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