SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended September 30, 2000
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
for the transition period from __________to__________.
Commission File Number: 01-14010
WATERS CORPORATION
(Exact name of registrant as specified in the charter)
Delaware 13-3668640
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
34 Maple Street
Milford, Massachusetts 01757
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 478-2000
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 |_|
Number of shares outstanding of the Registrant's common stock as of November
13, 2000: 129,278,852.
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations for the three months ended
September 30, 2000 and 1999 4
Consolidated Statements of Operations for the nine months ended
September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
2
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, 2000 December 31, 1999
------------------ -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 23,196 $ 3,803
Accounts receivable, less allowances for doubtful accounts of
$3,199 and $3,741 at September 30, 2000 and December 31, 1999,
respectively 164,889 149,271
Inventories 86,093 80,363
Other current assets 18,013 13,893
--------- ---------
Total current assets 292,191 247,330
Property, plant and equipment, net of accumulated depreciation
of $64,346 and $56,412 at September 30, 2000 and December 31,
1999, respectively 99,004 91,841
Other assets 90,762 74,530
Goodwill, less accumulated amortization of $18,112 and $16,068 at
September 30, 2000 and December 31, 1999, respectively 167,455 170,736
--------- ---------
Total assets $ 649,412 $ 584,437
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long term debt $ 3,910 $ 14,164
Accounts payable 42,080 34,771
Deferred revenue and customer advances 35,469 31,406
Accrued retirement plan contributions 3,913 5,181
Accrued income taxes 19,908 16,350
Accrued other taxes 5,968 4,026
Other current liabilities 91,613 91,943
--------- ---------
Total current liabilities 202,861 197,841
Long term debt 13,510 81,105
Other liabilities 5,771 13,329
--------- ---------
Total liabilities 222,142 292,275
Stockholders' equity:
Common stock, par value $0.01 per share, 200,000 shares authorized,
129,137 and 124,519 shares issued and outstanding at September 30,
2000 and December 31, 1999, respectively 1,291 1,245
Additional paid-in capital 228,188 194,833
Deferred stock option compensation -- (166)
Retained earnings 205,857 100,041
Accumulated other comprehensive (loss) (8,066) (3,791)
--------- ---------
Total stockholders' equity 427,270 292,162
--------- ---------
Total liabilities and stockholders' equity $ 649,412 $ 584,437
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
3
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
For the Three Months Ended
-----------------------------------------
September 30, 2000 September 30, 1999
------------------ ------------------
Net sales $ 194,073 $ 171,090
Cost of sales 70,857 61,903
--------- ---------
Gross profit 123,216 109,187
Selling, general and administrative expenses 59,712 57,075
Research and development expenses 10,394 8,634
Goodwill and purchased technology amortization 1,755 1,999
--------- ---------
Operating income 51,355 41,479
Interest (income) expense, net (322) 1,794
--------- ---------
Income before income taxes 51,677 39,685
Provision for income taxes 13,435 10,715
--------- ---------
Net income 38,242 28,970
Less: accretion of and 6% dividend on preferred stock -- 247
--------- ---------
Net income available to common stockholders $ 38,242 $ 28,723
========= =========
--------- ---------
Net income per basic common share $ 0.30 $ 0.23
========= =========
Weighted average number of basic common shares 128,485 123,509
--------- ---------
Net income per diluted common share $ 0.28 $ 0.22
========= =========
Weighted average number of diluted common shares and equivalents 137,430 133,222
The accompanying notes are an integral part of the consolidated financial
statements.
