WATERS CORP /DE/ (WAT) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
The Company has two operating segments: Waters and TA. Waters products and services primarily consist of high-performance liquid chromatography (“HPLC”), ultra-performance liquid chromatography (“UPLC” 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. Operations of the recently acquired Wyatt business are part of the Waters operating segment.
Wyatt Acquisition
On May 16, 2023, the Company completed the acquisition of Wyatt Technology, LLC and its three operating subsidiaries, Wyatt Technology Europe GmbH, Wyatt Technology France and Wyatt Technology UK Ltd. (collectively, “Wyatt”), for a total purchase price of $1.3 billion in cash. Wyatt is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories and services. The acquisition has expanded Waters’ portfolio and increased our exposure to large molecule applications. The Company financed this transaction with a combination of cash on its balance sheet and borrowings under its revolving credit facility. The Company’s financial results for the year ended December 31, 2024 include the financial results of Wyatt for the full year, while the financial results for the year ended December 31, 2023 only included seven-and-a-half months of Wyatt’s financial results as the closing of the acquisition occurred during the second quarter of 2023.
Financial Overview
The Company’s operating results are as follows for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands, except per share data):
| Year Ended December 31, | % change | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2024 vs 2023 | 2023 vs 2022 | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Product sales | $ | 1,844,176 | $ | 1,903,050 | $ | 1,988,169 | (3 | %) | (4 | %) | ||||||||||
| Service sales | 1,114,211 | 1,053,366 | 983,787 | 6 | % | 7 | % | |||||||||||||
| Total net sales | 2,958,387 | 2,956,416 | 2,971,956 | — | (1 | %) | ||||||||||||||
| Costs and operating expenses: | ||||||||||||||||||||
| Cost of sales | 1,200,201 | 1,195,223 | 1,248,182 | — | (4 | %) | ||||||||||||||
| Selling and administrative expenses | 690,148 | 736,014 | 658,026 | (6 | %) | 12 | % | |||||||||||||
| Research and development expenses | 183,027 | 174,945 | 176,190 | 5 | % | (1 | %) | |||||||||||||
| Purchased intangibles amortization | 47,090 | 32,558 | 6,366 | 45 | % | 411 | % | |||||||||||||
| Acquired in-process research and development | — | — | 9,797 | * | * | * | * | |||||||||||||
| Litigation provision | 11,568 | — | — | — | * | * | ||||||||||||||
| Operating income | 826,353 | 817,676 | 873,395 | 1 | % | (6 | %) | |||||||||||||
| Operating income as a % of sales | 27.9 | % | 27.7 | % | 29.4 | % | ||||||||||||||
| Other income, net | 776 | 807 | 2,228 | (4 | %) | (64 | %) | |||||||||||||
| Interest expense, net | (72,261 | ) | (82,240 | ) | (37,777 | ) | (12 | %) | 118 | % | ||||||||||
| Income before income taxes | 754,868 | 736,243 | 837,846 | 3 | % | (12 | %) | |||||||||||||
| Provision for income taxes | 117,034 | 94,009 | 130,091 | 24 | % | (28 | %) | |||||||||||||
| Net income | $ | 637,834 | $ | 642,234 | $ | 707,755 | (1 | %) | (9 | %) | ||||||||||
| Net income per diluted common share | $ | 10.71 | $ | 10.84 | $ | 11.73 | (1 | %) | (8 | %) |
| Column 1 | Column 2 |
|---|---|
| ** | Percentage not meaningful |
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The Company’s net sales were flat in 2024 as compared to 2023 and decreased 1% in 2023 as compared to 2022 as the Company’s sales growth in most major geographies was offset by a 10% and a 22% reduction in sales in China, respectively. The decline in China sales were primarily driven by lower demand for our instrument systems and chemistry products as a result of increased government regulations and lower spending by our customers due to macroeconomic conditions. Excluding China, the Company’s sales growth increased 2% and 5% in 2024 and 2023, respectively. Foreign currency translation decreased sales growth by 1% in both 2024 and 2023. Wyatt sales increased the Company’s sales growth by 1% and 3% in 2024 and 2023, respectively.
Instrument system sales decreased 6% in 2024 as compared to 2023 and 7% in 2023 as compared to 2022 as a result of weaker customer demand in most geographies, driven primarily by the 15% and 30% decline in our China instrument sales, respectively. Excluding China, the Company’s instrument system sales declined 4% in 2024 and grew 1% in 2023. Wyatt’s instrument system sales added 2% and 4% to the Company’s instrument system sales growth in 2024 and 2023, respectively.
