WAT · Read the filing

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.

COVID-19

Pandemic

Both the Company’s domestic and international operations have been and continue to be affected by the ongoing global

COVID-19

pandemic that has led to volatility and uncertainty in the U.S. and international markets. The Company is actively managing its business to respond to the

COVID-19

impact; however, the Company cannot reasonably estimate the length or severity of the

COVID-19

pandemic, including the effect of the emergence of variants of the virus, or the related response, or the extent to which the disruption may materially impact the Company’s business, consolidated financial position, consolidated results of operations or consolidated cash flows in the future.

The

COVID-19

pandemic has not materially impacted the Company’s manufacturing facilities or those of the third parties to whom it outsources certain manufacturing processes, the distribution centers where its inventory is managed, or the operations of its logistics and other service providers. The Company also did not see material disruptions or delays in shipments of certain materials or components of its products. However, the current logistic and supply chain issues being experienced throughout the world have made it more difficult for us to manage our operations and as such we cannot provide any assurances that any further disruptions in the logistics and supply chains will not have a material impact on our future financial results and cashflows.

The Company has taken decisive and appropriate actions throughout the

COVID-19

pandemic, and continues to take proactive measures to guard the health of its global employee base and the safety of all customer interactions. The Company has implemented rigorous protocols to promote a safe work environment in all of its locations that are operational around the world and continues to closely monitor and update its multi-phase process for the safe return of employees to their physical workplaces as social distancing, governmental requirements, including capacity limitations, and other protocols allow.

The vast majority of the markets the Company serves, most notably the pharmaceutical, biomedical research, materials sciences, food/environmental and clinical markets, have continued to operate at various levels, and the Company is working closely with these customers to facilitate their seamless operation.

The

COVID-19

pandemic continues to be fluid with uncertainties and risks across the global economy. During 2020, the Company took a proactive approach managing through this unpredictability and implemented a series of cost reduction actions, which included temporary salary reductions, furloughs and reductions in

non-essential

spending and other working capital reductions in order to preserve liquidity and enhance financial flexibility. These cost reductions were completed by the end of 2020 and reduced the Company’s spending by approximately $100 million in 2020. The majority of these cost saving actions were reinstated at the beginning of 2021, which negatively impacted the Company’s cashflows in 2021 and also attributed to the increase in expenses as a result of the normalization of these costs.

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Financial Overview

The Company’s operating results are as follows for the years ended December 31, 2021, 2020 and 2019 (dollars in thousands, except per share data):

Year Ended December 31, % change

Revenues:

Costs and operating expenses:

Asset impairments — 6,945 — (100 %) * *

Operating income as a % of sales 29.5 % 27.3 % 29.4 %

Net income per diluted common share $ 11.17 $ 8.36 $ 8.69 34 % (4 %)

** Percentage not meaningful

The Company’s net sales increased approximately 18% in 2021 as compared to 2020, and decreased 2% in 2020 as compared to 2019. The increase in sales in 2021 can be attributed to the strong sales performance across most major geographies, end markets, and product categories due to customer demand continuing to return to

pre-pandemic

normal operations. Foreign currency translation increased sales by 2% and less than 1% in 2021 and 2020, respectively. The Company’s recent acquisitions did not have material impacts on sales growth. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year.

Instrument system sales increased 23% in 2021 and decreased 8% in 2020. In 2021, the increase in instrument system sales was attributable to customer demand continuing to increase to

pre-COVID-19

pandemic levels as customer laboratories and manufacturing facilities continued to return to normal operations. This strength in 2021 was broad-based, particularly in LC,

LC-MS

and TA instrument system sales. Foreign currency translation had minimal impact on instrument system sales in 2021 and increased sales by 1% in 2020. Recurring revenues (combined sales of precision chemistry consumables and services) increased 13% and 4% in 2021 and 2020, respectively, as a result of a larger installed base of customers and higher billing demand for service sales. In 2020, recurring revenues were impacted by the interruption of business activities and the uncertainty caused by

the COVID-19 pandemic.

Recurring revenues were positively impacted by foreign currency translation in 2021 and 2020, which increased sales by 2% and 1%, respectively.

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Geographically, the sales growth in 2021 was broad-based across the world, and was due to customer demand continuing to increase to

pre-pandemic

levels as customer laboratories and manufacturing facilities continued to return to normal operations. In 2021, the strong sales performance was broad-based across all regions, with sales increasing 20% in Asia, 16% in the Americas, and 17% in Europe. Foreign currency translation increased sales by 1% and 3% in Asia and Europe, respectively. The sales declines in 2020 were broad-based across the world, except for Europe, and were due to the weaker demand and disruption of business activities caused by

the COVID-19 lockdowns.

Sales to pharmaceutical customers increased 20% and 2% in 2021 and 2020, respectively, with foreign currency translation positively impacting sales by 1% in both 2021 and 2020. The pharmaceutical sales growth was driven by strong double-digit growth in all major regions, including 45% in China, 26% in India, 17% in the Americas and 15% in Europe as strong customer demand continued to recover to

pre-pandemic

levels. Foreign currency translation added 4% to Europe sales growth in 2021. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 17% in 2021 and decreased 2% in 2020, with foreign currency translation increasing sales by 2% and 1% in 2021 and 2020, respectively. This increase in sales to industrial customers was driven by the TA business as TA’s sales grew 26% in 2021 as compared to a decline of 8% in 2020. Combined sales to academic and government customers increased 7% in 2021 and decreased 16% in 2020, with foreign currency translation increasing sales by 2% in 2021 and having minimal impact on sales in 2020. Sales to our academic and governmental 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.

