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| WAT > SEC Filings for WAT > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Operating income was $87 million in both the 2009 Quarter and 2008 Quarter.
In the 2009 Period and 2008 Period, operating income was $172 million and
$175 million, respectively. The changes in operating income are primarily a
result of the decline in overall sales volume in 2009 as compared to 2008 and
the impact of $6 million of expense incurred in the 2009 Quarter and 2009 Period
in connection with the TA building lease termination payment. These reductions
in operating income were offset by lower selling, administrative and research
and development expenses achieved through cost reductions, the net favorable
effect of foreign currency translation and a $9 million impact of expense
recorded in the 2008 Quarter and 2008 Period related to out-of-period
adjustments for capitalized software amortization.
During the 2008 Quarter, the Company identified errors originating in periods
prior to the three months ended June 28, 2008. The errors primarily relate to
(i) an overstatement of the Company's income tax expense of $16 million as a
result of errors in recording its income tax provision during the period from
2000 to March 29, 2008 and (ii) an understatement of amortization expense of
$9 million for certain capitalized software. The Company incorrectly calculated
its provision for income taxes by tax-effecting its tax liability utilizing a
U.S. tax rate of 35% instead of an Irish tax rate of 10%. In addition, the
Company incorrectly accounted for Irish-based capitalized software and the
related amortization expense as U.S. Dollar-denominated instead of
Euro-denominated, resulting in an understatement of amortization expense and
cumulative translation adjustment.
The Company identified and corrected the errors in the three months ended
June 28, 2008, which had the effect of increasing cost of sales by $9 million;
reducing gross profit and income from operations before income tax by
$9 million; reducing the provision for income taxes by $16 million and
increasing net income by $8 million. For the three and six months ended June 28,
2008, the errors reduced the Company's effective tax rate by 18.1 percentage
points and 8.9 percentage points, respectively. In addition, the out-of-period
adjustments had the following effect on the consolidated balance sheet as of
June 28, 2008: increased the gross carrying value of capitalized software by
$46 million; increased accumulated amortization for capitalized software by $36
million; reduced deferred tax liabilities by $14 million and increased
accumulated other comprehensive income by $17 million.
The Company also recorded approximately $5 million of tax benefit in the 2009
Period associated with the reversal of a $5 million tax provision, recorded in
the three months ended September 27, 2008, related to the reorganization of
certain foreign legal entities. The recognition of this tax benefit was a result
of changes in income tax regulations promulgated by the U.S. Treasury in
February 2009. This $5 million tax benefit decreased the Company's effective tax
rate by 2.7 percentage points in the 2009 Period.
Net income per diluted share was $0.72 and $0.82 in the 2009 Quarter and 2008
Quarter, respectively. Net income per diluted share was $1.47 and $1.49 in the
2009 Period and 2008 Period, respectively. The change in net income per diluted
share in the 2009 Quarter and 2009 Period as compared with the 2008 Quarter and
2008 Period can be attributed to the following factors:
• The impact of the 2008 out-of-period adjustments related to capitalized
software amortization increased both the 2008 Quarter and 2008 Period net
income per diluted share by $0.08.
• The $6 million TA lease termination payment decreased both the 2009 Quarter and 2009 Period net income per diluted share by $0.04.
• The $5 million tax benefit recorded in the first quarter of 2009 added $0.05 per diluted share to the 2009 Period.
• Lower net interest and lower weighted-average shares and equivalents increased net income per diluted share in both the 2009 Quarter and 2009 Period.
• Higher effective tax rates decreased net income per diluted share in both the 2009 Quarter and 2009 Period.
Net cash provided by operating activities was $174 million and $203 million in the 2009 Period and 2008 Period, respectively. The $29 million decrease is primarily a result of lower cash collections from customers due to the decrease in sales in the 2009 Period compared to the 2008 Period; a $6 million litigation payment made in the 2009 Period, which was expensed in the fourth quarter of 2008; and a $6 million TA building lease termination payment.
Within cash flows used in investing activities, capital expenditures related
to property, plant, equipment and software capitalization were $58 million and
$33 million in the 2009 Period and 2008 Period, respectively. The increase in
capital expenditures is primarily attributed to $25 million spent to acquire
land and construct a new TA facility that was completed in June 2009. In
February 2009, the Company acquired all of the remaining outstanding capital
stock of Thar for $36 million in cash.
Within cash flows used in financing activities, the Company received
$4 million and $16 million of proceeds from stock plans in the 2009 Period and
2008 Period, respectively. The fluctuations in these amounts are primarily
attributed to the change in the Company stock price and the expiration of stock
option grants. In February 2009, the Company's Board of Directors authorized the
Company to repurchase up to $500 million of its outstanding common stock over a
two-year period. The Company repurchased $107 million and $152 million of the
Company's outstanding common stock in the 2009 Period and 2008 Period,
respectively, under the February 2009 authorization and previously announced
stock repurchase programs.
