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, 2001
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, 2001: 130,803,972.
1
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000 3
Consolidated Statements of Operations for the three months
ended September 30, 2001 and 2000 4
Consolidated Statements of Operations for the nine
months ended September 30, 2001 and 2000 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market 13
Risk
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, 2001 December 31, 2000
------------------ -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 164,230 $ 75,509
Accounts receivable, less allowances for doubtful accounts of
$3,113 and $2,815 at September 30, 2001 and December 31, 2000,
respectively 166,780 167,713
Inventories 115,043 87,275
Other current assets 18,802 13,299
---------------- ---------------
Total current assets 464,855 343,796
Property, plant and equipment, net of accumulated depreciation of $82,364 and
$68,357 at September 30, 2001 and December 31,
2000, respectively 114,292 102,608
Other assets 81,283 80,486
Goodwill, less accumulated amortization of $22,331 and $19,464 at
September 30, 2001 and December 31, 2000, respectively 164,617 165,455
---------------- ---------------
Total assets $ 825,047 $ 692,345
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,124 $ 4,879
Accounts payable 44,410 43,310
Accrued compensation 9,653 18,299
Deferred revenue and customer advances 45,026 40,044
Accrued retirement plan contributions 3,301 4,405
Accrued income taxes 64,290 45,653
Accrued other taxes 4,623 3,590
Other current liabilities 58,172 60,353
---------------- ---------------
Total current liabilities 230,599 220,533
Other liabilities 19,180 20,031
---------------- ---------------
Total liabilities 249,779 240,564
Stockholders' equity:
Common stock, par value $0.01 per share, 400,000 shares authorized,
130,773 and 129,811 shares issued and outstanding at September 30, 2001
and December 31, 2000, respectively 1,308 1,298
Additional paid-in capital 221,219 213,261
Retained earnings 361,342 245,383
Accumulated other comprehensive (loss) (8,601) (8,161)
---------------- ---------------
Total stockholders' equity 575,268 451,781
---------------- ---------------
Total liabilities and stockholders' equity $ 825,047 $ 692,345
================ ===============
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)
Three Months Ended September 30
--------------------------------------------
2001 2000
---- ----
Net sales $202,694 $191,953
Cost of sales 73,120 70,293
-------------- --------------
Gross profit 129,574 121,660
Selling, general and administrative expenses 66,913 59,712
Research and development expenses 11,794 10,394
Goodwill and purchased technology amortization 1,755 1,755
-------------- --------------
Operating income 49,112 49,799
Interest income, net 1,211 322
-------------- --------------
Income before income taxes 50,323 50,121
Provision for income taxes 12,077 13,030
-------------- --------------
Net income $ 38,246 $ 37,091
============== ==============
-------------- --------------
Net income per basic common share $ 0.29 $ 0.29
============== ==============
Weighted average number of basic common shares 130,752 128,485
-------------- --------------
Net income per diluted common share $ 0.28 $ 0.27
============== ==============
Weighted average number of diluted common shares and equivalents 136,704 137,430
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)
Nine Months Ended September 30
------------------------------------------
2001 2000
---- ----
Net sales $610,529 $569,563
Cost of sales 221,963 208,410
--------------- --------------
Gross profit 388,566 361,153
Selling, general and administrative expenses 199,989 181,167
Research and development expenses 34,573 31,313
Goodwill and purchased technology amortization 5,274 5,326
--------------- --------------
Operating income 148,730 143,347
Interest income (expense), net 3,848 (722)
--------------- --------------
Income before income taxes 152,578 142,625
Provision for income taxes 36,619 37,081
--------------- --------------
Income before cumulative effect of change in accounting principle 115,959 105,544
Cumulative effect of change in accounting principle - (10,771)
--------------- --------------
Net income $115,959 $ 94,773
=============== ==============
Income per basic common share:
Net income per basic common share before cumulative effect
of change in accounting principle $ 0.89 $ 0.83
Cumulative effect of change in accounting principle - (0.08)
--------------- --------------
Net income per basic common share $ 0.89 $ 0.75
=============== ==============
Weighted average number of basic common shares 130,486 126,984
Income per diluted common share:
Net income per diluted common share before cumulative effect
of change in accounting principle $ 0.84 $ 0.77
Cumulative effect of change in accounting principle - (0.08)
--------------- --------------
Net income per diluted common share $ 0.84 $ 0.69
=============== ==============
Weighted average number of diluted common shares and equivalents 137,560 136,369
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, 2001 September 30, 2000
------------------ ------------------
Cash flows from operating activities:
Net income $ 115,959 $ 94,773
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes (1,959) (3,881)
