Waters Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended April 2, 2022; comparative period ended April 3, 2021. Amounts below are in U.S. dollars unless noted. Waters develops, sells and services analytical instruments, consumables and related software, principally for pharmaceutical, industrial, academic and government customers.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $690.6 million | $608.5 million | +13% |
| Product sales | $450.8 million | $382.0 million | +18% |
| Service sales | $239.7 million | $226.5 million | +6% |
| Operating income | $195.5 million | $171.3 million | +14% |
| Operating margin | 28.3% | 28.1% | +0.2 percentage points |
| Net income | $159.8 million | $148.1 million | +8% |
| Diluted EPS | $2.62 | $2.37 | +11% |
| Cash from operations | $198.0 million | $218.4 million | Down $20.4 million |
Gross margin was approximately 58.6%, versus 58.2% in the prior-year quarter, calculated from reported sales and cost of sales. Net margin was approximately 23.1%, versus 24.3%. The effective tax rate was 14.4%, compared with 14.8%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $480.1 million at April 2, 2022; cash, equivalents and investments totaled approximately $503 million.
- Total debt was approximately $1.44 billion, comprising $1.3 billion of senior notes and $140 million drawn on the revolving facility. Net debt, subtracting cash and investments, was approximately $941 million.
- The $1.8 billion revolving facility matures in September 2026; approximately $1.7 billion remained available after letters of credit. The company reported compliance with debt covenants.
- Current assets were $1.59 billion and current liabilities $687.8 million (current ratio approximately 2.3x). Inventories rose to $381.9 million from $356.1 million at year-end.
- Operating cash flow declined primarily due to inventory build and higher incentive-compensation payments. Investing activities provided $19.0 million, including investment maturities and sales; capital expenditures were $27.8 million.
- Financing activities used $227.4 million, including $170.1 million of treasury-share purchases and $70 million of debt repayment. Approximately $724 million remained authorized for repurchases at quarter-end. Waters reported no dividend plans.
Material changes and business drivers
- Growth reflected strong demand across major regions, end markets and product categories. Instrument-system sales increased 24% as described by management; reported Waters instrument-system sales rose 25%, while TA instrument-system sales rose 18%.
- Sales increased 26% in the Americas, 11% in Asia and 3% in Europe. U.S. sales rose 28%; China rose 18%, while Japan declined 3%. Pharmaceutical sales grew 15%, industrial 14%, and academic and government sales were flat.
- Foreign-currency translation reduced total sales growth by 3%. The quarter had one fewer calendar day than Q1 2021.
- Cost of sales rose 12%, with electronic-component and freight inflation partly offsetting the benefit of higher volume and price increases. Selling and administrative expenses rose 10%; as a share of sales, they declined to 22.8% from 23.5%.
- Net income growth lagged operating-income growth in part because other income fell to $0.2 million from $9.4 million. Q1 2022 included an approximately $4 million gain on an investment sale and an approximately $4 million impairment loss; Q1 2021 included an approximately $10 million unrealized investment gain.
Outlook, risks and unusual items
- The filing provides no specific consolidated revenue, earnings or EPS guidance. Management expected foreign-currency translation at then-current rates to slightly reduce gross profit for the remainder of 2022.
- Management anticipated approximately $7 million of lower net interest expense in 2022 from cross-currency swaps. It also expected to spend approximately $30 million in 2022 to complete its U.S. precision-chemistry facility expansion; $206 million had been incurred through Q1.
- COVID-19 had not materially disrupted manufacturing or shipments by the filing date, but management cautioned that prolonged Chinese lockdowns and global logistics or supply-chain disruption could hurt future results and cash flows. Component and freight inflation, currency movements, demand variability, competition and regulatory matters are also risks.
- The company acquired Megadalton charge-detection mass-spectrometry technology for approximately $10 million and expensed it as acquired in-process R&D. The filing states $5 million was paid at closing and approximately $4 million is payable later through 2029.
- Management reported no material changes to previously disclosed risk factors, legal proceedings or contractual obligations outside the ordinary course. It stated that COVID-19 had not required interim goodwill or long-lived-asset impairment testing and that there were no debt-covenant violations.
Investor facts to verify
- Whether demand and instrument-system growth continued, particularly in China and other major markets, and the effect of subsequent lockdowns.
- Whether supply constraints, inventory accumulation and component and freight inflation affected margins or operating cash conversion.
- How currency movements affected sales, gross profit and the value of the company’s substantial foreign-currency cash balances.
- Debt repayment, share repurchases and the remaining authorization, alongside cash generation and capital-spending needs.
- The development and commercial potential of the acquired CDMS technology, including the timing and amount of deferred payments.