WATERS CORP /DE/
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 2, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 01-14010
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address, including zip code, of principal executive offices)
(508 ) 478-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2
of the Exchange Act. | ☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer |
☐ | Smaller reporting company | ||||
| Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in ☒
Rule 12b-2
of the Act). Yes ☐ No Indicate the number of shares outstanding of the registrant’s common stock as of April 29, 2022: 60,235,338
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q
INDEX
Item 1: |
Financial Statements |
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
April 2, 2022 |
December 31, 2021 |
|||||||
(In thousands, except per share data) |
||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | $ | ||||||
Investments |
||||||||
Accounts receivable, net |
||||||||
Inventories |
||||||||
Other current assets |
||||||||
Total current assets |
||||||||
Property, plant and equipment, net |
||||||||
Intangible assets, net |
||||||||
Goodwill |
||||||||
Operating lease assets |
||||||||
Other assets |
||||||||
Total assets |
$ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
||||||||
Accrued employee compensation |
||||||||
Deferred revenue and customer advances |
||||||||
Current operating lease liabilities |
||||||||
Accrued income taxes |
||||||||
Accrued warranty |
||||||||
Other current liabilities |
||||||||
Total current liabilities |
||||||||
Long-term liabilities: |
||||||||
Long-term debt |
||||||||
Long-term portion of retirement benefits |
||||||||
Long-term income tax liabilities |
||||||||
Long-term operating lease liabilities |
||||||||
Other long-term liabilities |
||||||||
Total long-term liabilities |
||||||||
Total liabilities |
||||||||
Commitments and contingencies (Notes 6, 7, 8 and 11) |
||||||||
Stockholders’ equity: |
||||||||
Preferred stock, par value $ |
||||||||
Common stock, par value $ |
||||||||
Additional paid-in capital |
||||||||
Retained earnings |
||||||||
Treasury stock, at cost, |
( |
) | ( |
) | ||||
Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
Total stockholders’ equity |
||||||||
Total liabilities and stockholders’ equity |
$ | $ | ||||||
The accompanying notes are an integral part of the interim consolidated financial statements.
3
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended |
||||||||
April 2, 2022 |
April 3, 2021 |
|||||||
(In thousands, except per share data) |
||||||||
Revenues: |
||||||||
Product sales |
$ | $ | ||||||
Service sales |
||||||||
Total net sales |
||||||||
Costs and operating expenses: |
||||||||
Cost of product sales |
||||||||
Cost of service sales |
||||||||
Selling and administrative expenses |
||||||||
Research and development expenses |
||||||||
Purchased intangibles amortization |
||||||||
Acquired in-process research and development |
— | |||||||
Total costs and operating expenses |
||||||||
Operating income |
||||||||
Other income, net |
||||||||
Interest expense |
( |
) | ( |
) | ||||
Interest income |
||||||||
Income before income taxes |
||||||||
Provision for income taxes |
||||||||
Net income |
$ | $ | ||||||
Net income per basic common share |
$ | $ | ||||||
Weighted-average number of basic common shares |
||||||||
Net income per diluted common share |
$ | $ | ||||||
Weighted-average number of diluted common shares and equivalents |
||||||||
The accompanying notes are an integral part of the interim consolidated financial statements.
4
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended |
||||||||
April 2, 2022 |
April 3, 2021 |
|||||||
(In thousands) |
||||||||
Net income |
$ | $ | ||||||
Other comprehensive (loss) income: |
||||||||
Foreign currency translation |
( |
) | ||||||
Unrealized gains (losses) on investments before income taxes |
( |
) | ||||||
Income tax expense |
( |
) | — | |||||
Unrealized gains (losses) on investments, net of tax |
( |
) | ||||||
Retirement liability adjustment before reclassifications |
||||||||
Amounts reclassified to other income |
||||||||
Retirement liability adjustment before income taxes |
||||||||
Income tax expense |
( |
) | ( |
) | ||||
Retirement liability adjustment, net of tax |
||||||||
Other comprehensive (loss) income |
( |
) | ||||||
Comprehensive income |
$ | $ | ||||||
The accompanying notes are an integral part of the interim consolidated financial statements.
5
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended |
||||||||
April 2, 2022 |
April 3, 2021 |
|||||||
(In thousands) |
||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Stock-based compensation |
||||||||
Deferred income taxes |
||||||||
Depreciation |
||||||||
Amortization of intangibles |
||||||||
Acquired in-process research and development and other non-cash items |
— | |||||||
Change in operating assets and liabilities: |
||||||||
(Increase) decrease in accounts receivable |
( |
) | ||||||
Increase in inventories |
( |
) | ( |
) | ||||
Increase in other current assets |
( |
) | ( |
) | ||||
Increase in other assets |
( |
) | ( |
) | ||||
Decrease in accounts payable and other current liabilities |
( |
) | ( |
) | ||||
Increase in deferred revenue and customer advances |
||||||||
Increase (decrease) in other liabilities |
( |
) | ||||||
Net cash provided by operating activities |
||||||||
Cash flows from investing activities: |
||||||||
Additions to property, plant, equipment and software capitalization |
( |
) | ( |
) | ||||
Proceeds from sale of equity investment |
— | |||||||
Payments for intellectual property licenses |
( |
) | — | |||||
Purchases of investments |
( |
) | ( |
) | ||||
Maturities and sales of investments |
||||||||
Net cash provided by (used in) investing activities |
( |
) | ||||||
Cash flows from financing activities: |
||||||||
Proceeds from debt issuances |
— | |||||||
Payments on debt |
( |
) | ( |
) | ||||
Payments of debt issuance costs |
— | ( |
) | |||||
Proceeds from stock plans |
||||||||
Purchases of treasury shares |
( |
) | ( |
) | ||||
Payments for derivative contracts |
( |
) | ( |
) | ||||
Net cash (used in) provided by financing activities |
( |
) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
( |
) | ( |
) | ||||
(Decrease) increase in cash and cash equivalents |
( |
) | ||||||
Cash and cash equivalents at beginning of period |
||||||||
Cash and cash equivalents at end of period |
$ | $ | ||||||
The accompanying notes are an integral part of the interim consolidated financial statements.
6
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands)
Number of Common Shares |
Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Loss |
Total Stockholders’ Equity |
||||||||||||||||||||||
Balance December 31, 2020 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Net income |
— | — | — | — | — | |||||||||||||||||||||||
Other comprehensive income |
— | — | — | — | — | |||||||||||||||||||||||
Issuance of common stock for employees: |
||||||||||||||||||||||||||||
Employee Stock Purchase Plan |
— | — | — | — | ||||||||||||||||||||||||
Stock options exercised |
— | — | — | |||||||||||||||||||||||||
Treasury stock |
— | — | — | — | ( |
) | — | ( |
) | |||||||||||||||||||
Stock-based compensation |
— | — | — | |||||||||||||||||||||||||
Balance April 3, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
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 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Net income |
— | — | — | — | — | |||||||||||||||||||||||
Other comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Issuance of common stock for employees: |
||||||||||||||||||||||||||||
Employee Stock Purchase Plan |
— | — | — | — | ||||||||||||||||||||||||
Stock options exercised |
— | — | — | |||||||||||||||||||||||||
Treasury stock |
— | — | — | — | ( |
) | — | ( |
) | |||||||||||||||||||
Stock-based compensation |
— | — | — | |||||||||||||||||||||||||
Balance April 2, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1 Basis of Presentation and Summary of Significant Accounting Policies
Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC
TM
” and, together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together (“LC-MS”)
and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing. LC-MS
instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TATM
product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments. The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s first fiscal quarters for 2022 and 2021 ended on April 2, 2022 and April 3, 2021, respectively.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated.
10-Q
and do not include all of the information and footnote disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) in the United States of America. The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions.
It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 24, 2022. Risks and Uncertainties
The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.
