SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES 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
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(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, include 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 August 9,
1996: 28,831,482
1
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the three months ended June 30,
1996 and 1995 4
Consolidated Statements of Operations for the six months ended June 30,
1996 and 1995 5
Consolidated Statements of Cash Flows for the six months ended June 30,
1996 and 1995 6
Consolidated Statements of Stockholders' Equity 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, 1996 December 31, 1995
------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 770 $ 3,233
Accounts receivable, less allowances for doubtful accounts and
sales returns of $1,562 and $1,513 at June 30, 1996 and
December 31, 1995, respectively 79,987 76,087
Inventories 53,291 41,459
Other current assets 4,214 2,847
Net current assets - discontinued operations - 3,694
------------ ------------
Total current assets 138,262 127,320
Property, plant, and equipment, net of accumulated depreciation
of $14,405 and $10,154 at June 30, 1996 and December 31,
1995, respectively 73,267 70,261
Other assets 37,014 29,024
Goodwill, less accumulated amortization of $3,393 and $2,364 at
June 30, 1996 and December 31, 1995, respectively 113,394 72,491
Net long term assets - discontinued operations - 720
------------ ------------
Total assets $ 361,937 $ 299,816
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long term debt $ 1,302 $ 1,933
Accounts payable 18,480 16,757
Deferred revenue 10,289 6,945
Accrued retirement plan contributions 8,195 5,362
Accrued interest 1,716 2,527
Other current liabilities 36,756 36,763
------------ ------------
Total current liabilities 76,738 70,287
Loans under Bank Credit Agreement 236,330 83,500
Senior Subordinated Notes - 75,000
Redeemable preferred stock 6,690 6,232
Other liabilities 8,700 6,679
------------ ------------
Total liabilities 328,458 241,698
Commitments and contingent liabilities - -
Stockholders' Equity:
Common stock (par value $ .01, 50,000 shares authorized,
28,831 and 28,796 shares issued and outstanding at
June 30, 1996 and December 31, 1995, respectively) 288 288
Additional paid-in capital 145,198 145,318
Deferred stock option compensation (951) (1,076)
Accumulated deficit (109,346) (85,403)
Translation adjustments (1,306) (605)
Minimum pension liability adjustment (404) (404)
------------ ------------
Total stockholders' equity 33,479 58,118
------------ ------------
Total liabilities and stockholders' equity $ 361,937 $ 299,816
============ ============
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)
For the Three Months Ended
--------------------------------------
June 30, 1996 June 30, 1995
------------- -------------
Net sales $95,965 $84,328
Cost of sales 35,199 31,275
Revaluation of acquired inventory 2,440 --
------------------ ------------------
Gross profit 58,326 53,053
Selling, general and administrative expenses 35,963 31,693
Management fee -- 383
Goodwill and purchased technology amortization 1,431 900
Expensed in-process research and development 19,300 --
Research and development expenses 5,074 4,418
------------------ ------------------
(Loss) income from operations (3,442) 15,659
Interest expense, net 3,480 7,955
Unrealized loss on future cash flow hedges -- 2,461
------------------ ------------------
(Loss) income before income taxes (6,922) 5,243
Provision for income taxes 2,932 876
------------------ ------------------
Net (loss) income before extraordinary item (9,854) 4,367
Extraordinary item - (loss) on early retirement of debt (22,264) --
------------------ ------------------
Net (loss) income (32,118) 4,367
Less: accretion of and 6% dividend on preferred stock 229 226
------------------ ------------------
Net (loss) income available to common stockholders ($32,347) $4,141
================== ==================
(Loss) income per common share:
(Loss) income per common share from operations ($0.32) $0.17
Extraordinary (loss) per common share ($0.70) --
------------------ ------------------
Net (loss) income per common share ($1.02) $0.17
================== ==================
Weighted average common shares outstanding 31,782 23,852
