Waters Corporation (NYSE: WAT) Reports Second Quarter 2017 Financial Results

Waters Corporation (NYSE: WAT) reported second quarter 2017 sales of $558 million, a 4% increase versus sales of $537 million in the second quarter of 2016. Foreign currency translation reduced sales growth by approximately 1% in the quarter. On a GAAP basis, diluted earnings per share (EPS) for the second quarter was up 4% to $1.63 compared to $1.57 for the second quarter of 2016. On a non-GAAP basis, including the adjustments in the attached reconciliation, EPS increased 11% to $1.76 from $1.58 in the second quarter of 2016. A description and reconciliation of GAAP to non-GAAP EPS is attached and can be found on the Company's website at http://www.waters.com under the caption "Investors."

Through the first half of 2017, sales for the Company were $1,056 million, up 4% compared with sales of $1,012 million in the first half of 2016. Foreign currency translation reduced sales growth by approximately 2% during the first half of 2017. On a GAAP basis, EPS for the first half of 2017 was up 8% to $2.94 compared to $2.72 for the first half of 2016. On a non-GAAP basis and including adjustments in the attached reconciliation, EPS increased 13% to $3.22 in 2017 as compared to $2.85 for the first half of 2016.

Commenting on the Company's performance, Christopher J. O'Connell, President and Chief Executive Officer said, "We are pleased with our performance in the second quarter, highlighted by balanced growth across our major customer end markets and product lines, along with continued strength in Asia and Europe. In addition, meaningful operating leverage drove strong adjusted earnings growth in the quarter and year to date."

Unless otherwise noted, sales growth percentages are presented on an as reported basis and are the same as the sales growth percentages presented on a constant currency basis, each of which are detailed in the attached reconciliation of sales growth rates to constant currency growth rates.

Results from the Company's markets in the quarter were highlighted by 3% sales growth (4% in constant currency) from the broadly defined pharmaceutical market, 5% sales growth (7% in constant currency) from the industrial market and 7% sales growth (5% in constant currency) from governmental and academic markets. For the first half of 2017, sales to the pharmaceutical market grew 5% (6% in constant currency), sales to the industrial market grew 5% (8% in constant currency), and sales to the governmental and academic market fell 1% (3% in constant currency).

The Company's recurring revenues, the combination of service and chemistry consumables, posted 5% sales growth (7% in constant currency), while instrument system sales grew 3% (4% in constant currency) in the quarter. For the first half of 2017, the Company's recurring revenues grew 4% (6% in constant currency), while instrument system sales grew by 4% (5% in constant currency).

Geographically, sales during the quarter grew 13% in Asia (14% in constant currency) and 2% in Europe (5% in constant currency), and declined 3% in the Americas. For the first half of 2017, sales grew 14% in Asia and 2% in Europe (7% in constant currency), and declined 3% in the Americas.

As communicated in a prior press release, Waters Corporation will webcast its second quarter 2017 financial results conference call this morning, July 25, 2017 at 8:00 a.m. eastern time. To listen to the call, connect to www.waters.com, choose "Investors" and click on the "Live Webcast." A replay will be available through August 1, 2017 at midnight eastern time, similarly by webcast and also by phone at 203-369-0511.

About Waters Corporation

Waters Corporation (NYSE: WAT), the world's leading specialty measurement company, has pioneered chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for nearly 60 years. With approximately 7,000 employees worldwide, Waters operates directly in 31 countries, including 15 manufacturing facilities, and with products available in more than 100 countries.

