SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended September 30, 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
WATERS CORPORATION
(Exact name of registrant as specified in the charter)
Delaware 13-3668640
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
34 Maple Street
Milford, Massachusetts 01757
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 478-2000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No [_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [_]
Number of shares outstanding of the Registrant's common stock as of November 7,
2002: 129,142,428.
1
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the three months ended September 30, 2002 and 2001 4
Consolidated Statements of Operations for the nine months ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES AND CERTIFICATIONS 19
2
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
September 30, 2002 December 31, 2001
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 235,790 $ 226,798
Restricted cash (Note 2) 69,373 -
Accounts receivable, less allowances for doubtful accounts and
sales returns of $4,995 and $5,077 at September 30, 2002 and
December 31, 2001, respectively 167,594 182,164
Inventories 125,300 102,718
Other current assets 12,696 11,064
-------------- --------------
Total current assets 610,753 522,744
Property, plant and equipment, net of accumulated depreciation of $105,632 and
$86,421 at September 30, 2002 and December 31, 2001, respectively 116,108 114,207
Other assets, including intangibles 93,873 86,481
Goodwill 168,838 163,479
-------------- --------------
Total assets $ 989,572 $ 886,911
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,141 $ 1,140
Accounts payable 40,878 35,979
Accrued employee compensation 16,217 20,176
Deferred revenue and customer advances 55,097 46,014
Accrued retirement plan contributions 7,167 8,660
Accrued income taxes 47,795 41,643
Accrued other taxes 6,644 5,925
Accrued patent litigation 74,810 75,000
Other current liabilities 47,200 46,469
-------------- --------------
Total current liabilities 296,949 281,006
Other liabilities 25,491 24,160
-------------- --------------
Total liabilities 322,440 305,166
Stockholders' equity:
Common stock, par value $0.01 per share, 400,000 shares authorized,
131,983 and 130,918 shares issued (including treasury shares) at
September 30, 2002 and December 31, 2001, respectively 1,320 1,309
Additional paid-in capital 247,755 232,907
Retained earnings 467,394 359,926
Treasury stock, at cost, 2,328 and 0 shares at September 30, 2002
and December 31, 2001, respectively (54,275) -
Accumulated other comprehensive income (loss) 4,938 (12,397)
-------------- --------------
Total stockholders' equity 667,132 581,745
-------------- --------------
Total liabilities and stockholders' equity $ 989,572 $ 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 September 30
-------------------------------
2002 2001
---- ----
Net sales $216,045 $202,694
Cost of sales 74,909 73,120
--------- ---------
Gross profit 141,136 129,574
Selling, general and administrative expenses 77,682 66,913
Research and development expenses 13,576 11,794
Goodwill and purchased technology amortization 860 1,755
--------- ---------
Operating income 49,018 49,112
Interest income (expense), net 1,661 1,211
--------- ---------
Income from operations before income taxes 50,679 50,323
Provision for income taxes 11,656 12,077
--------- ---------
Net income $ 39,023 $ 38,246
========= =========
--------- ---------
Net income per basic common share $ 0.30 $ 0.29
========= =========
Weighted average number of basic common shares 130,788 130,752
--------- ---------
Net income per diluted common share $ 0.29 $ 0.28
========= =========
Weighted average number of diluted common shares and equivalents 135,483 136,704
The accompanying notes are an integral part of the consolidated
financial statements.
4
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
Nine Months Ended September 30
------------------------------
2002 2001
---- ----
Net sales $633,578 $610,529
Cost of sales 222,321 221,963
-------- --------
Gross profit 411,257 388,566
Selling, general and administrative expenses 226,641 199,989
Research and development expenses 38,499 34,573
Patent litigation provision (Note 12) 2,800 -
Goodwill and purchased technology amortization 2,697 5,274
-------- --------
Operating income 140,620 148,730
Other income (expense), net (Note 5) 116 -
Interest income (expense), net 4,539 3,848
-------- --------
Income from operations before income taxes 145,275 152,578
Provision for income taxes 33,301 36,619
-------- --------
Income before cumulative effect of change in accounting principle 111,974 115,959
Cumulative effect of change in accounting principle, net of tax (Note 4) (4,506) -
-------- --------
Net income $107,468 $115,959
======== ========
Income per basic common share:
Income before cumulative effect of change in accounting principle
per basic common share $ 0.85 $ 0.89
Cumulative effect of change in accounting principle (0.03) -
Net income per basic common share $ 0.82 $ 0.89
Weighted average number of basic common shares 131,090 130,486
Income per diluted common share:
Income before cumulative effect of change in accounting principle
per diluted common share $ 0.82 $ 0.84
Cumulative effect of change in accounting principle (0.03) -
Net income per diluted common share $ 0.79 $ 0.84
Weighted average number of diluted common shares and equivalents 136,511 137,560
The accompanying notes are an integral part of the consolidated
financial statements.