Operating income was $822 million in 2021, an increase of 27% 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 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. In addition, in the second half of 2021, the Company’s operating income was negatively impacted by higher freight costs and higher costs associated with certain electronic components.

Operating income decreased 9% in 2020 as compared to 2019. This decrease can be attributed to the decline in sales volumes caused by

the COVID-19 pandemic,

unfavorable manufacturing absorption and unfavorable foreign currency translation. The operating income decline was partially mitigated by a series of cost reduction actions, equaling $100 million, implemented by the Company in 2020. Operating income in 2020 also included $27 million of severance-related costs in connection with a reduction in workforce and lease termination and exit costs.

Operating income as a percentage of sales was 29.5%, 27.3% and 29.4% in 2021, 2020 and 2019, respectively. The 2020 operating income percentage decreased as a result of the decrease in sales volume due to the

COVID-19

pandemic. In addition, the 2020 operating margin benefited by the $100 million of cost reduction actions. The 2021 operating income margin was negatively impacted by the cost actions as these costs had been reinstated by the beginning of 2021.

The Company’s effective tax rates were 14.1%, 14.6% and 12.7% for 2021, 2020 and 2019, respectively. Net income per diluted share was $11.17, $8.36 and $8.69 in 2021, 2020 and 2019, respectively.

The Company generated $747 million, $791 million and $643 million of net cash flows from operations in 2021, 2020 and 2019, respectively. The decrease in operating cash flow in 2021 was primarily a result of the $100 million of 2020 cost actions and working capital improvements implemented being reinstated once customer demand increased. Included in the 2021, 2020 and 2019 net cash flow from operations is $38 million,

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$38 million and $29 million, respectively, of income tax payments made in the U.S. in relation to the 2017 transition tax liability. The Company is required to make a U.S. federal tax payment of approximately $38 million in 2022 to tax authorities in connection with the Company’s estimated remaining transition tax liabilities of $327 million under the 2017 Tax Act. The remainder of the liability is required to be paid in annual installments of $72 million, $96 million and $121 million in 2023, 2024 and 2025, respectively.

Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $161 million, $172 million and $164 million in 2021, 2020 and 2019, respectively. The cash flows from investing activities in 2021 also included $49 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the United States. The Company has incurred costs of $200 million on this facility through the end of 2021, and anticipates spending approximately $50 million to complete this new state-of-the-art facility in 2022.

On September 17, 2021, the Company entered into an amended and restated credit agreement (the “2021 Credit Agreement”), which amended the Company’s existing credit agreement entered into in 2017 (the “2017 Credit Agreement”). The 2021 Credit Agreement provides for a $1.8 billion revolving facility (the “2021 Credit Facility”) and converted the $300 million term loan under the 2017 Credit Agreement into part of the new revolving facility. As of December 31, 2021, the 2021 Credit Facility had a total of $210 million outstanding. As of December 31, 2020, the revolving credit facility and the term loan governed by the 2017 Credit Agreement had a total of $100 million and $300 million, respectively, outstanding. The 2021 Credit Facility matures on September 17, 2026 and requires no scheduled prepayments before that date.

In March 2021, the Company issued senior unsecured notes with an aggregate principal amount of $500 million. The Series N $100 million notes have a five-year term and a fixed interest rate of 1.68%. The Series O $400 million notes have

a 10-year term

and a fixed interest rate of 2.25%.

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. During 2021, 2020 and 2019, the Company repurchased 2.0 million, 0.8 million and 11.1 million shares of the Company’s outstanding common stock at a cost of $640 million, $167 million and $2.5 billion, respectively, under authorized share repurchase programs. As of December 31, 2021, the Company has a total of $885 million authorized for future repurchases. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. 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.

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Results of Operations

Sales by Geography

Geographic sales information is presented below for the years ended December 31, 2021, 2020 and 2019 (dollars in thousands):

Year Ended December 31, % change

Net Sales:

Asia:

Americas:

In 2021, sales increased 18% as compared to 2020, due to stronger demand for our products and services across most major geographies and customer classes 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.

The sales strength was broad-based, driven by continued growth in recurring revenues and the strong sales growth in instruments, particularly in LC instrument system sales. Foreign currency translation increased sales by 2% in 2021 and had minimal impact on sales in 2020.

In 2020, sales decreased 2% as compared to 2019, as the

COVID-19 pandemic

caused interruptions in business activities and uncertainties that resulted in our customers reducing purchases of our products and services. The sales declines in 2020 were broad-based across all geographies and were a result of the weaker demand and disruption of business activities caused by

the COVID-19 lockdowns,

except in Europe where sales increased 5% as compared to the prior year. The most significant decline in sales in 2020 occurred in China, where sales declined 8%, as well as declines of 2% in the U.S. and 13% in the Americas Other region.

