Waters (WAT) Q4 2010 earnings summary

Executive summary

• 2010 results exceeded expectations, returning to double-digit sales growth and close to 20% growth in adjusted EPS; Q4 sales rose 13% YoY and adjusted EPS increased 23%.

• Broad end-market recovery and strong uptake of new instrument systems supported results; early 2011 demand and customer response remained encouraging.

Financial highlights

• Q4 non-GAAP diluted EPS rose 23% to $1.38 from $1.12; GAAP diluted EPS was $1.36 versus $1.08 YoY.

• Q4 sales increased 13% before currency translation, which was approximately neutral; full-year free cash flow was $409M versus $372M in 2009.

• Q4 free cash flow was $127M versus $112M YoY, after $16M CapEx and specified non-cash tax and UK project adjustments.

• Full-year operating income as a percent of sales improved 70 bps; full-year EPS grew 19%, aided by tax benefits and share repurchases.

Outlook and guidance

• FY2011 sales growth expected in the high single digits, including ~1 point from FX; gross margin expected to rise 30–40 bps and operating expenses to grow slightly slower than sales.

• FY2011 non-GAAP diluted EPS guidance is $4.60–$4.70; operating tax rate expected at 16%–16.5%, and average diluted shares expected to fall by ~2M.

• Q1 organic sales growth expected at 8%–9%; FX at current levels expected to add ~1 point, for reported growth of 9%–10%; non-GAAP EPS guidance is $0.90–$0.95.

• FY2011 free cash flow expected to approach $450M, excluding the UK facility; forecast includes ~$510M cash from operations and ~$60M CapEx.

• Q1 Japan sales expected to decline modestly, reflecting a strong prior-year finish and stimulus spending; decline is included in guidance.