Waters (WAT) Q1 2012 earnings summary

Executive summary

• Q1 sales fell short of expectations amid delayed capital releases by large pharma customers and weakness in developing markets; organic sales were flat and adjusted EPS declined 4%.

• Underlying demand was viewed as intact, with early Q2 order movement supporting expectations for improved growth through the remainder of 2012, though timing remained uncertain.

Financial highlights

• Sales decreased 2% reported; excluding currency translation, sales were flat YoY, as FX reduced sales by 2%.

• Non-GAAP diluted EPS was $1.00, down 4% from $1.04; GAAP EPS was $0.98 versus $1.01 in Q1 2011.

• Non-GAAP gross margin was 60.2%, in line with Q1 2011; SG&A was flat and R&D expense rose 5%.

• Free cash flow was $100M after $16M of CapEx and adding back $6M of non-cash stock-compensation tax benefit.

Outlook and guidance

• FY 2012 sales growth is forecast at 4%-6% before currency and 2%-4% reported, assuming currency reduces growth by 2%.

• FY 2012 non-GAAP diluted EPS guidance is $5.05-$5.15; gross margin ~60.5%, operating tax rate ~16%, and average diluted share count ~89.5M.

• Q2 organic sales growth is forecast at 5%-7%; FX is expected to reduce sales by 2%, yielding 3%-5% reported growth; non-GAAP diluted EPS guidance is $1.15-$1.20.

• For the next three quarters, recurring revenue is expected to grow near 7%; instrument sales are expected to grow 4%-6%, with operating expenses rising slower than sales.

• Regional outlook for the rest of 2012: developing markets high single digits, U.S. mid-single digits, and Japan low to mid-single digits; government and academic spending remains a headwind.