4
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
For the Nine Months Ended
--------------------------------------
September 30, 2000 September 30, 1999
------------------ ------------------
Net sales $569,990 $503,732
Cost of sales 208,469 186,237
-------- --------
Gross profit 361,521 317,495
Selling, general and administrative expenses 181,167 167,116
Research and development expenses 31,313 26,341
Goodwill and purchased technology amortization 5,326 6,078
-------- --------
Operating income 143,715 117,960
Interest expense, net 722 7,206
-------- --------
Income before income taxes 142,993 110,754
Provision for income taxes 37,177 29,904
-------- --------
Net income 105,816 80,850
Less: accretion of and 6% dividend on preferred stock -- 736
-------- --------
Net income available to common stockholders $105,816 $ 80,114
======== ========
-------- --------
Net income per basic common share $ 0.83 $ 0.65
======== ========
Weighted average number of basic common shares 126,984 122,572
-------- --------
Net income per diluted common share $ 0.78 $ 0.60
======== ========
Weighted average number of diluted common shares and equivalents 136,369 132,446
The accompanying notes are an integral part of the consolidated financial
statements.
5
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
For the Nine Months Ended
-----------------------------------------
September 30, 2000 September 30, 1999
------------------ ------------------
Cash flows from operating activities:
Net income $ 105,816 $ 80,850
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 21,914 19,686
Amortization of debt issuance costs 552 552
Compensatory stock option expense 166 165
Tax benefit related to stock option activity 15,100 9,350
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (27,041) 4,759
(Increase) in inventories (11,024) (6,589)
(Increase) in other current assets (4,945) (2,253)
(Increase) in other assets (5,315) (526)
Increase in accounts payable and other current liabilities 17,290 6,381
Increase (decrease) in deferred revenue and customer advances 5,945 (533)
(Decrease) in other liabilities (2,912) (1,344)
--------- ---------
Net cash provided by operating activities 115,546 110,498
Cash flows from investing activities:
Additions to property, plant and equipment (22,970) (12,947)
Software capitalization (4,029) (3,800)
Loans to officers 312 1,114
Investment in unaffiliated company (7,595) -
Business acquisitions, net of cash acquired (1,709) --
--------- ---------
Net cash (used in) investing activities (35,991) (15,633)
Cash flows from financing activities:
Net (repayment) of bank debt (77,849) (105,694)
Proceeds from stock option and stock purchase plan activity 18,300 10,149
--------- ---------
Net cash (used in) financing activities (59,549) (95,545)
Effect of exchange rate changes on cash and cash equivalents (613) (507)
--------- ---------
Increase (decrease) in cash and cash equivalents 19,393 (1,187)
Cash and cash equivalents at beginning of period 3,803 5,497
--------- ---------
Cash and cash equivalents at end of period $ 23,196 $ 4,310
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
6
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. Organization and Basis of Presentation
Waters Corporation ("Waters" or the "Company"), an analytical instrument
manufacturer, is the world's largest manufacturer and distributor of high
performance liquid chromatography ("HPLC") instruments, chromatography columns
and other consumables, and related service. HPLC, the largest product segment of
the analytical instrument market, is utilized in a broad range of industries to
detect, identify, monitor and measure the chemical, physical and biological
composition of materials, and to purify a full range of compounds. Through its
Micromass Limited ("Micromass") subsidiary, the Company is also a market leader
in the development, manufacture, and distribution of mass spectrometry ("MS")
instruments, which are complementary products that can be integrated and used
along with other analytical instruments, especially HPLC. Through its TA
Instruments, Inc. ("TAI") subsidiary, the Company is also the world's leader in
thermal analysis, a prevalent and complementary technique used in the analysis
of polymers.
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP"). The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All material intercompany balances and transactions have been
eliminated. Certain amounts from prior years have been reclassified in the
accompanying financial statements in order to be consistent with the current
year's classifications.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and liabilities, (ii)
disclosure of contingent assets and liabilities at the dates of the financial
statements and (iii) the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
It is management's opinion that the accompanying interim financial
statements reflect all adjustments (which are normal and recurring) necessary
for a fair presentation of the results for the interim periods. The interim
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's 10-K filing with the Securities
and Exchange Commission for the year ended December 31, 1999.
