FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to COMMISSION FILE NUMBER 0-1052 Millipore Corporation (Exact name of registrant as specified in its charter) Massachusetts (State or other jurisdiction of incorporation or organization) 04-2170233 (I.R.S. Employer Identification No.) 80 Ashby Road Bedford, Massachusetts 01730 (Address of principal executive offices) Registrant's telephone number, include area code (781) 275- 9200 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 and 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 The Company had 43,596,783 shares of common stock outstanding as of October 26, 1997. MILLIPORE CORPORATION INDEX TO FORM 10-Q Page No. Part I. Financial Information Item 1. Condensed Financial Statements Consolidated Balance Sheets -- September 30, 1997 and December 31, 1996 2 Consolidated Statements of Income -- Three and Nine Months Ended September 30, 1997 and 1996 3 Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1997 and 1996 4 Notes to Consolidated Condensed Financial Statements 5-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 MILLIPORE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) September 30, December 31, 1997 1996 ASSETS (Unaudited) Current assets Cash $ 1,891 $ 4,010 Short-term investments 29,204 42,860 Accounts receivable, net 181,145 151,653 Inventories 129,305 106,410 Other current assets 14,253 6,979 Total Current Assets 355,798 311,912 Property, plant and equipment, net 219,011 203,017 Intangible assets 78,484 58,866 Deferred income taxes 82,464 69,086 Other assets 49,626 40,011 Total Assets $ 785,383 $ 682,892 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 180,129 $ 101,546 Accounts payable 46,922 34,404 Accrued expenses 85,532 57,011 Accrued divestiture costs 337 3,604 Dividends payable 4,359 3,899 Accrued retirement plan 6,273 4,705 contributions Accrued income taxes payable 5,457 11,231 Total Current Liabilities 329,009 216,400 Long-term debt 292,793 224,359 Other liabilities 26,281 24,528 Shareholders' equity Common stock 56,988 56,988 Additional paid-in capital 8,800 8,800 Retained earnings 473,373 548,598 Unrealized gain on securities 16,873 9,536 available for sale Translation adjustments (28,107) (8,280) 527,927 615,642 Less: Treasury stock, at cost, 13,399 shares in 1997 and 13,666 in 1996 (390,627) (398,037) Total Shareholders' Equity 137,300 217,605 Total Liabilities and Shareholders' $ 785,383 $ 682,892 Equity The accompanying notes are an integral part of the consolidated condensed financial statements. -2- MILLIPORE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Net sales $184,544 $148,913 $555,881 $467,317 Cost of sales 82,372 60,774 249,430 188,132 Gross profit 102,172 88,139 306,451 279,185 Selling, general & administrative expenses 58,965 50,226 182,015 152,425 Research & development expenses 14,353 9,610 42,507 28,760 Purchased research & development expense - - 114,091 - Operating income / (loss) 28,854 28,303 (32,162) 98,000 Gain on sale of equity securities 5,304 2,858 7,073 2,858 Interest income 708 660 2,105 2,034 Interest expense (8,026) (2,995) (22,209) (8,650) Income / (loss) before income taxes 26,840 28,826 (45,193) 94,242 Provision for income taxes 5,637 6,774 14,985 22,147 Net income / (loss) $21,203 $22,052 $(60,178) $72,095 Net income / (loss) per $ 0.49 $ 0.51 $(1.38) $1.65 common share Cash dividends declared per $ 0.10 $ 0.09 $ 0.29 $ 0.26 common share Weighted average common shares 43,565 43,335 43,492 43,714 The accompanying notes are an integral part of the consolidated condensed financial statements. -3- MILLIPORE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 1997 1996 Cash Flows From Operating Activities: Net (loss) income $(60,178) $72,095 Adjustments to reconcile net (loss) income to net cash provided: Purchased research and development 114,091 - expense Write-off of acquired inventory step- 5,000 - up Depreciation and amortization 30,358 22,736 Gain on sale of equity securities (7,073) (2,858) Change in operating assets and liabilities: (Increase) in accounts receivable (20,354) (9,042) (Increase) in inventories (11,024) (13,377) (Increase) in other current assets (8,783) (3,223) (Increase) in other assets (2,382) (4,582) (Decrease) increase in accounts payable and accrued (11,578) 4,407 expenses Increase(decrease) in accrued 1,648 (310) retirement plan contributions (Decrease) increase in accrued (389) 1,746 income taxes Other 4,782 2,993 Net cash provided by operating 34,118 70,585 activities Cash Flows From Investing Activities: Additions to property, plant and (28,464) (22,808) equipment Investment in businesses (5,395) (3,990) Acquisition of Tylan, net of cash (159,158) - acquired