☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2023
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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. |
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM10-Q
INDEX
Page | ||||||
PART I | FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements | |||||
Consolidated Balance Sheets (unaudited) as of September 30, | ||||||
8 | ||||||
9 | ||||||
Condensed Notes to Consolidated Financial Statements (unaudited) | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||
Item 4. | Controls and Procedures | |||||
PART II | OTHER INFORMATION | |||||
Item 1. | Legal Proceedings | |||||
Item 1A. | Risk Factors | |||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||
Item 6. | Exhibits | |||||
Signature |
(IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, 2017 | December 31, 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 603,807 | $ | 505,631 | ||||
Investments | 2,651,150 | 2,307,401 | ||||||
Accounts receivable, less allowances for doubtful accounts and sales returns of $9,379 and $8,657 at September 30, 2017 and December 31, 2016, respectively | 456,334 | 489,340 | ||||||
Inventories | 297,854 | 262,682 | ||||||
Other current assets | 69,380 | 70,391 | ||||||
|
|
|
| |||||
Total current assets | 4,078,525 | 3,635,445 | ||||||
Property, plant and equipment, net | 342,832 | 337,118 | ||||||
Intangible assets, net | 224,056 | 207,055 | ||||||
Goodwill | 359,376 | 352,080 | ||||||
Other assets | 158,196 | 130,361 | ||||||
|
|
|
| |||||
Total assets | $ | 5,162,985 | $ | 4,662,059 | ||||
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Notes payable and debt | $ | 225,423 | $ | 125,297 | ||||
Accounts payable | 66,754 | 67,740 | ||||||
Accrued employee compensation | 42,021 | 57,465 | ||||||
Deferred revenue and customer advances | 185,524 | 148,837 | ||||||
Accrued income taxes | 24,355 | 15,244 | ||||||
Accrued warranty | 12,855 | 13,391 | ||||||
Other current liabilities | 105,217 | 92,347 | ||||||
|
|
|
| |||||
Total current liabilities | 662,149 | 520,321 | ||||||
Long-term liabilities: | ||||||||
Long-term debt | 1,732,367 | 1,701,966 | ||||||
Long-term portion of retirement benefits | 69,666 | 72,568 | ||||||
Long-term income tax liabilities | 7,656 | 10,458 | ||||||
Other long-term liabilities | 62,052 | 54,797 | ||||||
|
|
|
| |||||
Total long-term liabilities | 1,871,741 | 1,839,789 | ||||||
|
|
|
| |||||
Total liabilities | 2,533,890 | 2,360,110 | ||||||
Commitments and contingencies (Notes 5, 6, 7 and 11) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at September 30, 2017 and December 31, 2016 | — | — | ||||||
Common stock, par value $0.01 per share, 400,000 shares authorized, 159,589 and 158,634 shares issued, 79,522 and 80,023 shares outstanding at September 30, 2017 and December 31, 2016, respectively | 1,596 | 1,586 | ||||||
Additionalpaid-in capital | 1,710,783 | 1,607,241 | ||||||
Retained earnings | 5,758,552 | 5,385,069 | ||||||
Treasury stock, at cost, 80,067 and 78,611 shares at September 30, 2017 and December 31, 2016, respectively | (4,721,409 | ) | (4,475,667 | ) | ||||
Accumulated other comprehensive loss | (120,427 | ) | (216,280 | ) | ||||
|
|
|
| |||||
Total stockholders’ equity | 2,629,095 | 2,301,949 | ||||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 5,162,985 | $ | 4,662,059 | ||||
|
|
|
|
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 issued, 59,116 and 59,104 shares outstanding at September 30, 2023 and December 31, 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 | ||||
1
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended | ||||||||
September 30, 2017 | October 1, 2016 | |||||||
Revenues: | ||||||||
Product sales | $ | 375,550 | $ | 349,934 | ||||
Service sales | 190,034 | 176,896 | ||||||
|
|
|
| |||||
Total net sales | 565,584 | 526,830 | ||||||
Costs and operating expenses: | ||||||||
Cost of product sales | 155,621 | 145,623 | ||||||
Cost of service sales | 80,271 | 72,721 | ||||||
Selling and administrative expenses | 135,194 | 123,861 | ||||||
Research and development expenses | 33,782 | 30,418 | ||||||
Purchased intangibles amortization | 1,682 | 2,476 | ||||||
|
|
|
| |||||
Total costs and operating expenses | 406,550 | 375,099 | ||||||
|
|
|
| |||||
Operating income | 159,034 | 151,731 | ||||||
Interest expense | (14,750 | ) | (11,707 | ) | ||||
Interest income | 9,516 | 5,426 | ||||||
|
|
|
| |||||
Income from operations before income taxes | 153,800 | 145,450 | ||||||
Provision for income taxes | 17,696 | 20,594 | ||||||
|
|
|
| |||||
Net income | $ | 136,104 | $ | 124,856 | ||||
|
|
|
| |||||
Net income per basic common share | $ | 1.71 | $ | 1.55 | ||||
Weighted-average number of basic common shares | 79,712 | 80,677 | ||||||
Net income per diluted common share | $ | 1.69 | $ | 1.53 | ||||
Weighted-average number of diluted common shares and equivalents | 80,521 | | 81,388 | |
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 |
2
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended | ||||||||
September 30, 2017 | October 1, 2016 | |||||||
Revenues: | ||||||||
Product sales | $ | 1,072,684 | $ | 1,017,478 | ||||
Service sales | 549,119 | 521,158 | ||||||
|
|
|
| |||||
Total net sales | 1,621,803 | 1,538,636 | ||||||
Costs and operating expenses: | ||||||||
Cost of product sales | 436,800 | 419,695 | ||||||
Cost of service sales | 239,814 | 220,179 | ||||||
Selling and administrative expenses | 395,908 | 382,793 | ||||||
Research and development expenses | 97,471 | 92,434 | ||||||
Litigation provisions | 10,018 | — | ||||||
Acquiredin-process research and development | 5,000 | — | ||||||
Purchased intangibles amortization | 5,104 | 7,531 | ||||||
|
|
|
| |||||
Total costs and operating expenses | 1,190,115 | 1,122,632 | ||||||
|
|
|
| |||||
Operating income | 431,688 | 416,004 | ||||||
Interest expense | (41,558 | ) | (32,809 | ) | ||||
Interest income | 25,229 | 14,340 | ||||||
|
|
|
| |||||
Income from operations before income taxes | 415,359 | 397,535 | ||||||
Provision for income taxes | 41,876 | 50,410 | ||||||
|
|
|
| |||||
Net income | $ | 373,483 | $ | 347,125 | ||||
|
|
|
| |||||
Net income per basic common share | $ | 4.67 | $ | 4.29 | ||||
Weighted-average number of basic common shares | 79,908 | 80,923 | ||||||
Net income per diluted common share | $ | 4.63 | $ | 4.26 | ||||
Weighted-average number of diluted common shares and equivalents | 80,660 | 81,573 |
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 |
3
(IN THOUSANDS)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Net income | $ | 136,104 | $ | 124,856 | $ | 373,483 | $ | 347,125 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation | 26,827 | 2,480 | 94,209 | (12,954 | ) | |||||||||||
Unrealized gains (losses) on investments before income taxes | 318 | (1,393 | ) | 1,700 | 3,777 | |||||||||||
Income tax (expense) benefit | (9 | ) | 61 | (108 | ) | (108 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Unrealized gains (losses) on investments, net of tax | 309 | (1,332 | ) | 1,592 | 3,669 | |||||||||||
Retirement liability adjustment before reclassifications | (499 | ) | (183 | ) | (2,030 | ) | (682 | ) | ||||||||
Amounts reclassified to selling and administrative expenses | 894 | 832 | 2,652 | 2,452 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Retirement liability adjustment before income taxes | 395 | 649 | 622 | 1,770 | ||||||||||||
Income tax expense | (183 | ) | (272 | ) | (570 | ) | (1,163 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Retirement liability adjustment, net of tax | 212 | 377 | 52 | 607 | ||||||||||||
Other comprehensive income (loss) | 27,348 | 1,525 | 95,853 | (8,678 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Comprehensive income | $ | 163,452 | $ | 126,381 | $ | 469,336 | $ | 338,447 | ||||||||
|
|
|
|
|
|
|
|
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 | ||||||||
4
(IN THOUSANDS)
Nine Months Ended | ||||||||
September 30, 2017 | October 1, 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 373,483 | $ | 347,125 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Stock-based compensation | 30,068 | 32,604 | ||||||
Deferred income taxes | 3,046 | 4,924 | ||||||
Depreciation | 45,454 | 38,854 | ||||||
Amortization of intangibles | 32,795 | 33,510 | ||||||
Excess tax benefit related to stock-based compensation plans | — | 12,914 | ||||||
Gain on sale of assets | — | (1,500 | ) | |||||
In-process research and development charge | 5,000 | — | ||||||
Change in operating assets and liabilities, net of acquisitions: | ||||||||
Decrease in accounts receivable | 53,358 | 39,471 | ||||||
Increase in inventories | (26,217 | ) | (39,988 | ) | ||||
Increase in other current assets | (12,944 | ) | (2,906 | ) | ||||
Increase in other assets | (2,370 | ) | (4,667 | ) | ||||
Decrease in accounts payable and other current | ||||||||
liabilities | (23,066 | ) | (29,179 | ) | ||||
Increase in deferred revenue and customer advances | 29,332 | 29,244 | ||||||
(Decrease) increase in other liabilities | (2,483 | ) | 8,611 | |||||
|
|
|
| |||||
Net cash provided by operating activities | 505,456 | 469,017 | ||||||
Cash flows from investing activities: | ||||||||
Additions to property, plant, equipment and software | ||||||||
capitalization | (55,257 | ) | (72,296 | ) | ||||
Business acquisitions, net of cash acquired | — | (5,654 | ) | |||||
Investment in unaffiliated company | (7,000 | ) | — | |||||
Payments for intellectual property licenses | (5,000 | ) | — | |||||
Purchases of investments | (2,345,259 | ) | (1,923,054 | ) | ||||
Maturities and sales of investments | 2,008,528 | 1,558,330 | ||||||
Proceeds from sale of assets | — | 4,000 | ||||||
|
|
|
| |||||
Net cash used in investing activities | (403,988 | ) | (438,674 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from debt issuances | 130,190 | 440,177 | ||||||
Payments on debt | (64 | ) | (325,323 | ) | ||||
Payments of debt issuance costs | — | (1,705 | ) | |||||
Proceeds from stock plans | 72,821 | 58,572 | ||||||
Purchases of treasury shares | (245,742 | ) | (241,924 | ) | ||||
Proceeds from (payments for) derivative contracts | 3,301 | (9,525 | ) | |||||
|
|
|
| |||||
Net cash used in financing activities | (39,494 | ) | (79,728 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 36,202 | (8,071 | ) | |||||
|
|
|
| |||||
Increase (decrease) in cash and cash equivalents | 98,176 | (57,456 | ) | |||||
Cash and cash equivalents at beginning of period | 505,631 | 487,665 | ||||||
|
|
|
| |||||
Cash and cash equivalents at end of period | $ | 603,807 | $ | 430,209 | ||||
|
|
|
|
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 othernon-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 | ||||
5
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 | |||||||||||||
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 | |||||||||||||
(unaudited)
cash on its balance sheet and borrowings under its revolving credit facility.
27, 2023.
For most of 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 period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets.
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
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 |
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.
Total at September 30, 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
U.S. Treasury securities | $ | 548,010 | $ | — | $ | 548,010 | $ | — | ||||||||
Foreign government securities | 6,970 | — | 6,970 | — | ||||||||||||
Corporate debt securities | 1,884,101 | — | 1,884,101 | — | ||||||||||||
Time deposits | 403,112 | — | 403,112 | — | ||||||||||||
Equity securities | 147 | — | 147 | — | ||||||||||||
Waters 401(k) Restoration Plan assets | 33,845 | 33,845 | — | — | ||||||||||||
Foreign currency exchange contracts | 213 | — | 213 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,876,398 | $ | 33,845 | $ | 2,842,553 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | 3,017 | $ | — | $ | — | $ | 3,017 | ||||||||
Foreign currency exchange contracts | 63 | — | 63 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 3,080 | $ | — | $ | 63 | $ | 3,017 | ||||||||
|
|
|
|
|
|
|
|
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
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 | $ | — | ||||||||
Total at December 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
U.S. Treasury securities | $ | 570,313 | $ | — | $ | 570,313 | $ | — | ||||||||
Foreign government securities | 17,991 | — | 17,991 | — | ||||||||||||
Corporate debt securities | 1,643,838 | — | 1,643,838 | — | ||||||||||||
Time deposits | 199,906 | — | 199,906 | — | ||||||||||||
Equity securities | 147 | — | 147 | — | ||||||||||||
Waters 401(k) Restoration Plan assets | 30,954 | 30,954 | — | — | ||||||||||||
Foreign currency exchange contracts | 60 | — | 60 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,463,209 | $ | 30,954 | $ | 2,432,255 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | 3,007 | $ | — | $ | — | $ | 3,007 | ||||||||
Foreign currency exchange contracts | 730 | — | 730 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 3,737 | $ | — | $ | 730 | $ | 3,007 | ||||||||
|
|
|
|
|
|
|
|
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 | ||||||||
Interest Rate Swap Cash Flow Hedges
Fair Value of Contingent Consideration
The fair value of the Company’s liability for contingent consideration relates to the July 2014 acquisition of Medimass Research, Development and Service Kft. and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the estimated future results and a discount rate that reflects both the likelihood of achieving the estimated future results and the Company’s creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Although there is no contractual limit, the fair value of future contingent consideration payments was estimated to be $3 million at both September 30, 2017 and December 31, 2016, based on the Company’s best estimate, as the earnout is based on future sales of certain products, some of which are currently in development, through 2034. There have been no changes in significant assumptions since December 31, 2016 and the change in fair value since then is primarily due to change in time value of money.
