WAT

Waters Corporation (WAT) 2004 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2004. Waters Corporation is a leading manufacturer of analytical instruments, primarily serving the pharmaceutical, life science, and industrial sectors. The company operates through two main divisions: the Waters Division (Liquid Chromatography, Mass Spectrometry, and Laboratory Informatics) and the TA Instruments Division (Thermal Analysis and Rheometry). In 2004, the company expanded its Laboratory Informatics portfolio through the acquisition of NuGenesis Technologies Corporation.

Key Financial Metrics

Note: Debt figures reflect outstanding borrowings under the new Credit Agreement and prior facilities. Total debt includes $250 million in long-term term loans and $190 million in revolving credit facilities.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 15% (11% excluding currency effects), driven by strong demand in the U.S., Japan, and Asia. Key growth drivers included the launch of the ACQUITY UPLC system and Mass Spectrometry (MS) products.
• Operating Income: Increased 30% to $284.9 million. This was significantly aided by a $17.1 million litigation judgment received from Perkin-Elmer, partially offset by a $7.8 million provision for ongoing HP litigation and a $4.0 million impairment of a technology license.
• Acquisitions: The company acquired NuGenesis Technologies for approximately $42.9 million in February 2004, adding Laboratory Informatics capabilities. This contributed approximately 2% to sales growth.
• Stock Repurchases: The company repurchased 5.5 million shares for $231.3 million in 2004. In October 2004, the Board authorized a new $500 million repurchase program.
• Debt Restructuring: In December 2004, the company replaced its credit facility with a new agreement increasing borrowing capacity from $375 million to $700 million.

Guidance, Outlook, and Risks

Management Commentary: Management expects capital expenditures to be modestly higher in 2005 to support business growth, excluding the recent building purchase. The company plans to continue reinvesting foreign earnings permanently into foreign operations, though it is evaluating the impact of the American Jobs Creation Act of 2004 regarding potential repatriation of up to $500 million in foreign earnings.

Risks and Contingencies:

• Patent Litigation: Ongoing disputes with Hewlett-Packard (HP) regarding the "Alliance" pump. While the UK court ruled in Waters' favor in December 2004, HP has appealed. Waters has recorded a $7.8 million provision for estimated damages and fees. A trial on damages is rescheduled for November 2005.
• Foreign Exchange: Approximately 64% of net sales are denominated in foreign currencies. A strengthening U.S. dollar could materially adversely affect results.
• Customer Concentration: The pharmaceutical industry accounts for approximately 53% of net sales. No single customer accounts for more than 3% of sales.
• Accounting Changes: Adoption of SFAS 123(R) regarding share-based payments is expected to increase pre-tax compensation expense by approximately $14.5 million in the second half of 2005.

Investor Verification Checklist

• Litigation Exposure: Verify the status of the HP appeal and the potential impact of the rescheduled damages trial on future earnings.
• UPLC Adoption: Assess the market penetration and revenue contribution of the new ACQUITY UPLC system relative to traditional HPLC.
• Debt Covenants: Review compliance with the new Credit Agreement covenants (3.5:1 interest coverage, 3:1 leverage ratio).
• Foreign Earnings Repatriation: Monitor management's decision on repatriating foreign earnings under the American Jobs Creation Act and the associated tax liability ($20M-$45M estimate).
• Stock-Based Compensation: Confirm the impact of SFAS 123(R) adoption on 2005 earnings per share.