585				117,543
Total long-term liabilities			2,967,580				1,991,228
Total liabilities			3,776,967				2,776,965
Commitments and contingencies (Notes 7 , 8 and 9 )
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at July 1, 2023 and December 31, 2022			—				—
Common stock, par value $0.01 per share, 400,000 shares authorized, 162,576 and 162,425 shares issued, 59,046 and 59,104 shares outstanding at July 1, 2023 and December 31, 2022, respectively			1,626				1,624
Additional paid-in capital			2,232,055				2,199,824
Retained earnings			8,800,064				8,508,587
Treasury stock, at cost, 103,530 and 103,321 shares at July 1, 2023 and December 31, 2022, respectively			(10,133,716	)			(10,063,975	)
Accumulated other comprehensive loss			(128,800	)			(141,572	)
Total stockholders’ equity			771,229				504,488
Total liabilities and stockholders’ equity		$	4,548,196			$	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
		July 1, 2023				July 2, 2022
		(In thousands, except per share data)
Revenues:
Product sales		$	477,926			$	469,630
Service sales			262,650				244,689
Total net sales			740,576				714,319
Costs and operating expenses:
Cost of product sales			194,354				202,356
Cost of service sales			106,722				104,850
Selling and administrative expenses			186,953				161,877
Research and development expenses			45,873				44,006
Purchased intangibles amortization			6,815				1,598
Total costs and operating expenses			540,717				514,687
Operating income			199,859				199,632
Other (expense) income, net			(352	)			1,535
Interest expense			(23,272	)			(11,419	)
Interest income			4,040				2,526
Income before income taxes			180,275				192,274
Provision for income taxes			29,721				27,410
Net income		$	150,554			$	164,864
Net income per basic common share		$	2.56			$	2.74
Weighted-average number of basic common shares			58,857				60,206
Net income per diluted common share		$	2.55			$	2.72
Weighted-average number of diluted common shares and equivalents			59,010				60,510

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

		Six Months Ended
		July 1, 2023				July 2, 2022
		(In thousands, except per share data)
Revenues:
Product sales		$	914,383			$	920,470
Service sales			510,867				484,421
Total net sales			1,425,250				1,404,891
Costs and operating expenses:
Cost of product sales			374,708				393,966
Cost of service sales			210,748				198,925
Selling and administrative expenses			368,909				319,352
Research and development expenses			88,564				84,478
Purchased intangibles amortization			8,294				3,271
Acquired in-process research and development			—				9,797
Total costs and operating expenses			1,051,223				1,009,789
Operating income			374,027				395,102
Other income, net			1,036				1,705
Interest expense			(37,716	)			(22,478	)
Interest income			8,101				4,640
Income before income taxes			345,448				378,969
Provision for income taxes			53,971				54,274
Net income		$	291,477			$	324,695
Net income per basic common share		$	4.97			$	5.38
Weighted-average number of basic common shares			58,703				60,399
Net income per diluted common share		$	4.95			$	5.35
Weighted-average number of diluted common

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Business Overview

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

Wyatt Acquisition

On May 16, 2023, the Company completed the acquisition of Wyatt Technology, LLC and its three operating subsidiaries, Wyatt Technology Europe GmbH, Wyatt Technology France and Wyatt Technology UK Ltd. (collectively, “Wyatt”), for a total purchase price of $1.3 billion in cash. Wyatt is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories, and services. The acquisition will expand Waters’ portfolio and increase exposure to large molecule applications. The Company financed this transaction with a combination of cash on its balance sheet and borrowings under its revolving credit facility.