Sales by Trade Class

Net sales by customer class are presented below for the years ended December 31, 2021, 2020 and 2019 (dollars in thousands):

Year Ended December 31, % change

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In 2021, sales to pharmaceutical customers increased 20% with foreign currency translation positively impacting sales by 1%. The increase in sales to pharmaceutical customers was broad-based with double-digit sales growth across most major geographies, primarily due to stronger demand for our products and services as a result of our customers continuing to resume laboratory and manufacturing operations. Sales also benefited from the demand from certain pharmaceutical customers involved

with COVID-19

diagnostic testing and the increase in the development of new drugs and therapies. Sales to industrial customers in 2021 increased 17%, primarily due to customers continuing to resume laboratory and manufacturing operations during the year and this growth was driven by the increased customer demand for our TA products. Foreign currency translation increased sales to industrial customers by 2% in 2021. Sales to academic and government customers increased 7% in 2021, with foreign currency translation increasing sales by 2%.

In 2020, sales to pharmaceutical customers increased 2% with foreign currency translation positively impacting sales by 1%. The lower sales volumes to pharmaceutical customers in 2020, particularly in the first half of the year, can be attributed to the disruption in business activities caused

by COVID-19, despite

increased demand for our products and services from certain pharmaceutical customers who are

involved with COVID-19 diagnostic testing

and the development of new drugs and therapies. Sales to industrial customers in 2020 declined 2%, which were significantly impacted by the TA sales declines of 8% in 2020. The sales declines to academic and government customers were broad-based across all product classes as academic and governmental customers adjusted their spending to mitigate the effects of

the COVID-19 pandemic,

which significantly impacted sales in China.

Waters Products and Services Net Sales

Net sales for Waters products and services were as follows for the years ended December 31, 2021, 2020 and 2019 (dollars in thousands):

Year Ended December 31, % change

Waters products and service sales increased 17% in 2021 and declined 1% in 2020, with the effect of foreign currency translation increasing Waters sales by 2% and 1% in 2021 and 2020, respectively. Waters instrument system sales (LC and MS technology-based) increased 22% in 2021 primarily due to customer demand continuing to increase to

pre-pandemic

levels as customer laboratories and manufacturing facilities continued to return to normal operations. Precision chemistry consumables sales increased double-digits due to the strong demand across most major geographies driven by the uptake in columns and application-specific testing kits to pharmaceutical customers. Waters service sales increased 10% due to higher service demand billings as

COVID-19

business closures and restrictions began to ease. 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.

In 2020 Waters instrument system sales (LC and MS technology-based) decreased 8%, primarily attributed to the weaker demand for our products and services by our customers due to the disruption and uncertainty caused

by the COVID-19 pandemic.

Precision chemistry consumables sales increased 5% in 2020, despite the disruption in business activities caused

by COVID-19.

Waters service sales increased 4%, primarily due to increased sales of service plans and higher service demand billings to a higher installed base of customers

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respectively, with sales in 2020 being partially offset by the weaker demand and disruption of business activities caused by

the COVID-19 lockdowns.

TA Product and Services Net Sales

Net sales for TA products and services were as follows for the years ended December 31, 2021, 2020 and 2019 (dollars in thousands):

Year Ended December 31, % change

TA instrument system and service sales growth in 2021 was broad-based across all geographies increasing 26%, and was primarily driven by stronger demand as a result of our customers continuing to resume laboratory and manufacturing operations. In 2021, the increase in TA instrument system sales was primarily driven by strength in all major regions. The increase in TA service sales was attributable to customers continuing to resume their operations after the restrictions caused

by COVID-19 during

2020, as well as sales of service plans and billings to a higher installed base of customers. The effect of foreign currency translation increased TA’s sales by 1% in 2021.

TA product and service sales declines in 2020 were primarily due to lower customer demand resulting from the

COVID-19 pandemic.

TA’s instrument system sales declined in 2019 primarily due to lower customer demand resulting from macroeconomic conditions, tariff posturing and political instability. TA service sales increased in 2019 due to sales of service plans and billings to a higher installed base of customers. TA sales declined in all major regions in 2020, with foreign currency translation having minimal impact on TA’s sales.

Cost of Sales

Cost of sales increased 15% in 2021 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 sales and gross profit during 2022.

Selling and Administrative Expenses

Selling and administrative expenses increased 13% and 4% in 2021 and 2020, respectively. The increase in selling and administrative expenses in 2021 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. The increase in selling and administrative expenses in 2020 can be attributed to the salary merit and incentive compensation increases along with the severance-related costs in connection with a reduction in workforce and lease-termination and exit costs. Severance and lease termination and exit costs were $27 million and $10 million in 2020 and 2019, respectively. Offsetting these increases in selling and administrative expenses were $70 million of savings in 2020, which

includes COVID-19 and

restructuring cost saving actions that reduced planned salaries

and non-essential spending.

The effect of foreign currency translation increased selling and administrative expenses by 1% in 2021 and had a minimal impact on selling and administrative expenses in 2020.

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As a percentage of net sales, selling and administrative expenses were 22.5%, 23.4% and 22.2% for 2021, 2020 and 2019, respectively.

Research and Development Expenses

Research and development expenses increased 20% in 2021 and decreased 2% in 2020. The increase in research and development expenses was impacted by additional headcount, merit compensation and costs associated with new products and the development of new technology initiatives as well as the reinstatement of

COVID-19

cost actions implemented in 2020. Research and development expenses in 2020 include $15 million of cost action savings from salary reductions, furloughs and reductions

in non-essential spending.

Foreign currency translation decreased research and development expenses in 2021 by 1% and had minimal impact on research and development costs in 2020.

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 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, which were recognized within other income in our consolidated statement of operations. In 2021, the Company also recorded an unrealized gain of $10 million due to an observable change in the fair value of an existing investment the Company does not have the ability to exercise significant influence over.