8
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
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
Principal hedged currencies include the Euro,euro, Japanese yen, British pound, Mexican peso and Brazilian real. At
September 30, 2017 | December 31, 2016 | |||||||
Other current assets | $ | 213 | $ | 60 | ||||
Other current liabilities | $ | 63 | $ | 730 |
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 | $ | — |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Realized gains (losses) on closed contracts | $ | 2,871 | $ | (1,994 | ) | $ | 3,301 | $ | (9,525 | ) | ||||||
Unrealized (losses) gains on open contracts | (1,258 | ) | 1,003 | 819 | 11 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Cumulative netpre-tax gains (losses) | $ | 1,613 | $ | (991 | ) | $ | 4,120 | $ | (9,514 | ) | ||||||
|
|
|
|
|
|
|
|
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 | $ | — |
9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
$750 million under the May 2014 authorization, which is now completed. The Company has a total of $885 million in remaining authorized capacity for future repurchases under the May 2017 authorization. In addition, the Company repurchased $8$12 million and $6$11 million of common stock related to the vesting of restricted stock units during the nine months ended September 30, 20172023 and October 1, 2016,2022, respectively. TheAs of September 30, 2023, the Company believes that it hashad repurchased an aggregate of 15.2 million shares at a cost of $3.8 billion under the financial flexibility to fund these share repurchases given current cash levelsJanuary 2019 repurchase program and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits.
had a total of $1.0 billion authorized for future repurchases.
Balance at Beginning of Period | Accruals for Warranties | Settlements Made | Balance at End of Period | |||||||||||||
Accrued warranty liability: | ||||||||||||||||
September 30, 2017 | $ | 13,391 | $ | 6,287 | $ | (6,823 | ) | $ | 12,855 | |||||||
October 1, 2016 | $ | 13,349 | $ | 7,101 | $ | (6,915 | ) | $ | 13,535 |
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 |
innovation strategies, resulting in a worldwide workforce reduction,
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 | ||||
AcquiredIn-process Research and Development
During the nine months ended September 30, 2017, the Company incurred a $5 million charge for acquiredin-process research and development relatedtransaction price allocated to a milestone paymentunfulfilled performance obligations for the licensing of certain intellectual property relating to mass spectrometry technologies yetperiod presented. Such amounts are expected to be commercialized and for which there was norecognized in the future alternative use as of the acquisition date. This licensing arrangement is significantly related to new, biologically-focused applications, as well as other applications, and requires the Company to make additional future payments of up to $7 million if certain milestones are achieved, as well as royalties on future net sales.
10
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
2follows (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 | ||
September 30, 2017 | ||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gain | Loss | Value | |||||||||||||
U.S. Treasury securities | $ | 548,736 | $ | 91 | $ | (817 | ) | $ | 548,010 | |||||||
Foreign government securities | 6,976 | — | (6 | ) | 6,970 | |||||||||||
Corporate debt securities | 1,883,688 | 1,474 | (1,061 | ) | 1,884,101 | |||||||||||
Time deposits | 403,113 | — | (1 | ) | 403,112 | |||||||||||
Equity securities | 77 | 70 | — | 147 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,842,590 | $ | 1,635 | $ | (1,885 | ) | $ | 2,842,340 | |||||||
|
|
|
|
|
|
|
| |||||||||
Amounts included in: | ||||||||||||||||
Cash equivalents | $ | 191,190 | $ | — | $ | — | $ | 191,190 | ||||||||
Investments | 2,651,400 | 1,635 | (1,885 | ) | 2,651,150 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,842,590 | $ | 1,635 | $ | (1,885 | ) | $ | 2,842,340 | |||||||
|
|
|
|
|
|
|
|
December 31, 2016 | ||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gain | Loss | Value | |||||||||||||
U.S. Treasury securities | $ | 570,695 | $ | 253 | $ | (635 | ) | $ | 570,313 | |||||||
Foreign government securities | 17,999 | — | (8 | ) | 17,991 | |||||||||||
Corporate debt securities | 1,645,468 | 496 | (2,126 | ) | 1,643,838 | |||||||||||
Time deposits | 199,906 | — | — | 199,906 | ||||||||||||
Equity securities | 77 | 70 | — | 147 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,434,145 | $ | 819 | $ | (2,769 | ) | $ | 2,432,195 | |||||||
|
|
|
|
|
|
|
| |||||||||
Amounts included in: | ||||||||||||||||
Cash equivalents | $ | 124,793 | $ | 1 | $ | — | $ | 124,794 | ||||||||
Investments | 2,309,352 | 818 | (2,769 | ) | 2,307,401 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,434,145 | $ | 819 | $ | (2,769 | ) | $ | 2,432,195 | |||||||
|
|
|
|
|
|
|
|
The estimatedconsist of time deposits that mature in one year or less with an amortized cost and a fair value of marketable debt securities by maturity date is as follows (in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Due in one year or less | $ | 1,574,317 | $ | 1,388,537 | ||||
Due after one year through three years | 864,764 | 843,605 | ||||||
|
|
|
| |||||
Total | $ | 2,439,081 | $ | 2,232,142 | ||||
|
|
|
|
3 Inventories
Inventories are classified as follows (in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Raw materials | $ | 99,832 | $ | 95,430 | ||||
Work in progress | 20,205 | 16,585 | ||||||
Finished goods | 177,817 | 150,667 | ||||||
|
|
|
| |||||
Total inventories | $ | 297,854 | $ | 262,682 | ||||
|
|
|
|
11
$0.9 million at both September 30, 2023 and December 31, 2022.
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 | ||||
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 | ||
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 | |||||||
September 30, 2023 | October 1, 2022 | |||||||
Revenue | $ | 2,174,209 | $ | 2,197,028 | ||||
Net income | 426,238 | 448,102 |
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Weighted- Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Weighted- Average Amortization Period | |||||||||||||||||||
Capitalized software | $ | 424,155 | $ | 273,430 | 5 years | $ | 355,973 | $ | 223,572 | 5 years | ||||||||||||||
Purchased intangibles | 169,023 | 136,491 | 11 years | 162,180 | 127,045 | 11 years | ||||||||||||||||||
Trademarks and IPR&D | 13,924 | — | — | 13,544 | — | — | ||||||||||||||||||
Licenses | 5,837 | 4,502 | 6 years | 4,632 | 3,851 | 6 years | ||||||||||||||||||
Patents and other intangibles | 67,971 | 42,431 | 8 years | 61,646 | 36,452 | 8 years | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 680,910 | $ | 456,854 | 7 years | $ | 597,975 | $ | 390,920 | 7 years | ||||||||||||||
|
|
|
|
|
|
|
|
During
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 | ||||||||||||||||||||
5
In June 2013,
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 |
$270 million outstanding, respectively.
At
12
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The Company had a total of $700 million$1.3 billion of outstanding senior unsecured notes as of September 30, 2017 and December 31, 2016.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, plus the applicable make-whole amount or prepayment premium for Series H and J senior unsecured notes.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.
September 30, 2017 | December 31, 2016 | |||||||
Foreign subsidiary lines of credit | $ | 423 | $ | 297 | ||||
Senior unsecured notes—Series D—3.22%, due March 2018 | 100,000 | — | ||||||
Credit agreements | 125,000 | 125,000 | ||||||
|
|
|
| |||||
Total notes payable and debt | 225,423 | 125,297 | ||||||
|
|
|
| |||||
Senior unsecured notes—Series B—5.00%, due February 2020 | 100,000 | 100,000 | ||||||
Senior unsecured notes—Series D—3.22%, due March 2018 | — | 100,000 | ||||||
Senior unsecured notes—Series E—3.97%, due March 2021 | 50,000 | 50,000 | ||||||
Senior unsecured notes—Series F—3.40%, due June 2021 | 100,000 | 100,000 | ||||||
Senior unsecured notes—Series G—3.92%, due June 2024 | 50,000 | 50,000 | ||||||
Senior unsecured notes—Series H—floating rate*, due June 2024 | 50,000 | 50,000 | ||||||
Senior unsecured notes—Series I—3.13%, due May 2023 | 50,000 | 50,000 | ||||||
Senior unsecured notes—Series J—floating rate**, due May 2024 | 40,000 | 40,000 | ||||||
Senior unsecured notes—Series K—3.44%, due May 2026 | 160,000 | 160,000 | ||||||
Credit agreements | 1,135,000 | 1,005,000 | ||||||
Unamortized debt issuance costs | (2,633 | ) | (3,034 | ) | ||||
|
|
|
| |||||
Total long-term debt | 1,732,367 | 1,701,966 | ||||||
|
|
|
| |||||
Total debt | $ | 1,957,790 | $ | 1,827,263 | ||||
|
|
|
|
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%. |
13
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
6
September 30, 2017 | October 1, 2016 | |||||||
Balance at the beginning of the period | $ | 9,964 | $ | 14,450 | ||||
Net changes in uncertain tax benefits | (2,953 | ) | (3,559 | ) | ||||
|
|
|
| |||||
Balance at the end of the period | $ | 7,011 | $ | 10,891 | ||||
|
|
|
|
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, 2012. However, carryforward tax attributes that were generated in years beginning on or before January 1, 2013 may still be adjusted upon examination by tax authorities if the attributes are utilized.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, 2017,2023, the Company expects to record additional reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of approximately $2$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.
7 Litigation
From time to time,
14
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The Company has been engaged in patent litigation in Germany since 2005. In June 2017, the court issued a verdict against the Company and awarded the plaintiff damages, fees and interest. As a result of the court’s judgment, the Company recorded a $10 million provision for damages and fees estimated to be incurredcustomers, in connection with this litigation. The accrued patent, litigation expense of $17 million and $7 million is in other current liabilities in the consolidated balance sheets at September 30, 2017 and December 31, 2016, respectively.
8 Stock-Based Compensation
The Company maintains various shareholder-approved, stock-based compensation plans which allow for the issuance of incentive ornon-qualified stock options, stock appreciation rights, restricted stockcopyright or other typesintellectual 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 awards (e.g. restricted stock units and performance stock units). In the first quarter of 2017,services by the Company adopted new accounting guidance related to stock-based compensation, see Note 13 for further information regarding the adoption of this standard.
or its subcontractors. The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations based on their grant date fair values. The Company recognizes the expense using the straight-line attribution method. The stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest; therefore, themaximum potential amount of expense has been reduced for estimated forfeitures. The new stock-based compensation accounting guidance offersfuture payments the option of recognizing forfeitures as they occur or estimating forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has electedcould be required to remain consistent with prior periods and estimate forfeitures at the time of grant and, if necessary, revise in subsequent periods in which actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If actual results differ significantly frommake under these estimates, stock-based compensation expense andindemnification agreements is unlimited. Historically, the Company’s results of operations could be materially impacted. In addition, ifcosts to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.
The consolidated statements of operations for the three and nine months ended September 30, 2017 and October 1, 2016 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock purchase plan (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Cost of sales | $ | 726 | $ | 731 | $ | 2,251 | $ | 2,058 | ||||||||
Selling and administrative expenses | 10,768 | 6,944 | 25,558 | 27,526 | ||||||||||||
Research and development expenses | 780 | 692 | 2,259 | 3,020 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total stock-based compensation | $ | 12,274 | $ | 8,367 | $ | 30,068 | $ | 32,604 | ||||||||
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2017 and October 1, 2016, the Company recognized $4 million and $7 million, respectively, of stock-based compensation expense related to the modification of certain stock awards upon the retirement of senior executives.
