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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended April 3, 2010
or
¨ Transition report pursuant to Section 13 or 15(d) of the Securities Act of 1934
For the transition period from to
Commission File Number 001-09781 (0-1052)
MILLIPORE CORPORATION
(Exact name of registrant as specified in its charter)
| Massachusetts | 04-2170233 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| 290 Concord Road, Billerica, MA | 01821 | |
| (Address of principal executive offices) | (Zip Code) | |
(978) 715-4321
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer x | Accelerated filer ¨ | |
| Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 1, 2010, there were 56,234,916 shares of the registrant’s Common Stock outstanding.
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PART I. | FINANCIAL INFORMATION | |||
Item 1 | Financial Statements (unaudited) | |||
| Condensed Consolidated Statements of Operations for the three months ended April 3, 2010 and April 4, 2009 | 3 | |||
| Condensed Consolidated Balance Sheets at April 3, 2010 and December 31, 2009 | 4 | |||
| Condensed Consolidated Statements of Cash Flows for the three months ended April 3, 2010 and April 4, 2009 | 5 | |||
| Notes to Condensed Consolidated Financial Statements | 6 | |||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 30 | ||
Item 4 | Controls and Procedures | 30 | ||
PART II. | OTHER INFORMATION | |||
Item 6 | Exhibits | 31 | ||
| 32 | ||||
| 33 | ||||
| In this Form 10-Q, unless the context otherwise requires, the terms “Millipore”, the “Company”, “we” or “us” shall mean Millipore Corporation and its subsidiaries. | ||||
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Condensed Consolidated Statements of Operations
| Three Months Ended | ||||||||
| (In thousands, except per share data) (Unaudited) | April 3, 2010 | April 4, 2009 | ||||||
Revenues | $ | 463,033 | $ | 407,940 | ||||
Cost of revenues | 203,671 | 184,621 | ||||||
Gross profit | 259,362 | 223,319 | ||||||
Selling, general and administrative expenses | 141,141 | 126,788 | ||||||
Research and development expenses | 30,084 | 25,203 | ||||||
Operating profit | 88,137 | 71,328 | ||||||
Gain on business acquisition | – | 8,542 | ||||||
Interest income | 113 | 242 | ||||||
Interest expense | (14,259 | ) | (14,609 | ) | ||||
Income before provision for income taxes | 73,991 | 65,503 | ||||||
Provision for income taxes | 16,776 | 11,949 | ||||||
Net income | 57,215 | 53,554 | ||||||
Less: Net income attributable to noncontrolling interest | – | 529 | ||||||
Net income attributable to Millipore | $ | 57,215 | $ | 53,025 | ||||
Earnings per share: | ||||||||
Basic | $ | 1.02 | $ | 0.96 | ||||
Diluted | $ | 0.99 | $ | 0.95 | ||||
Weighted average shares outstanding: | ||||||||
Basic | 55,934 | 55,352 | ||||||
Diluted | 57,906 | 55,779 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PART I
Condensed Consolidated Balance Sheets
| (In thousands, except per share data) (Unaudited) | April 3, 2010 | December 31, 2009 | ||||||
| Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 222,676 | $ | 168,333 | ||||
Accounts receivable (less allowance for doubtful accounts of $3,465 and $3,495 at April 3, 2010 and December 31, 2009, respectively) | 314,539 | 280,930 | ||||||
Inventories | 237,913 | 257,809 | ||||||
Deferred income taxes | 72,921 | 61,211 | ||||||
Other current assets | 35,684 | 33,985 | ||||||
Total current assets | 883,733 | 802,268 | ||||||
Property, plant and equipment, net | 574,111 | 595,611 | ||||||
Deferred income taxes | 13,587 | 40,175 | ||||||
Intangible assets, net | 324,223 | 337,696 | ||||||
Goodwill | 1,016,534 | 1,017,683 | ||||||
Other assets | 16,941 | 17,356 | ||||||
Total assets | $ | 2,829,129 | $ | 2,810,789 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 11,084 | $ | 42,851 | ||||
Accounts payable | 88,579 | 75,056 | ||||||
Income taxes payable | 20,854 | 16,739 | ||||||
Accrued expenses and other current liabilities | 177,426 | 185,061 | ||||||
Total current liabilities | 297,943 | 319,707 | ||||||
Deferred income taxes | 14,456 | 17,681 | ||||||
Long-term debt | 873,724 | 890,242 | ||||||
Other liabilities | 81,189 | 80,125 | ||||||
Total liabilities | 1,267,312 | 1,307,755 | ||||||
Commitments and contingencies (Note 16) | ||||||||
Shareholders’ equity: | ||||||||
Common stock, par value $1.00 per share, 120,000 shares authorized; 56,226 shares issued and outstanding as of April 3, 2010; 55,688 shares issued and outstanding as of December 31, 2009 | 56,226 | 55,688 | ||||||
Additional paid-in capital | 348,796 | 330,380 | ||||||
Retained earnings | 1,201,576 | 1,144,361 | ||||||
Accumulated other comprehensive loss | (44,781 | ) | (27,395 | ) | ||||
Total shareholders’ equity | 1,561,817 | 1,503,034 | ||||||
Total liabilities and shareholders’ equity | $ | 2,829,129 | $ | 2,810,789 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PART I
Condensed Consolidated Statements of Cash Flows
| Three Months Ended | ||||||||
| (In thousands) (Unaudited) | April 3, 2010 | April 4, 2009 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 57,215 | $ | 53,554 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 30,260 | 30,523 | ||||||
Stock-based compensation | 7,486 | 5,791 | ||||||
Amortization of deferred financing costs | 849 | 844 | ||||||
Amortization of debt discount | 3,965 | 3,704 | ||||||
Deferred income tax (benefit) provision | (1,306 | ) | 6,829 | |||||
Gain on business acquisition | – | (8,542 | ) | |||||
Business acquisition inventory fair value adjustment | – | 610 | ||||||
Other | (2,547 | ) | 4,161 | |||||
Changes in operating assets and liabilities, net of effects of business acquisitions: | ||||||||
Accounts receivable | (40,471 | ) | (22,464 | ) | ||||
Inventories | 11,384 | 2,250 | ||||||
Other assets | 449 | 5,535 | ||||||
Accounts payable | 15,676 | 9,493 | ||||||
Accrued expenses and other current liabilities | (7,333 | ) | (2,922 | ) | ||||
Income taxes payable | 11,505 | (681 | ) | |||||
Other liabilities | 1,125 | (4,458 | ) | |||||
Net cash provided by operating activities | 88,257 | 84,227 | ||||||
Cash flows from investing activities: | ||||||||
Additions to property, plant and equipment | (11,577 | ) | (15,708 | ) | ||||
Acquisition of business, net of cash acquired | – | (18,766 | ) | |||||
Other | (748 | ) | (1,362 | ) | ||||
Net cash used for investing activities | (12,325 | ) | (35,836 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock under stock plans | 16,876 | 1,710 | ||||||
Repayments under long-term revolving credit facility, net | – | (67,174 | ) | |||||
Net (repayments) borrowings of short-term debt | (32,289 | ) | 71,747 | |||||
Other | – | (460 | ) | |||||
Net cash (used for) provided by financing activities | (15,413 | ) | 5,823 | |||||
Effect of foreign exchange rates on cash and cash equivalents | (6,176 | ) | 2,446 | |||||
Net increase in cash and cash equivalents | 54,343 | 56,660 | ||||||
Cash and cash equivalents at beginning of year | 168,333 | 115,462 | ||||||
Cash and cash equivalents at end of period | $ | 222,676 | $ | 172,122 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data) (Unaudited)
1. GENERAL
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. The condensed consolidated balance sheet as of December 31, 2009 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of our management, these condensed consolidated financial statements reflect all significant adjustments necessary for a fair statement of the results for the interim periods presented. The accompanying unaudited condensed consolidated financial statements are not necessarily indicative of future trends or our operations for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2009.
Our interim fiscal quarters end on the thirteenth Saturday of each quarter. Since the fiscal year-end is December 31, the first and fourth fiscal quarters may not consist of precisely thirteen weeks. The first fiscal quarters of 2010 and 2009 ended on April 3, 2010 and April 4, 2009, respectively.
In June 2009, the Financial Accounting Standards Board (the “FASB”) issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIE”) and the evaluation of when consolidation of a VIE is required, which we adopted as of January 1, 2010. The amendment did not have an effect on our consolidated financial statements.