Non-GAAP Financial Measures

This press release contains financial measures, such as constant currency growth rate, adjusted operating income, adjusted net income and adjusted earnings per diluted share, among others, which are considered "non-GAAP" financial measures under applicable U.S. Securities and Exchange Commission rules and regulations. These non-GAAP financial measures should be considered supplemental to and not a substitute for financial information prepared in accordance with generally accepted accounting principles (GAAP). The Company's definition of these non-GAAP measures may differ from similarly titled measures used by others. The non-GAAP financial measures used in this press release adjust for specified items that can be highly variable or difficult to predict. The Company generally uses these non-GAAP financial measures to facilitate management's financial and operational decision-making, including evaluation of Waters Corporation's historical operating results, comparison to competitors' operating results and determination of management incentive compensation. These non-GAAP financial measures reflect an additional way of viewing aspects of the Company's operations that, when viewed with GAAP results and the reconciliations to corresponding GAAP financial measures, may provide a more complete understanding of factors and trends affecting Waters Corporation's business. Because non-GAAP financial measures exclude the effect of items that will increase or decrease the Company's reported results of operations, management strongly encourages investors to review the Company's consolidated financial statements and publicly filed reports in their entirety. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the tables accompanying this release.

Cautionary Statement

This release may contain "forward-looking" statements regarding future results and events. For this purpose, any statements that are not statements of historical fact may be deemed forward-looking statements. Without limiting the foregoing, the words, "feels", "believes", "anticipates", "plans", "expects", "intends", "suggests", "appears", "estimates", "projects", and similar expressions, whether in the negative or affirmative, are intended to identify forward-looking statements. The Company's actual future results may differ significantly from the results discussed in the forward-looking statements within this release for a variety of reasons, including and without limitation, foreign exchange rate fluctuations potentially affecting translation of the Company's future non-U.S. operating results; the impact on demand among the Company's various market sectors from economic, sovereign and political uncertainties; the effect on the Company's financial results from the United Kingdom voting to exit the European Union; fluctuations in expenditures by the Company's customers, in particular large pharmaceutical companies; introduction of competing products by other companies and loss of market share; pressures on prices from competitors and/or customers; regulatory, economic and competitive obstacles to new product introductions; other changes in demand from the effect of mergers and acquisitions by the Company's customers; increased regulatory burdens as the Company's business evolves, especially with respect to the U.S. Food and Drug Administration and U.S. Environmental Protection Agency, among others; shifts in taxable income in jurisdictions with different effective tax rates; the outcome of tax examinations or changes in respective country legislation affecting the Company's effective tax rate; the effect of the adoption of new accounting standards; the ability to access capital, maintain liquidity and service our debt in volatile market conditions, particularly in the U.S., as a large portion of the Company's cash is held and operating cash flows are generated outside the U.S.; environmental and logistical obstacles affecting the distribution of products and risks associated with lawsuits and other legal actions, particularly involving claims for infringement of patents and other intellectual property rights. Such factors and others are discussed more fully in the sections entitled "Forward-Looking Statements" and "Risk Factors" of the Company's annual report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission, which "Forward-Looking Statements" and "Risk Factors" discussions are incorporated by reference in this release. The forward-looking statements included in this release represent the Company's estimates or views as of the date of this release and should not be relied upon as representing the Company's estimates or views as of any date subsequent to the date of this release.
 
Waters Corporation and Subsidiaries
Condensed Preliminary Unclassified Consolidated Balance Sheets
(In thousands and unaudited)
       
July 1, 2017 December 31, 2016
 
 
Cash, cash equivalents and investments $ 3,125,946 $ 2,813,032
Accounts receivable 462,811 489,340
Inventories 287,139 262,682
Property, plant and equipment, net 338,860 337,118
Intangible assets, net 219,092 207,055
Goodwill 357,122 352,080
Other assets 205,775 200,752
Total assets $ 4,996,745 $ 4,662,059
 
 
Notes payable and debt $ 1,912,466 $ 1,827,263
Other liabilities 565,640 532,847
Total liabilities 2,478,106 2,360,110
 
Total equity 2,518,639 2,301,949
Total liabilities and equity $ 4,996,745 $ 4,662,059
 
 
Waters Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
               
 
Three Months Ended Six Months Ended
July 1, 2017 July 2, 2016 July 1, 2017 July 2, 2016
 