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)
For the Six Months Ended
--------------------------------------
June 30, 1996 June 30, 1995
------------- -------------
Net sales $ 181,278 $ 161,882
Cost of sales 67,313 61,557
Revaluation of acquired inventory 2,440 --
------------------ ------------------
Gross profit 111,525 100,325
Selling, general and administrative expenses 69,392 62,613
Management fee -- 770
Goodwill and purchased technology amortization 2,362 1,803
Expensed in-process research and development 19,300 --
Research and development expenses 9,742 8,514
------------------ ------------------
Income from operations 10,729 26,625
Interest expense, net 7,434 16,074
Unrealized loss on future cash flow hedges -- 6,347
------------------ ------------------
Income before income taxes 3,295 4,204
Provision for income taxes 4,974 677
------------------ ------------------
Net (loss) income before extraordinary item (1,679) 3,527
Extraordinary item - (loss) on early retirement of debt (22,264) --
------------------ ------------------
Net (loss) income (23,943) 3,527
Less: accretion of and 6% dividend on preferred stock 458 448
------------------ ------------------
Net (loss) income available to common stockholders ($24,401) $3,079
================== ==================
(Loss) income per common share:
(Loss) income per common share from operations ($0.07) $0.13
Extraordinary (loss) per common share ($0.71) --
------------------ ------------------
Net (loss) income per common share ($0.78) $0.13
================== ==================
Weighted average common shares outstanding 31,354 23,852
The accompanying notes are an integral part of the consolidated financial statements.
5
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
For the Six Months Ended
-----------------------------------------
June 30, 1996 June 30, 1995
Cash flows from operating activities:
Net (loss) income ($23,943) $ 3,527
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Unrealized loss on future cash flow hedges - 6,347
Depreciation and amortization 4,260 3,813
Amortization of capitalized software and intangible assets 3,474 2,941
Amortization of debt issuance costs 536 1,450
Extraordinary loss on retirement of debt 22,264 -
Compensatory stock option expense 125 -
Expensed in-process research and development 19,300 -
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (768) 10,149
(Increase) in inventories (309) (945)
(Increase) in other current assets (766) (515)
(Increase) in other assets (300) (1,013)
(Decrease) in accounts payable and accrued expenses (5,963) (6,533)
Increase in deferred revenue 2,337 1,775
Increase in accrued retirement plan contributions 91 916
Increase in other liabilities 2,013 442
------------------ ------------------
Net cash provided by continuing operations 22,351 22,354
Net cash provided by discontinued operations - 159
Net cash provided by operating activities 22,351 22,513
Cash flows from investing activities:
Additions to property, plant and equipment (3,454) (3,521)
Software capitalization and other intangibles (1,763) (1,942)
Loans to officers (356) -
Payment to acquire net assets of TA Instruments, Inc. (83,349) -
Proceeds from sale of discontinued operations 4,497 -
------------------ ------------------
Net cash (used in) continuing operations (84,425) (5,463)
Net cash used in discontinued operations - (154)
------------------ ------------------
Net cash (used in) investing activities (84,425) (5,617)
Cash flows from financing activities:
Payments for interest rate protection agreements (2,282) -
Early retirement of Senior Subordinated Notes (91,219) -
Payment for issuance of notes and accrued interest - (178)
Net borrowings (repayments) of bank debt 152,255 (2,651)
Stock options exercised 338 -
------------------ ------------------
Net cash provided by (used in) financing activities 59,092 (2,829)
Effect of exchange rate changes on cash 519 (192)
------------------ ------------------
Net change in cash and cash equivalents (2,463) 13,875
Cash and cash equivalents at beginning of period 3,233 16,739
------------------ ------------------
Cash and cash equivalents at end of period $ 770 $ 30,614
================== ==================
The accompanying notes are an integral part of the consolidated financial statements.