Financial Overview

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

		Three Months Ended												Six Months Ended
		July 1, 2023				July 2, 2022				% change				July 1, 2023				July 2, 2022				% change
Revenues:
Product sales		$	477,926			$	469,630				2	%		$	914,383			$	920,470				(1	%)
Service sales			262,650				244,689				7	%			510,867				484,421				5	%
Total net sales			740,576				714,319				4	%			1,425,250				1,404,891				1	%
Costs and operating expenses:
Cost of sales			301,076				307,206				(2	%)			585,456				592,891				(1	%)
Selling and administrative expenses			186,953				161,877				15	%			368,909				319,352				16	%
Research and development expenses			45,873				44,006				4	%			88,564				84,478				5	%
Purchased intangibles amortization			6,815				1,598				326	%			8,294				3,271				154	%
Acquired in-process research and development (Note 1)			—				—				—				—				9,797				(100	%)
Operating income			199,859				199,632				—				374,027				395,102				(5	%)
Operating income as a % of sales			27.0	%			27.9	%							26.2	%			28.1	%
Other income, net			(352	)			1,535				(123	%)			1,036				1,705				(39	%)
Interest expense, net			(19,232	)			(8,893	)			116	%			(29,615	)			(17,838	)			66	%
Income before income taxes			180,275				192,274				(6	%)			345,448				378,969				(9	%)
Provision for income taxes			29,721				27,410				8	%			53,971				54,274				(1	%)
Net income		$	150,554			$	164,864				(9	%)		$	291,477			$	324,695				(10	%)
Net income per diluted common share		$	2.55			$	2.72				(6	%)		$	4.95			$	5.35				(7	%)

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The Company’s net sales increased 4% in the second quarter of 2023, as compared to the second quarter of 2022, with the effect of foreign currency translation decreasing sales growth by 1%. For the first half of 2023, the Company’s net sales increased 1% with the effect of foreign currency translation decreasing sales growth by 3% as compared to the first half of 2022. The Wyatt acquisition increased sales growth by 2% and 1% for the second quarter and first half of 2023, respectively. The analysis in the remainder of this section compares the Company’s net sales for the second quarter and first half of 2023 with the Company’s net sales for the second quarter and first half of 2022 and includes the effect of the Wyatt acquisition.

In addition, the Company’s first half of 2023 included one less calendar day than the first half of 2022. At current foreign currency exchange rates, the Company expects that foreign currency translation would be neutral to sales for the remainder of 2023. Over the two-year period comparing the first half of 2023 to the first half of 2021, the Company’s net sales grew 5% annually.

Instrument system sales increased 1% for the second quarter of 2023, as the strength in the U.S. and Europe was offset by weaker customer demand in China from our pharmaceutical customers. Excluding China, the Company’s instrument system sales increased 12% for the second quarter of 2023, which was broad-based across all existing and newly introduced LC, LC-MS and thermal analysis instrument systems. Foreign currency translation decreased instrument system sales growth by 1% and 2% in the second quarter and first half of 2023, respectively. Recurring revenues (combined sales of precision chemistry consumables and services) increased 6% and 5% for the second quarter and first half of 2023, respectively, with foreign currency translation decreasing sales growth by 2% and 3% for the second quarter and first half of 2023, respectively.

Operating income was flat and decreased 5% for the second quarter and first half of 2023, respectively, primarily driven by higher salary expenses related to merit compensation and additional headcount increases, and Wyatt acquisition due diligence and integration costs of $4 million and $12 million for the second quarter and first half of 2023, respectively. The negative effect of foreign currency translation was minimal for the second quarter and lowered operating income by approximately $16 million for the first half of 2023.

The Company generated $215 million and $255 million of net cash from operating activities in the first half of 2023 and 2022, respectively. Net cash used in investing activities included $1.3 billion for the Wyatt acquisition in the first half of 2023 and capital expenditures related to property, plant, equipment and software capitalization of $81 million and $75 million in the first half of 2023 and 2022, respectively.

The Company funded the Wyatt acquisition with a combination of cash on hand and borrowings under our revolving credit facility. The Company’s outstanding debt on July 1, 2023 was $2.6 billion, a change of $1.2 billion from the end of the first quarter of 2023. The Company estimates that its interest expense for the full year 2023 will be approximately $80 million. As a result of the Wyatt acquisition, the Company temporarily suspended its share buyback program in the first quarter 2023.

