# WATERS CORP /DE/ (WAT) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from WATERS CORP /DE/'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1000697/000119312523050827/d412746d10k.htm
Accession: 0001193125-23-050827
Filing date: 2023-02-27
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/WAT/
All MD&A years: /company/WAT/mda/
Previous year: /company/WAT/mda/fy2021/ (FY 2021)
Next year: /company/WAT/mda/fy2023/ (FY 2023)

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

The Company has two operating segments: WatersTM 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 had a material impact on the Company’s manufacturing facilities or those of the third parties to whom it outsources certain manufacturing processes, the distribution centers where the inventory is managed or the operations of its logistics and other service providers.

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.

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Financial Overview

The Company’s operating results are as follows for the years ended December 31, 2022, 2021 and 2020 (dollars in thousands, except per share data):

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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["**","Percentage not meaningful"]]
[[/GREPCENT_TABLE]]

The Company’s net sales increased 7% in 2022 as compared to 2021, and 18% in 2021 as compared to 2020. The sales growth in 2022 and 2021 was driven by strong customer demand across most major geographies, end markets, and product categories. The increase in sales in 2021 was also impacted by the increase in demand for our products and services as our customers returned to pre-pandemic levels of operations. Foreign currency translation decreased total sales growth by 5% in 2022 as the U.S. dollar strengthened significantly against all other major currencies in the world, which negatively impacted our sales and operating profits. Foreign currency translation increased total sales growth by 2% in 2021.

Instrument system sales increased 11% and 23% in 2022 and 2021, respectively. Such increases were attributable 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 growth by 5% in 2022 and had minimal impact on sales growth in 2021. Recurring revenues (combined sales of precision chemistry consumables and services) increased 3% and 13% in 2022 and 2021, respectively, with foreign currency translation decreasing sales growth by 6% in 2022 and increasing sales growth by 2% in 2021.

Operating income was $873 million in 2022, an increase of 6% as compared to 2021. This increase was primarily a result of the increase in sales volume and pricing increases, partially offset by higher electronic component and freight inflationary costs and the negative effect of foreign currency translation. The effect of foreign currency translation lowered operating income by approximately $71 million during 2022.

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Operating income increased 27% in 2021 as compared to 2020. This increase was primarily a result of the increase in sales volumes caused by our customers resuming laboratory and manufacturing operations throughout the world as they returned to pre-pandemic levels of operations and the favorable impact of foreign currency translation. The operating income increase was partially offset by the restoration of expenses that had been decreased in 2020 which consisted of a series of cost reduction actions that included salary reductions, furloughs and reductions in non-essential spending that increased operating income by approximately $100 million in 2020. During 2021, the effect of foreign currency translation increased operating income by approximately $19 million.

Operating income as a percentage of sales was 29.4%, 29.5% and 27.3% in 2022, 2021 and 2020, respectively. The 2020 operating income percentage decreased as a result of the decrease in sales volume due to the COVID-19 pandemic.

The Company’s effective tax rates were 15.5%, 14.1% and 14.6% for 2022, 2021 and 2020, respectively. Net income per diluted share was $11.73, $11.17 and $8.36 in 2022, 2021 and 2020, respectively.

The Company generated $612 million, $747 million and $791 million of net cash flows provided by operating activities in 2022, 2021 and 2020, respectively. The decrease in 2022 operating cash flow was primarily a result of higher inventory levels, slower cash collections and higher incentive compensation payments in 2022 compared to 2021.

Net cash used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $176 million, $161 million and $172 million in 2022, 2021 and 2020, respectively. The cash flows used in investing activities in 2022, 2021 and 2020 included $32 million, $49 million and $70 million, respectively, of capital expenditures related to the major expansion of the Company’s precision chemistry consumable operations in the United States.

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. 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 by $750 million to $4.8 billion. During the years ended December 31, 2022 and 2021, the Company repurchased $616 million and $640 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.

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.

