Waters Corporation — Q1 2023 Form 10-Q
Business context and reporting period. Waters is a specialty measurement company selling and servicing liquid chromatography, mass spectrometry, thermal analysis and related consumable and software products. The unaudited quarter ended April 1, 2023; comparisons are with the three months ended April 2, 2022. The company reports one aggregated segment.
Financial performance
| Metric | Q1 2023 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $684.7 million | $690.6 million | Down 1% |
| Operating income | $174.2 million | $195.5 million | Down 11% |
| Operating margin | 25.4% | 28.3% | Down 2.9 percentage points |
| Net income | $140.9 million | $159.8 million | Down 12% |
| Diluted EPS | $2.38 | $2.62 | Down 9% |
| Operating cash flow | $196.8 million | $198.0 million | Slightly lower |
Product sales fell 3% to $436.5 million, while service sales rose 4% to $248.2 million. Gross profit, calculated as sales less product and service costs, was approximately $400.3 million, or 58.5% of sales, versus $404.9 million, or 58.6%. Selling and administrative expenses increased 16% to $182.0 million; the company cited acquisition due diligence, headcount, merit increases, travel normalization and product-launch investment. Net interest expense rose 16% to $10.4 million. The effective tax rate was 14.7%, compared with 14.4%.
- Product and service mix: Waters instrument systems sales decreased 10%; chemistry consumables increased 6%; Waters service increased 3%. TA instrument systems and service sales rose 6% and 8%, respectively. Recurring revenue (consumables and services) increased 4%.
- Customer and geographic trends: Pharmaceutical sales declined 7%, industrial sales were flat, and academic and government sales increased 38%. Sales in China fell 4%, U.S. sales fell 3%, and Europe fell 1%; total Asia was flat.
- Cash and investment: Cash and cash equivalents were $486.1 million at quarter-end. Investing cash outflow was $34.4 million, including $34.4 million of property, equipment and software additions. Financing cash outflow was $159.2 million.
- Debt and liquidity: Total debt was $1.48 billion, including $1.43 billion long-term debt; the company had $175 million outstanding on its revolving facility and reported $1.8 billion available to borrow under it. The facility’s total capacity was increased to $2.0 billion in March. The company reported compliance with debt covenants.
Material changes, outlook and key matters
- Management attributed the sales decline mainly to weaker instrument demand in the U.S., Europe and China. Foreign currency translation reduced total sales growth by 4 percentage points and reduced operating income by approximately $16 million. The quarter also had one fewer calendar day than the prior-year quarter.
- Management expected foreign currency translation to be neutral to sales growth for the remainder of 2023 at then-current rates, and neutral to gross profit for 2023. No full-year revenue or EPS guidance is stated in the provided filing text.
- On February 14, Waters agreed to acquire Wyatt Technology for $1.4 billion in cash, subject to customary adjustments and closing conditions. The company expected closing in Q2 2023 and planned to fund it with cash and revolving-credit borrowing. The agreement provides for a $15 million termination fee in specified circumstances if the transaction is terminated without closing.
- Share repurchases were temporarily suspended in connection with the Wyatt acquisition. During the quarter, Waters repurchased $58 million under its programs and $11 million related to restricted-stock vesting.
- Operating cash flow was nearly flat year over year: lower net income and higher inventory were offset by stronger collections. Inventory rose to $499.4 million from $455.7 million at year-end; days sales outstanding was 91 days versus 81 days in the prior-year quarter.
- Waters had incurred $236 million on its U.S. precision-chemistry facility expansion and anticipated approximately $16 million of additional spending to complete it during the remainder of 2023.
- Key risks cited include foreign-exchange movements, customer demand and funding cycles, economic and geopolitical uncertainty, competition and technology changes, supply-chain disruption, acquisition execution, debt and liquidity needs, and regulatory, tax, litigation and cybersecurity exposures. Management said the pandemic had not materially affected results to date, but future impacts remained uncertain. No material change in risk factors or legal proceedings was reported.
Important facts for investors to verify
- Whether and when the Wyatt acquisition closed, its final purchase price and financing, and its effect on debt, interest expense and share repurchases.
- Whether instrument demand—particularly pharmaceutical customer capital spending and demand in the U.S., Europe and China—recovered after the reported decline.
- Whether foreign-exchange effects and management’s stated 2023 expectations were borne out.
- Whether elevated inventory and DSO normalized and operating cash generation remained resilient.
- Debt maturities, borrowing availability and covenant headroom following acquisition financing; also monitor the $50 million note due May 2023 identified in the filing.
- Potential changes in tax benefits, including the Singapore incentive, and the expected reduction of approximately $18 million in unrecognized tax benefits and related amounts within the next twelve months.