Waters Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 report; selected fourth-quarter figures are included below. Waters develops and sells analytical instruments, consumables, software and services for life, materials and food sciences. Its Waters and TA operating segments are aggregated into one reportable segment.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Net sales | $2.420 billion | $2.309 billion | Up 5%; foreign-currency translation added 1 percentage point |
| Product sales | $1.605 billion | $1.552 billion | Up 3% |
| Service sales | $814.9 million | $756.7 million | Up 8%; about 34% of sales |
| Gross profit / margin | $1.427 billion / 59.0% | $1.362 billion / 59.0% | Calculated from reported sales and cost of sales |
| Operating income / margin | $739.8 million / 30.6% | $662.2 million / 28.7% | Up 12%; benefited partly from nonrecurrence of 2017 charges |
| Income before taxes | $682.1 million | $641.1 million | Up 6% |
| Net income | $593.8 million | $20.3 million | 2017 included a $550 million tax charge related to the Tax Act |
| Diluted EPS | $7.65 | $0.25 | 2017 Tax Act charge reduced 2017 EPS by $6.82 |
| Cash from operations | $604.4 million | $697.6 million | Down; affected by tax payments, litigation settlement and pension contributions |
| Capital expenditures and capitalized software | $96.1 million | $85.5 million | Operating cash flow less this spending was approximately $508 million |
| Cash, cash equivalents and investments | $1.735 billion | $3.394 billion | Lower following investment maturities, debt reduction and repurchases |
| Total debt | $1.148 billion | $1.998 billion | Reduced by approximately $850 million during 2018 |
| Working capital | $2.214 billion | $3.664 billion | Includes current maturities of debt, per filing |
At year-end, the company had $1.208 billion available under its committed credit facility after letters of credit and was in compliance with debt covenants. Reported current assets were $2.663 billion and current liabilities were $448.9 million.
Material changes and fourth-quarter results
- Recurring revenue—service plus precision chemistry consumables—increased 8%. Instrument system sales increased 2%; Waters instrument system sales rose 1%, while TA instrument systems grew 7%.
- Sales growth was strongest in Asia, up 7%, including China up 15%; Europe grew 4% and the Americas 3%. Pharmaceutical sales grew 5%, industrial sales 2%, and governmental and academic sales 8%.
- Fourth-quarter net sales were $715.0 million, versus $687.3 million in Q4 2017. Q4 operating income was $244.5 million and net income was $185.2 million; diluted EPS was $2.46. The filing notes that sales typically rise in Q4 as customers use year-end capital budgets.
- The 2018 effective tax rate was 13.0%, compared with 96.8% in 2017. The 2017 rate was distorted by the $550 million Tax Act provision; excluding that charge, the company reported an 11.0% 2017 effective rate.
- The company repurchased $1.306 billion of shares under authorized programs in 2018. In January 2019, the board authorized repurchases of up to $4 billion over two years, replacing the prior authorization.
Outlook, commentary, risks and unusual items
- Outlook: The filing does not provide a specific 2019 revenue or EPS growth forecast. Management expected currency translation at then-current exchange rates to reduce 2019 sales and gross profit, and estimated net interest expense could increase by about $25 million in 2019 as debt rises. The company planned to use cash, operating cash flow and borrowing capacity to repurchase up to $4 billion of stock over two years, targeting net debt of approximately 2.5 times EBITDA.
- Investment and restructuring: The company expects to spend approximately $215 million to build and equip an expanded U.S. precision-chemistry manufacturing facility; $11 million had been spent through year-end 2018. January 2019 organizational changes affected about 1% of employees, with approximately $15 million of severance and related costs expected in 2019.
- Unusual items: A $46 million pre-tax pension settlement charge in 2018 included $6 million in cash and $40 million non-cash; it reduced diluted EPS by $0.39. The 2018 tax provision also reflected Tax Act-related adjustments, including a net favorable $6 million impact from finalizing parts of the transition-tax estimate. The company expects about $38 million of annual U.S. federal transition-tax payments over the next four years, with the remaining amount payable over three years beginning in 2023.
- Tax exposure: A 0% Singapore contractual tax rate on qualifying activity runs through March 2021, subject to milestones. Failure to meet them could require reversal of prior tax benefits and tax on affected income at the statutory rate. The benefit increased 2018 net income by $28 million, or $0.36 per diluted share.
- Principal risks: Approximately 72% of 2018 sales were outside the U.S., creating foreign-exchange, political and trade-policy exposure. Other stated risks include customer capital-spending cycles, competition and product acceptance, supply-chain and manufacturing disruption, regulatory and cybersecurity compliance, intellectual-property claims, tax audits and debt-covenant constraints. Management considered ordinary-course litigation outcomes not material, individually or in aggregate.
- Controls and audit: Management and PwC concluded internal control over financial reporting was effective as of December 31, 2018; PwC issued an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Assess underlying earnings growth against the 2017 Tax Act distortion and the 2018 pension settlement; distinguish reported results from these unusual items.
- Track instrument-system demand and new-product launch contribution, particularly given slower 2018 instrument growth and the timing of launches.
- Monitor cash generation, working-capital movements and the capacity to fund the planned buyback, facility expansion and expected higher debt and interest expense.
- Confirm the pace and terms of the $4 billion repurchase program and the planned leverage target as capital allocation progresses.
- Verify the Singapore tax-rate milestones, remaining transition-tax payments and any material tax-audit developments.
- Review currency sensitivity and the effects of foreign-exchange movements on sales, margins, cash and earnings.