SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES 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 EXCHANGE ACT OF 1934 for the transition period from __________ to __________ COMMISSION FILE NUMBER 0-1052 ------ Millipore Corporation - --------------------- (Exact name of registrant as specified in its charter) Massachusetts - ------------- (State or other jurisdiction of incorporation or organization) 04-2170233 - ---------------------- (I.R.S. Employer Identification No.) 80 Ashby Road Bedford, Massachusetts 01730 - ----------------------------- (Address of principal executive offices) Registrant's telephone number, include area code (781) 533-6000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------ The Company had 47,744,527 shares of common stock outstanding as of October 26, 2001. MILLIPORE CORPORATION INDEX TO FORM 10-Q Page No. -------- Part I. Financial Information Item 1. Condensed Financial Statements Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 2 Consolidated Statements of Income - Three and Nine Months Ended September 30, 2001 and 2000 3 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000 4 Notes to Consolidated Condensed Financial Statements 5-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 Part II. Other Information Item 1 Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 15 MILLIPORE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) September 30, December 31, 2001 2000 - ---------------------------------------------------------------------------------------------- (Unaudited) ASSETS - ------ Current assets Cash and cash equivalents $ 95,258 $ 55,186 Cash held as collateral - 3,212 Accounts receivable, net 147,799 137,035 Deferred income taxes 13,077 13,077 Inventories 86,697 84,051 Other current assets 6,160 5,214 --------- --------- Total Current Assets 348,991 297,775 Property, plant and equipment, net 185,268 159,820 Deferred income taxes 71,283 71,283 Intangible assets 28,252 30,993 Other assets 10,991 11,438 Net assets of discontinued operations 278,064 248,790 --------- --------- Total Assets $ 922,849 $ 820,099 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities Notes payable $ - $ 52,544 Accounts payable 44,152 46,912 Accrued expenses 62,335 61,536 Dividends payable 5,245 5,319 Accrued retirement plan contributions 6,266 8,244 Accrued income taxes payable 5,299 20,137 --------- --------- Total Current Liabilities 123,297 194,692 Long-term debt 357,000 300,130 Other liabilities 21,737 19,909 Minority Interest in discontinued business 45,417 - Shareholders' equity Common stock 56,988 56,988 Additional paid-in capital 72,118 30,546 Retained earnings 588,568 579,552 Unearned compensation (2,647) (4,490) Accumulated other comprehensive loss (68,078) (48,548) --------- --------- 646,949 614,048 Less: Treasury stock, at cost, 9,307 shares in 2001 and 10,594 in 2000 (271,551) (308,680) --------- --------- Total Shareholders' Equity 375,398 305,368 --------- --------- Total Liabilities and Shareholders' Equity $ 922,849 $ 820,099 ========= ========= The accompanying notes are an integral part of the consolidated condensed financial statements. 2 MILLIPORE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------------- ----------------------------------------- 2001 2000 2001 2000 ---------------- ------------------ ------------------ ------------------ Net sales $157,667 $148,267 $488,137 $449,285 Cost of sales 70,579 66,828 216,593 198,118 -------- -------- -------- -------- Gross profit 87,088 81,439 271,544 251,167 Selling, general & administrative expenses 49,659 45,778 150,188 144,711 Research & development expenses 11,458 10,309 33,395 30,375 Restructuring and other charges - 320 17,962 320 -------- -------- -------- -------- Operating income 25,971 25,032 69,999 75,761 Net gain on sale of securities - - - 7,151 Interest income 577 1,006 2,158 2,539 Interest expense (6,081) (6,436) (19,346) (20,729) -------- -------- -------- -------- Income from continuing operations before Income taxes 20,467 19,602 52,811 64,722 Provision for income taxes 4,503 4,312 9,283 15,384 -------- -------- -------- -------- Income from continuing operations $ 15,964 $ 15,290 $ 43,528 $ 49,338 Income (loss) from discontinued operations, net of tax - 13,435 (6,736) 37,485 Loss on disposal of discontinued operations, net of tax - - (24,400) - -------- -------- -------- -------- Total discontinued operations - 13,435 (31,136) 37,485 Net income $ 15,964 $ 28,725 $ 12,392 $ 86,823 ======== ======== ======== ======== Net income (loss) per share: Continuing operations $ 0.34 $ 0.33 $ 0.93 $ 1.08 Discontinued operations - $ 0.29 $ (0.67) $ 0.82 Net income $ 0.34 $ 0.62 $ 0.26 $ 1.90 Diluted net income (loss) per share: Continuing operations $ 0.33 $ 0.32 $ 0.91 $ 1.05 Discontinued operations $ - $ 0.29 $ (0.65) $ 0.79 Net income $ 0.33 $ 0.61 $ 0.26 $ 1.84 Cash dividends declared per share $ 0.11 $ 0.11 $ 0.33 $ 0.33 Weighted average shares outstanding: Basic 47,377 46,073 46,908 45,742 Diluted 48,364 47,328 47,902 47,101 The accompanying notes are an integral part of the consolidated condensed financial statements. 