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Results of Operations

Sales by Geography

Geographic sales information is presented below for the years ended December 31, 2022, 2021 and 2020 (dollars in thousands):

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[[/GREPCENT_TABLE]]

Geographically, the Company’s sales growth in 2022 and 2021 was broad-based across most major regions. Foreign currency translation decreased total sales growth by 5% in 2022 as the U.S. dollar strengthened significantly against all other major currencies. The geographies that were the most negatively impacted by the strengthening of the U.S. dollar in 2022 were Europe and Japan, as the weakening of the euro and Japanese yen lowered sales growth in Europe and Japan by 10% and 17%, respectively, in 2022. In 2022, sales increased 5% in Asia, 14% in the Americas, and were flat in Europe, with the effect of foreign currency translation decreasing sales growth by 7% in Asia, and 10% in Europe. China sales increased 8% in 2022 with foreign currency translation decreasing China sales growth by 2% in 2022. This increase in China sales was driven by strong customer demand for our products and services despite the negative impact that the COVID-19 pandemic had on our business in China in 2022. The latest COVID-19 pandemic lockdowns and reopening in China made it difficult to conduct normal business operations in 2022, and the Company’s future sales growth may be negatively impacted if future lockdowns were to occur for a prolonged period in the future.

The sales growth in 2021 across all geographies was driven by increased demand for our products and services as a result of our customers resuming laboratory and manufacturing operations, as well as the pent-up demand from 2020 caused by the COVID-19 pandemic.

Sales by Trade Class

Net sales by customer class are presented below for the years ended December 31, 2022, 2021 and 2020 (dollars in thousands):

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[[/GREPCENT_TABLE]]

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Sales to pharmaceutical customers increased 5% and 20% in 2022 and 2021, respectively, with foreign currency translation decreasing pharmaceutical sales by 5% in 2022 and increasing sales by 1% in 2021. The sales growth in 2021 for each customer class was driven by the increased demand as our customers returned to pre-pandemic levels of operations. The pharmaceutical sales growth in 2022 was driven by strong growth in most major regions, partially offset by the negative impact from foreign currency translation. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 10% and 17% in 2022 and 2021, respectively, with foreign currency translation decreasing sales growth by 5% in 2022 and increasing sales growth by 2% in 2021. Combined sales to academic and government customers increased 7% in both 2022 and 2021, with foreign currency translation decreasing academic and government sales growth by 6% in 2022 and increasing sales growth by 2% in 2021. 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.

Waters Products and Services Net Sales

Net sales for Waters products and services were as follows for the years ended December 31, 2022, 2021 and 2020 (dollars in thousands):

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[[/GREPCENT_TABLE]]

Waters products and service sales increased 6% and 17% in 2022 and 2021, respectively, with the effect of foreign currency translation decreasing Waters sales growth by 6% in 2022 and increasing sales growth by 2% in 2021. Waters instrument system sales (LC and MS technology-based) grew 11% and 22% in 2022 and 2021, respectively, with foreign currency translation lowering sales growth by 5% in 2022. The increase in the Waters instrument system sales in 2022 and 2021 can be attributed to the strong customer demand for our existing products as well as the introduction of our new ArcTM HPLC, ACQUITYTM Premier and XEVOTM TQ Absolute products. The increase in Waters chemistry consumables sales was primarily due to the strong demand in most major geographies, driven by the uptake in columns and application-specific testing kits to pharmaceutical customers and partially offset by the negative impact from foreign currency translation which decreased sales by 5%. Waters service sales increased due to higher service demand billing, particularly in China and the United States, partially offset by the negative impact from foreign currency translation which decreased by 6%.

In 2021, the increase in Waters products and service sales was due to customer demand increasing to pre-pandemic levels as customer laboratories and manufacturing facilities continued to return to normal operations. In addition, sales growth in 2021 benefited from the growing contributions made by the Company’s recent introductions of new higher-performing products which included the ACQUITY PREMIER System, Arc Premier HPLC System and Multi-Reflecting ToF mass spectrometers.