Recurring revenues (combined sales of precision chemistry consumables and services) increased 5% and 6% in 2024 and 2023, respectively. Foreign currency translation decreased recurring revenues sales growth by 1% in both 2024 and 2023.
Operating income was $826 million in 2024, up from $818 million in 2023 as the cost savings from recent workforce reductions and the absence of the $26 million in severance costs associated with the workforce reduction incurred in 2023 were offset by higher annual incentive compensation, a full year of amortization associated with the Wyatt acquisition and merit increases in 2024. In addition, foreign currency translation lowered operating income by $43 million.
Operating income of $818 million in 2023 declined $55 million from the operating income of $873 million in 2022 as a result of the $26 million severance costs associated with the workforce reductions and the additional expenses associated with the Wyatt acquisition relating to purchased intangible amortization of $27 million, retention agreement costs of $19 million and due diligence costs of $13 million. These costs were partially offset by the cost savings from the workforce reductions and lower electronic components costs and freight costs. In addition, the negative effect of foreign currency translation lowered operating income by approximately $23 million during 2023.
The Company’s effective tax rates were 15.5%, 12.8% and 15.5% for 2024, 2023 and 2022, respectively. Net income per diluted share was $10.71, $10.84 and $11.73 in 2024, 2023 and 2022, respectively.
The Company generated $762 million, $603 million and $612 million of net cash flow from operating activities in 2024, 2023 and 2022, respectively. The increase in cash flows from operating activities in 2024 was driven by lower annual incentive bonus payments and an improvement in working capital in the current year. The decrease in 2023 operating cash flow was primarily a result of lower sales volumes, higher income tax payments and higher incentive compensation payments in 2023 as compared to 2022.
Net cash used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $142 million, $161 million and $176 million in 2024, 2023 and 2022, respectively. The decline in 2024 is primarily due to the completion of the Company’s new manufacturing facilities. In addition, net cash used in investing activities in 2023 included $1.3 billion for the Wyatt acquisition.
In July 2024, the Company entered into a private Master Note Facility Agreement (the “Shelf Agreement”) with NYL Investors LLC (“NYL”) pursuant to which the Company may, at its option, authorize the issuance and sale of senior promissory notes (the “Shelf Notes”) up to an aggregate principal amount of $200 million. The purchase of any Shelf Notes is in the sole discretion of NYL. Any Shelf Notes sold or issued pursuant to the Shelf Agreement will mature no more than 15 years after the issuance date and will bear interest on the unpaid balance from the issuance date at the rates specified in the Shelf Agreement.
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In December 2024, the Company’s Board of Directors authorized the extension of the existing share repurchase program through January 21, 2028. The Company’s remaining authorization is $1.0 billion. 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 to further grow the Company’s sales and profits, given current cash and investment levels and debt borrowing capacity.
Results of Operations
Sales by Geography
Geographic sales information is presented below for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):
| Year Ended December 31, | % change | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2024 vs. 2023 | 2023 vs. 2022 | ||||||||||||||||
| Net Sales: | ||||||||||||||||||||
| Asia: | ||||||||||||||||||||
| China | $ | 396,599 | $ | 440,707 | $ | 565,143 | (10 | %) | (22 | %) | ||||||||||
| Japan | 157,321 | 167,202 | 167,220 | (6 | %) | — | ||||||||||||||
| Asia Other | 415,302 | 399,916 | 399,380 | 4 | % | — | ||||||||||||||
| Total Asia | 969,222 | 1,007,825 | 1,131,743 | (4 | %) | (11 | %) | |||||||||||||
| Americas: | ||||||||||||||||||||
| United States | 933,926 | 927,982 | 886,140 | 1 | % | 5 | % | |||||||||||||
| Americas Other | 181,854 | 180,591 | 169,495 | 1 | % | 7 | % | |||||||||||||
| Total Americas | 1,115,780 | 1,108,573 | 1,055,635 | 1 | % | 5 | % | |||||||||||||
| Europe | 873,385 | 840,018 | 784,578 | 4 | % | 7 | % | |||||||||||||
| Total net sales | $ | 2,958,387 | $ | 2,956,416 | $ | 2,971,956 | — | (1 | %) |
In 2024, sales growth was flat as compared to 2023 and sales declined by 1% in 2023 as compared to 2022. During these periods, the Company’s sales in most geographies grew positively, except in China and Japan. The sales growth outside of China was led by India where sales increased 15% and 2% in 2024 and 2023, respectively. China’s sales declined by 10% and 22% in 2024 and 2023, respectively, and were primarily driven by lower demand for our instrument systems and chemistry products resulting from increased government regulations and lower spending by our customers due to macroeconomic conditions. Excluding China, the Company’s sales increased 2% and 5% in 2024 and 2023, respectively. Foreign currency translation decreased sales growth by 1% in both 2024 and 2023. Wyatt sales increased the Company’s sales growth by 1% and 3% in 2024 and 2023, respectively, and added 3% to the U.S. sales.