Investment in intangible assets - (1,523) Proceeds from sale of equity 7,073 2,979 securities Net cash used by discontinued (3,246) (7,735) operations Other investing activities (1,146) - Net cash used in investing activities (190,336) (33,077) Cash Flows From Financing Activities: Treasury stock acquired - (57,552) Issuance of treasury stock under stock 5,178 8,454 plans Increase in short-term debt 79,583 26,147 Proceeds from issuance of long-term 197,950 - debt Payments on long-term debt (126,018) (735) Dividends paid (12,185) (11,109) Net cash provided by (used in) 144,508 (34,795) financing activities Effect of foreign exchange rates on cash and (4,065) (738) short-term investments Net (decrease) increase in cash and (15,775) 1,975 short-term investments Cash and short-term investments on 46,870 23,758 January 1 Cash and short-term investments on $31,095 $25,733 September 30 The accompanying notes are an integral part of the consolidated condensed financial statements. -4- MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (In thousands) 1.The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and, accordingly, these footnotes condense or omit certain information and disclosures normally included in financial statements. These financial statements, which in the opinion of management reflect all adjustments necessary for a fair presentation, should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. The accompanying unaudited consolidated condensed financial statements are not necessarily indicative of future trends or the Company's operations for the entire year. 2. Inventories consisted of the following: September 30, December 31, 1997 1996 Raw materials $45,726 $ 27,502 Work in 17,969 16,310 process Finished 65,610 62,598 goods $129,305 $ 106,410 3. Accumulated depreciation on property, plant and equipment was $215,078 at September 30, 1997, and $195,397 at December 31, 1996. 4. On January 22, 1997, the Company completed a cash tender offer for all of the outstanding common shares of Tylan General, Inc. (Tylan). Tylan, which became a wholly-owned subsidiary on January 27, 1997, supplies precision mass flow controllers, pressure and vacuum measurement and control equipment, and ultraclean gas panels to the microelectronics industry. The aggregate purchase price, including the assumption of Tylan debt and transaction costs, was $163,371. On June 27, 1997 the Company sold a seventy-five percent owned subsidiary of Tylan. Cash proceeds from the sale of $2,700 are reflected as a reduction in the cost to acquire Tylan in the accompanying consolidated statement of cash flows. The acquisition is accounted for as a purchase, and accordingly, the purchase price has been preliminarily allocated to the identifiable tangible and intangible assets based on estimated fair market values of those assets. The Company has accrued approximately $31,000 for additional costs associated with the acquisition. These costs include severance payable to Tylan employees, abandonment of duplicate Tylan manufacturing and sales facilities, and termination of certain Tylan contractual obligations. The Company expects that the integration of Tylan's operations into those of the Company will be substantially complete by December 31, 1998. The ultimate execution of the Company's plans and costs incurred may result in an adjustment to the amounts preliminarily allocated to assets and liabilities and to amounts accrued for additional costs associated with the acquisition. The purchase price included at estimated fair value, current assets of $45,044, property and equipment of $22,759, other assets of $16,477 and liabilities of $22,042. Identifiable intangible assets were valued at $18,042 and included tradenames and patented and unpatented complete technology. These intangible assets are being amortized over their estimated useful lives ranging from 6 to 10 years. The value of in-process research and development for which technical feasibility has not been achieved was $114,091 and was charged to earnings in the first quarter of 1997. The purchase was financed through the Company's revolving credit facility discussed in Note J to the Company's financial statements for the year ended December 31, 1996. -5- MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (In thousands) 5. In March 1997, the Company sold $100,000 of 7.23% unsecured notes due in 2002 and $100,000 of 7.60% unsecured notes due in 2007, pursuant to a public offering. Net proceeds from the offering of $197,950 were used to repay borrowings outstanding under the Company's Revolving Credit Facility. Interest on the new notes is payable semi-annually in April and October. In July 1997, the Company reduced the maximum funds available under the five year Revolving Credit Facility from $450,000 to $350,000. Individual borrowings under the Revolving Credit Facility are made on terms not exceeding six months. Accordingly, borrowings under the facility are reflected in notes payable as a current liability in the accompanying consolidated balance sheet. 