Stock Options
In determining theestimated fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatilitythese agreements is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population ofnon-qualified stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasuryzero-coupon issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the nine months ended September 30, 2017 and October 1, 2016 is as follows:
15
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
Nine Months Ended | ||||||||
Options Issued and Significant Assumptions Used to Estimate Option Fair Values | September 30, 2017 | October 1, 2016 | ||||||
Options issued (in thousands) | 217 | 86 | ||||||
Risk-free interest rate | 2.2 | % | 1.5 | % | ||||
Expected life in years | 6 | 5 | ||||||
Expected volatility | 0.230 | 0.286 | ||||||
Expected dividends | — | — |
Nine Months Ended | ||||||||
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant | September 30, 2017 | October 1, 2016 | ||||||
Exercise price | $ | 151.24 | $ | 122.65 | ||||
Fair value | $ | 40.49 | $ | 34.63 |
The following table summarizes stock option activity for the plans for the nine months ended September 30, 2017 (in thousands, except per share data):
Number of Shares | Price per Share | Weighted-Average Exercise Price per Share | ||||||||||
Outstanding at December 31, 2016 | 2,697 | $ | 38.09 to $139.51 | $ | 106.55 | |||||||
Granted | 217 | $ | 136.43 to $184.89 | $ | 151.24 | |||||||
Exercised | (751 | ) | $ | 41.20 to $134.37 | $ | 90.28 | ||||||
Canceled | (43 | ) | $ | 87.06 to $136.43 | $ | 115.82 | ||||||
|
| |||||||||||
Outstanding at September 30, 2017 | 2,120 | $ | 38.09 to $184.89 | $ | 116.70 | |||||||
|
|
Restricted Stock
During the nine months ended September 30, 2017, the Company granted eight thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $140.52 per share.
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the nine months ended September 30, 2017 (in thousands, except per share data):
Shares | Weighted-Average Price per Share | |||||||
Unvested at December 31, 2016 | 453 | $ | 110.34 | |||||
Granted | 106 | $ | 154.31 | |||||
Vested | (140 | ) | $ | 106.06 | ||||
Forfeited | (17 | ) | $ | 116.83 | ||||
|
| |||||||
Unvested at September 30, 2017 | 402 | $ | 123.15 | |||||
|
|
Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period.
Performance Stock Units
The Company’s performance stock units are equity compensation awards with a market vesting condition based on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded.
16
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on the performance period of the underlying performance stock units. The risk-free interest rate is the yield currently available on U.S. Treasuryzero-coupon issues with a remaining term approximating the expected term used as the input to the Monte Carlo simulation model. The correlation coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each other during the performance period. The relevant data used to determine the value of the performance stock units granted during 2017 is as follows:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
|
The following table summarizes the unvested performance stock unit award activity for the nine months ended September 30, 2017 (in thousands, except per share data):
Shares | Weighted-Average Fair Value per Share | |||||||
Unvested at December 31, 2016 | 27 | $ | 171.16 | |||||
Granted | 20 | $ | 198.78 | |||||
|
| |||||||
Unvested at September 30, 2017 | 47 | $ | 184.40 | |||||
|
|
9immaterial.
Three Months Ended September 30, 2017 | ||||||||||||
Net Income (Numerator) | Weighted- Average Shares (Denominator) | Per Share Amount | ||||||||||
Net income per basic common share | $ | 136,104 | 79,712 | $ | 1.71 | |||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 809 | (0.02 | ) | ||||||||
|
|
|
|
|
| |||||||
Net income per diluted common share | $ | 136,104 | 80,521 | $ | 1.69 | |||||||
|
|
|
|
|
|
17
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 | |||||||
Three Months Ended October 1, 2016 | ||||||||||||
Net Income (Numerator) | Weighted- Average Shares (Denominator) | Per Share Amount | ||||||||||
Net income per basic common share | $ | 124,856 | 80,677 | $ | 1.55 | |||||||
Effect of dilutive stock option, restricted stock and restricted stock unit securities | — | 711 | (0.02 | ) | ||||||||
|
|
|
|
|
| |||||||
Net income per diluted common share | $ | 124,856 | 81,388 | $ | 1.53 | |||||||
|
|
|
|
|
|
Nine Months Ended September 30, 2017 | ||||||||||||
Net Income (Numerator) | Weighted- Average Shares (Denominator) | Per Share Amount | ||||||||||
Net income per basic common share | $ | 373,483 | 79,908 | $ | 4.67 | |||||||
Effect of dilutive stock option, restricted stock, performance stock unit and and restricted stock unit securities | — | 752 | (0.04 | ) | ||||||||
|
|
|
|
|
| |||||||
Net income per diluted common share | $ | 373,483 | 80,660 | $ | 4.63 | |||||||
|
|
|
|
|
|
Nine Months Ended October 1, 2016 | ||||||||||||
Net Income (Numerator) | Weighted- Average Shares (Denominator) | Per Share Amount | ||||||||||
Net income per basic common share | $ | 347,125 | 80,923 | $ | 4.29 | |||||||
Effect of dilutive stock option, restricted stock and restricted stock unit securities | — | 650 | (0.03 | ) | ||||||||
|
|
|
|
|
| |||||||
Net income per diluted common share | $ | 347,125 | 81,573 | $ | 4.26 | |||||||
|
|
|
|
|
|
Three Months Ended October 1, 2022 | ||||||||||||
Net Income (Numerator) | Weighted- Average Shares (Denominator) | Per Share Amount | ||||||||||
Net income per basic common share | $ | 155,998 | 59,801 | $ | 2.61 | |||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 280 | (0.01 | ) | ||||||||
Net income per diluted common share | $ | 155,998 | 60,081 | $ | 2.60 | |||||||
Nine Months Ended September 30, 2023 | ||||||||||||
Net Income (Numerator) | Weighted- Average Shares (Denominator) | Per Share Amount | ||||||||||
Net income per basic common share | $ | 426,029 | 59,061 | $ | 7.21 | |||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 201 | (0.02 | ) | ||||||||
Net income per diluted common share | $ | 426,029 | 59,262 | $ | 7.19 | |||||||
Nine Months Ended October 1, 2022 | ||||||||||||
Net Income (Numerator) | Weighted- Average Shares (Denominator) | Per Share Amount | ||||||||||
Net income per basic common share | $ | 480,693 | 60,200 | $ | 7.98 | |||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 321 | (0.04 | ) | ||||||||
Net income per diluted common share | $ | 480,693 | 60,521 | $ | 7.94 | |||||||
10
(Loss)
Currency Translation | Unrealized Gain (Loss) on Retirement Plans | Unrealized Gain (Loss) on Investments | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
Balance at December 31, 2016 | $ | (170,566 | ) | $ | (43,894 | ) | $ | (1,820 | ) | $ | (216,280 | ) | ||||
Other comprehensive income (loss), net of tax | 94,209 | 52 | 1,592 | 95,853 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at September 30, 2017 | $ | (76,357 | ) | $ | (43,842 | ) | $ | (228 | ) | $ | (120,427 | ) | ||||
|
|
|
|
|
|
|
|
18
Currency Translation | Unrealized Gain (Loss) on Retirement Plans | Unrealized Gain (Loss) on Derivative Instruments | Accumulated Other Comprehensive Loss | |||||||||||||
Balance at December 31, 2022 | $ | (146,120 | ) | $ | 4,548 | $ | — | $ | (141,572 | ) | ||||||
Other comprehensive (loss) income, net of tax | (4,909 | ) | (204 | ) | 388 | (4,725 | ) | |||||||||
Balance at September 30, 2023 | $ | (151,029 | ) | $ | 4,344 | $ | 388 | $ | (146,297 | ) | ||||||
11 Retirement Plans
The Company sponsors various retirement plans. The summary of the components of net periodic pension costs for the plans for the three and nine months ended September 30, 2017 and October 1, 2016 is as follows (in thousands):
Three Months Ended | ||||||||||||||||||||||||
September 30, 2017 | October 1, 2016 | |||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
Service cost | $ | 113 | $ | 137 | $ | 1,311 | $ | 94 | $ | 116 | $ | 1,253 | ||||||||||||
Interest cost | 1,707 | 155 | 386 | 1,710 | 135 | 423 | ||||||||||||||||||
Expected return on plan | ||||||||||||||||||||||||
assets | (2,574 | ) | (146 | ) | (434 | ) | (2,392 | ) | (130 | ) | (401 | ) | ||||||||||||
Net amortization: | ||||||||||||||||||||||||
Prior service credit | — | — | (47 | ) | — | — | (51 | ) | ||||||||||||||||
Net actuarial loss | 693 | — | 248 | 693 | — | 190 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net periodic pension (benefit) cost | $ | (61 | ) | $ | 146 | $ | 1,464 | $ | 105 | $ | 121 | $ | 1,414 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | ||||||||||||||||||||||||
September 30, 2017 | October 1, 2016 | |||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
Service cost | $ | 338 | $ | 410 | $ | 3,802 | $ | 282 | $ | 348 | $ | 3,721 | ||||||||||||
Interest cost | 5,122 | 464 | 1,112 | 5,200 | 405 | 1,273 | ||||||||||||||||||
Expected return on plan assets | (7,724 | ) | (440 | ) | (1,250 | ) | (7,226 | ) | (390 | ) | (1,206 | ) | ||||||||||||
Net amortization: | ||||||||||||||||||||||||
Prior service credit | — | — | (140 | ) | — | — | (145 | ) | ||||||||||||||||
Net actuarial loss | 2,078 | — | 714 | 2,027 | — | 570 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net periodic pension (benefit) cost | $ | (186 | ) | $ | 434 | $ | 4,238 | $ | 283 | $ | 363 | $ | 4,213 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2017, the Company contributed $4 million to the Company’s U.S. pension plans. During fiscal year 2017, the Company expects to contribute a total of approximately $6 million to $11 million to the Company’s defined benefit plans.
TA
19
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Product net sales: | ||||||||||||||||
Waters instrument systems | $ | 238,431 | $ | 226,296 | $ | 674,768 | $ | 646,733 | ||||||||
Chemistry consumables | 92,879 | 84,114 | 271,606 | 255,312 | ||||||||||||
TA instrument systems | 44,240 | 39,524 | 126,310 | 115,433 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total product sales | 375,550 | 349,934 | 1,072,684 | 1,017,478 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Service net sales: | ||||||||||||||||
Waters service | 172,594 | 160,503 | 498,736 | 471,792 | ||||||||||||
TA service | 17,440 | 16,393 | 50,383 | 49,366 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total service sales | 190,034 | 176,896 | 549,119 | 521,158 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total net sales | $ | 565,584 | $ | 526,830 | $ | 1,621,803 | $ | 1,538,636 | ||||||||
|
|
|
|
|
|
|
|
13 Recent Accounting Standard Changes and Developments
Recently Adopted Accounting Standards
In July 2015, accounting guidance was issued which clarifies the measurement
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||
Product net sales: | ||||||||||||||||
Waters instrument systems | $ | 262,142 | $ | 274,869 | $ | 786,293 | $ | 825,677 | ||||||||
Chemistry consumables | 128,650 | 128,096 | 398,084 | 385,661 | ||||||||||||
TA instrument systems | 57,289 | 61,958 | 178,087 | 174,055 | ||||||||||||
Total product sales | 448,081 | 464,923 | 1,362,464 | 1,385,393 | ||||||||||||
Service net sales: | ||||||||||||||||
Waters service | 238,556 | 220,436 | 700,281 | 660,371 | ||||||||||||
TA service | 25,055 | 23,196 | 74,197 | 67,682 | ||||||||||||
Total service sales | 263,611 | 243,632 | 774,478 | 728,053 | ||||||||||||
Total net sales | $ | 711,692 | $ | 708,555 | $ | 2,136,942 | $ | 2,113,446 | ||||||||
In March 2016, accounting guidance was issued which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidancedestination. Geographic sales information is effective for annual and interim reporting periods beginning after December 15, 2016. The new guidance is required to be adopted on a prospective basis for the statement of operations and the Company has elected to retrospectively apply the cash flow aspects of this new guidance. In addition, the Company has elected to continue to estimate forfeitures at the time of grant and update forfeiture estimates throughout the requisite service period. The Company adopted this standard as of January 1, 2017 and recognized an excess tax benefit related to stock-based compensation which decreased income tax expensepresented below for the three and nine months ended September 30, 20172023 and October 1, 2022 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||
Net Sales: | ||||||||||||||||
Asia: | ||||||||||||||||
China | $ | 102,081 | $ | 140,080 | $ | 333,127 | $ | 399,852 | ||||||||
Japan | 40,069 | 37,095 | 123,943 | 123,222 | ||||||||||||
Asia Other | 96,078 | 102,759 | 288,862 | 289,204 | ||||||||||||
Total Asia | 238,228 | 279,934 | 745,932 | 812,278 | ||||||||||||
Americas: | ||||||||||||||||
United States | 231,773 | 216,380 | 673,033 | 638,908 | ||||||||||||
Americas Other | 43,706 | 40,029 | 131,794 | 123,609 | ||||||||||||
Total Americas | 275,479 | 256,409 | 804,827 | 762,517 | ||||||||||||
Europe | 197,985 | 172,212 | 586,183 | 538,651 | ||||||||||||
Total net sales | $ | 711,692 | $ | 708,555 | $ | 2,136,942 | $ | 2,113,446 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||
Pharmaceutical | $ | 421,535 | $ | 405,959 | $ | 1,233,177 | $ | 1,258,902 | ||||||||
Industrial | 209,449 | 223,968 | 648,754 | 641,882 | ||||||||||||
Academic and government | 80,708 | 78,628 | 255,011 | 212,662 | ||||||||||||
Total net sales | $ | 711,692 | $ | 708,555 | $ | 2,136,942 | $ | 2,113,446 | ||||||||
ended September 30, 2023 and October 1, 2022 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||
Net sales recognized at a point in time: | ||||||||||||||||
Instrument systems | $ | 319,431 | $ | 336,827 | $ | 964,380 | $ | 999,732 | ||||||||
Chemistry consumables | 128,650 | 128,096 | 398,084 | 385,661 | ||||||||||||
Service sales recognized at a point in time (time & materials) | 88,545 | 89,724 | 269,464 | 267,074 | ||||||||||||
Total net sales recognized at a point in time | 536,626 | 554,647 | 1,631,928 | 1,652,467 | ||||||||||||
Net sales recognized over time: | ||||||||||||||||
Service and software maintenance sales recognized over time (contracts) | 175,066 | 153,908 | 505,014 | 460,979 | ||||||||||||
Total net sales | $ | 711,692 | $ | 708,555 | $ | 2,136,942 | $ | 2,113,446 | ||||||||
20
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
In February 2016, accounting guidance was issued regarding the accounting for leases. This new comprehensive lease standard amends various aspects of existing accounting guidance for leases. The core principle of the new guidance will require lessees to present the assets and liabilities that arise from leases on their balance sheets. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company expects that the adoption of this standard will have a material effect on the Company’s balance sheet classifications; however, it is not expected to have an overall material impact on the Company’s results of operations and cash flows.
