10-Q 1 d546163d10q.htm 10-Q 10-Q
Table of Contents
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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 September 30, 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)
(508478-2000
(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 November 3, 2023: 59,126,977
 
 
 


Table of Contents

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 September 30, 2023 and December 31, 2022

     3  
 

Consolidated Statements of Operations (unaudited) for the three months ended September 30, 2023 and October 1, 2022

     4  
 

Consolidated Statements of Operations (unaudited) for the nine months ended September 30, 2023 and October 1, 2022

     5  
 

Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2023 and October 1, 2022

     6  
 

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2023 and October 1, 2022

     7  
 

Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended September 30, 2023 and October 1, 2022

     8  
 

Consolidated Statements of Stockholders’ Equity (unaudited) for the nine months ended September 30, 2023 and October 1, 2022

     9  
  Condensed Notes to Consolidated Financial Statements (unaudited)      10  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      28  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      39  

Item 4.

  Controls and Procedures      40  

PART II

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      40  

Item 1A.

  Risk Factors      40  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      40  

Item 6.

  Exhibits      41  
  Signature      42  

 


Table of Contents
P1YP1Y2028-05-312030-05-31
Item 1: Financial Statements
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)

 
  
September 30, 2023
 
 
December 31, 2022
 
 
  
 
 
 
 
 
 
  
(In thousands, except per share data)
 
ASSETS
        
Current assets:
                
Cash and cash equivalents
   $ 336,414     $ 480,529  
Investments
     898       862  
Accounts receivable, net
     631,284       722,892  
Inventories
     544,402       455,710  
Other current assets
     121,528       103,910  
    
 
 
   
 
 
 
Total current assets
     1,634,526       1,763,903  
Property, plant and equipment, net
     616,846       582,217  
Intangible assets, net
     631,209       227,399  
Goodwill
     1,308,027       430,328  
Operating lease assets
     84,726       86,506  
Other assets
     221,846       191,100  
    
 
 
   
 
 
 
Total assets
   $ 4,497,180     $ 3,281,453  
    
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Notes payable and debt
   $ 50,000     $ 50,000  
Accounts payable
     79,834       93,302  
Accrued employee compensation
     43,481       103,300  
Deferred revenue and customer advances
     275,941       227,908  
Current operating lease liabilities
     26,527       26,429  
Accrued income taxes
     112,681       132,545  
Accrued warranty
     11,120       11,949  
Other current liabilities
     145,445       140,304  
    
 
 
   
 
 
 
Total current liabilities
     745,029       785,737  
Long-term liabilities:
                
Long-term debt
     2,455,265       1,524,878  
Long-term portion of retirement benefits
     41,529       38,203  
Long-term income tax liabilities
     155,743       248,496  
Long-term operating lease liabilities
     60,169       62,108  
Other long-term liabilities
     133,923       117,543  
    
 
 
   
 
 
 
Total long-term liabilities
     2,846,629       1,991,228  
    
 
 
   
 
 
 
Total liabilities
     3,591,658       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 September 30,
2023 and December 31, 2022
            
Common stock, par value $0.01 per share, 400,000 shares authorized, 162,649 and 162,425
 
shares
issued, 59,116 and 59,104 shares outstanding at September 30, 2023 and December 31,
 
2022,
respectively
     1,627       1,624  
Additional
paid-in
capital
     2,249,984       2,199,824  
Retained earnings
     8,934,616       8,508,587  
Treasury stock, at cost, 103,533 and 103,321 shares at September 30, 2023 and December 31,
2022, respectively
     (10,134,408     (10,063,975
Accumulated other comprehensive loss
     (146,297     (141,572
    
 
 
   
 
 
 
Total stockholders’ equity
     905,522  
  504,488  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 4,497,180     $ 3,281,453  
    
 
 
   
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
3

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
    
Three Months Ended
 
    
September 30, 2023
   
October 1, 2022
 
              
    
(In thousands, except per share data)
 
Revenues:
    
Product sales
   $ 448,081     $ 464,923  
Service sales
     263,611       243,632  
  
 
 
   
 
 
 
Total net sales
     711,692       708,555  
Costs and operating expenses:
    
Cost of product sales
     184,332       199,918  
Cost of service sales
     107,075       107,183  
Selling and administrative expenses
     186,748       164,417  
Research and development expenses
     41,995       43,435  
Purchased intangibles amortization
     12,116       1,592  
  
 
 
   
 
 
 
Total costs and operating expenses
     532,266       516,545  
  
 
 
   
 
 
 
Operating income
     179,426       192,010  
Other income, net
     328       895  
Interest expense
     (30,442     (12,420
Interest income
     3,883       2,896  
  
 
 
   
 
 
 
Income before income taxes
     153,195       183,381  
Provision for income taxes
     18,643       27,383  
  
 
 
   
 
 
 
Net income
   $ 134,552     $ 155,998  
  
 
 
   
 
 
 
Net income per basic common share
   $ 2.28     $ 2.61  
Weighted-average number of basic common shares
     59,093       59,801  
Net income per diluted common share
   $ 2.27     $ 2.60  
Weighted-average number of diluted common shares and equivalents
     59,255       60,081  
The accompanying notes are an integral part of the interim consolidated financial statements.
 