Both the Company’s domestic and international operations have been and continue to be affected by the ongoing global
COVID-19
pandemic and the resulting volatility and uncertainty it has caused in the U.S. and international markets. The Company operates in over 35 countries, including those in regions most impacted by the COVID-19
pandemic. 8
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Through the date of the issuance of these financial statements, the Company’s consolidated financial position, results of operations and cash flows have not been materially impacted and, thus, the Company concluded that no interim goodwill or long-lived asset impairment analyses were required. Further, there have been no violations of debt covenants. Any prolonged material disruption to the Company’s employees, suppliers, manufacturing, or customers could result in a material impact to its consolidated financial position, results of operations or cash flows in the future.
Translation of Foreign Currencies
The functional currency of each of the Company’s foreign operating subsidiaries is the local currency of its country of domicile, except for the Company’s subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity’s cash flows.
For the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive loss in the consolidated balance sheets.
Cash, Cash Equivalents and Investments
Accounts Receivable and Allowance for Credit Losses
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any off-balance sheet credit exposure related to its customers.
Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to
re-possess,
refurbish and re-sell
the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss. 9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The following is a summary of the activity of the Company’s allowance for credit losses for the three months ended April 2, 2022 and April 3, 2021(in thousands):
Balance at Beginning of Period |
Additions |
Deductions |
Balance at End of Period |
|||||||||||||
Allowance for Credit Losses |
||||||||||||||||
April 2, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||
April 3, 2021 |
$ | $ | $ | ( |
) | $ | ||||||||||
Other Investments
During the three months ended April 2, 2022, the Company sold an equity investment for $7 million in cash and recorded a gain on the sale of approximately $4 million in other income, net on the statement of operations. The Company also recorded an other than temporary impairment loss on an equity method investment still held at the reporting date of approximately $4 million within other income, net on the statement of operations as the company entered into a sale process and we adjusted the carrying value of our investment based on our portion of the total proceeds we expect to receive.
During the three months ended April 3, 2021, the Company recorded an unrealized gain on an equity security still held at the reporting date of approximately $10 million within other income on the income statement. This unrealized gain was recorded as an upward price adjustment to the carrying value of the investment due to an observable price change of a similar security issued during the current period.
Fair Value Measurements
In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of April 2, 2022 and December 31, 2021. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions.
10
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at April 2, 2022 (in thousands):
Quoted Prices |
||||||||||||||||
in Active |
Significant |
|||||||||||||||
Markets |
Other |
Significant |
||||||||||||||
Total at |
for Identical |
Observable |
Unobservable |
|||||||||||||
April 2, |
Assets |
Inputs |
Inputs |
|||||||||||||
2022 |
(Level 1) |
(Level 2) |
(Level 3) |
|||||||||||||
Assets: |
||||||||||||||||
U.S. Treasury securities |
$ | $ | — | $ | $ | — | ||||||||||
Corporate debt securities |
— | — | ||||||||||||||
Time deposits |
— | — | ||||||||||||||
Waters 401(k) Restoration Plan assets |
— | — | ||||||||||||||
Foreign currency exchange contracts |
— | — | ||||||||||||||
Interest rate cross-currency swap agreements |
— | — | ||||||||||||||
Total |
$ | |
$ | $ | $ | — | ||||||||||
Liabilities: |
||||||||||||||||
Contingent consideration |
$ | $ | — | $ | — | $ | ||||||||||
Foreign currency exchange contracts |
— | — | ||||||||||||||
Interest rate cross-currency swap agreements |
— | — | ||||||||||||||
Total |
$ | $ | — | $ | $ | |||||||||||
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2021 (in thousands):
Quoted Prices |
||||||||||||||||
in Active |
Significant |
|||||||||||||||
Markets |
Other |
Significant |
||||||||||||||
Total at |
for Identical |
Observable |
Unobservable |
|||||||||||||
December 31, |
Assets |
Inputs |
Inputs |
|||||||||||||
2021 |
(Level 1) |
(Level 2) |
(Level 3) |
|||||||||||||
Assets: |
||||||||||||||||
U.S. Treasury securities |
$ | $ | — | $ | — | |||||||||||
Corporate debt securities |
— | — | ||||||||||||||
Time deposits |
— | $ | — | |||||||||||||
Waters 401(k) Restoration Plan assets |
— | — | ||||||||||||||
Foreign currency exchange contracts |
— | — | ||||||||||||||
Total |
$ | $ | $ | $ | — | |||||||||||
Liabilities: |
||||||||||||||||
Contingent consideration |
$ | $ | — | $ | — | $ | ||||||||||
Foreign currency exchange contracts |
— | — | ||||||||||||||
Interest rate cross-currency swap agreements |
— | — | ||||||||||||||
Total |
$ | $ | — | $ | $ | |||||||||||
11
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
Fair Value of 401(k) Restoration Plan Assets
The 401(k) Restoration Plan is a nonqualified defined contribution plan and the assets were held in registered mutual funds and have been classified as Level 1. The fair values of the assets in the plan are determined through market and observable sources from daily quoted prices on nationally recognized securities exchanges.
Fair Value of Cash Equivalents, Investments, Foreign Currency Exchange Contracts and Interest Rate Cross-Currency Swap Agreements
The fair values of the Company’s cash equivalents, investments, foreign currency exchange contracts and interest rate cross-currency swap agreements are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources.
Fair Value of Contingent Consideration
The fair value of the Company’s liability for contingent consideration relates to earnout payments in connection with the December 2020 acquisition of Integrated Software Solutions (“ISS”) 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 achievement of certain revenue and customer account milestones over the two years after the acquisition date 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.
The fair value of future contingent consideration payments related to the December 2020 acquisition of ISS was estimated to be $1
Fair Value of Other Financial Instruments
The Company’s accounts receivable and accounts payable are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s variable interest rate debt approximates fair value due to the variable nature of the interest rate. The carrying value of the Company’s fixed interest rate debt was $1.3 billion and $1.3 billion at April 2, 2022 and December 31, 2021, respectively. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $1.2 billion and $1.3 billion at April 2, 2022 and December 31, 2021, respectively, using Level 2 inputs.
Derivative Transactions
non-U.S.
dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency. The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.
12
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
Foreign Currency Exchange Contracts
The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real.
Interest Rate Cross-Currency Swap Agreements
As of April 2, 2022, the Company had three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $550 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive loss in stockholders’ equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.
The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):
April 2, 2022 |
December 31, 2021 |
|||||||||||||||
Notional Value |
Fair Value |
Notional Value |
Fair Value |
|||||||||||||
Foreign currency exchange contracts: |
||||||||||||||||
Other current assets |
$ | $ | $ | $ | ||||||||||||
Other current liabilities |
$ | $ | $ | $ | ||||||||||||
Interest rate cross-currency swap agreements: |
||||||||||||||||
Other assets |
$ | $ | $ | $ | ||||||||||||
Other liabilities |
||||||||||||||||
Accumulated other comprehensive loss |
$ | $ | ||||||||||||||
13
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The following is a summary of the activity included in the consolidated statements of operations and statements of comprehensive income related to the foreign currency exchange contracts and interest rate cross-currency swap agreements (in thousands):
Financial Statement Classification |
Three Months Ended |
|||||||||
April 2, 2022 |
April 3, 2021 |
|||||||||
Foreign currency exchange contracts: |
||||||||||
Realized (losses) gains on closed contracts |
Cost of sales | $ | ( |
) | $ | |||||
Unrealized losses on open contracts |
Cost of sales | ( |
) | ( |
) | |||||
Cumulative net pre-tax (losses) gains |
Cost of sales | $ | ( |
) | $ | |||||
Interest rate cross-currency swap agreements: |
||||||||||
Interest earned |
Interest income | $ | $ | |||||||
Unrealized gains on contracts, net |
Accumulated other comprehensive loss | $ | $ | |||||||
Stockholders’ Equity
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a 0.5 million and 0.6 million shares of the Company’s outstanding common stock at a cost of $160 million and $173 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $10 million and $8 million of common stock related to the vesting of restricted stock units during the three months ended April 2, 2022 and April 3, 2021, respectively. As of April 2, 2022, the Company had repurchased an aggregate of 13.6 million shares at a cost of $3.3 billion under the January 2019 repurchase program and had a total of $0.7 billion authorized for future repurchases. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023.
two-year
period. This program replaced the remaining amounts available from the pre-existing
program. During the three months ended April 2, 2022 and April 3, 2021, the Company repurchased Product Warranty Costs
The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.
