WATERS CORP /DE/ (WAT) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
The Company has two operating segments: Waters and TA. Waters products and services primarily consist of high-performance liquid chromatography (“HPLC”), ultra-performance liquid chromatography (“UPLC” 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. Operations of the recently acquired Wyatt business are part of the Waters operating segment.
Wyatt Acquisition
On May 16, 2023, the Company completed the acquisition of Wyatt Technology, LLC and its three operating subsidiaries, Wyatt Technology Europe GmbH, Wyatt Technology France and Wyatt Technology UK Ltd. (collectively, “Wyatt”), for a total purchase price of $1.3 billion in cash. Wyatt is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories, and services. The acquisition will expand Waters portfolio and increase exposure to large molecule applications. The Company financed this transaction with a combination of cash on its balance sheet and borrowings under its revolving credit facility. The Company’s financial results for the year ended December 31, 2023 include the financial results of the Wyatt acquisition from the acquisition date.
Financial Overview
The Company’s operating results are as follows for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands, except per share data):
| Year Ended December 31, | % change | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | 2023 vs 2022 | 2022 vs 2021 | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Product sales | $ | 1,903,050 | $ | 1,988,169 | $ | 1,822,070 | (4 | %) | 9 | % | ||||||||||
| Service sales | 1,053,366 | 983,787 | 963,804 | 7 | % | 2 | % | |||||||||||||
| Total net sales | 2,956,416 | 2,971,956 | 2,785,874 | (1 | %) | 7 | % | |||||||||||||
| Costs and operating expenses: | ||||||||||||||||||||
| Cost of sales | 1,195,223 | 1,248,182 | 1,156,533 | (4 | %) | 8 | % | |||||||||||||
| Selling and administrative expenses | 736,014 | 658,026 | 626,968 | 12 | % | 5 | % | |||||||||||||
| Research and development expenses | 174,945 | 176,190 | 168,358 | (1 | %) | 5 | % | |||||||||||||
| Purchased intangibles amortization | 32,558 | 6,366 | 7,143 | 411 | % | (11 | %) | |||||||||||||
| Acquired in-process research and development | — | 9,797 | — | * | * | * | * | |||||||||||||
| Litigation provision | — | — | 5,165 | — | * | * | ||||||||||||||
| Operating income | 817,676 | 873,395 | 821,707 | (6 | %) | 6 | % | |||||||||||||
| Operating income as a % of sales | 27.7 | % | 29.4 | % | 29.5 | % | ||||||||||||||
| Other income, net | 807 | 2,228 | 17,203 | (64 | %) | (87 | %) | |||||||||||||
| Interest expense, net | (82,240 | ) | (37,777 | ) | (32,717 | ) | 118 | % | 15 | % | ||||||||||
| Income before income taxes | 736,243 | 837,846 | 806,193 | (12 | %) | 4 | % | |||||||||||||
| Provision for income taxes | 94,009 | 130,091 | 113,350 | (28 | %) | 15 | % | |||||||||||||
| Net income | $ | 642,234 | $ | 707,755 | $ | 692,843 | (9 | %) | 2 | % | ||||||||||
| Net income per diluted common share | $ | 10.84 | $ | 11.73 | $ | 11.17 | (8 | %) | 5 | % |
| Column 1 | Column 2 |
|---|---|
| ** | Percentage not meaningful |
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The Company’s net sales decreased 1% in 2023 as compared to 2022 and increased 7% in 2022 as compared to 2021. The Company’s sales in 2023 were negatively impacted by a 22% reduction of sales in China due to lower customer demand for our products. The sales growth in 2022 was driven by strong customer demand across most major geographies, end markets and product categories. Excluding China, the Company’s sales growth increased 5% and 6% in 2023 and 2022, respectively. Foreign currency translation decreased sales growth by 1% and 5% in 2023 and 2022, respectively. The Wyatt acquisition increased sales growth by 3% in 2023.
Instrument system sales decreased 7% in 2023 as compared to 2022 and increased 11% in 2022 as compared to 2021. In 2023, the decrease in instrument system sales resulted from weaker customer demand in China, which was partially offset by sales growth in the U.S. and Europe. Excluding China, the Company’s instrument system sales grew 1%. In addition, Wyatt’s instrument system sales added 4% to the Company’s instrument system sales growth. In 2022, the increase was driven by the broad-based increase in customer demand across all existing and newly introduced LC, LC-MS, and Thermal Analysis instrument system sales. Foreign currency translation decreased instrument system sales growth by 1% and 5% in 2023 and 2022, respectively.