4

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
    
Nine Months Ended
 
    
September 30, 2023
   
October 1, 2022
 
              
    
(In thousands, except per share data)
 
Revenues:
    
Product sales
   $ 1,362,464     $ 1,385,393  
Service sales
     774,478       728,053  
  
 
 
   
 
 
 
Total net sales
     2,136,942       2,113,446  
Costs and operating expenses:
    
Cost of product sales
     559,040       593,884  
Cost of service sales
     317,823       306,108  
Selling and administrative expenses
     555,657       483,769  
Research and development expenses
     130,559       127,913  
Purchased intangibles amortization
     20,410       4,863  
Acquired
in-process
research and development
           9,797  
  
 
 
   
 
 
 
Total costs and operating expenses
     1,583,489       1,526,334  
  
 
 
   
 
 
 
Operating income
     553,453       587,112  
Other income, net
     1,364       2,600  
Interest expense
     (68,158     (34,898
Interest income
     11,984       7,536  
  
 
 
   
 
 
 
Income before income taxes
     498,643       562,350  
Provision for income taxes
     72,614       81,657  
  
 
 
   
 
 
 
Net income
   $ 426,029     $ 480,693  
  
 
 
   
 
 
 
Net income per basic common share
   $ 7.21     $ 7.98  
Weighted-average number of basic common shares
     59,061       60,200  
Net income per diluted common share
   $ 7.19     $ 7.94  
Weighted-average number of diluted common shares and equivalents
     59,262       60,521  
The accompanying notes are an integral part of the interim consolidated financial statements.
 
5
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
    
Three Months Ended
   
Nine Months Ended
 
    
September
30, 2023
   
October 1,
2022
   
September
30, 2023
   
October 1,
2022
 
    
(In thousands)
   
(In thousands)
 
Net income
   $ 134,552     $ 155,998     $ 426,029     $ 480,693  
Other comprehensive loss:
        
Foreign currency translation
     (17,676     (23,779     (4,909     (54,255
Unrealized gains on derivative instruments before reclassifications
     603             603        
Amounts reclassified to other income, net
     (93           (93      
  
 
 
   
 
 
   
 
 
   
 
 
 
Unrealized gains on derivative instruments before income taxes
     510             510        
Income tax expense
     (122           (122      
  
 
 
   
 
 
   
 
 
   
 
 
 
Unrealized gains on derivative instruments, net of tax
     388             388        
Unrealized gains on investments before income taxes
                       26  
Income tax expense
                       (6
  
 
 
   
 
 
   
 
 
   
 
 
 
Unrealized gains on investments, net of tax
                       20  
Retirement liability adjustment before reclassifications
     (200     767       (29     1,755  
Amounts reclassified to other income, net
     (75     254       (242     501  
  
 
 
   
 
 
   
 
 
   
 
 
 
Retirement liability adjustment before income taxes
     (275     1,021       (271     2,256  
Income tax benefit (expense)
     66       (243     67       (546
  
 
 
   
 
 
   
 
 
   
 
 
 
Retirement liability adjustment, net of tax
     (209     778       (204     1,710  
Other comprehensive loss
     (17,497     (23,001     (4,725     (52,525
  
 
 
   
 
 
   
 
 
   
 
 
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income
   $ 117,055     $ 132,997     $ 421,304     $ 428,168  
  
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
6

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
    
Nine Months Ended
 
    
September 30, 2023
   
October 1, 2022
 
              
    
(In thousands)
 
Cash flows from operating activities:
    
Net income
   $ 426,029     $ 480,693  
Adjustments to reconcile net income to net cash provided by
    
operating activities:
    
Stock-based compensation
     32,224       30,929  
Deferred income taxes
     267       (20,836
Depreciation
     62,235       54,306  
Amortization of intangibles
     55,610       44,799  
R
ealized gain on sale of investment
     (651      
Acquired
in-process
research and development and other
non-cash
items
           10,003  
Change in operating assets and liabilities:
    
Decrease (increase) in accounts receivable
     100,327       (39,098
Increase in inventories
     (81,415     (113,211
Increase in other current assets
     (24,066     (6,861
Increase in other assets
     (23,432     (3,881
Decrease in accounts payable and other current liabilities
     (130,065     (4,952
Increase in deferred revenue and customer advances
     38,959       47,060  
Decrease in other liabilities
     (83,335     (65,999
  
 
 
   
 
 
 
Net cash provided by operating activities
     372,687       412,952  
Cash flows from investing activities:
    
Additions to property, plant, equipment and software
    
capitalization
     (119,044     (113,737
Business acquisitions, net of cash acquired
     (1,285,907      
Proceeds from equity investments, net
     651       8,903  
Payments for intellectual property licenses
           (7,535
Purchases of investments
     (1,791     (11,407
Maturities and sales of investments
     1,770       77,993  
  
 
 
   
 
 
 
Net cash used in investing activities
     (1,404,321     (45,783
Cash flows from financing activities:
    
Proceeds from debt issuances
     1,450,041       165,000  
Payments on debt
     (520,040     (135,000
Payments of debt issuance costs
     (400      
Proceeds from stock plans
     18,092       36,136  
Purchases of treasury shares
     (70,433     (477,167
Proceeds from derivative contracts
     8,178       12,844  
  