The following is a summary of the activity of the Company’s accrued warranty liability for the three months ended April 2, 2022 and April 3, 2021 (in thousands):
Balance at Beginning of Period |
Accruals for Warranties |
Settlements Made |
Balance at End of Period |
|||||||||||||
Accrued warranty liability: |
||||||||||||||||
April 2, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||
April 3, 2021 |
$ | $ | $ | ( |
) | $ | ||||||||||
Other Items
During the three months ended April 2, 2022, the Company completed an asset acquisition in which the charge detection mass spectrometry technology (“CDMS technology”) assets of Megadalton Solutions, Inc. (“Megadalton”) were acquired for approximately $10 million in total purchase price, of which $5 million was paid at closing and the
14
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
remaining $4 million will be paid in the future at various dates through 2029. This CDMS technology makes it possible to analyze extremely large proteins and protein complexes used in cell and gene therapies that would otherwise be difficult to analyze with conventional mass spectrometry. Once this technology is further developed, it will extend the capabilities of our mass spectrometry portfolio for a broader set of applications and as such the cost of this technology asset has been accounted for as Acquired
In-Process
Research and Development and expensed in costs and operating expenses in the statement of operations. 2 Revenue Recognition
The Company’s deferred revenue liabilities on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.
The following is a summary of the activity of the Company’s deferred revenue and customer advances for the three months ended April 2, 2022 and April 3, 2021 (in thousands):
April 2, 2022 |
April 3, 2021 |
|||||||
Balance at the beginning of the period |
$ | $ | ||||||
Recognition of revenue included in balance at beginning of the period |
( |
) | ( |
) | ||||
Revenue deferred during the period, net of revenue recognized |
||||||||
Balance at the end of the period |
$ | $ | ||||||
The Company classified $53 million and $47 million of deferred revenue and customer advances in other long-term liabilities at April 2, 2022 and December 31, 2021, respectively.
The amount of deferred revenue and customer advances equals the transaction price allocated to unfulfilled performance obligations for the period presented. Such amounts are expected to be recognized in the future as follows (in thousands):
April 2, 2022 |
||||
Deferred revenue and customer advances expected to be recognized in: |
||||
| $ | ||||
13- months |
||||
Total |
$ | |||
15
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
3 Marketable Securities
The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):
April 2, 2022 |
||||||||||||||||
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||||||
Cost |
Gain |
Loss |
Value |
|||||||||||||
U.S. Treasury securities |
$ | $ | — | $ | ( |
) | $ | |||||||||
Corporate debt securities |
— | ( |
) | |||||||||||||
Time deposits |
— | — | ||||||||||||||
Total |
$ | $ | — | $ | ( |
) | $ | |||||||||
Amounts included in: |
||||||||||||||||
Cash equivalents |
$ | $ | — | $ | — | $ | ||||||||||
Investments |
— | ( |
) | |||||||||||||
Total |
$ | $ | — | $ | ( |
) | $ | |||||||||
December 31, 2021 |
||||||||||||||||
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||||||
Cost |
Gain |
Loss |
Value |
|||||||||||||
U.S. Treasury securities |
$ | $ | — | $ | ( |
) | $ | |||||||||
Corporate debt securities |
— | ( |
) | |||||||||||||
Time deposits |
— | — | ||||||||||||||
Total |
$ | $ | — | $ | ( |
) | $ | |||||||||
Amounts included in: |
||||||||||||||||
Cash equivalents |
$ | $ | — | $ | $ | |||||||||||
Investments |
— | ( |
) | |||||||||||||
Total |
$ | $ | — | $ | ( |
) | $ | |||||||||
The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):
April 2, 2022 |
December 31, 2021 |
|||||||
Due in one year or less |
$ | $ | ||||||
Due after one year through three years |
— | |||||||
Total |
$ | $ | ||||||
4 Inventories
Inventories are classified as follows (in thousands):
April 2, 2022 |
December 31, 2021 |
|||||||
Raw materials |
$ | $ | ||||||
Work in progress |
||||||||
Finished goods |
||||||||
Total inventories |
$ | $ | ||||||
5 Goodwill and Other Intangibles
The carrying amount of goodwill was $436 million and $438 million at April 2, 2022 and December 31, 2021, respectively. The effect of foreign currency translation decreased goodwill by $2 million.
16
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):
April 2, 2022 |
December 31, 2021 |
|||||||||||||||||||||||
Weighted- |
Weighted- |
|||||||||||||||||||||||
Gross |
Average |
Gross |
Average |
|||||||||||||||||||||
Carrying |
Accumulated |
Amortization |
Carrying |
Accumulated |
Amortization |
|||||||||||||||||||
Amount |
Amortization |
Period |
Amount |
Amortization |
Period |
|||||||||||||||||||
Capitalized software |
$ | $ | $ | $ | ||||||||||||||||||||
Purchased intangibles |
||||||||||||||||||||||||
Trademarks |
— | — | — | — | ||||||||||||||||||||
Licenses |
||||||||||||||||||||||||
Patents and other intangibles |
||||||||||||||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||||||||||
The Company capitalized $12 million and $8 million of intangible assets in the three months ended April 2, 2022 and April 3, 2021, respectively. The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $13 million and $10 million, respectively, in the three months ended April 2, 2022 due to the effects of foreign currency translation. Amortization expense for intangible assets was $15 64
6 Debt
The Company entered into a credit agreement in September 2021 (the “2021 Credit Agreement”) governing the Company’s five-year , $1.8 billion revolving facility (the “2021 Credit Facility”) that expires in September 2026. As of April 2, 2022 and December 31, 2021, the 2021 Credit Facility had a total of $140 million and $210 million outstanding, respectively.
As of both April 2, 2022 and December 31, 2021, the Company had a total of $1.3 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 the Series H senior unsecured note. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest.
These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50 :1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50 :1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default
.17
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The Company had the following outstanding debt at April 2, 2022 and December 31, 2021 (in thousands):
April 2, 2022 |
December 31, 2021 |
|||||||
Senior unsecured notes - Series G - |
||||||||
Senior unsecured notes - Series H - floating rate*, due June 2024 |
||||||||
Senior unsecured notes - Series I - |
||||||||
Senior unsecured notes - Series K - |
||||||||
Senior unsecured notes - Series L - |
||||||||
Senior unsecured notes - Series M - |
||||||||
Senior unsecured notes - Series N - |
||||||||
Senior unsecured notes - Series O - |
||||||||
Credit agreement |
||||||||
Unamortized debt issuance costs |
( |
) | ( |
) | ||||
Total long-term debt |
||||||||
Total debt |
$ | $ | ||||||
| * | Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus |
As of April 2, 2022 and December 31, 2021, the Company had a total amount available to borrow under the 2021 Credit Agreement of $1.7 billion and $1.6 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.88 % and 2.74 % at April 2, 2022 and December 31, 2021, respectively. As of April 2, 2022, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $120 million and $121 million at April 2, 2022 and December 31, 2021, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of April 2, 2022 or December 31, 2021.
As of April 2, 2022, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $550 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.
7 Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21 %, 12.5 %, 19 % and 17 %, respectively, as of April 2, 2022. The Company had a contractual tax rate of 0 % on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones. The Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5 % on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax rates rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the Company’s net income for the three months ended April 2, 2022 and April 3, 2021 by $5 million and $4 million, respectively, and increased the Company’s net income per diluted share by $0.08 and $0.06 , respectively.