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

In May 2023, the Company entered into a note purchase and private shelf agreement with an aggregate amount of up to $400 million. In May 2023, the Company issued senior unsecured notes with an aggregate principal amount of $100 million. The Series P $50 million notes have a five-year term and a fixed interest rate of 4.91%. The Series Q $50 million notes have a seven-year term and a fixed interest rate of 4.91%.

In July 2023, the Company made organizational changes to better align its resources with its growth and innovation strategies, resulting in a worldwide workforce reduction, that has impacted approximately 5% of the Company’s employees. The Company expects to incur approximately $30 million of severance related costs relating to this reduction in the third quarter of 2023. The Company estimates that the savings from this reduction in workforce will be approximately $45 million on an annual basis.

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Results of Operations

Sales by Geography

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

		Three Months Ended												Six Months Ended
		July 1, 2023				July 2, 2022				% change				July 1, 2023				July 2, 2022				% change
Net Sales:
Asia:
China		$	114,981			$	138,740				(17	%)		$	231,046			$	259,772				(11	%)
Japan			37,380				37,504				—				83,874				86,127				(3	%)
Asia Other			102,262				101,766				—				192,784				186,445				3	%
Total Asia			254,623				278,010				(8	%)			507,704				532,344				(5	%)
Americas:
United States			238,955				213,815				12	%			441,260				422,528				4	%
Americas Other			43,972				43,456				1	%			88,088				83,580				5	%
Total Americas			282,927				257,271				10	%			529,348				506,108				5	%
Europe			203,026				179,038				13	%			388,198				366,439				6	%
Total net sales		$	740,576			$	714,319				4	%		$	1,425,250			$	1,404,891				1	%

Geographically, the Company’s sales growth in the second quarter and first half of 2023 was broad-based across all regions, with the exception of China which declined 17% and 11%, respectively. The decline in China was primarily driven by lower demand for our instrument systems by China’s pharmaceutical customers. Excluding China, the Company’s net sales would have increased 9% and 4% for the second quarter and first half of 2023, respectively. Foreign currency translation decreased total sales growth by 1% and 3% in the second quarter and first half of 2023, respectively. The significant impact of foreign currency translation in the first half of 2023 can be attributed to the significant U.S. dollar strengthening that started late in the first quarter of 2022 and has now annualized.

During the second quarter of 2023, sales increased 12% in the U.S. and 13% in Europe, while decreasing 8% in Asia driven by weakness in China. Foreign currency translation increased sales growth in Europe by 1% and decreased sales growth in Asia by 3% in the second quarter of 2023. During the first half of 2023, sales increased 4% in the U.S. and 6% in Europe and decreased 5% in Asia driven by weakness in China, with the effect of foreign currency translation decreasing sales growth in Europe and Asia by 2% and 5%, respectively.

Sales by Trade Class

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

		Three Months Ended												Six Months Ended
		July 1, 2023				July 2, 2022				% change				July 1, 2023				July 2, 2022				% change
Pharmaceutical		$	426,744			$	437,171				(2	%)		$	811,642			$	852,943				(5	%)
Industrial			229,655				208,517				10	%			439,305				417,914				5	%
Academic and government			84,177				68,631				23	%			174,303				134,034				30	%
Total net sales		$	740,576			$	714,319				4	%		$	1,425,250			$	1,404,891				1	%

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During the second quarter of 2023, sales to pharmaceutical customers decreased 2%, as double-digit growth in the U.S. and Europe was offset by weakness in China, with foreign currency translation decreasing pharmaceutical sales growth by 1%. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 10% in the second quarter of 2023, with foreign currency translation decreasing sales growth by 1%. Combined sales to academic and government customers increased 23% in the second quarter of 2023, with foreign currency translation decreasing sales growth by 1%. 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 half of 2023, sales to pharmaceutical customers decreased 5%, primarily driven by slower release of capital budgets by our customers, weakness in customer demand in China, and foreign currency translation which decreased pharmaceutical sales growth by 3%. Combined sales to industrial customers increased 5%, with the effect of foreign currency translation decreasing sales growth by 2%. Combined sales to academic and government customers increased 30%, with foreign currency translation decreasing sales growth by 4%.