In June 2016,March 2020, accounting guidance was issued that modifiesfacilitates the recognitioneffects of credit losses relatedreference rate reform on financial reporting. The amendments in the update provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial assets, such as debt securities, trade receivables, net investments in leases,off-balance sheet credit exposures,reporting and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other financial assetstransactions that have the contractual right to receive cash. Current guidance requires the recognition of a credit loss when it is considered probable that a loss event has incurred. The new guidance requires the measurement ofreference LIBOR or another reference rate expected credit losses to be based upon relevant information, including historical experience, current conditions,discontinued because of reference rate reform. In January of 2021, an update was issued to clarify that certain optional expedients and reasonable and supportable forecasts that affect the collectability of the asset. As such, expected credit losses may be recognized soonerexceptions under the newreference rate reform guidance duefor contract modifications and hedge accounting apply to derivatives that are affected by the broader rangediscounting transition. Specifically, certain provisions in the reference rate reform guidance, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of information that will be required to determine credit loss estimates. The new guidance also amends the current other-than-temporary impairment model used for debt securities classified asavailable-for-sale. When the fair value of anavailable-for-sale debt security is below its amortized cost, the new guidance requires the total unrealized loss to be bifurcated into its credit andnon-credit components. Any expected credit losses or subsequent recoveries will be recognized in earnings and any changes not considered credit related will continue to be recognized within other comprehensive income.reference rate reform. This temporary guidance is effective for annual and interim periods beginning afterall entities as of March 12, 2020, through December 15, 2019.31, 2022. In December 2022, an update was issued because the cessation date for overnight LIBOR rates being published was extended to June 30, 2023, which was beyond the current expiration date of this guidance. The update extended the sunset date to December 31, 2024. The Company currently does not expectmay elect to apply this guidance for all contract modifications or eligible hedging relationships during that the adoption of this standard will have a material effect on the Company’s financial position, results of operations and cash flows.
In August 2016, accounting guidance was issued that clarifies the classification oftime period subject to certain cash flows.criteria. The new guidance addresses eight specific areas where current accounting guidance is either unclear or does not specifically address classification issues. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company currently does not believe that it has material reference rate exposure which would require utilizing the adoption ofguidance under this standard will have a material impact on the Company’s cash flows.
In October 2016, accounting guidance was issued regarding intra-entity transfers of assets other than inventory. The new guidance eliminates the deferral of tax effects on intra-entity transfers other than inventorypronouncement and requires an entity to recognize the income tax consequences when the transfer occurs. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of this standard will have on the Company’s financial position, results of operations and cash flows.
In January 2017, accounting guidance was issued that clarifies the definition of a business. The new guidance provides a more robust framework to use in determining when a set of assets and activities is a business, thus narrowing the definition and the amount of transactions accounted for as business combinations. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early application is permitted under certain circumstances. The Company will apply this guidance prospectively to any business combination transactions that take place after adoption of this new guidance.
21
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
In January 2017, accounting guidance was issued that simplifies the accounting for goodwill impairment. The guidance eliminates step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company currently does not expect that the adoption of this standard will have a material effect on the Company’s financial position, results of operations and cash flows.
In March 2017, accounting guidance was issued regarding the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires that an employer disaggregate the service cost component from other components of net benefit cost, with service cost reported in the same line items as other compensation costs and the other components of net benefit costs presented outside income from operations. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company currentlyif adopted does not believe that the adoption of this standard willwould have a material impact on the Company’s financial position, results of operations and cash flows.
In March 2017, accounting guidance was issued to amend the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amortization period for certain callable debt securities will be shortened to end at the earliest call date. This guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.
In May 2017, accounting guidance was issued that clarifies the accounting for a change to the terms or conditions of a share-based payment award. The standard provides more specific guidance for determining when a change to an award requires modification accounting and when it should be deemed purely administrative in nature. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.
22
Item 2: Management’s Management’s Discussion and Analysis of Financial Condition andResults of Operations
Business and Financial Overview
The Company has two operating segments: Waters®TM and TA®TM. Waters products and services primarily consist of high performancehigh-performance liquid chromatography (“HPLC”), ultra performanceultra-performance liquid chromatography (“UPLC®TM” and, together with HPLC, referred to as “LC”), mass spectrometry (“MS”) and precision chemistry consumable products and related services. TA products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Company’s products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and governmentalgovernment customers. These customers use the Company’s products to detect, identify, monitor and measure the chemical, physical and biological composition of materials and to predict the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids in various industrial, consumer goods and healthcare products.
Wyatt Acquisition
On May 16, 2023, the Company completed the acquisition of Wyatt Technology, LLC and its three operating subsidiaries, Wyatt Technology Europe GmbH, Wyatt Technology France and Wyatt Technology UK Ltd. (collectively, “Wyatt”), for a total purchase price of $1.3 billion in cash. Wyatt is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories, and services. The acquisition will expand Waters’ portfolio and increase exposure to large molecule applications. The Company financed this transaction with a combination of cash on its balance sheet and borrowings under its revolving credit facility. The Company’s financial results for the three and nine months ended September 30, 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 three and nine months ended September 30, 20172023 and October 1, 20162022 (dollars in thousands, except per share data):
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | October 1, 2016 | % Change | September 30, 2017 | October 1, 2016 | % Change | September 30, 2023 | October 1, 2022 | % change | September 30, 2023 | October 1, 2022 | % change | |||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||
Product sales | $ | 375,550 | $ | 349,934 | 7 | % | $ | 1,072,684 | $ | 1,017,478 | 5 | % | $ | 448,081 | $ | 464,923 | (4 | %) | $ | 1,362,464 | $ | 1,385,393 | (2 | %) | ||||||||||||||||||||||||
Service sales | 190,034 | 176,896 | 7 | % | 549,119 | 521,158 | 5 | % | 263,611 | 243,632 | 8 | % | 774,478 | 728,053 | 6 | % | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total net sales | 565,584 | 526,830 | 7 | % | 1,621,803 | 1,538,636 | 5 | % | 711,692 | 708,555 | — | 2,136,942 | 2,113,446 | 1 | % | |||||||||||||||||||||||||||||||||
Costs and operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cost of sales | 235,892 | 218,344 | 8 | % | 676,614 | 639,874 | 6 | % | 291,407 | 307,101 | (5 | %) | 876,863 | 899,992 | (3 | %) | ||||||||||||||||||||||||||||||||
Selling and administrative expenses | 135,194 | 123,861 | 9 | % | 395,908 | 382,793 | 3 | % | 186,748 | 164,417 | 14 | % | 555,657 | 483,769 | 15 | % | ||||||||||||||||||||||||||||||||
Research and development expenses | 33,782 | 30,418 | 11 | % | 97,471 | 92,434 | 5 | % | 41,995 | 43,435 | (3 | %) | 130,559 | 127,913 | 2 | % | ||||||||||||||||||||||||||||||||
Litigation provisions | — | — | 10,018 | — | ||||||||||||||||||||||||||||||||||||||||||||
Purchased intangibles amortization | 12,116 | 1,592 | 661 | % | 20,410 | 4,863 | 320 | % | ||||||||||||||||||||||||||||||||||||||||
Acquiredin-process research and development | — | — | 5,000 | — | — | — | — | — | 9,797 | (100 | %) | |||||||||||||||||||||||||||||||||||||
Purchased intangibles amortization | 1,682 | 2,476 | (32 | %) | 5,104 | 7,531 | (32 | %) | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Operating income | 159,034 | 151,731 | 5 | % | 431,688 | 416,004 | 4 | % | 179,426 | 192,010 | (7 | %) | 553,453 | 587,112 | (6 | %) | ||||||||||||||||||||||||||||||||
Operating income as a % of sales | 28.1 | % | 28.8 | % | 26.6 | % | 27.0 | % | 25.2 | % | 27.1 | % | 25.9 | % | 27.8 | % | ||||||||||||||||||||||||||||||||
Other income, net | 328 | 895 | (63 | %) | 1,364 | 2,600 | (48 | %) | ||||||||||||||||||||||||||||||||||||||||
Interest expense, net | (5,234 | ) | (6,281 | ) | (17 | %) | (16,329 | ) | (18,469 | ) | (12 | %) | (26,559 | ) | (9,524 | ) | 179 | % | (56,174 | ) | (27,362 | ) | 105 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Income from operations before income taxes | 153,800 | 145,450 | 6 | % | 415,359 | 397,535 | 4 | % | ||||||||||||||||||||||||||||||||||||||||
Income before income taxes | 153,195 | 183,381 | (16 | %) | 498,643 | 562,350 | (11 | %) | ||||||||||||||||||||||||||||||||||||||||
Provision for income taxes | 17,696 | 20,594 | (14 | %) | 41,876 | 50,410 | (17 | %) | 18,643 | 27,383 | (32 | %) | 72,614 | 81,657 | (11 | %) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Net income | $ | 136,104 | $ | 124,856 | 9 | % | $ | 373,483 | $ | 347,125 | 8 | % | $ | 134,552 | $ | 155,998 | (14 | %) | $ | 426,029 | $ | 480,693 | (11 | %) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Net income per diluted common share | $ | 1.69 | $ | 1.53 | 10 | % | $ | 4.63 | $ | 4.26 | 9 | % | $ | 2.27 | $ | 2.60 | (13 | %) | $ | 7.19 | $ | 7.94 | (9 | %) |
Sales
28
The Company’s net sales increased less than one percent in 2017 grew 7% and 5% for the third quarter andyear-to-date periods, respectively,of 2023, as compared to the third quarter of 2022, with the same periods in 2016. Foreignforeign currency translation increased sales growth by 1% for the quarter and reduced sales growth 1%year-to-date. Sales growth was balanced across all product and customer end markets for both the quarter andyear-to-date. Recent acquisitions had a minimalhaving an insignificant impact on sales growth for both the quarter andyear-to-date.
In 2017, instrument systems sales grew 6% and 5% for the quarter andyear-to-date, respectively, while recurring revenues (combined sales of chemistry consumables and services) grew 8% and 6%, respectively. Instrument system sales growth for both the quarter andyear-to-date are attributed to an increase in customer demand for ourLC-MS and TA instrument systems.
23
Our recurring revenues continue to benefit from a higher installed customer base, which has resulted in increased chemistry consumable and service sales.growth. For the quarter, foreign currency translation increased both instrument system and recurring revenue sales growth by 1%.Year-to-date, foreign currency translation reduced recurring revenue sales growth by 1% and had a minimal impact on instrument systems sales growth. In addition, recurring revenues were negatively impacted by two fewer calendar days in the first nine months of 20172023, the Company’s net sales increased 1% with the effect of foreign currency translation decreasing sales growth by 2% as compared to the first nine months of 2016.
Geographically,2022. In both the third quarter and first nine months of 2023, the Company’s net sales were negatively impacted by a significant reduction in sales in EuropeChina due to lower customer demand for our products. Excluding China, the Company’s net sales increased 20%7% and 8% in 20175% for the third quarter andyear-to-date, respectively, on strong demand from pharmaceutical customers and the favorable effect first nine months of foreign currency translation, which2023, respectively. The Wyatt acquisition increased sales growth by 7%4% and 2% for the third quarter and reducedfirst nine months of 2023, respectively.