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TA Product and Services Net Sales

Net sales for TA products and services were as follows for the years ended December 31, 2022, 2021 and 2020 (dollars in thousands):

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[["","","Year Ended December 31,","","","% change"],["","","2022","","","% of Total","","","2021","","","% of Total","","","2020","","","% of Total","","","2022 vs. 2021","","","2021 vs. 2020"],["TA instrument systems","","$","252,314","","","","73","%","","$","225,613","","","","72","%","","$","174,398","","","","70","%","","","12","%","","","29","%"],["TA service","","","93,180","","","","27","%","","","87,178","","","","28","%","","","73,843","","","","30","%","","","7","%","","","18","%"],["Total TA net sales","","","345,494","","","","100","%","","","312,791","","","","100","%","","","248,241","","","","100","%","","","10","%","","","26","%"]]
[[/GREPCENT_TABLE]]

TA instrument system and service sales growth in 2022 and 2021 was broad-based across most major geographies increasing 10% and 26%, respectively. These increases were primarily driven by strong customer demand for our thermal analysis instruments and services. The increase in TA instrument systems and TA service sales in 2022 was driven by strength in China and the Americas, while the increase in 2021 was driven by strength in all major regions. In 2021, the increase in TA products and service sales was also due to customer demand increasing to pre-pandemic levels as customer laboratories and manufacturing facilities continued to return to normal operations. The effect of foreign currency translation decreased TA’s sales growth by 6% in 2022 and increased sales by 1% in 2021.

Cost of Sales

Cost of sales increased 8% in 2022 as compared to 2021, primarily due to the increase in sales volumes during the year as well as an increase in electronic component and freight inflationary costs. In 2021, cost of sales increased 15% as compared to 2020, primarily due to the increase in sales volumes during the year, the reinstatement in 2021 of expenses that had been reduced as a result of the COVID-19 pandemic in 2020 that consisted of salary reductions, furloughs and reductions in non-essential spending as well as an increase in freight 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 during 2023.

Selling and Administrative Expenses

Selling and administrative expenses increased 5% and 13% in 2022 and 2021, respectively. The increase in selling and administrative expenses in 2022 can be attributed to higher salary merit and variable incentive compensation costs due to an increase in the number of employees. The increase in selling and administrative expenses in 2021 as compared to 2020 can be attributed to the higher salary merit and variable incentive compensation costs as well as the impact of the reinstatement of salary reductions, furloughs and reductions in non-essential spending that occurred in 2020 as a result of the COVID-19 pandemic. The effect of foreign currency translation decreased selling and administrative expenses by 4% in 2022 and increased expenses by 1% in 2021.

As a percentage of net sales, selling and administrative expenses were 22.1%, 22.5% and 23.4% for 2022, 2021, and 2020, respectively.

Research and Development Expenses

Research and development expenses increased 5% and 20% in 2022 and 2021, respectively. The increase in research and development expenses in 2022 was impacted by additional headcount, merit compensation and costs associated with new products and the development of new technology initiatives. The impact of foreign currency exchange decreased expenses by 3% and 1% in 2022 and 2021, respectively.

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Acquired In-Process Research & Development

In 2022, the Company completed an asset acquisition in which the CDMS technology assets of Megadalton were acquired for approximately $10 million in total purchase price, of which $5 million was paid at closing and the remaining $4 million will be paid in the future at various dates through 2029. 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, we anticipate that 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.

Asset Impairments

During 2020, due to a shift in strategic priorities, the Company recorded a non-cash charge of $10 million for the impairment of certain intangible assets associated with the acquisition of Medimass Research Development and Service Kft (“Medimass”). In conjunction with the intangible asset impairment, the Company also reduced its liability for contingent consideration of $3 million during 2020 as the carrying value of this liability is based on the future sales of the Medimass intangible assets that were impaired. See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, under the heading “Asset Impairments” in the Notes to Consolidated Financial Statements for a description of the impairment charge.

Other Income (Expense), net

In 2022, the Company sold equity investments for $10 million in cash and recorded gains on the sales of approximately $7 million in other income (expense), net on the statement of operations. The Company also incurred $6 million in losses on equity investments within other income (expense), net on the statement of operations.

