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, 1999
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 8, 1999: 62,190,341.
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, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the three months ended September 30, 1999 and 1998 4
Consolidated Statements of Operations for the nine months ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 4,310 $ 5,497
Accounts receivable, less allowances for doubtful accounts of
$3,425 and $2,966 at September 30, 1999 and December 31, 1998,
respectively 131,188 136,806
Inventories 86,677 80,281
Other current assets 31,467 29,040
------------------ -----------------
Total current assets 253,642 251,624
Property, plant and equipment, net of accumulated depreciation
of $54,164 and $45,421 at September 30, 1999 and December 31,
1998, respectively 90,190 89,029
Other assets 58,686 59,554
Goodwill, less accumulated amortization of $15,337 and $12,281 at
September 30, 1999 and December 31, 1998, respectively 173,374 177,494
------------------ -----------------
Total assets $ 575,892 $ 577,701
------------------ -----------------
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long term debt $ 3,840 $ 4,259
Accounts payable 37,801 36,510
Deferred revenue and customer advances 28,782 29,706
Other current liabilities 108,083 115,098
------------------ -----------------
Total current liabilities 178,506 185,573
Long term debt 112,975 218,250
Redeemable preferred stock 9,794 9,058
Other liabilities 13,570 14,701
------------------ -----------------
Total liabilities 314,845 427,582
Stockholders' Equity:
Common stock (par value $0.01, 100,000 shares authorized, 62,159 and
60,594 shares issued and outstanding at September 30,
1999 and December 31, 1998, respectively) 622 606
Additional paid-in capital 203,776 174,414
Deferred stock option compensation (220) (386)
Accumulated earnings (deficit) 58,665 (21,697)
Accumulated other comprehensive (loss) (1,796) (2,818)
------------------ -----------------
Total stockholders' equity 261,047 150,119
------------------ -----------------
Total liabilities and stockholders' equity $ 575,892 $ 577,701
------------------ -----------------
------------------ -----------------
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, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Net sales $171,090 $151,793
Cost of sales 61,903 57,832
------------- -------------
Gross profit 109,187 93,961
Selling, general and administrative expenses 57,075 49,276
Research and development expenses 8,634 8,512
Goodwill and purchased technology amortization 1,999 2,537
------------- -------------
Operating income 41,479 33,636
Interest expense, net 1,794 4,416
------------- -------------
Income from operations before income taxes 39,685 29,220
Provision for income taxes 10,715 7,264
------------- -------------
Net income 28,970 21,956
Less: Accretion of and 6% dividend on preferred stock 247 241
------------- -------------
Net income available to common stockholders $28,723 $21,715
============= =============
------------- -------------
Net income per basic common share $0.47 $0.36
============= =============
Weighted average number of basic common shares 61,754 60,028
------------- -------------
Net income per diluted common share $0.43 $0.33
============= =============
Weighted average number of diluted common shares and equivalents 66,611 64,822
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, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Net sales $503,732 $439,829
Cost of sales 186,237 165,600
Revaluation of acquired inventory - 16,500
--------------- ------------------
Gross profit 317,495 257,729
Selling, general and administrative expenses 167,116 151,216
Research and development expenses 26,341 25,130
Goodwill and purchased technology amortization 6,078 7,043
--------------- ------------------
Operating income 117,960 74,340
Interest expense, net 7,206 14,367
--------------- ------------------
Income from operations before income taxes 110,754 59,973
Provision for income taxes 29,904 17,660
--------------- ------------------
Net income 80,850 42,313
Less: Accretion of and 6% dividend on preferred stock 736 720
--------------- ------------------
Net income available to common stockholders $80,114 $41,593
=============== ==================
Net income per basic common share $1.31 $0.70
=============== ==================
Weighted average number of basic common shares 61,286 59,718
--------------- ------------------
Net income per diluted common share $1.21 $0.65
=============== ==================
Weighted average number of diluted common shares and equivalents 66,223 64,412
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, 1999 SEPTEMBER 30, 1998
----------------------- -------------------
Cash flows from operating activities:
Net income $80,850 $42,313
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 19,686 20,167
Amortization of debt issuance costs 552 929