For the first nine months of 2023, the Company had the same amount of calendar days when compared to the first nine months of 2022. At current foreign currency exchange rates, the Company expects that foreign currency translation will be negative to sales for the remainder of 2023.
Instrument system sales decreased 5% and 4% for the third quarter and first nine months of 2023, respectively, as sales growth in the U.S., Latin America and Europe was offset by weaker customer demand in Asia (primarily in China). Instrument system sales in China declined 32% and 23% in the third quarter and first nine months of 2023, respectively, due to lower customer demand for our products. Excluding China, the Company’s instrument system sales increased 4% and 3% in the third quarter and first nine months of 2023, respectively. The decline in China’s instrument sales can be attributed to the decline in customer demand. The Wyatt acquisition increased instrument system sales growth by 1%year-to-date. Sales in Asia grew 7% and 11% in 20173%, for the quarter andyear-to-date, respectively, with strong demand continuing in China for our products and services, while sales in India were negatively impacted by lower customer demand resulting from the implementation of the new Goods and Services Tax (“GST”) system.
Sales in 2017 in the U.S. increased 1% for thethird quarter and declined 2%year-to-date, due to lower demand from pharmaceutical customers in this market as compared to the prior year. Sales in 2017 to the restfirst nine months of the world decreased 7% in the quarter and2023, respectively. Foreign currency translation increased 1%year-to-date as these markets were somewhat negatively impactedinstrument system sales growth by natural disasters1% in the third quarter.
The recent natural disastersquarter of 2023 and decreased instrument system sales growth by 1% in the U.S., Mexicofirst nine months of 2023.
Recurring revenues (combined sales of precision chemistry consumables and Puerto Rico, along with the impact of the GST system implementation in India, did not have a significant impact on our overall sales growth rates in the third quarter; however, it is unclear when the business climate in those affected areas will return to normal in the future.
In 2017, sales to pharmaceutical customers increased 7% and 6% for the quarter andyear-to-date, respectively, as compared to the corresponding prior year periods, with the effect of foreign currency translation increasing sales to pharmaceutical customers by 2% for the quarter and a minimal impactyear-to-date. This increase was driven by the increasing need for global access to prescription drugs and the testing of newer and more complex biologic drugs. Sales to pharmaceutical customers was negatively impacted by a decline in sales in the U.S., which we believe is the result of macroeconomic and governmental policy uncertainties as well as natural disasters experienced in the third quarter.
Combined sales to industrial customers (including sales to industrial chemical, nutritional safety and environmental customers) in 2017services) increased 6% and 5% for the third quarter andyear-to-date, first nine months of 2023, respectively, due to the increasing need for food quality and food safety testing and fine chemical applications. Combined globalwith foreign currency translation having a minimal impact on sales to governmental and academic customers increased 15% and 4% in 2017 for the quarter andyear-to-date, respectively. Sales to governmental and academic customers are highly dependent on when institutions receive the funding to purchase our instrument systems and, as such, sales growth rates can vary significantly from quarter to quarter.
Operating income increased 5% and 4% for the quarter andyear-to-date, respectively, in 2017. These increases were primarily a result of the positive effect achieved from higher sales volume and controlled spending being partially offset by a $4 million charge related to the acceleration of certain stock awards in the third quarter and decreasing sales growth by 2% for the first nine months of 2017. The 2017year-to-date operating income2023. Service revenues grew 8% and 6% for the third quarter and first nine months of 2023, respectively. Wyatt’s service revenues added 3% and 1% to service revenue growth for the third quarter and first nine months of 2023, respectively. Chemistry sales growth was alsoflat and increased 3% for the third quarter and first nine months of 2023, respectively. Chemistry sales were significantly impacted by $12 millionthe lower customer demand in China for our products. Excluding the impact of severance costsChina, the Company’s chemistry sales grew 9% and 6%, for the third quarter and first nine months of 2023, respectively.
Operating income decreased 7% and 6% for the third quarter and first nine months of 2023, respectively, primarily associated with the closure of a facilitydue to higher salary expenses related to merit compensation and an increase in Germany andseverance-related costs associated with providing U.S. employeesa workforce reduction, partially offset by lower incentive compensation costs. In July 2023, the Company made organizational changes to better align its resources with an early retirement transition incentive. In addition,year-to-date operating incomeits growth and innovation strategies, resulting in 2017 wasa worldwide workforce reduction that has impacted by $10approximately 5% of the Company’s employees. The Company incurred approximately $23 million and $27 million of litigation settlement provisions and relatedseverance-related costs and a $5 million charge relating to a milestone payment for the licensing of certain intellectual property relating to mass spectrometry technologies yet to be commercialized. The change inyear-to-date operating income in 2017 as compared with 2016 was also impacted by the $7 million expense incurred in the first quarter of 2016 related to the acceleration of certain stock awards.
In the first quarter of 2017, the Company adopted a new accounting standard that requires the excess tax benefit or deficiency on stock-based compensation to be included in the statement of operations as a component of the provision for income taxes, whereas previously it was recognized in equity. As a result, the Company recorded a tax benefit on stock-based compensation in the third quarter and first nine months of 2017 that decreased income tax expense by $32023, respectively. The Company paid $12 million and $14 million of severance-related costs in the third quarter and first nine months of 2023, respectively, with the majority of the remaining costs to be paid in the fourth quarter of 2023 and 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. In addition, the Company’s operating income was impacted by the Wyatt acquisition due diligence and integration costs of $1 million and $13 million for the third quarter andyear-to-date, first nine months of 2023, respectively, and added $0.03the Wyatt acquisition related bonus expense of $8 million and $0.18 to net$11 million for the third quarter and first nine months of 2023, respectively. The negative effect of foreign currency translation lowered operating income per diluted share,by approximately $2 million and $18 million for the third quarter and first nine months of 2023, respectively. Additionally, this standard required the Company to present the tax benefit in the Consolidated Statements of Cash Flows as an operating activity, whereas in the past this tax benefit was reflected as a financing activity. All prior periods presented in the cash flow have been adjusted accordingly.
The Company generated $505$373 million and $469$413 million of net cash flows from operationsoperating activities in the first nine months of 20172023 and 2016,2022, respectively. The increase in operatingNet cash flow was primarily a result of the increase in sales and net income. Cash flows used in investing activities included $1.3 billion for the Wyatt acquisition in the first nine months of 2023 and capital expenditures related to property, plant, equipment and software capitalization of $55$119 million and $72$114 million for the first nine months of 2017 and 2016,
24
respectively. The 2017 cash flow from investing activities included a $7 million payment for an investment in a developer of analytical system solutions used to make measurements, predict stability and accelerate product discovery in the routine analytic, process monitoring and quality control release processes for life science and biopharmaceutical markets. In addition, the Company made a milestone payment of $5 million in 2017 to acquire and license intellectual property.
Within cash flows used in financing activities, the Company received $73 million and $59 million of proceeds from stock plans in the first nine months of 20172023 and 2016,2022, respectively. In May 2017,
The Company funded the Wyatt acquisition with a combination of cash on hand and borrowings under our revolving credit facility. The Company’s Boardoutstanding debt on September 30, 2023 was $2.5 billion, a change of Directors authorized$1.0 billion from the end of the first quarter of 2023. The Company estimates that its interest expense for the full year 2023 will be approximately $80 million. As a result of the Wyatt acquisition, the Company to repurchase up to $1 billion oftemporarily suspended its outstanding common stock over a three-year period. The Company repurchased $238 million and $236 million of the Company’s outstanding common stockshare buyback program in the first nine months of 2017 and 2016, respectively, under authorized share repurchase programs. The Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits.quarter 2023.
29
Results of Operations
Sales by Geography
Geographic sales information is presented below for the three and nine months ended September 30, 20172023 and October 1, 20162022 (dollars in thousands):
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | October 1, 2016 | % change | September 30, 2017 | October 1, 2016 | % change | September 30, 2023 | October 1, 2022 | % change | September 30, 2023 | October 1, 2022 | % change | |||||||||||||||||||||||||||||||||||||
Net Sales: | ||||||||||||||||||||||||||||||||||||||||||||||||
United States | $ | 171,053 | $ | 168,614 | 1 | % | $ | 474,661 | $ | 485,945 | (2 | %) | ||||||||||||||||||||||||||||||||||||
Europe | 153,232 | 128,191 | 20 | % | 427,406 | 396,540 | 8 | % | ||||||||||||||||||||||||||||||||||||||||
Asia: | ||||||||||||||||||||||||||||||||||||||||||||||||
China | 96,141 | 84,051 | 14 | % | 275,367 | 234,632 | 17 | % | $ | 102,081 | $ | 140,080 | (27 | %) | $ | 333,127 | $ | 399,852 | (17 | %) | ||||||||||||||||||||||||||||
Japan | 42,202 | 42,191 | — | 125,058 | 126,305 | (1 | %) | 40,069 | 37,095 | 8 | % | 123,943 | 123,222 | 1 | % | |||||||||||||||||||||||||||||||||
Asia Other | 70,996 | 69,273 | 2 | % | 219,723 | 196,399 | 12 | % | 96,078 | 102,759 | (7 | %) | 288,862 | 289,204 | — | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total Asia | 209,339 | 195,515 | 7 | % | 620,148 | 557,336 | 11 | % | 238,228 | 279,934 | (15 | %) | 745,932 | 812,278 | (8 | %) | ||||||||||||||||||||||||||||||||
Other | 31,960 | 34,510 | (7 | %) | 99,588 | 98,815 | 1 | % | ||||||||||||||||||||||||||||||||||||||||
Americas: | ||||||||||||||||||||||||||||||||||||||||||||||||
United States | 231,773 | 216,380 | 7 | % | 673,033 | 638,908 | 5 | % | ||||||||||||||||||||||||||||||||||||||||
Americas Other | 43,706 | 40,029 | 9 | % | 131,794 | 123,609 | 7 | % | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total Americas | 275,479 | 256,409 | 7 | % | 804,827 | 762,517 | 6 | % | ||||||||||||||||||||||||||||||||||||||||
Europe | 197,985 | 172,212 | 15 | % | 586,183 | 538,651 | 9 | % | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total net sales | $ | 565,584 | $ | 526,830 | 7 | % | $ | 1,621,803 | $ | 1,538,636 | 5 | % | $ | 711,692 | $ | 708,555 | — | $ | 2,136,942 | $ | 2,113,446 | 1 | % | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Geographically, the Company’s sales growth in the third quarter and first nine months of 2023 was broad-based across most major regions, with the exception of China, which declined 27% and 17%, respectively. The decline in China was primarily driven by lower demand for our instrument systems and chemistry products. Excluding China, the Company’s net sales increased 7% and 5% for the third quarter and first nine months of 2023, respectively. Foreign currency translation had minimal impact on sales growth in the third quarter and decreased sales growth by 2% in the first nine months of 2023.
During the third quarter of 2023, sales increased 7% in the U.S. and 15% in Europe, while decreasing 15% in Asia driven by weakness in China and the negative effect of currency translation on sales in Japan. In the third quarter of 2017,2023, foreign currency translation increased sales growth in Europe by 7% and decreased sales growth in Asia by 4%. This decline in Asia was primarily driven by the increase8% decline in sales in the U.S. was driven primarily by TA instrument system and serviceJapan due to foreign currency translation. Wyatt’s sales to industrial markets. This increase partially offset the decline experiencedcontributed 9% of sales growth in the U.S. and 5% of sales growth in Europe in the third quarter of 2023. During the first halfnine months of 2017. Europe’s2023, sales growth was broad-based across all productincreased 5% in the U.S. and customer classes,9% in Europe, while decreasing 8% in Asia driven by weakness in China, with the effect of foreign currency translation increasing sales growth in 2017Europe by 7% for the quarter1% and decreasing sales growth in Asia by 1%year-to-date. China achieved strong4%, which includes a 9% decrease in sales growth across all product classes, which was drivenin Japan resulting from foreign currency translation.
30
Sales by Trade Class
Net sales to pharmaceuticalby customer class are presented below for the three and industrial customers. Innine months ended September 30, 2023 and October 1, 2022 (dollars in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2023 | October 1, 2022 | % change | September 30, 2023 | October 1, 2022 | % change | |||||||||||||||||||
Pharmaceutical | $ | 421,535 | $ | 405,959 | 4 | % | $ | 1,233,177 | $ | 1,258,902 | (2 | %) | ||||||||||||
Industrial | 209,449 | 223,968 | (6 | %) | 648,754 | 641,882 | 1 | % | ||||||||||||||||
Academic and government | 80,708 | 78,628 | 3 | % | 255,011 | 212,662 | 20 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total net sales | $ | 711,692 | $ | 708,555 | — | $ | 2,136,942 | $ | 2,113,446 | 1 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2017, sales growth in Asia Other was impacted by customers in India delaying purchases of our products as a result of the nationwide implementation of a new GST system. Sales growth in Japan in 2017 was driven by2023, sales to pharmaceutical governmentalcustomers increased 4%, as growth in the U.S. and academic customers andEurope was negatively impactedoffset by the effect ofweakness in China, with foreign currency translation which reducedincreasing pharmaceutical sales growth by 9%1% and 4% for the quarter andyear-to-date, respectively. SalesWyatt contributing 6% to the rest of the world were impacted by a decrease in demand fromCompany’s pharmaceutical sales growth. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, decreased 6% in the third quarter resultingof 2023, with foreign currency translation having minimal impact on sales growth and Wyatt contributing 1% to industrial sales growth. Combined sales to academic and government customers increased 3% in the third quarter of 2023, with foreign currency translation having minimal impact on sales growth and Wyatt contributing 5% to the Company’s 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 natural disasters.period to period.
