Waters Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparative results are for FY 2016 and FY 2015. Dollar amounts are U.S. dollars. Waters sells liquid chromatography, mass spectrometry, thermal-analysis instruments, consumables, software and related services. Waters and TA are its two operating segments, aggregated into one reportable segment.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net sales | $2.309 billion | $2.167 billion | +7% |
| Product sales | $1.552 billion | $1.460 billion | +6% |
| Service sales | $757 million | $707 million | +7% |
| Operating income | $662 million | $624 million | +6% |
| Operating margin | 28.7% | 28.8% | Down 0.1 percentage point |
| Net income | $20 million | $522 million | Down 96% |
| Diluted EPS | $0.25 | $6.41 | Down 96% |
| Operating cash flow | $698 million | $643 million | +9% |
- Gross margin was approximately 59.0%, versus 58.9% in 2016, calculated from reported sales and cost of sales.
- Cash, cash equivalents and investments totaled $3.394 billion at year-end, including $2.751 billion of investments. Total debt was approximately $1.998 billion, implying net cash of about $1.396 billion. An additional $498 million was available under committed credit facilities; the company reported covenant compliance.
- Working capital was $3.664 billion. Capital expenditures and capitalized software were $85 million. Operating cash flow less those expenditures was approximately $612 million; operating cash flow included a $530 million tax-related adjustment associated with the 2017 Tax Act.
Changes versus prior periods
- Growth was broad across customer and product categories. Waters instrument systems increased 5%, chemistry consumables 8%, and Waters service 7%. TA sales rose 9%, led by a 12% increase in TA instrument systems.
- Geographically, Europe and Asia each grew 10%; sales in the Americas were flat. China sales rose 17%. Foreign-currency translation added approximately 1 percentage point to total sales growth.
- Pharmaceutical sales grew 7%; industrial sales grew 4%; government and academic sales rose 8%. Services and consumables together continued to benefit from a larger installed base.
- Operating income growth was partly offset by $13 million of severance and early-retirement costs, an $11 million German patent-litigation provision, and $5 million of acquired in-process R&D expense. R&D expense increased 6% to $133 million.
- The effective tax rate was 96.8%, compared with 13.1% in 2016, primarily because of the estimated $550 million tax provision related to the U.S. Tax Cuts and Jobs Act. Excluding that charge, the filing reports an FY 2017 effective tax rate of 11.0%. The Act-related provision reduced diluted EPS by $6.82; a $20 million stock-compensation tax benefit added $0.24 per diluted share.
- Fourth-quarter sales were $687 million, versus $629 million in Q4 2016. FY 2017 Q4 net loss was $353 million, reflecting a $579 million quarterly tax provision that included the Tax Act charge.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings growth guidance. Management expected the future effective tax rate to rise approximately 1–3 percentage points, while noting that the estimate could change.
- Waters planned to spend approximately $215 million on a new precision-chemistry manufacturing facility, funded from existing cash and investments, with no debt issuance expected for the project. Management also anticipated using approximately $1 billion of repatriated cash in 2018 to reduce debt and repurchase shares.
- The estimated $550 million Tax Act liability is provisional and payable over eight years beginning in 2018. The company was still evaluating aspects of the law, including GILTI, and said final tax amounts could change. It expected approximately $40 million of annual federal payments for the first four years, with remaining payments thereafter.
- Key exposures include foreign-currency movements and international operations (71% of FY 2017 sales were outside the U.S.), shifts in customer capital spending and institutional funding, competition and product-development execution, supply-chain or manufacturing disruption, cyber and regulatory compliance, and intellectual-property litigation. A 10% adverse currency move was estimated to reduce the fair value of outstanding foreign-exchange contracts by about $15 million before tax.
- The company recorded an $11 million provision related to a German patent verdict; management stated that current litigation outcomes were not expected to be material overall. The Singapore 0% contractual tax rate depends on milestones; failure to meet them could require reversal of prior benefits.
- Waters reported effective disclosure controls and internal control over financial reporting. PwC issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- How the provisional $550 million Tax Act provision, payment schedule and future effective-tax-rate estimate change as the company completes its tax analysis.
- Whether underlying sales and operating earnings growth persist, particularly in the Americas, and how much growth comes from recurring service and consumables revenue.
- Execution, cost and returns of the planned $215 million manufacturing-facility expansion.
- How the company deploys cash among debt reduction and repurchases, and the resulting debt levels, interest costs and share count.
- Updates on the German patent litigation and the Singapore tax-rate milestones.