2. Investment Policy
The Company's investment policy guidelines for marketable securities have
been established to ensure the safety and preservation of principal, meet the
Company's liquidity needs and optimize after-tax yields subject to the
constraints of the policy. The Company's policy permits the investment in
marketable securities such as U.S. Treasury instruments, commercial paper or
money market funds with AAA or equivalent investment ratings with weighted
average maturities not to exceed 6 months. These securities are intended to
be available-for-sale and, in accordance with Statement of Financial
Accounting Standard ("SFAS") 115, Accounting for Certain Investments in Debt
and Equity Securities, any unrealized gains or losses deemed temporary in
nature are classified as a separate component of other comprehensive income
in the stockholders' equity section of the consolidated balance sheet. As of
September 30, 2000 and December 31, 1999 there were no investments and
related unrealized gains or losses from these marketable securities.
3. Inventories
Inventories are classified as follows:
September 30, December 31,
2000 1999
------------- ------------
Raw materials $32,238 $27,155
Work in progress 19,181 14,446
Finished goods 34,674 38,762
------- -------
Total inventories $86,093 $80,363
======= =======
7
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. Variagenics Alliance
In June 2000, the Company formed a strategic alliance with Variagenics, Inc.
("Variagenics") to develop and commercialize genetic variance reagent kits
for use in the clinical development of pharmaceutical products. Variagenics
is a leader in applying genetic variance information to the drug development
process. In July 2000, the Company paid Variagenics $7.5 million for a
minority equity ownership and $3.0 million for a license to manufacture and
sell reagents. The Company could pay up to $4 million in future milestone
payments and is obligated to pay royalties on net sales of the reagent kits.
The investment in Variagenics is included in other assets and carried at
fair value with unrealized gains and losses reported as a separate component of
other comprehensive income. The license is being amortized on a straight-line
basis over its useful life of 15 years.
5. Income Taxes
The Company's effective tax rate for the three months ended September 30, 2000
and 1999, was 26% and 27%, respectively. The Company's effective tax rate for
the nine months ended September 30, 2000 and 1999, was 26% and 27%,
respectively.
6. Earnings Per Share
Basic and diluted EPS calculations are detailed as follows:
-------------------------------------------------
Nine Months Ended September 30, 2000
-------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $105,816
-------- -------- --------
Income per basic common share $105,816 126,984 $ 0.83
======== ======== ========
Effect of dilutive securities:
Options outstanding 8,114
Options exercised 1,271
-------- -------- --------
Income per diluted common share $105,816 136,369 $ 0.78
======== ======== ========
-------------------------------------------------
Nine Months Ended September 30, 1999
-------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 80,850
Less: Accretion of and 6% dividend on preferred stock 736
-------- -------- --------
Income per basic common share $ 80,114 122,572 $ 0.65
======== ======== ========
Effect of dilutive securities:
Options outstanding 8,898
Options exercised 976
-------- -------- --------
Income per diluted common share $ 80,114 132,446 $ 0.60
======== ======== ========
8
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------
Three Months Ended September 30, 2000
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $38,242
------- ------- -------
Income per basic common share $38,242 128,485 $ 0.30
======= ======= =======
Effect of dilutive securities:
Options outstanding 8,555
Options exercised 390
------- ------- -------
Income per diluted common share $38,242 137,430 $ 0.28
======= ======= =======
------------------------------------------------
Three Months Ended September 30, 1999
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $28,970
Less: Accretion of and 6% dividend on preferred stock 247
------- ------- -------
Income per basic common share $28,723 123,509 $ 0.23
======= ======= =======
Effect of dilutive securities:
Options outstanding 9,251
Options exercised 462
------- ------- -------
Income per diluted common share $28,723 133,222 $ 0.22
======= ======= =======
For the three months and nine months ended September 30, 2000, the Company
had 0 and 2 stock option securities that were antidilutive, respectively. These
securities were not included in the computation of diluted EPS. For the three
months and nine months ended September 30, 1999, the Company had no stock option
securities that were antidilutive.