During the first nine months of 2023, sales to pharmaceutical customers decreased 2%, primarily driven by weakness in customer demand in China, with foreign currency translation decreasing pharmaceutical sales growth by 2%. Combined sales to industrial customers increased 1%, with foreign currency translation decreasing sales growth by 1%. Combined sales to academic and government customers increased 20%, with foreign currency translation decreasing sales growth by 2%.
2531
Waters Products and Services Net Sales
Net sales for Waters products and services arewere as follows for the three and nine months ended September 30, 20172023 and October 1, 20162022 (dollars in thousands):
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||
Three Months Ended | September 30, 2023 | % of Total | October 1, 2022 | % of Total | % change | |||||||||||||||||||||||||||||||||||
September 30, 2017 | % of Total | October 1, 2016 | % of Total | % change | ||||||||||||||||||||||||||||||||||||
Waters instrument systems | $ | 238,431 | 47 | % | $ | 226,296 | 48 | % | 5 | % | $ | 262,142 | 42 | % | $ | 274,869 | 44 | % | (5 | %) | ||||||||||||||||||||
Chemistry consumables | 92,879 | 19 | % | 84,114 | 18 | % | 10 | % | 128,650 | 20 | % | 128,096 | 21 | % | — | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total Waters product sales | 331,310 | 66 | % | 310,410 | 66 | % | 7 | % | 390,792 | 62 | % | 402,965 | 65 | % | (3 | %) | ||||||||||||||||||||||||
Waters service | 172,594 | 34 | % | 160,503 | 34 | % | 8 | % | 238,556 | 38 | % | 220,436 | 35 | % | 8 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total Waters net sales | $ | 503,904 | 100 | % | $ | 470,913 | 100 | % | 7 | % | $ | 629,348 | 100 | % | $ | 623,401 | 100 | % | 1 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
Nine Months Ended | September 30, 2023 | % of Total | October 1, 2022 | % of Total | % change | |||||||||||||||||||||||||||||||||||
September 30, 2017 | % of Total | October 1, 2016 | % of Total | % change | ||||||||||||||||||||||||||||||||||||
Waters instrument systems | $ | 674,768 | 47 | % | $ | 646,733 | 47 | % | 4 | % | $ | 786,293 | 42 | % | $ | 825,677 | 44 | % | (5 | %) | ||||||||||||||||||||
Chemistry consumables | 271,606 | 18 | % | 255,312 | 19 | % | 6 | % | 398,084 | 21 | % | 385,661 | 21 | % | 3 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total Waters product sales | 946,374 | 65 | % | 902,045 | 66 | % | 5 | % | 1,184,377 | 63 | % | 1,211,338 | 65 | % | (2 | %) | ||||||||||||||||||||||||
Waters service | 498,736 | 35 | % | 471,792 | 34 | % | 6 | % | 700,281 | 37 | % | 660,371 | 35 | % | 6 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total Waters net sales | $ | 1,445,110 | 100 | % | $ | 1,373,837 | 100 | % | 5 | % | $ | 1,884,658 | 100 | % | $ | 1,871,709 | 100 | % | 1 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Waters products and service sales increased 1% for both the third quarter and first nine months of 2023, with the effect of foreign currency translation having minimal impact on sales growth in the third quarter, while decreasing Waters sales growth by 1% in the first nine months of 2023. The increase inWyatt acquisition increased Waters products and service sales by approximately 5% and 2% for the third quarter and first nine months of 2023, respectively. Waters instrument system sales (LC and MS technology-based)decreased by 5% for both the third quarter andyear-to-date first nine months of 2023 due to weaker customer demand in 2017China. Waters instrument system sales in China declined 35% and 25% for the third quarter and first nine months of 2023, respectively. Foreign currency translation had minimal impact on Waters instrument system sales growth in the third quarter while decreasing sales growth by 1% for the first nine months of 2023. Wyatt’s instrument system sales contributed 8% and 4% to Waters instrument system sales growth for the third quarter and first nine months of 2023, respectively.
Waters chemistry consumables sales were significantly impacted by the lower customer demand in China for our products. Excluding the impact of China, the Company’s chemistry sales grew 9% and 6% for the third quarter and first nine months of 2023, respectively. This sales growth was primarily attributabledue to higher sales of LC instrument systems, as well as otherLC-MS systems that incorporate the Company’s tandem quadrupole technologies. Chemistry consumables sales increased oncontinued strong demand in most major geographies, driven by the uptake in columns and application-specific testing kits. kits to pharmaceutical customers, partially offset by the negative impact from foreign currency translation, which decreased chemistry sales growth by 1% and 2% in the third quarter and first nine months of 2023, respectively.
Waters service sales benefited from increased salesin the third quarter and first nine months of service plans and2023 due to higher service demand billings to a higher installed base of customers. In total,billing, partially offset by the negative impact from foreign currency translation, increased Waters product and service sales growth in 2017 by 1% for the quarter and reduced Waters product andwhich decreased service sales growth by 1%year-to-date.
In2% in the first nine months of 2023. Wyatt service revenues added 3% and 2% to Waters service revenue growth for the third quarter and first nine months of 2017, Waters sales in Europe increased 20%2023, respectively.
32
TA Product and 7% for the quarter andyear-to-date, respectively, as the effect of foreign currency translation increased sales in Europe by 6% for the quarter and decreased sales by 2%year-to-date. Waters sales in Asia increased 6% and 11% for the quarter andyear-to-date, respectively, and were primarily driven by China on strong demand for the Company’s products and services from pharmaceutical and industrial customers. In the third quarter, Waters sales growth in India was impacted by customer ordering delays caused by the implementation of a new GST system. Waters sales in Japan were flat for the quarter and decreased 1%year-to-date, as the effect of foreign currency translation decreased sales in Japan by 9% and 5%, respectively. Waters sales in the U.S. were flat for the quarter and decreased 3%year-to-date due to lower demand from pharmaceutical customers compared to the third quarter of 2016. Waters sales in the rest of the world decreased 4% in the quarter and increased 2%year-to-date. Both the U.S. and the rest of the world sales were negatively impacted by natural disasters in the third quarter.
TAServices Net Sales
Net sales for TA products and services arewere as follows for the three and nine months ended September 30, 20172023 and October 1, 20162022 (dollars in thousands):
Three Months Ended | ||||||||||||||||||||
September 30, 2017 | % of Total | October 1, 2016 | % of Total | % change | ||||||||||||||||
TA instrument systems | $ | 44,240 | 72 | % | $ | 39,524 | 71 | % | 12 | % | ||||||||||
TA service | 17,440 | 28 | % | 16,393 | 29 | % | 6 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total TA net sales | $ | 61,680 | 100 | % | $ | 55,917 | 100 | % | 10 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
Three Months Ended | ||||||||||||||||||||
September 30, 2023 | % of Total | October 1, 2022 | % of Total | % change | ||||||||||||||||
TA instrument systems | $ | 57,289 | 70 | % | $ | 61,958 | 73 | % | (8 | %) | ||||||||||
TA service | 25,055 | 30 | % | 23,196 | 27 | % | 8 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total TA net sales | $ | 82,344 | 100 | % | $ | 85,154 | 100 | % | (3 | %) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Nine Months Ended | ||||||||||||||||||||
September 30, 2023 | % of Total | October 1, 2022 | % of Total | % change | ||||||||||||||||
TA instrument systems | $ | 178,087 | 71 | % | $ | 174,055 | 72 | % | 2 | % | ||||||||||
TA service | 74,197 | 29 | % | 67,682 | 28 | % | 10 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total TA net sales | $ | 252,284 | 100 | % | $ | 241,737 | 100 | % | 4 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
26
Nine Months Ended | ||||||||||||||||||||
September 30, 2017 | % of Total | October 1, 2016 | % of Total | % change | ||||||||||||||||
TA instrument systems | $ | 126,310 | 71 | % | $ | 115,433 | 70 | % | 9 | % | ||||||||||
TA service | 50,383 | 29 | % | 49,366 | 30 | % | 2 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total TA net sales | $ | 176,693 | 100 | % | $ | 164,799 | 100 | % | 7 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
The increase in TA instrument system sales declined 3% for the third quarter of 20172023 due to lower customer demand for TA products and services while TA sales grew 4% for the first nine months of 2023. For the third quarter, TA’s sales geographically were weak in the U.S., China and Asia Other, declining 8%, 5% and 13%, respectively, but were strong in Europe and Japan, which grew 7% and 19%, respectively. Foreign currency translation increased sales by 3% in Asia Other and 9% in Europe, while decreasing sales by 1% in China and 11% in Japan. For the first nine months of 2023, TA sales growth was broad-based across most major geographies, except for China and Asia Other, which declined 11% and 15%, respectively. The sales growth for the first nine months of 2023 was primarily driven by strong customer demand for our thermal growth being fueled by continued acceptance of the recently introduced Discovery product line, while rheology saw strong performance across the entire range of productsanalysis instruments and service, particularly in the portfolio. Recent acquisitions increased TA sales by 3%U.S. and 2% for the quarter andyear-to-date, respectively. The effect of foreignEurope. Foreign currency translation increased TA sales in 2017 by 1% for the third quarter and had a minimal impactyear-to-date.
Geographically, TA sales in Asia in 2017 increased 19% and 13% for the quarter andyear-to-date, respectively. TA sales in China increased 16% and 11% for the quarter andyear-to-date, respectively. TA sales in Japan decreased 1% and 4% for the quarter andyear-to-date, respectively, as the effect of foreign currency translation decreased TA Japan sales by 8% and 2%, respectively. TA sales in the U.S. increased 10% and 3% for the quarter andyear-to-date, respectively. TA sales in Europe increased 11% for both the quarter andyear-to-date, with the effects of foreign currency translation increasing European sales by 5% for the quarter and reducing European sales by 1%year-to-date. TA sales to the rest of the world decreased 32% and 12% for the quarter andyear-to-date, respectively.first nine months of 2023.
Cost of Sales
For bothCost of sales decreased by 5% and 3% in the 2017third quarter andyear-to-date periods, the increase first nine months of 2023, respectively. The decrease in cost of sales as compared within these periods is primarily due to the 2016 periods was consistent with the increasechange in sales volume, as well as product mix dynamics. In 2017,and the effect of foreign currency translation increased cost of sales by 2% inlower material and freight costs for both the third quarter and had a minimal impact onyear-to-date costfirst nine months of sales.
2023. Cost of sales areis 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 that the impact of foreign currency translation may increase sales and still negatively impactto be neutral to gross profit during the rest of 2017, as the foreign currency translation benefit expected from a weaker Euro and Japanese yen would be somewhat mitigated by the unfavorable effect of a stronger British pound on the Company’s U.K. manufacturing costs.2023.
Selling and Administrative Expenses
In 2017, sellingSelling and administrative expenses increased 9%14% and 3% for the quarter andyear-to-date, respectively. Overall, this change is attributable to the cost of headcount additions, higher merit compensation costs, severance incurred in connection with the closure of a facility in Germany and an early retirement transition incentive program. The Company incurred $1 million and $12 million of severance-related costs in the 2017 quarter andyear-to-date, respectively. In addition, selling and administrative expenses included a $4 million and $7 million expense related to the acceleration of certain stock awards15% in the third quarter of 2017 and first nine months of 2023, respectively. The increase in these periods is primarily driven by severance-related costs in connection with a reduction in workforce, which increased expenses by 14% and 5%; the Wyatt acquisition due diligence and integration costs, which increased expenses by 1% and 3%; and the Wyatt acquisition-related bonus expense, which increased expenses by 5% and 2%, in each case, for the third quarter and first nine months of 2016,2023, respectively. These increases were partially offset by lower incentive compensation costs. The effect of foreign currency translation increased selling and administrative expenses by 2% infor the third quarter and decreased selling and administrative expenses by 1%year-to-date. for the first nine months of 2023.
As a percentage of net sales, selling and administrative expenses were 23.9%26.2% and 24.4%26.0% for the 2017third quarter andyear-to-date, first nine months of 2023, respectively, and 23.5%23.2% and 24.9%22.9% for the 2016third quarter andyear-to-date, first nine months of 2022, respectively.