Interest Expense, Net

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. The increase in net interest expense from 2019 to 2020 is due to higher debt balances in 2020.

Provision for Income Taxes

The Company’s effective tax rates were 14.1%, 14.6% and 12.7% in 2021, 2020 and 2019, respectively.

The Company’s effective income tax rate differs from the U.S. federal statutory rate each year due to differences in the proportionate amounts of

pre-tax

income recognized in jurisdictions with different effective tax rates and the items discussed below.

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, 2021. The Company entered into 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 of 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 these concessionary income tax rates rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the

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Company’s net income during the years ended December 31, 2021, 2020 and 2019 by $20 million, $21 million and $24 million, respectively, and increased the Company’s net income per diluted share by $0.32, $0.33 and $0.35, respectively.

During 2021, the Company’s 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 Global Intangible

Low-Taxed

Income (“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.

The 2019 effective tax rate differed from the U.S. federal statutory tax rate primarily due to the jurisdictional mix of earnings, an $11 million provision related to the GILTI tax and tax benefit of $9 million related to stock-based compensation.

The Company’s effective tax rate is influenced by many significant factors, including, but not limited to, the wide range of income tax rates in jurisdictions in which the Company operates; sales volumes and profit levels in each tax jurisdiction; changes in tax laws, tax rates and policies; the outcome of various ongoing tax audit examinations; and the impact of foreign currency transactions and translation. As a result of variability in these factors, the Company’s effective tax rates in the future may not be similar to the effective tax rates for the current or prior years, or for previously forecasted periods.

Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows (in thousands):

Year Ended December 31,

Asset impairments — 6,945 —

Observable unrealized gain on investment (9,707 ) — —

Change in accounts payable and other current liabilities 46,110 140,598 9,784

Effect of the 2017 Tax Cuts and Jobs Act — — (3,229 )

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Cash Flow Provided By Operating Activities

Net cash provided by operating activities was $747 million, $791 million and $643 million in 2021, 2020 and 2019, respectively. 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:

Cash (Used in) Provided By Investing Activities

Net cash used in investing activities totaled $232 million and $264 million in 2021 and 2020, respectively, while net cash provided by investing activities was $769 million in 2019. Additions to fixed assets and capitalized software were $161 million, $172 million and $164 million in 2021, 2020 and 2019, respectively. The cash flows from investing activities in 2021 also included $49 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the United States. The Company has incurred costs of $200 million on this facility through the end of 2021, and anticipates spending approximately $50 million to complete this new state-of-the-art facility in 2022.

During 2021, 2020 and 2019, the Company purchased $280 million, $26 million and $37 million of investments, respectively. During 2021, 2020 and 2019, $218 million, $21 million and $1.0 billion of investments matured, respectively.

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 2021 and 2019.

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During 2021, 2020 and 2019, the Company made $2 million, $6 million and $9 million of investments in unaffiliated companies, respectively.

Cash Used in Financing Activities

a 10-year term

and a fixed interest rate of 2.25%.

The Company’s net debt borrowings increased by $160 million in 2021, decreased by $325 million in 2020 and increased by $535 million in 2019. As of December 31, 2021, the Company had a total of $1.5 billion in outstanding debt, which consisted of $1.3 billion in outstanding senior unsecured notes and $210 million borrowed under a revolving credit facility, with both the term loan and revolving credit facilities under the 2017 Credit Agreement. As of December 31, 2021, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1.6 billion after outstanding letters of credit. As of December 31, 2021, the Company was in compliance with all debt covenants.

As of December 31, 2021, the Company has entered into three-year interest rate cross-currency swap derivative agreements with a notional value of $230 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. As a result of entering into these agreements, the Company lowered its net interest expense by $11 million, $15 million and $12 million during 2021, 2020 and 2019, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $1 million in 2022, as the three-year term of the agreements expire. During 2021, the Company entered into a new cross-currency swap derivative agreement with a notional value of $40 million.

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. During 2021, 2020 and 2019, the Company repurchased 2.0 million, 0.8 million and 11.1 million shares of the Company’s outstanding common stock at a cost of $640 million, $167 million and $2.5 billion, respectively, under the January 2019 authorization and other previously announced programs. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. In addition, the Company repurchased $9 million, $9 million and $8 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2021, 2020 and 2019, respectively.

The Company received $56 million, $66 million and $54 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan in 2021, 2020 and 2019, respectively.

The Company had cash, cash equivalents and investments of $569 million as of December 31, 2021. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $440 million held by foreign subsidiaries at December 31, 2021, of which $298 million was held in currencies other than U.S. dollars.

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As of December 31, 2021, the Company’s material cash requirements include the following contractual and other obligations:

Long-term debt.

As of December 31, 2021, the Company had $1.5 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; $670 million in 2026; $300 million in 2029 and $400 million in 2031.

Interest on Senior Unsecured Notes.