The Company’s effective tax rate for the three months ended April 2, 2022 and April 3, 2021 was 14.4 % and 14.8 %, respectively. The income tax provision includes a $4 million and a $2 million income tax benefit related to stock-based compensation for the three months ended April 2, 2022 and April 3, 2021, respectively. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates. The Company accounts for its uncertain tax return positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting
18
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
The Company’s gross unrecognized tax benefits, excluding interest and penalties, for both the three months ended April 2, 2022 and April 3, 2021 were $29 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.
8 Other Commitments and Contingencies
The Company licenses certain technology and software from third parties in the course of ordinary business. Future minimum license fees payable under existing license agreements as of April 2, 2022 are immaterial for the years ended December 31, 2022 and thereafter. The Company enters into licensing arrangements with third parties that require future milestone or royalty payments contingent upon future events. Upon the achievement of certain milestones in existing agreements, the Company could make additional future payments of up to $2 million.
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.
9 Stock-Based Compensation
The Company maintains various stockholder-approved, stock-based compensation plans which allow for the issuance of incentive or
non-qualified
stock options, stock appreciation rights, restricted stock or other types of awards (e.g. restricted stock units and performance stock units). In May 2020, the Company’s stockholders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of April 2, 2022, the 2020 Plan had 6.4 million shares available for grant in the form of incentive or ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock, restricted stock units and performance stock units may be issued under the 2020 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of April 2, 2022, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding under the 2020 Plan.
non-qualified
stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units or other types of awards (e.g. restricted stock units and performance stock units). The Company issues new shares of common stock upon exercise of stock options or restricted stock unit conversion. Under the 2020 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 2020 Plan is scheduled to terminate on May 13, 2030. Options generally will expire no later than 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
19
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
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, the amount of expense has been reduced for estimated forfeitures. Forfeitures are estimated based on historical experience. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted. In addition, if 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 months ended April 2, 2022 and April 3, 2021 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 |
||||||||
April 2, 2022 |
April 3, 2021 |
|||||||
Cost of sales |
$ | $ | ||||||
Selling and administrative expenses |
||||||||
Research and development expenses |
||||||||
Total stock-based compensation |
$ | $ | ||||||
Stock Options
In determining the 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 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 historical experience for the population of The relevant data used to determine the value of the stock options granted during the three months ended April 2, 2022 and April 3, 2021 are as follows:
non-qualified
stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon
issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. Three Months Ended |
||||||||
Options Issued and Significant Assumptions Used to Estimate Option Fair Values |
April 2, 2022 |
April 3, 2021 |
||||||
Options issued in thousands |
||||||||
Risk-free interest rate |
% | % | ||||||
Expected life in years |
||||||||
Expected volatility |
% | % | ||||||
Expected dividends |
— | |||||||
Three Months Ended |
||||||||
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant |
April 2, 2022 |
April 3, 2021 |
||||||
Exercise price |
$ | $ | ||||||
Fair value |
$ | $ | ||||||
20
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The following table summarizes stock option activity for the plans for the three months ended April 2, 2022 (in thousands, except per share data):
Number of Shares |
Exercise Price per Share |
Weighted-Average Exercise Price per Share |
||||||||||
Outstanding at December 31, 2021 |
$ | $ | ||||||||||
Granted |
$ | $ | ||||||||||
Exercised |
( |
) | $ | $ | ||||||||
Canceled |
( |
) | $ | $ | ||||||||
Outstanding at April 2, 2022 |
$ | $ | ||||||||||
Restricted Stock
During the three months ended April 2, 2022, the Company granted three thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $364.59 .
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the three months ended April 2, 2022 (in thousands, except per share data):
Shares |
Weighted-Average Grant Date Fair Value per Share |
|||||||
Unvested at December 31, 2021 |
$ | |||||||
Granted |
$ | |||||||
Vested |
( |
) | $ | |||||
Forfeited |
( |
) | $ | |||||
Unvested at April 2, 2022 |
$ | |||||||
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 SP 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. Beginning with the grants made in 2020, the vesting conditions for performance stock units now include a performance condition based on future sales growth.
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. Treasury
zero-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 SP Health Care Index tends to move in relation to each other during the performance period. 21
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The relevant data used to determine the value of the performance stock units granted during the three months ended April 2, 2022 and April 3, 2021 are as follows:
Three Months Ended |
||||||||
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values |
April 2, 2022 |
April 3, 2021 |
||||||
Performance stock units issued (in thousands) |
||||||||
Risk-free interest rate |
% | % | ||||||
Expected life in years |
||||||||
Expected volatility |
% | % | ||||||
Average volatility of peer companies |
% | % | ||||||
Correlation coefficient |
% | % | ||||||
Expected dividends |
— | |||||||
The following table summarizes the unvested performance stock unit award activity for the three months ended April 2, 2022 (in thousands, except per share data):
Shares |
Weighted-Average Fair Value per Share |
|||||||
Unvested at December 31, 2021 |
$ | |||||||
Granted |
$ | |||||||
Vested |
( |
) | $ | |||||
Forfeited |
$ | |||||||
Unvested at April 2, 2022 |
$ | |||||||
10 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
Three Months Ended April 2, 2022 |
||||||||||||
Net Income |
Weighted- Average Shares |
Per Share |
||||||||||
(Numerator) |
(Denominator) |
Amount |
||||||||||
Net income per basic common share |
$ | $ | ||||||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities |
— | ( |
) | |||||||||
Net income per diluted common share |
$ | $ | ||||||||||
Three Months Ended April 3, 2021 |
||||||||||||
Net Income |
Weighted- Average Shares |
Per Share |
||||||||||
(Numerator) |
(Denominator) |
Amount |
||||||||||
Net income per basic common share |
$ | $ | ||||||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities |
( |
) | ||||||||||
Net income per diluted common share |
$ | $ | ||||||||||
For the three months ended April 2, 2022 and April 3, 2021, the Company had 12 thousand and 123 thousand stock options that were antidilutive, respectively, due to having higher exercise prices than the Company’s average stock price during the period. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.
22
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
11 Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are detailed as follows (in thousands):
Currency Translation |
Unrealized Gain (Loss) on Retirement Plans |
Unrealized Gain (Loss) on Investments |
Accumulated Other Comprehensive Loss |
|||||||||||||
Balance at December 31, 2021 |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Other comprehensive (loss) income, net of tax |
( |
) | ( |
) | ||||||||||||
Balance at April 2, 2022 |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
12 Retirement Plans
Three Months Ended |
||||||||||||||||
April 2, 2022 |
April 3, 2021 |
|||||||||||||||
U.S. Retiree |
Non-U.S. |
U.S. Retiree |
Non-U.S. |
|||||||||||||
Healthcare |
Pension |
Healthcare |
Pension |
|||||||||||||
Plan |
Plans |
Plan |
Plans |
|||||||||||||
Service cost |
$ | $ | $ | $ | ||||||||||||
Interest cost |
||||||||||||||||
Expected return on plan assets |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Net amortization: |
||||||||||||||||
Prior service credit |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Net actuarial loss |
— | — | ||||||||||||||
Net periodic pension cost |
$ | $ | $ | $ | ||||||||||||
During fiscal year 2022, the Company expects to contribute a total of approximately $3 million to $6 million to the Company’s defined benefit plans.
13 Business Segment Information
The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: Waters
TM
and TATM
. The Waters operating segment is primarily in the business of designing, manufacturing, selling and servicing LC and MS instruments, columns and other precision chemistry consumables that can be integrated and used along with other analytical instruments. The TA operating segment is primarily in the business of designing, manufacturing, selling and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s two operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution; and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the one reportable segment of the Company.