Results of Operations
Net Sales
Product sales were $254 million and $287 million for the 2009 Quarter and the
2008 Quarter, respectively, a decrease of 12%. Product sales were $481 million
and $558 million for the 2009 Period and the 2008 Period, respectively, a
decrease of 14%. The decrease in product sales in both the 2009 Quarter and 2009
Period was primarily due to the overall decline in Waters and TA instrument
system sales and adverse effects from foreign currency translation. Service
sales were $109 million and $112 million in the 2009 Quarter and the 2008
Quarter, respectively, a decrease of 2%. Service sales were $215 million and
$213 million in the 2009 Period and the 2008 Period, respectively, an increase
of 1%. The decrease in service sales for the 2009 Quarter is primarily
attributable to the effects of foreign currency translation. The increase in the
2009 Period service sales was primarily attributable to increased sales of
service plans and billings to a higher installed base of customers and three
more selling days, offset by adverse foreign currency translation.
Waters Division Net Sales
The Waters Division net sales declined 8% and 9% in the 2009 Quarter and 2009
Period, respectively, as compared to the 2008 Quarter and 2008 Period. The
effect of foreign currency translation negatively impacted the Waters Division
across all product lines, resulting in a decline in total sales of 5% in both
the 2009 Quarter and 2009 Period.
Chemistry consumables sales declined 7% in the 2009 Quarter and 3% in the
2009 Period. These sales declines were driven by slightly lower chemistry
consumable sales and the negative effect of foreign currency translation. Waters
Division service sales declined 2% in the 2009 Quarter and increased 1% in the
2009 Period due primarily to the impact of the increased sales of service plans
and billings to the higher installed base of customers being offset by adverse
foreign currency translation. In addition, recurring sales of chemistry
consumables and service in the 2009 Period benefited from three more selling
days than the 2008 Period. There will be conversely fewer selling days in the
Company's fiscal fourth quarter of 2009. Waters instrument system sales (LC and
MS) declined 13% in the 2009 Quarter and 17% in the 2009 Period. The decreases
in instrument systems sales are primarily attributable to weak industrial and
pharmaceutical customer spending caused by the global recession. Waters Division
sales by product line in the 2009 Quarter were 52% for instrument systems, 18%
for chemistry consumables and 30% for service as compared to 54% for instrument
systems, 18% for chemistry consumables and 28% for service in the 2008 Quarter.
Waters Division sales by product line in the 2009 Period were 50% for instrument
systems, 19% for chemistry consumables and 31% for service as compared to 54%
for instrument systems, 18% for chemistry consumables and 28% for service in the
2008 Period.
Geographically, Waters Division sales in the U.S., Europe and the rest of the
world declined 2%, 18% and 30%, in the 2009 Quarter, respectively, while sales
in Asia increased 3%. Waters Division sales in the U.S., Europe, Asia and the
rest of the world declined 4%, 17%, 1% and 24% in the 2009 Period, respectively.
These declines are primarily due to lower demand from the Company's industrial
and pharmaceutical customers. Sales growth in China in both the 2009 Quarter and
2009 Period was strong and partially offset the weakness in other Asian markets.
In Europe, the Company's sales decline in the 2009 Quarter and 2009 Period was
primarily driven by weak demand in Eastern Europe. The effects of foreign
currency translation decreased sales in Europe by 13% and 14%, respectively, in
the 2009 Quarter and 2009 Period. The effects of foreign currency translation
decreased sales in the rest of the world by 2% and 7%, respectively, in the 2009
Quarter and 2009 Period.
TA Division Net Sales
TA's sales decreased 15% in the 2009 Quarter over the 2008 Quarter and 12% in
the 2009 Period over the 2008 Period primarily as a result of weak instrument
system demand from its industrial customers and an adverse effect from foreign
currency translation. The July 2008 acquisition of VTI Corporation added 2% to
sales in both the 2009 Quarter and 2009 Period. Instrument system sales declined
18% in the 2009 Quarter and represented 73% of sales in the 2009 Quarter as
compared to 75% in the 2008 Quarter. Instrument system sales declined 16% in the
2009 Period and represented 74% of sales in the 2009 Period as compared to 78%
in the 2008 Period. TA service sales declined by 8% in the 2009 Quarter and
increased by 3% in the 2009 Period. The 2009 Quarter decline in service sales
can be primarily attributed to the impact of the current economic downturn while
the 2009 Period benefited from the three additional selling days.
Geographically, the sales decrease overall for TA was broad-based.