As of December 31, 2021, the Company had $240 million of cash requirements for the interest on senior unsecured notes that is to be paid as follows: $39 million in 2022; $38 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, 2021, the Company had a remaining cash requirement of $327 million of which $38 million, $72 million, $96 million and $121 million will be paid in 2022, 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 operating leases consist of property leases for sales, demonstration, laboratory, warehouse and office spaces, automotive leases for sales and service personnel and equipment leases, primarily used in our manufacturing and distribution operations. For leases with terms greater than 12 months, the Company recorded the

related right-of-use asset

and lease liability obligation at the present value of lease payments over the term of the leases. Some of the Company’s leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments. A certain number of these leases contain rent escalation clauses, either fixed or adjusted periodically for inflation of market rates, that are factored into the Company’s determination of lease payments. The Company also has variable lease payments that do not depend on a rate or index, primarily for items such as real estate taxes and other expenses, which are recorded as variable costs when incurred. The Company’s cash requirements for future lease payments were approximately $94 million as of December 31, 2021. 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 $28 million as of December 31, 2021.

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

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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. All incremental costs of obtaining a contract are expensed as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less. Shipping and handling costs are included as a component of cost of sales. In situations where the control of the goods transfers prior to the completion of the Company’s obligation to ship the products to its customers, the Company has elected the practical expedient to account for the shipping services as a fulfillment cost. Accordingly, such costs are recognized when control of the related goods is transferred to the customer. In more rare situations, the Company has revenue associated with products that contain specific customer acceptance criteria and the related revenue is not recognized before the customer acceptance criteria are satisfied. The Company elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with specific revenue-producing transactions and collected by the Company from a customer.

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 instrument systems 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.

Payment terms and conditions vary among the Company’s revenue streams, although terms generally include a requirement of payment within 30 to 60 days of product shipment. Prior to providing payment terms to customers, an evaluation of their credit risk is performed. Returns and customer credits are infrequent and insignificant and are recorded as a reduction to sales. Rights of return are not included in sales arrangements and, therefore, there is minimal variable consideration included in the transaction price of our products.

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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, 2021 of $274 million on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.

Allowance for credit losses on Accounts Receivable

The Company maintains allowances for expected credit losses based on applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance on current receivables along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. The historical loss rate is calculated by comparing the prior year actual sales and accounts receivable balances to estimate the period of collection of trade receivables by aging category. This collection information by aging category is then compared to write offs over the same prior year period to estimate the amount of allowance that is attributable to each category of our accounts receivable aging. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. If the financial condition of the Company’s customers were to deteriorate beyond what is estimated in the current expected credit loss model, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company does not request collateral from its customers, but collectibility is enhanced through the use of credit card payments and letters of credit. The Company assesses collectibility based on a number of factors, including, but not limited to, past transaction history with the customer, the credit-worthiness of the customer, industry trends and the macro-economic environment. Historically, the Company has not experienced significant credit losses. Sales returns and allowances are estimates of future product returns related to current period revenue. Material differences may result in the amount and timing of revenue for any period if management made different judgments or utilized different estimates for sales returns and allowances for expected credit losses. The Company’s accounts receivable balance at December 31, 2021 was $613 million, net of allowances for expected credit losses of $13 million.

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, 2021 was recorded at its net realizable value of $356 million, which is net of write-downs of $32 million.

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Long-Lived Assets, Intangible Assets and Goodwill

The Company assesses the impairment of identifiable intangibles, long-lived assets and goodwill 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, but are not limited to, the following:

When the Company determines that the carrying value of an individual intangible asset, long-lived asset or goodwill 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, long-lived asset or goodwill, including its eventual residual value, is compared to the 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. Net intangible assets, long-lived assets and goodwill amounted to $242 million, $548 million and $438 million, respectively, as of December 31, 2021.

The Company performs annual impairment reviews of its goodwill on December 31 of each year. For goodwill impairment review purposes, the Company has two reporting units: Waters and TA. 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. The factors that could cause a material goodwill impairment charge in the future include, but are not limited to, the following:

• significant adverse change in legal factors or business climate;

• adverse action or assessment by a regulator; and

• unanticipated competition.

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 accounting standards for income taxes require that a company continually evaluate 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.

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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, 2021, the Company had unrecognized tax benefits, excluding interest and penalties, of $29 million.

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.

Warranty

Product warranties are recorded at the time revenue is recognized for certain product shipments. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company’s previous estimates, revisions to the estimated warranty liability would be required. At December 31, 2021, the Company’s warranty liability was $11 million.

Litigation

As described in Part I, Item 3, Legal Proceedings, of this

Form 10-K,

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.

Pension and Other Retirement Benefits

In 2018, the Company settled its defined benefit pension plan in the United States. As a result of this settlement, the Company’s defined benefit pension obligations were significantly reduced in 2018 and 2019. The Company still maintains a number of smaller defined benefit pension plans and other retirement benefits throughout the world. Assumptions used in determining projected benefit obligations and the fair values of plan assets for the Company’s remaining less significant pension plans and other retirement benefits are evaluated periodically by management. Changes in assumptions are based on relevant Company data. Critical assumptions, such as the

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discount rate used to measure the benefit obligations and the expected long-term rate of return on plan assets, are evaluated and updated annually. The Company has assumed that the weighted-average expected long-term rate of return on plan assets will be 6.25% for its U.S. benefit plans and 2.58% for its

non-U.S.

benefit plans.