3 MILLIPORE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, --------------------- 2001 2000 -------- -------- Cash Flows From Operating Activities: - ------------------------------------- Net income $ 12,392 $ 86,823 Less: income (loss) from discontinued operations (6,736) 37,485 (Loss) on disposal of discontinued operations (24,400) - -------- -------- Net income from continuing operations 43,528 49,338 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,265 22,844 Gain on sale of securities - (7,151) Deferred tax benefit - (5,861) Restructuring and other charges 17,962 320 Changes in operating assets and liabilities, net: (Increase) in accounts receivable (14,269) (7,414) (Increase) in inventories (4,744) (13,693) (Increase)/decrease in other current assets and other assets (2,753) 2,179 (Decrease)/increase in accounts payable and accrued expenses (20,275) 10,847 (Decrease) in accrued retirement plan contributions (5) (554) (Decrease)/increase in accrued income taxes (19,586) 10,242 Increase in other 1,995 2,079 -------- -------- Net cash provided by operating activities from continuing operations 25,118 63,176 Cash Flows From Investing Activities: - ------------------------------------- Additions to property, plant and equipment (49,847) (17,690) Proceeds from sale of securities - 7,498 Proceeds from sale of property - 8,808 -------- -------- Net cash used in investing activities from continuing operations (49,847) (1,384) Cash Flows From Financing Activities: - ------------------------------------- Issuance of treasury stock under stock plans 42,842 25,232 Net change in borrowing under lines of credit 4,456 (43,645) Dividends paid (15,435) (15,098) Decrease in cash held as collateral 3,212 7,605 -------- -------- Net cash provided by (used in) financing activities from continuing 35,075 (25,906) operations Effect of foreign exchange rates on cash and cash equivalents (2,204) (2,786) -------- -------- Net cash provided by continuing operations 8,142 33,100 Net cash provided by discontinued operations 31,930 2,190 -------- -------- Net increase in cash and cash equivalents 40,072 35,290 Cash and cash equivalents on January 1 55,186 32,420 -------- -------- Cash and cash equivalents on September 30 $ 95,258 $ 67,710 ======== ======== The accompanying notes are an integral part of the consolidated condensed financial statements. 4 MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in millions, shares in thousands) 1. GENERAL: The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and, accordingly, these footnotes condense or omit certain information and disclosures which substantially duplicate information provided in the Company's latest audited financial statements. These financial statements should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The financial statements for all periods presented have been restated for discontinued operations as discussed in Note 2. In the opinion of management, these financial statements reflect all adjustments necessary for a fair presentation of the results for the interim periods presented. The accompanying unaudited consolidated condensed financial statements are not necessarily indicative of future trends or the Company's operations for the entire year. 2. DISCONTINUED OPERATIONS: On October 3, 2000, the Company announced its plans, subject to certain conditions, to separate into two distinct companies by making its microelectronics business segment an independent, publicly traded company. In accordance with these plans, the microelectronics business segment was separated into a wholly-owned Millipore subsidiary named Mykrolis Corporation ("Mykrolis") on March 31, 2001. During the second quarter of 2001, the Company received a ruling from the Internal Revenue Service that the Mykrolis spin-off transaction, as planned, would be tax-free to the Company and its shareholders. Thereafter, the Company's management and Board of Directors approved the plan of disposition for Mykrolis. Accordingly, the Company's consolidated condensed financial statements and notes reflect the Company's microelectronics business as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30. The Company plans to spin-off its remaining interest in Mykrolis through a dividend distribution to its shareholders during the first quarter of 2002. On August 9, 2001, Mykrolis completed an initial public offering (the "Mykrolis IPO") of 7,000 of its common shares at a price of $15.00 per share. Net proceeds from the Mykrolis IPO, after deducting the underwriting discount, commissions and other direct costs, were approximately $94.1. Of that amount, Mykrolis paid $19.1 to the Company as a repayment of amounts outstanding under the separation agreements between the two companies. No additional Mykrolis shares were purchased pursuant to the underwriters' overallotment option provided for as part of the Mykrolis IPO. Prior to the Mykrolis IPO, the Company's ownership in Mykrolis' outstanding common shares was 100%, and at September 30, 2001 the Company's ownership in Mykrolis' outstanding common shares is approximately 82%. As a result of the Mykrolis IPO, the Company recorded a gain on its investment in Mykrolis of approximately $41.9 as an increase to additional paid-in capital. In the third quarter of 2001, the Company revised the $24.4 ($35.1 pretax) estimated loss on disposal of discontinued operations. The pre-tax revision included an $8.7 increase in the estimated future operating losses for Mykrolis through the planned disposition date offset by reduced disposition expenses of $2.0 and to adjust for a $6.7 deduction of the 17.7 percent minority interest share of forecasted operating losses to be incurred from the IPO date through the disposition date. For the third quarter of 2001, the estimated loss on disposal included an $11.3 loss from discontinued operations. Included in the third quarter operating results of the discontinued business is a $4.9 restructuring charge taken in response to the prolonged duration and severity of the current semiconductor industry downturn. 