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 March 31, 2002
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
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WATERS CORPORATION
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(Exact name of registrant as specified in the charter)
Delaware 13-3668640
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 April 24,
2002: 131,368,586.
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 March 31, 2002 and
December 31, 2001 3
Consolidated Statements of Operations for the three months ended
March 31, 2002 and 2001
4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001
5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Data)
March 31, 2002 December 31, 2001
-------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $250,761 $ 226,798
Accounts receivable, less allowances for
doubtful accounts and sales returns of
$3,890 and $3,812 at March 31, 2002
and December 31, 2001, respectively 168,014 182,164
Inventories 109,731 102,718
Other current assets 14,372 11,064
-------- ---------
Total current assets 542,878 522,744
Property, plant and equipment, net of
accumulated depreciation of $91,844
and $86,421 at March 31, 2002 and
December 31, 2001, respectively 114,903 114,207
Other assets 106,436 86,481
Goodwill, net 166,582 163,479
-------- ---------
Total assets $930,799 $ 886,911
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,614 $ 1,140
Accounts payable 44,624 35,979
Accrued compensation 11,155 20,176
Deferred revenue and customer advances 53,875 46,014
Accrued retirement plan contributions 9,627 8,660
Accrued income taxes 40,198 41,643
Accrued other taxes 6,043 5,925
Accrued patent litigation 76,100 75,000
Other current liabilities 47,075 46,469
-------- ---------
Total current liabilities 290,311 281,006
Other liabilities 24,780 24,160
-------- ---------
Total liabilities 315,091 305,166
Stockholders' equity:
Common stock, par value $0.01 per share,
400,000 shares authorized, 131,303 and
130,918 shares issued and outstanding
at March 31, 2002 and December 31, 2001,
respectively 1,313 1,309
Additional paid-in capital 236,922 232,907
Retained earnings 395,166 359,926
Accumulated other comprehensive (loss) (17,693) (12,397)
-------- ---------
Total stockholders' equity 615,708 581,745
-------- ---------
Total liabilities and stockholders'
equity $930,799 $ 886,911
======== =========
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 March 31
-----------------------------
2002 2001
---- ----
Net sales $200,341 $201,032
Cost of sales 71,432 73,298
-------- ---------
Gross profit 128,909 127,734
Selling, general and administrative expenses 68,671 65,907
Research and development expenses 12,280 11,038
Patent litigation provision (Note 10) 2,800 -
Goodwill and purchased technology amortization
(Note 8) 915 1,748
-------- --------
Operating income 44,243 49,041
Interest income, net 1,378 1,486
-------- --------
Income from operations before income taxes 45,621 50,527
Provision for income taxes 10,381 12,127
-------- --------
Net income $ 35,240 $ 38,400
======== ========
Net income per basic common share $ 0.27 $ 0.30
======== ========
Weighted average number of basic common shares 131,029 130,166
-------- --------
Net income per diluted common share $ 0.26 $ 0.28
======== ========
Weighted average number of diluted common shares
and equivalents 137,188 137,933
The accompanying notes are an integral part of the
consolidated financial statements.
4
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 35,240 $ 38,400
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss provisions on accounts receivable and inventory 258 (526)
Deferred income taxes (237) (1,225)
Depreciation 6,335 4,901
Amortization of goodwill and other intangibles 3,019 3,164
Tax benefit related to stock option plans - 4,717
Change in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable 11,344 (4,650)
(Increase) in inventories (8,905) (10,154)
(Increase) in other current assets (2,942) (2,850)
(Increase) in other assets (3,097) (1,425)
Increase (decrease) in accounts payable and other current liabilities 2,510 (11,621)
Increase in deferred revenue and customer advances 8,491 6,404
Increase in accrued patent litigation 1,100 -
Increase (decrease) in other liabilities 151 (565)
--------- --------
Net cash provided by operating activities 53,267 24,570
Cash flows from investing activities:
Additions to property, plant, equipment, software capitalization and
other intangibles (10,357) (9,554)
Investments in unaffiliated companies (14,500) (2,000)
Business acquisitions, net of cash acquired (5,851) -
Loan repayments from officers - 723
--------- --------
Net cash (used in) investing activities (30,708) (10,831)
Cash flows from financing activities:
Net borrowings (repayment) of bank debt 474 (2,602)
Payments for debt issuance costs (779) -
Proceeds from stock plans 4,019 3,949
Proceeds from debt swaps 472 -
--------- --------
Net cash provided by financing activities 4,186 1,347
Effect of exchange rate changes on cash and cash equivalents (2,782) (1,403)
--------- --------
Increase in cash and cash equivalents 23,963 13,683
Cash and cash equivalents at beginning of period 226,798 75,509
--------- --------
Cash and cash equivalents at end of period $ 250,761 $ 89,192
========= ========
The accompanying notes are an integral part of the
consolidated financial statements.