In 2024, sales increased 1% in the U.S. and 4% in Europe, while decreasing 4% in Asia, with the effect of foreign currency translation increasing sales growth in Europe by 1% and decreasing sales growth in Asia by 4%. The decrease in Asia sales growth is driven by the decline in China’s sales and the effect of foreign currency translation which decreased Japan’s sales growth by 7%.
In 2023, sales increased 5% in the U.S. and 7% in Europe, while decreasing 11% in Asia, with the effect of foreign currency translation increasing sales growth in Europe by 2% and decreasing sales growth in Asia by 4%, which includes a 9% decrease in sales in Japan resulting from foreign currency translation. Wyatt’s sales contributed 5% and 3% of sales growth to the U.S. and Europe in 2023, respectively.
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Sales by Trade Class
Net sales by customer class are presented below for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):
| Year Ended December 31, | % change | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2024 vs. 2023 | 2023 vs. 2022 | ||||||||||||||||
| Pharmaceutical | $ | 1,718,899 | $ | 1,696,875 | $ | 1,751,665 | 1 | % | (3 | %) | ||||||||||
| Industrial | 908,486 | 909,003 | 909,805 | — | — | |||||||||||||||
| Academic and government | 331,002 | 350,538 | 310,486 | (6 | %) | 13 | % | |||||||||||||
| Total net sales | $ | 2,958,387 | $ | 2,956,416 | $ | 2,971,956 | — | (1 | %) |
In 2024, sales to pharmaceutical customers increased 1% as compared to 2023 as the 18% increase in India’s sales was offset by the 11% decline in China’s sales. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, were flat in 2024 as the 7% sales growth in the U.S. was primarily offset by a 9% decline in China’s sales. Combined sales to academic and government customers decreased 6% in 2024 as sales declined in most major geographies, except for Europe and India where sales grew 1% and 27%, respectively. 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.
In 2023, sales to pharmaceutical customers decreased 3%, primarily driven by weakness in customer demand in China, with foreign currency translation decreasing pharmaceutical sales growth by 1% and Wyatt sales contributing 3% to the Company’s pharmaceutical sales growth. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, were flat in 2023, with foreign currency translation decreasing industrial sales growth by 1% and Wyatt contributing 1% to industrial sales growth. Combined sales to academic and government customers increased 13% in 2023, with foreign currency translation decreasing academic and government sales growth by 1% and Wyatt sales contributing 4% to academic and government sales growth.
Waters Products and Services Net Sales
Net sales for Waters products and services were as follows for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):
| Year Ended December 31, | % change | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | % of Total | 2023 | % of Total | 2022 | % of Total | 2024 vs. 2023 | 2023 vs. 2022 | |||||||||||||||||||||||||
| Waters instrument systems | $ | 1,032,493 | 40 | % | $ | 1,108,702 | 43 | % | $ | 1,210,456 | 46 | % | (7 | %) | (8 | %) | ||||||||||||||||
| Chemistry consumables | 565,481 | 21 | % | 541,469 | 20 | % | 525,399 | 20 | % | 4 | % | 3 | % | |||||||||||||||||||
| Total Waters product sales | 1,597,974 | 61 | % | 1,650,171 | 63 | % | 1,735,855 | 66 | % | (3 | %) | (5 | %) | |||||||||||||||||||
| Waters service | 1,006,447 | 39 | % | 951,419 | 37 | % | 890,607 | 34 | % | 6 | % | 7 | % | |||||||||||||||||||
| Total Waters net sales | $ | 2,604,421 | 100 | % | $ | 2,601,590 | 100 | % | $ | 2,626,462 | 100 | % | — | (1 | %) |
Waters products and service sales were flat and decreased by 1% in 2024 and 2023, respectively, with the effect of foreign currency translation decreasing Waters sales growth by 1% in both 2024 and 2023. Wyatt sales increased Waters products and service sales by approximately 1% in 2024. Waters instrument system sales (LC and MS technology-based) decreased 7% in 2024, primarily driven by weaker customer demand in China where Waters instrument sales declined 12%. Excluding China, the Company’s instrument system sales decreased 4% as compared to 2023. In addition, Wyatt’s instrument system sales contributed 3% to Waters instrument system sales growth in 2024. Waters chemistry consumables sales growth was due to the continued
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demand in most major geographies driven by the uptake in columns and application-specific testing kits to pharmaceutical customers, partially offset by weaker demand in China and the negative impact from foreign currency translation, which decreased chemistry sales growth by 1% in 2024.