Waters Products and Services Net Sales

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

		Three Months Ended
		July 1, 2023				% of Total				July 2, 2022				% of Total				% change
Waters instrument systems		$	279,940				43	%		$	280,846				44	%			—
Chemistry consumables			135,919				21	%			131,947				21	%			3	%
Total Waters product sales			415,859				64	%			412,793				65	%			1	%
Waters service			237,376				36	%			222,359				35	%			7	%
Total Waters net sales		$	653,235				100	%		$	635,152				100	%			3	%

		Six Months Ended
		July 1, 2023				% of Total				July 2, 2022				% of Total				% change
Waters instrument systems		$	524,151				42	%		$	550,808				44	%			(5	%)
Chemistry consumables			269,434				21	%			257,565				21	%			5	%
Total Waters product sales			793,585				63	%			808,373				65	%			(2	%)
Waters service			461,725				37	%			439,935				35	%			5	%
Total Waters net sales		$	1,255,310				100	%		$	1,248,308				100	%			1	%

Waters products and service sales increased 3% and 1% in the second quarter and first half of 2023, respectively, with the effect of foreign currency translation decreasing Waters sales growth by 1% and 2% in the second quarter and first half of 2023, respectively. Waters instrument system sales were flat and decreased 5% for the second quarter and first half of 2023, respectively, due to weaker customer demand in China from pharmaceutical customers. Foreign currency translation decreased Waters instrument system sales growth by 2% for the first half of 2023. The increase in Waters chemistry consumables sales was primarily due to the continued strong demand in most major geographies, driven by the uptake in columns and application-specific testing kits to pharmaceutical customers, partially offset by the negative impact from foreign currency translation which decreased sales growth by 2% in both the second quarter and first half of 2023. Waters service sales increased in the second quarter and first half of 2023 due to higher service demand billing, particularly in China and Europe, partially offset by the negative impact from foreign currency translation which decreased service sales growth by 2% and 3% in the second quarter and first half of 2023, respectively. The Wyatt acquisition increased Waters products and service sales by approximately 2% and 1% for the second quarter and first half of 2023, respectively, as compared to the corresponding prior year periods.

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TA Product and Services Net Sales

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

		Three Months Ended
		July 1, 2023				% of Total				July 2, 2022				% of Total				% change
TA instrument systems		$	62,067				71	%		$	56,837				72	%			9	%
TA service			25,274				29	%			22,330				28	%			13	%
Total TA net sales		$	87,341				100	%		$	79,167				100	%			10	%

		Six Months Ended
		July 1, 2023				% of Total				July 2, 2022				% of Total				% change
TA instrument systems		$	120,798				71	%		$	112,097				72	%			8	%
TA service			49,142				29	%			44,486				28	%			10	%
Total TA net sales		$	169,940				100	%		$	156,583				100	%			9	%

TA instrument system and service sales growth in the second quarter and first half of 2023 was broad-based across most major geographies, increasing 10% and 9% in the second quarter and first half of 2023, respectively. Foreign currency translation decreased sales by 1% for both the second quarter and first half of 2023. The sales growth was primarily driven by strong customer demand for our thermal analysis instruments and services, particularly in the U.S. and Europe.

Cost of Sales

Cost of sales decreased by 2% and 1% in the second quarter and first half of 2023, respectively. The decrease in cost of sales in these periods is primarily due to the change in sales mix and the lower material and freight costs for both the second quarter and first half of 2023. Cost of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix, product costs of instrument systems and amortization of software platforms. At current foreign currency exchange rates, the Company expects foreign currency translation to be neutral to gross profit during 2023.