6
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(unaudited)
Minimum
Additional Deferred Cumulative Pension
Common Paid-In Stock Option Accumulated Translation Liability
Stock Capital Compensation Deficit Adjustments Adjustment Total
----- ------- ----------- ------- ----------- ---------- -----
Balance - December 31, 1995 $ 288 $ 145,318 ($1,076) ($85,403) ($605) ($404) $ 58,118
Net (loss) for the six months
ended June 30, 1996 - - - (23,943) - - (23,943)
Stock options exercised - 338 - - - - 338
Compensatory stock option expense - - 125 - - - 125
Accretion of and dividend on
preferred stock - (458) - - - - (458)
Translation adjustment for the six
months ended June 30, 1996 - - - - (701) - (701)
------ ---------- ------ --------- -------- ------ --------
Balance - June 30, 1996 $ 288 $ 145,198 ($951) ($109,346) ($1,306) ($404) $ 33,479
====== ========== ====== ========= ======== ====== ========
The accompanying notes are an integral part of the consolidated financial statements.
7
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") is a holding company which owns
all and only the common stock of Waters Technologies Corporation. Waters
acquired ("Waters Acquisition") substantially all the assets of the Waters
Chromatography Division (the "Predecessor") of Millipore Corporation
("Millipore") on August 18, 1994.
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") and the
requirements of the Securities and Exchange Commission. The consolidated
financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly owned. 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 financial statements
reflect all adjustments (which are normal and recurring) necessary for a fair
presentation of the results for the interim periods. The interim financial
statements should be read in conjunction with the consolidated financial
statements included in the Company's 10-K filing with the Securities and
Exchange Commission for the year ended December 31, 1995.
2. Discontinued Operations
On December 31, 1994, the Company announced a plan to sell its process mass
spectrometry business. The results of this business have been classified as
discontinued operations in the consolidated statements of operations. The
largest operation was sold in July 1995 for proceeds, net of associated costs,
of approximately $6,500. Remaining operations were sold in January 1996 for
proceeds, net of associated costs, of approximately $4,500.
3. Inventories
Inventories are classified as follows:
June 30, December 31,
1996 1995
---- ----
Raw materials $15,332 $10,719
Work in progress 6,161 4,201
Finished goods 31,798 26,539
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Total Inventories $53,291 $41,459
======= =======
4. Material Transactions/Transition Agreement
In connection with the consummation of the Waters Acquisition, the Company and
Millipore entered into a Transition Support and Service Agreement (the
"Transition Agreement") whereby Millipore agreed to (i) lease office space, (ii)
8
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
transfer certain personnel, (iii) provide management information systems,
administrative, distribution and facilities management support services, (iv)
provide access to its telephone network, and (v) supply certain professional
support services. The Company believes that the costs incurred under the
Transition Agreement are representative of the charges that would be levied by
independent third parties for similar services. The Company incurred net
expenses pursuant to this agreement of $1,449 and $2,410 for the three month and
six month periods ended June 30, 1996, respectively. The net expenses for the
corresponding periods in 1995 were $1,457 and $3,818, respectively. The Company
had a net balance payable to Millipore of approximately $393 as of June 30, 1996
and $2,190 as of June 30, 1995. The Company sold product and services totaling
$22 and $72 to Millipore during the three month and six month periods ended June
30, 1996, respectively. During the three month and six month periods ended June
30, 1995, the Company sold product and services to Millipore totaling $168 and
$406, respectively.
5. Income Taxes
The Company's effective tax rate for the three and six month periods ended June
30, 1996, excluding non-recurring TAI Acquisition (defined below) charges for
the revaluation of acquired inventory and write-off of acquired in-process
research and development, was 20%. The Company's effective tax rate for the
corresponding periods in 1995 was 18.2%. The Company's 1996 U.S. taxable income
will be offset by net operating loss carryforwards.
