Waters(WAT) - 2022 Q4 - Annual Report

Part I Item 1. Business Waters Corporation offers analytical workflow solutions, including LC, MS, and TA instruments, with 59% of 2022 net sales from pharmaceuticals Products and Markets Waters and TA divisions offer LC, MS, and thermal analysis instruments, with significant service revenue contributions in 2022 - Introduced the new Xevo™ TQ Absolute system in 2022, described as the most sensitive and compact benchtop tandem mass spectrometer in its class[36] - Introduced the SELECT SERIES™ MRT in 2021, a high-resolution mass spectrometer that will serve as the basis for next-generation Time-of-Flight (Tof) instruments[34] - TA division introduced the Powder Rheology Accessory in 2022 to characterize powder behavior for applications like battery electrode coatings and pharmaceutical tablets[50] - Service revenue is a substantial part of the business, accounting for over 35% of Waters sales and over 25% of TA sales in 2022[43][52] Manufacturing and Human Capital Global manufacturing includes a $232M Taunton facility expansion; workforce reached approximately 8,200 employees by year-end 2022, focusing on diversity - A new state-of-the-art facility in Taunton, MA, for precision chemistry manufacturing is nearing completion in 2023, with approximately $232M invested[59] - The company's workforce grew to approximately 8,200 employees by the end of 2022, up from 7,800 in 2021[71] - As of year-end 2022, women occupied 34% of leadership roles (Senior Director or above), a 12% increase from 2017. The overall workforce is 23% racially and/or ethnically diverse[76] - The company operates through two main segments: Waters (LC and MS instruments) and TA (thermal analysis, rheometry, and calorimetry instruments), which are aggregated into one reporting segment for financial purposes[15] - The pharmaceutical sector is the largest customer segment, accounting for 59% of net sales in 2022, followed by industrial accounts (31%) and academic/governmental agencies (10%)[53] - The company has a significant global presence, with approximately 4,500 field representatives and 83 sales offices worldwide as of 2022[55] R&D Expenditures | Category | 2022 (M) | 2021 (M) | 2020 (M) | | :--- | :--- | :--- | :--- | | R&D Expenditures | $176M | $168M | $141M | | R&D Employees | ~1,233 | ~1,150 | ~1,112 | | Total Employees | ~8,200 | ~7,800 | ~7,400 | Item 1A. Risk Factors The company faces substantial risks from macroeconomic factors, competition, cybersecurity, supply chain, and evolving ESG expectations Macroeconomic and Business Risks International sales (70% of 2022 net sales, 19% in China) expose the company to currency and geopolitical risks, competition, and supply chain vulnerabilities - Approximately 70% of net sales in 2022 were outside the United States. The strengthening U.S. dollar negatively impacted 2022 sales growth by 5% and EPS growth by 9%[91] - China represents a significant market, generating approximately 19% of total net sales in 2022, exposing the company to risks from Chinese governmental policies and economic conditions[94] - The company faces strong competition from Agilent Technologies, Shimadzu, Bruker, Danaher, and Thermo Fisher Scientific in the analytical instrument market[79] - The COVID-19 pandemic has disrupted and may continue to disrupt the business, particularly supply chains and logistics, and has led to modified business practices like remote work, which could heighten security risks[99][101][102] Operational and Financial Risks Key risks include cybersecurity, regulatory compliance, ESG, goodwill impairment ($658M), tax liabilities, climate change, and managing $1.6B debt - The company relies on its technology infrastructure and is vulnerable to cybersecurity threats like ransomware and unauthorized access, which could lead to service interruptions and loss of data or assets[131] - Failure to meet evolving ESG expectations from stakeholders could negatively impact reputation, brand, and customer relationships[145][146] - As of December 31, 2022, the company had goodwill and other intangible assets of approximately $658M, which are subject to impairment risk from negative economic trends or business disruptions[127] - The company had $1.6B in debt as of December 31, 2022, and its ability to service this debt and fund operations depends on maintaining sufficient cash flow[155] Item 1B. Unresolved Staff Comments The company reports no unresolved comments from the SEC staff - None[158] Item 2. Properties Waters Corporation operates 89 facilities globally (19 U.S., 70 international), deemed adequate for current and near-term