WAT

Waters Corporation (WAT) - 2002 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2002. Waters Corporation is the world's largest manufacturer and distributor of High Performance Liquid Chromatography (HPLC) instruments, chromatography columns, and related services. The company also operates significant segments in Mass Spectrometry (MS) through its Micromass subsidiary and Thermal Analysis (TA) through TA Instruments. The company operates globally with approximately 62% of net sales derived from outside the United States.

Key Financial Metrics

Cash Flow: Net cash provided by operating activities was $219.65 million. The company generated "all-in" cash flow of $84.9 million. Significant cash uses included $99.3 million for treasury share repurchases and $38.0 million for capital expenditures.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 4% year-over-year. Excluding favorable currency effects, organic sales growth was 2%. Service revenue grew approximately 19% due to an expanding installed base.
• Operating Income: Operating income increased 31% to $196.4 million. This increase was primarily driven by a significant reduction in litigation provisions (from $75.0 million in 2001 to $7.9 million in 2002) and the elimination of goodwill amortization under new accounting standards (SFAS 142).
• Unusual Charges: The company recorded $7.4 million in restructuring charges related to the integration of Micromass and HPLC sales organizations, and a $2.4 million impairment charge for a discontinued technology license.
• Accounting Changes: The company adopted SFAS 142, ceasing goodwill amortization. It also changed its method of accounting for patent-related costs from capitalization to expensing as incurred, resulting in a $4.5 million cumulative effect charge to net income.

Guidance, Outlook, Risks, and Contingencies

• Patent Litigation (Applera): A jury found the company's Quattro Ultima mass spectrometer infringed on a patent. In March 2003, an appeals court affirmed the judgment, including damages and interest totaling approximately $54.0 million. The company expects to pay this amount in the second quarter of 2003. $49.9 million of cash was restricted as of year-end to secure this liability.
• Environmental Contingency: The company recorded a $5.1 million provision for a settlement with the Massachusetts Department of Environmental Protection regarding its Taunton facility, expected to be settled in Q2 2003.
• Restructuring: The integration of HPLC and Micromass sales forces is ongoing, with additional costs expected in 2003. The company aims to leverage strengths and reduce operating expenses.
• Stock Repurchase: The company intends to purchase the remaining $100.7 million available under its stock repurchase program during the first half of 2003.
• Product Strategy: In January 2003, the company announced it would exit its inorganic mass spectrometry product line, which generated approximately $14.0 million in annual sales.
• Risks: Key risks include currency fluctuations (62% of sales are foreign), dependence on the pharmaceutical industry (57% of sales), and ongoing patent litigation in various jurisdictions.

Investor Verification Checklist

• Applera Litigation Payment: Verify the timing and impact of the $54.0 million payment expected in Q2 2003 on liquidity and earnings.
• Restructuring Progress: Monitor the realization of cost synergies from the HPLC/Micromass integration against the $7.4 million charge and ongoing expenses.
• Foreign Currency Exposure: Assess the impact of exchange rate fluctuations on future revenue, given 62% of sales are international.
• Pharmaceutical Spending: Evaluate the health of the pharmaceutical sector, which accounts for the majority of the company's revenue.
• Stock Repurchase Execution: Confirm the execution of the remaining $100.7 million share buyback program.