Waters Corporation (WAT) — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. This is an annual filing, not a standalone quarterly report; fourth-quarter figures are noted separately below. The filing was signed February 26, 2010.
Business context
Waters designs, manufactures, sells and services liquid chromatography (LC/UPLC), mass spectrometry (MS), chromatography consumables, and thermal analysis, rheometry and calorimetry instruments. Its customers span pharmaceuticals, biotechnology, industrial and food-safety markets, academia and government. Pharmaceutical and biotechnology customers represented about 51% of 2009 sales. The company reports one aggregated segment.
Financial performance and liquidity
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net sales | $1,498.7 million | $1,575.1 million |
| Gross profit / margin | $903.8 million / 60.3% | $913.9 million / 58.0% |
| Operating income / margin | $394.6 million / 26.3% | $389.8 million / 24.7% |
| Net income | $323.3 million | $322.5 million |
| Diluted EPS | $3.34 | $3.21 |
| Operating cash flow | $418.3 million | $418.2 million |
| Capital expenditures | $93.8 million | $69.1 million |
- Sales declined 5% year over year, including an estimated 2% adverse currency effect; acquired businesses added about 2%. Product sales fell 8%, while service sales rose 3%.
- Gross margin improved despite lower sales, reflecting favorable currency effects, a richer mix of consumables and service, and lower manufacturing costs. Operating income increased modestly amid lower volume, pricing pressure and unusual expenses.
- Approximate free cash flow, calculated as operating cash flow less capital expenditures, was $324 million, versus $349 million in 2008.
- At year-end, cash, cash equivalents and short-term investments totaled $630.3 million; debt was approximately $631.8 million, including $131.8 million current and $500 million long-term. The company reported $479 million of remaining borrowing capacity under its credit facility.
- Current assets were $1.17 billion and current liabilities $394.6 million. Management said available liquidity, expected operating cash flow and committed borrowing capacity should fund needs for at least 12 months. Much of the company’s cash is generated and held overseas.
Fourth quarter and material changes
- Fourth-quarter 2009 sales were $428.8 million, up about 3% from $418.3 million a year earlier. Quarterly operating income was $126.3 million versus $116.3 million; net income was $104.1 million versus $99.4 million; diluted EPS was $1.08 versus $1.01.
- Management said the year-over-year sales decline that began in Q4 2008 ended in Q4 2009. The improvement reflected currency translation, acquisitions, some economic improvement and new products. Results are seasonally stronger in Q4 as customers use year-end capital budgets.
- Waters Division sales declined 4% for the year; its instrument-system sales fell 9%, while service sales rose 3%. TA Division sales fell 11%, with instrument-system sales down 15%.
- Asia sales increased 1% overall, while sales declined 4% in the U.S., 9% in Europe and 12% in the rest of the world. Government and academic sales rose 5%; pharmaceutical sales fell 4% and industrial and food-safety sales fell 11%.
- Thar Instruments was acquired in February 2009 for about $36 million in cash, including assumed debt. It contributed $17 million in sales and was approximately earnings-neutral after debt service. The acquisition added supercritical-fluid chromatography and extraction technology.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expected 2010 capital spending to return to 2008 levels; it also expected to contribute $3 million to $5 million to defined-benefit plans. The company continued to evaluate acquisitions and potential facility expansion.
- Key risks include continued recession or weak customer capital spending, competition and pricing pressure, foreign-exchange volatility, reliance on overseas operations and suppliers, operational disruption, regulatory requirements, and intellectual-property litigation. About 69% of 2009 sales were outside the U.S. A hypothetical 10% adverse exchange-rate move was estimated to reduce the fair value of outstanding forward contracts by about $14 million pre-tax.
- Patent litigation with Agilent remained ongoing. Waters appealed a French infringement judgment; a $7 million provision was recorded in 2008 and a $6 million payment was made in 2009. German litigation remained unresolved. A securities class action alleging misstatements about 2007–2008 projections was pending, and Waters intended to defend it.
- 2009 included a $5 million tax benefit from reversal of a prior-year provision and a $6 million TA facility lease-termination expense, plus $3 million of European restructuring severance. The 2008 comparison included a $7 million patent-litigation provision and software-amortization adjustments. In 2008, the company also corrected prior-period tax and software-amortization errors through out-of-period adjustments, without restating prior filings.
- Unrecognized tax benefits were about $78 million. The company stated that recognizing all of them would reduce future income-tax provision by approximately that amount; it did not expect the pending U.K. tax audit settlement to have a material effect.
- In February 2010, Waters issued $100 million of five-year notes at 3.75%. It also expected to issue $100 million of ten-year notes at 5.00% in early March 2010, to repay other debt and for general corporate purposes.
- Management and the auditor concluded internal control over financial reporting was effective at December 31, 2009. No dividends were planned for the foreseeable future.
Most important facts for investors to verify
- Whether Q4’s sales stabilization continued after year-end, particularly in instrument systems and the TA Division.
- How much of the improved gross margin is sustainable versus attributable to foreign exchange, mix and cost controls.
- Cash availability and repatriation needs, debt maturities and covenants, and the use and terms of the 2010 note proceeds.
- Developments in the Agilent patent cases, the securities class action and the company’s tax exposures.
- The impact of 2008 out-of-period adjustments and the 2009 tax benefit when assessing underlying earnings and comparability.