5
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
Nine Months Ended September 30
---------------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 107,468 $ 115,959
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of accounting change for patent related costs 4,506 -
Allowances for accounts receivable and inventory 1,941 (408)
Impairment of investments 7,564 -
Deferred income taxes (795) (1,959)
Depreciation 19,499 15,417
Amortization of goodwill and other intangibles 8,273 9,216
Tax benefit related to stock option plans 5,871 888
Change in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable 23,508 (1,326)
(Increase) in inventories (19,590) (27,248)
Decrease (increase) in other current assets 860 (5,471)
(Increase) in other assets (7,125) (3,800)
Increase in accounts payable and other current liabilities 6,911 12,472
Increase in deferred revenue and customer advances 931 5,267
(Decrease) in accrued patent litigation (190) -
Increase in other liabilities 4,115 897
------------ -----------
Net cash provided by operating activities 163,747 119,904
Cash flows from investing activities:
Additions to property, plant, equipment, software capitalization and
other intangibles (27,401) (33,958)
Investments in unaffiliated companies (14,500) (4,000)
Business acquisitions, net of cash acquired (5,851) (2,580)
Loan repayments from officers - 723
------------ -----------
Net cash (used in) investing activities (47,752) (39,815)
Cash flows from financing activities:
Net borrowings (repayment) of bank debt 1 (3,755)
Payments for debt issuance costs (827) -
Proceeds from stock plans 8,988 7,080
(Increase) in restricted cash (69,373) -
Purchase of treasury shares (54,275) -
(Payments) proceeds from debt swaps (1,075) 6,526
------------ -----------
Net cash (used in) provided by financing activities (116,561) 9,851
Effect of exchange rate changes on cash and cash equivalents 9,558 (1,219)
------------ -----------
Increase in cash and cash equivalents 8,992 88,721
Cash and cash equivalents at beginning of period 226,798 75,509
------------ -----------
Cash and cash equivalents at end of period $ 235,790 $ 164,230
============ ===========
The accompanying notes are an integral part of the consolidated
financial statements.
6
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. Organization and Basis of Presentation
Waters Corporation ("Waters" or the "Company"), an analytical instrument
manufacturer, is the world's largest manufacturer and distributor of high
performance liquid chromatography ("HPLC") instruments, chromatography columns
and other consumables, and related service. The Company 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 10 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 unaudited 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 ("SEC") for the
year ended December 31, 2001.
2. Restricted Cash
In September 2002, the Company issued a standby letter of credit for $55.4
million securing damages awarded plus interest in connection with the
unfavorable judgment against the Company with respect to the Applera patent
litigation (Note 12). As credit support for the letter of credit, the Company
transferred funds in British pounds to a restricted bank account for an amount,
required by the bank, sufficient to cover the letter of credit and potential
currency risk. Restricted cash was $69.4 million at September 30, 2002.
3. Inventories
Inventories are classified as follows:
September 30, December 31,
2002 2001
------------ -----------
Raw materials $ 40,643 $ 31,965
Work in progress 22,168 26,305
Finished goods 62,489 44,448
------------ -----------
Total inventories $ 125,300 $ 102,718
============ ===========
7
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. Change in Accounting for Patent Related Costs
In the second quarter of 2002, the Company changed its method of accounting for
legal costs associated with litigating patents effective January 1, 2002. Prior
to the change, the Company capitalized these patent costs and amortized them
over the estimated remaining economic life of the patent. Under the new method,
these costs will be expensed as incurred. The Company believes that this change
is preferable because it will provide a better comparison with the Company's
industry peers, the majority of which expense these costs as incurred. The $4.5
million cumulative effect of the change on prior years (after reduction for
income taxes of $1.3 million) is included as a charge to net income as of
January 1, 2002. The effect of the change on the three months ended September
30, 2002 was to decrease net income by approximately $.4 million with no effect
on net income per diluted share. The effect of the change on the nine months
ended September 30, 2002 was to decrease income before cumulative effect of a
change in accounting principle approximately $1.7 million or $.01 per diluted
share and net income $6.2 million or $.05 per diluted share.
Pro forma net income for the three months and nine months ended September
30, 2001 would have been $37.4 million and $114.3 million, respectively, had the
change in accounting for patent related costs occurred at the beginning of 2001.
