Waters Corporation (WATERS) — Q2 2010 Form 10-Q
Reporting period: Three and six months ended July 3, 2010; comparisons are with the periods ended July 4, 2009. Waters designs, manufactures, sells, and services analytical instruments, consumables, and related software, primarily in liquid chromatography and mass spectrometry, and thermal analysis. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial results
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $391.1 | $362.8 | $758.8 | $695.9 |
| Gross profit | $235.9 | $218.7 | $457.7 | $424.3 |
| Gross margin | 60.3% | 60.3% | 60.3% | 61.0% |
| Operating income | $105.6 | $86.7 | $197.9 | $172.2 |
| Net income | $84.9 | $69.9 | $160.4 | $143.3 |
| Diluted EPS | $0.90 | $0.72 | $1.69 | $1.47 |
- Q2 sales rose 8%; first-half sales rose 9%. Product sales increased 9% and 10%, respectively; service sales increased 6% and 7%.
- Operating income increased 22% in Q2 and 15% in the first half. Management attributed the improvement mainly to higher sales volumes, with relatively similar product mix and gross margin percentages.
- First-half operating cash flow was $214.8, versus $173.8. Cash and cash equivalents were $310.9 at July 3, 2010, down from $341.1 at year-end; short-term investments were $443.6, up from $289.1.
- At July 3, total debt was $756.9, versus $631.8 at year-end, including $700.0 long-term debt and $56.9 current debt. The company had $559 available under credit agreements after letters of credit. It reported compliance with debt covenants.
- Total current assets were $1,311.9 and current liabilities $362.6 at July 3. Cash plus short-term investments totaled about $754.5.
Changes and management commentary
- Growth reflected improved global economic conditions, new products including SYNAPT G-2 and ACQUITY UPLC H-Class, and increased pharmaceutical and industrial spending. Q2 sales grew 11% in Asia and the U.S.; Europe was flat. First-half sales increased across reported regions.
- TA Division sales rose 26% in Q2 and 18% in the first half, led by instrument systems. Waters Division sales rose 6% and 8%, respectively.
- First-half gross margin declined 0.7 percentage points year over year. Management cited unfavorable currency movements, largely offset by manufacturing cost reductions.
- First-half investing cash outflow was $175.7, including $154.4 net purchases of short-term investments; capital expenditures were $21.2, down from $57.8 in the prior-year period. Financing cash outflow was $40.2, including $179.8 of treasury-share purchases.
- The company issued $100 of five-year notes at 3.75% and $100 of ten-year notes at 5.00% in February and March 2010, respectively, using proceeds to repay other debt and for general corporate purposes. The weighted-average rate on long-term borrowings increased.
Outlook, risks, and unusual items
- No specific revenue, earnings, or EPS guidance is provided. Management said cash, investments, operating cash flow, and committed borrowing capacity should fund working capital, capital spending, authorized repurchases, potential acquisitions, and litigation needs for at least the next 12 months.
- The company expects $70–$90 of capital spending over the next few years to consolidate certain U.K. manufacturing locations into one facility. It expects 2010 defined-benefit-plan contributions of approximately $3–$5. No dividends are planned for the foreseeable future.
- Key stated risks include uncertain economic conditions and customer spending, competition and pricing pressure, product-launch acceptance, foreign-exchange movements, regulatory requirements, litigation, and tax-law or audit outcomes. The company reported no material change to its previously disclosed risk factors.
- During Q2, Waters corrected an error from prior periods involving overstated incentive-plan and other accruals, reducing selling and administrative expense. Management said the correction was not material to the current or previously issued periods.
- Prior-year comparisons include a $6 TA building lease termination expense in both Q2 and first-half 2009. First-half tax results include a $2 benefit in 2010; the first half of 2009 included a $5 tax benefit. First-half diluted EPS benefited by $0.02 from the 2010 tax item and $0.05 from the 2009 item.
- The Dearborn securities class action dismissal was appealed; oral argument was expected in October 2010. Waters also disclosed continuing patent litigation with Agilent in France and Germany; it had recorded a prior $7 provision and paid $6 in 2009 for the French case. The company said ordinary-course litigation was not expected to materially affect its financial position.
- Foreign-currency translation reduced first-half comprehensive income and cash; the cash-flow statement reports a $29.2 adverse exchange-rate effect on cash.
Important facts for investors to verify
- Whether sales momentum, especially in Asia and TA instruments, continued after the quarter, and whether new product launches sustained demand.
- Whether gross-margin pressure from currency and product/manufacturing costs persisted.
- Debt levels, borrowing availability, covenant compliance, and the cash demands of share repurchases and the planned U.K. facility.
- Developments in the Dearborn appeal, Agilent patent cases, and tax audits or unrecognized tax benefits.
- The impact of the accrual correction and the timing and effect of new revenue-recognition standards; the filing says the standards’ potential impact was still being evaluated.