Business context and reporting period
Waters Corporation designs, manufactures, sells and services analytical instruments and related consumables, software and services, principally for pharmaceutical, industrial, academic and governmental customers. This unaudited Form 10-Q covers the quarter ended June 27, 2020 and the six months then ended; comparisons are with the corresponding 2019 periods. Management attributed the broad-based business disruption to COVID-19.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $520; down 13% | $599 | $985; down 12% | $1,113 |
| Operating income | $155; down 13% | $178 | $223; down 25% | $299 |
| Operating margin | 29.8% | 29.7% | 22.7% | 26.8% |
| Net income | $123; down 15% | $144 | $176; down 30% | $253 |
| Diluted EPS | $1.98 | $2.08 | $2.83 | $3.57 |
| Operating cash flow | Not separately presented | Not separately presented | $350 | $303 |
- Product sales fell 19% in Q2 and 17% in the first half; service sales declined 3% and 2%, respectively. Instrument-system sales fell 23% in the first half, while recurring revenue (consumables and services) declined 3%.
- First-half cash generation included a $87 million reduction in accounts receivable and a $38 million increase in deferred revenue and customer advances. Capital expenditures and software capitalization were $97 million, implying approximately $253 million of operating cash flow after those outlays, before acquisitions and other investing items.
- At June 27, cash and cash equivalents were $339 million and investments were $17 million. Total debt was $1.696 billion, including $150 million current debt; long-term debt was $1.546 billion. The company reported $1.1 billion available under its revolving credit facility and compliance with debt covenants. Stockholders’ deficit was $192 million.
- Current assets were $1.269 billion and current liabilities $697 million. Cash, cash equivalents and investments totaled approximately $356 million; $288 million was held by foreign subsidiaries and $204 million in non-U.S.-dollar currencies.
Material changes versus the prior comparable period
- COVID-19-related disruption reduced sales across all major geographies and customer classes. Q2 sales declined 13% in Asia, 15% in the Americas and 11% in Europe. First-half sales declined 32% in China, 9% in the U.S. and 5% in Europe.
- First-half sales to pharmaceutical, industrial, and academic and governmental customers fell 9%, 11% and 23%, respectively. Academic and governmental demand was also affected by spending reductions and funding timing.
- Lower sales volumes drove the first-half operating-income decline. Cost reductions partly offset the impact; management said actions increased first-half operating income by about $60 million versus its operating plan.
- First-half operating cash flow increased from $303 million to $350 million, while investing cash flow moved from $785 million provided in 2019 to $192 million used in 2020. The prior period included $891 million of investment maturities and sales.
- Interest expense increased, which management attributed to higher debt balances and lower interest income. The weighted-average rate on senior notes and credit-facility borrowings was 2.62%, versus 3.39% at year-end 2019.
Outlook, management commentary and risks
- The filing gives no specific revenue or EPS guidance. Management’s planning assumptions included improving business conditions in the second half of 2020, but it emphasized that the pandemic remained fluid and that it could not estimate its duration or severity. Costs were expected to rise gradually toward pre-pandemic levels as temporary cost actions expired; plans could change with the pace of recovery.
- The company planned approximately $100 million of expense reductions versus its internal 2020 operating plan, reporting that about 60% had been achieved in the first half. It expected the remaining savings in the second half, alongside approximately $6 million of additional severance and lease-termination costs.
- First-half cash flows included $97 million of capital spending and $77 million of acquisition cash outflow. The company acquired Andrew Alliance for approximately $80 million, net of cash acquired; its effect on reported revenue and net income was immaterial. Construction of a U.S. consumables facility, with an estimated total cost of $215 million, was temporarily slowed; $123 million had been incurred through quarter-end.
- Share repurchases were temporarily suspended because of COVID-19 uncertainty. The company repurchased $167 million of shares in the first half, compared with $1.3 billion in the prior-year period. It reported $1.5 billion remaining under the authorization.
- Key risks include prolonged pandemic disruption, weakened demand, customer payment delays, supply-chain or manufacturing interruptions, foreign-exchange movements, remote-work cybersecurity risks, access to capital, competition, regulation, litigation and tax uncertainty. Management reported no material supply-chain disruption to date and no debt-covenant violations.
- The company reported no material changes to its previously disclosed legal proceedings and believed existing litigation would not materially affect financial position or results. It had no dividend plans. The filing also lists CEO transition and separation-related agreements among its exhibits; the supplied filing text does not explain their implications.
Important facts for investors to verify
- Whether sales and instrument-system demand recovered as assumed in management’s second-half planning, and how pandemic restrictions affected customer activity and service delivery.
- Whether temporary cost savings expired as planned, and the resulting effect on operating margins and earnings.
- Debt repayment, covenant headroom, cash availability by currency and location, and the company’s ability to fund capital spending and other commitments.
- The timing and total cost of the consumables-facility project, and the returns expected from the Andrew Alliance acquisition.
- The restructuring-cost disclosure is inconsistent: the note text states $18 million for Q2 and $3 million for the first half, whereas MD&A reports $3 million for Q2 and $21 million for the first half. Verify the correct period allocation in the filed statements or subsequent disclosures.
- The impact of foreign-exchange exposure, Singapore’s tax incentive (which the company expected to meet through March 2021), and the leadership-transition agreements listed as exhibits.