6. Debt
In January 1996, the Company entered into a three-year debt swap agreement with
the Bank of Boston. The Company swapped $22,000 in notional amount of floating
rate LIBOR borrowings for 2,330,240 yen notional amount of borrowings at a fixed
interest rate of 1.525% per annum. At representative interest rates and current
exchange rates in effect at January 23, 1996, the effective date of the
agreement, the Company would lower its annual interest costs by approximately
$900 over the term of the swap agreement.
In June 1996, the Company entered into an additional three-year debt swap
agreement with Bankers Trust Company. The Company swapped $7,500 in notional
amount of floating rate LIBOR borrowings for 817,500 yen notional amount of
borrowings at a fixed interest rate of 2.02% per annum. At representative
interest rates and current exchange rates in effect at June 26, 1996, the
effective date of the agreement, the Company would lower its annual interest
costs by approximately $266 over the term of the swap agreement. The Company
could also incur higher or lower principal repayments over the term of either
swap agreement.
In March 1996, the Company increased the maximum availability under its senior
credit facility (the "Bank Credit Agreement") to $300,000 in order to repurchase
its 12 3/4% Senior Subordinated Notes (the "Senior Subordinated Notes") and
provide additional financial flexibility. The availability under the Bank Credit
Agreement will decrease under certain circumstances, including upon certain
asset sales, issuance of equity, and incurrence of debt. The line of credit will
further decrease by $45,000 at November 22, 1998 and 1999, and will terminate on
the earlier of the date on which a Change of Control Event (as defined in the
Bank Credit Agreement) occurs and November 22, 2000.
In April 1996, the Company consummated a tender offer (the "Tender Offer") to
repurchase $75,000 in principal amount of the Company's Senior Subordinated
Notes. The aggregate purchase price paid by the Company in connection with the
Tender Offer was $91,219. The Company funded this redemption through additional
borrowings under the Bank Credit Agreement. In the second quarter of 1996, the
Company recorded an extraordinary loss of $22,264 related to the early
extinguishment of the Senior Subordinated Notes.
At August 9, 1996, the Company had aggregate borrowings outstanding under the
Bank Credit Agreement of $234,830 and approximately $62,208 in additional
borrowings available.
9
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
In March and April 1996, the Company entered into several interest rate
protection agreements. These agreements provide payments to the Company if the
three month LIBOR rate, as defined, exceeds 8% in 1996, 6% in 1997, and 6.5% in
1998 and 1999 on aggregate borrowings of $183,000 in 1996 and 1997 and $70,000
and $30,000 in 1998 and 1999, respectively.
7. TA Instruments, Inc. Acquisition
The Company entered into an Agreement and Plan of Merger on March 28, 1996 to
acquire all of the capital stock of TA Instruments, Inc. ("TAI") for $83,349 in
cash ("TAI Acquisition"). The TAI Acquisition was consummated on May 1, 1996 and
was financed through borrowings under the revolving credit facility under the
Bank Credit Agreement. TAI develops, manufactures, sells, and services thermal
analysis and rheology instrumentation which is used for the physical
characterization of polymers and related materials. Thermal analysis and
rheology are among the most prevalent techniques employed in the analysis of
polymers and other organic/inorganic materials. TAI is the global market leader
in the field of thermal analysis. Net sales for TAI were approximately $47,000
in 1995.
In conjunction with the TAI Acquisition, the Company recorded non-recurring
charges of $19,300 for the immediate write-off of acquired in-process research
and development and $2,440 for the amortized revaluation of acquired inventory.
(The total inventory revaluation was $6,100 and the remaining $3,660 unamortized
balance at June 30, 1996 will be charged to cost of sales during the third and
fourth quarters of 1996.) The Company also recorded goodwill in the transaction
which will be amortized over a 40 year period using the straight line method of
amortization. The TAI Acquisition was accounted for by the purchase method and
the results of its operations have been consolidated with the Company's results
from May 1, 1996, the date of the acquisition.