Pro forma net income per basic common share and pro forma net income per diluted
common share for the three months ended September 30, 2001 would have been $.29
and $.27, respectively. Pro forma net income per basic common share and pro
forma net income per diluted common share for the nine months ended September
30, 2001 would have been $.88 and $.83, respectively. The pro forma amounts
reflect the effect of retroactive application of this change had the new method
been in effect for all periods presented.
5. 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. 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 first quarter of 2002 as part of
Geneprot's second round of equity financing. The investment in Geneprot is
accounted for under the cost method of accounting. Due to changes in Geneprot's
business plan and financial condition, among other factors, the Company recorded
a pre-tax $6.5 million charge to other income (expense) in the consolidated
statements of operations during the nine months ended September, 30, 2002, for
an other-than-temporary impairment of its investment in Geneprot. The investment
in Geneprot was approximately $7.1 million and $3.6 million at September 30,
2002 and December 31, 2001, respectively and is included in other assets. In
connection with Geneprot's canceled order of up to $20.0 million of mass
spectrometry equipment, related systems and services, the Company received
approximately $7.7 million from Geneprot as a termination fee, which is recorded
in other income (expense) in the consolidated statements of operations for the
nine months ended September 30, 2002. The Company collected $2.5 million of this
fee in June 2002 and the remainder, approximately $5.2 million, was collected in
December 2001 as a customer advance and is included in the consolidated balance
sheet at December 31, 2001.
The Company's equity investment in Variagenics, Inc. ("Variagenics") is
accounted for under Statement of Financial Accounting Standard ("SFAS") 115,
Accounting for Certain Investments in Debt and Equity Securities. During the
nine months ended September 30, 2002, the Company recorded a $1.0 million charge
to other income (expense) in the consolidated statements of operations, for
further other-than-temporary impairment of its investment in Variagenics. The
Company recorded an other-than-temporary impairment charge of $5.9 million for
this investment in the fourth quarter of 2001. The investment in Variagenics was
approximately $.5 million and $1.7 million at September 30, 2002 and December
31, 2001, respectively. At September 30, 2002, no other investments and
long-lived assets were determined to be impaired.
During the nine months ended September 30, 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.
8
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. Goodwill and Other Intangibles
Effective January 1, 2002, the Company adopted SFAS 142, Goodwill and Other
Intangible Assets. 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. Under the
transition provisions of SFAS 142, there was no impairment of goodwill at
January 1, 2002.
For the three months and nine months ended September 30, 2001, the
Company's goodwill amortization expense was approximately $1.0 million and $3.0
million, respectively. Pro forma net income for the three months and nine months
ended September 30, 2001 would have been $39.0 million and $118.2 million,
respectively, excluding goodwill amortization expense at the Company's effective
tax rate in 2001 of 24%. Pro forma net income per basic common share and pro
forma net income per diluted common share for the three months ended September
30, 2001 would have been $.30 and $.29, respectively. Pro forma net income per
basic common share and pro forma net income per diluted common share for the
nine months ended September 30, 2001 would have been $.91 and $.86,
respectively.
The increase in the carrying amount of goodwill to $168.8 million at
September 30, 2002 from $163.5 million at December 31, 2001 is primarily related
to the acquisition of a foreign distributor in the amount of approximately $4.0
million and currency translation adjustments of approximately $1.3 million. 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 September 30, 2002 At December 31, 2001
--------------------------- ---------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Purchased technology $ 43,595 $ 22,005 $ 43,595 $ 19,308
Capitalized software 41,589 17,564 34,762 13,177
Patents, intellectual
property and other intangibles 22,358 7,321 21,711 7,026
-------------- ------------ -------------- ------------
Total $107,542 $ 46,890 $ 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. At
September 30, 2002, intangible assets above reflect the change in accounting for
patent related costs as discussed in Note 4. All intangible assets are amortized
on a straight-line basis. Amortization expense for intangible assets is
estimated to be approximately $11.0 million for each of the next five years.
7. Income Taxes
The Company's effective tax rate for the three months ended September 30, 2002
and 2001, was 23% and 24%, respectively. The Company's effective tax rate for
the nine months ended September 30, 2002 and 2001, was 22.9% and 24%,
respectively.