Waters service sales increased 6% in 2024 due to higher service demand billing, partially offset by the negative impact from foreign currency translation, which decreased service sales growth by 1% in 2024. Wyatt service revenues added 1% to Waters service revenue growth in 2024.
In 2023, Waters products and service sales decreased 1% with the effect of foreign currency translation decreasing Waters sales growth by 1% in 2023. Wyatt products and service sales increased Waters products and service sales by approximately 3% in 2023.
Waters instrument system sales (LC and MS technology-based) decreased 8% in 2023, primarily driven by weaker customer demand in China. Excluding China, the Company’s instrument system sales were flat as compared to 2022. In addition, Wyatt’s instrument system sales contributed 5% to Waters instrument system sales growth in 2023. Waters chemistry consumables sales were significantly impacted by the lower customer demand in China for our products. Excluding China, the Company’s chemistry sales grew 7% in 2023. This sales growth was primarily due to the continued strong demand in most major geographies, driven by the uptake in columns and application-specific testing kits to pharmaceutical customers, partially offset by the negative impact from foreign currency translation, which decreased chemistry sales growth by 1% in 2023. Waters service sales increased 7% in 2023 due to higher service demand billing, partially offset by the negative impact from foreign currency translation, which decreased service sales growth by 1% in 2023. Wyatt service revenues added 2% to Waters service revenue growth in 2023.
TA Product and Services Net Sales
Net sales for TA products and services were as follows for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):
| Year Ended December 31, | % change | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | % of Total | 2023 | % of Total | 2022 | % of Total | 2024 vs. 2023 | 2023 vs. 2022 | |||||||||||||||||||||||||
| TA instrument systems | $ | 246,202 | 70 | % | $ | 252,879 | 71 | % | $ | 252,314 | 73 | % | (3 | %) | — | |||||||||||||||||
| TA service | 107,764 | 30 | % | 101,947 | 29 | % | 93,180 | 27 | % | 6 | % | 9 | % | |||||||||||||||||||
| Total TA net sales | 353,966 | 100 | % | 354,826 | 100 | % | 345,494 | 100 | % | — | 3 | % |
TA instrument system and service sales growth was flat and grew 3% in 2024 and 2023, respectively. Foreign currency translation decreased sales growth by 1% and had a minimal impact on sales growth in 2023. In 2024, sales growth was broad-based across most major geographies, partially offset by weakness in China. The growth outside of China was primarily driven by strong customer demand for our thermal analysis instruments and services.
Cost of Sales
Cost of sales were flat in 2024 as compared to 2023, primarily due to the change in sales mix and the impact of foreign exchange. In 2023, cost of sales decreased 4% as compared to 2022, primarily due to the change in sales mix and the lower material and 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 be negative to gross profit during 2025.
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Selling and Administrative Expenses
Selling and administrative expenses decreased 6% and increased 12% in 2024 and 2023, respectively, as the cost savings from the recent workforce reductions and the absence of costs incurred in the prior year relating to severance charges in connection with the 2023 workforce reduction and the Wyatt acquisition-related due diligence costs were partially offset by an increase in annual incentive compensation expenses.
The increase in 2023 is primarily driven by severance-related costs in connection with a reduction in workforce, which increased expenses by 4%; the Wyatt acquisition due diligence and integration costs, which increased expenses by 2%; and the Wyatt acquisition-related retention expense, which increased expenses by 3%. These increases were partially offset by lower incentive compensation costs. The increase in selling and administrative expenses in 2023 as compared to 2022 can be attributed to higher salary merit and variable incentive compensation costs due to an increase in the number of employees. The effect of foreign currency translation had minimal impact on selling and administrative expenses in 2024 and 2023.