Depreciation 15,417 14,070
Amortization of intangibles 8,993 8,396
Compensatory stock option expense - 166
Tax benefit related to stock option plans 888 15,100
Change in operating assets and liabilities, net of acquisitions:
(Increase) in accounts receivable (1,028) (9,053)
(Increase) in inventories (27,954) (11,866)
(Increase) in other current assets (5,471) (4,945)
(Increase) in other assets (3,577) (5,315)
Increase in accounts payable and other current liabilities 12,472 17,290
Increase in deferred revenue and customer advances 5,267 3,723
Increase (decrease) in other liabilities 897 (2,912)
--------- --------
Net cash provided by operating activities 119,904 115,546
Cash flows from investing activities:
Additions to property, plant, equipment, software capitalization and
other intangibles (33,958) (26,999)
Investments in unaffiliated companies (4,000) (7,595)
Business acquisitions, net of cash acquired (2,580) (1,709)
Loan repayments from officers 723 312
--------- --------
Net cash (used in) investing activities (39,815) (35,991)
Cash flows from financing activities:
Net (repayment) of bank debt (3,755) (77,849)
Proceeds from stock plans 7,080 18,300
Proceeds from debt swap 6,526 -
--------- --------
Net cash provided by (used in) financing activities 9,851 (59,549)
Effect of exchange rate changes on cash and cash equivalents (1,219) (613)
--------- --------
Increase in cash and cash equivalents 88,721 19,393
Cash and cash equivalents at beginning of period 75,509 3,803
--------- --------
Cash and cash equivalents at end of period $ 164,230 $ 23,196
========= ========
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. The Company has the largest HPLC
market share in the United States, Europe and non-Japan Asia and has a leading
position in Japan. 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 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. As discussed in Note 7 to the consolidated financial statements,
these three operating segments have been aggregated into one reporting segment
for financial statement purposes.
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP") in
the Unites States of America. 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 GAAP 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 consolidated
financial statements reflect all adjustments (which are normal and recurring)
necessary for a fair presentation of the results for the interim periods. The
interim consolidated financial statements should be read in conjunction with the
consolidated financial statements included in the Company's Form 10-K filing
with the Securities and Exchange Commission for the year ended December 31,
2000.
2. Accounting Changes
Revenue Recognition
Effective January 1, 2000, the Company changed its method of revenue recognition
for certain products requiring installation in accordance with Staff Accounting
Bulletin ("SAB") 101, Revenue Recognition in Financial Statements. Previously,
the Company recognized revenue related to both the sale and the installation of
certain products at the time of shipment. The larger of the contractual cash
holdback or the fair value of the installation service is now deferred when the
product is shipped and recognized as a multiple element arrangement in
accordance with SAB 101 when installation is complete. The cumulative effect of
the change on prior years resulted in a charge to income of $10,771 (net of an
income tax benefit of $3,785), which is included in income for the nine months
ended September 30, 2000 (the "2000 period"). The adoption of SAB 101 had
virtually no effect on the Company's results of operations for the 2000 period,
excluding the cumulative effect.
7
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Accounting for Derivatives and Hedging Activities
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standard ("SFAS") 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value as either assets or liabilities. If the derivative
is designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the
effective portions of changes in the fair value of the derivative are recorded
in other comprehensive income ("OCI") and are recognized in earnings when the
hedged item affects earnings; ineffective portions of changes in fair value are
recognized in earnings. The impact of adopting SFAS 133 on January 1, 2001 was
not material to the Company.
The Company currently uses derivative instruments to manage exposures to
foreign currency risks. The Company's objectives for holding derivatives are to
minimize foreign currency risk using the most effective methods to eliminate or
reduce the impact of foreign currency exposure. The Company documents all
relationships between hedging instruments and hedged items, and links all
derivatives designated as fair value, cash flow or foreign currency hedges to
specific assets and liabilities on the balance sheet or to specific forecasted
transactions. The Company also assesses and documents, both at the hedges'
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values
or cash flows associated with the hedged items.
The Company has operations in various countries and currencies throughout the
world. As a result, the Company's financial position, results of operations and
cash flows can be affected by fluctuations in foreign currency exchange rates.
