Waters Corporation — Q3 2015 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended October 3, 2015, compared with periods ended September 27, 2014. Waters sells and services analytical instruments, consumables, and software, principally through its Waters and TA divisions. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $500.6m | $493.2m | $1,455.7m | $1,405.5m |
| Gross profit / margin | $293.8m / 58.7% | $290.9m / 59.0% | $851.0m / 58.5% | $813.7m / 57.9% |
| Operating income / margin | $135.8m / 27.1% | $138.7m / 28.1% | $386.1m / 26.5% | $345.9m / 24.6% |
| Net income | $116.3m | $113.5m | $318.0m | $280.3m |
| Diluted EPS | $1.40 | $1.34 | $3.82 | $3.29 |
| Operating cash flow | Not separately stated | Not separately stated | $406.6m | $349.9m |
- Quarterly sales increased 2%; nine-month sales increased 4%. Product sales rose 2% and 4%, respectively, while service sales rose 1% and 3%.
- Q3 operating income declined 2% despite higher revenue, with R&D expense up 13% and gross margin down 0.3 percentage points. Nine-month operating income rose 12% and operating margin improved 1.9 points.
- Nine-month net income increased 13% and diluted EPS rose 16%; EPS benefited from share repurchases and lower weighted-average shares.
- Q3 effective tax rate was 10.3% versus 13.6%; nine-month rate was 13.3% versus 14.1%. The company cited jurisdictional income mix and a $2m U.K. tax-credit benefit.
Cash, debt, and liquidity
- At October 3, cash and cash equivalents were $459.5m and investments were $1,851.2m, totaling $2,310.7m. Total debt was $1,630.2m, including $175.2m current and $1,455.0m long-term debt.
- Operating cash flow for nine months was $406.6m; investing cash outflow was $294.5m and financing cash outflow was $57.9m. Capital expenditures and capitalized software were $72.3m.
- Cash and investments exceeded debt, but $2,275m of the $2,311m total was held by foreign subsidiaries and may incur material tax effects if distributed to U.S. entities. Management said U.S. needs are managed through domestic operating cash flow and the revolving facility.
- Available borrowing capacity under the credit agreements was $468m after letters of credit. Waters reported compliance with debt covenants. Its amended revolving facility increased commitments from $1.1bn to $1.3bn and extended maturity to April 2020.
- The company repurchased $249m of shares in the first nine months and had $520m authorized for future repurchases under the May 2014 plan. It reported no current plan to pay dividends.
Changes, outlook, and risks
- Foreign currency translation reduced sales growth by 7% in both Q3 and year to date; management estimated a roughly 6% adverse full-year sales impact at then-current rates, with a negative effect on gross profit. Currency translation reduced diluted EPS by about $0.20 in Q3 and $0.44 year to date.
- Regional results were uneven: Q3 U.S. sales rose 13% and China 15%, while Europe fell 8% and Japan 13%. Management attributed much of the European and Japanese declines to currency translation. Latin American demand was also weak amid a strong U.S. dollar and weak Brazilian economy.
- Management linked sales growth to demand from life science, industrial chemical, and nutritional safety customers, particularly in the U.S. and Asia excluding Japan. Governmental and academic sales declined 5% in Q3. Increased service revenue reflected a larger installed base; inventory rose $35.4m from year-end, and DSO was 76 days versus 73 a year earlier.
- R&D increased as the company invested in new products and technology. Q3 S&A included $2m of European severance costs; prior-year comparisons included a $2m arbitration award in Q3 and, year to date, $6m severance and a $4m building impairment. The U.K. building was sold in Q3 for $5m, generating a $1m gain.
- Waters acquired ElectroForce for $9.4m in May; its contribution to nine-month revenue and net income was immaterial, and management did not expect a significant sales or profit impact over the next twelve months.
- Singapore authorities extended the company’s 0% contractual tax rate through March 2021, conditional on milestones management expects to meet. The company expected about $5m in reductions to unrecognized tax benefits within twelve months; tax audits and jurisdictional income mix remain uncertainties.
- Risks highlighted include foreign exchange, global and Chinese procurement conditions, customer spending and funding, competition and product acceptance, regulatory requirements, intellectual-property litigation, tax matters, and the September 2015 CEO transition. Management reported no material change in risk factors or legal proceedings; no material subsequent events were reported.
- No specific revenue or EPS guidance is provided in the supplied filing text. The quantified outlook cited is the estimated full-year currency effect and expected pension contributions of $6m–$11m for 2015.
Investor verification priorities
- Check underlying demand and growth excluding the substantial currency headwind, especially in Europe, Japan, and Latin America.
- Assess the location, accessibility, and potential tax cost of overseas cash relative to U.S. funding needs and planned share repurchases.
- Track debt balances, borrowing capacity, covenant compliance, interest costs, and the planned repayment of $125m of revolving borrowings classified as current.
- Monitor inventory growth, DSO, and cash conversion against sales growth.
- Verify progress on Singapore tax milestones, the new CEO transition, and the returns from R&D spending and the ElectroForce acquisition.