Waters Corporation — FY 2023 Form 10-K
Business context and reporting period. Waters designs, manufactures, sells and services analytical instruments and software, including liquid chromatography (LC), mass spectrometry (MS), thermal analysis, rheometry and calorimetry products, along with consumables and service plans. Its customers span pharmaceutical, industrial, academic and government markets. This annual report covers the fiscal year ended December 31, 2023; it is not a standalone Q4 filing. Fourth-quarter figures below are unaudited.
On May 16, 2023, Waters acquired Wyatt Technology for approximately $1.3 billion in cash, adding light-scattering and field-flow fractionation capabilities and expanding its large-molecule exposure. Wyatt results are included from the acquisition date.
Financial performance and liquidity
| Metric | FY 2023 | FY 2022 | Change |
|---|---|---|---|
| Net sales | $2.956 billion | $2.972 billion | Down 1% |
| Operating income | $818 million | $873 million | Down 6% |
| Operating margin | 27.7% | 29.4% | Down 1.7 percentage points |
| Net income | $642 million | $708 million | Down 9% |
| Diluted EPS | $10.84 | $11.73 | Down 8% |
| Operating cash flow | $603 million | $612 million | Down $9 million |
- Product sales were $1.903 billion, down 4%; service sales were $1.053 billion, up 7%. Services represented about 36% of total sales. Recurring revenue, defined by the company as services plus precision chemistry consumables, grew 6%.
- Cost of sales was $1.195 billion; implied gross margin was approximately 59.6%, versus 58.0% in 2022. Selling and administrative expense increased 12% to $736 million, while R&D expense was $175 million, down 1%.
- Net cash used in investing activities was $1.442 billion, including $1.282 billion for the Wyatt acquisition; capital expenditures and capitalized software were $161 million. Financing activities provided $755 million, primarily reflecting borrowing activity.
- At year-end, cash and cash equivalents were $395 million and investments were about $1 million. Debt totaled $2.356 billion on the balance sheet (approximately $2.4 billion as described by management), including $1.05 billion drawn under the credit facility; $0.9 billion remained available to borrow. Net debt is not presented here because the filing’s stated cash and debt totals use different descriptions and scopes.
- Current assets were $1.753 billion and current liabilities were $790 million. Deferred revenue and customer advances totaled $324 million. The company reported that it was in compliance with debt covenants.
Fourth-quarter results
Q4 2023 net sales were $819 million versus $859 million in Q4 2022; net income was $216 million versus $227 million; and diluted EPS was $3.65 versus $3.81. The company notes that sales are typically seasonally higher in Q4 as customers use year-end capital budgets. Wyatt-related amortization and interest expense increased beginning in Q2 2023.
Material changes versus prior year
- China sales fell 22% to $441 million, contributing to the overall sales decline. Management cited lower demand across customer classes, weak economic conditions, trade tensions and tariffs, increased competition, and tighter Chinese government procurement restrictions. Excluding China, sales grew 5%.
- Instrument-system sales declined 7% overall; Waters instrument-system sales declined 8%. Chemistry consumables grew 3%, and Waters service sales grew 7%. TA segment sales increased 3%, with instrument sales flat and service sales up 9%.
- Wyatt contributed approximately 3% to total sales growth for the year and recorded $73 million in sales and an $18 million operating loss after acquisition. Acquisition-related costs included $13 million of due-diligence costs, $27 million of acquired-intangible amortization and $19 million of retention expense.
- Operating income was pressured by salary costs, acquisition-related expenses, $26 million of workforce-reduction severance costs and an estimated $23 million adverse foreign-currency translation effect. Higher interest expense also weighed on earnings: net interest expense increased to $82 million from $38 million, as acquisition-related borrowing raised debt.
- Operating cash flow declined modestly. Management cited lower net income, higher inventory, increased income-tax payments and incentive-compensation payments. Days sales outstanding rose to 78 days from 77 days.
Outlook, risks and unusual items
- The filing provides no specific 2024 revenue, earnings or EPS guidance. Management stated that available financial resources, expected cash flows and committed borrowing capacity should be sufficient for debt service, working capital and capital spending for at least the next 12 months.
- Management estimates annual savings of approximately $48 million from the July 2023 workforce reduction, which affected about 5% of employees. Most remaining severance costs were expected to be paid in the first half of 2024. Realization of savings and potential effects on execution, innovation and customer relationships are risks.
- Debt maturities include $1.51 billion in 2026. Credit agreements include leverage and interest-coverage tests, each with a 3.50:1 threshold. The company had $2.4 billion of stated principal cash requirements and $189 million of future interest requirements on senior unsecured notes at year-end.
- Other significant risks include continued weakness in China, global capital-spending cycles and customer funding, foreign-exchange exposure (69% of sales were outside the U.S.), competition, supply-chain and manufacturing disruptions, cybersecurity, regulatory compliance, and the integration and performance of Wyatt. Goodwill and other intangible assets totaled about $1.9 billion, increasing exposure to potential impairment if acquired-business performance falls short.
- The effective tax rate was 12.8%, down from 15.5%, including an $18 million benefit from resolution of a tax examination. Singapore tax incentives increased 2023 net income by $16 million. Management did not expect Pillar Two minimum-tax changes to have a material 2024 impact.
- Legal proceedings arise in the ordinary course; management believes current matters are not expected to be material, but outcomes are uncertain. No material adverse environmental-compliance effect was anticipated. The company reported effective internal control over financial reporting and received an unqualified audit opinion; Wyatt, representing 2% of consolidated assets and revenue, was excluded from the 2023 internal-control assessment and audit.
Most important facts for investors to verify
- Whether demand and sales in China stabilize, and whether growth outside China can offset further weakness there.
- Wyatt’s ongoing revenue, operating performance, integration progress and ability to support the acquisition’s strategic rationale; also review the final purchase-price allocation, which was preliminary.
- Debt reduction, refinancing and covenant headroom, particularly ahead of the $1.51 billion of 2026 maturities; confirm the availability and cost of remaining credit capacity.
- Whether the projected $48 million annual workforce savings are achieved without impairing innovation, service quality or customer retention.
- Cash conversion and working-capital trends, including inventory levels, collections and the increase in days sales outstanding.
- The assumptions underlying the valuation of Wyatt-related goodwill and intangible assets, and the sustainability of the unusually low 2023 effective tax rate.