Waters Corporation — Q1 2011 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended April 2, 2011, compared with the three months ended April 3, 2010. Waters sells and services analytical instruments, consumables and software, principally through its Waters and TA divisions. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $427.6 | $367.7 | +16% |
| Gross profit / gross margin | $257.8 / 60.3% | $221.8 / 60.3% | +16% / unchanged |
| Operating income / operating margin | $115.9 / 27.1% | $92.4 / 25.1% | +25% |
| Net income / net margin | $94.5 / 22.1% | $75.5 / 20.5% | +25% |
| Diluted EPS | $1.01 | $0.79 | +28% |
| Operating cash flow | $122.8 | $103.2 | +$19.6 |
| Capital expenditures and software capitalization | $16.8 | $10.2 | Higher |
Cash and cash equivalents were $296.9 and short-term investments were $742.2 at April 2, totaling $1,039.0. Total debt was $790.3, versus $766.1 at December 31, 2010; debt included $390.3 classified as current and $400.0 long-term. The company reported $579 million of remaining borrowing capacity under existing credit agreements and said it was compliant with debt covenants. Net cash used in investing activities was $121.1, reflecting net purchases of short-term investments as well as capital spending; financing activities used $27.3. Cash declined $11.6 during the quarter. Operating cash flow less reported capital expenditures was approximately $105.9.
Material changes and management commentary
- Product sales rose 20% to $303.3; service sales increased 8% to $124.3. Instrument-system sales grew 23% overall, while chemistry consumables and services grew 9% combined.
- Management attributed growth to stronger pharmaceutical and industrial customer spending and uptake of the ACQUITY UPLC H-Class, Xevo Q-Tof and Xevo TQ-S systems. Sales grew 22% in Asia, 12% in Europe, 8% in the U.S. and 43% in the rest of the world. Pharmaceutical sales rose 20%; combined industrial and environmental sales rose 18%.
- Operating income benefited from increased sales volume. Gross margin remained at 60.3%: manufacturing cost reductions and fixed-cost leverage were offset by currency effects on manufacturing costs and a higher instrument-system sales mix. Selling and administrative expenses increased 10%, slower than sales, and R&D expense increased 11%.
- The effective tax rate was 16.0%, compared with 16.2%; the prior-year rate included a $2 million tax benefit from resolving a pre-acquisition tax exposure. Management noted Ireland’s statutory rate rose to 12.5% in 2011 from a historical 10% contractual rate.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management said cash, investments, expected operating cash flow and committed borrowing capacity should fund debt service and operating and investing needs for at least 12 months.
- The $380 million balance under the 2007 Credit Agreement was classified as current because it matures in January 2012. Waters anticipated refinancing at market rates and customary investment-grade terms, but cautioned that this outcome was not assured.
- In March, Waters issued $200 million of senior unsecured notes: $50 million at 2.50% due 2016, $100 million at 3.22% due 2018 and $50 million at 3.97% due 2021. Proceeds were used partly to repay term-loan and other debt. The weighted-average rate on senior notes and credit-agreement borrowings rose to 2.30% from 1.69% at year-end.
- A new $500 million, two-year share-repurchase authorization was approved in February 2011. The company repurchased $67 million of shares during the quarter, including $17 million under the new program. It said it did not plan to pay dividends in the foreseeable future.
- Management identified possible effects from Japan’s disasters on customer demand and supply chains; other cited risks include customer capital-spending changes, competition and new-product acceptance, foreign-exchange movements, regulation, intellectual-property litigation, tax changes and access to capital. The company said there were no material changes in legal proceedings and believed current litigation would not materially affect its financial position or results.
Important facts for investors to verify
- Progress and terms of refinancing the $380 million credit-agreement balance due January 2012, and compliance with debt covenants.
- Whether demand for new instrument systems and in Asia remains strong, including any lasting effects from the Japan disasters.
- Quality and sustainability of cash generation, given working-capital timing, increased inventory and the quarter’s investment purchases.
- Future tax-rate effects, including the Ireland rate change, and developments in uncertain tax positions and litigation.
- Share-repurchase pace and remaining authorization; the filing reports $483 million remained under the 2011 program at quarter-end.