2. PROPOSED TRANSACTION WITH MERCK KGaA
On February 28, 2010, we entered into a definitive agreement under which Concord Investments Corp., a fully owned subsidiary of Merck KGaA, will acquire all outstanding shares of our common stock for $107 per share in cash. This business combination will create a world-class partner for the Life Science sector with significant businesses in high-margin specialty products and an attractive growth profile.
Through the date of this filing, Millipore announced key milestones relating to the proposed transaction, including: the transaction was approved by the boards of directors of both companies; the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act expired; the Special Shareholder’s Meeting to vote on the proposed transaction will take place on June 3, 2010; and the Company filed its definitive proxy with the Securities and Exchange Commission. The proposed transaction is expected to be completed in the early part of the third quarter of 2010.
During the three months ended April 3, 2010, we recorded $2,346 of costs consisting primarily of legal and regulatory fees associated with this proposed transaction in our condensed consolidated statement of operations as selling, general and administrative expenses.
Our revenues from Merck KGaA as a customer were not material for the three months ended April 3, 2010 and April 4, 2009, respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data) (Unaudited)
3. STOCK-BASED COMPENSATION
We grant stock options and restricted stock units to employees, officers, and directors under our current stock plan. The following table presents grants of stock options and restricted stock units:
| Three Months Ended | ||||||
| April 3, 2010 | April 4, 2009 | |||||
Stock options | 341 | 430 | ||||
Restricted stock units | 180 | 228 | ||||
Performance-based restricted stock units | 92 | (a) | 111 | (a) | ||
| (a) | Represents target number of shares estimated to be earned at the time of grant. |
The following table presents stock-based compensation expense included in our condensed consolidated statements of operations:
| Three Months Ended | ||||||||
| April 3, 2010 | April 4, 2009 | |||||||
Stock-based compensation expense in: | ||||||||
Cost of revenues | $ | 973 | $ | 615 | ||||
Selling, general and administrative expenses | 5,489 | 4,490 | ||||||
Research and development expenses | 1,024 | 686 | ||||||
Income before provision for income taxes | 7,486 | 5,791 | ||||||
Provision for income taxes | (2,540 | ) | (1,994 | ) | ||||
Net income attributable to Millipore | $ | 4,946 | $ | 3,797 | ||||
4. GOODWILL
The following table presents changes in goodwill:
Balance at December 31, 2009 | $ | 1,017,683 | ||
Effect of foreign exchange rate changes | (1,149 | ) | ||
Balance at April 3, 2010 | $ | 1,016,534 |
We had no accumulated impairment losses through April 3, 2010.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data) (Unaudited)
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
| April 3, 2010 | Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | Estimated Useful Life | ||||||||
Patented and unpatented technologies | $ | 94,126 | $ | (49,321 | ) | $ | 44,805 | 5 – 20 years | ||||
Trademarks and trade names | 42,767 | (22,635 | ) | 20,132 | 5 – 20 years | |||||||
Customer relationships | 412,099 | (159,370 | ) | 252,729 | 15 – 18 years | |||||||
Licenses and other | 16,185 | (9,628 | ) | 6,557 | 1.5 – 20 years | |||||||
Total | $ | 565,177 | $ | (240,954 | ) | $ | 324,223 | |||||
| December 31, 2009 | ||||||||||||
Patented and unpatented technologies | $ | 93,621 | $ | (47,323 | ) | $ | 46,298 | 5 – 20 years | ||||
Trademarks and trade names | 42,797 | (21,955 | ) | 20,842 | 5 – 20 years | |||||||
Customer relationships | 412,554 | (148,807 | ) | 263,747 | 15 – 18 years | |||||||
Licenses and other | 16,062 | (9,253 | ) | 6,809 | 1.5 – 20 years | |||||||
Total | $ | 565,034 | $ | (227,338 | ) | $ | 337,696 | |||||
Amortization expense for the three months ended April 3, 2010 and April 4, 2009 was $13,832 and $14,544, respectively.
The estimated aggregate future amortization expense for intangible assets owned as of April 3, 2010 is as follows:
Remainder of 2010 | $ | 41,546 | |
2011 | 49,802 | ||
2012 | 43,711 | ||
2013 | 38,240 | ||
2014 | 32,539 | ||
2015 | 27,578 | ||
Thereafter | 90,807 | ||
Total | $ | 324,223 |
6. BASIC AND DILUTED EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (“EPS”):
| Three Months Ended | ||||||
| April 3, 2010 | April 4, 2009 | |||||
Numerator: | ||||||
Net income attributable to Millipore | $ | 57,215 | $ | 53,025 | ||
Denominator: | ||||||
Weighted average common shares outstanding for basic EPS | 55,934 | 55,352 | ||||
Dilutive effect of stock-based compensation awards | 889 | 427 | ||||
Dilutive effect of our $565,000 3.75% convertible senior notes | 1,083 | – | ||||
Weighted average common shares outstanding for diluted EPS | 57,906 | 55,779 | ||||
Earnings per share: | ||||||
Basic | $ | 1.02 | $ | 0.96 | ||
Diluted | $ | 0.99 | $ | 0.95 | ||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data) (Unaudited)
For the three months ended April 3, 2010 and April 4, 2009, outstanding stock options and restricted stock units amounting to 195 and 1,281, respectively, were excluded from the calculation of diluted earnings per share because of their antidilutive effect. Performance-based restricted stock units were excluded from the calculation of diluted earnings per share because they are considered contingently issuable shares and the underlying targeted financial metrics have not been achieved.
The proposed acquisition by Merck KGaA resulted in an increase in our stock price during the three months ended April 3, 2010, which caused shares issuable for the conversion premium upon conversion of our $565,000 3.75 percent convertible senior notes (the “Convertible Notes”) to be dilutive to earnings as of April 3, 2010. Shares issuable for the conversion premium on the Convertible Notes were excluded from diluted earnings per share for the three months ended April 4, 2009 because our stock price had not exceeded the conversion price.
7. INVENTORIES
Inventories, stated at the lower of first-in, first-out (“FIFO”) cost or market, consisted of the following:
April 3, 2010 | December 31, 2009 | |||||
Raw materials | $ | 43,653 | $ | 46,339 | ||
Work in process | 76,352 | 85,740 | ||||
Finished goods | 117,908 | 125,730 | ||||
Total inventories | $ | 237,913 | $ | 257,809 | ||
8. PROPERTY, PLANT AND EQUIPMENT
Accumulated depreciation on property, plant and equipment was $400,924 at April 3, 2010 and $399,907 at December 31, 2009.
9. DEBT
Short-term debt
Our short-term debt consisted of the following:
April 3, 2010 | December 31, 2009 | |||||
Revolving credit facilities | $ | 10,679 | $ | 41,846 | ||
Operating bank facilities | 405 | 1,005 | ||||
Total short-term debt | $ | 11,084 | $ | 42,851 | ||
We have revolving credit facilities with two Japanese banks. These credit facilities provide for cumulative borrowings of ¥7,000,000, or $74,011, with an interest rate of TIBOR plus an applicable margin. Interest is payable at the end of an interest period based upon the term of the borrowing. These credit facilities expire in December 2010 and are subject to annual renewal at terms consistent with the initial agreements. As of April 3, 2010, we had ¥5,990,000, or $63,332, available for borrowing under these credit facilities.
Operating bank facilities consist of bank overdrafts.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data) (Unaudited)
Long-term debt
Our long-term debt consisted of the following:
April 3, 2010 | December 31, 2009 | |||||
Revolving credit facility | $ | – | $ | – | ||
3.75% convertible senior notes due 2026, net of discount | 537,117 | 533,186 | ||||
5.875% senior notes due 2016, net of discount | 336,607 | 357,056 | ||||
Total long-term debt | $ | 873,724 | $ | 890,242 | ||
At April 3, 2010, we had€465,000, or $627,615, available for borrowing under our primary revolving credit agreement (“the Revolver”). The Revolver expires in June 2011. At April 3, 2010, we were in compliance with all financial covenants under the Revolver.
As of April 3, 2010, our Convertible Notes had a fair value of $709,781 and our 5.875 percent senior notes had a fair value of $371,170. Fair value was determined from available market prices using current interest rates, non-performance risk, and term to maturity.