At the end of each year, the Company determines the discount rate that reflects the current rate at which the pension liabilities could be effectively settled. The Company utilized Milliman’s Bond Matching model to determine the discount rate for its U.S. benefit plans. The Company determined the discount rate for its

non-U.S.

benefit plans based on the analysis of the Mercer Pension Discount Curve for high quality investments as of December 31, 2021 that best matched the timing of the plan’s future cash flows for the period to maturity of the pension benefits. Once the interest rates were determined, the plan’s cash flow was discounted at the spot interest rate back to the measurement date. At December 31, 2021, the Company determined the weighted-average discount rate to be 2.70% for the U.S. benefit plans and 1.40% for the

non-U.S.

benefits plans.

one-quarter

percentage point increase in the assumed long-term rate of return would decrease the Company’s net periodic benefit cost by less than $1 million. A

one-quarter

percentage point increase in the discount rate would decrease the Company’s net periodic benefit cost by less than $1 million.

Stock-based Compensation

The accounting standards for stock-based compensation require that all share-based payments to employees be recognized in the statements of operations based on their fair values. The Company has used the Black-Scholes option pricing model and Monte Carlo simulation model to determine the fair value of its stock option awards and performance stock unit awards, respectively. Under the fair-value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating stock price volatility and employee stock option exercise behaviors. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted. As stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest, the amount of the expense has been reduced for estimated forfeitures. These accounting standards require forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If factors change and the Company employs different assumptions in the application of these accounting standards, the compensation expense that the Company records in future periods may differ significantly from what the Company has recorded in the current period. The Company recognizes the expense using the straight-line attribution method.

As of December 31, 2021, unrecognized compensation costs and related weighted-average lives over which the costs will be amortized were as follows (in millions):

UnrecognizedCompensationCosts Weighted-AverageLife in Years

Stock options $ 20 3.5

Restricted stock units 44 3.3

Performance stock units 12 2.0

Business Combinations and Asset Acquisitions

The Company accounts for business acquisitions under the accounting standards for business combinations. The results of each acquisition are included in the Company’s consolidated results as of the acquisition date and the purchase price of an acquisition is allocated to tangible and intangible assets and assumed liabilities based on

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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.

Item 7A:

Quantitative and Qualitative Disclosures About Market Risk

Derivative Transactions

The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its

non-U.S.

dollar foreign subsidiaries’ financial statements into U.S. dollars, and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.

The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.

Foreign Currency Exchange Contracts

The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates these net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real.

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Interest Rate Cross-Currency Swap Agreements

As of December 31, 2021, the Company had three-year interest rate cross-currency swap derivative agreements with a notional value of $230 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive income in stockholders’ equity (deficit) until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.

The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):

NotionalValue FairValue NotionalValue FairValue

Foreign currency exchange contracts:

Interest rate cross-currency swap agreements:

Accumulated other comprehensive loss $ 15,944 $ 44,996

The following is a summary of the activity included in the consolidated statements of operations and statements of comprehensive income related to the foreign currency exchange contracts and interest rate cross-currency swap agreements (in thousands):

FinancialStatementClassification

Year Ended December 31,

Foreign currency exchange contracts:

Unrealized (losses) gains on open contracts Cost of sales (343 ) 1,663 (1,292 )

Interest rate cross-currency swap agreements:

Assuming a hypothetical adverse change of 10% in

year-end

exchange rates (a strengthening of the U.S. dollar), the fair market value of the foreign currency exchange contracts outstanding as of December 31, 2021 would decrease

pre-tax

earnings by approximately $5 million. Assuming a hypothetical adverse change of 10% in

year-end

exchange rates (a strengthening of the U.S. dollar), the fair market value of the interest rate cross-currency swap agreements outstanding as of December 31, 2021 would increase by approximately $23 million and would be recorded to foreign currency translation in other comprehensive income within stockholders’ equity (deficit). The related impact on interest income would not have a material effect on

pre-tax

earnings.

The Company’s cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. The Company’s cash equivalents represent highly liquid investments, with original maturities of 90 days or less, primarily in bank deposits, U.S. treasury bill money market funds and commercial paper. As of December 31, 2021, the carrying value of the Company’s cash and cash equivalents approximated fair value.

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The Company is exposed to the risk of interest rate fluctuations from the investments of cash generated from operations. Investments with maturities greater than 90 days are classified as investments, and are held primarily in U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities. As of December 31, 2021, the Company estimates that a hypothetical adverse change of 100 basis points across all maturities would not have a material effect on the fair market value of its portfolio.

The Company is also exposed to the risk of exchange rate fluctuations. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of December 31, 2021 and 2020, $440 million out of $569 million and $364 million out of $443 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $298 million out of $569 million and $254 million out of $443 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at December 31, 2021 and 2020, respectively. As of December 31, 2021, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.

Assuming a hypothetical adverse change of 10% in

year-end

exchange rates (a strengthening of the U.S. dollar), the fair market value of the Company’s cash, cash equivalents and investments held in currencies other than the U.S. dollar as of December 31, 2021 would decrease by approximately $30 million, of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders’ equity.

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Item 8:

Financial Statements and Supplementary Data

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in

Rules 13a-15(f)

and

15d-15(f)

under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in

Internal Control

— Integrated Framework (2013)

issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in

Internal Control

— Integrated Framework (2013)

, our management, including our chief executive officer and chief financial officer, concluded that our internal control over financial reporting was effective as of December 31, 2021.

