Waters Corporation — Q2 2021 Form 10-Q
Business context and reporting period
Waters designs, manufactures, sells, and services liquid chromatography, mass spectrometry, thermal analysis, and related consumables and software. The quarter ended July 3, 2021; comparisons are with the quarter ended June 27, 2020. The filing also reports the six months ended July 3, 2021, compared with the six months ended June 27, 2020. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $681.6m | $520.0m | $1,290.2m | $984.9m |
| Operating income | $196.4m | $155.1m | $367.7m | $223.4m |
| Operating margin | 28.8% | 29.8% | 28.5% | 22.7% |
| Net income | $167.3m | $122.9m | $315.4m | $176.5m |
| Diluted EPS | $2.69 | $1.98 | $5.05 | $2.83 |
| Operating cash flow | Not separately provided | Not separately provided | $361.4m | $350.4m |
- Q2 sales rose 31% year over year: product sales increased 40% and service sales 17%. First-half sales also rose 31%.
- First-half cash capital spending was $76.9m, implying operating cash flow less capital expenditures of approximately $284.6m, versus approximately $253.4m in the prior-year period. These are derived figures.
- At July 3, cash and cash equivalents were $460.1m and investments were $203.6m. Total debt was $1.603bn, all long-term; the current portion was zero. The company had $1.5bn of borrowing availability under its revolving facility and reported compliance with debt covenants.
- Current assets were $1.639bn and current liabilities $681.0m. Total stockholders’ equity was $268.3m.
Changes versus the prior comparable period
- Growth reflected demand recovery as customers resumed laboratory and manufacturing operations, alongside pent-up demand after pandemic-related weakness in 2020. China sales increased 42% in Q2 and 68% in the first half. Foreign currency translation added 4% to total sales growth in both periods; the first half also included five additional calendar days.
- Q2 operating income rose 27%, but operating margin declined 1.0 percentage point. First-half operating income rose 65% and margin expanded 5.8 points. Comparisons were affected by pandemic cost reductions in 2020 and their subsequent restoration; those 2020 actions increased operating income by about $54m. Prior-year restructuring costs were $21m in the first half.
- First-half operating cash flow increased modestly despite working-capital outflows, including a $50.9m inventory increase. Deferred revenue and customer advances provided $91.6m of cash.
- Debt increased from $1.357bn at year-end 2020 to $1.603bn. In March, Waters issued $500m of notes: $100m at 1.68% due 2026 and $400m at 2.25% due 2031. It repaid other debt and used proceeds for general corporate purposes.
Outlook, commentary, risks, and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management expected normalized expenses to rise and negatively affect second-half 2021 cash flows as most pandemic-era cost savings were restored.
- Management said it expected available cash, future operating cash flow, and borrowing capacity to fund debt service, working capital, capital spending, authorized repurchases, and potential acquisitions for at least the next 12 months.
- Waters anticipated approximately $215m in total spending for a U.S. precision-chemistry manufacturing facility; $182m had been incurred through the first half. First-half capital spending included $28m related to the expansion.
- COVID-19 had not materially disrupted manufacturing or shipments through the period, but management could not estimate the pandemic’s duration or future effect. Risks include renewed disruption, supplier availability and cost, foreign-exchange movements, demand volatility, competition, regulation, intellectual-property litigation, and tax matters.
- Q2 and first-half other income included a $10m gain recognized under a settlement resolving patent litigation with Bruker, including guaranteed and minimum royalty payments; $3m had been received by the period end, net of withholding taxes. First-half other income also included an approximately $10m unrealized gain on an investment. These items contributed to reported earnings.
- Waters repurchased $339m of shares in the first half and had $1.186bn remaining under its authorization. It reported no material changes to risk factors or legal proceedings. Disclosure controls were deemed effective.
Important facts for investors to verify
- How much reported growth reflects durable demand recovery versus pandemic comparisons, currency translation, and the extra first-half calendar days.
- Whether restored operating expenses, supply constraints, and inventory growth affect future margins and cash generation.
- Debt maturities, borrowing availability, covenant headroom, and the use of proceeds from the $500m note issuance.
- The timing and remaining cost of the manufacturing expansion, and the impact of continued share repurchases on leverage and financial flexibility.
- The recurring nature and cash realization of the Bruker settlement payments and the investment gain included in other income.