Waters Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the quarter and six months ended July 2, 2011. Waters designs, manufactures, sells and services analytical instruments, consumables, software and related services, principally through its Waters and TA divisions. Unless noted otherwise, financial amounts below are in millions.
Financial results and liquidity
- Q2 revenue: $451.5, up 1%. Product sales were $313.9, down 1%; service sales were $137.6, up 5%.
- Q2 earnings: Gross profit was $272.2, with a 60.3% gross margin (60.7% prior year). Operating income was $120.1, with a 26.6% operating margin (26.9%). Net income was $97.7, down 2%; diluted EPS was $1.09, up 2% as lower share count supported per-share results.
- First-half revenue: $871.9, essentially flat (down less than 1%). Product sales were $600.4, down 3%; service sales were $271.6, up 6%.
- First-half earnings: Gross profit was $525.4, with a 60.3% margin (60.5%). Operating income was $230.3, down 3%, with a 26.4% margin (27.0%). Net income was $186.4, down 4%; diluted EPS was $2.08 versus $2.09.
- Cash flow, first half: Operating cash flow was $216.3 versus $220.0. Investing cash outflow was $190.7, including $46.9 of capital expenditures and software capitalization and $18.4 for acquisitions. Financing cash outflow was $36.5. Cash and equivalents declined $14.6 to $369.4.
- Liquidity and debt at June 30: Cash, cash equivalents and short-term investments totaled $1,392.1; current assets were $2,065.3 and current liabilities $721.7. Total debt was $1,101.4, including $401.4 classified as current and $700.0 long-term. The company had $309 of borrowing availability under its 2011 credit agreement and reported compliance with debt covenants.
Material changes and operating drivers
- Foreign currency translation reduced sales by 3% in Q2 and 2% year to date. Management also expected currency weakness, particularly in the euro and Indian rupee, to weigh on future-period comparisons and earnings.
- Instrument-system sales were flat in Q2 and down 6% year to date, reflecting customer delays in capital spending amid global economic weakness. Waters instrument-system sales fell 1% in Q2 and 6% year to date; TA instrument-system sales grew 7% and 8%, respectively.
- Service growth reflected service-plan sales and billings to a larger installed base. Chemistry sales were affected by weaker HPLC-column demand, partly offset by stronger UPLC-column demand. China continued to record double-digit growth; India remained weak.
- Q2 interest expense increased to $6.9 from $5.1; first-half interest expense increased to $13.4 from $9.1. The company attributed the higher net interest burden to financing costs.
- The company repurchased $165 of shares in the first half and authorized up to $750 of repurchases over two years in May. It reported $770.7 available under its new and existing programs at June 30.
Outlook, risks and unusual items
- No specific numeric sales or earnings guidance is provided in the supplied filing text. Management cited customer capital-spending delays and foreign-exchange pressure, and expected currency effects to continue to weigh on second-half results.
- Several new products and software platforms were expected to launch beginning in late 2012. Management said associated product mix and software amortization could slightly reduce gross margin; estimated annual intangible amortization for 2013–2017 was approximately $41.
- A $3 litigation provision and settlement payment related to an alleged patent-infringement complaint reduced Q2 and first-half operating income. The company said other litigation was not expected to materially affect its financial position or results.
- Two first-half acquisitions—the Israeli distributor and Baehr Thermoanalyse—cost $18.4 in cash and were expected to add approximately $10 in annual sales; their first-half net-income impact was not significant. In July, Waters acquired Blue Reference for $14 in cash.
- Approximately $1.4 billion of cash, cash equivalents and short-term investments was held by foreign subsidiaries and may be subject to material tax-repatriation effects. Management said liquidity and expected cash flows should support obligations and planned spending for at least 12 months.
- Other risks include global economic and sovereign uncertainty, reduced customer capital spending, competition and product acceptance, foreign-exchange volatility, regulatory requirements, intellectual-property litigation, and tax audits. The company expected a roughly $5 reduction in unrecognized tax benefits from statute expirations within 12 months.
Important facts for investors to verify
- Whether instrument-system demand recovers, particularly in Europe and India, and whether service growth continues to offset weaker product sales.
- The extent to which currency movements and the expected software amortization affect revenue, earnings and gross margins.
- Debt repayment plans for revolving borrowings classified as current, available credit capacity, and the concentration of liquid assets in foreign subsidiaries.
- Execution and financial contribution of the acquisitions, new product launches and U.K. facility consolidation project, estimated to cost approximately $70.
- Progress and potential outcomes of litigation and tax matters, including the reported $3 settlement and expected tax-reserve release.