9
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. Earnings Per Share
Basic and diluted earnings per share ("EPS") calculations are detailed as
follows:
-------------------------------------
Three Months Ended September 30, 2002
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Net income per basic common share $ 39,023 130,788 $ 0.30
=========== ============= ===========
Effect of dilutive securities:
Options outstanding 4,671
Options exercised and cancellations 24
----------- ------------- -----------
Net income per diluted common share $ 39,023 135,483 $ 0.29
=========== ============= ===========
-------------------------------------
Three Months Ended September 30, 2001
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Net income per basic common share $ 38,246 130,752 $ 0.29
=========== ============= ===========
Effect of dilutive securities:
Options outstanding 5,951
Options exercised and cancellations 1
----------- ------------- -----------
Net income per diluted common share $ 38,346 136,704 $ 0.28
=========== ============= ===========
-------------------------------------
Nine Months Ended September 30, 2002
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Income before cumulative effect of change in
accounting principle per basic common share $ 107,468 131,090 $ 0.85
=========== ============= ===========
Effect of dilutive securities:
Options outstanding 5,149
Options exercised and cancellations 272
Income before cumulative effect of change in
----------- ------------- -----------
accounting principle per diluted common share $ 107,468 136,511 $ 0.82
=========== ============= ===========
-------------------------------------
Nine Months Ended September 30, 2001
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Income before cumulative effect of change in
accounting principle per basic common share $ 115,959 130,486 $ 0.89
=========== ============= ===========
Effect of dilutive securities:
Options outstanding 6,920
Options exercised and cancellations 154
Income before cumulative effect of change in
----------- ------------- -----------
accounting principle per diluted common share $ 115,959 137,560 $ 0.84
=========== ============= ===========
10
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the three months and nine months ended September 30, 2002, the Company
had 3,838 and 3,805 stock option securities that were antidilutive,
respectively. For the three months and nine months ended September 30, 2001, the
Company had 1,688 and 1,690 stock option securities that were antidilutive,
respectively. These antidilutive securities were not included in the computation
of diluted EPS. The effect of dilutive securities was calculated using the
treasury stock method.
9. Comprehensive Income
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income $ 39,023 $ 38,246 $ 107,468 $ 115,959
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax 1,698 10,455 19,714 (2,589)
Appreciation (depreciation) and realized gains
(losses) on derivative instruments 655 (1,223) (2,233) 5,303
Unrealized (loss) on investments, net of tax (146) (225) (146) (3,154)
------------- ------------- ------------- -------------
Comprehensive income $ 41,230 $ 47,253 $ 124,803 $ 115,519
============= ============= ============= =============
During the nine months ended September 30, 2002, the Company reclassified
an unrealized loss on its investment in Variagenics to other income (expense) in
the consolidated statements of operations. Any unrealized loss on investments,
net of tax, in Variagenics recorded prior to the three month period ending
September 30, 2002 has been included in the asset impairment charge recorded in
other income (expense) in the consolidated statements of operations for the nine
months ended September 30, 2002.
10. Business Segment Information
SFAS 131, Disclosures about Segments of an Enterprise and Related Information,
establishes standards for reporting information about operating segments in
annual financial statements of public business enterprises. The Company
evaluated its business activities that are regularly reviewed by the Chief
Executive Officer for which discrete financial information is available. As a
result of this evaluation, the Company determined that it has three operating
segments: Waters, Micromass and TAI.
Waters is in the business of manufacturing and distributing HPLC
instruments, chromatography columns and other consumables, and related service;
Micromass is in the business of manufacturing and distributing mass spectrometry
instruments that can be integrated and used along with other analytical
instruments, particularly HPLC; and TAI is in the business of manufacturing and
distributing thermal analysis and rheology instruments. For all three of these
operating segments within the analytical instrument industry; economic
characteristics, production processes, products and services, types and classes
of customers, methods of distribution, and regulatory environments are similar.
Because of these similarities, the three segments have been aggregated into one
reporting segment for financial statement purposes. Please refer to the
consolidated financial statements for financial information regarding the one
reportable segment of the Company.
11. New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146
addresses significant issues regarding the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including restructuring activities that are currently accounted for pursuant to
the guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The scope of SFAS 146 also includes (1) costs related to
terminating a contract that is not a capital lease, (2) termination benefits
that employees who are involuntarily terminated receive under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract and (3) costs to consolidate
facilities or relocate employees. SFAS 146 will be effective for exit or
disposal activities that are initiated after
11
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, 2002. Early application is encouraged. While management has not
determined the impact of the new standard, it is not expected to be material to
the Company.
12. Patent Litigation
Applera Corporation:
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 with 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 therefore.
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. The Court has entered an injunction in which the
Company is enjoined from making, using and selling the Quattro Ultima triple
quadrupole mass spectrometer incorporating features of the patent. 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 by way of an appeal to
the United States Court of Appeals for the Federal Circuit. 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 periods ended December 31, 2001 and September 30, 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 $74.0 million recorded
as of September 30, 2002 in the consolidated balance sheets, is the Company's
best estimate of its exposure for this contingent liability based on information
currently available. During the nine month period ended September 30, 2002, the
Company recorded a $3.0 million pre-tax charge for additional liabilities
associated with interest costs and related product sales made in the period
prior to the day of the jury's verdict. Approximately $4.0 million of legal fees
were paid or accrued and charged against the patent litigation accrual in the
nine months ended September 30, 2002.
