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Basis of Presentation and Summary of Significant Accounting Policies | 3 Months Ended
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Apr. 01, 2023
Accounting Policies [Abstract] |
Basis of Presentation and Summary of Significant Accounting Policies | 1 Basis of Presentation and Summary of Significant Accounting Policies Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high-performance liquid chromatography (“HPLC”), ultra-performance liquid chromatography (“UPLC TM ” and, together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together (“LC-MS”) and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing. LC-MS instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA TM product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments. 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 2023 and 2022 ended on April 1, 2023 and April 2, 2022, respectively. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form 10-Q and do not include all of the information and footnote disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated. The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions. It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2023. Risks and Uncertainties The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies. 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. 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. Acquisition Agreement On February 14, 2023, the Company entered into an agreement to acquire all issued and outstanding equity interests of Wyatt Technology for $1.4 billion in cash at closing, subject to customary adjustments. Wyatt Technology is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories and services. The Company will finance this acquisition through cash on its balance sheet and existing borrowing capacity that is available on its revolving credit facility. The agreement contains certain customary termination rights, including the right of the sellers to terminate this transaction if it has not been completed by June 14, 2023, subject to automatic extension to August 14, 2023 if certain regulatory approvals are not obtained by such date. If this were to occur, the Company would be required to pay the sellers a one-time fee in the amount of $15 million if the agreement is validly terminated and not consummated in accordance with the closing conditions set forth in the agreement. This transaction is expected to close in the second quarter of 2023, subject to regulatory approvals and other customary closing conditions. Cash, Cash Equivalents and Investments Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of April 1, 2023 and December 31, 2022, $313 million out of $487 million and $472 million out of $481 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $188 million out of $487 million and $336 million out of $481 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at April 1, 2023 and December 31, 2022, respectively. Accounts Receivable and Allowance for Credit Losses Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any off-balance sheet credit exposure related to its customers. Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to re-possess, refurbish and re-sell the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss. The following is a summary of the activity of the Company’s allowance for credit losses for the three months ended April 1, 2023 and April 2, 2022 (in thousands):
|  | Balance at Beginning of Period |  |  | Additions |  |  | Deductions |  |  | Balance at End of Period |
Allowance for Credit Losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
April 1, 2023 |  | $ | 14,311 |  |  | $ | 1,572 |  |  | $ | (1,028 | ) |  | $ | 14,855 |
April 2, 2022 |  | $ | 13,228 |  |  | $ | 987 |  |  | $ | (1,072 | ) |  | $ | 13,143 |
Other Investments During the three months ended April 1, 2023, the Company did not have any other investment activity. During the three months ended April 2, 2022, the Company recorded a realized gain of $ 4 million in other income, net in the consolidated statement of operations due to the sale of an equity investment as well as incurring $4 million in impairment losses on an equity investment. 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 1, 2023 and December 31, 2022. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions. The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at April 1, 2023 (in thousands):
|  | Total at April 1, 2023 |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits |  | $ | 885 |  |  | $ | — |  |  | $ | 885 |  |  | $ | — |
Waters 401(k) Restoration Plan assets |  |  | 28,310 |  |  |  | 28,310 |  |  |  | — |  |  |  | — |
Foreign currency exchange contracts |  |  | 121 |  |  |  | — |  |  |  | 121 |  |  |  | — |
Interest rate cross-currency swap agreements |  |  | 13,880 |  |  |  | — |  |  |  | 13,880 |  |  |  | — |
Total |  | $ | 43,196 |  |  | $ | 28,310 |  |  | $ | 14,886 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency exchange contracts |  | $ | 67 |  |  | $ | — |  |  | $ | 67 |  |  | $ | — |
Interest rate cross-currency swap agreements |  |  | 6,756 |  |  |  | — |  |  |  | 6,756 |  |  |  | — |
Total |  | $ | 6,823 |  |  | $ | — |  |  | $ | 6,823 |  |  | $ | — |
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2022 (in thousands):
|  | Total at December 31, 2022 |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits |  | $ | 862 |  |  | $ | — |  |  | $ | 862 |  |  | $ | — |
Waters 401(k) Restoration Plan assets |  |  | 25,532 |  |  |  | 25,532 |  |  |  | — |  |  |  | — |
Foreign currency exchange contracts |  |  | 231 |  |  |  | — |  |  |  | 231 |  |  |  | — |