Compensatory stock option expense 165 165
Tax benefit related to stock option plans 19,472 7,279
Revaluation of acquired inventory - 16,500
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable 4,759 (7,322)
(Increase) in inventories (6,589) (11,197)
(Decrease) in accounts payable and other current liabilities (3,741) (3,029)
(Decrease) increase in deferred revenue and customer advances (533) 1,507
Other, net (4,123) 1,041
------------------------ --------------------
Net cash provided by operating activities 110,498 68,353
Cash flows from investing activities:
Additions to property, plant and equipment (12,947) (10,760)
Software capitalization and other intangibles (3,800) (4,414)
Business acquisition, net of cash acquired - (3,157)
Loans to officers 1,114 221
------------------------ --------------------
Net cash (used in) investing activities (15,633) (18,110)
Cash flows from financing activities:
Net (repayment) of bank debt (105,694) (53,422)
Proceeds from stock plans 10,149 4,410
------------------------ --------------------
Net cash (used in) financing activities (95,545) (49,012)
Effect of exchange rate changes on cash (507) (786)
------------------------ --------------------
Net change in cash and cash equivalents (1,187) 445
Cash and cash equivalents at beginning of period 5,497 3,113
------------------------ --------------------
Cash and cash equivalents at end of period $4,310 $3,558
======================== ====================
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
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. 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.
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, 1998.
2. INVENTORIES
Inventories are classified as follows:
September 30, December 31,
1999 1998
-------- --------
Raw materials $30,281 $27,327
Work in progress 15,685 9,572
Finished goods 40,711 43,382
-------- --------
Total Inventories $86,677 $80,281
======= =======
3. INCOME TAXES
The Company's effective tax rate for the three months ended September 30, 1999
and 1998, was 27% and 25%, respectively. The Company's effective tax rate for
the nine months ended September 30, 1999 and 1998, was 27% and 23%,
respectively, before nondeductible, acquisition-related expenses.
7
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. EARNINGS PER SHARE
Basic and diluted EPS calculations are detailed as follows:
------------------------------------------------
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 from operations $80,114 61,286 $ 1.31
------------- --------------- -----------
------------- --------------- -----------
Effect of dilutive securities:
Options outstanding 4,449
Options exercised 488
------------- --------------- -----------
Income per diluted common share from operations $80,114 66,223 $ 1.21
------------- --------------- -----------
------------- --------------- -----------
------------------------------------------------
Nine Months Ended September 30, 1998
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- -----------
Net income $42,313
Less: Accretion of and 6% dividend on preferred stock 720
------------- --------------- -----------
Income per basic common share from operations $41,593 59,718 $0.70
------------- --------------- -----------
------------- --------------- -----------
Effect of dilutive securities:
Options outstanding 4,492
Options exercised 202
------------- --------------- -----------
Income per diluted common share from operations $41,593 64,412 $0.65
------------- --------------- -----------
------------- --------------- -----------
------------------------------------------------
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 from operations $28,723 61,754 $0.47
------------- --------------- -----------
------------- --------------- -----------
Effect of dilutive securities:
Options outstanding 4,626
Options exercised 231
------------- --------------- -----------
Income per diluted common share from operations $28,723 66,611 $0.43
------------- --------------- -----------
------------- --------------- -----------
8
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------
Three Months Ended September 30, 1998
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- -----------
Net income $21,956
Less: Accretion of and 6% dividend on preferred stock 241
------------- --------------- -----------
Income per basic common share from operations $21,715 60,028 $0.36
------------- --------------- -----------
------------- --------------- -----------
Effect of dilutive securities:
Options outstanding 4,742
Options exercised 52
------------- --------------- -----------
Income per diluted common share from operations $21,715 64,822 $0.33
------------- --------------- -----------
------------- --------------- -----------
For both the three month and nine month periods ended September 30, 1999
and September 30, 1998, the Company had no stock option securities that were
antidilutive.