As a percentage of net sales, selling and administrative expenses were 23.3%, 24.9% and 22.1% for 2024, 2023, and 2022, respectively.
Research and Development Expenses
Research and development expenses increased 5% and decreased 1% in 2024 and 2023, respectively. The increase in research and development expenses in 2024 can be attributed to increases from merit compensation and costs associated with new products and the development of new technology initiatives, being partially offset by lower incentive compensation costs. The impact of foreign currency exchange increased expenses by 3% and decreased expenses by 1% in 2024 and 2023, respectively.
Purchased Intangibles Amortization
The increase in purchased intangible amortization of $15 million and $26 million in 2024 and 2023, respectively, can be attributed to the timing of the Wyatt acquisition in May of 2023 as 2024 includes a full year of the amortization from the Wyatt acquisition intangible assets.
Litigation Provisions
The Company incurred $12 million of litigation provisions of 2024, primarily related to a patent litigation settlement.
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.
Other (Expense) Income, net
In 2022, the Company sold an equity investment for $10 million in cash and recorded a gain on the sale of approximately $7 million in other income, net on the statement of operations. The Company also incurred $6 million in losses on an equity investment in 2022 within other income, net on the statement of operations.
Interest Expense, net
Net interest expense in 2024 decreased $10 million as compared to 2023 due to the average outstanding debt in these periods being impacted by the timing of the borrowings to fund the Wyatt acquisition, which closed in May 2023, as well as the timing of the repayment of $1 billion of debt since the completion of the acquisition.
Net interest expense in 2023 increased $44 million as compared to 2022 due to the additional borrowings by the Company to fund the Wyatt acquisition in 2023.
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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%, 25% and 17%, respectively, as of December 31, 2024. 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 arising from qualifying activities in Singapore increased the Company’s net income by $14 million, $16 million and $20 million, and increased the Company’s net income per diluted share by $0.24, $0.27 and $0.33 for the years ended December 31, 2024, 2023 and 2022, respectively.
The Company’s effective tax rate for the years ended December 31, 2024, 2023 and 2022 was 15.5%, 12.8% and 15.5%, respectively.
The 2024 effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, a $5 million provision related to the GILTI tax and a tax benefit of $3 million on stock-based compensation.
The 2023 effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, an $18 million recognition of a previously unrecognized tax benefit as a result of the completion of a tax examination, a $15 million provision related to the Global Intangible Low-Taxed Income (“GILTI”) tax and a tax benefit of $3 million on stock-based compensation.
The 2022 effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, an $18 million provision related to the GILTI tax and a tax benefit of $7 million on stock-based compensation.
Effective starting in 2024, various foreign jurisdictions are beginning to implement aspects of the guidance issued by the Organization for Economic Co-operation and Development related to the new Pillar Two system of global minimum tax rules. These changes in tax law did not have a material impact on the Company’s financial position, results of operations and cash flows in 2024. As of the date of this Annual Report, the Company does not anticipate that the Pillar Two tax rules will have a material impact on future periods.