Selling and Administrative Expenses

Selling and administrative expenses increased 15% and 16% in the second quarter and first half of 2023, respectively. The increases in these periods include the Wyatt acquisition due diligence and integration costs, which increased expenses by 2% and 4% for the second quarter and first half of 2023, respectively. The remaining increase is attributed to investment in headcount to support higher-growth adjacencies, annual merit compensation increases, normalization of travel expenses to pre-COVID levels and timing of investments associated with product launch. The effect of foreign currency translation decreased selling and administrative expenses by 1% and 2% in the second quarter and first half of 2023, respectively.

As a percentage of net sales, selling and administrative expenses were 25.2% and 25.9% for the second quarter and first half of 2023, respectively, and 22.7% for both the second quarter and first half of 2022.

Research and Development Expenses

Research and development expenses increased 4% and 5% in the second quarter and first half of 2023, respectively. The increases in research and development expenses in these periods were impacted by additional headcount, higher salary expenses attributable to merit compensation increases and costs associated with new products and the development of new technology initiatives. The impact of foreign currency exchange decreased expenses by 2% and 3% in the second quarter and first half of 2023, respectively.

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Acquired In-Process Research & Development

In 2022, the Company completed an asset acquisition in which the CDMS technology assets of Megadalton were acquired for approximately $10 million in total purchase price, of which $5 million was paid at closing and the remaining $4 million will be paid in the future at various dates through 2029.

Other Income, net

During the first half of 2022, the Company sold an equity investment for $7 million in cash and recorded a gain on the sale of approximately $4 million in other income, net on the statement of operations. The Company also incurred $4 million in losses on an equity investment within other income, net on the statement of operations.

Interest Expense, net

The increase in interest expense for both the second quarter and first half of can be primarily attributed to the additional borrowings to fund the Wyatt acquisition. The Company estimates that its interest expense for the full year 2023 will be approximately $80 million.

Provision for Income Taxes

The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 25% and 17%, respectively, as of July 1, 2023. The Company has a Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax rate rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income by $7 million and $10 million and increased the Company’s net income per diluted share by $0.11 and $0.16 for the second quarter of 2023 and 2022, respectively.

The Company’s effective tax rate for the second quarter of 2023 and 2022 was 16.5% and 14.3%, respectively. The increase in the effective tax rate can be primarily attributed to the impact of discrete tax benefits 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 half of 2023 and 2022 was 15.6% and 14.3%, respectively. The differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates.

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Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows (in thousands):

		Six Months Ended
		July 1, 2023				July 2, 2022
Net income		$	291,477			$	324,695
Depreciation and amortization			70,038				66,891
Stock-based compensation			23,734				20,722
Deferred income taxes			(6,435	)			(12,523	)
Acquired in-process research and development and other non-cash items			—				7,903
Change in accounts receivable			50,273				(57,377	)
Change in inventories			(63,607	)			(65,070	)
Change in accounts payable and other current liabilities			(122,836	)			(32,197	)
Change in deferred revenue and customer advances			81,659				70,027
Other changes			(109,434	)			(68,208	)
Net cash provided by operating activities			214,869				254,863
Net cash used in investing activities			(1,366,920	)			(7,403	)
Net cash provided by (used in) financing activities			998,963				(310,181	)
Effect of exchange rate changes on cash and cash equivalents			2,252				(19,616	)
Decrease in cash and cash equivalents		$	(150,836	)		$	(82,337	)

Cash Flow from Operating Activities

Net cash provided by operating activities was $215 million and $255 million during the first half of 2023 and 2022, respectively. The decrease in 2023 operating cash flow was primarily a result of lower net income, higher inventory levels, higher income tax payments and the payment of acquired Wyatt liabilities, offset by higher cash collections in 2023 compared to 2022. The changes within net cash provided by operating activities include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the changes in net income:

	•		The changes in accounts receivable were primarily attributable to the timing of payments made by customers and timing of sales. Days sales outstanding was 85 days at July 1, 2023 and 81 days at July 2, 2022.

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

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

	•		An increase in income tax payments of $81 million as compared to the prior year and the payment of $26 million in Wyatt acquired liabilities.