The following unaudited Pro Forma results of operations for the six month
periods ended June 30, 1996 and June 30, 1995 give effect to the TAI Acquisition
as if the transaction had occurred at the beginning of each such period. The
financial data are based on the historical consolidated financial statements for
the Company and TAI and the assumptions and adjustments made upon the TAI
Acquisition. The Pro Forma results of operations do not (i) purport to represent
what the Company's results of operations actually would have been if the TAI
Acquisition had occurred as of the beginning of the periods, or (ii) what such
results will be for any future periods. The financial data are based upon
assumptions that the Company believes are reasonable and should be read in
conjunction with the Consolidated Financial Statements and accompanying notes
thereto included elsewhere in this report.
Pro Forma Results
-----------------
For the Six Months Ended
------------------------
June 30, 1996 June 30, 1995
------------- -------------
Net sales $ 195,473 $ 182,299
(Loss) income from continuing operations $ (2,092) $ 3,797
Net (loss) income $ (24,356) $ 3,797
(Loss) income per common share from continuing
operations $ (.08) $ .14
Net (loss) income per common share $ (.79) $ .14
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Recent Events
On June 6,1996, the Company announced that its Registration Statement with the
Securities and Exchange Commission for a secondary offering of 10 million shares
of common stock had been declared effective. Shares were sold by certain
selling shareholders of the Company. The Company did not receive any proceeds
from the offering.
On May 1, 1996, the Company acquired ("TAI Acquisition") all of the capital
stock of TA Instruments, Inc. ("TAI"), a U.S. based company. TAI develops,
manufactures, sells, and services thermal analysis and rheology instrumentation
which is used for the physical characterization of polymers and related
materials. The following discussion of the results of operations for the three
and six months ended June 30, 1996 include the results of TAI's operations since
the acquisition date.
Results of Operations
Net Sales:
Net sales for the three month period ended June 30, 1996 (the "1996 Quarter")
and six month period ended June 30, 1996 (the "1996 Period"), which include TAI
results from May 1, 1996, were $96.0 million and $181.3 million, respectively,
compared to $84.3 million for the three month period ended June 30, 1995 (the
"1995 Quarter") and $161.9 million for the six month period ended June 30, 1995
(the "1995 Period"), an increase of 14% for the Quarter and 12% for the Period.
Excluding unfavorable currency effects, consolidated net sales grew by 19% for
the Quarter and 15% for the Period. Further excluding the effects of TAI, the
Waters traditional business grew 8% for the Quarter and 9% for the Period as
compared to the 1995 Quarter and Period. Worldwide revenue growth would have
been higher had the Company been able to ship all orders for its new Alliance
product during the Quarter. Alliance product orders exceeded plan and the
Company is currently increasing production volume to enable shipment of these
orders, which is now planned for the second half of 1996. Excluding TAI and
unfavorable currency effects, the Company's international business grew 8% for
the Quarter. Growth was geographically broad based, although certain select
European geographies experienced slower growth in the second quarter than in the
first quarter of 1996. The U.S. business grew 8% during the 1996 Quarter, a
higher growth rate than the past several years during which revenues were
largely flat, reflecting the success of the Company's Alliance product which was
introduced in March 1996. Worldwide pharmaceutical sales, which account for
over 40% of the Company's business, continued the strong growth experienced in
1995. Product sales for TA Instruments, Inc. were strong and increased
consolidated sales by 11% as compared to the 1995 Quarter and 6% as compared to
the 1995 Period.
Gross Profit:
Gross profit increased to $58.3 million in the 1996 Quarter and $111.5 million
in the 1996 Period from $53.1 million in the 1995 Quarter and $100.3 million in
the 1995 Period, an increase of $5.2 million or 11% for the Quarter and $11.2
million or 11% for the Period. In the 1996 Quarter, the Company recorded a $2.4
million charge for revaluation of acquired inventory resulting from the TAI
Acquisition. (The total inventory revaluation was $6.1 million and there was a
remaining $3.7 million unamortized balance at June 30, 1996.) Excluding the
effects of this charge, gross profit increased $7.7 million or 15% for the 1996
Quarter and $13.6 million or 14% for the 1996 Period. Gross profit as a
percentage of sales, excluding the inventory revaluation charge, improved to
63.3% during the 1996 Quarter and 62.9% for the 1996 Period, from 62.9% during
the 1995 Quarter and 62.0% in the 1995 Period. During the 1996 period, the
Company continued to improve manufacturing productivity.
