Waters Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 26, 2020; comparisons are with the periods ended September 28, 2019. Waters designs, manufactures, sells, and services analytical instruments and related consumables, software, and support, principally in liquid chromatography, mass spectrometry, and thermal analysis.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $593.8 million | $577.3 million | $1,578.7 million | $1,690.3 million |
| Operating income | $158.4 million | $173.2 million | $381.8 million | $472.0 million |
| Operating margin | 26.7% | 30.0% | 24.2% | 27.9% |
| Net income | $126.8 million | $138.1 million | $303.3 million | $391.5 million |
| Diluted EPS | $2.03 | $2.07 | $4.86 | $5.63 |
- Q3 sales rose 3%, but operating income fell 9% and net income fell 8%. For the first nine months, sales declined 7%, operating income 19%, and net income 23%.
- Calculated gross margin was approximately 55.8% in Q3 versus 58.2% a year earlier, and 56.5% year to date versus 57.9%. Management cited sales mix, unfavorable manufacturing absorption, and foreign exchange as operating-income pressures.
- Operating cash flow was $523.0 million for the first nine months, up from $451.2 million. Capital expenditures and software capitalization were $125.3 million, implying approximately $397.7 million of operating cash flow less those expenditures. Cash and cash equivalents were $374.9 million at quarter-end.
- Total debt was $1.571 billion, down from $1.681 billion at year-end 2019; cash plus investments was $397.1 million. The company reported $1.2 billion available under its revolving credit facility and compliance with debt covenants. $150 million of debt was classified as current.
- Current assets were $1.292 billion and current liabilities $722.2 million. Stockholders’ deficit was $41.6 million, primarily reflecting the accumulated effect of substantial treasury-stock repurchases.
Changes, drivers, and unusual items
- Q3 recovery followed weaker first-half activity as customers resumed laboratory and manufacturing operations. Product sales increased 2% and service sales 5% in the quarter; year-to-date product sales declined 10%, while service sales were roughly flat.
- Q3 Waters instrument-system sales increased 1% and chemistry consumables 8%; TA sales declined 7%. Year-to-date instrument systems declined 15%, while TA sales fell 12%. Academic and governmental sales were particularly weak, down 17% year to date.
- Year-to-date sales declines were broad, including China down 20%, Asia down 11%, and the Americas down 7%; Europe was flat. China sales improved 4% in Q3 after a steep first-half decline.
- COVID-related cost actions and restructuring savings supported results: management said cost actions increased operating income by about $22 million in Q3 and $81 million year to date versus plan. Workforce reductions affected 3% of employees; related costs were $27 million year to date, with about $4 million more expected in the remainder of 2020.
- The January 2020 Andrew Alliance acquisition cost approximately $80 million net of cash acquired; its effect on reported revenue and earnings was immaterial. The company also spent $50 million year to date on a U.S. consumables facility expansion, had incurred $131 million cumulatively, and anticipated total project spending of $215 million. Construction was temporarily slowed because of uncertainty.
- The company recorded a $1.18 million litigation provision year to date. Management reported no material change in legal proceedings and believed current litigation would not materially affect financial position or results.
Outlook, risks, and liquidity
Management gave no specific numerical sales or earnings guidance in the supplied filing text. Its planning assumption was that business conditions would improve through the remainder of 2020 and into 2021, with spending gradually returning toward normal; management cautioned that plans would be adjusted to the pace of recovery. The company expected to realize the remaining 15% of its approximately $100 million 2020 cost-savings plan in Q4.
Management said COVID-19 had disrupted demand and caused uncertainty, but had not materially disrupted its own or outsourced manufacturing, distribution, or logistics through the filing date. A prolonged downturn, renewed restrictions, supply-chain or workforce disruption, delayed customer payments, and weaker demand could materially affect results, cash flows, or liquidity. Other identified exposures include foreign currency movements, customer spending and funding, competition, regulation, intellectual-property litigation, and tax uncertainty.
Share repurchases were temporarily suspended because of COVID-19 uncertainty. Approximately $1.525 billion remained authorized under the repurchase program. Most cash and investments were held by foreign subsidiaries: $359 million of $397 million, including $262 million denominated in currencies other than the U.S. dollar. Management stated that available cash, expected cash flows, and committed borrowing capacity should be sufficient for at least the next twelve months. No dividends were paid or planned.
Important facts for investors to verify
- Whether the Q3 rebound persisted, particularly in instrument systems, China, academic and governmental markets, and TA products.
- How much of the year-to-date cost savings is sustainable as expenses return toward normal and restructuring costs continue.
- Debt maturities and refinancing needs, covenant headroom, and the impact of the $150 million current debt classification.
- Timing and remaining cost of the consumables facility expansion, and whether the construction slowdown changes its expected completion or returns.
- COVID-19 developments, foreign-exchange exposure, and the availability and location of cash for U.S. obligations and investment needs.