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Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| Net income | $ | 637,834 | $ | 642,234 | $ | 707,755 | ||||||
| Depreciation and amortization | 191,825 | 165,905 | 130,423 | |||||||||
| Stock-based compensation | 44,709 | 36,868 | 42,564 | |||||||||
| Deferred income taxes | (877 | ) | (1,197 | ) | (31,988 | ) | ||||||
| Acquired in-process research and development and other non-cash items | — | — | 10,003 | |||||||||
| Change in accounts receivable | (66,240 | ) | 49,179 | (137,874 | ) | |||||||
| Change in inventories | 20,943 | (45,443 | ) | (101,902 | ) | |||||||
| Change in accounts payable and other current liabilities | 61,585 | (79,524 | ) | 60,984 | ||||||||
| Change in deferred revenue and customer advances | 6,165 | 10,433 | 12,862 | |||||||||
| Other changes | (133,821 | ) | (175,646 | ) | (81,166 | ) | ||||||
| Net cash provided by operating activities | 762,123 | 602,809 | 611,661 | |||||||||
| Net cash used in investing activities | (144,023 | ) | (1,442,265 | ) | (107,967 | ) | ||||||
| Net cash (used in) provided by financing activities | (696,675 | ) | 754,951 | (509,633 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | 7,920 | (948 | ) | (14,766 | ) | |||||||
| Decrease in cash and cash equivalents | $ | (70,655 | ) | $ | (85,453 | ) | $ | (20,705 | ) |
Cash Flow from Operating Activities
Net cash provided by operating activities was $762 million, $603 million and $612 million in 2024, 2023 and 2022, respectively. The increase in 2024 operating cash flow was primarily a result of lower inventory levels, partially offset by lower net income. 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, in addition to the changes in net income:
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | The changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales. Days sales outstanding was 79 days at December 31, 2024, 78 days at December 31, 2023 and 77 days at December 31, 2022. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | The decrease in inventory can primarily be attributed to better inventory management and higher sales volume in the second half of 2024. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | A decrease in income tax payments of $60 million as compared to the prior year. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | Other changes were attributable to variation in the timing of various provisions, expenditures, prepaid income taxes and accruals in other current assets, other assets and other liabilities. |
Cash Flow from Investing Activities
Net cash used in investing activities totaled $144 million, $1.4 billion and $108 million in 2024, 2023 and 2022, respectively. Additions to fixed assets and capitalized software were $142 million, $161 million and $176 million in 2024, 2023 and 2022, respectively. The cash flows from investing activities in 2023 and 2022 include $16 million and $32 million, respectively, of capital expenditures related to the major expansion of the Company’s precision chemistry consumable operations in the United States.
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During 2024, 2023 and 2022, the Company purchased $4 million, $2 million and $11 million of investments, respectively, while $4 million, $2 million and $78 million of investments matured, respectively, and were used for financing activities described below.
In 2023, the Company completed the acquisition of Wyatt for a total purchase price of $1.3 billion in cash. Wyatt is a pioneer in innovative light scattering and field-flow fractionation instruments, software, accessories, and services. The acquisition has expanded Waters’ portfolio and increased our exposure to large molecule applications.
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 2024.
There were no business acquisitions in 2024.
Cash Flow from Financing Activities
The Company has a credit agreement with an aggregate borrowing capacity of $2.0 billion. As of December 31, 2024, the Company had a total of $1.6 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $0.4 billion borrowed under its credit agreement. The Company’s net debt borrowings as of December 31, 2024 were $730 million lower than as of December 31, 2023, while the net borrowings as of December 31, 2023 and 2022 were $780 million and $60 million higher than as of December 31, 2022 and 2021, respectively.
In July 2024, the Company entered into the Shelf Agreement with NYL pursuant to which the Company may, at its option, authorize the issuance and sale of Shelf Notes up to an aggregate amount of $200 million. The purchase of any Shelf Notes is in the sole discretion of NYL. Any Shelf Notes sold or issued pursuant to the Shelf Agreement will mature no more than 15 years after the issuance date and will bear interest on the unpaid balance from the issuance date at the rates specified in the Shelf Agreement. The Company entered into the Shelf Agreement to increase its borrowing capacity for general corporate purposes. The Company has not issued any Shelf Notes pursuant to the Shelf Agreement through the date of these financial statements.
As of December 31, 2024, the Company has entered into three-year interest rate cross-currency swap derivative agreements with a notional value of $625 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 $9 million in 2024, 2023 and 2022, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $9 million in 2025.
In December 2024, the Company’s Board of Directors authorized the extension of the existing share repurchase program through January 21, 2028. The Company’s remaining authorization is $1.0 billion. During 2023 and 2022, the Company repurchased $58 million and $616 million, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. The Company did not make any open market share repurchases in 2024. In addition, the Company repurchased $13 million, $12 million and $11 million of common stock related to the vesting of restricted stock units during 2024, 2023 and 2022, respectively.
The Company received $30 million, $30 million and $43 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan during 2024, 2023 and 2022, respectively.
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The Company had cash, cash equivalents and investments of $325 million as of December 31, 2024. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $275 million held by foreign subsidiaries at December 31, 2024, of which $226 million was held in currencies other than U.S. dollars.
As of December 31, 2024, the Company’s material cash requirements include the following contractual and other obligations:
Long-term debt. As of December 31, 2024, the Company had $1.6 billion of cash requirements for the principal on long-term debt that will mature and be paid as follows: $830 million in 2026; $50 million in 2028; $300 million in 2029; $50 million in 2030 and $400 million in 2031.