The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Waters Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Waters Corporation and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in

Internal Control—Integrated Framework

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in

Internal Control—Integrated Framework

(2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in

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accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill Impairment Assessment

As described in Notes 2 and 8 to the consolidated financial statements, the Company’s consolidated goodwill balance was $438 million as of December 31, 2021. Management tests for goodwill impairment using a fair-value approach at the reporting unit level annually, or earlier, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company performs an annual goodwill impairment assessment for its reporting units as of December 31 each year. Under the impairment assessment, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the amount of the excess carrying amount of the reporting unit over its fair value. This impairment is limited to the total amount of goodwill allocated to that reporting unit. The fair value of reporting units was estimated using a discounted cash flows technique, which includes certain management assumptions, such as estimated future cash flows, estimated growth rates and discount rates. As disclosed by management, the estimated fair value of the reporting units significantly exceeds the carrying value.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are the significant judgment by management when developing the fair value measurement of the reporting units, which in turn led to a high degree of auditor judgment and effort in performing procedures and evaluating management’s significant assumptions related to the estimated growth rates.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, (i) testing management’s process for developing the fair value estimates; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the significant assumptions used by management related to the estimated growth rates. Evaluating management’s

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assumptions related to estimated revenue growth rates involved evaluating whether the growth rates used by management were reasonable considering the current and past performance of the reporting units and whether those growth rates were consistent with evidence obtained in other areas of the audit.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

We have served as the Company’s auditor since 1994.

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,

(In thousands, except per share data)

ASSETS

Current assets:

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Notes payable and debt $ — $ 150,000

Long-term liabilities:

Long-term portion of retirement benefits 64,027 72,620

Long-term operating lease liabilities 59,623 68,197

Commitments and contingencies (Notes 6, 9, 10, 11, 12, 13 and 17)

Stockholders’ equity:

The accompanying notes are an integral part of the consolidated financial statements.

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,

(In thousands, except per share data)

Revenues:

Costs and operating expenses:

Asset impairments — 6,945 —

Net income per basic common share $ 11.25 $ 8.40 $ 8.76

Net income per diluted common share $ 11.17 $ 8.36 $ 8.69

The accompanying notes are an integral part of the consolidated financial statements.

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,

(In thousands)

Other comprehensive income (loss):

Unrealized (losses) gains on investments before income taxes (26 ) — 3,046

Income tax benefit (expense) 6 — (641 )

Unrealized (losses) gains on investments, net of tax (20 ) — 2,405

Retirement liability adjustment before reclassifications 9,342 (6,786 ) (9,360 )

Amounts reclassified to other income (expense), net 1,167 1,389 1,979

Retirement liability adjustment before income taxes 10,509 (5,397 ) (7,381 )

Retirement liability adjustment, net of tax 8,001 (4,456 ) (5,536 )

The accompanying notes are an integral part of the consolidated financial statements.

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

(In thousands)

Cash flows from operating activities:

Asset impairments — 6,945 —

Observable unrealized gain on investment (9,707 ) — —

Change in operating assets and liabilities, net of acquisitions:

Increase in accounts payable and other current liabilities 46,110 140,598 9,784

Effect of the 2017 Tax Cuts and Jobs Act — — (3,229 )

Cash flows from investing activities:

Asset and business acquisitions, net of cash acquired — (80,545 ) —

Investment in unaffiliated company (1,788 ) (6,143 ) (8,843 )

Payments for intellectual property licenses (7,000 ) — —

Cash flows from financing activities:

Payments of debt issuance costs (8,537 ) — (2,932 )

Supplemental cash flow information:

The accompanying notes are an integral part of the consolidated financial statements.

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WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)

Other comprehensive loss — — — — — (1,500 ) (1,500 )

Issuance of common stock for employees:

Employee Stock Purchase Plan 43 — 7,996 — — — 7,996

Adoption of new accounting pronouncement — — — (985 ) — — (985 )

Other comprehensive income — — — — — 1,528 1,528

Issuance of common stock for employees:

Employee Stock Purchase Plan 43 — 7,531 — — — 7,531

Other comprehensive income — — — — — 6,078 6,078

Issuance of common stock for employees:

Employee Stock Purchase Plan 40 — 9,578 — — — 9,578

The accompanying notes are an integral part of the consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 Description of Business and Organization

Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC

” and together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together

(“LC-MS”)

and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing.

LC-MS

instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA

product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.

2 Basis of Presentation and Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, goodwill and intangible assets, income taxes, litigation, stock-based compensation and contingencies, and to a lesser extent, product returns and allowances, bad debts, inventory valuation, warranty and installation provisions, retirement plan obligations and equity investments, which are not as significant to our financial statements. 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.

Risks and Uncertainties

The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.

The impact of the global pandemic of a novel strain of coronavirus

(“COVID-19”)

over the last two years has resulted in a widespread public health crisis. The

COVID-19

pandemic has caused significant volatility and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

continued

spread throughout the United States and globally, which has disrupted and may continue to disrupt the Company’s business. The Company operates in over 35 countries, including those in the regions most impacted by the

COVID-19

pandemic. In response, governments of most countries, including the United States, as well as private businesses, have implemented numerous measures attempting to contain and mitigate the effects of

COVID-19.

Such measures have had and are expected to continue to have adverse impacts on the United States and foreign economies of uncertain severity and duration, and have had and may continue to have a negative impact on the Company’s operations, including Company sales, supply chain and cash flow.