Hewlett-Packard Company:
The Company filed suit in the U.S. against Hewlett-Packard Company and
Hewlett-Packard GmbH (collectively, "HP"), seeking a declaration that certain
products sold under the mark "Alliance" do not constitute an infringement of one
or more patents owned by HP or its foreign subsidiaries ("the HP patents"). The
action in the U.S. was dismissed for lack of controversy. Actions seeking
revocation or nullification of foreign HP patents were filed by the Company in
Germany, France and England. A German patent tribunal found the HP German patent
to be valid. The Company is appealing the German decision. In Germany, France
and England, HP and its successor, Agilent Technologies Deutschland GmbH, have
brought an action alleging certain features of the Alliance pump may infringe
the HP patent. In England, the Court of Appeal and in France, the Paris District
Court, has found the HP patent valid and infringed by the Alliance pump. The
Company intends to appeal both decisions. During the nine months ended September
30, 2002, the Company recorded a provision for estimated damages incurred with
respect to this ongoing litigation which was charged to selling, general and
administrative expenses and was not considered material to the Company. The
provision recorded represents management's best estimate of the probable and
reasonably estimable loss related to this litigation.
12
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. Environmental Contingencies
The Company is currently working with the Massachusetts' Department of
Environmental Protection regarding alleged noncompliance with state
environmental laws at its Taunton, Massachusetts facility. The Company believes
the outcome of any claims, should they be brought by the state, cannot be
predicted with certainty, but could be material to the Company. As of September
30, 2002, no provision has been made for this contingency. Other than the
alleged noncompliance discussed above, the Company does not currently anticipate
any material adverse effect on its operations, financial condition or
competitive position as a result of its efforts to comply with environmental
laws.
14. Stockholders' Equity
On June 25, 2002, the Board of Directors authorized the Company to repurchase up
to $200.0 million of its outstanding common shares over a one-year period.
During the three months and nine months ended September 30, 2002, the Company
purchased 2,328 shares of its common stock for $54.3 million.
On August 9, 2002, the Board of Directors approved the adoption of a stock
purchase rights plan where a dividend of one fractional preferred share purchase
right (a "Right") was declared for each outstanding share of common stock, par
value $.01 per share, of the Company. The dividend was paid on August 27, 2002
to the stockholders of record on that date. The Rights, which expire on August
27, 2012, become exercisable only under certain conditions. When they first
become exercisable, each Right will entitle its holder to buy from Waters one
one-hundredth of a share of new Series A Junior Participating Preferred Stock
(authorized limit of 4,000) for $120.00. When a person or group actually has
acquired 15% or more of Waters' common stock, the Rights will then become
exercisable for a number of shares of Waters' common stock with a market value
of twice the exercise price ($120.00) of each Right. In addition, the Rights
will then become exercisable for a number of shares of common stock of the
acquiring company with a market value of twice the exercise price per Right. The
Board of Directors may redeem the Rights at a price of $0.001 per Right up until
10 days following a public announcement that any person or group has acquired
15% or more of the Company's common stock.
15. Subsequent Events
Patent Litigation:
The Company, through its subsidiary TAI, asserted a claim against The
Perkin-Elmer Corporation ("PE") alleging patent infringement of three patents
owned by TAI ("the TAI patents"). PE counterclaimed for infringement of a patent
owned by PE ("the PE patent"). The U.S. District Court for the District of
Delaware granted judgment as a matter of law in favor of TAI and enjoined PE
from infringing the TAI patents. PE appealed the District Court judgment in
favor of TAI to the federal appellate court. The District Court's judgment, with
respect to PE's infringement of the TAI patents, was affirmed. The District
Court's judgment with respect to TAI's non-infringement of the PE patent was
reversed and remanded to the District Court for further proceedings.
On remand to the District Court in October 2002, a jury found PE liable to
TAI for damages of $13.3 million and found TAI did not infringe the PE patent.
The District Court has not entered judgment on the jury's verdict. The Company
believes it has meritorious arguments and should prevail, although the outcome
is not certain. The Company believes that any unfavorable outcome will not be
material to the Company. TAI has brought a further action against PE with
respect to PE's StepScan product. The Company believes it has a meritorious
claim and should prevail, although the outcome is not certain. As of September
30, 2002, no gain has been recorded due to the jury's finding and all litigation
costs have been expensed as incurred.