Recurring revenues (combined sales of precision chemistry consumables and services) increased 6% and 3% in 2023 and 2022, respectively. Recurring revenues were negatively impacted by foreign currency translation in 2023 and 2022, which decreased sales by 1% and 6%, respectively.
Operating income was $818 million in 2023, a decrease of 6% as compared to 2022. This decrease in operating income was primarily due to higher salary expenses related to merit compensation, $26 million in severance-related costs associated with a workforce reduction and costs related to the Wyatt acquisition, including $13 million in due diligence costs, $27 million of intangible asset amortization and $19 million of costs associated with retention agreements. The negative effect of foreign currency translation lowered operating income by approximately $23 million during 2023.
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 impacted approximately 5% of the Company’s employees. The Company incurred approximately $26 million of severance-related costs and paid approximately $19 million of severance-related costs in 2023, with the remaining costs to be paid in the first half of 2024. The Company estimates that the savings from this reduction in workforce will be approximately $48 million on an annual basis.
Operating income was $873 million in 2022, an increase of 6% as compared to 2021. This increase was primarily a result of the increase in sales volume and pricing increases, partially offset by higher electronic component and freight inflationary costs and the negative effect of foreign currency translation. The effect of foreign currency translation lowered operating income by approximately $71 million during 2022.
Operating income as a percentage of sales was 27.7%, 29.4% and 29.5% in 2023, 2022 and 2021, respectively.
The Company’s effective tax rates were 12.8%, 15.5% and 14.1% for 2023, 2022 and 2021, respectively. Net income per diluted share was $10.84, $11.73 and $11.17 in 2023, 2022 and 2021, respectively.
The Company generated $603 million, $612 million and $747 million of net cash flows provided by operating activities in 2023, 2022 and 2021, respectively. The decrease in 2023 operating cash flow was primarily a result of lower sales volumes, higher income tax payments and higher incentive compensation payments in 2023 as compared to 2022.
Net cash used in investing activities included $1.3 billion for the Wyatt acquisition in 2023 and capital expenditures related to property, plant, equipment and software capitalization of $161 million, $176 million and
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$161 million in 2023, 2022 and 2021, respectively. The cash flows used in investing activities in 2023, 2022 and 2021 included $16 million, $32 million, and $49 million, respectively, of capital expenditures related to the major expansion of the Company’s precision chemistry consumable operations in the United States.
During 2023, the Company funded the Wyatt acquisition with a combination of cash on hand and borrowings under its revolving credit facility. The Company’s outstanding debt on December 31, 2023 was $2.4 billion, a change of $0.8 billion from December 31, 2022, which resulted in the Company’s interest expense in 2023 increasing by $50 million to $99 million.
On March 3, 2023, 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 December 2023, the Company’s Board of Directors authorized the extension of the existing share repurchase program through January 21, 2025. The Company’s remaining authorization is $1.0 billion. During the years ended December 31, 2023, 2022 and 2021, the Company repurchased $58 million, $616 million and $640 million of the Company’s outstanding common stock, respectively, under the share repurchase programs. 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 in the second quarter of 2023.
Results of Operations
Sales by Geography
Geographic sales information is presented below for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands):
| Year Ended December 31, | % change | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | 2023 vs. 2022 | 2022 vs. 2021 | ||||||||||||||||
| Net Sales: | ||||||||||||||||||||
| Asia: | ||||||||||||||||||||
| China | $ | 440,707 | $ | 565,143 | $ | 521,128 | (22 | %) | 8 | % | ||||||||||
| Japan | 167,202 | 167,220 | 182,597 | — | (8 | %) | ||||||||||||||
| Asia Other | 399,916 | 399,380 | 372,040 | — | 7 | % | ||||||||||||||
| Total Asia | 1,007,825 | 1,131,743 | 1,075,765 | (11 | %) | 5 | % | |||||||||||||
| Americas: | ||||||||||||||||||||
| United States | 927,982 | 886,140 | 774,014 | 5 | % | 14 | % | |||||||||||||
| Americas Other | 180,591 | 169,495 | 151,206 | 7 | % | 12 | % | |||||||||||||
| Total Americas | 1,108,573 | 1,055,635 | 925,220 | 5 | % | 14 | % | |||||||||||||
| Europe | 840,018 | 784,578 | 784,889 | 7 | % | — | ||||||||||||||
| Total net sales | $ | 2,956,416 | $ | 2,971,956 | $ | 2,785,874 | (1 | %) | 7 | % |
In 2023, sales decreased 1% as compared to 2022, primarily as a result of a 22% decrease in China sales during 2023, which was partially offset by broad-based sales growth across most other major regions. The decline in China sales was primarily driven by lower demand for our instrument systems and chemistry products resulting from increased government regulations and lower spending by our customers due to weak economic conditions in China. Excluding China, the Company’s sales increased 5% and 6% in 2023 and 2022, respectively. Foreign currency translation decreased sales growth by 1% and 5% in 2023 and 2022, respectively.