 
 
   
 
 
 
Net cash provided by (used in) financing activities
     885,438       (398,187
Effect of exchange rate changes on cash and cash equivalents
     2,081       (26,579
  
 
 
   
 
 
 
Decrease in cash and cash equivalents
     (144,115     (57,597
Cash and cash equivalents at beginning of period
     480,529       501,234  
  
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 336,414     $ 443,637  
  
 
 
   
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
7

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands)
 
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
    
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Total
Stockholders’
Equity
 
Balance July 2, 2022
     162,348      $ 1,623      $ 2,166,221      $ 8,125,527      $ (9,759,858   $ (141,389   $ 392,124  
Net income
     —         —         —         155,998        —        —        155,998  
Other comprehensive loss
     —         —         —         —         —        (23,001     (23,001
Issuance of common stock for employees:
                  
Employee Stock Purchase Plan
     9        —         2,488        —         —        —        2,488  
Stock options exercised
     17        —         2,506        —         —        —        2,506  
Treasury stock
     —         —         —         —         (155,223     —        (155,223
Stock-based compensation
     5        1        10,343        —         —        —        10,344  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance October 1, 2022
     162,379      $ 1,624      $ 2,181,558      $ 8,281,525      $ (9,915,081   $ (164,390   $ 385,236  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
 
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
    
Treasury

Stock
   
Accumulated
Other
Comprehensive
Loss
   
Total
Stockholders’
Equity
 
Balance July 1, 2023
     162,576      $ 1,626      $ 2,232,055      $ 8,800,064      $ (10,133,716   $ (128,800   $ 771,229  
Net income
     —         —         —         134,552        —        —        134,552  
Other comprehensive loss
     —         —         —         —         —        (17,497     (17,497
Issuance of common stock for employees:
                  
Employee Stock Purchase Plan
     10        —         2,758        —         —        —        2,758  
Stock options exercised
     35        —         5,084        —         —        —        5,084  
Treasury stock
     —         —         —         —         (692     —        (692
Stock-based compensation
     28        1        10,087        —         —        —        10,088  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance September 30, 2023
     162,649      $ 1,627      $ 2,249,984      $ 8,934,616      $ (10,134,408   $ (146,297   $ 905,522  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
8
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands)
 
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
    
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Total
Stockholders’
Equity
 
Balance December 31, 2021
     162,084      $ 1,621      $ 2,114,880      $ 7,800,832      $ (9,437,914   $ (111,865   $ 367,554  
Net income
     —         —         —         480,693        —        —        480,693  
Other comprehensive loss
     —         —         —         —         —        (52,525     (52,525
Issuance of common stock for employees:
                  
Employee Stock Purchase Plan
     28        —         8,374        —         —        —        8,374  
Stock options exercised
     167        2        28,121        —         —        —        28,123  
Treasury stock
     —         —         —         —         (477,167     —        (477,167
Stock-based compensation
     100        1        30,183        —         —        —        30,184  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance October 1, 2022
     162,379      $ 1,624      $ 2,181,558      $ 8,281,525      $ (9,915,081   $ (164,390   $ 385,236  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
 
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
    
Treasury

Stock
   
Accumulated
Other
Comprehensive
Loss
   
Total
Stockholders’
Equity
 
Balance December 31, 2022
     162,425      $ 1,624      $ 2,199,824      $ 8,508,587      $ (10,063,975   $ (141,572   $ 504,488  
Net income
     —         —         —         426,029        —        —        426,029  
Other comprehensive loss
     —         —         —         —         —        (4,725     (4,725
Issuance of common stock for employees:
                  
Employee Stock Purchase Plan
     31        —         8,691        —         —        —        8,691  
Stock options exercised
     51        1        8,369        —         —        —        8,370  
Treasury stock
     —         —         —         —         (70,433     —        (70,433
Stock-based compensation
     142        2        33,100        —         —        —        33,102  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance September 30, 2023
     162,649      $ 1,627      $ 2,249,984      $ 8,934,616      $ (10,134,408   $ (146,297   $ 905,522  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
9

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1 Basis of Presentation and Summary of Significant Accounting Policies
Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high-performance liquid chromatography (“HPLC”), ultra-performance liquid chromatography (“UPLC
TM
” and, together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together
(“LC-MS”)
and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing.
LC-MS
instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA
TM
product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.
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 interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s third fiscal quarters for 2023 and 2022 ended on September 30, 2023 and October 1, 2022, respectively.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form
10-Q
and do not include all of the information and footnote disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions.
It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2022, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2023.
Risks and Uncertainties
The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.
 
10

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
Through the date of the issuance of these financial statements, the Company’s consolidated financial position, results of operations and cash flows have not been materially impacted and, thus, the Company concluded that no interim goodwill or long-lived asset impairment analyses were required. Further, there have been no violations of debt covenants. Any prolonged material disruption to the Company’s employees, suppliers, manufacturing, or customers could result in a material impact to its consolidated financial position, results of operations or cash flows in the future.
Translation of Foreign Currencies
The functional currency of each of the Company’s foreign operating subsidiaries is the local currency of its country of domicile, except for the Company’s subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity’s cash flows.
For the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive loss in the consolidated balance sheets.
Cash, Cash Equivalents and Investments
Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of September 30, 2023 and December 31, 2022, $307 million out of $337 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, $196 million out of $337 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 September 30, 2023 and December 31, 2022, respectively.
Accounts Receivable and Allowance for Credit Losses
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any
off-balance
sheet credit exposure related to its customers.
Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to
re-possess,
refurbish and
re-sell
the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss.
 