During the third and fourth quarters of 1996, the Company will incur charges to
cost of sales for the amortization of the $3.7 million of remaining revaluation
of acquired inventory.
Selling, General, and Administrative Expenses:
Selling, general and administrative expenses increased to $36.0 million in the
1996 Quarter as compared to $31.7 million the 1995 Quarter, an increase of $4.3
million or 14%. Selling, general and administrative expenses for the 1996
Period increased $6.8 million or 11% to $69.4 million, up from $62.6 million in
the 1995 Period. Selling,
11
general and administrative expenses, as a percentage of net sales, remained
relatively flat in comparison with the 1995 Quarter and Period.
Management Fee:
Until November 1995, the Company paid AEA Investors Inc. and Bain Capital, Inc.
an annual fee of $1.5 million plus out of pocket expenses for general
management, financial and other corporate advisory services. The agreement was
terminated in conjunction with the Company's November 1995 initial public
offering of stock (the "Offering").
Goodwill and Purchased Technology Amortization:
Goodwill and purchased technology amortization increased by $.5 million or 56%
as compared to the 1995 Quarter and $.6 million or 31% as compared to the 1995
Period. The increase was primarily related to the acquisition of TA
Instruments, Inc. on May 1, 1996.
Expensed In-Process Research and Development:
In the 1996 Quarter, the Company wrote off $19.3 million of the TAI Acquisition
purchase price related to in-process research and development acquired in the
TAI Acquisition. Generally accepted accounting principles prohibit
capitalization of acquired research and development expenditures.
Research and Development Expenses:
Research and development expenses increased to $5.1 million in the 1996 Quarter
from $4.4 million in the 1995 Quarter, an increase of $.7 million or 15%. There
was a corresponding $1.2 million or 14% increase in research and development
expenses for the Period, from $8.5 million in the 1995 Period to $9.7 million in
the 1996 Period. These increases reflect the Company's continued commitment to
new product development. In March 1996, Waters introduced its new Alliance/TM/
HPLC systems. Alliance/TM/ systems are modular and allow scientists the
flexibility to create tailored systems, which deliver more consistent and
accurate results and are more compact and easier to maintain than conventional
component systems.
Operating Income:
The Company experienced an operating loss of $3.4 million for the 1996 Quarter
compared to operating income of $15.7 million for the 1995 Quarter due to the
impact of the revaluation of acquired inventory and in-process research and
development charges associated with the TAI Acquisition. As a result of these
factors, the Company experienced a corresponding decrease in income from
operations for the Period from $26.6 million in the 1995 Period to $10.7 million
in the 1996 Period. Excluding the effects of the TAI Acquisition related
charges, operating income for the Quarter increased to $18.3 million, a 17%
increase over the 1995 Quarter, and operating income for the Period increased to
$32.5 million, a 22% increase over the 1995 Period, reflecting sales growth in
our traditional business, improved productivity, and the inclusion of TAI
operating results from the date of acquisition.
Interest Expense:
Contemporaneously with the November 1995 Offering, the Company retired $25
million of Senior Subordinated Notes and all outstanding indebtedness under the
original bank credit agreement with proceeds from the Offering and its new bank
agreement. In April 1996, the Company consummated a tender offer to repurchase
and retire the remaining $75 million of Senior Subordinated Notes (the "Tender
Offer"). The Company's average debt levels for the 1996 Quarter and Period were
substantially lower than debt levels for the 1995 Quarter and Period due to the
application of net proceeds from the Offering and strong operating cash flows
generated during 1996. The reduced indebtedness and more favorable interest
rates under the new bank credit agreement resulted in a 56% decrease in interest
expense for the 1996 Quarter to $3.5 million as compared to $8.0 million in the
1995 Quarter. Interest expense for the 1996 Period decreased $8.6 million or
54%, from $16.1 million in 1995 to $7.4 million in 1996.