In 2023, sales increased 5% in the U.S. and 7% in Europe, while decreasing 11% in Asia, with the effect of foreign currency translation increasing sales growth in Europe by 2% and decreasing sales growth in Asia by 4%,
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which includes a 9% decrease in sales in Japan resulting from foreign currency translation. Wyatt’s sales contributed 5% and 3% of sales growth to the U.S. and Europe in 2023, respectively.
The sales growth in 2022 was broad-based across most major regions. Foreign currency translation decreased total sales growth by 5% in 2022 as the U.S. dollar strengthened significantly against all other major currencies. The geographies that were the most negatively impacted by the strengthening of the U.S. dollar in 2022 were Europe and Japan, as the weakening of the euro and Japanese yen lowered sales growth in Europe and Japan by 10% and 17%, respectively. China sales increased 8% in 2022, with foreign currency translation decreasing China sales growth by 2% in 2022. This increase in China sales was driven by strong customer demand for our products and services despite the negative impact that the COVID-19 pandemic had on our business in China in 2022.
Sales by Trade Class
Net sales by customer class are presented below for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands):
| Year Ended December 31, | % change | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | 2023 vs. 2022 | 2022 vs. 2021 | ||||||||||||||||
| Pharmaceutical | $ | 1,696,875 | $ | 1,751,665 | $ | 1,667,061 | (3 | %) | 5 | % | ||||||||||
| Industrial | 909,003 | 909,805 | 829,204 | — | 10 | % | ||||||||||||||
| Academic and government | 350,538 | 310,486 | 289,609 | 13 | % | 7 | % | |||||||||||||
| Total net sales | $ | 2,956,416 | $ | 2,971,956 | $ | 2,785,874 | (1 | %) | 7 | % |
In 2023, sales to pharmaceutical customers decreased 3%, primarily driven by weakness in customer demand in China, with foreign currency translation decreasing pharmaceutical sales growth by 1% and Wyatt contributing 3% to the Company’s pharmaceutical sales growth. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, were flat in 2023, with foreign currency translation decreasing industrial sales growth by 1% and Wyatt contributing 1% to industrial sales growth. Combined sales to academic and government customers increased 13% in 2023, with foreign currency translation decreasing academic and government sales growth by 1% and Wyatt contributing 4% to academic and government sales growth. Sales to our academic and government customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales can vary significantly from period to period.
In 2022, sales to pharmaceutical customers increased 5%, driven by strong growth in most major regions, partially offset by the negative impact from foreign currency translation which decreased pharmaceutical sales by 5%. Combined sales to industrial customers increased 10%, with foreign currency translation decreasing sales growth by 5%. Combined sales to academic and government customers increased 7%, with foreign currency translation decreasing academic and government sales growth by 6%.
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Waters Products and Services Net Sales
Net sales for Waters products and services were as follows for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands):
| Year Ended December 31, | % change | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | % of Total | 2022 | % of Total | 2021 | % of Total | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||||||||||||||
| Waters instrument systems | $ | 1,108,702 | 43 | % | $ | 1,210,456 | 46 | % | $ | 1,089,248 | 44 | % | (8 | %) | 11 | % | ||||||||||||||||
| Chemistry consumables | 541,469 | 20 | % | 525,399 | 20 | % | 507,209 | 21 | % | 3 | % | 4 | % | |||||||||||||||||||
| Total Waters product sales | 1,650,171 | 63 | % | 1,735,855 | 66 | % | 1,596,457 | 65 | % | (5 | %) | 9 | % | |||||||||||||||||||
| Waters service | 951,419 | 37 | % | 890,607 | 34 | % | 876,626 | 35 | % | 7 | % | 2 | % | |||||||||||||||||||
| Total Waters net sales | $ | 2,601,590 | 100 | % | $ | 2,626,462 | 100 | % | $ | 2,473,083 | 100 | % | (1 | %) | 6 | % |
Waters products and service sales decreased 1% and 6% in 2023 and 2022, respectively, with the effect of foreign currency translation decreasing Waters sales growth by 1% and 6% in 2023 and 2022, respectively. The Wyatt acquisition increased Waters products and service sales by approximately 3% in 2023. Waters instrument system sales (LC and MS technology-based) decreased 8% in 2023, primarily driven by weaker customer demand in China. Excluding China, the Company’s instrument system sales were flat as compared to 2022. In addition, Wyatt’s instrument system sales contributed 5% to Waters instrument system sales growth in 2023. Waters chemistry consumables sales were significantly impacted by the lower customer demand in China for our products. Excluding China, the Company’s chemistry sales grew 7% in 2023. This sales growth was primarily due to the continued strong demand in most major geographies, driven by the uptake in columns and application-specific testing kits to pharmaceutical customers, partially offset by the negative impact from foreign currency translation, which decreased chemistry sales growth by 1% in 2023. Waters service sales increased 7% in 2023 due to higher service demand billing, partially offset by the negative impact from foreign currency translation, which decreased service sales growth by 1% in 2023. Wyatt service revenues added 2% to Waters service revenue growth in 2023.