 
11

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The following is a summary of the activity of the Company’s allowance for credit losses for the nine months ended September 30, 2023 and October 1, 2022 (in thousands):
 
    
Balance at
Beginning
of Period
    
Additions
    
Deductions
    
Balance at
End of
Period
 
Allowance for Credit Losses
           
September 30, 2023
   $ 14,311      $ 3,727      $ (3,434    $ 14,604  
October 1, 2022
   $ 13,228      $ 4,980      $ (4,973    $ 13,235  
Other Investments
During the nine months ended September 30, 2023, the Company recorded realized gains of approximately $0.7 million. During the nine months ended October 1, 2022, the Company recorded realized gains of approximately $7 million and incurred approximately $6 million in losses. Realized gains and losses on equity investments are recorded within other income, net on the statement of operations.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. Accordingly, at the date of each acquisition, the Company measures the fair value of all identifiable assets acquired (including intangible assets) and liabilities assumed and allocates the amounts paid to all items measured. The fair value of identifiable intangible assets acquired is based on valuations that use information and assumptions determined by management and which consider management’s best estimates of inputs and assumptions that a market participant would use. Any excess of the fair value consideration transferred over the estimated fair values of the net assets acquired is recognized as goodwill.
Goodwill and Other Intangible Assets
The Company evaluates goodwill 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. Goodwill is tested for impairment at the reporting unit level, which is the operating segment or one level below an operating segment. The Company has 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, the Company compares the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The fair value of reporting units is estimated using a discounted cash flows technique, which includes certain management assumptions, such as estimated future cash flows, estimated growth rates and discount rates. 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
TM
and TA
TM
. 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. IPR&D and indefinite-lived intangibles are tested annually for impairment.
Fair Value Measurements
In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
12

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2023 (in thousands):
 
    
Total at
September 30,
2023
    
Quoted Prices
in Active
Markets

for Identical
Assets

(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs

(Level 3)
 
Assets:
           
Time deposits
   $ 898      $ —       $ 898      $ —   
Waters 401(k) Restoration Plan assets
     26,460        26,460        —         —   
Foreign currency exchange contracts
     129        —         129        —   
Interest rate cross-currency swap agreements
     25,679        —         25,679        —   
Interest rate swap cash flow hedge
     778        —         778        —   
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 53,944      $ 26,460      $ 27,484      $  
  
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities:
           
Foreign currency exchange contracts
   $ 119      $ —       $ 119      $ —   
Interest rate cross-currency swap agreements
     1,018        —         1,018        —   
Interest rate swap cash flow hedge
     175        —         175        —   
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 1,312      $      $ 1,312      $  
  
 
 
    
 
 
    
 
 
    
 
 
 
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2022 (in thousands):
 
    
Total at
December 31,
2022
    
Quoted Prices
in Active
Markets

for Identical
Assets

(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs

(Level 3)
 
Assets:
           
Time deposits
   $ 862      $ —       $ 862      $ —   
Waters 401(k) Restoration Plan assets
     25,532        25,532        —         —   
Foreign currency exchange contracts
     231        —         231        —   
Interest rate cross-currency swap agreements
     19,163        —         19,163        —   
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 45,788      $ 25,532      $ 20,256      $  
  
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities:
           
Contingent consideration
   $ 1,509      $ —       $ —       $ 1,509  
Foreign currency exchange contracts
     98        —         98        —   
Interest rate cross-currency swap agreements
     4,783        —         4,783        —   
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 6,390      $      $ 4,881      $ 1,509  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
13
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Fair Value of 401(k) Restoration Plan Assets
The 401(k) Restoration Plan is a nonqualified defined contribution plan and the assets were held in registered mutual funds and have been classified as Level 1. The fair values of the assets in the plan are determined through market and observable sources from daily quoted prices on nationally recognized securities exchanges.
Fair Value of Cash Equivalents, Investments, Foreign Exchange Contracts, Interest Rate Cross-Currency Swap Agreements and Interest Rate Swap Cash Flow Hedges
The fair values of the Company’s cash equivalents, investments, foreign currency exchange contracts, interest rate cross-currency swap agreements and interest rate swap cash flow hedges are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources.
Fair Value of Other Financial Instruments
The Company’s accounts receivable and accounts payable are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s variable interest rate debt approximates fair value due to the variable nature of the interest rate. The carrying value of the Company’s fixed interest rate debt was $1.3 billion at both September 30, 2023 and December 31, 2022. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $1.1 billion at both September 30, 2023 and December 31, 2022, using Level 2 inputs.
Derivative Transactions
The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its
non-U.S.
dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.
The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its euro-denominated and
yen-denominated
net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.
Foreign Currency Exchange Contracts
The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the euro, Japanese yen, British pound, Mexican peso and Brazilian real.
 