5
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 believes it has the
largest HPLC market share in the United States, Europe and non-Japan Asia and
believes it 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 believes it 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 believes it 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 United 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,
2001.
2. Inventories
Inventories are classified as follows:
March 31, December 31,
2002 2001
-------- ---------
Raw materials $ 36,153 $ 31,965
Work in progress 19,289 26,305
Finished goods 54,289 44,448
-------- ---------
Total inventories $109,731 $102,718
======== =========
6
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
3. Business Investments and Acquisitions
In November 2000, the Company entered into an agreement to make a minority
equity investment in GeneProt(TM), Inc. ("GeneProt") of $3.6 million Series B
Preferred Stock, which is included in other assets for the periods presented and
is accounted for under the cost method of accounting. In December 2001, the
Company formed a strategic alliance with GeneProt to collaborate on product
development in the application of mass spectrometry equipment to
industrial-scale proteomics drug discovery. As part of the strategic alliance,
the Company purchased $10.0 million of Series B Preferred Stock equity
securities during the quarter ended March 31, 2002 as a second round of equity
financing. The investment has been accounted for under the cost method of
accounting. GeneProt will purchase up to $20.0 million of mass spectrometry
equipment, related systems, and services. The shipment of mass spectrometry
products is planned for later in 2002 and will be recognized as sales. The
products' prices were at fair values consistent with other orders of this
magnitude. The equity investment and sales arrangement were considered on an
arms-length basis.
During the quarter ended March 31, 2002, the Company made a business
acquisition totaling approximately $5.9 million for the net assets of a foreign
distributor and other minority equity investments totaling $4.5 million.
4. Income Taxes
The Company's effective tax rate for the three months ended March 31, 2002 and
2001, was 22.8% and 24%, respectively.
5. Earnings Per Share
Basic and diluted EPS calculations are detailed as follows:
----------------------------------------------
Three Months Ended March 31, 2002
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Net income per basic common share $ 35,240 131,029 $ 0.27
======== ======= ========
Effect of dilutive securities:
Options outstanding 6,039
Options exercised and cancellations 120
-------- ------- --------
Net income per diluted common share $ 35,240 137,188 $ 0.26
======== ======= ========
----------------------------------------------
Three Months Ended March 31, 2001
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Net income per basic common share $ 38,400 130,166 $ 0.30
======== ======= ========
Effect of dilutive securities:
Options outstanding 7,591
Options exercised and cancellations 176
-------- ------- --------
Net income per diluted common share $ 38,400 137,933 $ 0.28
======== ======= ========
For the three months ended March 31, 2002 and 2001, the Company had 3,877
and 1,690 stock option securities that were antidilutive, respectively. These
securities were not included in the computation of diluted EPS. The effect of
dilutive securities was calculated using the treasury stock method.