In 2022, Waters products and service sales increased 6%, with foreign currency translation decreasing Waters sales growth by 6%. Waters instrument system sales grew 11%, with foreign currency translation lowering sales growth by 5%. The increase in the Waters instrument system sales can be attributed to strong customer demand for our existing products as well as growing contributions made by recent product introductions. The increase in Waters chemistry consumables sales was primarily due to the strong demand in most major geographies, partially offset by the negative impact from foreign currency translation which decreased sales by 5%. Waters service sales increased due to higher service demand billing, particularly in China and the United States, partially offset by the negative impact from foreign currency translation which decreased by 6%.
TA Product and Services Net Sales
Net sales for TA products and services were as follows for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands):
| Year Ended December 31, | % change | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | % of Total | 2022 | % of Total | 2021 | % of Total | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||||||||||||||
| TA instrument systems | $ | 252,879 | 71 | % | $ | 252,314 | 73 | % | $ | 225,613 | 72 | % | — | 12 | % | |||||||||||||||||
| TA service | 101,947 | 29 | % | 93,180 | 27 | % | 87,178 | 28 | % | 9 | % | 7 | % | |||||||||||||||||||
| Total TA net sales | 354,826 | 100 | % | 345,494 | 100 | % | 312,791 | 100 | % | 3 | % | 10 | % |
TA instrument system and service sales increased 3% and 10% in 2023 and 2022, respectively. Foreign currency translation had minimal impact on sales growth in 2023 and decreased sales growth by 6% in 2022. In
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2023, sales growth was broad-based across most major geographies, partially offset by weakness in China and the rest of Asia. These increases were primarily driven by strong customer demand for our thermal analysis instruments and services.
Cost of Sales
Cost of sales decreased 4% in 2023 as compared to 2022, primarily due to the change in sales mix and the lower material and freight costs. In 2022, cost of sales increased 8% as compared to 2021, primarily due to the increase in sales volumes during the year as well as an increase in electronic component and freight inflationary costs.
Cost of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix, product costs of instrument systems and amortization of software platforms. At current foreign currency exchange rates, the Company expects foreign currency translation to be neutral to gross profit during 2024.
Selling and Administrative Expenses
Selling and administrative expenses increased 12% and 5% in 2023 and 2022, respectively. The increase in 2023 is primarily driven by severance-related costs in connection with a reduction in workforce, which increased expenses by 4%; the Wyatt acquisition due diligence and integration costs, which increased expenses by 2%; and the Wyatt acquisition-related retention expense, which increased expenses by 3%. These increases were partially offset by lower incentive compensation costs. The increase in selling and administrative expenses in 2022 as compared to 2021 can be attributed to higher salary merit and variable incentive compensation costs due to an increase in the number of employees. The effect of foreign currency translation had minimal impact on selling and administrative expenses in 2023 and decreased expenses by 4% in 2022.
As a percentage of net sales, selling and administrative expenses were 24.9%, 22.1% and 22.5% for 2023, 2022, and 2021, respectively.
Research and Development Expenses
Research and development expenses decreased 1% and increased 5% in 2023 and 2022, respectively. The decrease in research and development expenses in 2023 can be attributed to increases from merit compensation and costs associated with new products and the development of new technology initiatives, being offset by lower incentive compensation costs. The impact of foreign currency exchange decreased expenses by 1% and 3% in 2023 and 2022, respectively.
Purchased Intangibles Amortization
The increase in purchased intangible amortization of $26 million in 2023 can be attributed to the Wyatt acquisition intangible assets.
