Waters Corporation — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; comparisons are primarily with FY 2009. The filing also reports fourth-quarter results. Waters designs, manufactures, sells and services analytical instruments, consumables and related services, principally in liquid chromatography/mass spectrometry and thermal analysis. Its two operating divisions are aggregated into one reportable segment.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Net sales | $1.643 billion | $1.499 billion | +10% |
| Gross profit / margin | $990 million / 60.2% | $904 million / 60.3% | Margin down 0.1 percentage point |
| Operating income / margin | $450 million / 27.4% | $395 million / 26.3% | Operating income +14% |
| Net income | $382 million | $323 million | +18% |
| Diluted EPS | $4.06 | $3.34 | +22% |
| Operating cash flow | $458 million | $418 million | +$40 million |
| Capital expenditures and capitalized software | $63 million | $94 million | Down $31 million |
FY 2010 product sales rose 11% to $1.167 billion and service sales rose 7% to $477 million. Instrument-system sales increased 12% overall; chemistry consumables and services together increased 7%. Cash, cash equivalents and short-term investments totaled $946 million at year-end, compared with total debt of $766 million, or approximately $180 million of net cash on that basis. Current assets were $1.587 billion and current liabilities $386 million.
Fourth-quarter sales were $484 million versus $429 million in Q4 2009; net income was $127 million versus $104 million, and diluted EPS was $1.36 versus $1.08. The filing notes that customer capital-goods purchasing often lifts fourth-quarter sales.
Material changes versus the prior period
- Sales recovered from the 5% decline in 2009, when recession-related customer spending cuts weighed on instrument demand. In 2010, improved economic conditions, new product introductions and stronger pharmaceutical and industrial spending supported growth.
- Waters Division sales increased 9%; TA Division sales increased 17%. Asia (including Japan) grew 21%, the U.S. 9%, and the rest of the world 13%; Europe was flat.
- Gross margin was nearly unchanged. Higher volume and manufacturing cost reductions were partly offset by product mix and foreign-exchange effects.
- The effective tax rate fell to 12.8% from 16.4%, including $10 million of 2010 tax benefits tied to a U.K. audit settlement and a pre-acquisition tax matter. Higher earnings in lower-tax jurisdictions also contributed.
- Debt rose to $766 million from $632 million. The company issued $200 million of senior notes in 2010 and repurchased $292 million of its shares. Weighted-average diluted shares declined, supporting per-share growth.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management expects to refinance the $555 million outstanding under its 2007 Credit Agreement, which expires in January 2012; refinancing terms and availability are not assured. The $500 million term-loan portion became a current liability in January 2011.
- Management said cash, expected operating cash flow and committed borrowing capacity should fund debt service, working capital, capital spending, repurchases, potential acquisitions and litigation needs for at least the next 12 months.
- The company expects $70 million to $90 million of capital expenditures over the next few years for a U.K. facility to consolidate manufacturing locations. It also expects $3 million to $5 million of defined-benefit-plan contributions in 2011.
- Risks include exposure to global economic conditions and customer capital budgets; competition and rapid technological change; foreign currency movements; reliance on some limited-source suppliers and outside manufacturers; regulatory and environmental requirements; and debt refinancing, covenants and the concentration of much of its cash overseas. About 70% of 2010 sales were outside the U.S., and 52% were to pharmaceutical and biotechnology customers.
- Patent litigation with Agilent remained ongoing in France and Germany. A $7 million provision had been recorded for the French matter, and a $6 million payment was made in 2009; the company appealed the French judgment. No provision was recorded for the German matter, which management did not expect to be material if the plaintiff prevailed.
- A 2010 correction of prior-period incentive-plan and other accrual balances reduced selling and administrative expense; management said it was not material and did not restate prior periods. The filing also describes 2008 out-of-period software-amortization and tax adjustments that increased 2008 net income by $8 million.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2010.
Investor verification priorities
- Confirm the refinancing outcome and terms for the 2007 Credit Agreement, including treatment of the $555 million balance and covenant compliance.
- Assess whether the $946 million of cash and short-term investments is practically available for U.S. obligations: approximately $1.7 billion of foreign subsidiary earnings was intended to remain permanently reinvested abroad.
- Track execution, timing and total cost of the planned U.K. facility and the stated $70 million to $90 million investment range.
- Evaluate earnings quality and sustainability, including the effect of the $10 million of 2010 tax benefits, share repurchases and continued fourth-quarter seasonality.
- Monitor Agilent patent litigation, tax positions (including $72 million of unrecognized tax benefits), foreign-exchange exposure and the planned additional $500 million share-repurchase authorization.