6.On May 2, 1997, the Environmental Quality Board (EQB) of Puerto Rico served an administrative order on Millipore Cidra, Inc., a wholly-owned subsidiary of the Company. The administrative order (EQB order) generally alleges: (i) that the nitrocellulose filter membrane scrap produced by Millipore Cidra's manufacturing operations is a hazardous waste as defined in EQB regulations; (ii) that Millipore Cidra, Inc. failed to manage, transport and dispose of the nitrocellulose membrane scrap as a hazardous waste; and (iii) that such failure violated EQB regulations. The EQB order proposes penalties in the amount of $96,500 and orders Millipore Cidra, Inc. to manage the nitrocellulose membrane scrap as a hazardous waste. The Company believes that it has meritorious arguments, intends to vigorously contest the EQB Order and believes that it should prevail. Depending on the ultimate outcome of these proceedings (or if there are interim material adverse developments), the Company could be in violation of certain provisions contained in its $350,000 Revolving Credit Facility, $100,000 6.88% notes due in 2004, $100,000 7.23% notes due 2002 and $100,000 7.60% notes due in 2007. Violation of these provisions would allow the lenders to require repayment on demand (or, in the case of the Revolving Credit Facility, restrict borrowings or re-borrowings). In any such event, the Company believes that it would be able to renegotiate the terms of its existing debt, although potentially on less favorable terms. 7.The Company and Waters Corporation have engaged in an arbitration proceeding and a related litigation in the Superior Court, Middlesex, Massachusetts, both of which commenced in the second quarter of 1995 with respect to the amount of assets required to be transferred by the Company's Retirement Plan in connection with the Company's divestiture of its former Chromatography Division. In the second quarter of 1996, Waters filed a Complaint in the Federal District Court of Massachusetts alleging that the Company's operation of the Retirement Plan violates ERISA and certain sections of the Internal Revenue Code. Judgments in the Company's favor were handed down by both the Massachusetts Superior Court and the Federal District Court in May 1997 and July 1997, respectively. Waters has appealed both the state and federal court judgments. Although there can be no assurances of the outcome of any judicial appeals of these decisions, or that federal agencies with jurisdiction over pension benefit transfers might not review this transaction independently, the Company believes that it will prevail in any such appeal or review. 8.In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 128 - Earnings per Share. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15 (APB No. 15), by establishing new standards for computing and presenting earnings per share (EPS) and requiring a dual presentation of basic and dilutive EPS. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 and earlier adoption is not permitted. Neither basic nor dilutive EPS as calculated in accordance with SFAS No. 128 would be materially different from primary EPS as presented in these financial statements. In June 1997, the FASB issued SFAS No. 130 - Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 with earlier application permitted. The Company is currently assessing the impact of SFAS No. 130. -6- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) Forward Looking Statements The following Discussion and Analysis includes certain forward- looking statements which are subject to a number of risks and uncertainties as described in Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Such forward-looking statements are based on current expectations and actual results may differ materially. Recent Developments On January 22, 1997, the Company announced the successful completion of its tender offer for all of the outstanding common shares of Tylan General, Inc. "Tylan" for $16.00 per share. Tylan became a wholly owned subsidiary of the Company on January 27, 1997. The aggregate purchase price, including the assumption of Tylan debt and transaction costs, was $163,371. This acquisition has been accounted for as a purchase and resulted in a non-tax deductible charge for purchased research and