The Company uses debt swap agreements to mitigate partially such effects. In
May and June 2001, the Company closed outstanding debt swap agreements, in
European and Japanese currencies, and entered into a new debt swap agreement in
Japanese yen, with a notional amount totaling $27.0 million and a term of six
months. The debt swap agreement has been designated as a foreign currency hedge
of a net investment in foreign operations. For the nine months ended September
30, 2001, the Company recorded a cumulative net pre-tax gain of $5.3 million in
OCI, which consisted of a realized gain of $6.5 million relating to the closed
debt swap agreements offset by an unrealized loss of $1.2 million relating to
the new Japanese yen swap agreement, both of which partially offset hedged
foreign exchange impacts.
The Company also enters into forward foreign exchange contracts, not
designated as cash flow hedging instruments under SFAS 133, principally to hedge
the impact of currency fluctuations on certain intercompany balances. Principal
hedged currencies include the euro, Japanese yen and British pound. The periods
of these forward contracts typically range from three months to one year. At
September 30, 2001 and December 31, 2000, the Company held forward foreign
exchange contracts with notional amounts totaling approximately $58.5 million
and $60.0 million, respectively.
3. Inventories
Inventories are classified as follows:
September 30, December 31,
2001 2000
------------- --------------
Raw materials $ 42,594 $32,760
Work in progress 28,229 20,269
Finished goods 44,220 34,246
------------- --------------
Total inventories $115,043 $87,275
============= ==============
4. Income Taxes
The Company's effective tax rate for the three months ended September 30, 2001
and 2000, was 24% and 26%, respectively. The Company's effective tax rate for
the nine months ended September 30, 2001 and 2000, was 24% and 26%,
respectively.
8
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. Earnings Per Share
Basic and diluted EPS calculations are detailed as follows:
------------------------------------------------------------------------
Three Months Ended September 30, 2001
------------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------- --------------------- -----------------
Net income per basic common share $38,246 130,752 $0.29
=================== ===================== =================
Effect of dilutive securities:
Options outstanding 5,951
Options exercised 1
------------------- --------------------- -----------------
Net income per diluted common share $38,246 136,704 $0.28
=================== ===================== =================
------------------------------------------------------------------------
Three Months Ended September 30, 2000
------------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------- --------------------- -----------------
Net income per basic common share $37,091 128,485 $0.29
=================== ===================== =================
Effect of dilutive securities:
Options outstanding 8,555
Options exercised 390
------------------- --------------------- -----------------
Net income per diluted common share $37,091 137,430 $0.27
=================== ===================== =================
Nine Months Ended September 30, 2001
--------------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------------- --------------------- -----------------
Net income per basic common share before cumulative
effect of change in accounting principle $115,959 130,486 $0.89
=================== ===================== =================
Effect of dilutive securities:
Options outstanding 6,920
Options exercised 154
------------------- --------------------- -----------------
Net income per diluted common share before cumulative
effect of change in accounting principle $115,959 137,560 $0.84
=================== ===================== =================
------------------------------------------------------------------------
Nine Months Ended September 30, 2000
------------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------- --------------------- -----------------
Net income per basic common share before cumulative
effect of change in accounting principle $105,544 126,984 $0.83
=================== ===================== =================
Effect of dilutive securities:
Options outstanding 8,114
Options exercised 1,271
------------------- --------------------- -----------------
Net income per diluted common share before cumulative
effect of change in accounting principle $105,544 136,369 $0.77
=================== ===================== =================
9
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the three months and nine months ended September 30, 2001, the Company had
1,688 and 1,690 stock option securities that were antidilutive, respectively.
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
antidilutive securities were not included in the computation of diluted EPS.
The effect of dilutive securities was calculated using the treasury stock
method.
6. Comprehensive Income
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------- ------------------ ------------------ ------------------
Net income $38,246 $37,091 $115,959 $ 94,773
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax 10,455 (8,033) (2,589) (16,475)
Appreciation (depreciation) and realized gain
on derivative instruments (1,223) 5,289 5,303 9,284
Change in unrealized gain (loss) on investment,
net of tax (225) 2,916 (3,154) 2,916
----------------- ------------------ ------------------ ------------------
Comprehensive income $47,253 $37,263 $115,519 $ 90,498
================= ================== ================== ==================
7. Business Segment Information
SFAS 131, Disclosures about Segments of an Enterprise and Related Information,
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,
chromatography columns and other consumables, and 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.