5 The summary of operating results from discontinued operations is as follows: Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ------------------------------ 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------- -------------------------------- Net revenue $39.7 $91.1 $178.0 $254.9 Gross Margin 10.6 45.4 69.4 130.5 ===== ===== ====== ====== Income (loss) from discontinued operations, before income taxes $ - $17.2 $(10.7) $ 47.4 Provision (benefit) for income taxes - 3.8 (4.0) 9.9 ----- ----- ------ ------ Income (loss) from discontinued operations, net of taxes $ - $13.4 $ (6.7) $ 37.5 Loss on disposal of discontinued operations, net of taxes - - (24.4) - ----- ----- ------ ------ Total discontinued operations, net of taxes $ - $13.4 $(31.1) $ 37.5 ===== ===== ====== ====== Net assets of discontinued operations at September 30, 2001 and December 31, 2000 are summarized below: September 30, December 31, 2001 2000 -------------------- -------------------- Current assets $199.1 $157.8 Non current assets 133.7 145.8 Current liabilities (45.3) (39.9) Non current liabilities ( 9.4) (14.9) ------ ------ Net assets of discontinued operations $278.1 $248.8 ====== ====== MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in millions, shares in thousands) Current assets include cash and cash equivalents, accounts receivable and inventory. Non-current assets include property, plant and equipment, deferred income taxes, intangible assets and other assets. Current liabilities consist of accounts payable, income taxes payable, accrued expenses and amounts due to Millipore Corporation. Non-current liabilities consist principally of pension obligations. 3. INVENTORIES: Inventories consisted of the following: September 30, December 31, 2001 2000 --------------------- ---------------------- Raw materials $27.9 $24.9 Work in process 17.0 18.3 Finished goods 41.8 40.9 ----- ----- Total $86.7 $84.1 ===== ===== 4. PROPERTY, PLANT AND EQUIPMENT: Accumulated depreciation on property, plant and equipment was $166.3 at September 30, 2001 and $163.1 at December 31, 2000. 5. RESTRUCTURING PROGRAMS AND OTHER CHARGES: In the first quarter of 2001, a restructuring program was initiated to reorganize the Company. The program included reducing, consolidating and outsourcing of certain manufacturing operations, centralization of European shared services (including order processing, cash collections and cash applications processes) and streamlining certain corporate shared services and divisional overhead functions to serve a smaller organization. These initiatives included a $16.5 restructuring charge and $1.5 of fixed asset write-offs for assets that are no longer in use. The restructuring charge included $15.4 of employee severance costs and $1.1 of lease cancellation costs. The severance costs included non-cash stock based compensation expense related to changes in stock awards. Approximately 215 positions will be eliminated and the affected employees were notified by March 31, 2001. Certain of these employees will continue in their existing positions for a limited period with their related salary costs charged to operations as incurred. The Company anticipates that the restructuring program will be substantially completed by the second quarter of 2002. Under the terms of the 6 severance agreements, the Company expects to pay severance and associated benefits through 2002. Through September 30, 2001, approximately 185 employees have left the Company. The following is a summary of the 2001 Restructuring Program reserve balances at September 30, 2001: Restructuring Non-cash Balance at Charge Cash activity activity September 30, 2001 ------------------------------------------------------------------------------------ Employee severance costs $15.4 $6.7 $2.2 $6.5 Leasehold and other costs 1.1 0.4 - 0.7 ----- ---- ---- ---- Total $16.5 $7.1 $2.2 $7.2 ===== ==== ==== ==== The 1998 Restructuring program has been completed and the final cash payments occurred in third quarter of 2001. The payments consisted primarily of lease termination costs. Of the planned 159 employees, all left the Company pursuant to this initiative. In the third quarter of 2000, the Company agreed in principle to settle a patent lawsuit and recorded a charge of $1.5 for past royalties. This charge was offset by the reversal of $1.2 of restructuring reserves originally recorded in 1998. The reversal related to additional proceeds from the sale of facilities. 