23
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
Net sales for the Company’s products and services are as follows for the three months ended April 2, 2022 and April 3, 2021 (in thousands):
Three Months Ended |
||||||||
April 2, 2022 |
April 3, 2021 |
|||||||
Product net sales: |
||||||||
Waters instrument systems |
$ | $ | ||||||
Chemistry consumables |
||||||||
TA instrument systems |
||||||||
Total product sales |
||||||||
Service net sales: |
||||||||
Waters service |
||||||||
TA service |
||||||||
Total service sales |
||||||||
Total net sales |
$ | $ | ||||||
Net sales are attributable to geographic areas based on the region of destination. Geographic sales information is presented below for the three months ended April 2, 2022 and April 3, 2021 (in thousands):
Three Months Ended |
||||||||
April 2, 2022 |
April 3, 2021 |
|||||||
Net Sales: |
||||||||
Asia: |
||||||||
China |
$ | $ | ||||||
Japan |
||||||||
Asia Other |
||||||||
Total Asia |
||||||||
Americas: |
||||||||
United States |
||||||||
Americas Other |
||||||||
Total Americas |
||||||||
Europe |
||||||||
Total net sales |
$ | $ | ||||||
Net sales by customer class are as follows for the three months ended April 2, 2022 and April 3, 2021 (in thousands):
Three Months Ended |
||||||||
April 2, 2022 |
April 3, 2021 |
|||||||
Pharmaceutical |
$ | $ | ||||||
Industrial |
||||||||
Academic and government |
||||||||
Total net sales |
$ | $ | ||||||
24
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
Net sales for the Company recognized at a point in time versus over time are as follows for the three months ended April 2, 2022 and April 3, 2021 (in thousands):
Three Months Ended |
||||||||
April 2, 2022 |
April 3, 2021 |
|||||||
Net sales recognized at a point in time: |
||||||||
Instrument systems |
$ | $ | ||||||
Chemistry consumables |
||||||||
Service sales recognized at a point in time (time materials) |
||||||||
Total net sales recognized at a point in time |
||||||||
Net sales recognized over time: |
||||||||
Service and software sales recognized over time (contracts) |
||||||||
Total net sales |
$ | $ | ||||||
14 Recent Accounting Standard Changes and Developments
Recently Issued Accounting Standards
In March 2020, accounting guidance was issued that facilitates the effects of reference rate reform on financial reporting. The amendments in the update provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January of 2021, an update was issued to clarify that certain optional expedients and exceptions under the reference rate reform guidance for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in the reference rate reform guidance, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This temporary guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company may elect to apply this guidance for all contract modifications or eligible hedging relationships during that time period subject to certain criteria. The Company does not believe that it has material reference rate exposure which would require utilizing the guidance under this accounting pronouncement and if adopted does not believe that this standard would have a material impact on the Company’s financial position, results of operations and cash flows.
In October 2021, accounting guidance was issued that requires acquirers in a business combination to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The new guidance requires that at the acquisition date, the acquirer should account for the related revenue contracts in accordance with 606 as if it had originated the contracts. This guidance differs from current GAAP which requires an acquirer to recognize assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with 606, at fair value on the acquisition date. This guidance is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those years. The amendments within this update should be applied prospectively to business combinations on or after the effective date of the amendments. Early adoption of the amendment is permitted, including adoption in an interim period. The applicability of this standard is dependent on there being a business combination activity and therefore the Company will evaluate the impact of this guidance when and if there is applicable activity.
25
Item 2: |
Management ’ s Discussion and Analysis of Financial Condition and Results of Operations |
Business Overview
The Company has two operating segments: Waters
TM
and TATM
. Waters products and services primarily consist of high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLCTM
” and, together with HPLC, referred to as “LC”), mass spectrometry (“MS”) and precision chemistry consumable products and related services. TA products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Company’s products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and government customers. These customers use the Company’s products to detect, identify, monitor and measure the chemical, physical and biological composition of materials and to predict the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids in various industrial, consumer goods and healthcare products. COVID-19
Pandemic Both the Company’s domestic and international operations have been and continue to be affected by the ongoing global
COVID-19
pandemic that has led to volatility and uncertainty in the U.S. and international markets. The Company is actively managing its business to respond to the COVID-19
impact; however, the Company cannot reasonably estimate the length or severity of the COVID-19
pandemic, including the effect of the emergence of variants of the virus, or the related response, or the extent to which the disruption may materially impact the Company’s business, consolidated financial position, consolidated results of operations or consolidated cash flows in the future. The
COVID-19
pandemic has not materially impacted the Company’s manufacturing facilities or those of the third parties to whom it outsources certain manufacturing processes, the distribution centers where its inventory is managed, or the operations of its logistics and other service providers. The Company also did not see material disruptions or delays in shipments of certain materials or components of its products. However, the current logistic and supply chain issues being experienced throughout the world have made it more difficult for us to manage our operations and as such we cannot provide any assurances that any further disruptions in the logistics and supply chains will not have a material impact on our future financial results and cashflows. The Company has taken decisive and appropriate actions throughout the
COVID-19
pandemic, and continues to take proactive measures to guard the health of its global employee base and the safety of all customer interactions. The Company has implemented rigorous protocols to promote a safe work environment in all of its locations that are operational around the world and continues to closely monitor and update its multi-phase process for the safe return of employees to their physical workplaces as social distancing, governmental requirements, including capacity limitations, and other protocols allow. The vast majority of the markets the Company serves, most notably the pharmaceutical, biomedical research, materials sciences, food/environmental and clinical markets, have continued to operate at various levels, and the Company is working closely with these customers to facilitate their seamless operation.
26
Financial Overview
The Company’s operating results are as follows for the three months ended April 2, 2022 and April 3, 2021 (dollars in thousands, except per share data):
Three Months Ended |
||||||||||||
April 2, 2022 |
April 3, 2021 |
% Change |
||||||||||
Revenues: |
||||||||||||
Product sales |
$ | 450,840 | $ | 382,022 | 18 |
% | ||||||
Service sales |
239,732 | 226,523 | 6 |
% | ||||||||
Total net sales |
690,572 | 608,545 | 13 |
% | ||||||||
Costs and operating expenses: |
||||||||||||
Cost of sales |
285,685 | 254,147 | 12 |
% | ||||||||
Selling and administrative expenses |
157,475 | 143,196 | 10 |
% | ||||||||
Research and development expenses |
40,472 | 38,092 | 6 |
% | ||||||||
Purchased intangibles amortization |
1,673 | 1,840 | (9 |
%) | ||||||||
Acquired in-process research and development |
9,797 | — | — |
|||||||||
Operating income |
195,470 | 171,270 | 14 |
% | ||||||||
Operating income as a % of sales |
28.3 |
% |
28.1 |
% |
||||||||
Other income, net |
170 | 9,359 | (98 |
%) | ||||||||
Interest expense, net |
(8,945 | ) | (6,845 | ) | 31 |
% | ||||||
Income before income taxes |
186,695 | 173,784 | 7 |
% | ||||||||
Provision for income taxes |
26,864 | 25,657 | 5 |
% | ||||||||
Net income |
$ | 159,831 | $ | 148,127 | 8 |
% | ||||||
Net income per diluted common share |
$ | 2.62 | $ | 2.37 | 11 |
% | ||||||
The Company’s net sales increased 13% in the first quarter of 2022 as compared to the first quarter of 2021 driven by strong customer demand across most major geographies, end markets, and product categories. Foreign currency translation decreased total sales by 3% as the U.S. dollar strengthened versus most of the foreign currencies in the world in the quarter. In addition, the Company’s first quarter of 2022 had one less calendar day than the first quarter of 2021.
Instrument system sales increased 24% in the first quarter, due to the broad-based increase in customer demand across all existing and newly introduced LC,
LC-MS
and Thermal Analysis instrument system sales. Foreign currency translation decreased instrument system sales by 2%. Recurring revenues (combined sales of precision chemistry consumables and services) increased 6% in the first quarter, with foreign currency translation decreasing sales by 3%. Geographically, the Company’s sales growth in the first quarter was broad-based across most major regions as sales increased 11% in Asia, 26% in the Americas, and 3% in Europe, with the effect of foreign currency translation decreasing sales by 3% in Asia and 6% in Europe. In addition, sales increased 28% in the U.S. and 17% in India, while sales decreased by 3% in Japan with foreign currency translation decreasing India and Japan’s sales growth rates by 6% and 9%, respectively. China sales increased 18%, driven by strong customer demand for our products and service for most the of the first quarter of 2022; however, the new COVID lockdowns in China put in place late in the first quarter of 2022 may have a negative impact on our future sales growth if these lockdowns continue for a prolonged period. Foreign currency translation increased China sales growth by 1% in the quarter.