8. Interest Income
Interest income for the three months ended September 30, 2001 and 2000 was $1.5
million and $1.1 million, respectively. Interest income for the nine months
ended September 30, 2001 and 2000 was $4.8 million and $3.1 million,
respectively.
10
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141,
Business Combinations and SFAS 142, Goodwill and Other Intangible Assets. SFAS
141 requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS 142 requires that
ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. SFAS 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is after
June 30, 2001. The provisions of SFAS 142 will be effective for fiscal years
beginning after December 15, 2001, and will thus be adopted by the Company, as
required, in fiscal year 2002. Goodwill amortization was approximately $4.0
million in fiscal year 2000 and is expected to be approximately the same in
fiscal year 2001. The impact of impairment, if any, of goodwill on the
Company's financial statements has not yet been determined.
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. The provisions of SFAS 143 apply to all entities that incur
obligations associated with the retirement of tangible long-lived assets. SFAS
143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002, and with thus be adopted by the Company, as required, in
fiscal year 2003. The Company does not expect the application of SFAS 143 to
have a material impact on its financial position or results of operations.
In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 provides guidance on the accounting for
the impairment or disposal of long-lived assets. The objectives of SFAS 144 are
to address significant issues relating to the implementation of SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, and to develop a single model (based on the framework
established in SFAS 121) for long-lived assets to be disposed of by sale,
whether previously held or newly acquired. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, its provisions are to be applied prospectively. The Company does not
expect the application of SFAS 144 to have a material impact on its financial
position or results of operations.
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, 2001 (the "2001
Quarter") and the nine month period ended September 30, 2001 (the "2001 Period")
were $202.7 million and $610.5 million, respectively, compared to $192.0 million
for the three month period ended September 30, 2000 (the "2000 Quarter") and
$569.6 million for the nine month period ended September 30, 2000 (the "2000
Period"), an increase of 6% for the quarter and 7% for the period. Excluding
the adverse effects of a stronger U.S. dollar, net sales increased by 8% over
the 2000 Quarter and 11% over the 2000 Period. Sales growth decelerated for the
quarter, principally due to the Company's inability to convert strong mass
spectrometry orders into shipments during the later part of the quarter. This
was due, in part, to normal manufacturing setbacks on newly introduced mass
spectrometry products. The Company's HPLC product line grew at a low double
digit rate, excluding currency effects. Thermal analysis sales improved during
the quarter, reaching low double digit growth as the market reacted favorably to
newly launched products. Overall orders and sales reflected continued strong
demand across all major geographies, with order backlog increasing over $7.0
million.
Gross Profit:
Gross profit for the 2001 Quarter and the 2001 Period was $129.6 million and
$388.6 million, respectively, compared to $121.7 million for the 2000 Quarter
and $361.2 million for the 2000 Period, an increase of $7.9 million or 7% for
the quarter and $27.4 million or 8% for the period. Gross profit as a
percentage of sales increased to 63.9% in the 2001 Quarter from 63.4% in the
2000 Quarter. Gross profit as a percentage of sales increased to 63.6% in the
2001 Period from 63.4% in the 2000 Period due to productivity improvements and a
modest shift in sales mix to higher margin chemistry and service product lines,
both of which were partially offset by the adverse effects of currency
translation.
Selling, General, and Administrative Expenses:
Selling, general and administrative expenses for the 2001 Quarter and the 2001
Period were $66.9 million and $200.0 million, respectively, compared to $59.7
million for the 2000 Quarter and $181.2 million for the 2000 Period. As a
percentage of net sales, selling, general and administrative expenses increased
to 33.0% for the 2001 Quarter from 31.1% for the 2000 Quarter, and 32.8% for the
2001 Period from 31.8% for the 2000 Period. The $7.2 million or 12% increase
for the quarter and $18.8 million or 10% increase for the period in total
expenditures primarily resulted from increased headcount and related costs
required to support increased current and future sales levels, slightly reduced
by the effects of currency translation. In addition, the Company incurred
unexpected foreign currency transaction losses in the 2001 Quarter due to rapid
changes in currency translation rates and unusual cross-rate movements.