The following table sets forth balance sheet information regarding the Convertible Notes:
April 3, 2010 | December 31, 2009 | |||||
Principal value of the liability component | $ | 565,000 | $ | 565,000 | ||
Unamortized value of the liability component | 27,883 | 31,814 | ||||
Net carrying value of the liability component | $ | 537,117 | $ | 533,186 | ||
Interest expense on the Convertible Notes is recognized based on an effective interest rate of 6.94 percent. This rate represents the contractual coupon interest and the discount amortization as shown below:
April 3, 2010 | April 4, 2009 | |||||
Interest expense – coupon | $ | 5,297 | $ | 5,297 | ||
Interest expense – debt discount amortization | $ | 3,931 | $ | 3,672 | ||
10. INCOME TAXES
Our effective tax rate was 23 percent for the three months ended April 3, 2010 versus 18 percent for the prior year comparable period. Our effective tax rate for the prior year comparable period was lower because of the $8,542 non-taxable gain on the Guava acquisition. The higher current year rate was also attributable to a shift in the jurisdictional mix of our profits to higher tax rate jurisdictions this year and $1.5 million U.S. R&D credits recognized in the prior year comparable period. The R&D credit provisions expired at the end of fiscal year 2009, which resulted in a higher effective tax rate for the current period.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data) (Unaudited)
Over the next twelve months, we may need to record up to $3,900 of previously unrecognized tax benefits in the event of statue of limitations closures and settlements of tax audits.
11. EQUITY AND COMPREHENSIVE INCOME
The following table presents a summary of the changes in equity for the three months ended April 3, 2010 and April 4, 2009.
| Three Months Ended April 3, 2010 | Three Months Ended April 4, 2009 | |||||||||||||||||
Millipore Shareholders’ | Total Equity | Millipore Shareholders’ Equity | Noncontrolling Interest | Total Equity | ||||||||||||||
Equity, beginning of year | $ | 1,503,034 | $ | 1,503,034 | $ | 1,305,969 | $ | 6,326 | $ | 1,312,295 | ||||||||
Stock plan activities | 11,468 | 11,468 | (1,795 | ) | – | (1,795 | ) | |||||||||||
Stock based compensation expense | 7,486 | 7,486 | 5,791 | – | 5,791 | |||||||||||||
Dividends paid to noncontrolling interest | – | – | – | (460 | ) | (460 | ) | |||||||||||
Comprehensive income | 39,829 | 39,829 | 60,278 | 342 | 60,620 | |||||||||||||
Equity, end of period | $ | 1,561,817 | $ | 1,561,817 | $ | 1,370,243 | $ | 6,208 | $ | 1,376,451 | ||||||||
The following tables present the components of comprehensive income, net of taxes.
| Three Months Ended April 3, 2010 | Three Months Ended April 4, 2009 | |||||||||||||||||||
Millipore Shareholders’ | Total | Millipore Shareholders’ Equity | Noncontrolling Interest | Total | ||||||||||||||||
Net income | $ | 57,215 | $ | 57,215 | $ | 53,025 | $ | 529 | $ | 53,554 | ||||||||||
Net foreign currency translation adjustments | (19,104 | ) | (19,104 | ) | 2,855 | (187 | ) | 2,668 | ||||||||||||
Change in fair value of cash flow hedges | (639 | ) | (639 | ) | 3,939 | – | 3,939 | |||||||||||||
Net realized gain on interest rate swap | 2,277 | 2,277 | – | – | – | |||||||||||||||
Net realized loss on cash flow hedges | (819 | ) | (819 | ) | (31 | ) | – | (31 | ) | |||||||||||
Net realized loss on cash flow hedges reclassified to earnings | 884 | 884 | 247 | – | 247 | |||||||||||||||
Net changes in additional pension liability adjustments | 15 | 15 | 243 | – | 243 | |||||||||||||||
Total comprehensive income | $ | 39,829 | $ | 39,829 | $ | 60,278 | $ | 342 | $ | 60,620 | ||||||||||
12. DERIVATIVE INSTRUMENTS AND HEDGING
The purpose of our hedging activities is to mitigate the impact of volatility associated with foreign currency transactions and interest rate exposures related to an anticipated debt refinancing. We do not hold derivative instruments for trading or speculative purposes.
Cash Flow Hedges
We utilize foreign currency forward exchange contracts to hedge anticipated intercompany sales transactions in certain foreign currencies and designate these derivative instruments as cash flow hedges when appropriate. We enter into forward exchange contracts that match the currency, timing, and notional amounts of the underlying forecasted transactions. Therefore, no ineffectiveness resulted, or was recorded, through the consolidated statement of operations in any of the periods
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data) (Unaudited)
presented. Our forward exchange contracts are primarily short term in nature with maximum contract durations of fifteen months. At April 3, 2010, these forward exchange contracts had aggregate U.S. dollar equivalent notional amounts of $303,347 and aggregate U.S. dollar equivalent fair values amounting to a net gain of $2,646. The net gain or loss from these cash flow hedges reported in accumulated other comprehensive income will be reclassified to earnings and recorded in revenues in our consolidated statement of operations when the related inventory is sold to third-party customers. The amounts ultimately recognized will vary based on fluctuations of the hedged currencies through the contract maturity dates. At April 3, 2010, we had $211 in net realized losses in accumulated other comprehensive income which will be recognized as a reduction to revenues in the 2010 second quarter.
In August 2009, we entered into forward starting interest rate swap agreements with an aggregate notional amount of $300 million. The purpose of these swaps is to hedge interest rate exposures related to an anticipated fixed-rate debt financing in December 2011 with a term of at least 10 years. On April 2, 2010, the interest rate swaps were settled, which resulted in a gain of $2,277, net of tax of $1,423, that was recorded in accumulated other comprehensive income. This gain will be recognized in earnings as an adjustment to interest expense in our consolidated statement of operations in the same period that the hedged interest payments are recorded in our statement of operations or when the probability that the anticipated fixed-rate debt financing will occur is remote.
Net Investment Hedge
We designated our 5.875 percent senior notes, which are denominated in Euro, as a hedge of the foreign currency exposures of our net investment in a European subsidiary. Foreign exchange gains or losses on the hedge, which are caused by the remeasurement of the Euro debt to U.S. dollars, are recorded in other comprehensive income as a component of cumulative translation adjustment. At April 3, 2010 and December 31, 2009, the cumulative net loss on these senior notes included in accumulated other comprehensive income was $23,647 and $44,181, respectively.
Embedded Derivatives
The contingent interest feature of the Convertible Notes represents an embedded derivative that requires separate recognition at fair value apart from the Convertible Notes. As a result, we are required to separate the value of this feature from the Convertible Notes and record a liability on the condensed consolidated balance sheet. At April 3, 2010 and December 31, 2009, the contingent interest feature had no value.
Other Derivatives
In addition to cash flow hedges and the net investment hedge, we also enter into foreign currency forward exchange contracts to mitigate the impact of foreign exchange risk related to foreign currency denominated intercompany debt and foreign currency receivable and payable balances. Both realized and unrealized gains and losses resulting from changes in the fair value of these derivative instruments are recorded through current earnings because we do not designate these forward exchange contracts as hedges. The aggregate U.S. dollar equivalent notional amount of these forward exchange contracts was $253,549 at April 3, 2010. Cash paid or received upon settlement of these forward exchange contracts is included in operating activities in the condensed consolidated statements of cash flows.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data) (Unaudited)
Fair values of derivative instruments at April 3, 2010 are summarized in the following table:
| Asset Derivatives | Liability Derivatives | |||||||||
Balance Sheet Location | Fair value | Balance Sheet Location | Fair Value | |||||||
Cash flow hedges – foreign exchange contracts | Other current assets | $ | 6,613 | Accrued expenses | $ | 3,967 | ||||
Foreign exchange contracts not designated as hedges | Other current assets | 4,158 | Accrued expenses | 350 | ||||||
Total derivatives | $ | 10,771 | $ | 4,317 | ||||||
Amounts in the table above represent gross unrealized gains and losses and do not reflect the actual recorded values in our balance sheet because gains and losses offset in certain cases. Actual unrealized gains included in other current assets were $4,852 for cash flow hedges and $3,862 for derivatives not qualifying for hedge accounting. Actual unrealized losses included in accrued expenses were $2,206 for cash flow hedges and $54 for derivatives not qualifying for hedge accounting.