Gross Profit
Gross profit for the 2009 Quarter was $219 million compared to $224 million for
the 2008 Quarter, a decrease of $5 million, or 2%. Gross profit for the 2009
Period was $424 million compared to $440 million for the 2008 Period, a decrease
of $16 million, or 4%. Gross profit as a percentage of sales increased to 60.3%
in the 2009 Quarter compared to 56.1% for the 2008 Quarter. Gross profit as a
percentage of sales increased to 61.0% in the 2009 Period compared to 57.1% for
the 2008 Period. The decrease in gross profit dollars in the 2009 Quarter and
2009 Period can be primarily attributed to the lower sales volume being offset
by the $9 million impact of the out-of-period adjustments recorded in the 2008
Quarter and 2008 Period related to capitalized software amortization, the
benefits from net favorable foreign currency translation and, to a lesser
extent, lower manufacturing costs. During the 2009 Quarter and 2009 Period, the
Company's gross profit as a percentage of sales benefited from the favorable
movements in certain foreign exchange rates between the currencies where the
Company manufactures and services products and the currencies where the sales
were transacted, principally the Euro, Japanese Yen and British Pound. The
increase in gross profit as a percentage of sales is also primarily a result of
a change in sales mix. The 2009 Quarter and 2009 Period contained a higher level
of higher margin chemistry consumables and service sales than the 2008 Quarter
and 2008 Period.
Selling and Administrative Expenses
Selling and administrative expenses for the 2009 Quarter and the 2008 Quarter
were $110 million and $112 million, respectively, a decrease of 2%. Selling and
administrative expenses for the 2009 Period and the 2008 Period were
$209 million and $218 million, respectively, a decrease of 4%. The decrease in
2009 Quarter and 2009 Period selling and administrative expenses is primarily
due to cost reductions, lower incentive compensation and the comparative
favorable impact of foreign currency translation offset by the impact of the
expense incurred in connection with the TA lease termination payment of
$6 million in the 2009 Quarter and 2009 Period. As a percentage of net sales,
selling and administrative expenses were 30.2% for the 2009 Quarter and 30.0%
for the 2009 Period compared to 28.1% for the 2008 Quarter and 28.3% for the
2008 Period.
Research and Development Expenses
Research and development expenses were $20 million and $22 million for the 2009
Quarter and 2008 Quarter, respectively, a decrease of $2 million, or 11%.
Research and development expenses were $38 million and $42 million for the 2009
Period and 2008 Period, respectively, a decrease of 4 million, or 9%. The
decrease in research and development expenses for both the 2009 Quarter and 2009
Period is primarily due to the comparative favorable impact of foreign currency
translation.
Interest Expense
Interest expense was $3 million and $10 million for the 2009 Quarter and 2008
Quarter, respectively. Interest expense was $6 million and $21 million for the
2009 Period and 2008 Period, respectively. The decrease in interest expense for
the 2009 Quarter and 2009 Period is primarily attributable to a significant
decrease in average borrowings and lower interest rates during the 2009 Quarter
and 2009 Period as compared to the 2008 Quarter and 2008 Period.
Interest Income
Interest income was $1 million and $5 million for the 2009 Quarter and 2008
Quarter, respectively. Interest income was $2 million and $12 million for the
2009 Period and 2008 Period, respectively. The decrease in interest income is
primarily due to significantly lower yields and significantly lower cash and
short-term investment balances.
Provision for Income Taxes
The Company's effective tax rates for the 2009 Quarter and 2008 Quarter were an
income tax provision of 17.4% and an income tax benefit of 1.2%, respectively.
The Company's effective tax rates for the 2009 Period and 2008 Period were an
income tax provision of 14.7% and 8.8%, respectively. Included in the effective
tax rates for the 2008 Quarter and 2008 Period is a $16 million benefit
resulting from the out-of-period adjustments related to software capitalization
amortization. The out-of-period adjustments had the effect of reducing the
Company's effective tax rate by 18.1 percentage points and 8.9 percentage points
in the 2008 Quarter and 2008 Period, respectively. In addition, the income tax
provision for the 2009 Period included approximately $5 million of tax benefit
associated with the reversal of a $5 million tax provision, recorded in the
three months ended September 27, 2008, related to the reorganization of certain
foreign legal entities. The recognition of this tax benefit was a result of
changes in income tax regulations promulgated by the U.S. Treasury in
February 2009. This $5 million tax benefit had the effect of reducing the
Company's effective tax rate by 2.7 percentage points for the 2009 Period. After
consideration of these items, the remaining changes in the effective tax rates
for the 2009 Quarter and 2009 Period are primarily attributable to changes in
income in jurisdictions with different effective tax rates.
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