Waters Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended April 4, 2015; comparable period ended March 29, 2014. Waters designs, manufactures, sells and services analytical instruments, consumables and related software, principally through its Waters and TA divisions. The divisions are aggregated as one reportable segment. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
- Revenue: $460.4 million, up 7% year over year. Product sales rose 6% to $302.9 million; service sales rose 8% to $157.5 million. Waters Division sales grew 7% and TA Division sales 8%.
- Profit and margins: Gross profit was $271.2 million, up 12%; gross margin was 58.9%, versus 56.4%. Operating income increased 35% to $120.0 million; operating margin was 26.1%, versus 20.6%. Net income rose 37% to $96.1 million. Diluted EPS was $1.15, up from $0.82.
- Cash flow: Cash from operations was $154.6 million, compared with $115.8 million. Capital spending on property, equipment and software was $21.4 million; operating cash flow less this spending was approximately $133.2 million. Cash and cash equivalents increased $18.6 million to $440.8 million.
- Liquidity and investments: Cash, cash equivalents and investments totaled $2.109 billion; current assets were $2.876 billion and current liabilities $538.5 million. About $2.067 billion of cash, cash equivalents and investments was held by foreign subsidiaries and may incur material tax effects if distributed to U.S. entities.
- Debt: Total debt was $1.485 billion, versus $1.465 billion at year-end 2014. The company had $413 million available under its credit agreement after letters of credit and reported compliance with debt covenants. Weighted-average borrowing rates were 2.09% on senior notes and credit-facility borrowings.
Changes and management commentary
- Management attributed sales growth to demand from life science, industrial chemical, nutritional safety and environmental customers, especially in the U.S., China and India. Instrument systems and recurring revenue each increased 7%.
- Foreign currency translation reduced reported sales growth by 8%; management estimated that additional calendar days added about 4% to Q1 2015 growth. Europe sales fell 6% and Japan sales fell 14%, with currency translation a significant factor.
- Gross margin benefited from sales mix, higher volume and favorable currency effects on European operating costs. Selling and administrative expense fell 5%, partly because Q1 2014 included $6 million of workforce-reduction severance costs. R&D expense increased 17%, reflecting headcount, compensation and product-development costs.
- Foreign currency translation reduced diluted EPS by approximately $0.08 year over year. Other comprehensive income was a loss of $59.7 million, mainly reflecting a $64.3 million foreign-currency translation loss.
- Share repurchases were $85 million during the quarter. The May 2012 program was completed; $684 million remained authorized under the May 2014 program.
Outlook, risks and contingencies
- Management estimated that, at then-current rates and forecasts, currency translation would reduce full-year 2015 sales by approximately 6% and negatively affect gross profit. The filing does not provide a specific full-year revenue or EPS forecast.
- On April 23, 2015, after quarter-end, the company amended its credit agreement: revolving commitments increased from $1.1 billion to $1.3 billion and maturity was extended to April 23, 2020. Proceeds are intended for general corporate purposes.
- Management said liquidity, expected cash flows and borrowing capacity should fund operations, debt service, capital spending, authorized repurchases and potential acquisitions. Most cash and investments are outside the U.S., creating a funding and tax-access consideration.
- The company expected to contribute approximately $4 million to $11 million to defined-benefit plans in 2015. It expected about $5 million of reductions in unrecognized tax benefits and related interest and penalties within 12 months as statutes of limitation lapse.
- The company’s Singapore contractual tax rate was 0% through March 2016, subject to milestones it expected to meet; it was seeking an extension. The statutory Singapore rate was 17%.
- Risks highlighted include foreign-exchange movements, customer spending and funding conditions, competition and product acceptance, regulatory requirements, supply-chain risks, intellectual-property litigation, tax examinations, and CEO succession. The CEO had announced an intention to retire. Management reported no material changes in risk factors or legal proceedings; it considered current litigation outcomes unlikely to materially affect results or financial position.
Most important facts for investors to verify
- How much of reported growth reflects underlying demand after adjusting for the estimated 8% currency headwind and 4% calendar-day benefit.
- Whether foreign-held cash and investments can support U.S. obligations and capital returns without material tax costs.
- Debt repayment plans, covenant headroom and the impact of the April 23 credit amendment.
- The pace and funding of share repurchases relative to debt, investment needs and cash generation.
- Whether the Singapore tax-rate arrangement is extended and how currency movements affect full-year sales and gross profit.