Interest on Senior Unsecured Notes. As of December 31, 2024, the Company had $150 million of cash requirements for the interest on senior unsecured notes that is to be paid as follows: $38 million in 2025; $32 million in 2026; $25 million in 2027; $23 million in 2028; $20 million in 2029; $10 million in 2030; and $2 million in 2031. See also Note 8 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, 2024, the Company had a remaining cash requirement of $120 million which will be paid in 2025. See also Note 9 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 $81 million as of December 31, 2024. See also Note 11 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 obligations were approximately $94 million as of December 31, 2024. In December 2024, the Company’s Board of Directors approved the implementation of a new ERP system. The Company anticipates spending approximately $130 million over the next three years in connection with the implementation of the new ERP system. The Company expects to use existing cash and its credit facility to fund the ERP implementation.
Wyatt Retention Agreements. In conjunction with the Wyatt acquisition, the Company entered into retention agreements with certain employees, in which the Company agreed to pay a total of $40 million by the end of the second anniversary of the acquisition date provided the employees remain employed over that period of time. As of December 31, 2024 the Company’s remaining future obligations associated with the Wyatt retention agreements were $20 million.
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
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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.
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, 2024 of $320 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.
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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 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, 2024 was recorded at its net realizable value of $477 million, which is net of write-downs of $42 million.
Long-Lived Assets, Intangible Assets and Goodwill
Goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment on an annual basis, or on an interim basis when events or changes in circumstances indicate that the carrying value may not be recoverable. In assessing the recoverability of goodwill and indefinite-lived intangible assets, we must make assumptions regarding the estimated future cash flows, including forecasted revenue growth and the discount rate to determine the fair value of these assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges against these assets in the reporting period in which the impairment is determined.
We test goodwill for impairment at the reporting unit level, which is the operating segment or one level below an operating segment. We have the option of performing a qualitative assessment to determine whether further impairment testing is necessary before performing the quantitative assessment. If as a result of the qualitative assessment, it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test will be required. Otherwise, no further testing will be required. If a quantitative impairment test is performed, we compare the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. Estimating the fair value of the reporting units requires significant judgment by management. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an impairment charge is recognized for the amount by which the carrying value amount exceeds the reporting unit’s fair value up to the total amount of goodwill allocated to the reporting unit. The Company performs an annual goodwill impairment assessment for its reporting units as of December 31 each year. The Company has two reporting units: Waters and TA. Goodwill is allocated to the reporting units at the time of acquisition.
The Company’s intangible assets include purchased technology; capitalized software; costs associated with acquiring Company patents, trademarks and intellectual properties, such as licenses; and acquired IPR&D. Purchased intangibles are recorded at their fair market values as of the acquisition date and amortized over their estimated useful lives, ranging from one to fifteen years. Other intangibles are amortized over a period ranging from one to ten years. Acquired IPR&D is amortized from the date of completion of the acquired program over its estimated useful life.
Goodwill totaled $1.3 billion as of both December 31, 2024 and 2023. Net intangible assets and long-lived assets amounted to $568 million and $651 million, as of December 31, 2024, respectively, and $629 million and $639 million as of December 31, 2023, respectively.
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.
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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, 2024, the Company had unrecognized tax benefits, excluding interest and penalties, of $18 million.
The Company has a 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 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.
The effect of applying these concessionary income tax rates rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the Company’s net income by $14 million, $16 million and $20 million and increased the Company’s net income per diluted share by $0.24, $0.27 and $0.33 for the years ended December 31, 2024, 2023 and 2022, respectively.
Business Combinations and Asset Acquisitions
We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represents a significant portion of the purchase price in our recent acquisition of Wyatt, requires the use of significant judgment with regard to (i) the fair value; and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible asset will be amortized. We utilize commonly accepted valuation techniques, such as the income, cost and market approaches, as appropriate, in establishing the fair value of intangible assets. Typically, key assumptions include projections of cash flows that arise from identifiable intangible assets of acquired businesses as well as discount rates based on an analysis of the weighted-average cost of capital, adjusted for specific risks associated with the assets.
In our prior year acquisition of Wyatt in fiscal 2023, customer relationship intangible assets have been the most significant identifiable assets acquired. The customer relationships were valued using the multi-period excess earnings method under the income approach. Our cash flow projections for the customer relationships acquired included significant judgments and assumptions related to customer attrition rate, discount rate, and forecasted revenues. The value of the client relationships acquired was $331 million in fiscal year 2023, the majority of which relates to U.S. customer relationships.
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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.