Waters Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are with the quarter ended October 1, 2022. Nine-month figures compare the periods ended on those dates. Dollar amounts below are in millions unless otherwise stated.
Business context
Waters develops and sells analytical measurement instruments, consumables, software and services, principally in liquid chromatography, mass spectrometry and thermal analysis. Its customers include pharmaceutical, industrial, academic and government organizations. The results include Wyatt Technology from its May 16, 2023 acquisition; Wyatt expands Waters’ light-scattering and field-flow-fractionation offerings and exposure to large-molecule applications.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Net sales | $711.7 | $708.6 | $2,136.9 | $2,113.4 |
| Operating income | $179.4 | $192.0 | $553.5 | $587.1 |
| Operating margin | 25.2% | 27.1% | 25.9% | 27.8% |
| Net income | $134.6 | $156.0 | $426.0 | $480.7 |
| Diluted EPS | $2.27 | $2.60 | $7.19 | $7.94 |
| Operating cash flow | Not stated by quarter | $372.7 | $413.0 |
- Quarterly sales were nearly flat; nine-month sales rose 1%. Product sales fell 4% in Q3 and 2% year to date, while service sales rose 8% and 6%, respectively.
- Cost of sales declined 5% in Q3 and 3% year to date. Gross margin, calculated from reported sales and cost of sales, was approximately 59.0% in Q3 (56.7% prior year) and 59.0% year to date (57.4% prior year). Operating margin declined amid higher selling and administrative expense and acquisition-related amortization.
- Net interest expense increased to $26.6 million in Q3 and $56.2 million year to date, reflecting acquisition financing. The company estimated full-year 2023 interest expense of approximately $80 million.
- At September 30, cash and cash equivalents were $336.4 million; total debt was $2.505 billion, implying net debt of approximately $2.169 billion. Debt increased about $930 million from December 31, 2022. The $2.0 billion revolving facility had $1.2 billion drawn and $0.8 billion available after letters of credit. Waters reported compliance with debt covenants.
- Current assets were $1.635 billion and current liabilities $745.0 million (current ratio approximately 2.2). Cash declined $144.1 million from year-end. The company held $307 million of cash, cash equivalents and investments at foreign subsidiaries, including $196 million in non-U.S.-dollar currencies.
Material changes and notable items
- China was the principal demand weakness: sales there fell 27% in Q3 and 17% in the first nine months. Instrument-system sales in China declined 32% and 23%, respectively. Excluding China, total sales grew 7% in Q3 and 5% year to date. Wyatt contributed 4% and 2% to total sales growth, respectively.
- Sales grew in the U.S. and Europe in Q3, while Asia sales fell 15%. Pharmaceutical sales rose 4% in Q3 but declined 2% year to date; academic and government sales grew 20% year to date, a customer group whose purchases can vary with funding timing.
- Waters paid $1.286 billion net of cash acquired for Wyatt, funded with balance-sheet cash and borrowings. Wyatt contributed $45 million in sales and a $9 million operating loss from acquisition through September 30. The purchase-price allocation was preliminary and included $879 million of goodwill and $418 million of acquired intangible assets.
- Operating cash flow decreased from $413.0 million to $372.7 million year to date. Management cited lower net income, higher inventory, increased tax payments and payment of acquired Wyatt liabilities, partly offset by higher customer collections. Investing cash outflow was $1.404 billion, primarily due to Wyatt.
- In July, Waters reduced its global workforce by approximately 5%, recording $27 million of severance costs year to date. Management estimated annual savings of approximately $48 million; most remaining severance was expected to be paid in Q4 2023 and the first half of 2024.
Outlook, risks and contingencies
- The filing provides no specific full-year revenue or EPS guidance. Management expected foreign-currency translation to weigh on sales for the remainder of 2023 and to be neutral to gross profit for the year.
- Share repurchases were temporarily suspended following the Wyatt acquisition. The repurchase authorization had $1.0 billion remaining and was scheduled to expire January 21, 2024. Waters reported no plan to pay dividends.
- Key risks include continued weakness in China and other shifts in customer demand; foreign-exchange movements; acquisition integration and realization of expected benefits; higher debt service and interest rates; supply-chain disruption; competition and technology changes; and customer funding variability. A hypothetical 10% strengthening of the U.S. dollar was estimated to reduce the fair value of foreign-currency cash, cash equivalents and investments by approximately $19 million.
- Management reported no material change in legal proceedings or risk factors from the 2022 Form 10-K, no debt-covenant violations, and no need for interim goodwill or long-lived-asset impairment testing. Standard customer and partner indemnification agreements can require unlimited payments, though historical defense and settlement costs were minimal. The company also expected to record an $18 million reduction in unrecognized tax benefits and related interest and penalties within the next 12 months.
Investor verification priorities
- Track China demand and instrument-system sales, separating underlying trends from Wyatt’s contribution and foreign-exchange effects.
- Verify integration progress and the final Wyatt purchase-price allocation, including goodwill, amortization and retention costs.
- Monitor debt balances, interest expense, facility availability, covenant headroom and the pace of debt reduction.
- Assess whether the announced workforce savings are realized and how severance and acquisition expenses affect margins.
- Reconcile cash-flow conversion, inventory levels, tax payments and the cash held in foreign currencies.