Net sales $ 558,250 $ 536,560 $ 1,056,219 $ 1,011,806
 
Costs and operating expenses:
Cost of sales 229,627 220,379 440,722 421,530
Selling and administrative expenses 130,190 129,581 260,714 258,932
Research and development expenses 32,937 32,578 63,689 62,016
Litigation provisions 10,018 - 10,018 -
Acquired in-process research and development - - 5,000 -
Purchased intangibles amortization 1,693 2,411 3,422 5,055
 
Operating income 153,785 151,611 272,654 264,273
 
Interest expense, net (5,713 ) (6,156 ) (11,095 ) (12,188 )
 
Income from operations before income taxes 148,072 145,455 261,559 252,085
 
Provision for income taxes (a) 16,250 17,238 24,180 29,816
 
Net income $ 131,822 $ 128,217 $ 237,379 $ 222,269
 
 
Net income per basic common share $ 1.65 $ 1.59 $ 2.97 $ 2.74
 
Weighted-average number of basic common shares 79,979 80,804 80,029 81,043
 
 
Net income per diluted common share $ 1.63 $ 1.57 $ 2.94 $ 2.72
 
Weighted-average number of diluted common shares and equivalents 80,756 81,455 80,769 81,663
 

(a) In the first quarter of 2017, the Company adopted Accounting Standards Update No. 2016-09 (ASU 2016-09) "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." Starting in the first quarter of 2017, the excess tax benefits or deficiencies related to stock-based compensation are reflected in the Consolidated Statements of Operations as a component of the provision for income taxes, whereas they were previously recognized in equity. ASU 2016-09 is required to be adopted on a prospective basis for the statement of operations and retroactive restatement is not permitted. For the three and six months ended July 1, 2017, the Company recognized an excess tax benefit, which decreased income tax expense by $4 million and $12 million, respectively, and added $0.05 and $0.14, respectively, to net income per diluted share. Additionally, the Company's Consolidated Statements of Cash Flows will present excess tax benefits as an operating activity, with the prior periods presented adjusted accordingly.
                           
Waters Corporation and Subsidiaries
Reconciliation of GAAP to Adjusted Non-GAAP
Net Sales by Operating Segment, Products & Services, Geography and Markets
Three Months Ended July 1, 2017 and July 2, 2016
(In thousands)
 

 

 
Constant
Three Months Ended Percent Currency Currency
July 1, 2017 July 2, 2016 Change Impact Growth Rate (a)
 
NET SALES - OPERATING SEGMENT
 
Waters $ 497,780 $ 478,731 4 % $ (6,023 ) 5 %
TA 60,470 57,829 5 % (540 ) 6 %
           
Total $ 558,250 $ 536,560 4 % $ (6,563 ) 5 %
 
 
NET SALES - PRODUCTS & SERVICES
 
Instruments $ 282,014 $ 272,639 3 % $ (1,571 ) 4 %
 
Service 185,412 176,873 5 % (3,980 ) 7 %
Chemistry   90,824   87,048 4 %   (1,012 ) 6 %
Total Recurring 276,236 263,921 5 % (4,992 ) 7 %
           
Total $ 558,250 $ 536,560 4 % $ (6,563 ) 5 %
 
 
NET SALES - GEOGRAPHY
 
Asia $ 215,703 $ 190,348 13 % $ (1,755 ) 14 %
Americas 196,586 202,895 (3 %) (434 ) (3 %)
Europe 145,961 143,317 2 % (4,374 ) 5 %
           
Total $ 558,250 $ 536,560 4 % $ (6,563 ) 5 %
 
 
NET SALES - MARKETS
 
Pharmaceutical $ 319,650 $ 310,009 3 % $ (3,750 ) 4 %
Industrial 174,531 166,686 5 % (4,034 ) 7 %
Government & Academic 64,069 59,865 7 % 1,221 5 %
           
Total $ 558,250 $ 536,560 4 % $ (6,563 ) 5 %
 
     

 
 

(a) The Company believes that referring to comparable constant currency growth rates is a useful way to evaluate the underlying performance of Waters Corporation's net sales. Constant currency growth rate, a non-GAAP financial measure, measures the change in net sales between current and prior year periods, ignoring the impact of foreign currency exchange rates during the current period. See description of non-GAAP financial measures contained in this release.
                           