Unrealized Losses on Future Cash Flow Hedges:
During 1995, the Company periodically entered into forward exchange contracts to
economically hedge a significant portion of the U.S. dollar value of its
anticipated future international cash flows. Generally accepted accounting
principles required that those contracts outstanding at period end be valued at
current market value with the resulting unrealized gain or loss reflected in the
statements of operations even though they economically hedged anticipated future
cash flows. In the fourth quarter of 1995, the Company ceased to hedge
anticipated future international cash
12
flows and therefore liquidated those particular forward currency contracts.
During the 1995 Quarter and 1995 Period, the Company recorded losses of $2.5
million and $6.3 million, respectively, for unrealized losses on future cash
flow hedges.
Provision for Income Taxes:
The Company's effective income tax rate for the 1996 Period, excluding non-
recurring TAI Acquisition charges for the revaluation of acquired inventory and
write-off of acquired in-process research and development, was 20.0%. The
effective income tax rate for the 1995 Period was 18.2%. The Company's 1996 U.S.
taxable income will be offset by net operating loss carryforwards.
Net Income (Loss) before Extraordinary Item:
The Company generated a net loss before extraordinary items of $9.9 million in
the 1996 Quarter and $1.7 million in the 1996 Period compared to income of $4.4
million for the 1995 Quarter and $3.5 million for the 1995 Period. These
declines were the result of the TAI Acquisition related charges totaling $21.7
million. Excluding the effects of these charges, net income before
extraordinary items increased to $11.9 million in the 1996 Quarter, up $7.5
million or 172% as compared to the 1995 Quarter. In addition, net income before
extraordinary items for the Period increased to $20.1 million from $3.5 million
in the 1995 Period, an increase of $16.5 million or 468%, reflecting net sales
growth in the traditional business, results from the TAI Acquisition, a
continuing focus on cost reductions in all operating areas, a $4.5 million
reduction in interest expense, and the discontinuance of currency contracts
which generated unrealized losses on future cash flow hedges in the 1995 Quarter
and Period.
Extraordinary Item:
During the 1996 Quarter, the Company repurchased $75 million in principal amount
of its Senior Subordinated Notes. The Company recorded a $22.2 million charge
associated with the early extinguishment of this debt.
Net Income (Loss):
The Company generated a net loss of $32.1 million in the 1996 Quarter compared
to $4.4 million net income in the 1995 Quarter. Net loss for the Period was
$23.9 million compared to net income of $3.5 million in the 1995 Period. The
decline was the result of the aforementioned TAI Acquisition charges and charges
for the early extinguishment of debt. Loss per share of $1.02 for the 1996
Quarter and $.78 for the 1996 Period decreased in comparison with $.17 income
per share in the 1995 Quarter and $.13 income per share in the 1995 Period.
Income per share, before the effect of the TAI Acquisition and extraordinary
charges was $.37 for the 1996 and $.63 for the 1996 Period.
Liquidity and Capital Resources:
The Company generated $22.1 million in operating cash flows during the 1996
Period primarily as a result of the $23.9 million net loss, more than offset by
$7.7 million of depreciation and amortization, $22.3 million for early
extinguishment of debt (see "Tender Offer" below), and the $19.3 million charge
from the TAI Acquisition for in-process research and development.
Net cash used in investing activities of $84.4 million was the result of $83.3
million used to acquire TAI and additions to property, plant and equipment and
software capitalization, offset by proceeds from the sale of remaining
discontinued Extrel operations.