Research and Development Expenses
Research and development expenses decreased 3% in 2017 increased 11% and 5% for the third quarter andyear-to-date, respectively, due to an increase increased 2% in additional headcount,the first nine months of 2023. The decrease in third quarter research and development expenses was driven by lower incentive compensation costs, which were offset by annual merit compensationincreases and costs associated with new products and the development of new product and technology initiatives.Year-to-date, these increases were partially offset by the favorable effect The impact of foreign currency translation, which decreased the Company’s U.K.-based research and developmentexchange increased expenses by 5% from1% for the weakeningthird quarter and decreased expenses by 2% for the first nine months of 2023.
33
Purchased Intangibles Amortization
The increase in purchased intangible amortization of $11 million and $16 million in the British pound.third quarter and first nine months of 2023, respectively, can be attributed to the Wyatt acquisition intangible assets.
Litigation ProvisionsAcquired In-Process Research & Development
In 2022, the Company completed an asset acquisition in which the CDMS technology assets of Megadalton were acquired for approximately $10 million in total purchase price, of which $5 million was paid at closing and the remaining $4 million will be paid in the future at various dates through 2029.
Other Income, net
During the first nine months of 2017,2022, the Company incurred asold an equity investment for $10 million litigation provision related toin cash and recorded a gain on the issuancesale of a verdictapproximately $7 million in a German patent litigation case.
Interest Expense, net
27
AcquiredIn-Process ResearchThe increase in interest expense for both the third quarter and Development
During the first nine months of 2017,2023 can be primarily attributed to the Company incurred a $5 million charge for acquiredin-process research and development related to milestone payments associated with a licensing arrangement for certain intellectual property relating to mass spectrometry technologies yet to be commercialized and for which there was no future alternative use as of the acquisition date. The licensing arrangement is significantly related to new, biologically-focused applications, as well as other applications, and requiresadditional borrowings by the Company to make additional future payments of up to $7 million if certain milestones are achieved, as well as royalties on future net sales. These future payments may be significant and may occur over multiple years.
Interest Expense, Net
fund the Wyatt acquisition. The decrease in netCompany estimates that its interest expense in 2017 was primarily attributable to higher income earned on increased cash, cash equivalents and investment balances.for the full year 2023 will be approximately $80 million.
Provision for Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the Company’s marginal effectivestatutory tax rates were approximately 37.5%21%, 12.5%, 19.25%25% and 0%17%, respectively, as of September 30, 2017.2023. The Company has a contractualDevelopment and Expansion Incentive in Singapore that provides a concessionary income tax rate of 0%5% on qualifying activities in Singaporecertain types of income for the period April 1, 2021 through March 2021, based upon the achievement of certain contractual milestones, which the Company expects to continue to meet.31, 2026. The current statutory tax rate in Singapore is 17%. For the first nine months of 2017 and 2016, the effect of applying the contractualconcessionary income tax rate rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income by $18$11 million and $16$15 million respectively, and increased the Company’s net income per diluted share by $0.23$0.18 and $0.20, respectively.
The Company’s effective tax rate is influenced by many significant factors, including, but not limited to, the wide range of income tax rates in jurisdictions in which the Company operates; sales volumes and profit levels in each tax jurisdiction; changes in tax laws, tax rates and policies; the outcome of various ongoing tax audit examinations; and the impact of foreign currency transactions and translation. As a result of variability in these factors, the Company’s effective tax rates in the future may not be similar to the effective tax rates$0.25 for the current or prior years.third quarter of 2023 and 2022, respectively.
The Company’s effective tax rate for the third quarter of 2023 and 2022 was 11.5%12.2% and 14.2% for 2017 and 2016, respectively.Year-to-date, the Company’s effective tax rate was 10.1% and 12.7% for 2017 and 2016,14.9%, respectively. The decrease in the effective tax rate in 2017 as compared to 2016 can be primarily attributed to the adoptionimpact of new accounting guidance related to stock-based compensation, which decreased incomediscrete tax expense by $3 millionbenefits in the current year and $14 million for the quarter andyear-to-date, respectively, and decreased the Company’s effective tax rate by 1.7 percentage points and 3.4 percentage points, respectively. See Note 13 for further information regarding the adoption of this standard. In addition, the provision for income tax for the first quarter of 2016 included a quarter-specific tax benefit associated with modifications to certain stock-based compensation awards. The remaining differences between the effective tax rate in 2017 and 2016 can be primarily attributed to differences in the proportionate amounts ofpre-tax income recognized in jurisdictions with different effective tax rates.
The Company’s effective tax rate for the first nine months of 2023 and 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.
2834
Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2023 | October 1, 2022 | |||||||||||||
Net income | $ | 373,483 | $ | 347,125 | $ | 426,029 | $ | 480,693 | ||||||||
Depreciation and amortization | 78,249 | 72,364 | 117,845 | 99,105 | ||||||||||||
Stock-based compensation | 30,068 | 32,604 | 32,224 | 30,929 | ||||||||||||
Deferred income taxes | 3,046 | 4,924 | 267 | (20,836 | ) | |||||||||||
Acquired in-process research and development and other non-cash items | — | 10,003 | ||||||||||||||
Change in accounts receivable | 53,358 | 39,471 | 100,327 | (39,098 | ) | |||||||||||
Change in inventories | (26,217 | ) | (39,988 | ) | (81,415 | ) | (113,211 | ) | ||||||||
Change in accounts payable and other current liabilities | (23,066 | ) | (29,179 | ) | (130,065 | ) | (4,952 | ) | ||||||||
Change in deferred revenue and customer advances | 29,332 | 29,244 | 38,959 | 47,060 | ||||||||||||
Other changes | (12,797 | ) | 12,452 | (131,484 | ) | (76,741 | ) | |||||||||
|
|
|
| |||||||||||||
Net cash provided by operating activities | 505,456 | 469,017 | 372,687 | 412,952 | ||||||||||||
Net cash used in investing activities | (403,988 | ) | (438,674 | ) | (1,404,321 | ) | (45,783 | ) | ||||||||
Net cash used in financing activities | (39,494 | ) | (79,728 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 885,438 | (398,187 | ) | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 36,202 | (8,071 | ) | 2,081 | (26,579 | ) | ||||||||||
|
|
|
| |||||||||||||
Increase (decrease) in cash and cash equivalents | $ | 98,176 | $ | (57,456 | ) | |||||||||||
Decrease in cash and cash equivalents | $ | (144,115 | ) | $ | (57,597 | ) | ||||||||||
|
|
|
|
Cash Flow from Operating Activities
Net cash provided by operating activities was $505$373 million and $469$413 million induring the first nine months ended September 30, 2017of 2023 and October 1, 2016,2022, respectively. The decrease in 2023 operating cash flow was primarily a result of lower net income, higher inventory levels, higher income tax payments and the payment of acquired Wyatt liabilities, offset by higher cash collections in 2023 compared to 2022. The changes within net cash provided by operating activities in the first nine months of 2017 as compared to the first nine months of 2016 include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the changes in net income:
The changechanges in accounts receivable waswere primarily attributable to the timing of payments made by customers and timing of sales. Days sales outstanding decreased to 73was 81 days at September 30, 2017 from 762023 and 77 days at October 1, 2016.2022.
The changeincrease in inventory wascan primarily attributablebe attributed to anticipated annual increases in sales volumes,higher material costs as well as the timing of new product launches.an increase in safety stock levels to help mitigate any future supply chain issues.
An increase in income tax payments of $79 million as compared to the prior year and the payment of $26 million in Wyatt acquired liabilities.
Other changes were attributable to variation in the timing of various provisions, expenditures, prepaid income taxes and accruals in other current assets, other assets and other liabilities. In addition, as a result of the adoption of a new accounting standard related to stock-based compensation, the Company reclassified $13 million of excess tax benefits related to stock-based compensation for the first nine months of 2016
Cash Flow from cash flows from financing activities to cash flows from operating activities.
Cash Used in Investing Activities
Net cash used in investing activities totaled $404 million$1.4 billion and $439$46 million in the first nine months of 20172023 and 2016,2022, respectively. Additions to fixed assets and capitalized software were $55$119 million and $72 millionyear-to-date in 2017 and 2016, respectively. During 2017 and 2016, the Company purchased $2,345 million and $1,923 million of investmentsyear-to-date, while $2,009 million and $1,558 million of investments matured, respectively.
Cash flow from investing activitiesyear-to-date in 2017 included a $7 million payment for an investment in a developer of analytical system solutions used to make measurements, predict stability and accelerate product discovery in the routine analytic, process monitoring and quality control release processes for life science and biopharmaceutical markets. In addition, the Company made a $5 million milestone payment in the first nine months 2017 foracquired in-process research and development for the licensing of certain intellectual property relating to mass spectrometry technologies yet to be commercialized. Business acquisitions, net of cash acquired were $6$114 million in the first nine months of 2016.
2935
Cash Used in Financing ActivitiesDuring the first nine months of 2023 and 2022, the Company purchased $2 million and $11 million of investments, respectively, while $2 million and $78 million of investments matured, respectively, and were used for financing activities described below.
During the first nine months of 20172022, the Company paid $5 million for the CDMS technology and 2016,intellectual property right asset from Megadalton, and the Company is required to make an additional $4 million of guaranteed payments at various dates in the future through 2029. The total purchase price of approximately $10 million was accounted for as Acquired In-Process Research and Development and expensed as part of costs and operating expenses in the statement of operations in 2022.
During the first nine months of 2022, the Company received $10 million in proceeds from equity investments and made $1 million of investments in equity investments.
On May 16, 2023, the Company completed the acquisition of Wyatt for a total purchase price of $1.3 billion in cash. Wyatt is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories, and services. The acquisition will expand Waters’ portfolio and increase exposure to large molecule applications.
Cash Flow from Financing Activities
The Company had entered into a credit agreement in September 2021 governing the Company’s five-year, $1.8 billion revolving facility that matures in September 2026. On March 3, 2023, 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 September 30, 2023, the Company had a total of $2.5 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $1.2 billion borrowed under its credit agreement. The Company’s net debt borrowings increased by $130$0.9 billion and $30 million during the first nine months of 2023 and $115 million, respectively. 2022, respectively, primarily to fund the Wyatt acquisition.
As of September 30, 2017,2023, 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 totalportion of $1,958its euro-denominated and yen-denominated net asset investments. As a result of entering into these agreements, the Company lowered net interest expense by approximately $8 million and $6 million during the first nine months of 2023 and 2022, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $10 million in outstanding debt, which consisted of $700 million in outstanding senior unsecured notes, $300 million borrowed under a term loan facility under the Company’s credit agreement, $960 million borrowed under a revolving credit facility under the Company’s credit agreement and less than $1 million borrowed under various other short-term lines of credit, offset by $3 million of unamortized debt issuance costs. At September 30, 2017, $125 million of the outstanding portion of the revolving facility was classified as short-term liabilities in the consolidated balance sheet due to the fact that the Company expects to repay this portion of the borrowing under the revolving line of credit within the next twelve months. The remaining $835 million of the outstanding portion of the revolving facility was classified as long-term liabilities in the consolidated balance sheet, as this portion is not expected to be repaid within the next twelve months. As of September 30, 2017, the Company had a total amount available to borrow under its credit agreement of $338 million after outstanding letters of credit. As of September 30, 2017, the Company was in compliance with all debt covenants.2023.
In May 2017,January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $1$4 billion of its outstanding common stock over a three-yeartwo-year period. This new program replaced the remaining amounts available from the pre-existing program. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. In December 2022, the Company’s Board of Directors amended and extended this repurchase program’s term by one year such that it shall now expire on January 21, 2024 and increased the total authorization level to $4.8 billion, an increase of $750 million. During the first nine months endedof September 30, 20172023 and October 1, 2016,2022, the Company repurchased 1.4$58 million and 1.8$467 million shares of the Company’s outstanding common stock, at a cost of $238 million and $236 million, respectively, under the May 2017 and other previously announced programs. As of September 30, 2017, the Company had purchased an aggregate of 5.5 million shares at a cost of $750 million under the May 2014 authorization, which is now completed. The Company has a total of $885 million in remaining authorized capacity for future repurchases under the May 2017 authorization.share repurchase program. In addition, the Company repurchased $8$12 million and $6$11 million of common stock related to the vesting of restricted stock units during the first nine months endedof September 30, 20172023 and October 1, 2016,2022, respectively. While the Company believes that it has the financial flexibility to fund these share repurchases, as well as to invest in research, technology and business acquisitions, given current cash levels and debt borrowing capacity, it has temporarily suspended its share repurchases due to its acquisition of Wyatt.
The Company received $73$18 million and $59$36 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan in 2017during the first nine months of 2023 and 2016,2022, respectively.
The Company had cash, cash equivalents and investments of $3,255$337 million as of September 30, 2017.2023. The majority of the Company’s cash and cash equivalents and investments are generated from foreign operations, with $3,212$307 million held by foreign subsidiaries at September 30, 2017,2023, of which $337$196 million werewas held in currencies other than U.S. dollars. Due to the fact that most of the Company’s cash, cash equivalents and investments are held outside of the U.S., the Company must manage and maintain sufficient levels of cash flow in the U.S. to fund operations and capital expenditures, service debt interest, finance potential U.S. acquisitions and continue the authorized stock repurchase program in the U.S. These U.S. cash requirements are managed by the Company’s cash flow from U.S. operations and the use of the Company’s revolving credit facility.
