Waters Corporation — Q1 2012 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2012, compared with the three months ended April 2, 2011. Waters makes and services liquid chromatography, mass spectrometry and thermal-analysis instruments, related consumables and software. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2012 | Comparable 2011 period | Change |
|---|---|---|---|
| Net sales | $420.5 | $427.6 | Down 2% reported; flat excluding currency |
| Gross profit / margin | $253.2 / 60.2% | $257.8 / 60.3% | Profit down 2% |
| Operating income / margin | $110.2 / 26.2% | $115.9 / 27.1% | Down 5% |
| Net income | $88.7 | $94.5 | Down 6% |
| Diluted EPS | $0.98 | $1.01 | Down 3% |
| Cash from operating activities | $111.2 | $122.8 | Down $11.6 |
- Revenue mix: Product sales fell 6% to $286.5 million; service sales rose 8% to $134.0 million. Waters instrument-system sales declined 11%, while chemistry consumables increased 2% and Waters service sales increased 7%. TA Division sales grew 10%, including a 3% contribution from recent acquisitions.
- Cash flow and investment: Capital expenditures and software capitalization were $15.5 million. Acquisitions used $18.4 million net of cash acquired. Cash and cash equivalents increased $43.2 million to $427.2 million.
- Liquidity: Cash, cash equivalents and short-term investments totaled $1.354 billion at quarter-end, compared with total debt of $1.024 billion. Current assets were $2.023 billion and current liabilities $648.3 million. The filing says $1.307 billion of cash and marketable securities was held by foreign subsidiaries and is subject to material repatriation tax effects.
- Debt: Total debt rose from $990.8 million at year-end 2011. This included $323.6 million classified as current and $700.0 million long term. Available borrowing capacity under the credit agreement was $384 million; the company reported compliance with debt covenants.
- Other measures: The effective tax rate was 15.1%, versus 16.0%. The company repurchased approximately 695,000 shares for $62 million under its buyback program, with $124 million remaining authorized.
Material changes and management commentary
- Management attributed weaker instrument sales to delayed capital spending by large pharmaceutical customers, reduced Indian customer purchases amid a weaker rupee, and lower government spending, particularly amid European austerity measures. Foreign currency translation reduced reported sales by 2% overall.
- Service and consumables growth partly offset lower instrument volume. Gross margin was nearly unchanged; lower instrument volume and fixed-cost absorption were offset by a mix shift toward higher-margin chemistry and service sales.
- Operating cash flow declined primarily with lower net income; management also cited the timing of customer receipts, inventory increases for new products and vendor payments. Inventory increased to $233.4 million from $212.9 million at year-end.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said its liquidity, expected cash flows and borrowing capacity should support debt service, working capital, capital spending, authorized repurchases, potential acquisitions and litigation needs for at least the next 12 months.
- Several new products and software platforms were expected to launch beginning in late 2012. Management cautioned these could slightly reduce product gross margins; amortization expense was estimated at approximately $41 million annually for 2013–2017, partly reflecting a new software platform planned for launch in Q4 2012.
- Two 2012 acquisitions—the Israeli distributor’s net assets and German thermal-analysis manufacturer Baehr—were expected to add approximately $16 million in annual sales; management expected them to be accretive to 2012 earnings. Their Q1 net-income contribution was not significant.
- A U.K. facility consolidation was expected to cost approximately $70 million. Defined-benefit plan contributions for 2012 were estimated at $7–$9 million.
- Key risks include changes in customer capital spending, economic and political conditions, competition and product acceptance, foreign exchange movements, regulatory requirements, intellectual-property litigation, and tax audits or changes in tax rules. The company reported no material change in risk factors, legal proceedings or market risk during the quarter. It said ordinary-course litigation outcomes were not expected to be material.
- Unrecognized tax benefits were $72.7 million; the company expected about $3 million to reverse within 12 months from statute expirations. No material subsequent events were reported.
Investor verification points
- Check whether instrument-system demand recovered, especially among large pharmaceutical, government and Indian customers, and whether service and consumables continued to offset equipment weakness.
- Track organic growth separately from currency effects and acquisition contributions, including the expected sales and earnings contribution from Baehr and the distributor acquisition.
- Monitor operating cash flow, inventory, receivables and customer-payment timing; reported DSO increased to 76 days from 74 days a year earlier.
- Assess debt repayment and refinancing capacity, the $384 million available credit facility, and practical access to overseas cash given repatriation tax effects.
- Verify the timing and economics of the late-2012 product/software launches, projected amortization and margin effects, and funding and cost progress for the U.K. facility.
- Review developments in tax positions, litigation, pension funding and the remaining share-repurchase authorization.