Acquired In-Process Research & Development
In 2022, the Company completed an asset acquisition in which the CDMS technology assets of Megadalton were acquired for approximately $10 million in total purchase price, of which $5 million was paid at closing and the remaining $4 million will be paid in the future at various dates through 2029.
Other (Expense) Income, net
In 2022, the Company sold equity an equity investment for $10 million in cash and recorded a gain on the sale of approximately $7 million in other income, net on the statement of operations. The Company also incurred $6 million in losses on an equity investment within other income, net on the statement of operations.
In 2021, the Company executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation and Bruker Daltronik GmbH regarding their timsTOF product line. In connection with the
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settlement, the Company is entitled to receive $10 million in guaranteed payments, including minimum royalty payments. In 2021, the Company recorded an unrealized gain of $10 million due to an observable change in the fair value of an existing investment that the Company does not have the ability to exercise significant influence over.
Interest Expense, net
Net interest expense in 2023 increased $44 million as compared to 2022 due to the additional borrowings by the Company to fund the Wyatt acquisition in 2023. Net interest expense in 2022 increased $5 million as compared to 2021 due to the lower interest income benefit from the lower notional amount of interest rate cross currency swap agreements.
Provision for Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 25% and 17%, respectively, as of December 31, 2023. The Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. Prior to April 1, 2021, the Company had a tax exemption on income arising from qualifying activities in Singapore based upon the achievement of certain contractual milestones, which the Company met as of December 31, 2020 and maintained through March 2021. The effect of applying the concessionary income tax rates rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the Company’s net income by $16 million, $20 million and $20 million, and increased the Company’s net income per diluted share by $0.27, $0.33 and $0.32 for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company’s effective tax rate for the years ended December 31, 2023, 2022 and 2021 was 12.8%, 15.5% and 14.1%, respectively.
The 2023 effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, an $18 million recognition of a previously unrecognized tax benefit as a result of the completion of a tax examination, a $15 million provision related to the Global Intangible Low-Taxed Income (“GILTI”) tax and a tax benefit of $3 million on stock-based compensation.
The 2022 effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, an $18 million provision related to the GILTI tax and a tax benefit of $7 million on stock-based compensation.
The 2021 effective tax rate differed from the U.S. federal statutory tax rate primarily due to the jurisdictional mix of earnings, a $10 million provision related to the GILTI tax and a tax benefit of $7 million on stock-based compensation.
Effective starting in 2024, various foreign jurisdictions are beginning to implement aspects of the guidance issued by the Organization for Economic Co-operation and Development related to the new Pillar Two system of global minimum tax rules. The Company does not believe these changes in tax law will have a material impact on the Company’s financial position, results of operations and cash flows in 2024. The Company continues to monitor the adoption of the Pillar Two rules in additional jurisdictions.
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Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||
| Net income | $ | 642,234 | $ | 707,755 | $ | 692,843 | ||||||
| Depreciation and amortization | 165,905 | 130,423 | 131,680 | |||||||||
| Stock-based compensation | 36,868 | 42,564 | 29,918 | |||||||||
| Deferred income taxes | (1,197 | ) | (31,988 | ) | 16,633 | |||||||
| Observable unrealized gain on investment | — | — | (9,707 | ) | ||||||||
| Acquired in-process research and development and other non-cash items | — | 10,003 | — | |||||||||
| Change in accounts receivable | 49,179 | (137,874 | ) | (62,448 | ) | |||||||
| Change in inventories | (45,443 | ) | (101,902 | ) | (67,250 | ) | ||||||
| Change in accounts payable and other current liabilities | (79,524 | ) | 60,984 | 46,110 | ||||||||
| Change in deferred revenue and customer advances | 10,433 | 12,862 | 37,845 | |||||||||
| Other changes | (175,646 | ) | (81,166 | ) | (68,350 | ) | ||||||
| Net cash provided by operating activities | 602,809 | 611,661 | 747,274 | |||||||||
| Net cash used in investing activities | (1,442,265 | ) | (107,967 | ) | (231,630 | ) | ||||||
| Net cash used in financing activities | 754,951 | (509,633 | ) | (438,275 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (948 | ) | (14,766 | ) | (12,830 | ) | ||||||
| (Decrease) increase in cash and cash equivalents | $ | (85,453 | ) | $ | (20,705 | ) | $ | 64,539 |
Cash Flow from Operating Activities
Net cash provided by operating activities was $603 million, $612 million and $747 million in 2023, 2022 and 2021, respectively. The decrease in 2023 operating cash flow was primarily a result of lower net income, higher inventory levels, higher income tax payments and higher incentive compensation payments in 2023 as 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, in addition to the changes in net income:
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | The changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales. Days sales outstanding was 78 days at December 31, 2023, 77 days at December 31, 2022 and 66 days at December 31, 2021. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | The changes in accounts payable and other current liabilities were a result of the timing of payments to vendors, as well as the annual payment of management incentive compensation. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | An increase in income tax payments of $83 million as compared to the prior year and the payment of $26 million in Wyatt acquired liabilities. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | 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, $108 million and $232 million in 2023, 2022 and 2021, respectively. Additions to fixed assets and capitalized software were $161 million, $176 million and $161 million
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in 2023, 2022 and 2021, respectively. The cash flows from investing activities in 2023, 2022 and 2021 include $16 million, $32 million and $49 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 $248 million on this new state-of-the-art facility, which is substantially complete as of December 31, 2023.