Fair values of derivative instruments at December 31, 2009 are summarized in the following table:
| Asset Derivatives | Liability Derivatives | |||||||||
Balance Sheet Location | Fair value | Balance Sheet Location | Fair Value | |||||||
Cash flow hedges – foreign exchange contracts | Other current assets | $ | 2,638 | Accrued expenses | $ | 4,192 | ||||
Cash flow hedges – interest rate swap | Other current assets | 4,940 | Accrued expenses | – | ||||||
Foreign exchange contracts not designated as hedges | Other current assets | 2,136 | Accrued expenses | 1,024 | ||||||
Total derivatives | $ | 9,714 | $ | 5,216 | ||||||
Amounts in the table above represent gross unrealized gains and losses and do not reflect the actual recorded values in our balance sheet because gains and losses offset in certain cases. Actual unrealized gains included in other current assets were $1,015 for foreign exchange contracts designated as cash flow hedges and $1,619 for foreign exchange contracts not qualifying for hedge accounting. Actual unrealized losses included in accrued expenses were $2,569 for foreign exchange contracts designated as cash flow hedges and $507 for foreign exchange contracts not qualifying for hedge accounting.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data) (Unaudited)
The effect of derivative instruments that were designated as hedges on our condensed consolidated financial statements is summarized below:
| Amount of Gain (Loss) Recognized in OCI (Effective Portion) | Statement of Operations Location (Effective Portion) | Amount of Gain Reclassified Accumulated OCI into Income Portion) | Statement of Location (Ineffective Portion) | Amount of Gain (Loss) Recorded (Ineffective Portion) | |||||||||||
Three months ended April 3, 2010 | |||||||||||||||
Cash flow hedges: | |||||||||||||||
Foreign exchange contracts | $ | 2,899 | Revenues | $ | (1,429 | ) | Selling, general and administrative expenses | $ | – | ||||||
Interest rate swaps | (1,240 | ) | Interest expense | – | Selling, general and administrative expenses | – | |||||||||
Net investment hedge | 20,534 | – | – | – | – | ||||||||||
Total | $ | 22,193 | $ | (1,429 | ) | $ | – | ||||||||
Three months ended April 4, 2009 | |||||||||||||||
Cash flow hedges: | |||||||||||||||
Foreign exchange contracts | $ | 6,008 | Revenues | $ | (162 | ) | Selling, general and administrative expenses | $ | – | ||||||
Net investment hedge | 12,496 | – | – | – | – | ||||||||||
Total | $ | 18,504 | $ | (162 | ) | $ | – | ||||||||
The effect of derivative instruments not designated as hedges on our condensed consolidated financial statements for the three months ended April 3, 2010 and April 4, 2009 is as follows:
| Statement of Operations Location | Amount of Gain (Loss) Recorded | |||
Three months ended April 3, 2010 | ||||
Foreign exchange contracts | Selling, general and administrative expenses | $(2,776) | ||
Three months ended April 4, 2009 | ||||
Foreign exchange contracts | Selling, general and administrative expenses | $(738) |
13. FAIR VALUE MEASUREMENTS
We hold cash equivalents, derivatives, certain other assets, and certain other liabilities that are carried at fair value. We generally determine fair value using a market approach based on quoted prices of identical instruments, when available. When market quotes of identical instruments are not readily accessible or available, we determine fair value based on quoted market prices of similar instruments. Nonperformance risk of counter-parties is considered in determining the fair value of derivative instruments in an asset position while the impact of our own credit standing is considered in determining the fair value of our obligations.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data) (Unaudited)
Our valuation techniques are based on both observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:
| Level 1: | Quoted prices for identical instruments in active markets. | |
| Level 2: | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. | |
| Level 3: | Instruments whose significant value drivers are unobservable. | |
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
| April 3, 2010 | ||||||||||||
| Level 1 | Level 2 | Level 3 | Balance | |||||||||
| Assets | ||||||||||||
Cash equivalents1 | $ | – | $ | 107,166 | $ | – | $ | 107,166 | ||||
Derivatives | $ | – | $ | 8,714 | $ | – | $ | 8,714 | ||||
Marketable securities2 | $ | 1,317 | $ | – | $ | – | $ | 1,317 | ||||
| Liabilities | ||||||||||||
Derivatives | $ | – | $ | 2,260 | $ | – | $ | 2,260 | ||||
Deferred compensation3 | $ | 11,283 | $ | – | $ | – | $ | 11,283 | ||||
| December 31, 2009 | ||||||||||||
| Level 1 | Level 2 | Level 3 | Balance | |||||||||
| Assets | ||||||||||||
Cash equivalents1 | $ | – | $ | 115,165 | $ | – | $ | 115,165 | ||||
Derivatives | $ | – | $ | 7,574 | $ | – | $ | 7,574 | ||||
Marketable securities2 | $ | 1,128 | $ | – | $ | – | $ | 1,128 | ||||
| Liabilities | ||||||||||||
Derivatives | $ | – | $ | 3,076 | $ | – | $ | 3,076 | ||||
Deferred compensation3 | $ | 8,794 | $ | – | $ | – | $ | 8,794 | ||||
| 1 | Valued at their ending balances as reported by the financial institution that hold our cash equivalents, which approximates fair value. |
| 2 | Relates to investments in marketable securities associated with certain of our non-qualified deferred compensation plans, which are included in Other assets. |
| 3 | Relates to our obligations to pay benefits under certain of our non-qualified deferred compensation plans and supplemental savings plan for senior executives, which are included in Other liabilities. |
There were no assets or liabilities that were measured at fair value on a nonrecurring basis during the three months ended April 3, 2010.
14. COSTS ASSOCIATED WITH EXIT ACTIVITIES
On September 10, 2008, we took actions to optimize the performance of our global supply chain and reduce our cost structure to improve operational efficiency. These actions were partly in response to the market conditions that caused revenue declines in our Bioprocess Division in 2008. These actions were also part of our long term strategy to further improve the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data) (Unaudited)
efficiency of our global supply chain, primarily through consolidation of our manufacturing locations. We have substantially completed this program as of April 3, 2010. We expect to complete this program in 2010 with the closing of one more facility and do not anticipate significant additional charges relating to this program going forward.
The following table summarizes expected, incurred, and remaining costs associated with these actions at April 3, 2010:
| Severance and Retention Costs | Facility Exit and Lease Termination Costs | Accelerated Depreciation | Other Costs | Total | ||||||||||||||||
Expected costs | $ | 7,000 | $ | 1,921 | $ | 2,876 | $ | 10,792 | $ | 22,589 | ||||||||||
Costs incurred through 2009 | (6,844 | ) | (1,506 | ) | (2,876 | ) | (9,234 | ) | (20,460 | ) | ||||||||||
Costs incurred in the three months ended | (41 | ) | (56 | ) | – | (531 | ) | (628 | ) | |||||||||||
Remaining expected costs at April 3, 2010 | $ | 115 | $ | 359 | $ | – | $ | 1,027 | $ | 1,501 | ||||||||||
The following table summarizes the accrual balances and utilization by cost type associated with these actions at April 3, 2010:
| Severance and Retention Costs | Facility Exit and Lease Termination Costs | Accelerated Depreciation | Other Costs | Total | |||||||||||||||
Balance at December 31, 2009 | $ | 1,497 | $ | 1,076 | $ | – | $ | – | $ | 2,573 | |||||||||
Expense | �� | 41 | 56 | – | 531 | 628 | |||||||||||||
Payments/utilization | (453 | ) | (310 | ) | – | (531 | ) | (1,294 | ) | ||||||||||
Foreign currency translation | (46 | ) | 3 | – | – | (43 | ) | ||||||||||||
Balance at April 3, 2010 | $ | 1,039 | $ | 825 | $ | – | $ | – | $ | 1,864 | |||||||||
During the three months ended April 3, 2010, we recorded costs associated with these exit activities in our condensed consolidated statement of operations of $612, $14, and $2 in cost of revenues, selling, general and administrative expenses and research and development expenses, respectively.
15. NONCONTROLLING INTEREST
On November 20, 2009, we acquired the remaining 60% ownership of our joint venture in India (the “India JV”) for $58,082 in cash. Prior to November 20, 2009, we owned a 40% equity interest in our India JV which we consolidated as we determined that substantially all of the activities of the India JV involved us or were conducted on our behalf.