Acquisition:
In October 2002, the Company entered into an agreement to acquire the worldwide
rheology business of Rheometric Scientific, Inc. ("Rheometrics") for $17.0
million in cash and the assumption of $6.0 million in trade debt. Pending
Rheometrics' stockholder, creditor and SEC approval, the acquisition is expected
to be completed in December 2002.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Net Sales:
Net sales for the three month period ended September 30, 2002 (the "2002
Quarter") and the nine month period ended September 30, 2002 (the "2002 Period")
were $216.0 million and $633.6 million, respectively, compared to $202.7 million
for the three month period ended September 30, 2001 (the "2001 Quarter") and
$610.5 million for the nine month period ended September 30, 2001 (the "2001
Period"), an increase of 7% for the quarter and 4% for the period. Excluding the
favorable effects of a weaker U.S. dollar, net sales increased by 4% over the
2001 Quarter and 3% over the 2001 Period. The Company's HPLC product line
continued to perform well across all major geographies with overall sales growth
in the low double digits for the 2002 Quarter, excluding currency effects. The
Company's mass spectrometry product line continued to be affected in the U.S. by
the March 2002 unfavorable patent litigation ruling involving sales of certain
mass spectrometry products. Overall mass spectrometry sales decreased by a low
double-digit rate in the 2002 Quarter. In addition to the litigation described
above, the Company experienced a production issue in the 2002 Quarter that the
Company believes has now been corrected. As a result of these two factors, mass
spectrometry order backlog grew significantly. Thermal analysis sales were down
slightly in the 2002 Quarter. Currency increased reported sales growth in the
2002 Quarter by three percentage points primarily due to the strengthening of
the euro and British pound.
Gross Profit:
Gross profit for the 2002 Quarter and the 2002 Period was $141.1 million and
$411.3 million, respectively, compared to $129.6 million for the 2001 Quarter
and $388.6 million for the 2001 Period, an increase of $11.5 million or 9% for
the quarter and $22.7 million or 6% for the period. Gross profit as a percentage
of sales increased to 65.3% in the 2002 Quarter from 63.9% in the 2001 Quarter.
Gross profit as a percentage of sales increased to 64.9% in the 2002 Period from
63.6% in the 2001 Period. The increases in the gross profit percentages are
attributed to many factors including a higher mix of sales of more profitable
consumables and services, and manufacturing savings in material costs. In
addition, the Company acquired the businesses of its Irish and Korean
distributors in early 2002 and mid- 2001, respectively. As such, the incremental
profit from direct billings have increased gross profit and gross profit
percentages and will continue to do so for the remainder of 2002, as well as
operating expenses. This incremental profit was not in the 2001 Quarter and 2001
Period.
Selling, General, and Administrative Expenses:
Selling, general and administrative expenses for the 2002 Quarter and the 2002
Period were $77.7 million and $226.6 million, respectively, compared to $66.9
million for the 2001 Quarter and $200.0 million for the 2001 Period. As a
percentage of net sales, selling, general and administrative expenses increased
to 36.0% for the 2002 Quarter from 33.0% for the 2001 Quarter, and 35.8% for the
2002 Period from 32.8% for the 2001 Period. The $10.8 million or 16% increase
for the quarter and $26.6 million or 13% increase for the period in total
expenditures primarily resulted from increased headcount and related costs
required to support anticipated increased current and future sales levels,
including the acquisitions of Irish and Korean distributor businesses. In
addition, the Company recorded an increase of approximately $1.7 million in
patent related costs during the 2002 Period. The Company changed its method of
accounting for legal costs associated with litigating patents effective January
1, 2002 and current year patent related expenses are recorded in selling,
general and administrative expenses. The Company also recorded a provision of
$1.5 million for estimated damages incurred with respect to ongoing patent
infringement litigation during the 2002 Period.
The Company announced during the 2002 Quarter that it will fully integrate
the worldwide sales, service and distribution groups of the Micromass division
with the Waters HPLC division. The objective of this strategy is to leverage the
strengths of both divisions and align operating expenses to a more rational
historical level as a percentage of sales. It is expected operating expense
growth will continue to be just over 10% for the rest of 2002 before the
benefits of the combination will be realized. In connection with the
integration, the Company will record approximately $4.0 to $6.0 million of
non-recurring costs in the fourth quarter of 2002 for restructuring and other
charges such as termination benefits and other related costs.
Also, coupled with the integration, the Company has identified certain
service labor and related costs associated with revenue producing activities
that are currently classified as operating expenses and that are included in
selling, general and administrative expenses. The Company will reclassify these
costs to cost of sales for the years ended December 31, 2002, 2001 and 2000. The
reclassification for the year ended December 31, 2002 will result in a decrease
in gross profit as a percentage of sales by approximately six percentage points,
with no change in operating income.