During 2023, 2022 and 2021, the Company purchased $2 million, $11 million and $280 million of investments, respectively, while $2 million, $78 million and $218 million of investments matured, respectively, and were used for financing activities described below.
In 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.
In 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 2023.
There were no business acquisitions in 2022 and 2021.
In 2022, the Company received $10 million in proceeds and made $1 million of investments in certain equity investments. In 2021, the Company made $2 million of investments in certain equity investments.
Cash Flow from Financing Activities
The Company entered into a credit agreement in September 2021 governing the Company’s five-year, $1.8 billion revolving facility that matures in September 2026. On March 3, 2023, in anticipation of closing of the Wyatt acquisition, the Company entered into an agreement to amend the credit agreement governing its revolving credit facility (the “2023 Amendment”). The 2023 Amendment increases the borrowing capacity by $200 million to an aggregate total borrowing capacity of $2.0 billion. As of December 31, 2023, the Company had a total of $2.4 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $1.1 billion in borrowings under its credit agreement. The Company’s net debt borrowings as of December 31, 2023, 2022 and 2021 were $780 million, $60 million and $160 million higher than as of December 31, 2022, 2021 and 2020, respectively.
As of December 31, 2023, the Company has entered into three-year interest rate cross-currency swap derivative agreements with a notional value $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 $11 million, $9 million and $15 million in 2023, 2022 and 2021, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $7 million in 2024.
In December 2023, the Company’s Board of Directors authorized the extension of the existing share repurchase program through January 21, 2025. The Company’s remaining authorization is $1.0 billion. During 2023, 2022 and 2021, the Company repurchased $58 million, $616 million and $640 million, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased $12 million, $11 million and $9 million of common stock related to the vesting of restricted stock units during 2023, 2022 and 2021, respectively.
The Company received $30 million, $43 million and $56 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan during 2023, 2022 and 2021, respectively.
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The Company had cash, cash equivalents and investments of $396 million as of December 31, 2023. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $321 million held by foreign subsidiaries at December 31, 2023, of which $233 million was held in currencies other than U.S. dollars.
As of December 31, 2023, the Company’s material cash requirements include the following contractual and other obligations:
Long-term debt. As of December 31, 2023, the Company had $2.4 billion of cash requirements for the principal on long-term debt that will mature and be paid as follows: $50 million in 2024; $1.5 billion in 2026; $50 million in 2028; $300 million in 2029; $50 million in 2030 and $400 million in 2031.
Interest on Senior Unsecured Notes. As of December 31, 2023, the Company had $189 million of cash requirements for the interest on senior unsecured notes that is to be paid as follows: $39 million in 2024; $38 million in 2025; $32 million in 2026; $25 million in 2027; $23 million in 2028; $20 million in 2029; $10 million in 2030; and $2 million in 2031. See also Note 9 in the Notes to the Consolidated Financial Statements for financial information about interest payable.
2017 Tax Act liabilities. As a result of the 2017 Tax Act, the Company incurred a Transition Toll Tax, that would be paid over an eight-year period, starting in 2018, and will not accrue interest. As of December 31, 2023, the Company had a remaining cash requirement of $216 million of which $96 million and $120 million will be paid in 2024 and 2025, respectively. See also Note 10 in the Notes to the Consolidated Financial Statements for financial information about tax liabilities.
Operating Leases. The Company’s cash requirements for future lease payments were approximately $93 million as of December 31, 2023. See also Note 12 in the Notes to the Consolidated Financial Statements for financial information about lease liabilities.
Long-term Software Contract Commitments. For contracts the Company is committed to that are not cancelable without penalties. The Company’s contractual obligation with these vendors was approximately $22 million as of December 31, 2023.
