Waters Corporation — Q2 2011 Form 10-Q
Business context and reporting period. Waters designs, manufactures, sells, and services analytical instruments and related consumables and software, including liquid chromatography, mass spectrometry, and thermal analysis products. The unaudited quarter ended July 2, 2011; comparisons are with the quarter ended July 3, 2010. Six-month results are compared with the six months ended July 3, 2010. Dollar figures below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $447.6 | $391.1 | $875.2 | $758.8 |
| Gross profit / margin | $271.5 / 60.7% | $235.9 / 60.3% | $529.3 / 60.5% | $457.7 / 60.3% |
| Operating income / margin | $120.6 / 26.9% | $105.6 / 27.0% | $236.5 / 27.0% | $197.9 / 26.1% |
| Net income | $100.1 | $84.9 | $194.6 | $160.4 |
| Diluted EPS | $1.07 | $0.90 | $2.09 | $1.69 |
| Operating cash flow | Not separately reported for quarter | $220.0 | $214.8 |
- Quarterly sales grew 14%; six-month sales grew 15%. Product sales rose 15% and 17%, respectively; service sales rose 14% and 11%.
- Gross margin improved modestly, attributed to manufacturing cost reductions, fixed-cost leverage, and favorable currency translation. Six-month operating margin also increased, while quarterly operating margin was slightly lower.
- Six-month capital spending, including capitalized software, was $35.3 million versus $21.2 million. Approximate operating cash flow less this spending was $184.7 million, compared with $193.6 million in 2010.
- At July 2, cash and cash equivalents were $344.9 million and short-term investments were $776.8 million, totaling $1.122 billion. Total debt was $836.2 million, including $136.2 million of current notes and debt and $700.0 million of long-term debt.
- Inventory increased to $243.2 million from $204.3 million at year-end 2010. Total current assets were $1.800 billion and current liabilities $467.3 million.
Material changes versus prior comparable periods
- Revenue growth reflected increased customer spending and uptake of the ACQUITY UPLC H-Class, Xevo Q-Tof, and Xevo TQ-S systems. Instrument system sales grew 14% in the quarter and 18% in the six-month period; chemistry consumables and services also increased.
- Growth was broad geographically, led by Asia and Europe; U.S. sales increased 2% in the quarter and 5% over six months. Foreign currency translation contributed 6% to quarterly sales growth and 4% to six-month growth.
- Operating income increased 14% for the quarter and 19% for the six-month period. Net income rose 18% and 21%, respectively. Diluted EPS benefited from higher earnings and lower weighted-average share counts.
- Quarterly selling and administrative expense grew 17%, faster than sales, reflecting headcount, compensation, currency effects, and comparison with a prior-year accrual correction. Six-month operating cash flow increased only modestly despite higher net income, partly reflecting working-capital timing and incentive-plan payments.
- Debt increased by $70.1 million from December 31, 2010. The company issued $200 million of senior notes in March at fixed rates of 2.50% to 3.97%, with maturities from 2016 to 2021; weighted-average borrowing rates increased.
Outlook, management commentary, risks, and unusual items
- Management provided no specific revenue or earnings guidance. It said cash, short-term investments, expected operating cash flow, and committed borrowing capacity should be sufficient for at least the next 12 months to fund debt service, operations, capital spending, authorized repurchases, potential acquisitions, and possible litigation outcomes.
- On July 28, 2011, after quarter-end, Waters entered a new credit agreement providing a $700 million revolving facility and a $300 million term loan, both maturing in 2016. The company used the new financing to repay amounts under the prior credit agreement, which it terminated early without penalty. The filing describes this as a subsequent event, not quarter-end cash or debt activity.
- On July 18, 2011, Waters acquired Anter Corporation’s net assets for $11 million cash. Anter is expected to add about $6 million in annual sales and initially be neutral to EPS.
- Management cited planned product and software launches in 2012 and subsequent years; related software amortization is expected to contribute to higher annual amortization, estimated at about $40 million in 2012–2013 and $45 million annually in 2014–2016. New product mix and amortization may affect gross margins.
- Risks include uncertain customer capital spending and economic conditions, competition and product acceptance, foreign-exchange movements, regulatory requirements, intellectual-property litigation, tax examinations and rate changes, and possible lower demand from Japanese customers following the 2011 disasters. The company reported no material change in legal proceedings and believed existing litigation outcomes would not materially affect results.
- The six-month effective tax rate was 15.0%, versus 16.6% a year earlier; the 2011 period included a $2 million benefit from reversal of U.K. audit-related interest reserves. Management noted that Ireland’s statutory tax rate rose to 12.5% from the historical 10% contractual rate, which may increase future taxes.
- Waters repurchased $148 million of shares during the six months, including $98 million under a new $500 million, two-year authorization. The company stated it did not pay dividends and did not plan to do so in the foreseeable future.
- The filing notes an immaterial correction in 2010 for overstated incentive-plan and other accruals, reducing prior-year selling and administrative expense. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether growth in new instruments and key regions continues, and how much reported growth depends on foreign-exchange translation.
- Whether higher inventories, order backlog, receivables, and working-capital movements convert into sustained cash generation.
- Debt balances and classification following the July 28 refinancing, along with borrowing costs and covenant headroom; the filing states the company was compliant with covenants at July 2.
- Execution and sales contribution from the Anter acquisition and planned product launches, including the effect of software amortization on margins.
- Future effective tax rates, including the Ireland rate change and resolution of uncertain tax positions, as well as any material developments in litigation or Japan-related demand.