In 2021, the Company executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation and Bruker Daltronik GmbH regarding their timsTOF product line. In connection with the settlement, the Company is entitled to receive $10 million in guaranteed payments, including minimum royalty payments. In 2021, the Company recorded an unrealized gain of $10 million due to an observable change in the fair value of an existing investment that the Company does not have the ability to exercise significant influence over.

Interest Expense, net

Net interest expense in 2022 increased $5 million as compared to 2021 due to the lower interest income benefit from the lower notional amount of interest rate cross currency swap agreements. Net interest expense in 2021 remained consistent with 2020 as the increase in the average debt balance in 2021 was offset by the impact of lower interest rates.

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 December 31, 2022. 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. Prior to April 1, 2021, the Company had a tax exemption on income arising from qualifying activities in Singapore based upon the achievement of certain contractual milestones, which the Company met as of December 31, 2020 and maintained through March 2021. 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 by $20 million, $20 million and $21 million, and increased the Company’s net income per diluted share by $0.33, $0.32 and $0.33 for the years ended December 31, 2022, 2021 and 2020, respectively.

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The Company’s effective tax rate for the years ended December 31, 2022, 2021 and 2020 was 15.5%, 14.1% and 14.6%, respectively. The increase in the Company’s effective tax rate in 2022 can primarily be attributed to the impact of the change in the U.S. tax law that now requires research and development expenditures to be capitalized and amortized. This change in tax law increased the Company’s 2022 effective tax rate, through the Global Intangible Low-Taxed Income (“GILTI”) provision, by approximately 1.5%. The remaining differences in the effective tax rate are primarily attributed to differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates and a tax benefit of $7 million on stock-based compensation.

The 2021 effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, a $10 million provision related to the GILTI tax and a tax benefit of $7 million on stock-based compensation.

The 2020 effective tax rate differed from the U.S. federal statutory tax rate primarily due to the jurisdictional mix of earnings, a $13 million provision related to the GILTI tax and a tax benefit of $7 million on stock-based compensation.

Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows (in thousands):

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[[/GREPCENT_TABLE]]

Cash Flow from Operating Activities

Net cash provided by operating activities was $612 million, $747 million and $791 million in 2022, 2021 and 2020, respectively. The decrease in 2022 operating cash flow was primarily a result of higher inventory levels, slower cash collections and higher incentive compensation payments in 2022 compared to 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:

[[GREPCENT_TABLE]]
[["","\u2022","","The changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales. Days sales outstanding was 77 days at December 31, 2022, 66 days at December 31, 2021 and 70 days at December 31, 2020."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u2022","","The increase in inventory can primarily be attributed to higher material costs as well as an increase in safety stock levels to help mitigate any future supply chain issues."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","","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. In addition, the changes in 2022, 2021 and 2020 each included $38 million of income tax payments made in the U.S. relating to the Company\u2019s estimated 2017 tax reform liability. In 2021, the change was impacted by the normalization of COVID-19 cost actions, as well as higher variable incentive compensation costs as compared to 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","","Under the 2017 Tax Act, the Company is required to make a U.S. federal tax payment of approximately $72 million in 2023 to tax authorities in connection with the Company\u2019s estimated remaining transition tax liabilities of $289 million. The remainder of the transition tax liability is required to be paid in annual installments of $96 million and $121 million in 2024 and 2025, respectively."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","","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."]]
[[/GREPCENT_TABLE]]

Cash Used in Investing Activities

Net cash used in investing activities totaled $108 million, $232 million and $264 million in 2022, 2021 and 2020, respectively. Additions to fixed assets and capitalized software were $176 million, $161 million and $172 million in December 31, 2022, 2021 and 2020, respectively. The cash flows from investing activities in 2022, 2021 and 2020 include $32 million, $49 million and $70 million, respectively, of capital expenditures related to the major expansion of the Company’s precision chemistry consumable operations in the United States. The Company has incurred costs of $232 million on this facility through the end of 2022 and anticipates spending approximately $20 million to complete this new state-of-the-art facility in 2023.

During 2022, 2021 and 2020, the Company purchased $11 million, $280 million and $26 million of investments, respectively, while $78 million, $218 million and $21 million of investments matured, respectively, and were used for financing activities described below.