Wyatt Retention Agreements. In conjunction with the Wyatt acquisition, the Company entered into retention agreements with certain employees, in which the Company agreed to pay a total of $40 million by the end of the second anniversary of the acquisition date provided the employees remain employed over that period of time.
Management believes, as of the date of this report, that the Company’s financial position, along with expected future cash flows from earnings based on historical trends and the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, will be sufficient to service debt and fund working capital and capital spending requirements, authorized share repurchase amounts and potential acquisitions for at least the next twelve months.
Critical Accounting Policies and Estimates
Summary
The preparation of consolidated financial statements 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. Critical accounting policies are those that are central to the presentation of the Company’s financial condition and results of operations that require management to make estimates about matters that are highly uncertain and that would have a material impact on the Company’s results of operations given changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that reasonably could have been used in the current period. On an ongoing basis, the Company evaluates its policies and
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estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions or conditions. There are other items within the Company’s consolidated financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could potentially have a material impact on the Company’s consolidated financial statements.
Revenue Recognition
The Company recognizes revenue upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company generally enters into contracts that include a combination of products and services. Revenue is allocated to distinct performance obligations and is recognized net of allowances for returns and discounts.
The Company recognizes revenue on product sales at the time control of the product transfers to the customer. In substantially all of the Company’s arrangements, title of the product transfers at shipping point and, as a result, the Company determined control transfers at the point of shipment. In more limited cases, there are destination-based shipping terms and, thus, control is deemed to transfer when the products arrive at the customer site.
Generally, the Company’s contracts for products include a performance obligation related to installation. The Company has determined that the installation represents a distinct performance obligation and revenue is recognized separately upon the completion of installation. The Company determines the amount of the transaction price to allocate to the installation service based on the standalone selling price of the product and the service, which requires judgment. The Company determines the relative standalone selling price of installation based upon a number of factors, including hourly service billing rates and estimated installation hours. In developing these estimates, the Company considers past history, competition, billing rates of current services and other factors.
The Company has sales from standalone software, which are included in product revenue. These arrangements typically include software licenses and maintenance contracts, both of which the Company has determined are distinct performance obligations. The Company determines the amount of the transaction price to allocate to the license and maintenance contract based on the relative standalone selling price of each performance obligation. Software license revenue is recognized at the point in time when control has been transferred to the customer. The revenue allocated to the software maintenance contract is recognized on a straight-line basis over the maintenance period, which is the contractual term of the contract, as a time-based measure of progress best reflects the Company’s performance in satisfying this obligation. Unspecified rights to software upgrades are typically sold as part of the maintenance contract on a when-and-if-available basis.
Service revenue includes (i) service and software maintenance contracts and (ii) service calls (time and materials). Instrument service contracts and software maintenance contracts are typically annual contracts, which are billed at the beginning of the contract or maintenance period. The amount of the service and software maintenance contract is recognized on a straight-line basis to revenue over the maintenance service period, which is the contractual term of the contract, as a time-based measure of progress best reflects the Company’s performance in satisfying this obligation. There are no deferred costs associated with the service contract, as the cost of the service is recorded when the service is performed. Service calls are recognized to revenue at the time a service is performed.
The Company’s deferred revenue liabilities at December 31, 2023 of $324 million on the consolidated balance sheets consist of instrument service contract obligations 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.
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Loss Provision on Inventory
The Company values all of its inventories at the lower of cost or net realizable value on a first-in, first-out basis (“FIFO”). The Company estimates revisions to its inventory valuations based on technical obsolescence, historical demand, projections of future demand, including in the Company’s current backlog of orders, and industry and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional write-downs may be required. The Company’s inventory balance at December 31, 2023 was recorded at its net realizable value of $516 million, which is net of write-downs of $41 million.
Long-Lived Assets, Intangible Assets and Goodwill
Goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment on an annual basis, or on an interim basis when events or changes in circumstances indicate that the carrying value may not be recoverable. In assessing the recoverability of goodwill and indefinite-lived intangible assets, we must make assumptions regarding the estimated future cash flows, including forecasted revenue growth and the discount rate to determine the fair value of these assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges against these assets in the reporting period in which the impairment is determined.
We test goodwill for impairment at the reporting unit level, which is the operating segment or one level below an operating segment. We have the option of performing a qualitative assessment to determine whether further impairment testing is necessary before performing the quantitative assessment. If as a result of the qualitative assessment, it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test will be required. Otherwise, no further testing will be required. If a quantitative impairment test is performed, we compare the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. Estimating the fair value of the reporting units requires significant judgment by management. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an impairment charge is recognized for the amount by which the carrying value amount exceeds the reporting unit’s fair value up to the total amount of goodwill allocated to the reporting unit. The Company performs an annual goodwill impairment assessment for its reporting units as of December 31 each year. The Company has two reporting units: Waters and TA. Goodwill is allocated to the reporting units at the time of acquisition.
