Waters Corporation (WAT) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. Waters sells analytical instruments, consumables, software and services, principally for pharmaceutical, industrial, academic and government laboratories. Its Waters and TA operating segments are combined into one reportable segment.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $2.407 billion | $2.420 billion | Down 1% |
| Operating income | $708 million | $740 million | Down 4% |
| Operating margin | 29.4% | 30.6% | Down 1.2 percentage points |
| Net income | $592 million | $594 million | Approximately flat |
| Diluted EPS | $8.69 | $7.65 | Up 14% |
| Cash from operations | $643 million | $604 million | Up 6% |
- Product sales fell 2% to $1.567 billion; service sales rose 3% to $839 million. Service revenue was about 35% of sales, supporting recurring revenue.
- Gross profit was approximately $1.396 billion, or a 58.0% gross margin, based on reported net sales and cost of sales.
- Fourth-quarter sales were $716 million versus $715 million in Q4 2018. Q4 net income was $201 million versus $185 million; diluted EPS was $3.12 versus $2.46.
- Capital expenditures and capitalized software were $164 million, up from $96 million. Cash flow from investing was $769 million, primarily reflecting investment maturities; cash used in financing was $1.873 billion.
- Year-end cash, cash equivalents and investments totaled $337 million. Total debt was $1.681 billion; approximately $1.173 billion remained available under the committed credit facility. Net debt was approximately $1.344 billion. The company reported compliance with debt covenants.
- Working capital was $721 million. Stockholders’ equity was a deficit of $216 million, primarily reflecting substantial share repurchases.
Changes and management commentary
- Reported sales declined partly because foreign currency translation reduced revenue by 2%. Instrument system sales fell 4%; recurring revenues, including services and precision chemistry consumables, grew 3%.
- Sales to pharmaceutical customers were flat; industrial sales declined 2%, while academic and government sales increased 2%. China sales declined 1%, Europe declined 4%, and total Asia increased 2%.
- Management attributed weaker instrument demand to macroeconomic uncertainty, Brexit-related uncertainty and policy changes affecting procurement and demand in China. Operating income also reflected lower sales volume, currency effects and $10 million of severance costs, partly offset by lower incentive compensation.
- EPS growth exceeded net-income growth in part because of a lower weighted-average share count following repurchases. The company repurchased 11.1 million shares for $2.5 billion in 2019; $1.7 billion remained authorized at year-end under the repurchase program.
- R&D expense was $143 million, essentially unchanged. Waters introduced new LC, MS and TA products during the year, including BioAccord, Cyclic IMS and SYNAPT XS systems.
Outlook, risks and unusual items
- The filing provides no specific 2020 revenue or earnings guidance. Management said current exchange rates could reduce 2020 sales and gross profit.
- In January 2020, the company announced a workforce reduction affecting 3% of employees and expected approximately $25 million of 2020 severance, lease termination and related costs. It also agreed to acquire Andrew Alliance for approximately $80 million; the acquisition was not expected to materially affect 2020 sales or expenses.
- Remaining estimated U.S. transition-tax liabilities under the 2017 Tax Act were $404 million; annual payments of approximately $38 million were expected over the next three years, with the final 60% due over a three-year period beginning in 2023.
- The 2019 effective tax rate was 12.7%. A Singapore tax holiday at a 0% contractual rate increased 2019 net income by $24 million, or $0.35 per diluted share; continued eligibility depends on meeting contractual milestones through March 2021.
- Key risks include foreign-exchange exposure, weak or delayed customer capital spending, competition and product-development execution, reliance on suppliers and manufacturing sites, cybersecurity, regulation and intellectual-property litigation. The filing also flags Brexit, trade-policy uncertainty and the coronavirus outbreak as potential sources of disruption.
- The company reported ordinary-course litigation and did not expect current matters, individually or collectively, to materially affect its financial position or results. The auditor issued an unqualified opinion and identified goodwill impairment testing as a critical audit matter; management and the auditor concluded internal control over financial reporting was effective.
Investor verification priorities
- Check whether instrument demand and regional trends improved after the 2019 declines, especially in China, Europe and industrial markets.
- Assess service and consumables growth, and whether recurring revenue continues to offset weaker instrument sales.
- Review debt maturities, borrowing availability, share repurchases and cash generation against the company’s substantial debt and negative stockholders’ equity.
- Verify progress on the Taunton manufacturing expansion, including remaining spending against the estimated $215 million project cost.
- Monitor Singapore tax-holiday milestone compliance and payments on the remaining transition-tax liability.
- Evaluate the actual costs and business effects of the 2020 workforce reduction and Andrew Alliance acquisition.