Waters Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 27, 2014. The filing also reports unaudited fourth-quarter results. Financial amounts below are in U.S. dollars.
Business context and reporting period
Waters designs, manufactures, sells and services analytical instruments and related consumables and software. Its Waters Division focuses on liquid chromatography, mass spectrometry and chemistry products; its TA Division sells thermal analysis, rheometry and calorimetry systems. The company reports these divisions together as one reportable segment. Customers span pharmaceutical, industrial, academic and government markets; 52% of 2013 sales were to pharmaceutical accounts. Service sales were approximately 31% of total sales.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $1,904.2 million | $1,843.6 million |
| Gross profit / margin | $1,120.8 million / 58.9% | $1,106.0 million / 60.0% |
| Operating income / margin | $517.3 million / 27.2% | $511.5 million / 27.7% |
| Income before tax | $490.1 million | $487.6 million |
| Net income | $450.0 million | $461.4 million |
| Diluted EPS | $5.20 | $5.19 |
| Operating cash flow | $484.9 million | $449.3 million |
| Capital expenditures and capitalized software | $118.5 million | $104.7 million |
| Cash, cash equivalents and investments | $1,803.7 million | $1,539.0 million |
| Total debt | $1,323.3 million | $1,177.8 million |
| Working capital | $2,068.7 million | $1,753.5 million |
Fourth-quarter 2013 sales were $565.4 million versus $521.8 million in Q4 2012; net income was $141.6 million versus $175.9 million, and diluted EPS was $1.65 versus $2.00. The filing identifies the Q4 2012 tax benefits as an important comparison factor.
Cash and investments exceeded total debt by approximately $480 million, but $1,738 million of cash, cash equivalents and investments was held by foreign subsidiaries and could incur material tax effects if distributed to U.S. entities. The company had $483 million available to borrow under committed credit facilities. It was in compliance with debt covenants at year-end.
Material changes versus the prior comparable period
- Sales rose 3% in 2013, following flat sales in 2012. Service sales increased 5%; product sales increased 2%. Higher instrument demand and continued service growth contributed to the improvement.
- Sales growth was broad in several markets, but Japan sales fell 18%, largely reflecting a 22% weakening of the yen against the U.S. dollar. Foreign currency translation reduced 2013 sales by 2% and operating profit by approximately $27 million.
- Gross margin declined 1.1 percentage points, to 58.9%; operating margin declined 0.5 percentage points, to 27.2%. Management cited product mix, currency effects and higher UNIFI software amortization among the factors affecting profitability.
- Net income declined 2% despite higher sales and operating income, principally because the effective tax rate rose to 8.2% from 5.4%. 2013 included a $31 million net tax benefit from resolved tax audits and a $3 million research and development tax-credit benefit; 2012 included $36 million in deferred-tax benefits and $6 million in tax-audit benefits.
- Operating cash flow increased by $35.6 million, with management citing collection and payment timing; days sales outstanding improved to 69 days from 71 days.
- Debt increased by approximately $145.6 million. In June 2013 the company refinanced through a $1.1 billion revolving facility and a $300 million term loan, both maturing in 2018.
Outlook, management commentary, risks and unusual items
- The filing provides no formal numerical revenue or earnings guidance for 2014. Management expected 2013 acquisitions to add approximately $14 million to 2014 sales and be accretive to earnings per share.
- Management expected foreign exchange translation to have a minimal effect on 2014 gross profit, based on exchange rates at the time, while noting that UNIFI software costs and amortization could continue to affect gross profit.
- The new $78 million Wilmslow, England facility was completed in early 2014. The company expected relocation costs and temporary duplicate-facility costs and cautioned that operations or financial results could be affected despite its disruption-mitigation plans.
- The company planned to continue share repurchases in 2014. It repurchased $295 million of shares during 2013 and had $348 million remaining under the May 2012 authorization at year-end. It did not plan to pay dividends in the immediate future.
- Key risks include customer capital-spending volatility and global economic conditions; competition and new-product acceptance; foreign currency exposure (71% of sales were outside the U.S.); overseas cash availability and possible repatriation taxes; debt covenants; reliance on selected suppliers and contractors; manufacturing disruption; regulation, intellectual-property litigation, tax uncertainty and cybersecurity.
- Other notable items: the company recorded no new litigation provisions in 2013; it had recorded a $4 million provision in 2012 for the Agilent German patent matter. Management said current litigation outcomes were not expected to be material. CEO succession was also a stated risk: the CEO intended to retire by the end of 2015, and the former CFO left the role effective February 1, 2014; an interim CFO was appointed.
Important facts for investors to verify
- Whether 2014 sales and earnings growth can be sustained without relying on tax benefits, and whether new products and acquired businesses meet management’s expectations.
- Whether margins stabilize as UNIFI amortization, product mix, currency effects and facility-transition costs evolve.
- How much of the foreign-held cash and investments is practically available to fund U.S. operations, debt service, acquisitions and repurchases, including potential tax costs.
- Debt levels, refinancing needs, covenant headroom and the company’s continued compliance with credit agreements.
- Progress and costs of the Wilmslow relocation, and any effects on manufacturing continuity or customer delivery.
- Developments in tax audits and uncertain tax positions, litigation and other contingencies; the filing estimated approximately $25 million of unrecognized tax benefits at year-end.