Waters Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter ended October 2, 2021; comparisons are with the quarter ended September 26, 2020. Year-to-date figures cover nine months. Dollar amounts below are in U.S. dollars.
Business context
Waters develops and sells analytical instruments, consumables, software and services, primarily for life sciences and industrial applications. Its Waters business includes liquid chromatography and mass spectrometry products; TA sells thermal analysis, rheometry and calorimetry instruments. The filing reports one aggregated reportable segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $659.2M | $593.8M | $1,949.4M | $1,578.7M |
| Operating income | $191.8M | $158.4M | $559.5M | $381.8M |
| Operating margin | 29.1% | 26.7% | 28.7% | 24.2% |
| Net income | $161.2M | $126.8M | $476.6M | $303.3M |
| Diluted EPS | $2.60 | $2.03 | $7.66 | $4.86 |
| Operating cash flow | — | $529.3M | $523.0M |
Q3 sales rose 11%, operating income 21%, net income 27% and diluted EPS 28%. For the first nine months, sales increased 23%, operating income 47%, net income 57% and diluted EPS 58%. Growth reflected recovering customer laboratory and manufacturing activity, stronger instrument demand and recurring sales. Q3 product sales rose 11% and service sales 10%; year-to-date they increased 29% and 15%, respectively.
Gross margin, calculated from reported sales and cost of sales, was approximately 58.9% in Q3 versus 55.8% a year earlier, and 58.7% year to date versus 56.5%. The filing attributes improved operating results principally to higher sales volumes; 2020 comparisons were affected by pandemic-related cost reductions and restructuring charges.
Cash, debt and liquidity
- At October 2, 2021, cash and cash equivalents were $524.7M and investments were $130.5M, totaling approximately $655M, compared with approximately $443M at year-end 2020.
- Total debt was $1.614B, up from $1.357B at year-end; reported long-term debt was $1.614B, with no current debt. Cash and investments less debt imply net debt of about $959M.
- Operating cash flow was $529.3M. Investing activities used $248.4M and financing activities used $183.9M. Capital expenditures and software capitalization were $116.6M, implying approximately $412.7M of operating cash flow after those outlays.
- The company repurchased $492.7M of treasury shares during the first nine months. Approximately $1.0B remained authorized under its share repurchase program.
- In March, Waters issued $500M of senior notes: $100M at 1.68% due 2026 and $400M at 2.25% due 2031. A September credit agreement provides a $1.8B revolving facility, maturing in 2026; $310M was drawn and about $1.5B remained available after letters of credit. Waters reported compliance with debt covenants.
Changes, outlook and risks
- Q3 sales growth was broad-based: Americas +16%, Europe +10%, Asia +8%. China sales were flat, which management attributed in part to third-party shipping and logistics execution issues. Academic and government sales declined 9% in Q3, despite year-to-date growth.
- Year-to-date results benefited from five additional calendar days compared with the prior-year period. Foreign currency translation had minimal effect on Q3 total sales and increased year-to-date sales by 2%.
- Waters expects a significant increase in expenses and a negative cash-flow effect in Q4 as most pandemic-era cost reductions were reinstated during 2021. Management also expected foreign currency translation to slightly reduce gross profit for the remainder of 2021. The filing provides no clear numeric full-year sales or earnings guidance.
- Management said COVID-19 had not materially affected results or cash flows to the filing date, but could not estimate the pandemic’s duration or future impact. Global logistics and supply-chain issues, supplier disruptions or higher input costs could affect future results.
- Waters expects to spend approximately $215M to build and equip a U.S. precision-chemistry consumables facility; $191M had been incurred through Q3.
- Year-to-date other income included a $10M unrealized gain on an investment and $10M of guaranteed payments, including minimum royalties, under a Bruker patent-litigation settlement. $3M of settlement payments had been received by period-end.
- Management said its liquidity and borrowing capacity should be sufficient for at least the next 12 months. The filing reported no material changes to risk factors or legal proceedings; it also identifies foreign-exchange, demand, competition, regulatory, tax and litigation risks.
Important facts for investors to verify
- Whether sales growth persists after customer reopening and pent-up demand, and how the extra five calendar days affected year-to-date comparisons.
- Whether Q4 expense normalization, supply-chain constraints and China logistics issues pressure margins or cash flow.
- Debt levels, covenant headroom and the effect of continued share repurchases on liquidity.
- The recurring earnings contribution versus the one-time or valuation-related settlement and investment gains.
- Exposure to foreign currencies and the sustainability of Singapore’s concessionary tax incentive.