Waters Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparisons are with the three months ended March 30, 2019. Amounts below are in U.S. dollars. Waters develops and sells analytical instruments, consumables, software and related services, principally for life sciences, pharmaceutical, industrial, academic and governmental customers.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $464.9 million | $513.9 million | (10%) |
| Product sales | $274.2 million | $320.5 million | (14%) |
| Service sales | $190.8 million | $193.4 million | (1%) |
| Operating income | $68.3 million | $121.2 million | (44%) |
| Operating margin | 14.7% | 23.6% | Down 8.9 percentage points |
| Net income | $53.6 million | $109.0 million | (51%) |
| Diluted EPS | $0.86 | $1.51 | (43%) |
| Operating cash flow | $151.6 million | $175.8 million | (14%) |
Gross margin, calculated as sales less reported product and service costs, was approximately 54.7%, compared with 57.0% a year earlier. Capital expenditures and software capitalization were $51.1 million, implying approximate operating cash flow less these expenditures of $100.5 million.
Liquidity, debt and balance sheet
- At March 28, 2020, cash and cash equivalents were $390.1 million and investments were $3.8 million. Total debt was $1.896 billion, up from $1.681 billion at year-end 2019; cash less debt was approximately $1.502 billion net debt.
- Debt comprised $960 million of senior unsecured notes and $940 million borrowed under the credit agreement. The company had $858 million available under its revolving facility after letters of credit and reported compliance with all debt covenants.
- Current assets were $1.328 billion and current liabilities were $551.1 million. The company reported a stockholders’ deficit of $338.0 million.
- Investing cash outflow was $130.2 million, including $76.7 million for acquisitions net of cash acquired. Financing cash flow was positive $32.9 million, including $315 million of debt issuance and $196.2 million of treasury-share purchases.
Material changes and drivers
- Management attributed the sales decline primarily to COVID-19 disruption and uncertainty. China sales fell 48%; excluding China, sales declined 1%, with currency translation also weighing on reported results. Management said the pandemic’s effect was expected to be more significant in Q2 2020.
- Instrument-system sales fell 20%; recurring revenue from consumables and services declined 2%. Sales fell 21% in Asia and 5% in the Americas, while Europe grew 2%. Pharmaceutical, industrial, and academic/governmental sales declined 7%, 8%, and 24%, respectively.
- Operating income was pressured by lower sales volume and $18 million of severance, lease-termination and related restructuring costs. Selling and administrative expense rose 10%; excluding the one-time costs, it declined 3%. An additional approximately $5 million of related costs was expected during the remainder of 2020.
- Net interest expense increased, mainly because of higher debt and lower interest income. The reported effective tax rate was 7.4%, including a $4 million tax benefit related to restructuring charges.
- Waters acquired Andrew Alliance, a laboratory-workflow automation business, for approximately $80 million net of cash acquired. The acquisition’s quarterly effect on revenue and net income was immaterial; approximately $72 million was allocated to goodwill.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said it could not reasonably estimate the duration or severity of COVID-19 or its future financial impact. It reported no material pandemic-related manufacturing, logistics or supplier disruptions to date.
- Management considered cash, expected operating cash flows and committed borrowing capacity sufficient for at least the next 12 months to fund operations, debt service and capital needs. It implemented salary reductions, furloughs, spending controls and working-capital actions to preserve liquidity.
- Share repurchases were temporarily suspended because of uncertainty, after $167 million of program repurchases during the quarter. The company also planned to slow construction of its U.S. consumables facility; expected total project cost was $215 million, of which $106 million had been incurred by quarter-end.
- Key risks include a deeper or longer COVID-19 disruption, reduced customer demand and delayed payments, supply-chain interruptions, foreign-exchange movements, remote-work cybersecurity and productivity issues, competition, regulation, litigation and access to capital. Foreign-currency translation reduced reported sales by 2%; a hypothetical 10% strengthening of the U.S. dollar was estimated to reduce the value of foreign-currency cash, cash equivalents and investments by approximately $18 million.
- The company reported no required goodwill or long-lived-asset impairment analysis, no debt-covenant violations, and no material changes to its previously reported legal proceedings or contractual obligations. It does not currently plan to pay dividends.
Important facts for investors to verify
- Whether Q2 and subsequent results confirm management’s expectation of a more pronounced COVID-19 impact, particularly on instrument demand and China-related sales.
- Cash conversion, receivables collection and inventory levels; days sales outstanding increased to 99 days from 88 days a year earlier.
- Debt balances, borrowing capacity, covenant headroom and the effect of weaker earnings or higher interest costs on leverage.
- Timing and remaining costs of the manufacturing-facility project, restructuring actions and the resumption, if any, of share repurchases.
- Whether the 7.4% effective tax rate and Singapore tax arrangements remain applicable; the Singapore contractual 0% rate was stated to run through March 2021, subject to milestones.