7. Comprehensive Income
Comprehensive income details follow:
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---------- ------------- ------------- -------------
Net income $ 105,816 $ 80,850 $ 38,242 $ 28,970
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax (7,191) 1,022 (2,744) 447
Unrealized gain on investment, net of tax 2,916 -- 2,916 --
--------- --------- --------- ---------
Comprehensive income $ 101,541 81,872 38,414 29,417
========= ========= ========= =========
8. Business Segment Information
SFAS 131 establishes standards for reporting information about operating
segments in annual financial statements of public business enterprises. The
Company evaluated its business activities that are regularly reviewed by the
Chief Executive Officer for which discrete financial information is available.
As a result of this evaluation, the Company determined that it has three
operating segments: Waters, Micromass and TAI.
Waters is in the business of manufacturing and distributing HPLC
instruments, columns and other consumables, and
9
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
related service; Micromass is in the business of manufacturing and distributing
mass spectrometry instruments that can be integrated and used along with other
analytical instruments, particularly HPLC; and TAI is in the business of
manufacturing and distributing thermal analysis and rheology instruments. For
all three of these operating segments within the analytical instrument industry;
economic characteristics, production processes, products and services, types and
classes of customers, methods of distribution, and regulatory environments are
similar. Because of these similarities, the three segments have been aggregated
into one reporting segment for financial statement purposes. Please refer to the
consolidated financial statements for financial information regarding the one
reportable segment of the Company.
9. Stockholders' Equity
On February 29, 2000, the Board of Directors approved an amendment to the
Company's Certificate of Incorporation to increase authorized common stock from
one hundred million to two hundred million shares, contingent upon shareholder
approval at the Company's Annual Meeting. On May 4, 2000, shareholders approved
the amendment.
On July 13, 2000, the Board of Directors approved a two-for-one common
stock split, in the form of a 100% stock dividend. Shareholders of record on
August 4, 2000 received the stock dividend on or about August 25, 2000. All
share and per share amounts have been retroactively restated to reflect the
stock split.
10. New Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities- a replacement of FASB Statement No. 125. SFAS
140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS 125's provisions without
reconsideration. This Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. This Statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company does
not expect tha application of SFAS 140 to have a material impact on its
financial position or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation ("FIN") 44, Accounting for Certain Transactions Involving
Stock Compensation - an interpretation of Accounting Principles Board ("APB")
Opinion 25. FIN 44 clarifies the application of APB Opinion 25 and among
other issues clarifies the following: the definition of an employee for
purposes of applying APB Opinion 25; the criteria for determining whether a
plan qualifies as a non-compensatory plan; the accounting consequence of
various modifications to the terms of previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The Company has adopted FIN 44 as
required with no significant effect on the Company's financial position or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial
Statements, which provides guidance related to revenue recognition based on
interpretations and practices promulgated by the SEC. Before modification by SAB
101A, SAB 101 was to be effective with the first fiscal quarter of fiscal years
beginning after December 15, 1999 and requires companies to report any changes
in revenue recognition as a cumulative change in accounting principle at the
time of implementation. In March 2000, the SEC issued SAB 101A, Amendment:
Revenue Recognition in Financial Statements, which delayed implementation of SAB
101 until the Company's second fiscal quarter of 2000. SAB 101B, Second
Amendment: Revenue Recognition in Financial Statements, was issued in June 2000
which further delays implementation of SAB 101 until the Company's fourth fiscal
quarter of 2000. The Company is currently determining the effect implementation
will have on the financial statements.
10
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of SFAS 133.
SFAS 137 amends SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, which was issued in June 1998 and previously was to be effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 137
defers the effective date of SFAS 133 to fiscal years beginning after June 15,
2000. Earlier application is permitted. In June 2000, the FASB issued SFAS 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities.