The Company’s intangible assets include purchased technology; capitalized software; costs associated with acquiring Company patents, trademarks and intellectual properties, such as licenses; and acquired IPR&D. Purchased intangibles are recorded at their fair market values as of the acquisition date and amortized over their estimated useful lives, ranging from one to fifteen years. Other intangibles are amortized over a period ranging from one to ten years. Acquired IPR&D is amortized from the date of completion of the acquired program over its estimated useful life.
Goodwill totaled $1.3 billion and $430 million as of December 31, 2023 and 2022, respectively. Net intangible assets and long-lived assets amounted to $629 million and $639 million, as of December 31, 2023, respectively, and $227 million and $582 million as of December 31, 2022, respectively.
Income Taxes
As part of the process of preparing the consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the Company estimating its income taxes, taking into account the amount, timing and character of taxable income, tax deductions and credits and assessing changes in tax laws, regulations, agreements and treaties. Differing treatment of items for tax and accounting purposes, such as depreciation, amortization and inventory reserves, result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. In the event that actual results differ from these estimates, or the Company adjusts these estimates in future periods, such changes could materially impact the Company’s financial position and results of operations.
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The Company continually evaluates the necessity of establishing or changing a valuation allowance for deferred tax assets depending on whether it is more likely than not that the actual benefit of those assets will be realized in future periods.
Uncertain Tax Positions
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 positions on the presumption that all concerned tax authorities possess full knowledge of those tax positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those positions for the time value of money. The Company classified interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. At December 31, 2023, the Company had unrecognized tax benefits, excluding interest and penalties, of $14 million, which represents a decrease of $15 million resulting, primarily, from the completion of a tax examination in 2023. This decrease reduced the income tax expense in the statement of operations and did not impact cash flows.
The Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. This new incentive has similar requirements for business spending targets, attaining and sustaining employment targets and performance of certain research and manufacturing activities as previous agreements. Prior to April 1, 2021, the Company had a tax exemption on income arising from qualifying activities in Singapore, based upon the achievement of certain contractual milestones, which the Company met as of December 31, 2020 and maintained through March 2021. These milestones include the following types of objectives: reaching and maintaining annual revenue and business spending targets; meeting capital expenditures targets; attaining and sustaining employment targets; and establishing a local research and development and service center. The Company determined that it was more likely than not to realize the tax exemption in Singapore and, accordingly, did not recognize any reserves for unrecognized tax benefits on its balance sheet related to this exemption. In the event that any of the milestone targets were not met, the Company would not be entitled to the tax exemption on income earned in Singapore and all the tax benefits previously recognized would be reversed, resulting in the recognition of income tax expense equal to the statutory tax of 17% on income earned during that period.
The effect of applying these concessionary income tax rates rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the Company’s net income by $16 million, $20 million and $20 million and increased the Company’s net income per diluted share by $0.27, $0.33 and $0.32 for the years ended December 31, 2023, 2022 and 2021, respectively.
Business Combinations and Asset Acquisitions
We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represents a significant portion of the purchase price in our recent acquisition of Wyatt, requires the use of significant judgment with regard to (i) the fair value; and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible asset will be amortized. We utilize commonly accepted valuation techniques, such as the income, cost and market approaches, as appropriate, in establishing the fair value of intangible assets. Typically, key assumptions include projections of cash flows that arise from identifiable intangible assets of acquired businesses as well as discount rates based on an analysis of the weighted average cost of capital, adjusted for specific risks associated with the assets.
In our recent acquisition of Wyatt, customer relationship intangible assets have been the most significant identifiable assets acquired. The customer relationships were valued using the multi-period excess earnings method under the income approach. Our cash flow projections for the customer relationships acquired included significant judgments and assumptions related to customer attrition rate, discount rate, and forecasted revenues. The value of the client relationships acquired was $331 million in fiscal year 2023, the majority of which relates to US customer relationships.
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Recent Accounting Standard Changes and Developments
Information regarding recent accounting standard changes and developments is incorporated by reference from Part II, Item 8, Financial Statements and Supplementary Data, of this document and should be considered an integral part of this Item 7. See Note 2 in the Notes to the Consolidated Financial Statements for recently adopted and issued accounting standards.