In 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 2022.

In January 2020, the company entered into a definitive agreement to acquire Andrew Alliance, an innovator in specialty laboratory automation technology, including software and robotics for approximately $80 million in cash. The Company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration. This acquisition did not have a material effect on the Company’s sales and expenses in 2020.

In December 2020, the company entered into a definitive agreement to acquire ISS, a provider of clinical laboratory software systems, for $4 million in cash. This acquisition did not have a material effect on the Company’s sales and expenses in 2020.

There were no business acquisitions in 2022 and 2021.

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In 2022, the Company received $10 million in proceeds and made $1 million of investments in certain equity investments. In 2021 and 2020, the Company made $2 million and $6 million, respectively, of investments in certain equity investments.

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 Used in 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 December 31, 2022, the Company had a total of $1.6 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $270 million borrowed under its credit agreement. The Company’s net debt borrowings increased by $60 million and $160 million during the years ended 2022 and 2021, respectively, while it decreased by $325 million during the year ended 2020.

As of December 31, 2022, the Company has entered into three-year interest rate cross-currency swap derivative agreements with a notional value $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. As a result of entering into these agreements, the Company lowered net interest expense by approximately $9 million, $11 million and $15 million in 2022, 2021 and 2020, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $10 million in 2023.

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. 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 increases the total authorization level to $4.8 billion, an increase of $750 million. During 2022, 2021 and 2020, the Company repurchased $616 million, $640 million and $167 million, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased $11 million, $9 million and $9 million of common stock related to the vesting of restricted stock units during 2022, 2021 and 2020, respectively.

The Company received $43 million, $56 million and $66 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan during 2022, 2021 and 2020, respectively.

The Company had cash, cash equivalents and investments of $481 million as of December 31, 2022. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $472 million held by foreign subsidiaries at December 31, 2022, of which $336 million was held in currencies other than U.S. dollars.

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As of December 31, 2022, the Company’s material cash requirements include the following contractual and other obligations:

Long-term debt. As of December 31, 2022, the Company had $1.6 billion of cash requirements for the principal on long-term debt that will mature and be paid as follows: $50 million in 2023; $100 million in 2024; $730 million in 2026; $300 million in 2029 and $400 million in 2031.

Interest on Senior Unsecured Notes. As of December 31, 2022, the Company had $240 million of cash requirements for the interest on senior unsecured notes that is to be paid as follows: $37 million in 2023; $35 million in 2024; $33 million in 2025; $27 million in 2026; $20 million in both 2027 and 2028; $17 million in 2029; $9 million in 2030; and $2 million in 2031. See also Note 9 in the Notes to the Consolidated Financial Statements for financial information about interest payable.

2017 Tax Act liabilities. As a result of the 2017 Tax Act, the Company incurred a Transition Toll Tax, that would be paid over an eight-year period, starting in 2018, and will not accrue interest. As of December 31, 2022, the Company had a remaining cash requirement of $289 million of which $72 million, $96 million and $121 million will be paid in 2023, 2024 and 2025, respectively. See also Note 10 in the Notes to the Consolidated Financial Statements for financial information about tax liabilities.

Operating Leases. The Company’s cash requirements for future lease payments were approximately $95 million as of December 31, 2022. See also Note 12 in the Notes to the Consolidated Financial Statements for financial information about lease liabilities.

Long-term Software Contract Commitments. For contracts the Company is committed to that are not cancelable without penalties. The Company’s contractual obligation with these vendors was approximately $25 million as of December 31, 2022.

Management believes, as of the date of this report, that the Company’s financial position, along with expected future cash flows from earnings based on historical trends and the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, will be sufficient to service debt and fund working capital and capital spending requirements, authorized share repurchase amounts and potential acquisitions for at least the next twelve months.

Critical Accounting Policies and Estimates

Summary

The preparation of consolidated financial statements 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. Critical accounting policies are those that are central to the presentation of the Company’s financial condition and results of operations that require management to make estimates about matters that are highly uncertain and that would have a material impact on the Company’s results of operations given changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that reasonably could have been used in the current period. On an ongoing basis, the Company evaluates its policies and estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions or conditions. There are other items within the Company’s consolidated financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could potentially have a material impact on the Company’s consolidated financial statements.