needs - The company operates a total of 89 facilities, with 19 in the U.S. and 70 internationally, including field offices[159] Location and Function of Key Facilities | Location | Function | Owned/Leased | | :--- | :--- | :--- | | New Castle, DE | M, R, S, D, A | Owned | | Milford, MA | M, R, S, A | Owned | | Taunton, MA | M, R | Owned | | Solihull, England | M, A | Owned | | Wilmslow, England | M, R, S, D, A | Owned | | Wexford, Ireland | M, R, D, A | Owned | | Bangalore, India | M, S, D, A | Owned | | Etten-Leur, Netherlands | S, D, A | Owned | | Hüllhorst, Germany | M, R, S, D, A | Owned | Item 3. Legal Proceedings The company is involved in routine legal proceedings, but management anticipates no material financial impact - The company is subject to various legal proceedings in the ordinary course of business but does not anticipate any material impact on its financial results[164] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[165] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on NYSE (WAT); no dividends paid; active share repurchase program with $269M remaining at year-end 2022 - The company has not paid cash dividends for the last three fiscal years and does not plan to in the foreseeable future[168] - In December 2022, the Board of Directors extended the share repurchase program to January 21, 2024, and increased the total authorization by $750M to $4.8B[176] Period (2022) Share Repurchases | Period (2022) | Total Shares Purchased (thousands) | Average Price Paid per Share | Maximum Value Remaining for Purchase (thousands) | | :--- | :--- | :--- | :--- | | Oct 2 - Oct 29 | 174 | $282.93 | $368,795 | | Oct 30 - Nov 26 | 147 | $318.78 | $321,997 | | Nov 27 - Dec 31 | 154 | $342.87 | $269,297 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net sales grew 7% to $2.97B, operating income up 6% to $873M; company announced $1.4B Wyatt Technology acquisition - Announced an agreement on February 14, 2023, to acquire Wyatt Technology for $1.4B in cash, expected to close in Q2 2023[190][225] Key Financial Metrics | Metric | 2022 (M) | 2021 (M) | % Change | | :--- | :--- | :--- | :--- | | Total Net Sales | $2,971.9M | $2,785.9M | 7% | | Operating Income | $873.4M | $821.7M | 6% | | Net Income | $707.8M | $692.8M | 2% | | Diluted EPS | $11.73 | $11.17 | 5% | - Foreign currency translation had a significant negative impact in 2022, decreasing total sales growth by 5% and operating income by approximately $71M[182][184] Results of Operations 2022 sales growth led by Americas (+14%) and Asia (+5%), with Pharmaceutical sales up 5%; operating expenses increased Net Sales by Geography (2022 vs 2021) | Region | 2022 Sales (M) | 2021 Sales (M) | % Change | | :--- | :--- | :--- | :--- | | Asia | $1,131.7 | $1,075.8 | 5% | | China | $565.1 | $521.1 | 8% | | Americas | $1,055.6 | $925.2 | 14% | | United States | $886.1 | $774.0 | 14% | | Europe | $784.6 | $784.9 | 0% | Net Sales by Customer Class (2022 vs 2021) | Class | 2022 Sales (M) | 2021 Sales (M) | % Change | | :--- | :--- | :--- | :--- | | Pharmaceutical | $1,751.7 | $1,667.1 | 5% | | Industrial | $909.8 | $829.2 | 10% | | Academic & Gov't | $310.5 | $289.6 | 7% | Net Sales by Division (2022 vs 2021) | Division/Product | 2022 Sales (M) | 2021 Sales (M) | % Change | | :--- | :--- | :--- | :--- | | Waters Division | $2,626.5 | $2,473.1 | 6% | | Instrument Systems | $1,210.5 | $1,089.2 | 11% | | Chemistry Consumables | $525.4 | $507.2 | 4% | | Service | $890.6 | $876.6 | 2% | | TA Division | $345.5 | $312.8 | 10% | | Instrument Systems | $252.3 | $225.6 | 12% | | Service | $93.2 | $87.2 | 7% | - The effective tax rate increased to 15.5% in 2022 from 14.1% in 2021, primarily due to a U.S. tax law change requiring capitalization and amortization of R&D expenditures, which impacted the GILTI provision[213] Liquidity and Capital Resources Net cash from operations decreased to $612M in 2022; $176M capital expenditures, $616M of stock repurchases; $481M cash, $1.6B debt - Net cash provided by operating activities was $612M in 2022, a decrease from $747M in 2021[216] - Capital expenditures were $176M in 2022, with ongoing investment in the Taunton, MA precision chemistry facility, which is expected to be completed in 2023[218] - The company repurchased $616M of its common stock in 2022 under its authorized program[228] - As of Dec 31, 2022, the company had $1.6B in total debt and $481M in cash, cash equivalents, and investments. The majority of cash ($472M) is held by foreign subsidiaries[226][230] Critical Accounting Policies and Estimates Critical policies include Revenue Recognition, Inventory Valuation, Goodwill and