development of $114,091 in the first quarter of 1997. On December 31, 1996, the Company acquired the Amicon Separation Science Business "Amicon" of W.R. Grace and Co. for a price of $129,265 in cash, including transaction costs. This acquisition, which is discussed more fully in the financial statements of the Company for the year ended December 31, 1996, has also been accounted for as a purchase. Both acquisitions are included in the Company's consolidated year to date and quarterly financial statements in 1997 from their respective date of acquisition and, accordingly, results of operations of 1997 are not comparable to results of operations of 1996. Results of Operations Consolidated net sales for the third quarter of 1997 were $184,544, an increase of 24% over sales for the same period last year. Sales growth measured in local currency terms was 31% in the third quarter of 1997, with the stronger U.S. dollar against the Japanese Yen and most European currencies decreasing reported sales growth by 7% points. Sales growth in the third quarter of 1997 was generated primarily by the Company's acquisitions of Amicon and Tylan. Without these acquisitions, revenues increased 1% over the same period last year, and, in local currency increased 8%. Third quarter earnings per share were $0.49, compared to $0.51 per share last year. Dilution due to the Tylan acquisition reduced earnings per share by $0.09 in the third quarter. The Company expects a similar dilution impact in the fourth quarter of 1997. The following table summarizes sales growth by geography and market in the third quarter of 1997 with and without the recent acquisitions. Sales growth rates Sales growth rates measured in local measured in U.S. currencies dollars With Without With Without Acquisi- Acquisi- Acquisi- Acquisi- tions tions tions tions Americas 47% 9% 48% 9% Europe 32% 13% 15% (3)% Asia/Pacific 15% 3% 7% (4)% 31% 8% 24% 1% Consolidated Microelectronics 68% 9% 60% 3% Mfg. BioPharmaceutical 17% 6% 10% (1)% Mfg. Analytical 19% 9% 10% 1% Laboratory 31% 8% 24% 1% Consolidated -7- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) Sales growth in the analytical laboratory market in the third quarter was 9% in local currency consistent with the growth rate achieved in this market in the second quarter of 1997 and the second half of 1996. Growth in this market in the third quarter of 1997 was driven by the successful introduction of a new family of laboratory water purification systems. Sales to microelectronics manufacturing customers continued to be affected by a down cycle in the microelectronics industry, a trend which started in the middle of 1996. This downturn has negatively impacted both sales and income for the first nine months of 1997 as compared to the first nine months of 1996. Sales of microelectronics products did increase in the third quarter of 1997 compared to the second quarter of 1997. Sales growth in the BioPharmaceutical market was 6%, consistent with the growth rate achieved in the second quarter of 1997. Sales to biotechnology customers within this market remained strong. In the third quarter of 1997, the U.S. dollar continued to strengthen against all European currencies and, in the fourth quarter has continued to strengthen against most Asian currencies. If foreign exchange rates remain at October 30, 1997 levels, the affect of foreign exchange currencies is expected to reduce reported fourth quarter and full year 1997 sales growth by approximately 7 to 8 % points when compared to local currency growth rates. Gross margins in the third quarter of 1997 were 55.4% of sales, compared to 59.2% in the third quarter of 1996. Gross margin percentages were lower than those in the same period last year as the acquired businesses both have lower gross margin percentages than those achieved by the Company in 1996. The Company expects that gross margin percentages in the fourth quarter of 1997 will approximate those reported in the third quarter of 1997. Operating expenses in the third quarter of 1997 increased 23% over operating expenses for the third quarter of 1996. The increase is mainly due to operating expenses of the acquired businesses. The Company expects operating expenses in the fourth quarter of 1997 will increase slightly over those incurred in the third quarter of 1997. The gain on sale of equity securities of $5,304 in the third quarter of 1997, represents the sale of a portion of the Company's holdings in PerSeptive Biosystem's common shares. The Company has sold additional portions of this equity investment in the fourth quarter of 1997. Net interest expense in the third quarter of 1997 was significantly higher than that of the