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Revenue Recognition

The Company recognizes revenue upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company generally enters into contracts that include a combination of products and services. Revenue is allocated to distinct performance obligations and is recognized net of allowances for returns and discounts.

The Company recognizes revenue on product sales at the time control of the product transfers to the customer. In substantially all of the Company’s arrangements, title of the product transfers at shipping point and, as a result, the Company determined control transfers at the point of shipment. In more limited cases, there are destination-based shipping terms and, thus, control is deemed to transfer when the products arrive at the customer site.

Generally, the Company’s contracts for products include a performance obligation related to installation. The Company has determined that the installation represents a distinct performance obligation and revenue is recognized separately upon the completion of installation. The Company determines the amount of the transaction price to allocate to the installation service based on the standalone selling price of the product and the service, which requires judgment. The Company determines the relative standalone selling price of installation based upon a number of factors, including hourly service billing rates and estimated installation hours. In developing these estimates, the Company considers past history, competition, billing rates of current services and other factors.

The Company has sales from standalone software, which are included in product revenue. These arrangements typically include software licenses and maintenance contracts, both of which the Company has determined are distinct performance obligations. The Company determines the amount of the transaction price to allocate to the license and maintenance contract based on the relative standalone selling price of each performance obligation. Software license revenue is recognized at the point in time when control has been transferred to the customer. The revenue allocated to the software maintenance contract is recognized on a straight-line basis over the maintenance period, which is the contractual term of the contract, as a time-based measure of progress best reflects the Company’s performance in satisfying this obligation. Unspecified rights to software upgrades are typically sold as part of the maintenance contract on a when-and-if-available basis.

Service revenue includes (i) service and software maintenance contracts and (ii) service calls (time and materials). Instrument service contracts and software maintenance contracts are typically annual contracts, which are billed at the beginning of the contract or maintenance period. The amount of the service and software maintenance contract is recognized on a straight-line basis to revenue over the maintenance service period, which is the contractual term of the contract, as a time-based measure of progress best reflects the Company’s performance in satisfying this obligation. There are no deferred costs associated with the service contract, as the cost of the service is recorded when the service is performed. Service calls are recognized to revenue at the time a service is performed.

The Company’s deferred revenue liabilities at December 31, 2022 of $285 million on the consolidated balance sheets consist of instrument service contract obligations 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.

Loss Provision on Inventory

The Company values all of its inventories at the lower of cost or net realizable value on a first-in, first-out basis (“FIFO”). The Company estimates revisions to its inventory valuations based on technical obsolescence, historical demand, projections of future demand, including that in the Company’s current backlog of orders, and industry and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional write-downs may be required. The Company’s inventory balance at December 31, 2022 was recorded at its net realizable value of $456 million, which is net of write-downs of $36 million.

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Long-Lived Assets, Intangible Assets and Goodwill

The Company assesses goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger impairment include significant decline in the Company’s projected revenue, earnings or cash flows, significant adverse change in legal factors or business climate including patent matters, significant decline in the Company’s stock price or the stock price of comparable companies, adverse action or assessment by a regulator and unanticipated competition. Goodwill totaled $430 million as of December 31, 2022. When the Company determines that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators, an estimate of the fair value of the reporting unit (calculated using a discounted cash flow method) is compared to its carrying value to determine whether impairment exists. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the asset is written-down to its estimated fair value. Estimates of discounted future cash flows require assumptions related to revenue growth, discount rates and other factors. The Company currently does not expect to record an impairment charge in the foreseeable future as the estimated fair values of the reporting units significantly exceeds the carrying value of the reporting units; however, there can be no assurance that, at the time future reviews are completed, a material impairment charge will not be recorded.

