01—Abstract
Summary
Summary of the 10-K filed February 27, 2018. Cited figures are marked; the original filing is the authoritative source.
Waters Corporation (WAT) is a specialty measurement company whose products serve life, materials and food sciences, centered on liquid chromatography (HPLC/UPLC), mass spectrometry (LC-MS) and thermal analysis through its Waters and TA operating segments.
Net sales for 2017 were $2,309,078 thousanda, up 7% from $2,167,423 thousand in 2016, with growth balanced across customer and product classes. Operating income rose 6% to $661,858 thousand, but net income fell sharply to $20,311 thousand (diluted EPS of $0.25) from $521,503 thousand, because of a $550 million estimated provision for the 2017 Tax Act, which reduced net income per share by $6.82. Excluding that charge, the filing states an effective tax rate of 11.0%.
The balance sheet remained strong, with $3,394 millionb in cash, cash equivalents and investments against $1,998 million in debt at December 31, 2017, and $3,326 million of that cash held by foreign subsidiaries. The Transition Tax will be paid over eight years starting in 2018. The company expects to use about $1 billion of repatriated cash in 2018 to reduce debt and repurchase common stock, and its board approved a $215 million chemistry manufacturing expansion in February 2018.
Management also notes that the company's sales to pharmaceutical customers represented 56%c of 2017 sales, and that the company expects its effective tax rate to rise by one to three percentage points going forward. Risk factors highlighted by the filing include international exposure (71% of 2017 net sales were outside the United States), competition, reliance on certain single-source suppliers, cybersecurity, and the uncertainty of the provisional tax estimates, which the company says may be revised within the measurement period.
02—Key points
Key Highlights
- Net sales rose 7% to $2,309,078 thousand in 2017, with Waters product sales up 6% and TA sales up 9%.
- Operating income increased 6% to $661,858 thousand, with operating margin of 28.7% of sales.
- Net income fell to $20,311 thousand ($0.25 per diluted share) from $521,503 thousand, due to a $550 million provision for the 2017 Tax Act.
- Cash, cash equivalents and investments totaled $3,394 million at year end, against $1,998 million of total debt.
- The company plans to use about $1 billion of repatriated cash in 2018 to reduce debt and repurchase shares; $800 million remains authorized under the May 2017 program.
- A new $215 million precision chemistry manufacturing facility was approved in February 2018, to be paid for with existing cash and investments.
- Approximately 71% of 2017 net sales were outside the United States, and 56% were to pharmaceutical accounts.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Waters kept $0.01.
- Revenue$2.31B100.0%
- Cost of revenue−$947.1M41.0%
- Gross profit$1.36B59.0%
- Operating costs−$699.8M30.3%
- Operating income$662.2M28.7%
- Interest, other & tax−$641.9M27.8%
- Net income$20.3M0.9%
Where FY2017 revenue went
$2.31B- Cost of revenue: $947.1M, 41% of revenue
- Interest, other & tax: $641.9M, 28% of revenue
- SG&A: $544.4M, 24% of revenue
- Net income: $20.3M, 0.9% of revenue
- R&D: $132.6M, 5.7% of revenue
- Other operating costs: $22.9M, 1.0% of revenue
Kept 0.9% as net incomeNet income $20.3M · 0.9%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 27, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $2.31B$2.17B | +6.5% |
| Cost of Revenue | $947.07M$891.45M | +6.2% |
| Gross Profit | $1.36B$1.28B | +6.7% |
| R&D Expenses | $132.59M$125.19M | +5.9% |
| SG&A Expenses | $544.36M$512.33M | +6.3% |
| Operating Expenses | $1.65B$1.54B | +6.8% |
| Operating Income | $662.20M$625.04M | +5.9% |
| Interest Expense | $56.84M$44.91M | +26.6% |
| Net Income | $20.31M$521.50M | −96.1% |
| EPS (Basic) | $0.25$6.46 | −96.1% |
| EPS (Diluted) | $0.25$6.41 | −96.1% |
| Shares Outstanding (Basic) | 79.79M80.79M | −1.2% |
| Shares Outstanding (Diluted) | 80.60M81.42M | −1.0% |
05—Questions
Frequently Asked Questions
Why did net income drop so sharply in 2017?
The provision for income taxes was $620,786 thousand, including a $550 million estimated provision for the 2017 Tax Act. That charge reduced net income per share by $6.82, and the filing reports an effective tax rate of 96.8%, or 11.0% excluding the Tax Act impact.
How will the Tax Act affect future cash flows?
The Transition Tax of about $550 million is payable over eight years starting in 2018 without interest, with roughly $40 million per year in federal payments and about $40 million in state and withholding taxes expected in 2018. The company also expects its future effective tax rate to rise by one to three percentage points.
What is the company's capital allocation plan?
The company expects to deploy about $1 billion of repatriated cash during 2018 to reduce debt and repurchase common stock. It also has $800 million of remaining authorized repurchase capacity under the May 2017 program and a $1.5 billion revolving facility plus a $300 million term loan maturing in 2022.
What are the main risks to the business?
The filing cites international operations and currency exposure, competition from larger diversified rivals, dependence on pharmaceutical customers (56% of sales), reliance on limited or single-source suppliers, cybersecurity and data protection, and product quality and regulatory compliance.
06—Continue