16. CONTINGENCIES
The proposed acquisition by Merck KGaA resulted in two putative shareholder class actions challenging the exchange have been filed in Massachusetts naming Millipore, Merck, Sub and certain officers and directors of Millipore as defendants. The first such case is Elliot v. Millipore Corporation, et al., No. 10-0853 (filed March 2, 2010) (“Elliot”), and the second such case is United Union of Roofers, Waterproofers and Allied Workers Local Union No. 8 v. Millipore Corporation et al., No. 10-0855 (filed March 4, 2010) (“United Union of Roofers”). The complaints, which are similar, allege claims for breach of fiduciary duty against the individual defendants and for aiding and abetting a breach of fiduciary duty against the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data) (Unaudited)
corporate defendants. The complaints seek equitable relief including an order enjoining the exchange. The complaints generally allege that the consideration offered in the proposed transaction is inadequate and the process through which the proposed transaction was approved was unfair. The plaintiff in United Union of Roofers has notified the Elliot parties that it intends to seek consolidation of the two actions. Millipore is defending the lawsuit and along with the other defendants served a motion to dismiss Elliot on April 26, 2010.
We are also subject to a number of claims and legal proceedings which, in the opinion of our management, are incidental to our normal business operations. In our opinion, although final settlement of these suits and claims may impact our financial statements in a particular period, they are not expected to, in the aggregate, have a material adverse effect on our financial position, cash flows or results of operations.
17. RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, the Emerging Issues Task Force (“the EITF”) reached consensus on an amendment to the accounting and disclosure requirements for revenue arrangements with multiple deliverables. The amendment eliminates the use of the residual method of allocation and requires, instead, that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price. When applying the relative selling price allocation method, the selling price for each of the deliverables shall be determined using vendor-specific objective evidence (“VSOE”), if it exists, otherwise third-party evidence (“TPE”). If neither VSOE nor TPE exists, the amendment allows a vendor to use its best estimate of selling price. This amendment is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, this amendment may be applied retrospectively to all periods presented. Earlier application is permitted as of the beginning of an entity’s fiscal year. We plan to adopt this amendment as of January 1, 2011 and do not believe this amendment will have a material effect on our consolidated financial statements.
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PART I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Basis of Presentation
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Condensed Consolidated Financial Statements and related notes thereto and other financial information included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2009. We will also be disclosing certain non-GAAP information in the Management’s Discussion and Analysis. A reconciliation of our GAAP financial measures to our non-GAAP financial measures and information about the use of non-GAAP measures begins on page 28 under the heading “Use of Non-GAAP Financial Measures.”
Our interim fiscal quarters end on the thirteenth Saturday of each quarter. Since our fiscal year-end is December 31, the first and fourth fiscal quarters may not consist of precisely thirteen weeks. The first fiscal quarters of 2010 and 2009 ended on April 3, 2010 and April 4, 2009, respectively.
General Overview
Millipore is a global leader in the life science tools market. Together with our customers, we help to advance the research, development, and production of drugs. Our innovative products and services are used to support life science research, drug discovery, process development, drug manufacturing, and quality assurance. We help customers to improve laboratory productivity and work flows, prioritize potential drugs, optimize manufacturing productivity, and support commercial scale manufacturing.
We manage our business globally and are organized in two operating divisions. Our Bioscience Division provides products and technologies to support life science research and development activities. Our Bioprocess Division provides products and services to support pharmaceutical and biotechnology manufacturing.
The breadth of our product offering and our global scale make us a strategic supplier to the life science industry and provide us with access to many different segments of the market. Our products and services are primarily used by a diverse, global customer base including biotechnology and pharmaceutical companies, academic institutions, and research laboratories. In addition, we derive most of our revenues from consumable products. These attributes allow us to target growth on a number of dimensions and make our business less susceptible to economic downturns.
PROPOSED TRANSACTION WITH MERCK KGaA
On February 28, 2010, we entered into a definitive agreement under which Concord Investments Corp., a fully owned subsidiary of Merck KGaA, will acquire all outstanding shares of our common stock for $107 per share in cash. This business combination will create a world-class partner for the Life Science sector with significant businesses in high-margin specialty products and an attractive growth profile.
Through the date of this filing, Millipore announced key milestones relating to the proposed transaction, including: the transaction was approved by the boards of directors of both companies; the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act expired; the Special Shareholder’s Meeting to vote on the proposed transaction will take place on June 3, 2010; and the Company filed its definitive proxy with the Securities and Exchange Commission. The proposed transaction is expected to be completed in the early part of the third quarter of 2010.
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During the three months ended April 3, 2010, we recorded $2.3 million of costs consisting primarily of legal and regulatory fees associated with this proposed transaction in our condensed consolidated statement of operations as selling, general and administrative expenses.
The following table sets forth revenues derived from the Bioprocess and Bioscience divisions as a percentage of our total revenues.
| Three Months Ended | ||||||
| April 3, 2010 | April 4, 2009 | |||||
Bioprocess | 56 | % | 56 | % | ||
Bioscience | 44 | % | 44 | % | ||
Total | 100 | % | 100 | % | ||
The following table sets forth the composition of our revenues by geography.
| Three Months Ended | ||||||
| April 3, 2010 | April 4, 2009 | |||||
Americas | 41 | % | 40 | % | ||
Europe | 36 | % | 40 | % | ||
Asia/Pacific | 23 | % | 20 | % | ||
Total | 100 | % | 100 | % | ||
The following tables set forth reported and organic revenue growth rates by division compared with the prior year.
| Bioprocess | Bioscience | Consolidated | ||||||||||||||||
| Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||
| April 3, 2010 | April 4, 2009 | April 3, 2010 | April 4, 2009 | April 3, 2010 | April 4, 2009 | |||||||||||||
Reported growth | 12 | % | 6 | % | 15 | % | (1 | )% | 14 | % | 3 | % | ||||||
Less: Foreign currency translation | 3 | % | (7 | )% | 6 | % | (7 | )% | 5 | % | (7 | )% | ||||||
Acquisition | – | % | – | % | – | % | 1 | % | – | % | 1 | % | ||||||
Organic growth | 9 | % | 13 | % | 9 | % | 5 | % | 9 | % | 9 | % | ||||||
Consolidated revenues of $463.0 million for the three months ended April 3, 2010 increased $55.1 million, or 14 percent, versus the prior year comparable period. Adjusting for a 5 percentage point favorable effect from foreign currency translation, our consolidated revenues for the three months ended April 3, 2010 grew 9 percent. We delivered strong revenue growth as we benefited from the contribution of new products and a strengthening economic environment. Our results were well-balanced between both divisions. From a geographic perspective, we generated double-digit revenue growth in North America and Asia. Our Bioscience Division revenue growth was attributable to higher laboratory instrumentation sales and increased demand from pharmaceutical customers, two areas which rebounded from last year. Bioprocess Division revenue growth was primarily the result of continued higher spending by our biotechnology customers.
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Operating profit increased to $88.1 million for the three months ended April 3, 2010 from $71.3 million in the prior year comparable period. Higher revenues, favorable impact from changes in foreign currency exchange rates, and lower costs related to the global supply chain initiatives were the primary drivers of the increase. This profit expansion enabled us to continue to invest in research and development in accordance with our innovation strategy and absorb the effects of an unfavorable product mix and higher employee-related costs. Our gross margin increased to 56 percent for the three months ended April 3, 2010 from 55 percent in the prior year comparable period.
Diluted GAAP and non-GAAP earnings per share (“EPS”) were $0.99 and $1.21, respectively, for the three months ended April 3, 2010 and increased by $0.04 and $0.15, respectively, versus the prior year comparable period. (Please see our non-GAAP reconciliation which begins on page 28.) Higher operating profit contributed to higher GAAP EPS, which was offset by a higher tax rate in the current period and the absence this year of the $8.5 million non-taxable gain resulting from our Guava business acquisition. Diluted EPS was also adversely impacted by shares issuable upon conversion of the 3.75 percent convertible notes becoming dilutive as a result of the increase in our stock price during the three months ended April 3, 2010 and an increase in dilution of stock-based compensation awards.
Free cash flow is an important operating metric that we define as net cash provided by operating activities less additions to property, plant and equipment. We generated $76.7 million of free cash flow for the three months ended April 3, 2010, a 12 percent increase over the prior year comparable period. This growth was primarily attributable to a significant improvement in our inventory management as a result of our working capital initiatives. Over the past year, we have lowered our days of inventory outstanding from 129 days at April 4, 2009 to 109 days at April 3, 2010.
