WAT

Waters Corporation (WAT) - Q3 2003 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, and the nine-month period ended on the same date. Waters Corporation is a manufacturer of analytical instruments, primarily High Performance Liquid Chromatography (HPLC) and Mass Spectrometry (MS) systems, as well as thermal analysis and rheology instruments. During the quarter, the Company completed the integration of its Micromass division into the Waters Division, resulting in a single reporting segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 7% in Q3 and 8% year-to-date (YTD). Currency translation contributed 5% to Q3 growth and 7% to YTD growth. Organic growth was driven by chemistry (12% Q3) and service (14% Q3), offset by a decline in instrument sales (-2% Q3).
• Acquisitions: The Company acquired Creon Lab Control (July 2003) and Rheometric Scientific's rheology business (Jan 2003). These contributed to sales growth but resulted in a $5.2 million charge for expensed in-process research and development (IPR&D) related to Creon.
• Divestiture: The Company sold its inorganic mass spectrometry product line, recording a $5.0 million loss on disposal.
• Litigation Settlements: The Company paid $53.7 million in April 2003 to settle the Applera patent litigation (damages and interest). Additionally, a $5.9 million civil penalty was paid in July 2003 to settle an environmental matter with the Commonwealth of Massachusetts.
• Debt Increase: Current debt increased from $2.7 million to $181.1 million, primarily due to borrowings under a $250 million credit facility to fund a stock repurchase program.
• Stock Repurchases: The Company repurchased 9.6 million shares for $251.8 million during the first nine months of 2003, completing a $200 million program and initiating a new $400 million authorization.

Guidance, Outlook, and Risks

• Outlook: Management expects cash flow from operations and available credit facilities to be sufficient to fund working capital, capital spending, and the remaining authorized share repurchases for at least the next 12 months.
• Restructuring: Ongoing integration of Micromass and HPLC operations is expected to yield approximately $6 million in annual cost savings, with $1.5 million per quarter realized starting in Q2 2003.
• Legal Risks:
  • Applera: While the U.S. judgment was settled, similar claims exist in Japan and Canada, and the outcome remains uncertain.
  • European Litigation: On October 31, 2003 (post-period), MDS/Applied Biosystems filed a new suit in the UK alleging infringement of a European patent regarding mass spectrometry products.
  • Perkin-Elmer: A jury awarded Waters $13.3 million in damages; however, the counterclaim regarding Waters' non-infringement of a Perkin-Elmer patent is on appeal.
• Market Risks: Sales in Europe remain weak, while Asia continues to grow strongly. Mass spectrometry sales declined 10% (excluding the divestiture) due to market weakness in Europe and Japan.

Investor Verification Checklist

• Debt Utilization: Verify the impact of the $181 million debt load on future interest expenses and liquidity, noting the intent to expand the credit facility by $125 million in Q4 2003.
• Acquisition Integration: Monitor the realization of the projected $6 million annual cost savings from the Micromass/HPLC integration.
• Legal Exposure: Track the status of the new UK patent litigation filed in October 2003 and the appeal of the Perkin-Elmer counterclaim.
• Product Mix: Assess the sustainability of growth in consumables and services versus the decline in instrument sales, particularly in the mass spectrometry segment.
• Share Count: Confirm the reduction in outstanding shares due to the aggressive buyback program and its effect on future EPS.