Waters Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 29, 2019; comparisons are with the periods ended June 30, 2018. Waters sells and services analytical instruments, consumables and software for life, materials and food sciences. Amounts below are in U.S. dollars; financial statement amounts are converted to millions where indicated.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $599.2m | $596.2m | $1,113.0m | $1,126.9m |
| Operating income | $177.7m | $179.2m | $298.8m | $323.6m |
| Operating margin | 29.7% | 30.1% | 26.8% | 28.7% |
| Net income | $144.4m | $155.7m | $253.4m | $267.6m |
| Diluted EPS | $2.08 | $1.98 | $3.57 | $3.39 |
| Operating cash flow | — | $302.8m | $276.6m |
Revenue was essentially flat in Q2 and fell 1% for the first half, as reported. Operating income declined 1% and 8%, respectively, and net income declined 7% and 5%. Diluted EPS nevertheless rose 5% in both comparisons, alongside a substantially lower weighted-average share count following repurchases. Approximate gross margin was 58.4% in Q2 and 57.7% in the first half, versus 59.2% and 58.8% a year earlier.
Liquidity, debt and capital allocation
- At June 29, cash and cash equivalents were $588.0m and investments were $87.8m, totaling $675.8m, down from $1.735bn at year-end 2018. The filing attributes cash use principally to share repurchases and investment maturities.
- Total debt was $1.149bn, including $100m of notes due February 2020; the company also had $1.208bn available under its credit agreement. It reported compliance with debt covenants. Cash and investments less debt were approximately $473m.
- First-half investing cash flow of $785.1m mainly reflected investment maturities and sales; financing cash outflow was $1.295bn, including $1.330bn of treasury-share purchases. Operating cash flow was $302.8m.
- Capital expenditures and software capitalization were $65.2m, versus $36.8m a year earlier. The company had spent $48m through Q2 on a planned U.S. consumables manufacturing facility expected to cost approximately $215m in total.
Changes, outlook and risks
- Service revenue increased 2% in Q2 and the first half, while instrument-system sales weakened. Recurring revenue grew 2% in Q2 and 1% year to date. Europe sales fell 5% in Q2 and 8% in the first half; U.S. sales rose 8% and 5%, respectively.
- Management cited Brexit-related uncertainty, changes in government policy and regulation in certain regions, lower industrial demand, and weak Eastern European demand. Foreign-currency translation reduced reported sales growth by 2% in both Q2 and the first half; management expected currency translation to weigh on gross profit for the rest of 2019.
- Operating results included workforce-reduction costs of $1m in Q2 and $9m in the first half. The first half of 2018 included a $2m litigation-settlement gain. Q2’s higher effective tax rate versus 2018 partly reflected a prior-year tax benefit; the first-half 2019 rate included a $3m tax benefit.
- The company authorized up to $4bn of repurchases over two years and had $2.8bn remaining under the authorization at quarter-end. Management expected to increase 2019 repurchases and said it planned to use cash, operating cash flow and, as needed, borrowing. It anticipated sufficient resources for at least the next 12 months. No specific revenue or EPS guidance was provided in the filing text.
- Key stated risks include foreign exchange, tariffs and trade rules, Brexit, China policy changes, customer capital-spending patterns, competition, product acceptance, supply-chain capacity, intellectual-property litigation and tax audits. The company said current litigation outcomes were not expected to be material; it also disclosed customary indemnification agreements with potentially unlimited contractual payments, whose estimated fair value management considers immaterial.
Important facts for investors to verify
- Whether instrument demand and European sales recover, and whether currency and macroeconomic pressures continue.
- How repurchases are funded and their effect on debt, liquidity and per-share results; note the sizable first-half buyback relative to operating cash generation.
- Progress, total cost and timing of the planned $215m manufacturing-facility expansion.
- Whether the company maintains its Singapore tax incentives and manages tax exposures, including uncertain tax positions.
- Future cash conversion, particularly inventory growth, receivable collection and deferred service revenue.