14

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Cash Flow Hedges
The Company’s Credit Facility is a variable borrowing and has interest payments based on a contractually specified interest rate index. The contractually specified index on the Credit Facility is the 3-month Term SOFR. The variable rate interest payments create interest risk for the Company as interest payments will fluctuate based on changes in the contractually specified interest rate index over the life of the Credit Facility. In order to reduce interest rate risk, the Company enters into interest rate swaps that will effectively lock-in the forecasted interest payments on the variable rate borrowing over its term. The interest rate swaps represent cash flow hedges and are assessed for hedge effectiveness each reporting period. When the hedge relationship is highly effective at achieving offsetting changes in cash flows, the Company will record the entire change in fair value of the interest rate swaps in accumulated other comprehensive loss. The amount in accumulated other comprehensive loss is reclassified to earnings in the period that the underlying transaction impacts consolidated earnings. If it becomes probable that the forecasted transaction will not occur, the hedge relationship will be de-designated and amounts accumulated in other comprehensive loss will be reclassified to earnings in the current period. Interest settlements due to benchmark interest rate changes are recorded in interest income or interest expense. For the three and nine months ended
September 
30, 2023, the Company did not have any cash flow hedges that were deemed ineffective.
Interest Rate Cross-Currency Swap Agreements
As of September 30, 2023, the Company had
entered into
interest rate cross-currency swap derivative agreements
 with durations up to three years
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. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated other comprehensive loss in stockholders’ equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.
The Company’s foreign currency exchange contracts, interest rate cross-currency swap agreements and interest rate swap agreements designated as cash flow hedges are included in the consolidated balance sheets are classified as follows (in thousands):
 
    
September 30, 2023
    
December 31, 2022
 
    
Notional
    
Fair Value
    
Notional
    
Fair Value
 
Foreign currency exchange contracts:
                                   
Other current assets
   $ 16,000      $ 129      $ 42,047      $ 231  
Other current liabilities
   $ 24,790      $ 119      $ 13,450      $ 98  
Interest rate cross-currency swap agreements:
                                   
Other assets
   $ 505,000      $ 25,679      $ 400,000      $ 19,163  
Other liabilities
   $ 120,000      $ 1,018      $ 185,000      $ 4,783  
Accumulated other comprehensive income
            $ 20,306               $ 10,026  
Interest rate swap cash flow hedges:
                                   
Other assets
   $ 50,000      $ 778      $ —       $ —   
Other liabilities
   $ 50,000      $ 175      $ —       $ —   
Accumulated other comprehensive income
            $ 510               $ —   
 
15

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The following is a summary of the activity included in the consolidated statements of operations and statements of comprehensive income related to the foreign currency exchange contracts, interest rate cross-currency swap agreements and interest rate swap agreements designated as cash flow hedges (in thousands):
 
    
Financial

Statement

Classification
    
Three Months Ended
   
Nine Months Ended
 
  
September

30, 2023
   
October 1,
2022
   
September

30, 2023
   
October 1,
2022
 
 
Foreign currency exchange contracts:
 
                                
Realized losses
                                         
on closed contracts
     Cost of sales      $ (755   $ (3,811   $ (50   $ (6,603
Unrealized gains (losses)
                                         
on open contracts
     Cost of sales        168       461       (123     (93
Cumulative net
pre-tax
                                         
             
 
 
   
 
 
   
 
 
   
 
 
 
losses
     Cost of sales      $ (587   $ (3,350   $ (173   $ (6,696
             
 
 
   
 
 
   
 
 
   
 
 
 
Interest rate cross-currency swap agreements:
 
                                
Interest earned
     Interest income      $ 2,720     $ 2,362     $ 8,048     $ 6,214  
Unrealized gains
     Other comprehensive                                   
on open contracts
     income      $ 18,936     $ 31,108     $ 10,280     $ 73,812  
Interest rate swap cash flow hedges:
 
                                
Interest earned
     Interest income      $ 93     $ —      $ 93     $ —   
Unrealized gains
     Other comprehensive                                   
on open contracts
     income      $ 510     $ —      $ 510     $ —   
Stockholders’ Equity
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 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 nine months ended September 30, 2023 and October 1, 2022, the Company repurchased 0.2 million and 1.5 million shares of the Company’s outstanding common stock at a cost of $58 million and $467 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $12 million and $11 million of common stock related to the vesting of restricted stock units during the nine months ended September 30, 2023 and October 1, 2022, respectively. As of September 30, 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.
Product Warranty Costs
The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.
 
