Waters Corporation (NYSE: WAT) — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing also reports unaudited fourth-quarter results. Waters supplies chromatography, mass spectrometry, thermal analysis and related consumables, software and services to pharmaceutical, industrial, academic and government customers.
Financial performance
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Net sales | $2.972 billion | $2.786 billion | +7% |
| Product sales | $1.988 billion | $1.822 billion | +9% |
| Service sales | $984 million | $964 million | +2% |
| Operating income | $873 million | $822 million | +6% |
| Operating margin | 29.4% | 29.5% | Down 0.1 percentage point |
| Net income | $708 million | $693 million | +2% |
| Diluted EPS | $11.73 | $11.17 | +5% |
| Operating cash flow | $612 million | $747 million | Down $136 million |
| Capital expenditures and capitalized software | $176 million | $161 million | +9% |
Gross profit was approximately $1.724 billion, or 58.0% of sales, based on reported sales and cost of sales. Net margin was approximately 23.8%. Operating cash flow less capital expenditures and capitalized software was approximately $436 million.
Fourth-quarter sales were $859 million versus $836 million in Q4 2021; net income was $227 million versus $216 million, and diluted EPS was $3.81 versus $3.52.
Liquidity and debt
- At year-end, cash and cash equivalents were $481 million and investments were $1 million. Current assets were $1.764 billion and current liabilities $786 million.
- Reported debt was approximately $1.575 billion: $50 million current and $1.525 billion long-term. Cash and investments were therefore about $1.094 billion below debt.
- The company had approximately $1.5 billion of additional availability under its $1.8 billion revolving credit facility, which matures in September 2026. It reported compliance with debt covenants.
- Debt principal maturities include $50 million in 2023, $100 million in 2024 and $730 million in 2026. Remaining 2017 Tax Act transition-tax payments total $289 million, scheduled for 2023–2025.
Changes and drivers
- Sales growth was broad-based, with instrument-system sales up 11%; Waters product sales up 9%; and TA sales up 10%. Pharmaceutical customers accounted for 59% of sales, industrial customers 31%, and academic and government customers 10%.
- Foreign currency translation reduced 2022 sales growth by 5% and operating income by approximately $71 million. The stronger U.S. dollar was a significant headwind, particularly in Europe and Japan.
- Higher sales volume and pricing supported operating income, partly offset by electronic-component and freight inflation. Operating margin was nearly unchanged.
- Operating cash flow fell as receivables and inventories increased, collections slowed and incentive-compensation payments rose. Days sales outstanding increased to 77 from 66.
- The effective tax rate rose to 15.5% from 14.1%, partly reflecting U.S. tax-law treatment of research and development expenditures. A Singapore tax incentive increased 2022 net income by approximately $20 million.
Outlook, risks and unusual items
- The filing gives no quantified 2023 revenue or earnings guidance. Management expected foreign currency translation at then-current rates to reduce 2023 gross profit. It anticipated about $20 million of additional 2023 spending to complete the Taunton facility expansion.
- On February 14, 2023, Waters agreed to acquire Wyatt Technology for $1.4 billion in cash, expected to close in Q2 2023 subject to regulatory and other customary conditions. Planned funding is from cash and revolving-credit borrowing. A $15 million termination fee may apply in specified circumstances.
- In 2022, Waters expensed $9.8 million of acquired in-process research and development related to Megadalton CDMS technology. It also recorded $6 million of investment impairment losses and approximately $7 million of gains on sales of equity investments.
- Key disclosed risks include foreign-exchange exposure, China and geopolitical conditions, COVID-19-related disruption, component shortages and supply-chain dependence, customer capital-spending variability, competition and product innovation, cybersecurity, regulation, tax examinations and debt-service needs. China represented approximately 19% of 2022 sales. Electronic-component shortages persisted during the year.
- Management said cash flows, existing cash and committed borrowing capacity were expected to be sufficient for debt service, working capital, capital spending, authorized repurchases and potential acquisitions for at least 12 months. Waters repurchased $616 million of shares in 2022; the repurchase authorization was increased to $4.8 billion and extended through January 21, 2024. No cash dividend is planned for the foreseeable future.
- Waters reported that current litigation outcomes were not expected to be material, while noting that proceedings remain subject to uncertainty. PwC issued unqualified opinions on the financial statements and internal control over financial reporting; the auditor identified product revenue recognition as a critical audit matter.
Important facts for investors to verify
- Whether sales growth and margins can hold up against currency headwinds, inflation and any weakening in instrument demand, particularly in China.
- Whether cash collections and inventory levels improve after the 2022 working-capital drag.
- The final financing, regulatory approvals, closing status and post-close debt impact of the Wyatt acquisition.
- Debt maturities, covenant headroom and the timing of transition-tax payments, especially alongside acquisition funding and continued share repurchases.
- Execution and remaining cost of the Taunton expansion, and commercial progress of new products and acquired CDMS technology.