8-K: Waters Corporation Reports Mixed Q4 and Full-Year 2023 Results, Provides 2024 Guidance

Waters Corporation's Q4 2023 sales declined by 4.5% as reported, and 8% organically in constant currency, while full-year sales decreased by 0.5% as reported and 2% organically in constant currency, with margin expansion driven by operational excellence.

Summary

• Waters Corporation announced its fourth quarter and full-year 2023 financial results on February 6, 2024.
• Fourth-quarter sales were $819 million, a 4.5% decrease as reported compared to $859 million in Q4 2022, and an 8% decrease in organic constant currency.
• Full-year 2023 sales reached $2,956 million, a 0.5% decrease as reported compared to $2,972 million in 2022, and a 2% decrease in organic constant currency.
• The Wyatt acquisition contributed 2.5% to full-year sales, meeting its target.
• Gross margin expanded by 170 basis points in Q4 and 160 basis points for the full year, reaching 59.6%.
• Adjusted operating margin expanded by 120 basis points in Q4 and 70 basis points for the full year, reaching 30.9%.
• Non-GAAP EPS for Q4 was $3.62, while GAAP EPS was $3.65.
• Full-year non-GAAP EPS was $11.75, and GAAP EPS was $10.84.
• The company experienced a 2% headwind from unfavorable foreign exchange in Q4 and a 3% headwind for the full year, along with a 1% dilution from the Wyatt acquisition.
• Sales in Asia decreased significantly, with China sales declining almost 40% in Q4 and more than 20% for the full year.
• The company expects full-year 2024 organic constant currency sales growth to be between -0.5% and +1.5%, with a 1% decrease from currency translation and a 1.3% increase from the Wyatt acquisition.
• Full-year 2024 reported sales growth is expected to be between 0% and +2%, with non-GAAP EPS between $11.75 and $12.05.
• First quarter 2024 organic constant currency sales growth is expected to be between -11% and -9%, with a 1% decrease from currency translation and a 3.5% increase from the Wyatt acquisition.
• First quarter 2024 reported sales growth is expected to be between -8.5% and -6.5%, with non-GAAP EPS between $2.05 and $2.15.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the sales decline, particularly in instrument systems and Asia, despite margin expansion and the Wyatt acquisition's contribution. The cautious 2024 guidance also contributes to the lower sentiment.

Positives

• Operational excellence drove gross margin expansion of 170 basis points in Q4 and 160 basis points for the full year.
• Adjusted operating margin expanded by 120 basis points in Q4 and 70 basis points for the full year.
• The Wyatt acquisition delivered an on-target M&A contribution of 2.5% to sales for the full year.
• Non-GAAP EPS of $3.62 for Q4 was at the high end of guidance.
• Recurring revenues increased 7% as reported and 5% in organic constant currency in Q4.
• The company saw an expected increase in sales in Q4 versus Q3.

Negatives

• Q4 sales decreased by 4.5% as reported and 8% in organic constant currency.
• Full-year sales decreased by 0.5% as reported and 2% in organic constant currency.
• Instrument system sales decreased 14% as reported and 20% in organic constant currency in Q4.
• Sales in Asia decreased 18% in Q4 and 11% for the full year, with China sales declining almost 40% in Q4 and more than 20% for the full year.
• The company experienced a 2% headwind from unfavorable foreign exchange in Q4 and a 3% headwind for the full year.
• The Wyatt acquisition caused a 1% dilution to full-year EPS.
• First quarter 2024 organic constant currency sales growth is expected to be between -11% and -9%.

Risks

• The company faces risks related to the commercial success of the Wyatt transaction and its impact on the business.
• Foreign currency exchange rate fluctuations could negatively affect the translation of non-U.S. operating results.
• Global economic, sovereign, and political conditions, including trade regulations, inflation, and interest rates, pose risks.
• The ongoing conflict between Russia and Ukraine and in the Middle East could lead to further geopolitical and regulatory instability.
• The Chinese government's tightening restrictions on procurement by government-funded customers is a concern.
• The company's ability to access capital, maintain liquidity, and service debt in volatile market conditions is a risk.
• Changes in timing and demand for the company's products among customers and various market sectors could impact results.
• The introduction of competing products and loss of market share are potential risks.
• The company faces risks associated with acquisitions, strategic investments, joint ventures, and divestitures.
• Unexpected disruptions in operations and supply chain issues could negatively impact the company.
• Cybersecurity and technology risks, including attempts by third parties to defeat security measures, are a concern.
• Increased regulatory burdens, especially with respect to the FDA and EPA, could pose challenges.
• Litigation and other legal and regulatory proceedings are potential risks.

Future Outlook

The company expects full-year 2024 organic constant currency sales growth to be in the range of -0.5% to +1.5%, with reported sales growth between 0% and +2% and non-GAAP EPS between $11.75 and $12.05. First quarter 2024 organic constant currency sales growth is expected to be between -11% and -9%, with reported sales growth between -8.5% and -6.5% and non-GAAP EPS between $2.05 and $2.15.

Management Comments

• Waters results in 2023 demonstrate our teams strong focus on execution, the competitiveness of our new products, and the resilience of demand in QA/QC and high-volume applications, said Dr. Udit Batra, President & CEO, Waters Corporation.
• Our focus on operational excellence helped us to deliver exceptional margin expansion even in difficult market conditions.
• The year ended with our business benefitting from an expected increase in sales in Q4 versus that of Q3, a testament to our teams commitment to innovation that addresses our customers greatest needs.
• We also reached a new chapter in our transformation in 2023 with the acquisition of Wyatt. We have made very good progress integrating the team, achieving our target sales contribution of 2.5% for the year.

Industry Context

The results reflect a mixed performance in the analytical instruments and software industry, with challenges in certain geographic markets and product segments, but also resilience in recurring revenues and margin expansion. The company's focus on operational excellence and the integration of the Wyatt acquisition are key factors influencing its performance.

Comparison to Industry Standards

• Waters' performance is mixed when compared to industry peers. While the company achieved margin expansion, sales growth was negative, particularly in instrument systems and in Asia, which is a key market for many analytical instrument companies.
• Companies like Agilent Technologies and Thermo Fisher Scientific, which also operate in the analytical instruments space, have shown varying results in recent quarters, with some experiencing stronger growth in certain segments and regions.
• The decline in instrument sales for Waters is a concern, as this is a key indicator of future recurring revenue potential. Companies with strong instrument sales tend to have a more robust outlook.
• The 2.5% contribution from the Wyatt acquisition is positive, but the 1% dilution to EPS highlights the challenges of integrating acquisitions.
• The company's guidance for 2024 indicates a cautious outlook, with expected sales growth in the low single digits, which is below the growth rates of some of its competitors.

Stakeholder Impact

• Shareholders may be concerned about the sales decline and cautious outlook for 2024.
• Employees may be affected by the company's cost-saving initiatives and restructuring efforts.
• Customers may be impacted by changes in product offerings and pricing.
• Suppliers may be affected by changes in the company's supply chain and procurement strategies.
• Creditors may be concerned about the company's debt levels and ability to service its debt.

Next Steps

• The company will continue to focus on operational excellence and integrating the Wyatt acquisition.
• The company will monitor market conditions and adjust its strategies as needed.
• The company will host a conference call to discuss the results and outlook.

Key Dates

Keywords

financial results, sales, earnings per share, EPS, organic growth, constant currency, gross margin, operating margin, acquisition, Wyatt, pharmaceutical, industrial, academic, government, Asia, China, instrument systems, recurring revenue, guidance