16

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The following is a summary of the activity of the Company’s accrued warranty liability for the nine months ended September 30, 2023 and October 1, 2022 (in thousands):
 
    
Balance at
Beginning
of Period
    
Accruals for
Warranties
    
Settlements
Made
    
Balance at
End of
Period
 
Accrued warranty liability:
                                   
September 30, 2023
   $ 11,949      $ 4,813      $ (5,642    $ 11,120  
October 1, 2022
   $ 10,718      $ 6,606      $ (6,663    $ 10,661  
Restructuring
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. During the three and nine months ended September 30, 2023, the Company incurred $23 million and $27 million
, respectively,
of severance-related costs
 in
connection
with this reduction.
During the three and nine months ended September 30, 2023, the Company paid $12 million and $14 million, respectively
,
of these costs
,
with the majority of the remaining costs to be paid in the fourth quarter of 2023 and the first half of 2024.
2 Revenue Recognition
The Company’s deferred revenue liabilities in the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.
The following is a summary of the activity of the Company’s deferred revenue and customer advances for the nine months ended September 30, 2023 and October 1, 2022 (in thousands):
 
    
September 30,
2023
    
October 1,
2022
 
Balance at the beginning of the period
   $ 285,175      $ 273,598  
Recognition of revenue included in balance at beginning of the period
     (222,001      (213,527
Revenue deferred during the period, net of revenue recognized
     276,277        243,853  
    
 
 
    
 
 
 
Balance at the end of the period
   $ 339,451      $ 303,924  
    
 
 
    
 
 
 
The Company classified $64 million and $57 million of deferred revenue and customer advances in other long-term liabilities at September 30, 2023 and December 31, 2022, respectively.
The amount of deferred revenue and customer advances equals the transaction price allocated to unfulfilled performance obligations for the period presented. Such amounts are expected to be recognized in the future as follows (in thousands):
 
    
September 30,
2023
 
Deferred revenue and customer advances expected to be recognized in:
        
One year or less
   $ 275,941  
13-24
months
     37,373  
25 months and beyond
     26,137  
    
 
 
 
Total
   $ 339,451  
    
 
 
 
3 Marketable Securities
The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets consist of time deposits that mature in one year or less with an amortized cost and a fair value of $0.9 million at both September 30, 2023 and December 31, 2022.
 
17

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
4 Inventories
Inventories are classified as follows (in thousands):
 
    
September 30, 2023
    
December 31, 2022
 
Raw materials
   $ 241,012      $ 205,760  
Work in progress
     25,689        19,899  
Finished goods
     277,701        230,051  
    
 
 
    
 
 
 
Total inventories
   $ 544,402      $ 455,710  
    
 
 
    
 
 
 
5 Acquisitions
On May 16, 2023, the Company acquired all of the issued and outstanding equity interests of Wyatt for $1.3 billion, net of cash acquired. 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. As a result of the acquisition, the results of Wyatt are included in the Company’s consolidated financial statements from the acquisition date.
The Company preliminarily allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The purchase price allocation was based upon preliminary information and is subject to change if additional information about the facts and circumstances that existed at the acquisition date becomes available. The Company is in the ongoing process of conducting a valuation of the assets acquired and liabilities assumed related to the acquisition. The final fair value of the net assets acquired may result in adjustments to these assets and liabilities, including goodwill.
The intangible assets were valued with input from valuation specialists. The Company used variations of the income approach, which uses Level 3 inputs, in determining the fair value of intangible assets acquired in the Wyatt acquisition. Specifically, the customer relationships were valued using the multi-period excess earnings method under the income approach. The Company utilized the relief from royalty method to determine the fair value of the tradename and the developed technology. The following table presents the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of May 16, 2023 (in thousands):
 
Purchase Price
        
Cash paid
   $ 1,311,531  
Less: cash acquired
     (25,624
    
 
 
 
Net cash consideration
     1,285,907  
    
 
 
 
Identifiable Net Assets (Liabilities) Acquired
        
Accounts receivable
     20,099  
Inventory
     14,706  
Prepaid and other assets
     1,327  
Property, plant and equipment
     9,056  
Operating lease assets
     5,204  
Intangible assets
     418,100  
Accounts payable and accrued expenses
     (31,664
Operating lease liabilities
     (5,204
Tax liabilities
     (3,871
Deferred revenue
     (15,219
Other liabilities
     (5,728
    
 
 
 
Total identifiable net assets acquired
     406,806  
Goodwill
     879,101  
    
 
 
 
Net cash consideration
   $ 1,285,907  
    
 
 
 
The details of the purchase price allocated to the intangible assets acquired and the estimated useful lives are as follows (dollars in thousands
):
 
18

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
    
Amount
    
Weighted-Average

Life
 
Developed technology
   $ 80,000        10 years  
Customer relationships
     330,600        10 years  
Trade name
     7,500        5 years  
    
 
 
          
Total
     $418,100           
    
 
 
          
The Company allocated $879 million of the purchase price to goodwill which is
 
deductible for tax purposes and has been allocated to the Waters Division operating segment. The goodwill arising from the acquisition consists largely of the value of intangible assets that do not qualify for separate recognition such as workforce in place and cash flows from the integration of acquired technology, distribution channels and products with the Company’s products, which are higher than if the acquired companies’ technology, customer access or products were utilized on a stand-alone basis.
During the three and nine months ended September 30, 2023, the Company’s consolidated results included net sales of $
29 million and $
45 million
, respectively,
and a net operating loss of $
6 million and $
9 million
, respectively,
since the acquisition closed on May 16, 2023. The Company also incurred transaction related costs of $13 million during the nine months
ended
September 30, 2023
, which are recorded in selling and administrative expenses in the consolidated statement of operations.
Unaudited Pro Forma Financial Information
The following unaudited pro forma information is presented for illustrative purposes only. It is not necessarily indicative of the actual results of operations that actually would have been realized had the entities been a single company as of January 1, 2022 or the future operating results of the combined entity. The unaudited pro forma information does not give effect to the potential impact of current financial conditions, regulatory matters or any anticipated synergies that may be associated with the acquisition. The unaudited pro forma information also does not include any integration costs that the Company may incur related to the acquisition as part of combining the operations of the companies.
The following unaudited pro forma information shows the results of the Company’s operations for the nine months ended September 30, 2023 and October 1, 2022, as if the acquisition had occurred on January 1, 2022 (in thousands):
 