7
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
6. Comprehensive Income
Comprehensive income details follow:
Three Months Three Months
Ended Ended
March 31, 2002 March 31, 2001
-------------- --------------
Net income $ 35,240 38,400
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax (6,075) (8,799)
Appreciation and realized gains on
derivative instruments 971 4,543
Unrealized (loss) on investment, net of tax (192) (2,450)
-------- -------
Comprehensive income $ 29,944 $31,694
======== =======
7. Business Segment Information
Statement of Financial Accounting Standard ("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. Goodwill and Other Intangibles
In June 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 are effective for fiscal years
beginning after December 15, 2001. The Company has initially applied SFAS 142
and ceased goodwill amortization during the quarter ended March 31, 2002. The
Company's transitional goodwill impairment test is expected to be completed by
June 30, 2002. The impact of impairment, if any, of goodwill on the Company's
financial statements is not expected to be material. For the quarter ended March
31, 2001, the Company's goodwill amortization expense was approximately $1.0
million. Pro forma net income for the quarter ended March 31, 2001 would have
been $39.2 million, excluding goodwill amortization expense at the Company's
effective tax rate in 2001 of 24%. Pro forma basic income per share and pro
forma diluted income per share for the quarter ended March 31, 2001 would have
been $.30 and $.28, respectively.
8
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
The increase in the carrying amount of goodwill to $166.6 million at March
31, 2002 from $163.5 million at December 31, 2001 related to the acquisition of
a foreign distributor, in the amount of approximately $4.0 million offset by
currency translation adjustments. As part of this acquisition, the Company
recorded approximately $2.2 million of other intangible assets for customer
contracts and non-compete covenants. These other intangibles are being amortized
over a period of two to fifteen years.
The Company's intangible assets included in other assets in the
consolidated balance sheets are detailed as follows:
At March 31, 2002 At December 31, 2001
------------------------------------ -------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ----------------- -------------- ------------------
Purchased technology $43,595 $20,223 $43,595 $19,308
Capitalized software 37,121 14,621 34,762 13,177
Patents, intellectual property
and other intangibles 27,086 7,686 21,711 7,026
-------- ------- -------- -------
Total $107,802 $42,530 $100,068 $39,511
======== ======= ======== =======
Purchased technology is amortized over a period ranging from four to
fifteen years. Capitalized software is amortized over a period ranging from
three to five years. Patents, intellectual property, such as licenses, and other
intangibles are amortized over a period ranging from two to fifteen years. All
intangible assets are amortized on a straight-line basis. Amortization expense
for intangible assets is estimated to be approximately $11.5 million for each of
the next five years.
9. Recent Accounting Standards Changes
In June 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 will 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 August 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 has
adopted SFAS 144 as required with no significant effect on the Company's
financial position or results of operations.
9
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. Patent Litigation
PE Corporation (since renamed Applera Corporation), MDS Inc. and Applied
Biosystems/MDS Sciex ("the plaintiffs") have filed a civil action against
Micromass UK Limited and Micromass, Inc., wholly owned subsidiaries of the
Company, in the U.S. District Court for the District of Delaware. The plaintiffs
allege that the Quattro Ultima triple quadrupole mass spectrometer infringes
U.S. Patent No. 4,963,736 ("the patent"). The patent is owned by MDS Inc. and
licensed to a joint venture, Applied Biosystems/MDS Sciex. The Company believes
that it does not infringe the patent and alleges the patent is invalid and
unenforceable based on inequitable conduct in the course of obtaining the patent
and the Reexamination Certificate therefor.
In March 2002, the Company was informed of a jury's finding that the
Quattro Ultima with Mass Transit ion tunnel technology infringes the patent. The
same jury has found that the infringement was not willful and determined damages
in the amount of $47.5 million. As of the date these financial statements were
published, the Court still had not addressed claims brought by the Company of
inequitable conduct. Favorable rulings on these claims could render the patent
unenforceable, although the outcome is not certain. The Court may also enter an
injunction in which the Company is enjoined from making, using and selling the
Quattro Ultima triple quadrupole mass spectrometer. These instruments are
manufactured in the United Kingdom and shipments to the rest of the world
outside of the United States are not subject to the present litigation. There is
a possibility that similar claims may be asserted against the Company in other
countries and for other products in the mass spectrometry product line. Based on
the facts available to management, the Company believes the outcome of any such
claims should they be brought, cannot be predicted with certainty, but could be
material to the Company's financial position, results of operations and
liquidity.