14
Research and Development Expenses:
Research and development expenses were $13.6 million for the 2002 Quarter and
$38.5 million for the 2002 Period, compared to $11.8 million for the 2001
Quarter and $34.6 million for the 2001 Period, an increase of $1.8 million or
15% from the 2002 Quarter and $3.9 million or 11% from the 2001 Period,
respectively. The Company continued to invest significantly in the development
of new and improved HPLC, mass spectrometry, thermal analysis and rheology
products.
Patent Litigation Provision:
The Company recorded a $2.8 million pre-tax charge for Applera patent litigation
in the 2002 Period for additional liabilities associated with related product
sales made in 2002 prior to the day of the jury's verdict in March 2002. There
was no such charge in 2001.
Goodwill and Purchased Technology Amortization:
Goodwill and purchased technology amortization for the 2002 Quarter and 2002
Period was $.9 million and $2.7 million, respectively, compared to $1.8 million
for the 2001 Quarter and $5.3 million for the 2001 Period, a decrease of $.9
million or 51% for the quarter and $2.6 or 49% for the period. 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 and 2002 Period was $49.0 million and
$140.6 million, respectively, compared to $49.1 million for the 2001 Quarter and
$148.7 million for the 2001 Period, flat for the quarter and a decrease of $8.1
million or 5% for the period. Waters operating income levels stayed flat for the
quarter and decreased for the period due to an increase in operating expenses,
including an increase in current year patent related costs for the period,
offset by the impact of improved profit margins and the elimination of goodwill
amortization in 2002.
Other Income (Expense):
In the 2002 Period, the Company recorded a $7.6 million pre-tax charge for
other-than-temporary impairments to the carrying amounts of certain equity
investments, including investments in Geneprot and Variagenics. The impairment
charges were offset by a $7.7 million termination fee received from Geneprot for
cancellation of its $20.0 million order. There were no such items in 2001.
Interest Income (Expense), Net:
Net interest income for the 2002 Quarter and 2002 Period was $1.7 million and
$4.5 million, respectively, compared to $1.2 million for the 2001 Quarter and
$3.8 million for the 2001 Period. The increases primarily reflected considerably
higher cash balances in 2002, offset by lower yields on investments.
Provision for Income Taxes:
The Company's effective income tax rate was 23% in the 2002 Quarter and 22.9% in
the 2002 Period compared to 24% in the 2001 Quarter and 2001 Period. The 2002
tax rate decreased primarily due to the continued favorable shift in the mix of
taxable income to lower tax rate jurisdictions.
Income before Cumulative Effect of Change in Accounting Principle:
Net income for the 2002 Quarter and income before the cumulative effect of
change in accounting principle for the 2002 Period was $39.0 million and $112.0
million, respectively, compared to $38.2 million for the 2001 Quarter and $116.0
million for the 2001 Period, an increase of $.8 million or 2% from the 2001
Quarter and a decrease of $4.0 million or 3% from the 2001 Period, respectively.
The changes for the 2002 Quarter and 2002 period were due to an increase in
operating expenses, including an increase in current year patent related costs
for the period. These were offset by the impact of improved profit margins, a
decrease in the Company's effective income tax rate and the elimination of
goodwill amortization in 2002.
Change in Patent Accounting:
In the 2002 Period, the method of accounting for patent related costs associated
with patent litigation was changed effective January 1, 2002 from a method of
capitalizing the patent related costs and amortizing them over their estimated
remaining economic life, to expensing the costs as incurred. The Company
believes that this change is preferable because it will provide a better
comparison with the Company's industry peers, the majority of which expense
these costs as incurred. The $4.5 million cumulative effect of the change on
prior years (after reduction for income taxes of $1.3 million) is included as a
charge to net income for the nine months ended September 30, 2002.
15
Liquidity and Capital Resources
During the 2002 Period, net cash provided by the Company's operating activities
was $163.7 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 and after excluding the effects of currency
translation, $23.5 million was provided as accounts receivable decreased due to
lower sales volume in the 2002 Period compared to the prior nine months of 2001
and due to solid collection efforts during the period. Approximately $19.6
million was used for inventory growth related to sales expectations, including
the canceled Geneprot order in June 2002 and the temporary impact of a
production issue in the 2002 Quarter. Within liabilities, an increase in
accounts payable and other current liabilities, and deferred revenue and
customer advances provided $7.8 million. In addition, the Company received $9.0
million of proceeds from the exercise of stock options and its employee stock
purchase plan.