third quarter of 1996, due to increased borrowings used to acquire Amicon and Tylan. Interest on borrowing required to complete the Tylan acquisition, as well as interest on Tylan's assumed debt, are included in the Company's statement of income from January 22, 1997. The Company expects that interest expense in the fourth quarter will approximate that reported in the third quarter 1997. The Company's effective income tax rate for the first nine months of 1997, excluding the non-tax deductible write-off of purchased research and development associated with the Tylan acquisition, was 21.0% compared to 23.5% for the full year in 1996. The effective rate in 1997 is lower than the effective rate in 1996 as the Company's current estimates of 1997 income increase the relative importance of the Company's low tax rate manufacturing sites as compared to 1996. -8- A substantial portion of the Company's business is conducted outside of the United States through its foreign subsidiaries. This exposes the Company to risks associated with foreign currency rate fluctuations which can impact the Company's revenue and net income. The Company had entered into foreign currency transactions, primarily forward and option contracts to sell Yen, on a continuing basis in amounts and timing consistent with the underlying currency exposure so that the gains or losses on these transactions offset gains or losses on the underlying exposure. In the third quarter of 1997, a gain of $1,000 was realized on the Company's foreign exchange contracts and was recorded in cost of sales, compared to a gain of $400 in the third quarter of 1996. As of September 30, 1997, the Company has only forward option contracts to sell yen. In the event of a significant strengthening of the U.S. dollar against the yen, the exercise of these forward options will partially mitigate losses incurred by the Company on the underlying currency exposure. The Company does not engage in speculative trading activity. Capital Resources And Liquidity Cash flow from operations in the first nine months of 1997 was $34,118 compared to $70,585 in the first nine months of 1996. Cash flow from operations in the first nine months of 1997 included outflows of $19,468, primarily employee severance and related costs associated with the acquisitions of Amicon and Tylan. During the nine months of 1997, cash generated from operations, along with increased borrowings, was used to acquire Tylan, invest in property, plant and equipment, and pay dividends. In addition, in the third quarter of 1997, the Company acquired for a purchase price of $5,395 certain assets and technology, principally dispense pump technology used in the microelectronics market, of FAStar Ltd. and FAS Holding Corporation. Property, plant and equipment expenditures in the first nine months of 1997 were higher than for the same period in 1996. The Company expects capital expenditures in the fourth quarter of 1997 will approximate capital expenditures in the third quarter of 1997. At September 30, 1997, the Company held 2,318 shares of common stock of PerSeptive Biosystems (PBIO). In addition, the Company holds one thousand shares of PBIO preferred stock, which is redeemable by PBIO in August 1998 at a value of $10,000. On August 25, 1997, PBIO announced it was being acquired by Perkin-Elmer Corp. Under the agreement, holders of PBIO shares would be paid the equivalent of $13.00 a share in Perkin-Elmer stock (NYSE: PKN). The acquisition is subject to certain conditions relating to price and regulatory approvals. A successful conclusion of the acquisition will result in the automatic conversion of PBIO common stock into Perkin-Elmer common stock and the acceleration of the preferred stock redemption to the date of the acquisition close. As noted in Footnote 5 to the Consolidated Condensed Financial Statements, the Company successfully completed a public debt offering in the first quarter of 1997. Net proceeds from the offering of $197,950 were used to repay borrowings outstanding under the Company's Revolving Credit Facility. Refer to Footnote 6 to the Consolidated Condensed Financial Statements regarding the Company's recent notification from the Environmental Quality Board of Puerto Rico and the potential capital resource and liquidity issues arising from the resolution of this notification. -9- PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a.Exhibits 27 Article 5 Financial Data Schedule - Third Quarter 1997 -10- SIGNATURES 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 Registrant November 14, 1997 /s/ Francis J. Lunger Date Francis J. Lunger Corporate Vice President, Chief Financial Officer and Treasurer -11-