Waters Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone Q4 filing; unaudited quarterly results are also provided. Waters designs, manufactures, sells and services analytical instruments, consumables and software, principally liquid chromatography and mass spectrometry systems, plus thermal analysis and rheometry products. Its two operating divisions are aggregated into one reportable segment.
Key financial results
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $1.989 billion | $1.904 billion | +4% |
| Product sales | $1.347 billion | $1.313 billion | +3% |
| Service sales | $643 million | $592 million | +9% |
| Gross profit / margin | $1.164 billion / 58.5% | $1.121 billion / 58.9% | Margin down 0.4 percentage points |
| Operating income / margin | $518 million / 26.0% | $517 million / 27.2% | Income essentially flat; margin down 1.2 points |
| Net income | $432 million | $450 million | −4% |
| Diluted EPS | $5.07 | $5.20 | −3% |
| Operating cash flow | $512 million | $485 million | +$27 million |
FY2014 net interest expense was $27 million. The effective tax rate rose to 12.0% from 8.2%; FY2013 included a $31 million net tax benefit from completed tax audits and a research credit. Capital expenditures and capitalized software were $91 million, versus $118 million in 2013.
Q4 2014: Revenue was $584 million, net income $151 million and diluted EPS $1.80, compared with $565 million, $142 million and $1.65, respectively, in Q4 2013.
Business changes and financial position
- Pharmaceutical sales, 53% of total, grew 8%; demand was strong across most regions. Sales to other industrial customers declined 1%, principally due to weaker chemical-instrument demand.
- Waters Division sales rose 5% to $1.764 billion, led by service sales (+9%) and instrument systems (+4%). TA Division sales fell 1% to $226 million as instrument systems declined 3%, partly offset by service growth.
- Regional results were mixed: U.S. sales grew 7%, Europe 6%, and total Asia 2%. China declined 1% amid tighter procurement by government-funded customers; Japan fell 4%, including an 8% adverse currency-translation impact.
- Cash, cash equivalents and investments totaled $2.055 billion; total debt was $1.465 billion, implying approximately $590 million of net cash on that basis. Working capital was $2.272 billion. Available committed borrowing capacity was $533 million; the company reported compliance with debt covenants.
- Foreign subsidiaries held $1.971 billion of cash, cash equivalents and investments, which could face material tax effects if distributed to U.S. entities. The company reported $1.240 billion of long-term debt and $225 million of current notes payable and debt.
Outlook, commentary and risks
- No specific 2015 revenue or earnings guidance is provided in the filing. Management warned that, at then-current exchange rates, currency translation could significantly reduce 2015 sales and could pressure gross profit. Currency translation reduced 2014 operating profit by approximately $22 million.
- Management expected further costs in 2015 and beyond to commercialize newly acquired mass-spectrometry technologies; those acquisitions were not expected to contribute significant sales in 2015. The company also plans to continue share repurchases and invest in R&D, technology and acquisitions.
- Unusual FY2014 charges included $15 million of acquired in-process R&D, $6 million of severance costs and a $5 million impairment on a U.K. building held for sale; a $2 million arbitration award partly offset these items. R&D expense was $108 million, up 7%.
- Other material risks include foreign-exchange exposure (about 70% of sales were outside the U.S.), customer capital-spending and funding cycles, Chinese government procurement restrictions, competition and product acceptance, supply-chain or facility disruption, regulatory compliance, intellectual-property litigation, and CEO succession. The CEO had announced an intention to retire.
- Potential contingencies include up to $15 million of milestone payments plus royalties under technology licenses, and contingent Medimass consideration estimated at $4 million at year-end. The company described ordinary-course litigation as not expected to be material; it had an accrued patent-litigation expense associated with the Agilent dispute.
Most important facts to verify
- Whether currency movements materially affected 2015 sales, margins and earnings, and how much hedging mitigated exposure.
- The composition, maturity and accessibility of the $2.055 billion cash-and-investment balance, particularly funds held abroad and any repatriation tax cost.
- Whether service growth and pharmaceutical demand continued, and whether weakness in China, Japan and industrial markets persisted.
- Commercialization progress, future spending and potential returns from Medimass and the licensed mass-spectrometry technologies.
- Debt maturities, covenant headroom, buyback execution and the impact of repurchases on per-share results.
- CEO succession developments and any changes in the status or estimated exposure of litigation, tax matters and contingent payments.