7 MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in millions, shares in thousands) 6. BASIC AND DILUTED EARNINGS PER SHARE: Share information used to calculate earnings per share ("EPS") is as follows: Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---------------------------- ------------------------------ Weighted average common shares outstanding for basic 47,377 46,073 46,908 45,742 EPS Dilutive effect of stock options and restricted stock 987 1,255 994 1,359 ------ ------ ------ ------ Weighted average common shares outstanding for 48,364 47,328 47,902 47,101 diluted EPS ====== ====== ====== ====== 7. COMPREHENSIVE INCOME: The following table presents the components of comprehensive income (loss), net of taxes: Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ----------------------------- ----------------------------- Unrealized holding gains on marketable securities $(0.6) $ 0.8 $ (1.3) $ 7.7 Reclassification adjustment for gains realized in Net income - - - (4.7) ----- ----- ------ ------ Net unrealized gains (loss) on securities available For sale $(0.6) $ 0.8 $ (1.3) $ 3.0 Impact of adopting SFAS No. 133 (5.1) Change in value of foreign currency interest rate swaps designated as hedges 5.9 Foreign currency translation adjustments 4.9 (9.1) (19.0) (18.3) ----- ----- ------ ------ Other comprehensive income (loss) 4.3 (8.3) (19.5) (15.3) Net income 16.0 28.7 12.4 86.8 ----- ----- ------ ------ Total comprehensive income $20.3 $20.4 $ (7.1) $ 71.5 ===== ===== ====== ====== 8. DEBT: On October 5, 2001, the Company entered into a five year unsecured revolving credit agreement which replaced its prior revolving credit agreement. The new revolving credit agreement, together with a Lender Joinder Agreement that the Company entered into on October 23, 2001, (together, the "Credit Agreement") allows for revolving loan borrowings of up to $250.0. Individual borrowings under the Credit Agreement are made on terms not to exceed twelve months. Because of the Company's ability and intent to continuously refinance such borrowings under the Credit Agreement, short-term borrowings expected to be refinanced, including $57.0 of amounts due at September 30, 2001 under the prior revolving credit agreement and $125.0 due on notes payable with maturities within the next 12 months have been classified as long-term. Interest is payable on outstanding borrowings at a floating rate defined in the Credit Agreement as Eurocurrency rate plus a margin. The Credit Agreement also calls for a facility fee at a rate ranging from 0.25 to 0.625 percent of the available facility. The exact amount of the margin and the facility fee is dependent on the Company's debt rating. The Credit Agreement calls for the Company to maintain certain financial covenants in the areas of leverage ratios and interest coverage. On October 4, 2001, the Company amended the agreement governing its $100.0 7.23% note payable (the "Note Agreement"). The amended Note Agreement's financial covenants were modified and mirror the financial covenants under the Credit Agreement. The Company also prepaid $25.0 of the note at that time. 8 MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in millions, shares in thousands) 9. NEW ACCOUNTING PRONOUNCEMENTS: In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 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 No. 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 No. 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 No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company as required in the first quarter of fiscal year 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's financial statements has not yet been determined. In October 2001, the FASB issued SFAS No.144, "Accounting for the impairment or Disposal of Long-Lived Assets" effective January 1, 2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and provides a single accounting model for long-lived assets to be disposed of. The Company is currently assessing the impact of this new statement on its consolidated financial position and results of operations and has not yet determined the impact of this adoption. 10. LEGAL PROCEEDINGS: On July 21, 1999 Amersham Pharmacia Biotech AB ("APB") of Sweden filed a complaint in the High Court of Justice in the United Kingdom against the Company and two of its subsidiaries alleging that the sale of the Company's ISOPAK chromatography valve infringed one or more of the claims contained in certain APB patents. APB sought an injunction against the alleged infringement as well as damages. On October 26, 2000, the High Court ruled that the chromatography valve currently sold by the Company did not infringe the APB patents. APB appealed this decision and, on July 5, 2001, the British Appeals Court affirmed the decision of the High Court. APB is now seeking leave to appeal the decision to the House of Lords. The High Court also ruled that a discontinued product did infringe one of the APB patents. A hearing on damages has yet to be scheduled with respect to this matter. In any event, the outcome of this suit is not expected to have a material adverse effect on the Company's financial statements. 