SFAS 138 establishes accounting and reporting standards for a limited number of
derivative instruments and hedging activities when implementing SFAS 133. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. While management is currently determining the
impact of the new standards, they are not expected to be material to the
Company.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Net Sales:
Net sales for the three month period ended September 30, 2000 (the "2000
Quarter") and the nine month period ended September 30, 2000 (the "2000 Period")
were $194.1 million and $570.0 million, respectively, compared to $171.1 million
for the three month period ended September 30, 1999 (the "1999 Quarter") and
$503.7 million for the nine month period ended September 30, 1999 (the "1999
Period"), an increase of 13% for both the quarter and the period. Excluding the
adverse effects of a stronger U.S. dollar, net sales increased by 18% over the
1999 Quarter and 16% over the 1999 Period. The 2000 Quarter and 2000 Period
reflected continued strong demand across all major geographies. Sales were
particularly strong to life science customers and for mass spectrometry products
in general. Sales of time-of-flight mass spectrometry products continued to
perform well with sales growing in excess of 50% in the 2000 Quarter as a result
of expanding customers needs in proteomics, drug discovery and drug development
application areas. Currency translation reduced sales growth rates by five
percentage points in the 2000 Quarter primarily due to weakening of the Euro
and British pound, which was partially offset by appreciation of the Japanese
yen. If unchanged from today's levels, currency rates will continue to present
a translation challenge in the fourth quarter of 2000 and in 2001.
Gross Profit:
Gross profit for the 2000 Quarter and the 2000 Period was $123.2 million and
$361.5 million, respectively, compared to $109.2 million for the 1999 Quarter
and $317.5 million for the 1999 Period, an increase of $14.0 million or 13% for
the quarter and $44.0 million or 14% for the period. Gross profit as a
percentage of sales decreased to 63.5% in the 2000 Quarter from 63.8% in the
1999 Quarter as translation effects on sales were partially offset by
productivity improvements. Gross profit as a percentage of sales increased to
63.4% in the 2000 Period from 63.0% in the 1999 Period as the Company continues
to benefit from productivity improvements which were offset, to a certain
extent, by the effects of currency translation.
Selling, General, and Administrative Expenses:
Selling, general and administrative expenses for the 2000 Quarter and the 2000
Period were $59.7 million and $181.2 million, respectively, compared to $57.1
million for the 1999 Quarter and $167.1 million for the 1999 Period. As a
percentage of net sales, selling, general and administrative expenses decreased
to 30.8% for the 2000 Quarter from 33.4% for the 1999 Quarter and 31.8% for the
2000 Period from 33.2% for the 1999 Period as a result of higher sales volume
and expense controls. The $2.6 million or 5% increase for the quarter and $14.1
million or 8% increase for the period in total expenditures primarily resulted
from increased headcount and related costs required to support increased sales
levels, both of which were reduced by the effects of currency translation.
Research and Development Expenses:
Research and development expenses were $10.4 million for the 2000 Quarter and
$31.3 million for the 2000 Period, compared to $8.6 million for the 1999 Quarter
and $26.3 million for the 1999 Period, an increase of $1.8 million or 20% from
the 1999 Quarter and $5.0 million or 19% from the 1999 Period, respectively. The
Company continued to invest significantly in the development of new and improved
HPLC, mass spectrometry, thermal analysis and rheology products.
Goodwill and Purchased Technology Amortization:
Goodwill and purchased technology amortization for the 2000 Quarter and the 2000
Period was $1.8 million and $5.3 million, respectively, compared to $2.0 million
for the 1999 Quarter and $6.1 million for the 1999 Period, a decrease of $.2
million or 12% for the quarter and $.8 million or 12% for the period. The
expense decreased primarily because a portion of purchased technology reached
full amortization in 1999.