Interest rate cross-currency swap agreements |  |  | 19,163 |  |  |  | — |  |  |  | 19,163 |  |  |  | — |
Total |  | $ | 45,788 |  |  | $ | 25,532 |  |  | $ | 20,256 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | 1,509 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,509 |
Foreign currency exchange contracts |  |  | 98 |  |  |  | — |  |  |  | 98 |  |  |  | — |
Interest rate cross-currency swap agreements |  |  | 4,783 |  |  |  | — |  |  |  | 4,783 |  |  |  | — |
Total |  | $ | 6,390 |  |  | $ | — |  |  | $ | 4,881 |  |  | $ | 1,509 |
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 Other Financial Instruments The Company’s accounts receivable and accounts payable are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s variable interest rate debt approximates fair value due to the variable nature of the interest rate. The carrying value of the Company’s fixed interest rate debt was $1.3 billion at both April 1, 2023 and December 31, 2022. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $1.1 billion at both April 1, 2023 and December 31, 2022, using Level 2 inputs. Derivative Transactions The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its non-U.S. dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency. The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its euro-denominated and yen-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows. Foreign Currency Exchange Contracts The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the euro, Japanese yen, British pound, Mexican peso and Brazilian real. Interest Rate Cross-Currency Swap Agreements As of April 1, 2023, the Company had three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $585 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its euro-denominated and yen-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated other comprehensive loss in stockholders’ equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations. The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):
|  | April 1, 2023 |  |  | December 31, 2022 |
|  | Notional Value |  |  | Fair Value |  |  | Notional Value |  |  | Fair Value |
Foreign currency exchange contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other current assets |  | $ | 31,461 |  |  | $ | 121 |  |  | $ | 42,047 |  |  | $ | 231 |
Other current liabilities |  | $ | 16,968 |  |  | $ | 67 |  |  | $ | 13,450 |  |  | $ | 98 |
Interest rate cross-currency swap agreements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other assets |  | $ | 400,000 |  |  | $ | 13,880 |  |  | $ | 400,000 |  |  | $ | 19,163 |
Other liabilities |  | $ | 185,000 |  |  | $ | 6,756 |  |  | $ | 185,000 |  |  | $ | 4,783 |
Accumulated other comprehensive income |  |  |  |  |  | $ | 2,770 |  |  |  |  |  |  | $ | 10,026 |
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 1, 2023 |  |  | April 2, 2022 |
Foreign currency exchange contracts: |  |  |  |  |  |  |  |
Realized gains (losses) on closed contracts |  | Cost of sales |  | $ | 30 |  |  | $ | (1,499 | )
Unrealized losses on open contracts |  | Cost of sales |  |  | (78 | ) |  |  | (489 | )
Cumulative net pre-tax losses |  | Cost of sales |  | $ | (48 | ) |  | $ | (1,988 | )
Interest rate cross-currency swap agreements: |  |  |  |  |  |  |  |
Interest earned |  | Interest income |  | $ | 2,655 |  |  | $ | 1,775 |
Unrealized (losses) gains on contracts, net |  | Accumulated other comprehensive loss |  | $ | (7,256 | ) |  | $ | 12,188 |
Stockholders’ Equity In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $ 4 billion of its outstanding common stock over a two-year period. This program replaced the remaining amounts available from the pre-existing program. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. In December 2022, the Company’s Board of Directors amended and extended this repurchase program’s term by one year such that it shall now expire on January 21, 2024 and increased the total authorization level to $ 4.8 billion, an increase of $ 750 million. During the three months ended April 1, 2023 and April 2, 2022, the Company repurchased 0.2 million and 0.5 million shares of the Company’s outstanding common stock at a cost of $ 58 million and $160 million, respectively, under the January 2019 authorization and other previously announced programs. In addition, the Company repurchased $ 11 million and $10 million of common stock related to the vesting of restricted stock units during the three months ended April 1, 2023 and April 2, 2022, respectively. As of April 1, 2023, the Company had repurchased an aggregate of 15.2 million shares at a cost of $ 3.8 billion under the January 2019 repurchase program and had a total of $1.0 billion authorized for future repurchases. While the Company believes that it has the financial flexibility to fund these share repurchases, as well as to invest in research, technology and business acquisitions, given current cash levels and debt borrowing capacity, it has temporarily suspended its share repurchases due to its recently announced agreement to acquire Wyatt Technology. 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 1, 2023 and April 2, 2022 (in thousands):
|  | Balance at Beginning of Period |  |  | Accruals for Warranties |  |  | Settlements Made |  |  | Balance at End of Period |
Accrued warranty liability: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
April 1, 2023 |  | $ | 11,949 |  |  | $ | 2,177 |  |  | $ | (1,815 | ) |  | $ | 12,311 |
April 2, 2022 |  | $ | 10,718 |  |  | $ | 1,916 |  |  | $ | (2,422 | ) |  | $ | 10,212 |

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- Definition The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI https://asc.fasb.org/topic&trid=2122369 + Details
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