01—Abstract
Summary
Summary of the 10-K filed March 6, 2006. Cited figures are marked; the original filing is the authoritative source.
Waters Corporation's 10-K for fiscal 2005 reports net sales of $1,158.2 milliona, up 5% from $1,104.5 million in 2004, with product sales up $27.9 million or 3% and service sales up $25.8 million or 9%.
Net income fell to $201.975 millionb from $224.053 million, and diluted EPS was $1.74 versus $1.82. Management attributed the sales growth to the ACQUITY UPLC system, new mass spectrometry and columns, and growth outside the U.S., while sales to large U.S. pharmaceutical customers weakened. Operating income was $283.2 million versus $284.9 million, held down by a $24.0 million one-time tax charge tied to the $500.0 million repatriation under the American Jobs Creation Act, and by a $3.1 million Hewlett-Packard litigation provision.
Excluding the repatriation charge, the effective tax rate was 17.7%. Cash flow from operations rose to $298.1 millionc from $259.4 million, aided by improved days sales outstanding (70 days versus 76). Waters repurchased 15.4 million shares for $659.3 million in 2005.
Total borrowings reached $810.0 milliond at year-end, with $500.0 million classified as long-term, compared with $440.0 million at the end of 2004. Cash and equivalents stood at $493.6 million. The company expects a one-time restructuring charge of $5.0 million to $7.0 million in 2006 and a negative impact of $0.21 to $0.24 per diluted share from adopting SFAS 123(R) in 2006.
The filing also describes ongoing HP patent litigation, which was settled in February 2006 for 3.5 million British pounds, and a $500.0 million share repurchase authorization, of which $283.9 million remained available at year-end. The company does not pay dividends.
02—Key points
Key Highlights
- Net sales rose 5% to $1,158.2 million in 2005; Waters Division LC sales grew about 6% in constant currency and TA sales grew about 9%.
- Net income declined to $201.975 million ($1.74 diluted EPS) from $224.053 million ($1.82) because of a $24.0 million tax charge on the $500.0 million AJCA repatriation.
- Operating cash flow increased to $298.1 million from $259.4 million, helped by DSO improving to 70 days from 76 days.
- Share repurchases totaled $659.3 million for 15.4 million shares in 2005; $283.9 million remained under the $500.0 million program at year-end.
- Total debt rose to $810.0 million at December 31, 2005 from $440.0 million, mainly to fund buybacks.
- U.S. pharmaceutical demand weakened, with U.S. MS sales down 6%, while sales to non-U.S. pharmaceutical customers rose 8%.
- Sales outlook for 2006 includes a $5.0 million to $7.0 million restructuring charge and a $0.21 to $0.24 per-share SFAS 123(R) impact.
03—Questions
Frequently Asked Questions
Why did net income decline in 2005 even though sales grew?
Net income fell to $201.975 million from $224.053 million mainly because of a $24.0 million income tax charge tied to the repatriation of $500.0 million of foreign earnings under the American Jobs Creation Act. Operating income was roughly flat at $283.2 million versus $284.9 million, and the effective tax rate rose to 26.4% from 21.6%.
What drove sales growth in 2005?
Product sales increased $27.9 million (3%) and service sales increased $25.8 million (9%). Growth came mainly from the full-year sales of the ACQUITY UPLC system, chromatography columns and consumables, the Quattro Premier XE and Q-Tof Premier mass spectrometers, and service plans on a larger installed base. Sales to non-U.S. pharmaceutical customers rose 8%, while U.S. pharmaceutical demand was weak.
How is Waters managing its capital and debt?
Waters repurchased $659.3 million of stock in 2005 and total borrowings rose to $810.0 million, with $500.0 million classified as long-term. The company said its cash of $493.6 million and expected operating cash flow, together with committed credit facilities, would be sufficient for at least the next twelve months. Waters does not pay dividends.
What are the main 2006 expense headwinds the company disclosed?
Waters expects a one-time restructuring charge of $5.0 million to $7.0 million, tied to cost reductions of about 70 positions and the closure of a Netherlands sales office. It also expects SFAS 123(R) stock option expensing to reduce diluted EPS by approximately $0.21 to $0.24, and expects gross margin to decline slightly.
What litigation did Waters resolve, and what remains open?
In February 2006, Waters settled the first Hewlett-Packard/Agilent patent action by paying 3.5 million British pounds, and the Company recorded a $3.1 million litigation provision in 2005. Other HP-related actions in France and Germany remain pending, as do Cohesive Technologies claims, which the company says will not be material.
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