During the first quarter of 2022, sales to pharmaceutical customers increased 15%, driven by growth in most regions, including 18% in China, 21% in India, and 32% in the Americas on a 37% sales increase in the United States on strong customer demand. Foreign currency translation decreased pharmaceutical sales growth by 4%. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 14%, with the effect of foreign currency translation decreasing sales growth by 3%. During the first quarter of 2022, combined sales to academic and government customers were flat, with foreign currency translation negatively impacting sales growth by 4%. Sales to our academic and government customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales can vary significantly from period to period.
27
Operating income was $195 million in the first quarter of 2022, an increase of 14% as compared to the first quarter of 2021. This increase in operating income was primarily a result of the increase in sales volumes and price increases being partially offset by an increase in electronic component and freight inflationary costs.
During the first quarter 2022, the Company completed an asset acquisition in which the charge detection mass spectrometry technology (“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. This CDMS technology makes it possible to analyze extremely large proteins and protein complexes used in cell and gene therapies that would otherwise be difficult to analyze with conventional mass spectrometry. Once this technology is further developed it will extend the capabilities of our mass spectrometry portfolio for a broader set of applications and as such the cost of this technology asset has been accounted for as Acquired
In-Process
Research and Development and expensed as part of costs and operating expenses in the statement of operations. The Company generated $198 million and $218 million of net cash flows from operations in the first quarter of 2022 and 2021, respectively. This decrease in cash flow from operations can primarily be attributed to an increase in inventory levels due to the higher sales volumes and the
build-up
of safety stock in an attempt to mitigate future supply chain issues. In addition, the Company paid a higher amount of incentive compensation in the 2022 quarter as compared to the 2021 quarter. Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $28 million and $40 million in the first quarter of 2022 and 2021, respectively. In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a
two-year
period. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. During the first quarters of 2022 and 2021, the Company repurchased $160 million and $173 million of the Company’s outstanding common stock, 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. 28
Results of Operations
Sales by Geography
Geographic sales information is presented below for the three months ended April 2, 2022 and April 3, 2021 (dollars in thousands):
Three Months Ended |
||||||||||||
April 2, 2022 |
April 3, 2021 |
% change |
||||||||||
Net Sales: |
||||||||||||
Asia: |
||||||||||||
China |
$ | 121,032 | $ | 102,919 | 18 |
% | ||||||
Japan |
48,623 | 50,296 | (3 |
%) | ||||||||
Asia Other |
84,679 | 76,327 | 11 |
% | ||||||||
Total Asia |
254,334 | 229,542 | 11 |
% | ||||||||
Americas: |
||||||||||||
United States |
208,713 | 162,433 | 28 |
% | ||||||||
Americas Other |
40,124 | 34,924 | 15 |
% | ||||||||
Total Americas |
248,837 | 197,357 | 26 |
% | ||||||||
Europe |
187,401 | 181,646 | 3 |
% | ||||||||
Total net sales |
$ | 690,572 | $ | 608,545 | 13 |
% | ||||||
In the first quarter of 2022, sales benefited from stronger demand for our products and services across all major geographies and customer classes. The sales strength was broad-based, driven by continued growth in recurring revenues and the very strong sales growth in existing and newly introduced LC and
LC-MS
and Thermal Analysis instrument system sales. Recurring revenues sales growth was negatively impacted by one less calendar day in the first quarter of 2022 as compared to the first quarter of 2021. Sales by Trade Class
Net sales by customer class are presented below for the three months ended April 2, 2022 and April 3, 2021 (dollars in thousands):
Three Months Ended |
||||||||||||
April 2, 2022 |
April 3, 2021 |
% change |
||||||||||
Pharmaceutical |
$ | 415,772 | $ | 360,148 | 15 |
% | ||||||
Industrial |
209,397 | 183,273 | 14 |
% | ||||||||
Academic and government |
65,403 | 65,124 | — |
|||||||||
Total net sales |
$ | 690,572 | $ | 608,545 | 13 |
% | ||||||
In the first quarter of 2022, the increase in sales to pharmaceutical customers was broad-based with double-digit sales growth across most major geographies, primarily due to stronger demand for our products and services. Foreign currency translation decreased sales to pharmaceutical customers by 4%. Sales to industrial customers increased 14% in the first quarter of 2022, primarily due to an increase in customer demand. Foreign currency translation decreased sales to industrial customers by 3% in the first quarter of 2022. Sales to academic and government customers were flat in the first quarter of 2022, with foreign currency translation decreasing sales by 4%.
29
Waters Products and Services Net Sales
Net sales for Waters products and services were as follows for the three months ended April 2, 2022 and April 3, 2021 (dollars in thousands):
Three Months Ended |
||||||||||||||||||||
April 2, 2022 |
% of Total |
April 3, 2021 |
% of Total |
% change |
||||||||||||||||
| Waters instrument systems |
$ | 269,962 | 44 |
% |
$ | 216,072 | 40 |
% |
25 |
% | ||||||||||
| Chemistry consumables |
125,618 | 21 |
% |
118,974 | 22 |
% |
6 |
% | ||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Waters product sales |
395,580 | 65 |
% |
335,046 | 62 |
% |
18 |
% | ||||||||||||
| Waters service |
217,576 | 35 |
% |
206,832 | 38 |
% |
5 |
% | ||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Waters net sales |
$ | 613,156 | 100 |
% |
$ | 541,878 | 100 |
% |
13 |
% | ||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
The effect of foreign currency translation decreased Waters sales by 3% for the first quarter. Waters instrument system sales (LC and MS technology-based) increased in the first quarter of 2022 driven by the strong broad-based sales performance across all key regions, with double-digit sales growth, primarily due to higher sales as a result of stronger demand for our products and services by our customers. Waters chemistry consumables sales increased in the first quarter of 2022, attributable to the increased demand in India, Asia Other, and the United States, driven by the uptake in columns and application-specific testing kits to pharmaceutical customers. Waters service sales increased due to higher service demand billings, particularly in India and the United States. Waters recurring revenues were also negatively impacted by one less calendar day and the impact of foreign currency translation which decreased sales by 4% in the first quarter of 2022 as compared to the first quarter of 2021.
In the first quarter of 2022, Waters sales growth was broad-based and increased by 30% in the Americas, 2% in Europe, and 9% in Asia, with sales in China and India growing 13% and 17%, respectively. Foreign currency translation decreased Waters sales by 6% in Europe, 2% in Asia, and 6% in India, while increasing sales by 1% in China.
TA Product and Services Net Sales
Net sales for TA products and services were as follows for the three months ended April 2, 2022, 2021 and 2020 (dollars in thousands):
Three Months Ended |
||||||||||||||||||||
April 2, 2022 |
% of Total |
April 3, 2021 |
% of Total |
% change |
||||||||||||||||
| TA instrument systems |
$ | 55,260 | 71 |
% |
$ | 46,976 | 70 |
% |
18 |
% | ||||||||||
| TA service |
22,156 | 29 |
% |
19,691 | 30 |
% |
13 |
% | ||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total TA net sales |
$ | 77,416 | 100 |
% |
$ | 66,667 | 100 |
% |
16 |
% | ||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
TA product and service sales were broad-based across most major geographies increasing 16% in the first quarter, driven by strong customer demand for our Thermal Analysis instruments and services. The increase in TA instrument system sales in the first quarter of 2022 was primarily driven by strength in China, Korea and Europe. The increase in TA service sales was primarily due to customers continuing to resume their operations after the restrictions caused by
COVID-19,
as well as sales of service plans and billings to a higher installed base of customers. The effect of foreign currency translation decreased TA’s sales by 2%. Cost of Sales
Cost of sales for the first quarter of 2022 increased 12% primarily due to the increase in sales volume as well as an increase in electronic component and freight inflationary costs. Cost of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix, product costs of instrument systems and amortization of software platforms. At current foreign currency exchange rates, the Company expects foreign currency translation to decrease gross profit slightly for the remainder of 2022.