Waters Corporation and Subsidiaries
Reconciliation of GAAP to Adjusted Non-GAAP
Net Sales by Operating Segment, Products & Services, Geography and Markets
Six Months Ended July 1, 2017 and July 2, 2016
(In thousands)
 
Current
Period Constant
Six Months Ended Percent Currency Currency
July 1, 2017 July 2, 2016 Change Impact Growth Rate (a)
 
NET SALES - OPERATING SEGMENT
 
Waters $ 941,206 $ 902,924 4 % $ (12,454 ) 6 %
TA 115,013 108,882 6 % (806 ) 6 %
           
Total $ 1,056,219 $ 1,011,806 4 % $ (13,260 ) 6 %
 
 
NET SALES - PRODUCTS & SERVICES
 
Instruments $ 518,407 $ 496,346 4 % $ (4,199 ) 5 %
 
Service 359,085 344,262 4 % (6,937 ) 6 %
Chemistry   178,727   171,198 4 %   (2,124 ) 6 %
Total Recurring 537,812 515,460 4 % (9,061 ) 6 %
           
Total $ 1,056,219 $ 1,011,806 4 % $ (13,260 ) 6 %
 
 
NET SALES - GEOGRAPHY
 
Asia $ 410,809 $ 361,821 14 % $ (1,204 ) 14 %
Americas 371,236 381,636 (3 %) (235 ) (3 %)
Europe 274,174 268,349 2 % (11,821 ) 7 %
           
Total $ 1,056,219 $ 1,011,806 4 % $ (13,260 ) 6 %
 
 
NET SALES - MARKETS
 
Pharmaceutical $ 599,460 $ 569,095 5 % $ (6,484 ) 6 %
Industrial 335,834 320,207 5 % (9,354 ) 8 %
Governmental & Academic 120,925 122,504 (1 %) 2,578 (3 %)
           
Total $ 1,056,219 $ 1,011,806 4 % $ (13,260 ) 6 %
 
       
 

(a) The Company believes that referring to comparable constant currency growth rates is a useful way to evaluate the underlying performance of Waters Corporation's net sales. Constant currency growth rate, a non-GAAP financial measure, measures the change in net sales between current and prior year periods, ignoring the impact of foreign currency exchange rates during the current period. See description of non-GAAP financial measures contained in this release.
 
Waters Corporation and Subsidiaries
Reconciliation of GAAP to Adjusted Non-GAAP Financials
Quarters and Six Months Ended July 1, 2017 and July 2, 2016
(In thousands, except per share data)
                                   
Income from
Operations
Selling & Research & Operating before Provision for Diluted
Administrative Development Operating Income Income Income Net Earnings
  Expenses (a)   Expenses (a)   Income   Percentage   Taxes   Taxes   Income   per Share
Quarter Ended July 1, 2017
GAAP $ 141,901 $ 32,937 $ 153,785 27.5 % $ 148,072 $ 16,250 $ 131,822 $ 1.63
Adjustments:
Purchased intangibles amortization (b) (1,693 ) - 1,693 0.3 % 1,693 449 1,244 0.02
Restructuring costs, asset impairments,

acquisition-related costs & certain other items (c)
(1,663 ) - 1,663 0.3 % 1,663 735 928 0.01
Litigation provisions (d) (10,018 ) - 10,018 1.8 % 10,018 3,757 6,261 0.08
Certain income tax items (e)   -     -     -   -     -   (1,972 )   1,972     0.02  
Adjusted Non-GAAP $ 128,527   $ 32,937   $ 167,159   29.9 % $ 161,446 $ 19,219   $ 142,227   $ 1.76  
 