Results of Operations
REVENUES
The following table sets forth revenues and percent of revenue growth by division compared with the prior year.
| Three Months Ended | |||||||||
| ($ in millions): | April 3, 2010 | April 4, 2009 | Growth | ||||||
Bioprocess | $ | 258.3 | $ | 230.0 | 12 | % | |||
Bioscience | 204.7 | 177.9 | 15 | % | |||||
Total | $ | 463.0 | $ | 407.9 | 14 | % | |||
Bioprocess Division
Bioprocess revenues of $258.3 million for the three months ended April 3, 2010 increased $28.3 million, or 12 percent, versus the prior year comparable period. Excluding the favorable effect of foreign currency translation, Bioprocess revenues increased 9 percent. The revenue growth was primarily attributable to higher sales of our downstream bioprocessing products used in biopharmaceutical manufacturing, which was a result of the following: higher spending levels by our North America biotechnology customers as these customers are accelerating their production of monoclonal antibodies; increased revenues related to disposable manufacturing as companies continue to migrate to single use, disposable technologies that eliminate the need for cleaning and sterilization, thus shortening the time between processing runs; and higher revenues in Asia, particularly in China and Singapore, due to biotechnology industry growth in the region and more stringent regulatory compliance standards in China.
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To a lesser extent, the Bioprocess revenue increase was the result of continued growth in process monitoring tools products. Demand for on-site testing products, particularly our disposable NovaSeptum® products, continued to increase, as drug companies are adopting disposable sampling technology to monitor contamination earlier in the drug manufacturing process.
Bioscience Division
Bioscience revenues of $204.7 million for the three months ended April 3, 2010 increased $26.8 million, or 15 percent, versus the prior year comparable period. Excluding the favorable effect of foreign currency translation, Bioscience revenues increased 9 percent. The division’s revenue growth benefited from increased spending from pharmaceutical customers and higher sales of laboratory instrumentation products. These two areas were weak last year and benefited from an improving economic environment in the three months ended April 3, 2010, particularly in North America and Asia. Bioscience revenue growth was also attributable to successful new product launches and a $3.3 million revenue from a technology license.
REVENUES BY GEOGRAPHY
Revenues and the percent of revenue growth by geography, as compared with the prior year, are summarized in the table below:
| Three Months Ended | |||||||||
| ($ in millions): | April 3, 2010 | April 4, 2009 | Growth | ||||||
Americas | $ | 188.9 | $ | 165.2 | 14 | % | |||
Europe | 166.7 | 162.9 | 2 | % | |||||
Asia/Pacific | 107.4 | 79.8 | 35 | % | |||||
Total | $ | 463.0 | $ | 407.9 | 14 | % | |||
Reported and organic growth rates by geography, as compared with the prior year, are summarized below:
| Americas | Europe | Asia/Pacific | ||||||||||||||||
| Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||
| April 3, 2010 | April 4, 2009 | April 3, 2010 | April 4, 2009 | April 3, 2010 | April 4, 2009 | |||||||||||||
Reported growth | 14 | % | 13 | % | 2 | % | (5 | )% | 35 | % | 1 | % | ||||||
Less: Foreign currency translation | – | (1 | )% | 7 | % | (16 | )% | 7 | % | 2 | % | |||||||
Acquisition | – | 1 | % | – | 1 | % | – | – | ||||||||||
Organic growth | 14 | % | 13 | % | (5 | )% | 10 | % | 28 | % | (1 | )% | ||||||
From a geographic perspective, reported revenues increased in all regions, $23.7 million in the Americas, $3.8 million in Europe, and $27.6 million in Asia/Pacific, during the three months ended April 3, 2010 versus the prior year comparable period. Excluding the effects of foreign currency translation, revenues increased 14 percent in the Americas, decreased 5 percent in Europe, and increased 28 percent in Asia/Pacific. The increase in the Americas was primarily the result of higher spending by our Bioprocess biotechnology customers and Bioscience pharmaceutical customers as well as the $3.3 million revenue from a technology license. The decrease in Europe was primarily attributable to general economic conditions and the timing of purchases by certain larger Bioprocess customers. The increase in Asia/Pacific was primarily driven by revenue growth in our downstream bioprocessing products in China and Singapore and higher Bioscience revenues in Japan as the economy began to improve.
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PART I
GROSS PROFIT MARGIN
| Three Months Ended | ||||||||
| ($ in millions): | April 3, 2010 | April 4, 2009 | ||||||
Gross profit | $ | 259.4 | $ | 223.3 | ||||
Gross profit margin | 56 | % | 55 | % | ||||
Gross profit increased $36.1 million, or 16 percent, versus the prior year comparable period. Gross profit margin improved from 55 percent of revenues last year to 56 percent of revenues this year. The primary drivers of the increase in gross profit margin were favorable foreign currency, a decrease in inventory write-offs due to our working capital improvement actions implemented last year, lower costs associated with our global supply chain initiatives, and a slight impact from price increases. The favorable foreign currency impact was primarily the result of a weaker U.S. dollar, versus the prior year comparable period. Generally, when the Japanese Yen strengthens against the U.S. dollar and Euro, our gross profit margin is favorably impacted because substantially all of our manufacturing activities are in the United States, Ireland, and France. We incurred charges associated with our global supply chain initiatives amounting to $0.6 million and $3.3 million in the three months ended April 3, 2010 and April 4, 2009, respectively. By the end of fiscal year 2010, we expect to complete these initiatives by incurring approximately $1.5 million of planned additional costs.
These favorable effects were partly offset by an unfavorable product mix in our upstream bioprocessing products and, to a lesser extent, higher salary and facility costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
| Three Months Ended | ||||||||
| ($ in millions): | April 3, 2010 | April 4, 2009 | ||||||
Selling, general and administrative expenses | $ | 141.1 | $ | 126.8 | ||||
Percentage of revenues | 30 | % | 31 | % | ||||
Selling, general and administrative (“SG&A”) expenses increased $14.3 million, or 11 percent, versus the prior year comparable period. Excluding the adverse effect of foreign currency translation, SG&A expenses increased $10.2 million, or 8 percent. The increase was primarily attributable to increased employee-related costs driven by: salary increases; higher incentive compensation costs; and higher costs related to our non-employee director deferred compensation plan resulting from an increase in the Millipore stock price. Additionally, acquisition and related integration expenses increased due to the proposed acquisition by Merck KGaA. Amortization expense for the three months ended April 3, 2010 affecting SG&A was $11.5 million versus $12.0 million in the prior year comparable period.
RESEARCH AND DEVELOPMENT EXPENSES
| Three Months Ended | ||||||||
| ($ in millions): | April 3, 2010 | April 4, 2009 | ||||||
Research and development expenses | $ | 30.1 | $ | 25.2 | ||||
Percentage of revenues | 6 | % | 6 | % | ||||
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Research and development (“R&D”) expenses increased $4.9 million, or 19 percent, versus the prior year comparable period. Excluding the adverse effect of foreign currency translation, R&D expenses increased $4.5 million, or 18 percent. The increase was primarily attributable to increased employee-related costs driven by salary increases, higher incentive compensation costs, and increased headcount. Additionally, technology partner payments have increased as a result of our strategy to enhance our internal R&D capabilities through technology collaborations and license arrangements with third parties. We expect 2010 full year R&D expenses to be approximately 7 percent of revenues.
INTEREST INCOME/EXPENSE
| Three Months Ended | ||||||||
| ($ in millions): | April 3, 2010 | April 4, 2009 | ||||||
Interest income | $ | 0.1 | $ | 0.2 | ||||
Interest expense | $ | 14.3 | $ | 14.6 | ||||
Average interest rate during the period | 6.3 | % | 5.5 | % | ||||
Interest expense decreased $0.3 million, or 2 percent, versus the prior year comparable period. Excluding the adverse effect of foreign currency translation, interest expense decreased $0.5 million, or 3 percent. The decrease was the result of lower overall debt balances.
PROVISION FOR INCOME TAXES
| Three Months Ended | ||||||
| April 3, 2010 | April 4, 2009 | |||||
Effective income tax rate | 23 | % | 18 | % | ||
Our effective tax rate was 23 percent for the three months ended April 3, 2010 versus 18 percent for the prior year comparable period. Our effective tax rate for the prior year comparable period was lower because of the $8.5 million non-taxable gain on the Guava acquisition. The higher current year rate was also attributable to a shift in the jurisdictional mix of our profits to higher tax rate jurisdictions this year and $1.5 million U.S. R&D credits recognized in the prior year comparable period. The R&D credit provisions expired in December 2009, thus resulting in a higher effective tax rate for the current period. On a full year basis, we expect our effective tax rate to be approximately 22 percent.