11. BUSINESS SEGMENT INFORMATION: In conjunction with its reporting of the Microelectronics business segment as discontinued operations in the second quarter, the Company evaluated its business activities. The Company's chief decision makers evaluate the performance of the Company and make resource allocation decisions based on total consolidated company results. As a result of this evaluation, the Company determined that it operates in one reportable operating segment, the Bioscience segment. Within this segment, the Company develops, manufactures and sells consumable products and capital equipment to pharmaceutical, biotechnology, and life science research companies, university and government laboratories and research institutes. The Company's product offerings are used in laboratory and research applications, drug discovery and development, and biopharmaceutical and biotechnology applications for drug manufacturing. These products are sold worldwide, principally through a direct sales force. Distributors are used in selected regions and for specific product lines. Please refer to the consolidated condensed financial statements for financial information regarding the one reportable segment of the Company. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On October 3, 2000, the Company announced its plans, subject to certain conditions, to separate into two distinct companies by making its microelectronics business segment an independent, publicly traded company. In accordance with these plans, the microelectronics business segment was separated into a wholly-owned Millipore subsidiary named Mykrolis Corporation ("Mykrolis") on March 31, 2001. During the second quarter of 2001, the Company received a ruling from the Internal Revenue Service that the Mykrolis spin-off transaction, as planned, would be tax-free to the Company and its shareholders. Thereafter, the Company's management and Board of Directors approved the plan of disposition for Mykrolis. Accordingly, the Company's consolidated condensed financial statements and notes reflect the Company's microelectronics business as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30. The Company plans to spin-off its remaining interest in Mykrolis through a dividend distribution to its shareholders during the first quarter of 2002. On August 9, 2001, Mykrolis completed an initial public offering (the "Mykrolis IPO") of 7 million of its common shares at a price of $15.00 per share. Net proceeds from the Mykrolis IPO, after deducting the underwriting discount, commissions and other direct costs, were approximately $94.1 million. Of that amount, Mykrolis paid $19.1 million to the Company as a repayment of amounts outstanding under the separation agreements between the two companies. No additional Mykrolis shares were purchased pursuant to the underwriters' overallotment option provided for as part of the Mykrolis IPO. Prior to the Mykrolis IPO, the Company's ownership in Mykrolis' outstanding common shares was 100%, and at September 30, 2001 the Company's ownership in Mykrolis' outstanding common shares is approximately 82%. As a result of the Mykrolis IPO, the Company recorded a gain on its investment in Mykrolis of approximately $41.9 million as an increase to additional paid-in capital. In the third quarter of 2001, the Company revised the $24.4 million ($35.1 million pretax) estimated loss on disposal of discontinued operations. The pre-tax revision included an $8.7 million increase in the estimated future operating losses for Mykrolis through the planned disposition date offset by reduced disposition expenses of $2.0 million and to adjust for a $6.7 million deduction of the 17.7 percent minority interest share of forecasted operating losses to be incurred from the IPO date through the disposition date. For the third quarter of 2001, the estimated loss on disposal included an $11.3 million loss from discontinued operations. Included in the third quarter operating results of the discontinued business is a $4.9 million restructuring charge taken in response to the prolonged duration and severity of the current semiconductor industry downturn. Local Currency Results - ---------------------- The following discussion of the Results of Operations includes reference to revenue, margins and expenses in "local currencies". Local currency results represent the foreign currency balances translated, in all periods presented, at Millipore's budgeted exchange rates for 2001, thus excluding the impact of fluctuations in the actual foreign currency rates. The Company's management uses this presentation for internal evaluation of the financial performance of the Company because it believes that the local currency results provide a clearer presentation of underlying business trends. The U.S. dollar results represent the foreign currency balances translated at actual exchange rates. Results of Operations - --------------------- Consolidated net sales for the third quarter of 2001 were $158 million, an increase of 6% over sales for the same period last year. The Company reported earnings from continuing operations of $0.33 per share for the third quarter of 2001 compared to earnings per share of $0.32 for the third quarter of 2000. 