Net intangible assets and long-lived assets amounted to $227 million and $582 million, respectively, as of December 31, 2022. The company reviews definite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant underperformance relative to historical or projected future operating results, significant negative industry or economic trends or significant changes or developments in strategic technological collaborations or legal matters. When the Company determines that the carrying value of an individual intangible asset or long-lived asset may not be recoverable based upon the existence of one or more of the above indicators, an estimate of undiscounted future cash flows produced by that intangible asset or long-lived asset, including its eventual residual value, is compared to the carrying value to determine whether impairment exists. Estimates of future cash flows require assumptions related to revenue growth and other factors. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the asset is written-down to its estimated fair value.

Income Taxes

As part of the process of preparing the consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the Company estimating its income taxes, taking into account the amount, timing and character of taxable income, tax deductions and credits and assessing changes in tax laws, regulations, agreements and treaties. Differing treatment of items for tax and accounting purposes, such as depreciation, amortization and inventory reserves, result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. In the event that actual results differ from these estimates, or the Company adjusts these estimates in future periods, such changes could materially impact the Company’s financial position and results of operations.

The company continually evaluates the necessity of establishing or changing a valuation allowance for deferred tax assets depending on whether it is more likely than not that the actual benefit of those assets will be realized in future periods.

Uncertain Tax Positions

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 positions on the presumption that all concerned tax authorities possess full knowledge of those tax positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those positions for the time value of money. The Company classified interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. At December 31, 2022, the Company had unrecognized tax benefits, excluding interest and penalties, of $29 million.

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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. This new incentive has similar requirements for business spending targets, attaining and sustaining employment targets and performance of certain research and manufacturing activities as previous agreements. Prior to April 1, 2021, the Company had a tax exemption on income arising from qualifying activities in Singapore, based upon the achievement of certain contractual milestones, which the Company met as of December 31, 2020 and maintained through March 2021. These milestones include the following types of objectives: reaching and maintaining annual revenue and business spending targets; meeting capital expenditures targets; attaining and sustaining employment targets; and establishing a local research and development and service center. The Company determined that it was more likely than not to realize the tax exemption in Singapore and, accordingly, did not recognize any reserves for unrecognized tax benefits on its balance sheet related to this exemption. In the event that any of the milestone targets were not met, the Company would not be entitled to the tax exemption on income earned in Singapore and all the tax benefits previously recognized would be reversed, resulting in the recognition of income tax expense equal to the statutory tax of 17% on income earned during that period.

Litigation

As described in Part I, Item 3, Legal Proceedings, of this Annual Report, the Company is a party to various pending litigation matters. With respect to each pending claim, management determines whether it can reasonably estimate whether a loss is probable and, if so, the probable range of that loss. If and when management has determined, with respect to a particular claim, both that a loss is probable and that it can reasonably estimate the range of that loss, the Company records a charge equal to either its best estimate of that loss or the lowest amount in that probable range of loss. The Company will disclose additional exposures when the range of loss is subject to considerable uncertainty.

Business Combinations and Asset Acquisitions

As of the acquisition date the results of the acquiree are included in the Company’s consolidated results and the purchase price is allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values. Any excess of the fair value consideration transferred over the estimated fair values of the net assets acquired is recognized as goodwill. Acquired in-process research and development (“IPR&D”) included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred and acquired IPR&D is tested for impairment annually until completion of the acquired programs. Upon commercialization, this indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life, subject to periodic impairment reviews. If the research and development project is abandoned, the indefinite-lived asset is charged to expense. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.

The Company also acquires intellectual property through licensing arrangements. These arrangements often require upfront payments and may include additional milestone or royalty payments, contingent upon certain future events. IPR&D acquired in an asset acquisition (as opposed to a business combination) is expensed immediately unless there is an alternative future use. Subsequent payments made for the achievement of milestones are evaluated to determine whether they have an alternative future use or should be expensed. Payments made to third parties subsequent to commercialization are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.

Recent Accounting Standard Changes and Developments

Information regarding recent accounting standard changes and developments is incorporated by reference from Part II, Item 8, Financial Statements and Supplementary Data, of this document and should be considered an integral part of this Item 7. See Note 2 in the Notes to the Consolidated Financial Statements for recently adopted and issued accounting standards.

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