Management believes, as of the date of this report, that its financial position, particularly in the U.S., 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. In addition, there have been no recent significant changes to the Company’s financial position, nor are there any anticipated changes, to warrant a material adjustment related to indefinitely reinvested foreign earnings.
36
Contractual Obligations, Commercial Commitments, Contingent Liabilities and Dividends
A summary of the Company’s contractual obligations and commercial commitments is included in the Company’s Annual Report on Form10-K for the year ended December 31, 2016,2022, as filed with the U.S. Securities and Exchange Commission (“SEC”)SEC on February 24, 2017.27, 2023. The Company reviewed its contractual obligations and commercial commitments as of September 30, 20172023 and determined that there were no material changes outside the ordinary course of business from the information set forth in the Annual Report on Form10-K.
From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. The Company believes that it has meritorious arguments in its current litigation matters and that any outcome, either individually or in the aggregate, will not be material to the Company’s financial position or results of operations.
30
During the nine months ended September 30, 2017, the Company contributed $4 million to the Company’s U.S. pension plans. During fiscal year 2017,2023, the Company expects to contribute a total of approximately $3 million to $6 million to $11 million to the Company’sits defined benefit plans.
The Company has not paid any dividends and has no plans, at this time, to pay any dividends in the future.
Off-Balance Sheet Arrangements
The Company has not created, and is not party to, any special-purpose oroff-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of its business that are not consolidated (to the extent of the Company’s ownership interest therein) into the consolidated financial statements. The Company has not entered into any transactions with unconsolidated entities whereby it has subordinated retained interests, derivative instruments or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company.
The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company’s costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.
Critical Accounting Policies and Estimates
In the Company’s Annual Report on Form10-K for the year ended December 31, 2016,2022, as filed with the SEC on February 24, 2017,27, 2023, the Company’s most critical accounting policies and estimates upon which its financial status depends were identified as those relating to revenue recognition, loss provisions on accounts receivable and inventory, valuation of long-lived assets, intangible assets and goodwill, income taxes, uncertain tax positions, warranty, litigation pension and other postretirement benefit obligations, stock-based compensation, business combinations and asset acquisitions and valuation of contingent consideration.acquisitions. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the nine months ended September 30, 2017.2023. The Company did not make any changes in those policies during the nine months ended September 30, 2017.2023.
New Accounting Pronouncements
Please refer to Note 13, Recent Accounting StandardsStandard Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.
37
Special Note Regarding Forward-Looking Statements
Certain of the statements in thisThis Quarterly Report on Form10-Q, including the information incorporated by reference herein, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to future results and events, including any statements regarding, among other items, anticipated trends or growth in the Company’s business, including, but not limited to, the impact of foreign currency translation on financial results; development of products by acquired businesses; the growth rate of sales and research and development expenses; the impact of costs associated with developing new technologies and bringing these new technologies to market; the impact of new product launches and the associated costs, such as the amortization expense related to software platforms; geographic sales mix of business; development of products by acquired businesses and the amount of contingent payments to the sellers of an acquired business; anticipated expenses, including interest expense, capitalized software costs and effective tax rates; the impact and outcome of the Company’s various ongoing tax audit examinations; the achievement of contractual milestones to preserve foreign tax rates; the impact and outcome of litigation matters; the impact of the loss of intellectual property protection; the
31
impact of new accounting standards and pronouncements; the adequacy of the Company’s supply chain and manufacturing capabilities and facilities; the impact of regulatory compliance; the Company’s expected cash flow, borrowing capacity, debt repayment and refinancing; the Company’s ability to fund working capital, capital expenditures, service debt, repay outstanding lines of credit, make authorized share repurchases, fund potential acquisitions and pay any adverse litigation or tax audit liabilities, particularly in the U.S.; future impairment charges; the Company’s contributions to defined benefit plans; the Company’s expectations regarding changes to its financial position; compliance with applicable environmental laws; and the impact of recent acquisitions on sales and earnings.
Many of these statements appear, in particular, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form10-Q.. Statements that are not statements of historical fact may be deemed forward-looking statements. You can identify these forward-looking statements by the use of the words “feels”, “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “suggests”, “appears”, “estimates”, “projects”, “should” and similar expressions, whether in the negative or affirmative. These forward-looking statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without limitation:
• | foreign currency exchange rate fluctuations potentially affecting translation of the Company’s future non-U.S. operating results, particularly when a foreign currency weakens against the U.S. dollar; |
current global economic, sovereign and political conditions and uncertainties, particularly regardingincluding the effect of new or proposed tariff or trade regulations, changes in inflation and interest rates, the U.K. voting toimpacts and costs of war, in particular as a result of the ongoing conflict between Russia and Ukraine and in the Middle East, and the possibility of further escalation resulting in new geopolitical and regulatory instability, the United Kingdom’s exit from the European Union as well asand the Chinese government’s ongoing tightening of restrictions on procurement by government-funded customers;
the Company’s ability to access capital, and maintain liquidity and service the Company’s debt in volatile market conditions;
• | risks related to the effects of the ongoing COVID-19 pandemic on our business, financial condition, results of operations and prospects; |
changes in timing and demand byfor the Company’s products among the Company’s customers and various market sectors, particularly if they should reduce capitalas a result of fluctuations in their expenditures or are unableability to obtain funding, as in the cases of academic, governmental academic and research institutions; the effect of mergers and acquisitions on customer demand; and the Company’s ability to sustain and enhance service.
the introduction of competing products by other companies and loss of market share, as well as pressures on prices from customers and/or competitors;
changes in the competitive landscape as a result of changes in ownership, mergers and continued consolidation among the Company’s competitors; introduction of competing products by other companies and loss of market share; pressures on prices from customers or resulting from competition;
regulatory, economic and competitive obstacles to new product introductions;introductions, lack of acceptance of new products;products and inability to grow organically through innovation;
rapidly changing technology and product obsolescence;
risks associated with previous or future acquisitions, strategic investments, joint ventures and divestitures, including risks associated with contingent purchase price payments and expansion of our business ininto new or developing markets; spending by certainend-markets; ability to obtain alternative sources for components and modules; and the possibility that future sales of new products related to acquisitions, which trigger contingent purchase payments, may exceed the Company’s expectations.
risks associated with unexpected disruptions in operations;
failure to adequately protect the Company’s intellectual property, infringement of intellectual property rights of third parties and inability to obtain licenses on commercially reasonable terms;
the Company’s ability to acquire adequate sources of supply and its reliance on outside contractors for certain components and modules, as well as disruptions to its supply chain;
risks associated with third-party sales intermediaries and resellers;
the impact and costs in connection with shifts in taxable income in jurisdictions with different effective tax rates, the outcome of ongoing and future tax examinations and changes in legislation affecting the Company’s effective tax rate;
the Company’s ability to attract and retain qualified employees and management personnel;
the ability to realize the expected benefits related to the Company’s various cost-saving initiatives;
38
risks associated with cybersecurity and technology, including attempts by third parties to defeat the security measures of the Company and its third-party partners;
increased regulatory burdens as the Company’s business evolves, especially with respect to the U.S. Food and Drug Administration and U.S. Environmental Protection Agency, among others, as well as and in connection with government contracts;
regulatory, environmental and logistical obstacles affecting the distribution of the Company’s products, completion of purchase order documentation by our customers and the ability of customers to obtain letters of credit or other financing alternatives.alternatives;
risks associated with lawsuits, particularly involving claims for infringement of patentslitigation and other intellectual property rights.legal and regulatory proceedings; and
the impact and costs incurred from changes in accounting principles and practices, such as the recently adopted accounting pronouncement regarding employee share-based payment accounting;practices; the impact and costs of changes in statutory or contractual tax rates;rates in jurisdictions in which the Company operates, specifically as it relates to the Tax Cuts and Jobs Act in the U.S.; and shifts in taxable income among jurisdictions with different effective tax rates; and the outcome of and costs associated with ongoing and future tax audit examinations or changes in respective country legislation affecting the Company’s effective rates.
Certain of these and other factors are discussed under the heading “Risk Factors” under Part I, Item 1A of the Company’s Annual Report on Form10-K for the year ended December 31, 2016,2022, as filed with the SEC on February 24, 2017.27, 2023. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements, whether because of these factors or for other reasons. All forward-looking statements speak only as of the date of this Quarterly Report on Form10-Q and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by law, the Company does not assume any obligation to update any forward-looking statements.
32
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of interest rate fluctuations from the investments of cash generated from operations. Investments with maturities greater than 90 days are classified as investments and are held primarily in U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities. As of September 30, 2023, the Company estimates that a hypothetical adverse change of 100 basis points across all maturities would not have a material effect on the fair market value of its portfolio.
The Company is also exposed to the risk of exchange rate fluctuations. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of September 30, 20172023 and December 31, 2016, $3,2122022, $307 million out of $3,255$337 million and $2,766$472 million out of $2,813$481 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries and may be subject to material tax effects on distribution to U.S. legal entities.subsidiaries. In addition, $337$196 million out of $3,255$337 million and $261$336 million out of $2,813$481 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at September 30, 20172023 and December 31, 2016,2022, respectively. As of September 30, 2023, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.
Assuming a hypothetical adverse change of 10% inyear-end exchange rates (a strengthening of the U.S. dollar), the fair market value of the Company’s cash, cash equivalents and investments held in currencies other than the U.S. dollar as of September 30, 20172023 would decrease by approximately $34$19 million, of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders’ equity.
There have been no other material changes in the Company’s market risk during the nine months ended September 30, 2017.2023. For information regarding the Company’s market risk, refer to Item 7A of Part II of the Company’s Annual Report on Form10-K for the year ended December 31, 2016,2022, as filed with the SEC on February 24, 2017.27, 2023.
39
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s chief executive officer and chief financial officer (principal executive officer and principal financial officers)officer), with the participation of management, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report onForm 10-Q. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 20172023 (1) to ensure that information required to be disclosed by the Company, including its consolidated subsidiaries, in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, to allow timely decisions regarding the required disclosure and (2) to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal ControlsControl Over Financial Reporting
No change was identified in the Company’s internal control over financial reporting (as defined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended September 30, 20172023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
There have been no material changes in the Company’s legal proceedings during the threenine months ended September 30, 20172023 as described in Item 3 of Part 1I of the Company’s Annual Report on Form10-K for the year ended December 31, 2016,2022, as filed with the SEC on February 24, 2017.27, 2023.
Item 1A: Risk Factors
Information regarding risk factors of the Company is set forth under the heading “Risk Factors” under Part I, Item 1A in the Company’s Annual Report on Form10-K for the year ended December 31, 2016,2022, as filed with the SEC on February 24, 2017.27, 2023. The Company reviewed its risk factors as of September 30, 20172023 and determined that there were no material changes from the ones set forth in the Form10-K. Note, however, the discussion of certain factors under the subheading “Special Note Regarding Forward-Looking Statements” in Part I, Item 2 of this Quarterly Report on Form10-Q. These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affecthave a material adverse effect on the Company’s business, financial condition and operating results.
33
Item 2:Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
The following table provides information about purchases by the Company duringDuring the three months ended September 30, 20172023, the Company purchased 205 and 2,269 shares at a cost of $57 thousand and $634 thousand with average prices paid of $280.25 and $279.44 during fiscal July and September, respectively, of equity securities registered by the Company under the Exchange Act (in thousands, except perAct.
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock in open market or private transactions over a two-year period. This program replaced the remaining amounts available under the pre-existing authorization. In December 2020, the Company’s Board of Directors authorized the extension of the share data):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. 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. The size and timing of these purchases, if any, will depend on our stock price and market and business conditions, as well as other factors.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||
July 2 to July 29, 2017 | — | $ | — | — | $ | 964,384 | ||||||||||
July 30 to August 26, 2017 | 230 | $ | 178.10 | 230 | $ | 923,458 | ||||||||||
August 27 to September 30, 2017 | 208 | $ | 187.04 | 208 | $ | 885,182 | ||||||||||
|
|
|
| |||||||||||||
Total | 438 | $ | 182.35 | 438 | $ | 885,182 | ||||||||||
|
|
|
|
40
Item 6: Exhibits
Exhibit | Description of Document | |
31.1 | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*) | |
32.2 | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*) | |
101 | The following materials from Waters Corporation’s Quarterly Report on Form10-Q for the quarter ended September 30, | |
104 | Cover Page Interactive Date File (formatted in iXBRL and contained in Exhibit 101). |
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act |
3441
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WATERS CORPORATION | ||||
/s/ | ||||
| ||||
Senior Vice President and | ||||
Chief Financial Officer | ||||
(Principal Financial Officer) | ||||
(Principal Accounting Officer) |
Date: November 3, 2017
35
42