Primary uses of cash flow during the 2002 Period were $54.3 million for the
purchase of treasury shares, $20.4 million for investments in unaffiliated
companies and business acquisitions and $27.4 million of property, plant and
equipment and software capitalization investments. In addition, approximately
$69.4 million of cash was reclassed to restricted cash, included in other
current assets, during the period in connection with the standby letter of
credit issued by the Company with respect to the unfavorable judgment in the
Applera patent litigation.
The Company believes that the existing cash and cash equivalent balance of
$235.8 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 other cash outlays in the foreseeable
future. The Company intends to continue the purchase of its common shares under
the Company's $200.0 million stock repurchase program. Repurchases are expected
ratably over the next three quarters and are expected to be at the same level as
the 2002 Quarter. Because the repurchases are made in the U.S. only, it is
expected that the Company will have borrowings against its credit facility
during the fourth quarter and at year-end.
During the fourth quarter of 2002, the Company announced its intention to
make an acquisition for approximately $17.0 million in cash and the assumption
of $6.0 million in debt pending various outside approvals. 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 2002 Period. We
did not make any changes in those policies during the period, except for the
change in accounting for legal costs associated with litigating patents and the
adoption of SFAS 142, Goodwill and Other Intangible Assets.
Forward-Looking Information
Safe Harbor Statement under Private Securities Litigation Reform Act of 1995
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, (iii) the ability of the Company to generate increased sales and
profitability from new product introductions and (iv) the short term effect on
sales and operating expenses as a result of the recently announced combination
of the Waters HPLC and Micromass sales, service and distribution organizations,
as well as additional risk factors set forth in the Company's Form 10-K for the
year ended December 31, 2001. Actual 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.
16
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the nine
months ended September 30, 2002. For additional information, refer to the
Company's Form 10-K, Item 7a for the year ended December 31, 2001.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company and its
consolidated subsidiaries required to be included in the Company's periodic SEC
filings.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or, to the
Company's knowledge, in other factors that could significantly affect such
internal controls subsequent to the date of the Company's evaluation of its
internal controls.
Part II: Other Information
Item 1. Legal Proceedings
Applera Corporation:
Reference regarding the Applera patent litigation against the Company is
contained in Note 12, Patent Litigation on page 12 of this Form, included in
Part I, Item 1, Financial Statements.
Hewlett-Packard Company:
Reference regarding the Hewlett-Packard Company and Hewlett-Packard GmbH patent
litigation is contained in Note 12, Patent Litigation on page 12 of this Form,
included in Part I, Item 1, Financial Statements.
The Perkin-Elmer Corporation:
Reference regarding The Perkin-Elmer Corporation patent litigation is contained
in Note 15, Subsequent Events on page 13 of this Form, included in Part I, Item
1, Financial Statements.
Other:
In June 2002, Varian, Inc. filed a civil action against the Company alleging
trademark infringement with respect to a product the Company previously sold
under the mark "Polarity". The Company does not believe the trademark Polarity
infringed the trademark rights of Varian, Inc. The Company currently sells the
product under a different name. The Company believes it has meritorious
arguments and should prevail, although the outcome is not certain. The Company
believes that any outcome of this action will not be material to the Company.
In July 2002, the Company filed suit against Applera Corporation in a civil
action alleging patent infringement on U.S. Patent No. 5,304,798 owned by the
Company. The Company believes it has a meritorious claim and should prevail,
although the outcome is uncertain.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
17
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.15 Rights Agreeement, dated as of August 9, 2002
between Waters Corporation and EquiServe Trust
Company, N.A. as Rights Agent. Incorporated by
reference to the Registrant's Report on Form 8-A,
dated August 27, 2002.
Exhibit 99.1 Chief Executive Officer Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Chief Financial Officer Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The Registrant filed reports on Form 8-K on each of the following
dates during the quarter for which this report is filed:
A report on Form 8-K was filed by the Company on July 8, 2002 to
report the Company's field integration of the Micromass division
with the Waters HPLC division.
A report on Form 8-K was filed by the Company on August 12, 2002
to report the Company's adoption of a stock purchase rights plan.
18
WATERS CORPORATION AND SUBSIDIARIES
SIGNATURES AND CERTIFICATIONS
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: November 8, 2002 Waters Corporation
/s/ John Ornell
--------------------------------------------
John Ornell
Vice President, Finance and Administration
and Chief Financial Officer
19
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
I, Douglas A. Berthiaume, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waters Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
/s/ Douglas A. Berthiaume
------------------------------------------
Douglas A. Berthiaume
Chairman of the Board of Directors and
Chief Executive Officer
20
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
I, John Ornell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waters Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
/s/ John Ornell
-------------------------------------------
John Ornell
Vice President, Finance and Administration
and Chief Financial Officer
21