01—Abstract
Summary
Summary of the 10-K filed February 26, 2019. Cited figures are marked; the original filing is the authoritative source.
Waters Corporation (WAT) reported net sales of $2.42 billiona in 2018, up 5% from $2.31 billion in 2017, with operating income of $739.8 million, up 12% year over year.
Net income was $593.8 millionb, or $7.65 per diluted share, compared with $20.3 million, or $0.25 per diluted share, in 2017, which included a $550 million provision for the 2017 Tax Act. Growth was led by Asia, with China sales of $443.3 million up 15%, and by recurring revenues (consumables and services), which rose 8%. Pharmaceutical customers accounted for 56% of net sales, and the company reported no single customer above 2% of sales.
Cash generation and capital allocation were central themes. Net cash provided by operating activities was $604.4 millionc, reduced by $103 million of U.S. income tax payments related to the 2017 Tax Act and 2018 estimated taxes. The company used $850 million to reduce debt and repurchased $1,306 million of stock during 2018.
Its board authorized a new program in January 2019 to repurchase up to $4 billiond of common stock over two years, and the filing states the company plans to increase debt to approximately 2.5 times its net debt-to-EBITDA ratio to fund a significant portion of these repurchases. Total debt was $1.1 billion at December 31, 2018, against cash, cash equivalents and investments of $1.735 billion.
Risk factors highlighted in the filing include foreign currency exposure, with 72% of 2018 net sales generated outside the United States, the transition tax payable over eight years, a Singapore contractual 0% tax rate tied to milestones through March 2021, and dependence on pharmaceutical and governmental/academic funding cycles. Management also disclosed a December 2018 pension settlement charge of $46 million and a planned 1% workforce reduction in January 2019 with approximately $15 million of related costs expected in 2019.
02—Key points
Key Highlights
- Net sales rose 5% to $2.42 billion in 2018, with Waters sales up 4% to $2.14 billion and TA sales up 7% to $280.6 million.
- Operating income increased 12% to $739.8 million, a 30.6% operating margin, versus 28.7% in 2017.
- Net income was $593.8 million ($7.65 per diluted share) versus $20.3 million ($0.25) in 2017, which included a $550 million 2017 Tax Act provision.
- Recurring revenues (chemistry consumables and services) grew 8% in 2018, supported by a larger installed base.
- Operating cash flow was $604.4 million, reduced by $103 million of U.S. tax payments; the company repaid $850 million of debt.
- Board authorized a new $4 billion share repurchase program in January 2019 over two years, and the company plans to increase debt to about 2.5 times net debt-to-EBITDA to fund a significant portion of it.
- Total debt was $1.15 billion at year-end 2018 against $1.735 billion of cash, cash equivalents and investments.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Waters kept $0.25.
- Revenue$2.42B100.0%
- Cost of revenue−$992.6M41.0%
- Gross profit$1.43B59.0%
- Operating costs−$687.6M28.4%
- Operating income$739.8M30.6%
- Interest, other & tax−$146.0M6.0%
- Net income$593.8M24.5%
Where FY2018 revenue went
$2.42B- Cost of revenue: $992.6M, 41% of revenue
- Net income: $593.8M, 25% of revenue
- SG&A: $536.9M, 22% of revenue
- R&D: $143.4M, 5.9% of revenue
- Interest, other & tax: $146.0M, 6.0% of revenue
Kept 25% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 26, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $2.42B$2.31B | +4.8% |
| Cost of Revenue | $992.56M$947.07M | +4.8% |
| Gross Profit | $1.43B$1.36B | +4.8% |
| R&D Expenses | $143.40M$132.59M | +8.2% |
| SG&A Expenses | $536.90M$544.36M | −1.4% |
| Operating Expenses | $1.68B$1.65B | +2.0% |
| Operating Income | $739.77M$662.20M | +11.7% |
| Interest Expense | $48.64M$56.84M | −14.4% |
| Net Income | $593.79M$20.31M | +2823.5% |
| EPS (Basic) | $7.71$0.25 | +2984.0% |
| EPS (Diluted) | $7.65$0.25 | +2960.0% |
| Shares Outstanding (Basic) | 76.99M79.79M | −3.5% |
| Shares Outstanding (Diluted) | 77.62M80.60M | −3.7% |
05—Questions
Frequently Asked Questions
How did Waters perform financially in 2018?
Net sales were $2.42 billion, up 5% from $2.31 billion in 2017. Operating income was $739.8 million, up 12%, and net income was $593.8 million, or $7.65 per diluted share. Results benefited from higher sales volume and the absence of about $33 million of 2017 facility closure, litigation and intellectual property charges.
Why was 2017 net income so low compared with 2018?
2017 net income was $20.3 million because the provision for income taxes included a $550 million estimate for the impact of the 2017 Tax Act, which reduced net income per diluted share by $6.82.
What is the company's capital allocation plan?
In January 2019 the board authorized repurchases of up to $4 billion of common stock over two years, replacing the remaining $3 billion April 2018 authorization. The company plans to fund a significant portion of these repurchases with existing cash, cash flow and increased debt, targeting approximately 2.5 times its net debt-to-EBITDA ratio.
What are the main risks to the business?
The filing cites foreign currency exposure, with 72% of 2018 net sales outside the United States; dependence on pharmaceutical customers, which represented 56% of net sales; reliance on capital spending and government or academic funding; competitive pressure; and the Singapore 0% contractual tax rate, which depends on meeting milestones through March 2021 and would otherwise be reversed back to April 1, 2016.
How much is the company's debt and how is it being managed?
Total debt was $1.15 billion at December 31, 2018, including $560 million of senior unsecured notes and $590 million under the credit agreement. The company reduced debt by $850 million in 2018 using repatriated cash, had $1.208 billion available to borrow, and reported it was in compliance with all debt covenants.
06—Continue