Operating Income:
Operating income for the 2000 Quarter and the 2000 Period was $51.4 million and
$143.7 million, respectively, compared to $41.5 million for the 1999 Quarter and
$118.0 million for the 1999 Period, an increase of $9.9 million or 24% for the
quarter and $25.7 million or 22% for the period. Waters improved operating
income levels on the strength of sales growth, volume leverage and continued
focus on cost controls.
12
Interest (Income) Expense, Net:
Net interest income was ($.3) million for the 2000 Quarter compared to net
interest expense of $1.8 million for the 1999 Quarter, a decrease of $2.1
million. Net interest expense was $.7 million for the 2000 Period compared to
$7.2 million for the 1999 Period, a decrease of $6.5 million. The current
quarter and period decrease primarily reflected lower average debt levels as a
result of debt repayments from the Company's cash flow.
Provision for Income Taxes:
The Company's effective income tax rate was 26% in the 2000 Quarter and 2000
Period and 27% in the 1999 Quarter and 1999 Period. The 2000 tax rate decreased
primarily due to a favorable shift in the mix of taxable income to lower tax
rate jurisdictions.
Net Income:
Income for the 2000 Quarter and the 2000 Period was $38.2 million and $105.8
million, respectively, compared to $29.0 million for the 1999 Quarter and $80.9
million for the 1999 Period. The improvement over 1999 was a result of sales
growth, productivity improvement in all operating areas, a decline in interest
expense and the impact of a decrease in the Company's effective income tax rate.
Euro Currency Conversion
Several countries of the European Union will adopt the Euro as their legal
currency effective July 1, 2002. A transition period has been established from
January 1, 1999 to July 1, 2002 during which companies conducting business in
these countries may use the Euro or their local currency. The Company has
considered the potential impact of the Euro conversion on pricing competition,
information technology systems, currency risk and risk management. Currently,
the Company does not expect that the Euro conversion will result in any material
increase in costs to the Company or have a material adverse effect on its
business or financial condition.
Liquidity and Capital Resources
During the 2000 Period, net cash provided by the Company's operating
activities was $115.5 million, primarily as a result of net income for the
period after adding back depreciation and amortization and the tax benefit
related to stock option activity, less net working capital needs. In terms of
working capital, $38.1 million of cash was used for accounts receivable and
inventory growth related to current and future sales, and $23.2 million of
cash was provided from an increase in accounts payable, deferred revenue and
customer advances, and other current liabilities. The Company also received
$18.3 million of combined proceeds from the exercise of stock options and the
purchase of stock. Primary uses of cash flow during the period were $77.8
million of net bank debt repayment, $27.0 million of property, plant and
equipment and software capitalization investments, and $9.3 million of
business investments.
The Company believes that existing cash balances and current cash flow from
operating activities together with borrowings available under the Bank Credit
Agreement will be sufficient to fund working capital, capital spending and
debt service requirements of the Company in the foreseeable future.
As a publicly held company, the Company has not paid any dividends and does
not plan to pay any dividends in the foreseeable future.
Forward-Looking Information
Safe Harbor Statement under Private Securities Litigation Reform Act of 1996
Certain statements contained herein are forward looking. Many factors could
cause actual results to differ from these statements, including loss of
market share through competition, introduction of competing products by other
companies, pressures on prices from competitors and/or customers, regulatory
obstacles to new product introductions, lack of acceptance of new products,
changes in the health care market and the pharmaceutical industry, changes in
distribution of the Company's products, and foreign exchange fluctuations.
Please refer to the Company's Form 10-K for a more detailed discussion on
risk factors.
13
Part II: Other Information
Item 1. Legal Proceedings
From time to time, the Company and its subsidiaries are involved in
various litigation matters arising in the ordinary course of its business.
The Company does not believe that the matters in which it or its
subsidiaries are currently involved, either individually or in the
aggregate, are material to the Company or its subsidiaries.