Intangible Assets impairment, and Income Taxes - Revenue Recognition: Judgement is required to allocate transaction prices between distinct performance obligations, such as product and installation services, based on relative standalone selling prices[240] - Goodwill and Intangible Assets: Goodwill ($430M at year-end 2022) is tested for impairment annually using a discounted cash flow method, which requires assumptions about revenue growth and discount rates[246] - Income Taxes: The company has a concessionary 5% income tax rate in Singapore through March 2026, contingent on meeting certain operational and financial milestones. Failure to meet these could result in a reversal of previously recognized tax benefits[252] - Inventory Valuation: Inventory is valued at the lower of cost or net realizable value, with provisions for obsolescence based on historical and projected future demand. The inventory balance was $456M at year-end 2022[244] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Company manages foreign currency and interest rate risks using derivatives; hypothetical 10% adverse exchange rate change impacts pre-tax earnings by $6M - The company uses interest rate cross-currency swap agreements with a notional value of $585M to hedge its euro and yen-denominated net asset investments[261] - A hypothetical 10% adverse change (strengthening of the U.S. dollar) in year-end exchange rates would increase pre-tax earnings by approximately $6M from foreign currency exchange contracts[263] - As of December 31, 2022, $472M of the company's $481M in cash, cash equivalents, and investments were held by foreign subsidiaries[266] Item 8. Financial Statements and Supplementary Data Management and auditor confirm effective internal controls; unqualified opinion on financial statements and controls; full financial statements included - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework (2013)[270] - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion, stating the financial statements are presented fairly and the company maintained effective internal control over financial reporting[275] - The auditor identified 'Product Revenue Recognition' as a Critical Audit Matter due to the high degree of auditor effort required in performing procedures related to it[282][284] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[527] Item 9A. Controls and Procedures CEO and CFO concluded disclosure controls were effective as of Dec 31, 2022, with no material changes to internal control - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[528] - No material changes to internal control over financial reporting were identified in the quarter ended December 31, 2022[531] Item 9B. Other Information The company reports no other information for this item - None[532] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[533] Part III Item 10. Directors, Executive Officers and Corporate Governance Executive officers identified; detailed director and corporate governance information incorporated by reference from 2023 Proxy Statement - The executive officers of the company include Dr. Udit Batra (President and CEO), Amol Chaubal (CFO), Jianqing Bennett (SVP, TA Instruments Division), and Jonathan M. Pratt (SVP, Waters Division)[535][538][539] Item 11. Executive Compensation Executive compensation information, including the Compensation Committee Report, is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[545] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity compensation plan details provided; security ownership information incorporated by reference from 2023 Proxy Statement Equity Compensation Plan Information as of December 31, 2022 (in thousands) | Plan Category | Securities to be Issued Upon Exercise (thousands) | Weighted-Average Exercise Price ($) | Securities Remaining Available for Future Issuance (thousands) | | :--- | :--- | :--- | :--- | | Approved by security holders | 976 | $238.43 | 6,929 | | Not approved by security holders | — | — | — | | Total | 976 | $238.43 | 6,929 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[549] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[550] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all documents filed with the Annual Report, including consolidated financial statements, auditor's report, and various exhibits - This section contains the list of all financial statements and exhibits filed with the Form 10-K[552] Item 16. Form 10-K Summary The company has opted not to include the optional summary for Item 16 in this Annual Report - The optional summary in Item 16 has not been included in this Annual Report[557]