Waters Corporation — FY 2015 Form 10-K
Business and reporting period. Waters designs, manufactures, sells and services analytical instruments and related consumables, software and support. Its Waters Division focuses on liquid chromatography, mass spectrometry and chemistry products; TA Division sells thermal analysis, rheometry and calorimetry instruments. The divisions are aggregated into one reporting segment. This filing covers the fiscal year ended December 31, 2015; fourth-quarter figures are included below where relevant.
Financial performance and liquidity
- Revenue: $2.042 billion, up 3% from 2014. Product sales were $1.385 billion (+3%) and service sales were $657.1 million (+2%). Foreign-exchange translation reduced reported sales growth by 6%.
- Profit and margins: Gross profit was $1.200 billion; gross margin was 58.7%, versus 58.5% in 2014. Operating income rose 10% to $567.5 million, with operating margin of 27.8% versus 26.0%. Net income increased 9% to $469.1 million; diluted EPS rose 11% to $5.65.
- Cash flow: Operating cash flow was $560.3 million, up from $511.6 million. Capital expenditures and capitalized software were $100.0 million; operating cash flow less these expenditures was approximately $460 million.
- Cash, investments and liquidity: Cash, cash equivalents and investments totaled $2.399 billion at year-end. Working capital was $2.649 billion. The company had $428 million available under its committed revolving facility after letters of credit.
- Debt: Total debt was $1.668 billion, up from $1.463 billion in 2014. Cash and investments exceeded debt by approximately $731 million, although $2.346 billion of cash and investments was held by foreign subsidiaries and may face material tax effects if distributed to U.S. entities. Waters reported compliance with debt covenants.
- Capital returns: The company repurchased $327 million of shares in 2015 and had $441 million remaining authorized under its repurchase program. It reported no dividend and no immediate plan to pay one.
- Fourth quarter: Sales were $586.6 million versus $583.9 million in Q4 2014. Net income was $151.1 million versus $151.3 million; diluted EPS was $1.83 versus $1.80.
Changes versus the prior year
- Reported revenue growth slowed to 3% from 4% in 2014, largely reflecting a stronger U.S. dollar. U.S. sales rose 10% and China sales rose 17%; Europe declined 8% and Japan declined 11%.
- Operating income improved despite an estimated $56 million adverse foreign-exchange impact. Lower selling and administrative expenses helped; R&D spending rose 10% to $118.5 million.
- Effective tax rate rose to 13.4% from 12.0%. The 2013 comparison is affected by a $31 million net tax benefit from resolved audits, which contributed to that year’s higher net income.
- Waters Division sales increased 2% to $1.807 billion; TA Division sales increased 4% to $235.5 million. Service and chemistry revenue continued to benefit from the installed base, though recurring revenues grew more slowly than in 2014.
Outlook, commentary and notable items
- Management gave no specific numerical 2016 revenue or earnings guidance in the supplied filing text. It expected foreign-currency translation to weigh on 2016 sales growth and gross profit at then-current exchange rates.
- Management cited strong 2015 demand in life science, industrial chemical, nutritional safety and environmental markets, with double-digit growth in the U.S., China and India. Governmental and academic sales fell 5%.
- Key risks include currency movements, global economic and customer capital-spending uncertainty, competition and new-product acceptance, regulatory requirements, supply-chain or manufacturing interruptions, cybersecurity, intellectual-property disputes, and the concentration of cash overseas. Pharmaceutical and biotechnology customers accounted for 54% of sales; no single customer exceeded 2%.
- Unusual charges included $4 million of litigation provisions and $4 million of acquired in-process R&D charges in 2015. The company also reported $3 million of severance costs. It expects additional commercialization spending for acquired mass-spectrometry technologies; milestone payments of up to $12 million plus future royalties may be due if specified conditions are met.
- Waters appealed a $0.4 million EPA fine relating to its Taunton facility and was working on remediation; estimated related capital expenditures were under $2 million. Management considered these amounts immaterial. The company stated that other litigation outcomes were not expected to be material.
- The 2015 results include a $3 million tax benefit from completed tax audits. Management expected about $5 million of additional reductions in uncertain tax benefits within 12 months. The Singapore contractual 0% tax rate was extended through March 2021, subject to milestones management expected to meet.
- PricewaterhouseCoopers gave an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective at year-end.
Important facts for investors to verify
- How much of future reported growth and margin performance is likely to be affected by foreign exchange, given the 2015 sales and operating-income impacts and the company’s international exposure?
- Whether growth in instrument systems and recurring service and consumables revenue is sustaining after the slower 2015 growth rate.
- How effectively Waters can fund U.S. operations, debt service and buybacks when most cash and investments are held abroad, and what tax costs repatriation could entail.
- Debt maturities, borrowing needs and covenant headroom, particularly against the $1.145 billion debt amount scheduled for 2020 in the contractual-obligations table.
- Progress and costs in commercializing acquired technologies, including potential milestone payments and royalties, and the resolution of the EPA matter and other litigation.