The Company, through its subsidiary TAI, asserted a claim against The
Perkin-Elmer Corporation ("PE") alleging patent infringement of three
patents owned by TAI ("the TAI patents"). PE counterclaimed for
infringement of a patent owned by PE ("the PE patent"). PE withdrew its
claim for infringement preserving its right to appeal rulings interpreting
the claims of the PE patent. The U.S. District Court for the District of
Delaware granted judgment as a matter of law in favor of TAI and enjoined
PE from infringing the TAI patents. PE has appealed the District Court
judgment in favor of TAI to a federal appellate court. PE has also filed a
motion for post-judgment relief which motion has been denied. The District
Court's judgment, with respect to PE's infringement of the TAI patents,
has been affirmed. The District Court's judgment with respect to TAI's
non-infringement of the PE patent has been reversed and remanded to the
District Court for further proceedings. PE has appealed the appellate
court decision, that PE failed to preserve certain arguments on appeal, to
the U.S. Supreme Court. The Company believes it has meritorious arguments
and should prevail, although the outcome is not certain. The Company
believes that any outcome will not be material to the Company.
The Company has filed suit in the U.S. against Hewlett-Packard Company and
Hewlett-Packard GmbH ("HP"), seeking a declaration that certain products
sold under the mark Alliance do not constitute an infringement of one or
more patents owned by HP or its foreign subsidiaries ("the HP patents").
The action in the U.S. was dismissed for lack of controversy. Actions
seeking revocation or nullification of foreign HP patents have been filed
by the Company in Germany, France and England. A German patent tribunal
found the HP German patent to be valid. The Company is appealing the
German decision. In Germany, France and England, HP and its successor,
Agilent Technologies Deutschland GmbH, has brought an action alleging
certain features of the Alliance pump may infringe the HP patent. The
Company believes it has meritorious arguments and should prevail,
although the outcome is not certain. The Company believes that any
outcome of the proceedings will not be material to the Company.
Cohesive Technologies, Inc. ("Cohesive") has filed infringement actions
against the Company alleging that several products in a large product line
infringe one or more Cohesive patents. The Company has denied
infringement. The Company believes it has meritorious arguments and should
prevail, although the outcome is not certain. The Company believes that
any outcome of the proceedings will not be material to the Company.
Viscotek Corporation ("Viscotek") has filed a civil action against the
Company alleging one option offered by the Company with a high temperature
gel permeation chromatography instrument is an infringement of two of its
patents. These patents are owned by E. I. Du Pont de Nemours and Company
("Du Pont") and claimed to be exclusively licensed to Viscotek. Du Pont is
not a party to the suit. The Company has answered the complaint and
believes it does not infringe the patents. The Company believes it has
meritorious arguments and should prevail, although the outcome is not
certain. The Company believes that any outcome of the proceedings will not
be material to the Company.
PE Corporation, MDS Inc. and Perkin-Elmer Sciex Instruments have filed a
civil action against the Micromass UK Limited and Micromass, Inc. wholly
owned subsidiaries of the Company alleging one or more mass spectroscopy
instrument products infringes upon a patent. The Company believes it has
meritorious arguments and should prevail, although the outcome is not
certain. The Company believes that any outcome of the proceedings will not
be material to the Company.
Item 2. Changes in Securities
On July 13, 2000, the Board of Directors approved a two-for-one common
stock split through the payment of a stock dividend in an amount equal to
one share of common stock for each share of common stock issued and
outstanding. Shareholders of record on August 4, 2000 received the stock
dividend on or about August 25, 2000.
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Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit 10.22 Third Amendment to Amended and Restated Credit
Agreement, dated as of September 14, 2000
Exhibit 27.1 Financial Data Schedule
B. No reports on Form 8-K were filed during the three months ended
September 30, 2000.
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WATERS CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: November 14, 2000 Waters Corporation
/s/ Philip S. Taymor
------------------------------
Philip S. Taymor
Senior Vice President and Chief Financial
Officer
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