Research and Development Expenses:
Research and development expenses were $11.8 million for the 2001 Quarter and
$34.6 million for the 2001 Period, compared to $10.4 million for the 2000
Quarter and $31.3 million for the 2000 Period, an increase of $1.4 million or
13% from the 2000 Quarter and $3.3 million or 10% from the 2000 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 2001 Quarter and the 2001
Period was $1.8 million and $5.3 million, respectively, consistent with the $1.8
million for the 2000 Quarter and $5.3 million for the 2000 Period.
Operating Income:
Operating income for the 2001 Quarter and the 2001 Period was $49.1 million and
$148.7 million, respectively, compared to $49.8 million for the 2000 Quarter and
$143.3 million for the 2000 Period, a decrease of $0.7 million or 1% for the
quarter and an increase of $5.4 million or 4% for the period. The decrease for
the 2001 Quarter is attributed to the increase in operating expenses being
slightly greater than the effects of favorable gross margins and sales growth.
The 2001 Period increase resulted from overall sales growth and productivity
improvements across all operating areas.
Interest Income (Expense), Net:
Net interest income for the 2001 Quarter and the 2001 Period was $1.2 million
and $3.8 million, respectively, compared to net interest income (expense) of $.3
million for the 2000 Quarter and ($0.7) million for the 2000 Period. The change
primarily reflected the cumulative effects of the Company's cash flow, offset by
lower yields on investments.
12
Provision for Income Taxes:
The Company's effective income tax rate was 24% in the 2001 Quarter and 2001
Period and 26% in the 2000 Quarter and 2000 Period. The 2001 tax rate decreased
primarily due to the continued favorable shift in the mix of taxable income to
lower tax rate jurisdictions.
Income before Cumulative Effect of Change in Accounting Principle:
Net income for the 2001 Quarter and income before the cumulative effect of an
accounting change for the 2001 Period was $38.2 million and $116.0 million,
respectively, compared to $37.1 million for the 2000 Quarter and $105.5 million
for the 2000 Period, an increase of $1.1 million or 3% from the 2000 Quarter and
$10.5 million or 10% from the 2000 Period, respectively. The improvement over
2000 was a result of sales growth, favorable interest income dynamics 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 January 1, 2002 ("the Euro conversion"). A transition period
has been established from January 1, 1999 to January 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. During the
quarter, the Company successfully tested and implemented the Euro conversion of
its information technology systems.
Liquidity and Capital Resources
During the 2001 Period, net cash provided by the Company's operating activities
was $119.9 million, primarily as a result of net income for the period after
adding back depreciation and amortization, less working capital needs of
approximately $18.7 million. In terms of working capital, $28.0 million of cash
was used for inventory growth, including new product inventory related to future
sales, offset by cash provided by an increase in accounts payable and other
current liabilities. In addition to cash from operating activities, cash was
provided by $7.1 million of proceeds received by the Company from the exercise
of stock options and its employee stock purchase plan, and $6.5 million from the
settlement of debt swap agreements. During the period, the Company spent $34.0
million on property, plant, equipment and software capitalization investments
and $6.6 million for investments in unaffiliated companies and business
acquisitions.
The Company believes that existing cash and cash equivalent balances of $164.2
million and expected cash flow from operating activities together with
borrowings available under the Bank Credit Agreement will be sufficient to fund
working capital and capital spending requirements of the Company in the
foreseeable future.
As a publicly held company, the Company has not paid any dividends on its
common stock 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. These statements are
subject to various risks and uncertainties, many of which are outside the
control of the Company, including (i) changes in the HPLC, mass spectrometry and
thermal analysis portions of the analytical instrument marketplace as a result
of economic or regulatory influences, (ii) changes in the competitive
marketplace, including new products and pricing changes by the Company's
competitors and (iii) the ability of the Company to generate increased sales and
profitability from new product introductions, as well as additional risk factors
set forth in the Company's Form 10-K. Factual results or events could differ
materially from the plans, intentions and expectations disclosed in the forward-
looking statements we make, whether because of these factors or for other
reasons. We do not assume any obligations to update any forward-looking
statement we make.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the nine
months ended September 30, 2001. For additional information, refer to the
Company's Form 10-K, Item 7a for the year ended December 31, 2000.
13
Part II: Other Information
Item 1. Legal Proceedings
There were no material developments during the quarter for which this
report is filed.
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. None
B. No reports on Form 8-K were filed during the three months ended September
30, 2001.
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 9, 2001 Waters Corporation
/s/ John Ornell
----------------------------------
John Ornell
Vice President and Chief Financial
Officer
15