Waters Corporation — Q2 2022 Form 10-Q Summary
Reporting period: Quarter ended July 2, 2022; comparable quarter ended July 3, 2021. The six-month period is also discussed. Waters develops and sells analytical instruments, consumables, software and services, principally for pharmaceutical, industrial, academic and government customers. Its Waters and TA operating segments are reported together as one segment.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $714.3 | $681.6 | $1,404.9 | $1,290.2 |
| Operating income | $199.6 | $196.4 | $395.1 | $367.7 |
| Operating margin | 27.9% | 28.8% | 28.1% | 28.5% |
| Net income | $164.9 | $167.3 | $324.7 | $315.4 |
| Diluted EPS | $2.72 | $2.69 | $5.35 | $5.05 |
| Operating cash flow | Not stated by quarter | $254.9 | $361.4 |
- Q2 sales rose 5% year over year; product sales increased 7% and service sales 2%. For the first half, sales rose 9%, with product sales up 12% and service sales up 4%.
- Q2 operating income increased 2%, but operating margin declined 0.9 percentage points. First-half operating income rose 7%, while margin declined 0.4 points. Cost of sales rose faster than revenue, reflecting volume, electronic-component and freight inflation.
- Q2 net income declined 1% despite higher sales and operating income. First-half net income rose 3%. Q2 other income fell to $1.5 million from $9.3 million; first-half other income fell to $1.7 million from $18.7 million.
- First-half operating cash flow fell to $254.9 million from $361.4 million. Management cited higher inventories, incentive compensation payments, receivables and supply-chain-related shipment timing. Capital expenditures, including software, were $74.7 million versus $76.9 million.
- Cash and cash equivalents were $418.9 million at July 2, down from $501.2 million at December 31, 2021; investments were $0.9 million, versus $68.1 million. Total debt was $1.484 billion, down from $1.514 billion. The company had $1.6 billion available under its revolving facility after letters of credit and reported compliance with debt covenants.
- Current assets were $1.564 billion and current liabilities $746.6 million at quarter-end. Inventory increased to $409.9 million from $356.1 million at year-end; accounts receivable increased to $639.5 million from $612.6 million.
Material changes and notable items
- Foreign-exchange translation reduced sales growth by 5 percentage points in Q2 and 4 points in the first half. The stronger U.S. dollar also pressured operating results; management expected translation to significantly reduce gross profit for the remainder of 2022 at then-current rates.
- Regional growth was uneven: Q2 sales rose 14% in the Americas and 3% in Asia, but declined 4% in Europe. Japan sales fell 17%, with currency translation a substantial factor. U.S. sales rose 14%; China sales rose 9% in Q2 and 13% for the first half.
- First-half cash generation was also affected by a $65.1 million increase in inventory and a $57.4 million increase in receivables. Days sales outstanding rose to 81 from 73 a year earlier.
- The company expensed $9.8 million of acquired in-process research and development for Megadalton charge-detection mass spectrometry technology. It also recorded approximately $4 million of gain on an equity-investment sale and approximately $4 million of impairment on another equity-method investment. The prior-year first half included a $10 million unrealized investment gain.
- Waters repurchased $312 million of shares in the first half. Approximately $573 million remained authorized for repurchases at July 2, 2022; the program was extended through January 21, 2023.
Outlook, risks and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management described broad-based customer demand and strong instrument-system demand, while noting cost inflation and currency headwinds.
- COVID-19-related lockdowns in China delayed receipt of certain supplier materials and delayed customer shipments in Q2. Management said the company managed the disruption but could not assure against future supply-chain impacts. Prolonged disruption could materially affect results or cash flows.
- Other identified risks include foreign-exchange movements, global economic and geopolitical uncertainty, rising interest rates, demand variability, competition, component availability, regulatory requirements, intellectual-property litigation and the effects of COVID-19. Management reported no material COVID-19 impact to date on consolidated results or cash flows and no need for interim goodwill or long-lived-asset impairment analyses.
- Management expected approximately $30 million of additional 2022 spending to complete its U.S. precision-chemistry facility expansion; $215 million had been incurred through the first half. It also expected 2022 defined-benefit-plan contributions of approximately $3 million to $6 million.
- The company expected to recognize $18 million of reductions in unrecognized tax benefits and related interest and penalties within the next 12 months, subject to potential settlements and statute expirations. Gross unrecognized tax benefits were $29 million.
- Management said existing litigation outcomes were not expected to be material. Standard indemnification agreements have potentially unlimited payments, but management considered their estimated fair value immaterial based on minimal historical costs. No material changes to contractual obligations or risk factors were reported.
Investor verification points
- Check subsequent results for recovery in operating cash flow, inventory levels and receivables/DSO after the China-related shipment delays.
- Track gross and operating margins against component, freight and foreign-currency pressures, including the extent of reported currency impacts.
- Review debt maturities and borrowing costs, particularly the $50 million note due May 2023, floating-rate exposure and remaining revolver capacity.
- Monitor execution and remaining costs of the U.S. facility expansion and development of the acquired CDMS technology.
- Verify actual share repurchases, the remaining authorization, and whether capital returns affect liquidity or debt reduction.
- Follow China lockdowns, foreign-exchange movements, tax settlements and any changes in litigation or other contingencies.