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

Cash Flow from Investing Activities

Net cash used in investing activities totaled $1.4 billion and $7 million during the first half of 2023 and 2022, respectively. Additions to fixed assets and capitalized software were $81 million and $75 million in the first half of 2023 and 2022, respectively. The cash flows from investing activities in 2023 and 2022 include $9 million and $17 million, respectively, of capital expenditures related to the major expansion of the Company’s precision chemistry consumable operations in the United States. The Company has incurred costs of $241 million on this facility through the end of the first half of 2023 and anticipates spending approximately $11 million to complete this new state-of-the-art facility for the remainder of 2023.

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During the first half of 2023 and 2022, the Company purchased $1 million and $11 million of investments, respectively, while $1 million and $78 million of investments matured, respectively, and were used for financing activities described below.

During the first half of 2022, the Company paid $5 million for the CDMS technology and intellectual property right asset from Megadalton, and the Company is required to make an additional $4 million of guaranteed payments at various dates in the future through 2029. The total purchase price of approximately $10 million was accounted for as Acquired In-Process Research and Development and expensed as part of costs and operating expenses in the statement of operations in 2022.

On May 16, 2023, the Company completed the acquisition of Wyatt for a total purchase price of $1.3 billion in cash. Wyatt is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories, and services. The acquisition will expand Waters’ portfolio and increase exposure to large molecule applications.

Cash Flow from Financing Activities

In June 2023, the Company issued senior unsecured notes with an aggregate principal amount of $100 million. The Series P $50 million notes have a five-year term and a fixed interest rate of 4.91%. The Series Q $50 million notes have a seven-year term and a fixed interest rate of 4.91%. The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes.

The Company had entered into a credit agreement in September 2021 governing the Company’s five-year, $1.8 billion revolving facility that matures in September 2026. On March 3, 2023 the Company entered into an agreement to amend such credit agreement. The 2023 Amendment increases the borrowing capacity by $200 million to an aggregate borrowing capacity of $2.0 billion. As of July 1, 2023, the Company had a total of $2.6 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $1,325 million borrowed under its credit agreement. The Company’s net debt borrowings increased by $1.1 billion and $30 million during the first half of 2023 and 2022, respectively, primarily to fund the Wyatt acquisition.

As of July 1, 2023, the Company has entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $625 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its euro-denominated and yen-denominated net asset investments. As a result of entering into these agreements, the Company lowered net interest expense by approximately $5 million and $4 million in the during the first half of 2023 and 2022, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $10 million in 2023.

In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a two-year period. This new program replaced the remaining amounts available from the pre-existing program. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. In December 2022, the Company’s Board of Directors amended and extended this repurchase program’s term by one year such that it shall now expire on January 21, 2024 and increased the total authorization level to $4.8 billion, an increase of $750 million. During the first half of July 1, 2023 and July 2, 2022, the Company repurchased $58 million and $312 million of the Company’s outstanding common stock, respectively, under the share repurchase program. In addition, the Company repurchased $11 million and $10 million of common stock related to the vesting of restricted stock units during the first half of July 1, 2023 and July 2, 2022, respectively. While the Company believes that it has the financial flexibility to fund these share repurchases, as well as to invest in research, technology and business acquisitions, given current cash levels and debt borrowing capacity, it has temporarily suspended its share repurchases due to its acquisition of Wyatt.

The Company received $9 million and $31 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 half of 2023 and 2022, respectively.

The Company had cash, cash equivalents and investments of $331 million as of July 1, 2023. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $272 million held by foreign subsidiaries at July 1, 2023, of which $184 million was held in currencies other than U.S. dollars.

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Contractual Obligations, Commercial Commitments, Contingent Liabilities and Dividends

A summary of the Company’s contractual obligations and commercial commitments is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 27, 2023. The Company reviewed its contractual obligations and commercial commitments as of July 1, 2023 and determined that there were no material changes outside the ordinary course of business from the information set forth in the Annual Report on Form 10-K.