Over the next twelve months, we may need to record up to $3,900 of previously unrecognized tax benefits in the event of statute of limitations closures and settlements of tax audits.
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OPERATING PROFIT, NET INCOME ATTRIBUTABLE TO MILLIPORE AND DILUTED EARNINGS PER SHARE
| Three Months Ended | ||||||||
| ($ in millions, except per share data): | April 3, 2010 | April 4, 2009 | ||||||
Operating profit | $ | 88.1 | $ | 71.3 | ||||
Operating profit margin | 19.0 | % | 17.5 | % | ||||
Net income attributable to Millipore | $ | 57.2 | $ | 53.0 | ||||
Diluted earnings per share | $ | 0.99 | $ | 0.95 | ||||
Non-GAAP net income attributable to Millipore* | $ | 70.2 | $ | 59.2 | ||||
Non-GAAP earnings per share* | $ | 1.21 | $ | 1.06 | ||||
| * | See non-GAAP reconciliation on page 29 for more information. |
Operating profit increased $16.8 million, or 23.6 percent, versus the prior comparable period, primarily as a result of higher revenues and favorable effect of foreign currency translation. These increases were partially offset by higher employee-related costs and higher investments in research and development. On a GAAP basis, the 8 percent increase in net income attributable to Millipore was the result of higher operating profit which was partially offset by a higher tax rate in the current period and the absence this year of the $8.5 million non-taxable gain on the Guava acquisition. On a non-GAAP basis, the 19 percent increase in net income attributable to Millipore was the result of higher operating profit.
Capital Resources and Liquidity
The following table shows information about our capitalization as of the dates indicated.
| (In millions, except ratio amounts) | April 3, 2010 | December, 2009 | ||||
Total debt | $ | 884.8 | $ | 933.1 | ||
Cash and cash equivalents | $ | 222.7 | $ | 168.3 | ||
Net debt* | $ | 662.1 | $ | 764.8 | ||
| * | Non-GAAP. See page 28 for more information. |
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our primary sources of liquidity are internally generated cash flows and borrowings under our revolving credit facility. Significant factors affecting the management of our ongoing cash requirements are the adequacy of available bank lines of credit and our ability to attract long-term capital with satisfactory terms. The sources of our liquidity are subject to all of the risks of our business and could be adversely affected by, among other factors, a decrease in demand for our products, our ability to integrate acquisitions, deterioration in certain financial ratios, and market changes in general.
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The cost of additional or replacement financing is partly a function of our debt to capitalization levels, credit standing, and financial market conditions. Our credit ratings are reviewed regularly by major debt rating agencies such as Standard & Poor’s and Moody’s Investors Service. The chart below summarizes our ratings at April 3, 2010.
| Moody’s | Standard & Poor’s | |||
Primary revolving credit facility | Baa2 | BBB | ||
5.875% senior notes | Ba2 | BBB | ||
3.75% convertible senior notes | – | BB- | ||
Millipore corporate rating | Ba1 | BB+ |
We believe our future operating cash flows will be sufficient to meet our future operating and investing cash needs. The availability of borrowings under our primary revolving credit facility and our ability to obtain equity financing provide additional potential sources of liquidity should they be required. We intend to utilize excess cash generated from our operations to fund future acquisitions while preserving an appropriate level of cash needed for our operations. We may from time to time seek to retire or purchase our outstanding obligations. We may also seek to repurchase shares of our common stock. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors.
In August 2009, we entered into forward starting interest rate swap agreements with an aggregate notional amount of $300.0 million. The purpose of these swaps is to hedge interest rate exposures related to an anticipated fixed-rate debt financing in December 2011 with a term of at least 10 years. On April 2, 2010, the interest rate swaps were settled, resulting in a gain of $2.3 million, net of tax of $1.4 million, which was recorded in accumulated other comprehensive income. This gain will be recognized in earnings as an adjustment to interest expense in our consolidated statement of operations in the same period when the hedged interest payments are recorded in our statement of operations or when the probability that the anticipated fixed-rate debt financing will occur is remote.
CASH FLOWS
The following table summarizes our sources and uses of cash over the periods indicated.
| Three Months Ended | ||||||||
| ($ in millions) | April 3, 2010 | April 4, 2009 | ||||||
Net cash provided by operating activities | $ | 88.3 | $ | 84.2 | ||||
Less: additions to property, plant and equipment | (11.6 | ) | (15.7 | ) | ||||
Free cash flow* | $ | 76.7 | $ | 68.5 | ||||
Net cash used in investing activities | $ | (12.3 | ) | $ | (35.8 | ) | ||
Net cash (used in) provided by financing activities | $ | (15.4 | ) | $ | 5.8 | |||
Increase in cash and cash equivalents | $ | 54.3 | $ | 56.7 | ||||
| * | Non-GAAP. See page 28 for more information. |
OPERATING CASH FLOWS
Cash provided by operating activities was $88.3 million for the three months ended April 3, 2010 and was primarily attributable to our net income of $57.2 million, non-cash items totaling $38.7 million (primarily depreciation and amortization expenses, stock-based compensation expense, and debt discount amortization), and a net working capital increase of $7.7 million. Our working capital increase was primarily the result of an increase in accounts receivable and a decrease in
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accrued expenses offset by decrease in inventory and increases in accounts payable and income taxes payable balances. The increase in accounts receivable since year end was primarily attributable to the higher overall revenues as well as timing of our sales during the quarter. Days sales outstanding was 63 days at April 3, 2010, compared to 59 days at December 31, 2009 and 67 days at April 4, 2009. The decrease in accrued expenses since year end was primarily attributable to payments made to employees under the 2009 management incentive plan paid during the three months ended April 3, 2010. The decrease in inventory was attributable to two main factors. First, continued global supply chain initiatives contributed to reductions in inventory levels. Secondly, the timing of product sales as well as overall revenue increases helped reduce inventory levels. Days of inventory was 109 days at April 3, 2010, compared to 118 days at December 31, 2009 and 129 days at April 4, 2009. At the end of 2009, we accelerated cash payments to take advantage of early vendor payment discounts, which decreased our December 31, 2009 accounts payable balance. For the three months ended April 3, 2010, the amount of early payment discount opportunities decreased causing accounts payable to increase as of April 3, 2010. Lastly, the increase in income taxes payable was attributable to an increase in profitability in higher tax rate jurisdictions.
INVESTING CASH FLOWS
Cash used for investing activities was $12.3 million during the three months ended April 3, 2010. We paid $11.6 million for capital expenditures and expect our full year 2010 capital expenditures to be approximately $80 million.
FINANCING CASH FLOWS
Cash used for financing activities was $15.4 million during the three months ended April 3, 2010 resulting from net repayments of short-term debt of $32.3 million, which was offset by proceeds of $16.9 million from exercises of employee stock options. Increases in stock option exercises were attributable to the higher stock price as a result of the proposed Merck KGaA transaction.
FINANCING COMMITMENTS
Short-term debt
Short-term debt consisted of borrowings under our operating bank facilities and two short-term revolving credit facilities in Japan. These two credit facilities provide for cumulative borrowings of ¥7.0 billion, or $74.0 million, with an interest rate of TIBOR plus an applicable margin. Interest is payable at the end of an interest period based upon the term of the borrowing. These credit facilities expire in December 2010 and are subject to automatic annual renewals subject to termination by either Millipore or the banks. As of April 3, 2010, we had ¥6.0 billion, or $63.3 million, available for borrowing under these credit facilities. We are not required to comply with any debt covenants under these agreements.
Primary revolving credit facility
At April 3, 2010, we had a commitment under our primary revolving credit agreement amounting to€465.0 million, or $627.6 million. This credit agreement expires in June 2011.
We are required to maintain certain leverage and interest coverage ratios set forth in the primary revolving credit agreement. As of April 3, 2010, we were compliant with all financial covenants specified in this credit agreement. The agreement also includes limitations on our ability to incur additional indebtedness; to merge, consolidate, or sell assets; to create liens; and to make payments in respect of capital stock or subordinated debt, as well as other customary covenants and representations.
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The following table summarizes the financial covenant requirements and our compliance with these covenants as of April 3, 2010:
| Covenant | Requirement | Actual at April 3, 2010 | ||
Maximum leverage ratio | 3.50 | 2.0 | ||
Minimum interest coverage ratio | 3.50 | 10.22 |
As of April 3, 2010, we had no borrowings under our primary revolving credit facility.