The Company intends to contest both the jury's verdict and the district
court's underlying patent claim construction vigorously both in post-trial
motions and, if necessary, by way of an appeal to the United States Court of
Appeals for the Federal Circuit. It believes that it has meritorious arguments
and has filed counter claims in connection with the above, alleging antitrust
violations and the invalidity of the asserted patent, among other things.
Management, after reviewing available information relating to this matter, has
determined that it is probable some liability has been incurred. The Company
believes that any liability ultimately incurred will not likely exceed the
provisions recorded in the quarters ended December 31, 2001 and March 31, 2002,
respectively, including interest, court costs, legal fees and other charges.
However, in the event of an unanticipated adverse final determination in respect
of certain matters, the Company's consolidated net income for the period in
which such determination occurs could be materially affected. Although
sufficient uncertainties exist to preclude the Company from precisely
determining the amount of its liability, the accrued patent litigation of $76.1
million recorded as of March 31, 2002 in the consolidated balance sheets, is the
Company's best estimate of its exposure based on information currently
available. During the quarter ended March 31, 2002, the Company recorded a $2.8
million pre-tax charge for additional liabilities associated with interest costs
and related product sales made in the quarter prior to the day of the jury's
verdict. Approximately $1.7 million of legal fees were paid or accrued and
charged against the patent litigation accrual in the quarter ended March 31,
2002.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Net Sales:
Net sales for the three month period ended March 31, 2002 (the "2002 Quarter")
were $200.3 million, relatively flat compared to $201.0 million for the three
month period ended March 31, 2001 (the "2001 Quarter"). Sales grew by 2% over
the 2001 Quarter before currency effects. Sales growth for the 2002 Quarter
slowed, principally as a result of the unfavorable ruling in the patent
litigation involving certain mass spectrometry products sold in the U.S. The
Company has stopped shipment in the U.S. of the products involved in the patent
litigation as well as products with similar technology. Currency reduced
reported sales growth in the 2002 Quarter by two percentage points primarily due
to the weakening of the euro and Japanese yen.
Gross Profit:
Gross profit for the 2002 Quarter was $128.9 million, compared to $127.7 million
for the 2001 Quarter, an increase of $1.2 million or 1%. Gross profit as a
percentage of sales increased to 64.3% in the 2002 Quarter from 63.5% in the
2001 Quarter, as the Company has realized benefits from recent price increases
as well as a higher sales mix of more profitable consumables and services,
offset to a certain extent, by the effects of currency translation.
Selling, General, and Administrative Expenses:
Selling, general and administrative expenses for the 2002 Quarter were
$68.7 million, compared to $65.9 million for the 2001 Quarter. As a percentage
of net sales, selling, general and administrative expenses increased to 34.3%
for the 2002 Quarter from 32.8% for the 2001 Quarter as a result of lower sales
growth in the 2002 Quarter. The $2.8 million or 4% increase in total
expenditures primarily resulted from increased headcount and related costs
required to support increased current and future sales levels, reduced by the
effects of currency translation.
Research and Development Expenses:
Research and development expenses were $12.3 million for the 2002 Quarter
compared to $11.0 million for the 2001 Quarter, a $1.3 million or 11% increase
from the 2001 Quarter. The Company continued to invest significantly in the
development of new and improved HPLC, mass spectrometry, thermal analysis and
rheology products. The spending increase was slightly reduced by the effects of
currency translation.
Patent Litigation Provision:
The Company recorded a $2.8 million pre-tax charge for patent litigation in the
2002 Quarter for additional liabilities associated with interest costs and
related product sales made in the 2002 Quarter prior to the day of the jury's
verdict in March 2002. There was no such charge in the 2001 Quarter.
