Waters Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also presents unaudited fourth-quarter results. Waters designs, manufactures, sells and services analytical instruments, consumables and related software, principally liquid chromatography and mass spectrometry systems, plus thermal analysis, rheometry and calorimetry products. The company reports one aggregated segment; its two operating divisions are Waters and TA.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $1,851.2 million | $1,643.4 million | +13% |
| Operating income | $528.6 million | $449.9 million | +17% |
| Net income | $433.0 million | $381.8 million | +13% |
| Diluted EPS | $4.69 | $4.06 | +16% |
| Gross margin | 60.5% | 60.2% | +0.3 percentage points |
| Operating cash flow | $497.4 million | $457.9 million | +$39.5 million |
FY 2011 operating margin was approximately 28.6% and net margin approximately 23.4%. Capital expenditures were $85.4 million, implying operating cash flow less capital expenditures of approximately $411.9 million. Cash, cash equivalents and short-term investments totaled $1,281.4 million at year-end; working capital was $1,340.2 million. Total debt was $990.8 million, up from $766.1 million; stockholders’ equity was $1,226.6 million. The company had $419 million available under its credit facilities and reported compliance with debt covenants. Approximately $1.2 billion of cash and investments were held by foreign subsidiaries.
Fourth-quarter results
| Metric | Q4 2011 | Q4 2010 | Approx. change |
|---|---|---|---|
| Net sales | $521.4 million | $483.6 million | +8% |
| Operating income | $164.9 million | $148.2 million | +11% |
| Net income | $137.1 million | $126.6 million | +8% |
| Diluted EPS | $1.51 | $1.36 | +11% |
Q4 is typically the company’s strongest sales quarter because customers often use remaining calendar-year capital budgets. Q4 figures are unaudited.
Material changes and drivers
- Growth reflected stronger pharmaceutical, industrial and chemical-analysis demand, new instrument uptake and higher consumables and service sales. Product sales rose 13% to $1,322.1 million; service sales rose 11% to $529.0 million.
- Instrument-system sales increased 14%; chemistry consumables and services combined increased 11%. Waters Division sales rose 12%; TA Division sales rose 16%, including a 1% contribution from the Anter acquisition and 3% from foreign-currency translation.
- Sales outside the United States were 71% of total. Europe grew 16%, Asia 13%, the U.S. 6%, and the rest of the world 26%. Currency translation added 3% to total sales and approximately $26 million to operating-income growth.
- Gross margin improved as higher volume leveraged manufacturing costs and currency effects were favorable. Selling and administrative expense rose 10%, while R&D expense rose 10% to $92.3 million. Interest expense increased to $22.0 million from $13.9 million.
- The effective tax rate was 15.0%, versus 12.8% in 2010. FY 2010 included $10 million of tax benefits from audit and pre-acquisition matters; FY 2011 included a $2 million U.K. tax-related benefit.
- The company repurchased $364 million of shares in 2011 and authorized up to $500 million of repurchases over two years. It has not paid dividends and does not expect to do so in the foreseeable future.
Outlook, risks and contingencies
- The filing gives no specific 2012 revenue or earnings growth target. Based on exchange rates then prevailing, management expected currency translation to be slightly negative for 2012 sales and neutral or potentially negative for operating income versus 2011.
- Management cautioned that austerity programs could cause government and academic sales to lag overall expected growth. It also expected new products and software platforms to weigh slightly on gross margin; amortization expense was estimated at about $32 million in 2012 and about $45 million annually in 2013–2016.
- Capital spending was $85 million in 2011. The company expected to spend $50–$70 million over the next few years on a U.K. facility consolidating MS research, manufacturing and distribution locations.
- Key risks include global economic weakness and customer capital-spending changes; competition and product acceptance; foreign currency, political and regulatory conditions; reliance on select suppliers and contract manufacturers; facility disruption; intellectual-property claims; and tax-rate variability. Pharmaceutical and biotechnology customers represented 52% of sales, although no single customer exceeded 3%.
- Management said ordinary-course litigation outcomes were not expected to be material. Unrecognized tax benefits were approximately $73 million; the company anticipated an approximately $4 million reduction from expiring statutes of limitations within 12 months. Standard indemnification agreements have potentially unlimited maximum payments, though historical costs were minimal and management considered their estimated fair value immaterial.
- In January 2012, the company acquired German thermal-analysis manufacturer Bahr for $12 million in cash. The Anter acquisition cost $11 million in 2011.
Important facts for investors to verify
- Whether subsequent results support management’s expectations for currency effects, sales growth and margins, particularly given the lack of quantified 2012 guidance.
- How the $1.2 billion held by foreign subsidiaries can support U.S. debt service, repurchases and investment needs, including any repatriation-tax implications.
- Debt maturities, revolving-credit repayment plans and covenant headroom, given total debt of $990.8 million and the company’s continuing share repurchases.
- Execution, cost and timing of the U.K. facility project, and the anticipated amortization burden from new software platforms.
- Developments in tax audits, the $73 million of unrecognized tax benefits, litigation and potential indemnification obligations.