5. 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,
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 80,850 $ 42,313 $ 28,970 $ 21,956
Other comprehensive income (loss) 1,022 (551) 447 (242)
------------ ------------- ------------- -------------
Comprehensive income $ 81,872 $ 41,762 $ 29,417 $ 21,714
========== ========== ========== ==========
6. 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, TAI and Micromass.
Waters is in the business of manufacturing and distributing HPLC
instruments, columns and other consumables, and related service; TAI is in the
business of manufacturing and distributing thermal analysis and rheology
instruments; and 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. 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
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. STOCK SPLIT
On February 25, 1999, the Board of Directors approved a two-for-one common stock
split, in the form of a 100% stock dividend, contingent upon shareholder
approval of a charter amendment increasing authorized common stock. At the
Company's Annual Meeting on May 4, 1999, shareholders approved the charter
amendment. Shareholders of record on May 27, 1999 received the stock dividend on
or about June 10, 1999. Earnings per share amounts, after giving retroactive
effect to the two-for-one stock split, are disclosed in the financial statements
and the notes to the financial statements.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133. SFAS 137 amends SFAS 133, Accounting
for Derivative Instruments and Hedging Activities, which was issued in June 1998
and 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 June 15, 2000.
Earlier application is permitted. 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 has not determined the impact of the new standard, it is not
expected to be material to the Company.
9. SUBSEQUENT EVENT
On November 2, 1999, the Company repurchased all outstanding shares of
Redeemable Preferred Stock ("Preferred Stock") for $9,500 in cash including
cumulative unpaid dividends. The carrying value of the one hundred shares of
Preferred Stock and cumulative dividends payable was approximately $9,876 on
this date resulting in a gain on redemption of approximately $376 which has been
credited to additional paid-in capital in the fourth quarter.
10
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, 1999 (the "1999
Quarter") and the nine month period ended September 30, 1999 (the "1999 Period")
were $171.1 million and $503.7 million, respectively, compared to $151.8 million
for the three month period ended September 30, 1998 (the "1998 Quarter") and
$439.8 million for the nine month period ended September 30, 1998 (the "1998
Period"), an increase of 13% for the quarter and 15% for the period. The impact
of currency on net sales was negligible for the 1999 Quarter and the 1999 Period
over the 1998 Quarter and 1998 Period, respectively. Sales growth was generally
broad based across all geographies.
GROSS PROFIT:
Gross profit for the 1999 Quarter and the 1999 Period was $109.2 million and
$317.5 million, respectively, compared to $94.0 million for the 1998 Quarter and
$257.7 million for the 1998 Period, an increase of $15.2 million or 16% for the
quarter and $59.8 million or 23% for the period. Excluding the $16.5 million
nonrecurring charge for revaluation of acquired inventory in the 1998 Period
related to purchase accounting for the acquisition of Micromass, gross profit
increased by 16% in the 1999 Period. Gross profit as a percentage of sales for
the 1999 Quarter and 1999 Period increased to 63.8% and 63.0% respectively, from
61.9% in the 1998 Quarter and 62.3% in the 1998 Period. The improvement was
primarily as a result of increased efficiencies in the Company's manufacturing
operations and lower raw material costs.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses for the 1999 Quarter and the 1999
Period were $57.1 million and $167.1 million, respectively, compared to $49.3
million for the 1998 Quarter and $151.2 million for the 1998 Period. As a
percentage of net sales, selling, general and administrative expenses increased
to 33% for the 1999 Quarter from 32% for the 1998 Quarter and decreased to 33%
for the 1999 Period from 34% for the 1998 Period. The $7.8 million or 16%
increase for the quarter and $15.9 million or 11% increase for the period in
total expenditures primarily resulted from increased headcount required to
support increased sales levels and inflation.
RESEARCH AND DEVELOPMENT EXPENSES:
Research and development expenses were $8.6 million for the 1999 Quarter and
$26.3 million for the 1999 Period, compared to $8.5 million for the 1998 Quarter
and $25.1 million for the 1998 Period, an increase of $.1 million or 1% from the
1998 Quarter and $1.2 million or 5% from the 1998 Period, respectively. The
Company continued to invest significantly in the development of new and improved
HPLC, thermal analysis, rheology, and mass spectrometry products.