Quarter Ended July 2, 2016
GAAP $ 131,992 $ 32,578 $ 151,611 28.3 % $ 145,455 $ 17,238 $ 128,217 $ 1.57
Adjustments:
Purchased intangibles amortization (b) (2,411 ) - 2,411 0.4 % 2,411 721 1,690 0.02
Restructuring costs, asset impairments,

acquisition-related costs & certain other items (c)
(1,980 ) - 1,980 0.4 % 1,980 519 1,461 0.02
Certain income tax items (e)   -     -     -   -     -   2,367     (2,367 )   (0.03 )
Adjusted Non-GAAP $ 127,601   $ 32,578   $ 156,002   29.1 % $ 149,846 $ 20,845   $ 129,001   $ 1.58  
 
Six Months Ended July 1, 2017
GAAP $ 274,154 $ 68,689 $ 272,654 25.8 % $ 261,559 $ 24,180 $ 237,379 $ 2.94
Adjustments:
Purchased intangibles amortization (b) (3,422 ) - 3,422 0.3 % 3,422 922 2,500 0.03
Restructuring costs, asset impairments,

acquisition-related costs & certain other items (c)
(11,011 ) - 11,011 1.0 % 11,011 3,794 7,217 0.09
Litigation provisions (d) (10,018 ) - 10,018 0.9 % 10,018 3,757 6,261 0.08
Acquired in-process research and development (f) - (5,000 ) 5,000 0.5 % 5,000 962 4,038 0.05
Certain income tax items (e)   -     -     -   -     -   (2,447 )   2,447     0.03  
Adjusted Non-GAAP $ 249,703   $ 63,689   $ 302,105   28.6 % $ 291,010 $ 31,168   $ 259,842   $ 3.22  
 
Six Months Ended July 2, 2016
GAAP $ 263,987 $ 62,016 $ 264,273 26.1 % $ 252,085 $ 29,816 $ 222,269 $ 2.72
Adjustments:
Purchased intangibles amortization (b) (5,055 ) - 5,055 0.5 % 5,055 1,471 3,584 0.04
Restructuring costs, asset impairments,

acquisition-related costs & certain other items (c)
(5,588 ) - 5,588 0.6 % 5,588 1,661 3,927 0.05
Stock award modification (g) (7,085 ) - 7,085 0.7 % 7,085 2,657 4,428 0.05
Certain income tax items (e)   -     -     -   -     -   1,630     (1,630 )   (0.02 )
Adjusted Non-GAAP $ 246,259   $ 62,016   $ 282,001   27.9 % $ 269,813 $ 37,235   $ 232,578   $ 2.85  
     
 

(a) Selling & administrative expenses include purchased intangibles amortization and litigation provisions. Research & development expenses include acquired in-process research and development.(b) The purchased intangibles amortization, a non-cash expense, was excluded to be consistent with how management evaluates the performance of its core business against historical operating results and the operating results of competitors over periods of time.(c) Restructuring costs, asset impairments, acquisition-related costs and certain other items were excluded as the Company believes that the cost to consolidate operations and reduce overhead; the cost to complete acquisitions; the non-cash expense to record asset impairments and certain other income or expense items are not normal and do not represent future ongoing business expenses of a specific function or geographic location of the Company.(d) Litigation Provisions were excluded as these costs are isolated, unpredictable and not expected to recur regularly.(e) Certain income tax items were excluded as these non-cash expenses and benefits represent updates in management's assessment of ongoing examinations or other tax items that are not indicative of the Company's normal or future income tax expense.(f) Acquired In-Process Research and Development was excluded as it relates to milestone payments associated with a licensing arrangement for mass spectrometry that the Company believes is unusual and not indicative of its normal business operations.(g) The non-cash expense associated with accelerating the vesting of certain stock awards was excluded as the Company believes these expenses are not indicative of normal operating costs.

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