Waters Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended July 4, 2015; comparisons are with the quarter and six months ended June 28, 2014. Waters manufactures and services analytical instruments, chemistry consumables, and related software, primarily through its Waters and TA divisions. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $494.7 | $481.8 | $955.1 | $912.3 |
| Gross profit | $286.0 | $279.9 | $557.2 | $522.7 |
| Gross margin | 57.8% | 58.1% | 58.3% | 57.3% |
| Operating income | $130.3 | $118.4 | $250.3 | $207.2 |
| Operating margin | 26.3% | 24.6% | 26.2% | 22.7% |
| Net income | $105.7 | $96.5 | $201.7 | $166.8 |
| Diluted EPS | $1.27 | $1.13 | $2.41 | $1.95 |
| Cash from operating activities | Not separately provided | Not separately provided | $267.5 | $222.1 |
Quarterly sales rose 3%, net income 9%, and diluted EPS 12%. First-half sales increased 5%, net income 21%, and diluted EPS 24%. First-half operating cash flow was up $45.5 million year over year. The filing attributes the cash-flow increase to higher sales, payment and collection timing, and additional calendar days in the first quarter.
Liquidity, debt, and capital allocation
- At July 4, cash and cash equivalents were $365.9 million and investments were $1.843 billion, totaling approximately $2.209 billion. Current assets were $3.007 billion and current liabilities $546.7 million.
- Total debt was $1.560 billion, versus $1.465 billion at year-end 2014. The company reported $538 million available under its credit agreements after letters of credit and said it was in compliance with debt covenants.
- In April, Waters amended its credit agreement, increasing revolving commitments from $1.1 billion to $1.3 billion and extending maturity to April 2020.
- $2.162 billion of cash, cash equivalents, and investments was held by foreign subsidiaries and may be subject to material tax effects if distributed to U.S. entities.
- Waters repurchased $165 million of shares in the first half; $604 million remained authorized under its May 2014 repurchase plan. The company reported no current plans to pay dividends.
Changes, outlook, and risks
- Foreign currency translation reduced sales growth by 7 percentage points in both the quarter and first half, primarily due to euro and yen weakness. Management estimated that, at then-current exchange rates and forecasts, currency translation would reduce full-year 2015 sales by approximately 6% and negatively affect gross profit.
- Quarterly gross margin declined 0.3 percentage points, reflecting a mix shift toward instrument systems. First-half gross margin improved 1.0 percentage point, helped by higher volume and favorable currency effects on European operating costs.
- Quarterly and first-half operating margins improved as selling and administrative expenses fell, including comparison against prior-year building impairment and, year to date, severance costs. R&D expense rose 13% in the quarter and 15% in the first half, reflecting investment in new products and initiatives.
- Growth was broad-based across end markets, but regional results diverged: China sales rose 26% in the quarter and 21% in the first half; U.S. sales rose 7% and 13%, respectively. Europe and Japan declined, substantially affected by currency translation. TA Division sales fell 3% in the quarter but rose 2% year to date.
- The May 2015 acquisition of Electroforce cost $9.4 million net of acquired liabilities; its contribution to sales and earnings was immaterial to date and management did not expect a significant impact over the following 12 months.
- In July 2015, the company entered a new agreement extending Singapore’s 0% contractual tax rate through March 2021, contingent on milestones management expected to meet. Effective tax rates were 14.6% for the quarter and 14.9% year to date.
- Principal disclosed risks include foreign-exchange movements, global economic and customer spending conditions, Chinese government procurement restrictions, competition and product acceptance, regulatory requirements, intellectual-property litigation, tax audits, and the announced CEO transition effective September 2015.
- Management said there were no material changes in legal proceedings or risk factors from the 2014 Form 10-K, no material subsequent events, and no material changes in market risk. Disclosure controls were considered effective; no material change in internal controls was reported.
Important facts for investors to verify
- Whether underlying sales momentum persists after separating currency effects and the estimated first-half calendar-day benefit.
- The impact of continued currency weakness on full-year revenue and gross profit relative to management’s approximately 6% sales-impact estimate.
- Debt repayment and refinancing plans, covenant headroom, and the availability of U.S. liquidity given the large share of funds held by foreign subsidiaries.
- Whether R&D investment, share repurchases, and the Electroforce acquisition generate expected returns without weakening financial flexibility.
- Progress against the Singapore tax agreement’s milestones and developments in tax audits, litigation, and the CEO transition.