3.75% convertible senior notes due 2026
In June 2006, we issued $565.0 million in aggregate principal amount of 3.75 percent convertible senior notes (the “Convertible Notes”) in a private placement offering. The estimated fair value of a similar debt instrument without the conversion feature was $483.7 million at the time of issuance. The resulting $81.3 million discount on the debt is being amortized through interest expense over the period from June 2006 through December 2011, which represents the expected life of the debt. As a result, our Convertible Notes have a 6.94 percent effective interest rate.
As of April 3, 2010, the Convertible Notes had a carrying value of $537.1 million, net of $27.9 million of unamortized discount, and a fair value of $709.8 million. The fair value was determined from available market prices using current interest rates, non-performance risk, and term to maturity.
5.875% senior notes due 2016
In June 2006, we issued€250.0 million, or $337.4 million, in aggregate principal amount of 5.875 percent senior notes (the “Euro Notes”).
As of April 3, 2010, the Euro Notes had a carrying value of $336.6 million, net of $0.8 million of unamortized original issue discount, and a fair value of $371.2 million. This fair value was determined from available market prices using current interest rates, non-performance risk, and term to maturity.
Legal Matters
The proposed acquisition by Merck KGaA resulted in two putative shareholder class actions challenging the exchange have been filed in Massachusetts naming Millipore, Merck, Sub and certain officers and directors of Millipore as defendants. The first such case is Elliot v. Millipore Corporation, et al., No. 10-0853 (filed March 2, 2010) (“Elliot”), and the second such case is United Union of Roofers, Waterproofers and Allied Workers Local Union No. 8 v. Millipore Corporation et al., No. 10-0855 (filed March 4, 2010) (“United Union of Roofers”). The complaints, which are similar, allege claims for breach of fiduciary duty against the individual defendants and for aiding and abetting a breach of fiduciary duty against the corporate defendants. The complaints seek equitable relief including an order enjoining the exchange. The complaints generally allege that the consideration offered in the proposed transaction is inadequate and the process through which the proposed transaction was approved was unfair. The plaintiff in United Union of Roofers has notified the Elliot parties that it intends to seek consolidation of the two actions. Millipore is defending the lawsuit and along with the other defendants served a motion to dismiss Elliot on April 26, 2010.
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Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our most critical accounting policies have a significant impact on the preparation of these condensed consolidated financial statements. These policies include estimates and significant judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continue to have the same critical accounting policies and estimates as we described in Item 7, beginning on page 55, of our Annual Report on Form 10-K for the year ended December 31, 2009. Those policies and estimates were identified as those relating to revenue recognition, inventory valuation, valuation of long-lived assets, stock-based compensation, income taxes, and employee retirement plans. We continue to evaluate our estimates and judgments on an on-going basis. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We base our estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.
New Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 17 “Recent Accounting Pronouncements” in the Notes to condensed consolidated financial statements in this Form 10-Q.
Use of Non-GAAP Financial Measures
Millipore provides non-GAAP supplemental information to its financial results. Non-GAAP net income attributable to Millipore and diluted earnings per share exclude costs related to global supply chain initiatives, acquisition and related integration expenses, costs related to the proposed acquisition, amortization of purchased intangible assets, inventory fair value adjustments related to business acquisitions, gain on business acquisition, and non-cash interest expense on our Convertible Notes. We define free cash flow as net cash provided by operating activities less additions to property, plant, and equipment. We define net debt as our debt less cash and cash equivalents.
We believe that the non-GAAP financial measures provide useful and supplementary information to investors regarding our operating performance, although they may not be directly comparable to measures used by other companies. It is our belief that these non-GAAP financial measures have been particularly useful to investors over the last few years because of the significant changes that have occurred outside of our day-to-day business in accordance with the execution of our strategy. Non-GAAP information should not be construed as an alternative to GAAP information as the items excluded from the non-GAAP measures often have a material impact on our financial results. Management uses, and investors should use, non-GAAP measures in conjunction with our GAAP results.
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Reconciliation of GAAP to Non GAAP Financial Measures
Operating Results—three months ended April 3, 2010
| (dollars in thousands, except EPS data) | Net income Attributable to Millipore | Diluted EPS | ||||
GAAP results, three months ended April 3, 2010 | $ | 57,215 | $ | 0.99 | ||
Non-GAAP adjustments: | ||||||
Costs related to global supply chain initiatives1 | 404 | 0.01 | ||||
Costs related to proposed acquistion3 | 1,511 | 0.02 | ||||
Purchased intangibles amortization2 | 8,645 | 0.15 | ||||
Non-cash interest expense on convertible debt4 | 2,474 | 0.04 | ||||
Total non-GAAP adjustments | 13,034 | 0.22 | ||||
Non-GAAP results, three months ended April 3, 2010 | $ | 70,249 | $ | 1.21 | ||
Operating Results—three months ended April 4, 2009
| (dollars in thousands, except EPS data) | Net Income Attributable To Millipore | Diluted EPS | ||||||
GAAP results, three months ended April 4, 2009 | $ | 53,025 | $ | 0.95 | ||||
Non-GAAP adjustments: | ||||||||
Costs related to global supply chain initiatives1 | 2,466 | 0.04 | ||||||
Business acquisition inventory fair value adjustment2 | 391 | 0.01 | ||||||
Acquisition and related integration expenses3 | 574 | 0.01 | ||||||
Purchased intangibles amortization2 | 8,979 | 0.16 | ||||||
Gain on business acquisition2 | (8,542 | ) | (0.15 | ) | ||||
Non-cash interest expense on convertible debt4 | 2,299 | 0.04 | ||||||
Total non-GAAP adjustments | 6,167 | 0.11 | ||||||
Non-GAAP results, three months ended April 4, 2009 | $ | 59,192 | $ | 1.06 | ||||
| (1) | We exclude severance and relocation costs, facility closure costs, and accelerated depreciation associated with our global supply chain initiatives because they are material expenses in excess of our normal operating costs. We undertook these initiatives to significantly reduce our cost structure and improve operational efficiency primarily through the consolidation of manufacturing locations. |
| (2) | We exclude the amortization of purchased intangible assets, gain on business acquisition, and inventory fair value adjustments from business acquisitions because (i) the amounts are non-cash, (ii) we can not influence the timing and amount of future expense recognition, and (iii) excluding such expenses provides investors and management better visibility into the components of operating expenses. |
| (3) | We exclude costs related to the proposed acquisition and acquisition and related integration expenses to make year-over-year comparisons because these are incremental costs to our day-to-day business and can be material. |
| (4) | Non-cash interest expense on our Convertible Notes is the incremental interest expense as a result of a change in accounting principles. This interest expense is non-cash and we can not control the amount of this expense without modifying our capital structure. |
Forward-Looking Statements
The matters discussed in this Form 10-Q, as well as in future oral and written statements by our management, that are forward-looking statements are based on our current management expectations. These expectations involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. These risks and uncertainties include, without limitation, the risk factors and uncertainties set forth in Item 1A (Risk Factors) and elsewhere in our Form 10-K for the year ended December 31, 2009.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There has been no significant change in our exposure to market risk since December 31, 2009. For discussion of our exposure to market risk, refer to Part II Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2009 under the heading “Market Risk.”
ITEM 4. CONTROLS AND PROCEDURES.
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the fiscal quarter covered by this report. Based upon that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective. There has been no change in our internal control over financial reporting during the quarter ended April 3, 2010 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
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a. Exhibits Filed or Furnished Herewith.
| Exhibits Filed Herewith | ||
| 10.1 | Form of Amendment No. 1 to Executive Termination Agreement | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) / Rule 15d-14(a) | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) / Rule 15d-14(a) | |
| Exhibits Furnished Herewith | ||
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MILLIPORE CORPORATION
| Signature | Title | Date | ||||
By: | /s/ CHARLES F. WAGNER, JR. Charles F. Wagner, Jr. | Vice President and Chief Financial Officer (on behalf of the registrant as its Principal Financial Officer) | May 12, 2010 | |||
By: | /s/ ANTHONY L. MATTACCHIONE Anthony L. Mattacchione | Vice President, Corporate Controller and Chief Accounting Officer (on behalf of the registrant as its Principal Accounting Officer) | May 12, 2010 | |||
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| Exhibit Number | Exhibit Title | |
| 10.1 | Form of Amendment No. 1 to Executive Termination Agreement | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/Rule 15d-14(a) | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/Rule 15d-14(a) | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 | |
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