10 The following table summarizes sales growth by geography in the third quarter of 2001 as compared to the third quarter of 2000 (U.S. dollars in millions): September 30, Sales Growth 2001 2000 In U.S. Dollars Local Currency --------------------------------------------------------------------------------- Americas $ 73 $ 71 2% 2% Europe 52 46 14% 14% Asia/Pacific 33 31 5% 17% ----- ----- -- -- Total $ 158 $ 148 6% 9% ===== ===== == == During the third quarter of 2001, the Japanese yen weakened against the U.S. dollar by approximately 13%, as compared to the third quarter of 2000. The significant weakening of the yen and the weakening of other Asia/Pacific region currencies adversely affected the region's sales growth rates by 12 percentage points in the third quarter of 2001. As a result, worldwide sales growth in the third quarter of 2001 versus the third quarter of 2000 was reduced by 3 percentage points. In local currency, sales increased 9% in the third quarter of 2001 compared to the third quarter of 2000. Positive sales growth, in local currency, was reported in all geographies with double-digit sales growth in the Europe and Asia/Pacific regions. Sales growth was strongest for products used in life science laboratory research and in consumables sold to customers in biotechnology markets. Gross profit margins, in local currencies, were 57% in the third quarter of 2001 compared to 56% reported in the third quarter of 2000. The improved margins were primarily due to a favorable mix of sales in high margin consumables, in overseas geographies and in services. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Selling, general and administrative (SG&A) expenses, in local currencies, increased 11% in the third quarter of 2001 as compared to the third quarter of 2000 due in part to increased spending driven by higher sales activity. As a percentage of net sales, SG&A expenses in local currencies remained at 31%, the same level as last year. Research and development (R&D) expenses, in local currencies, increased 12% in the third quarter of 2001, as compared to the third quarter of 2000. This increase is due to continued investment in R&D programs particularly in the areas of genomic and proteomic research. As a percentage of sales, R&D expenses remained constant at 7%. Operating income, in local currency, increased 9% in the third quarter of 2001 versus the third quarter of 2000 as increased sales combined with improved gross profit margins more than offset operating spending. In U.S. dollars, operating income in the third quarter of 2001, as compared to the third quarter of 2000, increased 2%, being adversely impacted by the weakened Japanese yen. If current foreign exchange rates remain in effect for the fourth quarter, foreign exchange will have a slightly more significant negative impact on operating income as compared to the same period of the prior year. Net interest expense decreased in the third quarter of 2001 as compared to the third quarter of 2000 primarily attributed to lower average borrowings and decrease in average rates. The effective income tax rate for the first nine months of 2001 and 2000 was 22%, excluding unusual items for the March 2001 restructuring program and gain on sale of equity securities recorded in the second quarter of 2000. The effective income tax rate on these unusual items was 35% since they occurred in countries with higher tax rates. Income (loss) from discontinued operations includes the results of the microelectronics businesses that comprise Mykrolis. In the third quarter of 2001, the Company reported $13.4 million in income from discontinued operations. In the third quarter of 2001, the Company revised the loss on disposal of discontinued operations that was recorded in the second quarter of 2001. The pre-tax revision included an $8.7 million increase in the estimated future operating losses for Mykrolis through the planned disposition date offset by reduced disposition expenses of $2.0 million and to adjust for a $6.7 million deduction of the 17.7 percent minority interest share of forecasted operating losses to be incurred from the IPO date through the disposition date. Restructuring and Other Charges - ------------------------------- In the first quarter of 2001, the Company initiated a restructuring program. Key initiatives that will be substantially concluded by the second quarter of 2002 include: . Globally streamlining certain corporate shared services and divisional overhead functions to serve smaller organizations . Centralizing into two locations European shared services including order processing, cash collections and cash applications processes . Closing the manufacturing operation in China in order to reduce manufacturing infrastructures . Outsourcing certain manufacturing processes in Puerto Rico to third party vendors in order to create a more flexible cost structure These initiatives included a $16.5 million restructuring charge and $1.5 million of fixed asset write-offs for assets which are no longer in use. The restructuring charge included $15.4 million of employee severance costs and $1.1 million of lease cancellation costs. Approximately 215 positions were eliminated and the affected employees were notified by March 31, 2001, however, for employees temporarily continuing in their existing positions, related salary costs will be charged to operations as incurred. The Company anticipates that the restructuring program will be substantially completed by the second quarter of 2002. Under the terms of the severance agreements, the Company expects to pay severance and associated benefits through 2002. Through September 30, 2001, approximately 185 employees have left the Company and $6.7 million of severance benefits have been paid. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The restructuring program is expected to yield annualized savings of approximately $10 million related to reduced wages, facility related costs and depreciation, and will be reflected in cost of sales, SG&A expenses and R&D expenses. The savings, which began in the second quarter of 2001, will not be fully realizable until the first quarter of 2002. In the third quarter of 2000, the Company agreed in principle to settle a patent lawsuit and recorded a charge of $1.5 million for past royalties. This charge was offset by the reversal of $1.2 million of restructuring reserves originally recorded in 1998. The reversal related to additional proceeds from the sale of facilities. Foreign Exchange - ---------------- A substantial portion of the Company's business is conducted outside of the United States through its foreign subsidiaries, generally in the local currency. Approximately 37% of the Company's sales are derived from Europe where the U.S. dollar continued to strengthen against the Euro during the third quarter of 2001, and 20% of the sales are from Asia/Pacific where the U.S. dollar strengthened against the Japanese yen. The Company is able to partially mitigate the impact of currency fluctuations by active management of cross border currency flows and material sourcing. Generally, when the U.S. dollar strengthens against currencies in which the Company transacts its business, sales and net income will be adversely impacted. Capital Resources and Liquidity - -------------------------------- Cash generated by operations in the first nine months of 2001 was $ 25.1 million, compared to $63.2 million in the first nine months of 2000. In the first nine months of 2001, net income of $55.2 million (excluding the $18.0 million ($11.7 after tax) of restructuring) was primarily offset by increased accounts receivable of $14.3 million, decreases in accounts payable and accrued expenses of $20.3 million and accrued income taxes of $19.6 million. The increased accounts receivable relates to increased sales in 2001. The accounts payable and accrued expense decrease related to payments for employee compensation accrued in 2000 and paid in 2001 coupled with lower employee compensation accruals during 2001. The decrease in accrued taxes resulted from income tax payments made during the first nine months of 2001. The Company also borrowed $4.5 million under its revolving credit facility and received $42.8 million for stock option exercises and $3.2 million of cash previously restricted as part of the close out of the debt swap agreements. Cash was used to invest $49.8 million in property, plant and equipment and to pay dividends of $15.4 million. On October 5, 2001, the Company entered into a five year unsecured revolving credit agreement which replaced its prior revolving credit agreement. The new revolving credit agreement, together with a Lender Joinder Agreement that the Company entered on October 23, 2001, (together the "Credit Agreement") allows for revolving loan borrowings of up to $250 million. Individual borrowings under the Credit Agreement are made on terms not to exceed twelve months. Because of the Company's ability and intent to continuously refinance such borrowings under the Credit Agreement, short-term borrowings expected to be refinanced, including $57.0 million of amounts due at September 30, 2001 under the prior revolving credit agreement and $125.0 million due on notes payable with maturities within the next 12 months, have been classified as long-term. Interest is payable on outstanding borrowings at a floating rate defined in the agreement as Eurocurrency rate plus a margin. The Credit Agreement also calls for a facility fee at a rate ranging from 0.25 to 0.625 percent of the available facility. The exact amount of the margin and the facility fee is dependent on the Company's debt rating. The Credit Agreement calls for the Company to maintain certain financial covenants in the areas of leverage ratios and interest coverage. On October 4, 2001, the Company amended the agreement governing its $100 million 7.23% note payable (the "Note Agreement"). The amended Note Agreement's financial covenants were modified and mirror the financial covenants under the revolving credit agreement. The Company also prepaid $25 million of the note at that time. Legal Proceedings - ----------------- On July 21, 1999 Amersham Pharmacia Biotech AB ("APB") of Sweden filed a complaint in the High Court of Justice in the United Kingdom against the Company and two of its subsidiaries alleging that the sale of the Company's ISOPAK chromatography valve infringed one or more of the claims contained in certain APB patents. APB sought an injunction against