    
September 30,
2023
    
October 1,
2022
 
Revenue
   $ 2,174,209      $ 2,197,028  
Net income
     426,238        448,102  
The impact of the unaudited pro forma information for the three months ended September 30, 2023 and October 1, 2022 was immaterial to the consolidated financial statements.
To reflect the acquisition of Wyatt as if it had occurred on January 1, 2022, the unaudited pro forma information includes adjustments to reflect, among other things, the incremental intangible asset amortization to be incurred based on the preliminary values of each identifiable intangible asset of Wyatt and the interest expense from debt financings obtained to partially fund the cash consideration transferred. Pro forma adjustments were tax effected at the Company’s historical statutory rates in effect for the respective periods.
Pro forma net income for the nine months ended September 30, 2023, was adjusted to exclude certain
non-recurring
expenses related to transaction costs incurred and the fair value adjustment of inventory. These
non-recurring
expenses were reclassified to the prior period and included in the pro forma net income for the nine months ended October 1, 2022.
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, in two equal installments upon the first and second anniversary of the acquisition date. As these employees are earning their individual cash award by providing service over the
two-year
period that benefit the Company, the $40 million will be recognized within total costs and operating expenses in the consolidated statements of operations over the
two-year
service period. The Company has recorded $8 million and $11 million of expense in the consolidated statement of operations for the three and nine months ended September 30, 2023
, respectively.
 
19
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
6 Goodwill and Other Intangibles
The carrying amount of goodwill was $1.3 billion and $430 million at September 30, 2023 and December 31, 2022, respectively. The acquisition of Wyatt increased goodwill by $879 million, while the effect of foreign currency translation decreased goodwill by $1 million.
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):
 
    
September 30, 2023
    
December 31, 2022
 
                  
Weighted-
                  
Weighted-
 
    
Gross
           
Average
    
Gross
           
Average
 
    
Carrying
    
Accumulated
    
Amortization
    
Carrying
    
Accumulated
    
Amortization
 
    
Amount
    
Amortization
    
Period
    
Amount
    
Amortization
    
Period
 
Capitalized software
   $ 616,406      $ 460,730        5        years      $ 589,604      $ 441,414        5        years  
Purchased intangibles
     610,513        182,214        10        years        197,805        166,735        11        years  
Trademarks
     9,680        —         —            9,680        —         —      
Licenses
     14,142        7,753        7        years        14,070        6,729        6        years  
Patents and other intangibles
     109,371        78,206        8        years        104,139        73,021        8        years  
  
 
 
    
 
 
          
 
 
    
 
 
       
Total
   $ 1,360,112      $ 728,903        7        years      $ 915,298      $ 687,899        7        years  
  
 
 
    
 
 
          
 
 
    
 
 
       
The Company capitalized intangible assets in the amounts of $10 million and $14 million in the three months ended September 30, 2023 and October 1, 2022, respectively, and $455 million and $38 million in the nine months ended September 30, 2023 and October 1, 2022, respectively. The increases in intangible assets are a result of the Wyatt acquisition.
The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $6 million and $10 million, respectively, in the nine months ended September 30, 2023 due to the effects of foreign currency translation.
Amortization expense for intangible assets was $26 million and $15 million for the three months ended September 30, 2023 and October 1, 2022. Amortization expense for intangible assets was $56 million and $45 million for the nine months ended September 30, 2023 and October 1, 2022, respectively. Amortization expense for intangible assets is estimated to be $97 million per year for each of the next five years.
7 Debt
On May 16, 2023, the Company financed the Wyatt acquisition with a combination of cash on its balance sheet and borrowings under its revolving credit facility. As a result of the Wyatt transaction, the Company’s outstanding debt on September 30,
2023
was $2.5 billion, a change of $1.0 billion from the end of the first quarter of 2023.
On May 11, 2023, the Company issued the following senior unsecured notes:
 
Senior
Unsecured Notes
  
Term
    
Interest Rate
   
Face Value
(in millions)
    
Maturity Date
 
Series P
     5 years        4.91   $ 50        May 2028  
Series Q
     7 years        4.91   $ 50        May 2030  
The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes. Interest on the Series P and Q Senior Notes is payable semi-annually in arrears. The Company may prepay some or all of the Senior Notes, at any time and from time to time, in an amount not less than 10% of the aggregate principal amount of the Senior Notes then outstanding, plus the applicable make-whole
 