Goodwill and Purchased Technology Amortization:
Goodwill and purchased technology amortization for the 2002 Quarter was
$.9 million compared to $1.7 million for the 2001 Quarter, a $.8 million or 48%
decrease from the 2001 Quarter. The change was primarily related to the
elimination of goodwill amortization in 2002 in accordance with recently adopted
accounting standards.
Operating Income:
Operating income for the 2002 Quarter was $44.2 million, compared to
49.0 million for the 2001 Quarter, a decrease of $4.8 million or 10%. Waters
operating income levels decreased due to lower sales growth with an increase in
operating expenses and the patent litigation provision, offset by the
elimination of goodwill amortization in 2002.
Interest Income, Net:
Net interest income was $1.4 million in the 2002 Quarter compared to
$1.5 million in the 2001 Quarter. The change primarily reflected lower yields on
investments even though cash balances were considerably higher in the 2002
Quarter.
Provision for Income Taxes:
The Company's effective income tax rate was 22.8% in the 2002 Quarter and 24% in
the 2001 Quarter. The 2002 Quarter rate decreased primarily due to a favorable
shift in the mix of taxable income to lower tax rate jurisdictions.
11
Net Income:
Income for the 2002 Quarter was $35.2 million, compared to $38.4 million for the
2001 Quarter, a decrease of $3.2 million or 8%. The decline over the 2001
Quarter was due to flat sales with an increase in operating expenses, the patent
litigation provision and the effects of currency translation. These were offset
by the impact of a decrease in the Company's effective income tax rate and the
elimination of goodwill amortization in 2002.
LIQUIDITY AND CAPITAL RESOURCES
During the 2002 Quarter, net cash provided by the Company's operating activities
was $53.3 million, primarily as a result of net income for the year after adding
back depreciation, amortization and a decrease in working capital needs. In
terms of working capital, $11.3 million was provided as accounts receivable
decreased due to lower sales volume in the 2002 Quarter compared to the fourth
quarter of 2001. Approximately $8.9 million was used for inventory growth
related to current sales expectations and new product inventory related to
future sales. Within liabilities, an increase in accounts payable and other
current liabilities, and deferred revenue and customer advances provided $12.1
million. In addition, the Company received $4.0 million of proceeds from the
exercise of stock options and its employee stock purchase plan. Primary uses of
cash flow during the quarter were $20.4 million for investments in unaffiliated
companies and business acquisitions, and $10.4 million of property, plant and
equipment and software capitalization investments.
In February 2002, the Company entered into an agreement to replace its
existing credit facility, unsecured in nature, in the amount of $250.0 million.
The Company believes that the existing cash and cash equivalent balance of
$250.8 million and expected cash flow from operating activities together with
borrowings available from its credit facility will be sufficient to fund working
capital, capital spending requirements, and any adverse final determination of
ongoing patent litigation in the foreseeable future. As a publicly held company,
the Company has not paid any dividends and does not plan to pay any dividends in
the foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In the Company's Form 10-K for the year ended December 31, 2001, the Company's
most critical accounting policies and estimates upon which our financial status
depends upon were identified as those relating to revenue recognition, loss
provisions on accounts receivable and inventory, valuation of equity
investments, long-lived assets, intangible assets and goodwill, warranty, income
taxes and litigation. We reviewed our policies and determined that those
policies remain our most critical accounting policies for the quarter ended
March 31, 2002. We did not make any changes in those policies during the
quarter.
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 for the year ended December 31, 2001.
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
three months ended March 31, 2002. For additional information, refer to the
Company's Form 10-K, Item 7a for the year ended December 31, 2001.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to information contained in Note 10, Patent Litigation
on page 10 of this Form, included in Part I, Item 1, Financial
Statements.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit 10.1 Credit Agreement, dated as of February 12, 2002 among
Waters Corporation, Bankers Trust Company and other
Lenders party thereto.
B. The Registrant filed reports on Form 8-K on each of the following
dates during the quarter for which this report is filed:
March 25, 2002
13
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: April 26, 2002 Waters Corporation
/s/ John Ornell
-----------------------------------
John Ornell
Vice President, Finance and
Administration and Chief Financial Officer
14