GOODWILL AND PURCHASED TECHNOLOGY AMORTIZATION:
Goodwill and purchased technology amortization for the 1999 Quarter and the 1999
Period was $2.0 million and $6.1 million, respectively, compared to $2.5 million
for the 1998 Quarter and $7.0 million for the 1998 Period, a decrease of $.5
million or 21% for the quarter and $.9 million or 14% for the period. This
decrease was primarily a result of a portion of purchased technology becoming
fully amortized during the 1999 Period.
OPERATING INCOME:
Operating income for the 1999 Quarter and the 1999 Period was $41.5 million and
$117.9 million, respectively, compared to $33.6 million for the 1998 Quarter and
$74.3 million for the 1998 Period, an increase of $7.8 million or 23% for the
quarter and $43.6 million or 59% for the period. Operating income for the 1998
Period included a $16.5 million nonrecurring acquisition related charge.
Excluding the revaluation of acquired inventory charge in 1998 in connection
with the Micromass acquisition, operating income was $90.8 million for the 1998
Period, resulting in a comparative $27.1 million or 30% increase for the 1999
Period. Waters improved operating income levels on the strength of sales growth,
volume leverage and continued focus on cost reduction in all operating areas.
INTEREST EXPENSE, NET:
Net interest expense decreased by $2.6 million or 59% for the quarter and $7.2
million or 50% for the period, from $4.4 million and $14.4 million in the 1998
Quarter and 1998 Period, respectively, to $1.8 million and $7.2 million in the
1999 Quarter and 1999 Period, respectively. The current quarter and period
decrease primarily reflected lower average debt levels as a result of repayments
from the Company's cash flow.
11
PROVISION FOR INCOME TAXES:
The Company's effective income tax rate, excluding the nonrecurring,
nondeductible charge related to the revaluation of acquired inventory in 1998,
was 27% in the 1999 Period and 23% in the 1998 Period. The Company's effective
income tax rate was 27% in the 1999 Quarter and 25% in the 1998 Quarter. The
1999 tax rate primarily increased because remaining net operating loss
carryforwards were utilized in the 1998 Period.
NET INCOME:
Income for the 1999 Quarter and the 1999 Period was $29.0 million and $80.9
million, respectively, compared to $22.0 million for the 1998 Quarter and $42.3
million for the 1998 Period. Excluding the nonrecurring acquisition related
charge, the Company generated $58.8 million of income in the 1998 Period. The
improvement over the 1998 Period was a result of sales growth, productivity
improvement in all operating areas, and a decline in interest expense.
YEAR 2000
Year 2000 ("Y2K") issues concern the ability of information systems to properly
recognize and process date-sensitive information beyond December 31, 1999.
The Company has been engaged in a concerted effort to ready its business
systems and products in anticipation of Y2K. A special internal project team led
by senior management was organized in 1997 in an attempt to ensure that all
material business systems, instrument products and applications software are
compliant by January 1, 2000. Currently, the companywide planning and inventory
phases have been completed. The assessment phase was substantially completed by
December 31, 1998, and included the examination of products, worldwide
operations, manufacturing systems, business computer systems, manufacturing,
warehousing and servicing equipment, network hardware and software, telephone
systems, desktop application software, mainframe operating systems, and
environmental operations. Currently, the Company believes that most of its
internal systems and related software are likely to be Y2K compliant. The
Company is continuing to examine its material software and systems for Y2K
compliance and take corrective action to minimize any significant detrimental
effects on operations.
The remediation and testing phases of the Company's systems and associated
contingency planning have been substantially completed. Based on the results of
remaining testing, the contingency planning will be updated through year end.
The Company has no plans to engage in third party validation of its Y2K efforts.
To date, approximately $10.8 million has been spent over the past four years in
connection with bringing the Company's internal systems into compliance,
primarily capital expenditures for entirely new business and communications
systems which replaced predecessor systems. The remaining costs to fix Y2K
problems are estimated at less than $0.2 million, including capital expenditures
to replace certain predecessor capital items. These costs do not include any
allocation for the time devoted by regular employees of the Company to
addressing Y2K problems, as the Company does not separately track such time. The
Company does not expect the costs relating to the Y2K remediation phase to have
a material effect on the Company.
