Waters Corporation (WAT) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2023; comparisons are with the periods ended July 2, 2022. Waters sells and services analytical instruments, consumables, and related software, including chromatography, mass spectrometry, and thermal analysis products.
Financial highlights
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $740.6 million | $714.3 million | $1,425.3 million | $1,404.9 million |
| Operating income | $199.9 million | $199.6 million | $374.0 million | $395.1 million |
| Operating margin | 27.0% | 27.9% | 26.2% | 28.1% |
| Net income | $150.6 million | $164.9 million | $291.5 million | $324.7 million |
| Diluted EPS | $2.55 | $2.72 | $4.95 | $5.35 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $214.9 million | $254.9 million |
Q2 sales rose 4% (product sales +2%; service sales +7%). First-half sales rose 1%. Derived gross margin was approximately 59.3% in Q2 versus 57.0% and 58.9% for the first half versus 57.8%. Higher selling and administrative expenses, compensation and headcount costs, acquisition-related expenses, and interest expense pressured earnings. Q2 net income fell 9% and diluted EPS fell 6%; first-half net income fell 10% and diluted EPS fell 7%.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $329.7 million at July 1, 2023, down from $480.5 million at year-end 2022; cash, cash equivalents, and investments totaled about $331 million.
- Total debt was $2.63 billion, compared with $1.57 billion at December 31, 2022. Debt increased primarily to finance the Wyatt acquisition. The weighted-average debt interest rate was 4.68%, versus 3.54% at year-end.
- The amended revolving facility has $2.0 billion of capacity, with $1.325 billion outstanding and approximately $0.7 billion available after letters of credit. Waters reported compliance with debt covenants.
- First-half operating cash flow was $214.9 million; investing cash outflow was $1.37 billion, including $1.286 billion net cash paid for Wyatt; financing provided $999.0 million. Capital expenditures and software capitalization were $81.0 million.
- Current assets were $1.68 billion and current liabilities $809.4 million. Inventory increased to $536.8 million from $455.7 million at year-end.
Material changes and management commentary
- Waters acquired Wyatt Technology on May 16, 2023, for $1.3 billion in cash, funded with cash and revolving-credit borrowings. Wyatt contributed $16 million of sales and a $3 million operating loss from acquisition through quarter-end. Preliminary purchase accounting included $879 million of goodwill and $418 million of identifiable intangible assets.
- China sales declined 17% in Q2 and 11% in the first half, primarily reflecting weaker instrument demand from pharmaceutical customers. Excluding China, sales grew 9% in Q2 and 4% in the first half. Q2 sales increased 12% in the U.S. and 13% in Europe.
- Recurring revenue—consumables and services—grew 6% in Q2 and 5% in the first half. Pharmaceutical sales declined 2% in Q2 and 5% in the first half; academic and government sales increased 23% and 30%, respectively.
- Management expected foreign-currency translation to be neutral to sales for the remainder of 2023. It estimated full-year 2023 interest expense of approximately $80 million. No full-year sales or EPS guidance is provided in the supplied filing text.
- Waters temporarily suspended share repurchases following the Wyatt acquisition. In July, it announced a workforce reduction affecting approximately 5% of employees, with about $30 million of expected severance costs in Q3 2023 and estimated annual savings of $45 million.
- The company expects to spend approximately $11 million more in 2023 to complete its U.S. precision-chemistry facility expansion. It does not currently plan to pay dividends.
Risks, contingencies, and unusual items
- Risks include demand weakness and customer budget timing, particularly in China and pharmaceutical markets; foreign-exchange movements; inflation and interest rates; debt service and liquidity; acquisition integration; competition and technology change; supply disruptions; regulation; cybersecurity; and tax and litigation matters.
- Management reported no material changes to previously disclosed risk factors, no debt-covenant violations, and no need for interim goodwill or long-lived-asset impairment testing. It reported no material change in ordinary-course litigation and believed current litigation outcomes would not be material.
- Gross unrecognized tax benefits were $30 million. Waters expected an $18 million reduction in unrecognized tax benefits and related interest and penalties within the next 12 months, subject to settlements and statute expirations.
- Standard indemnification agreements can have unlimited maximum potential payments, though management considered their estimated fair value immaterial based on historically minimal costs. The filing reports no material off-balance-sheet financing arrangements.
Investor verification priorities
- Track China and pharmaceutical instrument demand, customer capital-budget timing, and whether service and consumables growth offsets instrument weakness.
- Assess Wyatt integration, realized growth and cost synergies, final purchase-price allocation, and the effect of acquired intangibles and goodwill.
- Monitor debt, borrowing costs, covenant headroom, cash generation, and the timing or resumption of share repurchases.
- Compare the announced workforce savings with Q3 severance costs and subsequent operating expenses.
- Verify full-year sales, EPS, and cash-flow guidance when available; this filing provides an interest-expense estimate but no clear sales or EPS outlook.