the alleged infringement as well as damages. On October 26, 2000, the High Court ruled that the chromatography valve currently sold by the Company did not infringe the APB patents. APB appealed this decision and, on July 5, 2001, the British Appeals Court affirmed the decision of the High Court. APB is now seeking leave to appeal the decision to the House of Lords. The High Court also ruled that a 13 discontinued product did infringe one of the APB patents. A hearing on damages has yet to be scheduled with respect to this matter. In any event, the outcome of this suit is not expected to have a material adverse effect on the Company's financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS New Accounting Pronouncements - ------------------------------ In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 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 No. 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 No. 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 No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company as required in the first quarter of fiscal year 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's financial statements has not yet been determined. In October 2001, the Financial Accounting Standards Board issued SFAS No.144, "Accounting for the impairment or Disposal of Long-Lived Assets "effective January 1, 2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and provides a single accounting model for long-lived assets to be disposed of. The Company is currently assessing the impact of this new statement on its consolidated financial position and results of operations and has not yet determined the impact of this adoption. Forward Looking Statements - -------------------------- The foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contain certain forward-looking statements based on current management expectations involving substantial risks and uncertainties that could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. These risks and uncertainties include, without limitation, difficulties in the successful implementation of our restructuring activities, as well as those risks and uncertainties described in our Form 10-K for the year ended December 31, 2000. Item 3. Quantitative and Qualitative Disclosures About Market Risk The mitigating actions enumerated above under "Foreign Exchange" in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K have effectively limited the impact of exchange rate fluctuations and credit risk on the Company's results of operations and financial position to a level which is not material. Part II - Other Information Item 1 Legal Proceedings On July 21, 1999 Amersham Pharmacia Biotech AB ("APB") of Sweden filed a complaint in the High Court of Justice in the United Kingdom against the Company and two of its subsidiaries alleging that the sale of the Company's ISOPAK chromatography valve infringed one or more of the claims contained in certain APB patents. APB sought an injunction against the alleged infringement as well as damages. On October 26, 2000, the High Court ruled that the chromatography valve currently sold by the Company did not infringe the APB patents. APB appealed this decision and, on July 5, 2001, the British Appeals Court affirmed the decision of the High Court. APB is now seeking leave to appeal the decision to the House of Lords. The High Court also ruled that a 14 discontinued product did infringe one of the APB patents. A hearing on damages has yet to be scheduled with respect to this matter. In any event, the outcome of this suit is not expected to have a material adverse affect on the Company's financial statements. Item 6. Exhibits and Reports on Form 8-K a. Exhibits 10.1 Credit Agreement between Millipore and certain of its subsidiaries, Bank of America, N.A, and certain other lending and arranging institutions, dated October 5, 2001 10.2 Lender Joinder Agreement between Millipore and certain of its subsidiaries, Bank of America, N.A., and PB Capital Corporation, dated October 23, 2001 10.3 Amendment No. 3, dated October 4, 2001, to Note Purchase and Exchange Agreement between Millipore and Metropolitan Life Insurance Company b. Report on Form 8-K No reports on Form 8-K have been filed by the Company during the fiscal quarter ended September 30, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Millipore Corporation Registrant November 13, 2001 /s/ Kathleen B. Allen - ----------------- --------------------- Date Kathleen B. Allen Vice President and Chief Financial Officer November 13, 2001 /s/ Donald B. Melson - ----------------- -------------------- Date Donald B. Melson Corporate Controller and Chief Accounting Officer 15 Exhibit Index Exhibit Number Exhibit Title - ------ ------------- 10.1 Credit Agreement between Millipore and certain of its subsidiaries, Bank of America, N.A. and certain other lending and arranging institutions, dated October 5, 2001 10.2 Lender Joinder Agreement between Millipore and certain of its subsidiaries, Bank of America, N.A., and PB Capital Corporation, dated October 23, 2001 10.3 Amendment No. 3, dated October 4, 2001, to Note Purchase and Exchange Agreement between Millipore and Metropolitan Life Insurance Company