The Company has made public statements to customers regarding its state of
Year 2000 readiness for its products; however, the possibility of product
liability claims still exists. The Company also recognizes that Y2K disruptions
in customer operations could result in reduced sales and cash flow and increased
inventory or receivables. While these events are possible, the Company believes
that its customer base is broad enough to minimize the effects of a single
occurrence. To date, the Company has received communications from many of its
major customers which indicate an awareness of Y2K issues.
The Company has obtained certificates of compliance from its major systems
vendors. Additionally, the Company has surveyed its financial services,
utilities, and communication providers, as well as its critical suppliers to
attempt to determine that they are compliant. Results so far have indicated that
the majority of the Company's critical suppliers are actively addressing and
resolving Y2K issues. Despite these efforts, however, interruption of supplier
operations due to Y2K issues could potentially affect Company operations. The
Company uses multiple suppliers, and, in some instances, maintains an inventory
of parts and supplies, which may reduce the risks of interruption, but cannot
eliminate the potential for disruption due to third party failure.
12
The Company currently has identified contingency alternatives for many
elements of Year 2000 risk. The contingency planning will be updated through
year end. The updated plan will address customer problems as well as temporary
remedies in the event of failure of Company or third party systems. The Company
will continue to review its business interruption contingency plans through the
balance of the year. However, there can be no assurance that any contingency
plans will prevent Y2K problems from occurring.
While the Company believes its efforts will provide reasonable assurance
that material disruptions are not likely to occur due to internal failure, the
potential for interruption still exists. Specifically, the Company and its
subsidiaries could be materially adversely affected if utilities, private
businesses and governmental entities with which they do business or that provide
essential services are not Y2K compliant. The Company currently believes that
the greatest risk of disruption in its businesses exists in certain
international markets. Such interruptions could cause, among other things,
temporary plant closings, delays in the delivery of products, delays in the
receipt of supplies, invoice and collection errors, and inventory and supply
obsolescence. Recovery under existing insurance policies may be available
depending upon the circumstances of a Y2K related event.
The estimates and conclusions herein are based on management's best
estimates of future events. Risks that could cause results to differ from these
estimates and conclusions include the uncertainties involved in discovering and
correcting the potential Y2K sensitive problems which could have a serious
impact on specific facilities and the ability of suppliers and customers to
bring their systems into Y2K compliance.
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,
its information technology systems, and 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 1999 Period, net cash provided by the Company's operating activities
was $110.5 million, primarily as a result of net income for the period after
adding back depreciation and amortization. In addition, the Company received
$10.1 million of proceeds from the exercise of stock options. Primary uses of
this cash flow during the period were $105.7 million of net bank debt repayment
and $16.7 million of property, plant and equipment and software capitalization
investment.
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.
CAUTIONARY STATEMENT
Certain statements contained herein are forward looking. Many factors could
cause actual results to differ from these statements, including, but not limited
to, obsolescence resulting from the introduction of technologically advanced
products by other companies, pressure on prices from competitors with
significantly greater financial resources, regulatory obstacles to new product
introductions, reduction in capital spending of pharmaceutical customers, and
market risk. Please refer also to the Company's Form 10-K for additional 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. PE has also filed a motion
for post-judgment relief. 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 intends to pursue an appeal of the German decision. In England,
HP 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 an infringement
action against the Company alleging that one product, in a large
product line, infringes one or more issued 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.
Item 2. Changes in Securities
Not Applicable
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 27 - Financial Data Schedule
B. No reports on Form 8-K were filed during the three months ended
September 30, 1999.
14
WATERS CORPORATION AND SUBSIDIARIES
SIGNATURES
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 8, 1999 Waters Corporation
/s/ PHILIP S. TAYMOR
--------------------------------------
Philip S. Taymor
Senior Vice President and Chief
Financial Officer
15