20

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
amount for Series P and Q Senior Notes, in each case, upon no more than 60 nor less than 20 days’ written notice to the holders of the Senior Notes. In the event of a change in control (as defined in the note purchase agreement) of the Company, the Company may be required to prepay the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. Other provisions for these senior unsecured notes are similar to the existing senior unsecured notes, as described below.
The Company has a five-year, $1.8 billion revolving facility (the “Credit Facility”) that expires in September 2026. On March 3, 2023, the Company amended the Credit Facility to increase the borrowing capacity by $200 million to an aggregate total borrowing capacity of $2.0 billion, which did not affect the maturity date of September 17, 2026. The amendment also replaced all references in the Credit Facility to LIBOR with Term SOFR as the benchmark rate. As of September 30, 2023 and December 31, 2022, the Credit Facility had a total of $1.2 billion and $270 million outstanding, respectively.
The interest rates applicable under the Credit Facility are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (1) the prime rate in effect on such day, (2) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (3) the adjusted Term SOFR rate for a
one-month
interest period as published two U.S. Government Securities Business Days prior to such day (or if such day is not a U.S. Government Securities Business Day, the immediately preceding U.S. Government Securities Business Day), plus 1% annum) or the applicable 1, 3 or 6 month adjusted Term SOFR or EURIBO rate for euro-denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for Term SOFR or EURIBO rate loans. The facility fee on the Credit Facility ranges between 7.5 and 25 basis points per annum, based on the leverage ratio, of the amount of the revolving facility commitments and the outstanding term loan.
The Credit Facility requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the Credit Facility includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.
As of both September 30, 2023 and December 31, 2022, the Company had a total of $1.3 billion of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest.
 
These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.
 
21

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The Company had the following outstanding debt at September 30, 2023 and December 31, 2022 (in thousands):
 
    
September 30, 2023
    
December 31, 2022
 
Senior unsecured notes - Series I - 3.13%, due May 2023
            50,000  
Senior unsecured notes - Series G - 3.92%, due June 2024
     50,000        —   
    
 
 
    
 
 
 
Total notes payable and debt, current
     50,000        50,000  
Senior unsecured notes - Series G - 3.92%, due June 2024
     —         50,000  
Senior unsecured notes - Series H - floating rate*, due June 2024
            50,000  
Senior unsecured notes - Series K - 3.44%, due May 2026
     160,000        160,000  
Senior unsecured notes - Series L - 3.31%, due September 2026
     200,000        200,000  
Senior unsecured notes - Series M - 3.53%, due September 2029
     300,000        300,000  
Senior unsecured notes - Series N - 1.68%, due March 2026
     100,000        100,000  
Senior unsecured notes - Series O - 2.25%, due March 2031
     400,000        400,000  
Senior unsecured notes - Series P - 4.91%, due May 2028
     50,000         
Senior unsecured notes - Series Q - 4.91%, due May 2030
     50,000         
Credit agreement
     1,200,000        270,000  
Unamortized debt issuance costs
     (4,735      (5,122
    
 
 
    
 
 
 
Total long-term debt
     2,455,265        1,524,878  
    
 
 
    
 
 
 
Total debt
   $ 2,505,265      $ 1,574,878  
    
 
 
    
 
 
 
 
*
Series H senior unsecured notes bear interest at a
3-month
LIBOR for that floating rate interest period plus 1.25%.
As of September 30, 2023 and December 31, 2022, the Company had a total amount available to borrow under the Credit Facility of $0.8 billion and $1.5 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 4.97% and 3.54% at September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $112 million and $113 million at September 30, 2023 and December 31, 2022, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of September 30, 2023 or December 31, 2022.
As of September 30, 2023, the Company had entered into interest rate cross-currency swap derivative agreements
 with durations up to three-years
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.
8 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 September 30, 2023. The Company has a Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax
rate
rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the Company’s net income for the nine months ended September 30, 2023 and October 1, 2022 by $11 million and $15 million, respectively, and increased the Company’s net income per diluted share by $0.18 and $0.25, respectively.
The Company’s effective tax rate for the three months ended September 30, 2023 and October 1, 2022 was 12.2% and 14.9%, respectively. The
decrease
in the effective income tax rate can be primarily attributed to the impact of discrete tax benefits in the
current
year and differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
 
22

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The Company’s effective tax rate for the nine months ended September 30, 2023 and October 1, 2022 was 14.6% and 14.5%, 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.
The Company accounts for its uncertain tax return positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
The Company’s gross unrecognized tax benefits, excluding interest and penalties, at September 30, 2023 and October 1, 2022 were $32 million and $29 million, respectively. With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2017. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities. As of September 30, 2023, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of $18 million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.
9 Other Commitments and Contingencies
The Company licenses certain technology and software from third parties in the course of ordinary business. Future minimum license fees payable under existing license agreements as of September 30, 2023 are immaterial for the years ended December 31, 2023 and thereafter.
The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company’s costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.
10 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
 
    
Three Months Ended September 30, 2023
 
    
Net Income
(Numerator)
    
Weighted-
Average Shares
(Denominator)
    
Per Share
Amount
 
Net income per basic common share
   $ 134,552        59,093      $ 2.28  
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
            162        (0.01
    
 
 
    
 
 
    
 
 
 
Net income per diluted common share
   $ 134,552        59,255      $ 2.27  
    
 
 
    
 
 
    
 
 
 
 
23

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
    
Three Months Ended October 1, 2022
 
    
Net Income
(Numerator)