Waters Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended April 3, 2021; comparative quarter ended March 28, 2020. Unaudited results. Waters develops and sells analytical instruments, consumables, software and services, principally for life, materials and food sciences. Unless noted, financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2021 | Prior comparable quarter | Change |
|---|---|---|---|
| Revenue | $608.5 million | $464.9 million | +31% |
| Operating income | $171.3 million | $68.3 million | +151% |
| Operating margin | 28.1% | 14.7% | +13.4 percentage points |
| Net income | $148.1 million | $53.6 million | +177% |
| Diluted EPS | $2.37 | $0.86 | +176% |
| Operating cash flow | $218.4 million | $151.6 million | +44% |
Product sales were $382.0 million, up 39%; service sales were $226.5 million, up 19%. Instrument systems rose 49%, while recurring revenue (consumables and services) rose 20%. Approximate gross margin, calculated from reported sales and cost of sales, was 58.2%, versus 54.7%.
Cash and cash equivalents were $683.8 million and investments were $126.0 million at April 3, 2021. Current assets were $1.768 billion and current liabilities $785.0 million (about 2.25x current ratio). Total debt was $1.703 billion, compared with $1.357 billion at year-end 2020; cash plus investments of $809.8 million imply net debt of about $893 million. The company reported $1.5 billion available under its revolving credit facility and compliance with debt covenants.
Operating cash flow less $39.5 million of property, equipment and software additions was approximately $178.9 million. Investing activities used $159.0 million, including $122.6 million of investment purchases; financing activities provided $188.8 million. Waters repurchased $173 million of shares during the quarter.
Changes and drivers
- Growth was broad-based as customers resumed laboratory and manufacturing operations after pandemic disruptions. Sales rose 44% in Asia, 15% in the Americas and 36% in Europe. China sales increased 118%, including a favorable comparison with pandemic-affected Q1 2020.
- Management said Q1 sales also benefited from five additional calendar days versus the prior-year quarter and favorable foreign currency translation, which increased total sales by 4%.
- Operating income benefited from higher sales volumes and comparison with $18 million of severance and lease-termination costs in Q1 2020. Selling and administrative expense fell 3% reported, but increased 10% excluding those prior-year one-time costs.
- Other income included a $10 million unrealized gain on an equity investment. Net interest expense declined, primarily due to lower debt balances and higher interest income.
- The effective tax rate was 14.8%, versus 7.4%; the prior period included a $4 million tax benefit related to restructuring. A Singapore tax incentive contributed $4 million to Q1 2021 net income.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management expects a significant increase in expenses and a negative cash-flow effect during the remaining three quarters of 2021 as most pandemic-era cost reductions are reinstated; 2020 savings were approximately $100 million.
- Management said it expects available cash, future operating cash flows and borrowing capacity to fund debt service, working capital, capital spending, authorized repurchases and potential acquisitions for at least the next 12 months.
- Waters expects to spend approximately $215 million to build and equip a U.S. precision-chemistry manufacturing facility; $166 million had been spent through quarter-end. Q1 included $14 million of related capital spending.
- In March, Waters issued $500 million of senior notes: $100 million at 1.68% due 2026 and $400 million at 2.25% due 2031. Proceeds were used to repay debt and for general corporate purposes.
- COVID-19 had not materially disrupted Q1 manufacturing, suppliers or logistics, but management cannot estimate the pandemic’s future duration or impact. Risks include demand volatility, supply-chain disruption, foreign exchange, competition, regulation, litigation, taxes and debt obligations.
- A subsequent settlement of patent litigation with Bruker provides Waters $10 million in guaranteed payments, including minimum royalties, expected to be recognized as other income in Q2 2021. The filing reported no material change in other legal proceedings or risk factors.
Investor facts to verify
- How much of the 31% sales increase reflects durable underlying demand versus the five extra calendar days, currency effects and recovery from pandemic-depressed comparisons?
- Whether expected cost normalization, supply-chain pressures and ongoing pandemic uncertainty affect margins and cash generation over the rest of 2021.
- Debt and liquidity developments after the $500 million note issuance, including covenant headroom, share repurchases and planned facility spending.
- Timing and accounting recognition of the $10 million Bruker settlement payment, and continued performance of the Singapore tax incentive.