COVID-19

and the related economic uncertainty adversely impacted sales of the Company for the year ended December 31, 2020; however, through the date of the issuance of these financial statements, the Company’s consolidated financial position, results of operations and cash flows have not been materially impacted and, thus, the Company concluded that no interim goodwill or long-lived asset impairment analyses were required. Further, there have been no violations of debt covenants. Any prolonged material disruption to the Company’s employees, suppliers, manufacturing, or customers could result in a material impact to its consolidated financial position, results of operations or cash flows in the future.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. The Company consolidates entities in which it owns or controls fifty percent or more of the voting shares. All inter-company balances and transactions have been eliminated.

Translation of Foreign Currencies

The functional currency of each of the Company’s foreign operating subsidiaries is the local currency of its country of domicile, except for the Company’s subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity’s cash flows.

For the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets.

The Company’s net sales derived from operations outside the United States were 72%, 71% and 71% in 2021, 2020 and 2019, respectively. Gains and losses from foreign currency transactions are included primarily in cost of sales in the consolidated statements of operations. In 2021, 2020 and 2019, foreign currency transactions resulted in net losses of $5 million, $7 million and $9 million, respectively.

Seasonality of Business

The Company typically experiences an increase in sales in the fourth quarter, as a result of purchasing habits for capital goods of customers that tend to exhaust their spending budgets by calendar year end.

Cash, Cash Equivalents and Investments

Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, primarily in bank deposits, U.S. treasury bill money market funds and commercial paper. Investments with longer maturities are classified as investments, and are held primarily in U.S. treasury bills, U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Investments are classified as

available-for-sale

(“AFS”) debt securities. If the AFS debt security’s fair value exceeds the security’s amortized cost the unrealized gain is recognized in accumulated other comprehensive income in stockholders’ equity (deficit), net of the related tax effects. If the AFS debt security’s fair value declines below its amortized cost the Company considers all available evidence to evaluate the extent to which the decline is due to credit-related factors or noncredit-related factors. If the decline is due to noncredit-related factors then no credit loss is recorded and the unrealized loss is recognized in accumulated other comprehensive income in stockholders’ equity (deficit), net of the related tax effects. If the decline is considered to be a credit-related impairment, it is recognized as an allowance on the consolidated balance sheet with a corresponding charge to the statement of operations. The credit allowance is limited to the difference between the fair value and the amortized cost basis. No credit-related allowances or impairments have been recognized on the Company’s investments in

available-for-sale

debt securities. The Company classifies its investments exclusive of those categorized as cash equivalents.

The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of December 31, 2021 and 2020, $440 million out of $569 million and $364 million out of $443 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $298 million out of $569 million and $254 million out of $443 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at December 31, 2021 and 2020, respectively.

Accounts Receivable and Allowance for Credit Losses

The Company adopted new accounting guidance regarding the accounting for credit losses as of January 1, 2020 using a modified retrospective transition approach that was applied to the trade receivable balance as of January 1, 2020. This new accounting guidance required the Company to move from an incurred loss model to a current expected credit loss (“CECL”) model. Upon adoption, the Company recorded a net decrease of approximately $1 million to the Company’s stockholders’ deficit as of January 1, 2020. The adoption of this standard did not have a material impact on the Company’s balance sheets, results of operations or cash flows.

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any off-balance sheet credit exposure related to its customers.

Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to

re-possess,

refurbish and

re-sell

the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The

following is a summary of the activity of the Company’s allowance for credit losses for the year ended December 31

, 2021

, 2020

and 2019

(in thousands). The December 31

, 2021

and 2020

balances are calculated using the CECL method and the December 31

, 2019

balance is calculated using the incurred loss method under legacy GAAP:

Allowance for Credit Losses

Concentration of Credit Risk

The Company sells its products and services to a significant number of large and small customers throughout the world, with net sales to the pharmaceutical industry of approximately 60%, 59% and 57% in 2021, 2020 and 2019, respectively. None of the Company’s individual customers accounted for more than 2% of annual Company sales in 2021, 2020 or 2019. The Company performs continuing credit evaluations of its customers and generally does not require collateral, but in certain circumstances may require letters of credit or deposits. Historically, the Company has not experienced significant bad debt losses.

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”).

Income Taxes

As part of the 2017 Tax Act, there is a provision for the taxation of

certain off-shore earnings

referred to as the Global

Intangible Low-Taxed Income

(“GILTI”) provision. This provision

taxes off-shore earnings

at a rate of 10.5%, partially offset with foreign tax credits. In connection with this provision, the Company’s accounting policy is to treat this tax as a current period cost.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Leases

The Company’s lease portfolio consists primarily of operating leases. The Company’s operating leases consist of property leases for sales, demonstration, laboratory, warehouse and office spaces, automotive leases for sales and service personnel and equipment leases, primarily used in our manufacturing and distribution operations. The Company categorizes leases as either operating or finance leases at the commencement date of the lease. The Company does not have any material financing leases.

The Company makes variable lease payments that do not depend on a rate or index, primarily for items such as real estate taxes and other expenses. These expenses are recorded as variable costs in the period incurred. For the years ended December 31, 2021, 2020 and 2019, respectively, variable costs incurred were not material.

The Company’s lease agreements may include tenant improvement allowances, rent holidays, and/or contingent rent provisions as well as a certain number of these leases contain rental escalation clauses that are either fixed or adjusted periodically for inflation of market rates which are factored into our determination of lease payments at lease inception. The Company’s leases also sometimes include renewal options and/or termination options which are included in the determination of the lease term when they are reasonably certain to be exercised.

The Company has lease agreements which contain lease and

non-lease

components, which are accounted for as a single lease component for all underlying classes of assets.

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