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

During fiscal year 2023, the Company expects to contribute a total of approximately $3 million to $6 million to its defined benefit plans.

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

Off-Balance Sheet Arrangements

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

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

Critical Accounting Policies and Estimates

In the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 27, 2023, the Company’s most critical accounting policies and estimates upon which its financial status depends were identified as those relating to revenue recognition, valuation of long-lived assets, intangible assets and goodwill, income taxes, uncertain tax positions, litigation and business combinations and asset acquisitions. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the six months ended July 1, 2023. The Company did not make any changes in those policies during the six months ended July 1, 2023.

New Accounting Pronouncements

Please refer to Note 13, Recent Accounting Standard Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are not statements of historical fact may be deemed forward-looking statements. You can identify these forward-looking statements by the use of the words “feels”, “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “suggests”, “appears”, “estimates”, “projects”, “should” and similar expressions, whether in the negative or affirmative. These forward-looking statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without limitation:

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

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	•		current global economic, sovereign and political conditions and uncertainties, including the effect of new or proposed tariff or trade regulations, changes in inflation and interest rates, the impacts and costs of war, in particular as a result of the ongoing conflict between Russia and Ukraine, and the possibility of further escalation resulting in new geopolitical and regulatory instability, the United Kingdom’s exit from the European Union and the Chinese government’s ongoing tightening of restrictions on procurement by government-funded customers;

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

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

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

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

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

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

	•		rapidly changing technology and product obsolescence;

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

	•		risks associated with unexpected disruptions in operations;

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

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

	•		risks associated with third-party sales intermediaries and resellers;

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

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

	•		the ability to realize the expected benefits related to the Company’s various cost-saving initiatives;

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

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

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

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

	•		the impact and costs incurred from changes in accounting principles and practices; the impact and costs of changes in statutory or contractual tax rates in jurisdictions in which the Company operates, specifically as it relates to the Tax Cuts and Jobs Act in the U.S.; and shifts in taxable income among jurisdictions with different effective tax rates.

Certain of these and other factors are discussed under the heading “Risk Factors” under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 27, 2023. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements, whether because of these factors or for other reasons. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by law, the Company does not assume any obligation to update any forward-looking statements.

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 July 1, 2023, the Company estimates that a hypothetical adverse change of 100 basis points across all maturities would not have a material effect on the fair market value of its portfolio.

The Company is also exposed to the risk of exchange rate fluctuations. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of July 1, 2023 and December 31, 2022, $272 million out of $331 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, $184 million out of $331 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 July 1, 2023 and December 31, 2022, respectively. As of July 1, 2023, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.

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

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

Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer (principal executive officer and principal financial officer), with the participation of management, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of July 1, 2023 (1) to ensure that information required to be disclosed by the Company, including its consolidated subsidiaries, in the

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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 July 1, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II: Other Information

Item 1: Legal Proceedings

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

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

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

Purchases of Equity Securities by the Issuer

During the three months ended July 1, 2023, the Company purchased 204, 491 and 149 shares at a cost of $62 thousand, $137 thousand and $38 thousand with average prices paid of $302.66, $278.06 and $256.45 during fiscal April, May and June, respectively, of equity securities registered by the Company under the Exchange Act.

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

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Exhibit Number		Description of Document
10.1		Multi-currency Note Purchase and Private Shelf Agreement, dated as of May 11, 2023, by and among the Company, PGIM, Inc. and each of the purchasers listed on Schedules A-1 and A-2 attached thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 11, 2023).
31.1		Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)
32.2		Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)
101		The following materials from Waters Corporation’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Cash Flows (unaudited) and (vi) Condensed Notes to Consolidated Financial Statements (unaudited).
104		Cover Page Interactive Date File (formatted in iXBRL and contained in Exhibit 101).

(*)

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

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SIGNATURES

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

WATERS CORPORATION
/s/ Amol Chaubal
Amol Chaubal
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)

Date: August 2, 2023