Waters Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 30, 2024; comparison period ended April 1, 2023. Waters provides analytical instruments, consumables, software and services for life, materials and food sciences. Results include Wyatt Technology, acquired in May 2023; the prior-year quarter does not, limiting comparability.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $636.8 million | $684.7 million | Down 7% |
| Product sales | $376.2 million | $436.5 million | Down 14% |
| Service sales | $260.7 million | $248.2 million | Up 5% |
| Operating income | $133.8 million | $174.2 million | Down 23% |
| Operating margin | 21.0% | 25.4% | Down 4.4 percentage points |
| Net income | $102.2 million | $140.9 million | Down 27% |
| Diluted EPS | $1.72 | $2.38 | Down 28% |
| Operating cash flow | $262.9 million | $196.8 million | Up $66.1 million |
Cost of sales was $261.8 million versus $284.4 million; gross profit was approximately 58.9% of sales versus 58.5%. Net interest expense rose to $21.2 million from $10.4 million, primarily reflecting borrowing to fund the Wyatt acquisition. The effective tax rate declined to 11.0% from 14.7%.
Liquidity, debt and cash flow
- Cash, cash equivalents and investments were $338.2 million at quarter-end, down from $396.0 million at year-end 2023. Operating cash flow was $262.9 million; investing cash outflow was $29.7 million and financing cash outflow was $292.2 million.
- Total debt was $2.056 billion, down from $2.356 billion at December 31, 2023, following $300 million of debt repayments. The company had $1.2 billion available under its $2.0 billion revolving credit facility and was in compliance with debt covenants.
- Capital expenditures and capitalized software were $28.7 million. The company made no open-market share repurchases in the quarter; repurchases related to vesting restricted stock totaled $13 million.
Material changes and management commentary
- Management attributed lower sales mainly to cautious customer capital spending and delayed instrument purchases. Instrument-system sales fell 20%; recurring revenue, comprising services and chemistry consumables, increased 3%.
- Regional sales fell 18% in Asia, including 26% in China and 24% in Japan; the Americas declined 2%, while Europe grew 2%. Sales to academic and government customers declined 25%, partly reflecting funding timing.
- Wyatt contributed approximately 3 percentage points to total sales growth, partially offsetting underlying demand weakness. Foreign exchange reduced total sales growth by 1%. The quarter also had one fewer calendar day than the prior-year quarter.
- Operating income was pressured by lower sales volume, Wyatt-related retention expense and amortization, workforce-reduction costs, and patent litigation provisions. These items were partly offset by lower prior-year Wyatt diligence costs.
- Operating cash flow increased year over year, supported by higher collections and lower annual incentive payments; higher inventory and lower net income were offsets.
Outlook, risks and unusual items
- The filing provides no specific sales or earnings guidance. Management expected foreign-exchange translation to reduce gross profit during 2024 and estimated cross-currency swaps would lower 2024 net interest expense by approximately $8 million.
- In March 2024, Waters reduced its workforce by approximately 2%, primarily in China, citing significant sales declines linked to lower customer demand. It recorded approximately $8 million of severance-related costs; most remaining costs were expected to be paid in Q2.
- The company recorded $10 million of patent-litigation settlement provisions and related costs. Management stated that other current litigation outcomes were not expected to be material, but legal outcomes remain uncertain.
- Key disclosed risks include weak or delayed customer demand, restrictions on Chinese government-funded procurement, foreign-exchange and interest-rate exposure, debt servicing and liquidity, competition, supply-chain disruption, cybersecurity, regulation, and acquisition integration and synergy realization.
- Approximately $305 million of cash, cash equivalents and investments was held by foreign subsidiaries, including $239 million in non-U.S.-dollar currencies. Management estimated a hypothetical 10% strengthening of the U.S. dollar would reduce the value of those currency holdings by about $24 million.
Important facts for investors to verify
- How much of the sales and earnings comparison reflects underlying demand versus Wyatt’s inclusion in 2024 and acquisition-related costs?
- Whether instrument demand, especially in China and academic/government markets, stabilizes, and whether service and consumables growth continues.
- Debt repayment pace, refinancing of the $50 million note due June 2024, interest expense, and continued compliance with credit covenants.
- The final cash cost and timing of workforce reductions and patent litigation matters, and whether further unusual expenses arise.
- Foreign-exchange effects on sales, gross profit and overseas cash, as well as execution of the expected benefits from Wyatt.