Waters Corporation 2020 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; it was filed February 24, 2021. Waters develops, sells and services analytical laboratory systems, consumables and software, principally liquid chromatography and mass spectrometry, as well as thermal analysis instruments through TA. Its customers span pharmaceutical, industrial, academic and government markets. The company reports one aggregated financial reporting segment.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $2.365 billion | $2.407 billion | Down 2% |
| Operating income | $645 million | $708 million | Down 9% |
| Operating margin | 27.3% | 29.4% | Down 2.1 percentage points |
| Net income | $522 million | $592 million | Down 12% |
| Diluted EPS | $8.36 | $8.69 | Down 4% |
| Cash from operations | $791 million | $643 million | Up 23% |
| Capital expenditures and capitalized software | $172 million | $164 million | Up 5% |
| Cash, cash equivalents and investments | $443 million | $337 million | Up $106 million |
| Total debt | $1.357 billion | $1.681 billion | Down $325 million |
- Product sales were $1.497 billion, down 4%; service sales were $868 million, up 3%. Approximate gross margin was 57.4%, versus 58.0% in 2019, calculated from reported sales and cost of sales.
- Calculated operating cash flow less capital expenditures and capitalized software was approximately $618 million, compared with $479 million in 2019.
- Year-end current assets were $1.401 billion and current liabilities $805 million; reported working capital was $596 million. The company also had $1.4 billion available under its committed credit facility and was in compliance with debt covenants.
- Pharmaceutical customers generated 59% of sales, industrial customers 30%, and academic and government customers 11%. Sales outside the U.S. were 71%.
- Fourth-quarter sales were $787 million, compared with $716 million in Q4 2019; fourth-quarter net income was $218 million, compared with $201 million.
Material changes versus the prior comparable period
- COVID-19 disruption reduced 2020 sales, especially in the first half: sales declined 12% year over year in that half, then grew 7% in the second half as customers resumed operations. Instrument-system sales fell 8% for the year; recurring revenue, defined as chemistry consumables and services, rose 4%.
- Academic and government sales fell 16%, while pharmaceutical sales increased 2%. China sales declined 8%; Europe sales increased 5%.
- Operating income was pressured by lower sales volume, unfavorable manufacturing absorption and foreign exchange. Cost actions partly offset these effects; management said the actions improved operating income by approximately $103 million versus its operating plan.
- Operating cash flow rose, supported by cost actions and working-capital improvements, including lower receivables and inventory. Share repurchases fell to $167 million from $2.5 billion in 2019; repurchases were temporarily suspended amid pandemic uncertainty.
- Debt declined, and stockholders’ equity improved from a $216 million deficit at year-end 2019 to $232 million positive at year-end 2020, reflecting, among other items, sharply lower repurchases.
Outlook, management commentary, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management stated it expected available cash, future operating cash flow and borrowing capacity to be sufficient for operations, debt service and planned investment needs for at least the next 12 months.
- Management said COVID-19 had not materially disrupted the company’s manufacturing, logistics or component shipments during 2020, but the duration and future financial effects remained uncertain. It cited potential renewed restrictions, demand volatility, supply-chain interruptions, remote-work productivity and cybersecurity risks.
- Other key exposures include foreign exchange movements, customer capital-spending cycles, competition and product-development execution, reliance on some limited-source components and contract manufacturers, regulatory and intellectual-property matters, and debt covenant requirements.
- 2020 included $27 million of severance and lease termination/exit costs, a net $7 million non-cash impairment-related expense tied to Medimass intangible assets, and $1.2 million of litigation provision. The company also acquired laboratory automation provider Andrew Alliance for approximately $80 million and clinical software provider ISS for $4 million, with a contingent ISS payment estimated at $1 million.
- The company had $365 million of remaining U.S. transition-tax liability; scheduled payments include approximately $38 million annually for the next two years. A Singapore tax exemption was expected to continue through March 2021, followed by a new incentive offering a 5% rate on certain income through March 2026.
- The CFO departed at year-end 2020; an interim CFO was appointed effective January 1, 2021, and a permanent successor search was underway. CEO Udit Batra took office in September 2020.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Goodwill impairment assessment was identified as a critical audit matter; goodwill was $444 million, and the assessment depends on management’s projected cash flows and growth assumptions.
Important facts for investors to verify
- Whether the second-half recovery in sales continued, particularly for instrument systems, academic and government customers, and China.
- Whether recurring-revenue growth and margins can offset volatility in capital-equipment demand and the 2020 decline in operating margin.
- Cash conversion and working-capital performance, including whether the 2020 operating cash-flow improvement is sustainable.
- Debt maturity and refinancing plans, especially the $400 million credit-agreement balance due in 2022, alongside scheduled transition-tax payments and the Taunton facility investment.
- Progress on the CFO transition, acquisition integration, and the effect of Singapore tax incentives on future effective tax rates.