Selling and Administrative Expenses
Selling and administrative expenses increased 10% in the first quarter of 2022 as compared to the first quarter of 2021. In the first quarter of 2022, selling and administrative expenses were impacted by higher merit and incentive compensation costs, compared to the first quarter of 2021. In addition, the effect of foreign currency translation decreased selling and administrative expenses by 2% in the first quarter of 2022.
30
As a percentage of net sales, selling and administrative expenses were 22.8% and 23.5% for the first quarters of 2022 and 2021, respectively. The decrease in this percentage is attributable to the increase in sales.
Research and Development Expenses
Research and development expenses increased 6% in the first quarter of 2022. In addition, the effect of foreign currency translation decreased research and development expenses by 1% in the quarter.
In-Process
Research Development During the three months ended April 2, 2022, the Company completed a technology and intellectual property right asset acquisition in which the charge detection mass spectrometry technology (“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. This CDMS technology makes it possible to analyze extremely large proteins and protein complexes used in cell and gene therapies that would otherwise be difficult to analyze with conventional mass spectrometry. Once this technology is further developed, it is expected to extend the capabilities of our mass spectrometry portfolio for a broader set of applications and as such the cost of this technology asset has been accounted for as
In-Process
Research and Development and expensed in costs and operating expenses in the statement of operations. Other Income, net
During the first quarter of 2022, the Company sold an equity investment for $7 million in cash and recorded a gain on sale of approximately $4 million in other income, net on the statement of operations. The Company also recorded an other than temporary impairment loss on an equity method investment still held at the reporting date of approximately $4 million within other income, net on the statement of operations as the company entered into a sale process and we adjusted the carrying value of our investment based on our portion of the total proceeds we expect to receive.
During the first quarter of 2021, the Company recorded an unrealized gain of $10 million due to an observable change in the fair value of an existing investment the Company does not have the ability to exercise significant influence over.
Interest Expense, Net
The increase in net interest expense in the first quarter of 2022 was primarily attributable to the lower interest income benefit from the lower notional amount of interest rate cross currency swap agreements.
Provision for Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of April 2, 2022. The Company had a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones. The Company has a new Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. The effect of applying the concessionary income tax rates rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the quarter in 2022 and 2021 by $5 million and $4 million, respectively, and increased the Company’s net income per diluted share by $0.08 and $0.06, respectively.
The Company’s effective tax rate for the 2022 and 2021 quarters was 14.4% and 14.8%, respectively. The decrease in the effective rate is primarily due to the income tax provision including a $4 million income tax benefit related to stock-based compensation for the first quarter 2022 as compared to a $2 million income tax benefit related to stock-based compensation for the first quarter of 2021. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates. 31
Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):
Three Months Ended |
||||||||
April 2, 2022 |
April 3, 2021 |
|||||||
| Net income |
$ | 159,831 | $ | 148,127 | ||||
| Depreciation and amortization |
32,664 | 31,356 | ||||||
| Stock-based compensation |
10,933 | 8,305 | ||||||
| Deferred income taxes |
4,175 | 2,787 | ||||||
| Acquired in-process research and development and other non-cash items |
9,381 | — | ||||||
| Change in accounts receivable |
(907 | ) | 7,945 | |||||
| Change in inventories |
(26,832 | ) | (30,544 | ) | ||||
| Change in accounts payable and other current liabilities |
(69,548 | ) | (29,758 | ) | ||||
| Change in deferred revenue and customer advances |
91,514 | 89,048 | ||||||
| Other changes |
(13,251 | ) | (8,862 | ) | ||||
| |
|
|
|
|||||
| Net cash provided by operating activities |
197,960 | 218,404 | ||||||
| Net cash used in investing activities |
18,992 | (159,004 | ) | |||||
| Net cash used in financing activities |
(227,411 | ) | 188,775 | |||||
| Effect of exchange rate changes on cash and cash equivalents |
(10,705 | ) | (1,087 | ) | ||||
| |
|
|
|
|||||
| (Decrease) increase in cash and cash equivalents |
$ | (21,164 | ) | $ | 247,088 | |||
| |
|
|
|
|||||
Cash Flow from Operating Activities
Net cash provided by operating activities was $198 million and $218 million during the first quarter of 2022 and 2021, respectively. This decrease in operating cash flow was primarily a result of higher inventory levels due to higher sales volumes and higher incentive compensation payments in the first quarter of 2022 compared to the first quarter of 2021. The changes within net cash provided by operating activities include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the changes in net income:
| • | The changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales. Days sales outstanding decreased to 81 days at April 2, 2022 as compared to 84 days at April 3, 2021. |
| • | The changes in accounts payable and other current liabilities were a result of the timing of payments to vendors, as well as the annual payment of management incentive compensation. |
| • | Net cash provided from deferred revenue and customer advances results from annual increases in new service contracts as a higher installed base of customers renew annual service contracts. |
| • | Other changes were attributable to variation in the timing of various provisions, expenditures, prepaid income taxes and accruals in other current assets, other assets and other liabilities. |
Cash Flow from Investing Activities
Net cash provided by investing activities totaled $19 million in the first quarter of 2022 and net cash used in investing activities totaled $159 million in the first quarter of 2021, respectively. Additions to fixed assets and capitalized software were $28 million and $40 million in the three months ended April 2, 2022 and April 3, 2021, respectively. The cash flows from investing activities in 2022 also included $6 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the United States. The Company has incurred costs of $206 million on this facility through the end of the first quarter of 2022, and anticipates spending approximately $30 million to complete this new facility in 2022.
state-of-the-art
32
During the three months ended April 2, 2022 and April 3, 2021, the Company purchased $9 million and $123 million of investments, respectively, while $54 million and $3 million of investments matured, respectively, and were used for financing activities described below.
During the first of quarter 2022, the Company paid $5 million for the CDMS technology and intellectual property right asset from Megadalton, and the Company is required to make an additional $4 million of guaranteed payments at various dates in the future through 2029. The total purchase price of approximately $10 million was accounted for as Acquired
In-Process
Research and Development and expensed as part of costs and operating expenses in the statement of operations in the first quarter of 2022. Cash Flow from Financing Activities
The Company entered into a credit agreement in September 2021 governing the Company’s five-year, $1.8 billion revolving facility that matures in September 2026. As of April 2, 2022, the Company had a total of $1.4 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $140 million borrowed under the 2021 Credit Agreement. During the three months ended April 2, 2022 and April 3, 2021, the Company’s net debt borrowings decreased by $70 million and increased by $350 million, respectively.
As of April 2, 2022, the Company has entered into three-year interest rate cross-currency swap derivative agreements with a notional value $550 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. As a result of entering into these agreements, the Company anticipates lowering net interest expense by approximately $7 million in 2022.
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a
two-year
period. This new program replaced the remaining amounts available from the pre-existing
program. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. During the three months ended April 2, 2022 and April 3, 2021, the Company repurchased $160 million and $173 million, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased $10 million and $8 million of common stock related to the vesting of restricted stock units during both the three months ended April 2, 2022 and April 3, 2021, respectively. The Company received $13 million and $16 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan during the three months ended April 2, 2022 and April 3, 2021, respectively.
The Company had cash, cash equivalents and investments of $503 million as of April 2, 2022. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $431 million held by foreign subsidiaries at April 2, 2022, of which $324 million was held in currencies other than U.S. dollars.
Contractual Obligations, Commercial Commitments, Contingent Liabilities and Dividends
A summary of the Company’s contractual obligations and commercial commitments is included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021, as filed with the SEC on February 24, 2022. The Company reviewed its contractual obligations and commercial commitments as of April 2, 2022 and determined that there were no material changes outside the ordinary course of business from the information set forth in the Annual Report on Form 10-K.
From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. The Company believes that it has meritorious arguments in its current litigation matters and that any outcome, either individually or in the aggregate, will not be material to the Company’s financial position or results of operations.
During fiscal year 2022, the Company expects to contribute a total of approximately $3 million to $6 million to its defined benefit plans, excluding the U.S. defined benefit pension plans.
33
The Company has not paid any dividends and has no plans, at this time, to pay any dividends in the future.
Off-Balance
Sheet Arrangements The Company has not created, and is not party to, any special-purpose or
off-balance
sheet entities for the purpose of raising capital, incurring debt or operating parts of its business that are not consolidated (to the extent of the Company’s ownership interest therein) into the consolidated financial statements. The Company has not entered into any transactions with unconsolidated entities whereby it has subordinated retained interests, derivative instruments or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company. The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company’s costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.
Critical Accounting Policies and Estimates
In the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021, as filed with the SEC on February 24, 2022, 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 and business combinations and asset acquisitions. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the three months ended April 2, 2022. The Company did not make any changes in those policies during the three months ended April 2, 2022. New Accounting Pronouncements
Please refer to Note 14, Recent Accounting Standard Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.
Special Note Regarding Forward-Looking Statements
Certain of the statements in this Quarterly Report on Form
10-Q,
including the information incorporated by reference herein, may contain forward-looking statements 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 the ongoing COVID-19
pandemic; the impact of new or proposed tariff or trade regulations or changes in the interpretation or enforcement of existing regulations; 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 of the 2017 Tax Act in the U.S.; 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 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. 34
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 Form
10-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 statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without limitation: | • | Risks related to the effects of the COVID-19 pandemic on our business, including: portions of our global workforce being unable to work fully and/or effectively due to working remotely, illness, quarantines, government actions, facility closures or other reasons related to the COVID-19 pandemic, increased risks of cyber attacks resulting from our temporary remote working model, disruptions in our manufacturing capabilities or to our supply chain and distribution network, volatility and uncertainty in global capital markets limiting our ability to access capital, customers being unable to make timely payment for purchases and volatility in demand for our products. |
| • | Foreign currency exchange rate fluctuations that could adversely affect translation of the Company’s future sales, financial operating results and the condition of its non-U.S. operations, especially when a currency weakens against the U.S. dollar. |
| • | Current global economic, sovereign and political conditions and uncertainties, particularly regarding the effect of the COVID-19 pandemic; new or proposed tariffs or trade regulations or changes in the interpretation or enforcement of existing regulations; the United Kingdom’s exit from the European Union as well as the Chinese government’s ongoing tightening of restrictions on procurement by government-funded customers; the Company’s ability to access capital and maintain liquidity in volatile market conditions; changes in timing and demand for the Company’s products among the Company’s customers and various market sectors or geographies, particularly if they should reduce capital expenditures or are unable to obtain funding, as in the cases of governmental, academic and research institutions; the effect of mergers and acquisitions on customer demand for the Company’s products; and the Company’s ability to sustain and enhance service. |
| • | Negative industry trends; 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; lack of acceptance of new products; expansion of our business in developing markets; spending by certain end-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. |
| • | Increased regulatory burdens as the Company’s business evolves, especially with respect to the United States Food and Drug Administration and the United States Environmental Protection Agency, among others, as well as regulatory, environmental and logistical obstacles affecting the distribution of the Company’s products, completion of purchase order documentation by our customers and ability of customers to obtain letters of credit or other financing alternatives. |
| • | Risks associated with lawsuits, particularly involving claims for infringement of patents and other intellectual property rights. |
| • | The impact and costs incurred from changes in accounting principles and practices; the impact and costs of changes in statutory or contractual tax rates in jurisdictions in which the Company operates, specifically as it relates to the 2017 Tax Act in the U.S.; 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. |
| • | The impact and costs of war, in particular as a result of the ongoing conflict between Russia and Ukraine, and the possibility of further escalation resulting in a new geopolitical and regulatory instability. |
35
Certain of these and other factors are discussed under the heading “Risk Factors” under Part I, Item 1A of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021, as filed with the SEC on February 24, 2022. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements, whether because of these factors or for other reasons. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q
and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by law, the Company does not assume any obligation to update any forward-looking statements. 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 April 2, 2022, 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 April 2, 2022 and December 31, 2021, $431 million out of $503 million and $440 million out of $569 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $324 million out of $503 million and $298 million out of $569 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at April 2, 2022 and December 31, 2021, respectively. As of April 2, 2022, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.
Assuming a hypothetical adverse change of 10% in
year-end
exchange rates (a strengthening of the U.S. dollar), the fair market value of the Company’s cash, cash equivalents and investments held in currencies other than the U.S. dollar as of April 2, 2022 would decrease by approximately $30 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 three months ended April 2, 2022. For information regarding the Company’s market risk, refer to Item 7A of Part II of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021, as filed with the SEC on February 24, 2022. 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 officer), with the participation of management, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e)
and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of April 2, 2022 (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 Control Over Financial Reporting
No change was identified in the Company’s internal control over financial reporting (as defined in
Rules 13a-15(f)
and 15d-15(f)
under the Exchange Act) during the quarter ended April 2, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 36
Part II:
Other Information
Item 1: |
Legal Proceedings |
There have been no material changes in the Company’s legal proceedings during the three months ended April 2, 2022 as described in Item 3 of Part I of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021, as filed with the SEC on February 24, 2022. 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 Form
10-K
for the year ended December 31, 2021, as filed with the SEC on February 24, 2022. The Company reviewed its risk factors as of April 2, 2022 and determined that there were no material changes from the ones set forth in the Form 10-K.
Note, however, the discussion of certain factors under the subheading “Special Note Regarding Forward-Looking Statements” in Part I, Item 2 of this Quarterly Report on Form 10-Q.
These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial may have a material adverse effect on the Company’s business, financial condition and operating results. Item 2: |
Unregistered Sales of Equity Securities and Use of Proceeds |
Purchases of Equity Securities by the Issuer
The following table provides information about purchases by the Company during the three months ended April 2, 2022 of equity securities registered by the Company under the Exchange Act (in thousands, except per share data):
| Period |
Total Number of Shares Purchased (1) |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Programs |
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs (2) |
||||||||||||
| January 1, 2022 to January 29, 2022 |
151 | $ | 332.31 | 151 | $ | 834,249 | ||||||||||
| January 30, 2022 to February 26, 2022 |
181 | $ | 321.53 | 159 | $ | 782,972 | ||||||||||
| February 27, 2022 to April 2, 2022 |
191 | $ | 321.45 | 183 | $ | 724,176 | ||||||||||
| |
|
|
|
|||||||||||||
| Total |
523 | $ | 324.61 | 493 | $ | 724,176 | ||||||||||
| |
|
|
|
|||||||||||||
| (1) | The Company repurchased 31 thousand shares of common stock at a cost of $10 million related to the vesting of restricted stock during the three months ended April 2, 2022. |
| (2) | In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock in open market or private transactions over a two-year period. This program replaced the remaining amounts available under the pre-existing authorization. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. 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. |
37
Item 6: |
Exhibits |
| Exhibit Number |
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 Form 10-Q for the quarter ended April 2, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Cash Flows (unaudited) and (vi) Condensed Notes to Consolidated Financial Statements (unaudited). | |
| 104 | Cover Page Interactive Date File (formatted in iXBRL and contained in Exhibit 101). | |
| (*) | This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filing, except to the extent the Company specifically incorporates it by reference. |
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| W ATERS CORPORATION |
| /s/ Amol Chaubal |
| Amol Chaubal |
| Senior Vice President and Chief Financial Officer |
| (Principal Financial Officer) |
| (Principal Accounting Officer) |
Date: May 5, 2022
39
TABLE OF CONTENTS
Item 1: Financial StatementsItem 2: Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3: Quantitative and Qualitative Disclosures About Market RiskItem 4: Controls and ProceduresPart Ii: Other InformationPart Ii:Item 1: Legal ProceedingsItem 1A: Risk FactorsItem 2: Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6: Exhibits