Net cash provided by financing activities of $59.4 million primarily consisted
of $152.2 million of net borrowings of bank debt, offset by $91.2 million used
in the early extinguishment of Senior Subordinated Notes and $2.3 million used
for payments for interest rate protection agreements.
In April 1996, the Company consummated the Tender Offer for an aggregate
repurchase price of $91.2 million. The Company funded this redemption through
additional borrowings under the Bank Credit Agreement. Prior to the commencement
of the Tender Offer, the Bank Credit Agreement was amended in March 1996 to
provide for aggregate borrowings, as defined, totaling $300 million and to
permit the expected completion of the acquisition of TA Instruments, Inc.
In January 1996, the Company entered into a three-year debt swap agreement with
the Bank of Boston. The Company swapped $22 million in notional amount of
floating rate LIBOR borrowings for 2,300 million yen notional amount of
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borrowings at a fixed interest rate of 1.525% per annum. At representative
interest rates and current exchange rates in effect at January 23, 1996, the
effective date of the agreement, the Company would lower its annual interest
costs by approximately $.9 million over the term of the swap agreement.
In June 1996, the Company entered into an additional three-year debt swap
agreement with Bankers Trust Company. The Company swapped $7.5 million in
notional amount of floating rate LIBOR borrowings for 817.5 million yen notional
amount of borrowings at a fixed interest rate of 2.02% per annum. At
representative interest rates and current exchange rates in effect at June 26,
1996, the effective date of the agreement, the Company would lower its annual
interest costs by approximately $.3 million over the term of the swap agreement.
The Company could also incur higher or lower principal repayments over the term
of either swap agreement.
In March and April 1996, the Company entered into several interest rate
protection agreements. These agreements provide payments to the Company if the
three month LIBOR rate, as defined, exceeds 8% in 1996, 6% in 1997, and 6.5% in
1998 and 1999 on aggregate borrowings of $183,000 in 1996 and 1997 and $70,000
and $30,000 in 1998 and 1999, respectively.
At August 9, 1996, the Company had aggregate borrowings outstanding under the
Bank Credit Agreement of $235 million and approximately $62 million additional
borrowings available.
The Company believes that existing cash balances and cash flow from operating
activities together with borrowings available under the Bank Credit Agreement
will be sufficient to fund future working capital needs, capital spending
requirements and debt service requirements of the Company in the foreseeable
future.
Cautionary Statement:
Certain statements contained herein are forward looking. Many factors could
cause actual results to differ from these statements, including loss of market
share through competition, introduction of competing products by other
companies, pressure on prices from competitors and/or customers, regulatory
obstacles to new product introductions, lack of acceptance of new products by
the HPLC industry, changes in the healthcare market and the pharmaceutical
industry, changes in distribution of the Company's products, and interest rate
and foreign exchange fluctuations.
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Part II: Other information
Item 1. Legal Proceedings
The Company is not party to any legal proceedings other than
litigation incidental to normal business activities. The outcome of
such litigation is not expected to have a material adverse effect on
the Company.
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
The Waters Corporation annual meeting of stockholders was held on May
7, 1996 at which the following matters were submitted to a vote of
security holders: the election of directors of the Company as
previously reported to the Commission (the Board of Directors was re-
elected in its entirety), the election of auditors for the Company,
the approval and adoption of the Company's Long-Term Performance
Incentive Plan, the approval and adoption of the Company's Employee
Stock Purchase Plan, the approval and adoption of the Company's Non-
Employee Director Deferred Compensation Plan, and the approval and
adoption of the Company's Non-Employee Director Stock Option Plan.
As of March 25, 1996, the record date for said meeting, there were
28,795,685 shares of Waters Corporation common stock entitled to vote
at the meeting. At such meeting, the holders of 22,406,676 shares were
represented in person or by proxy, constituting a quorum. At such
meeting, the vote with respect to the matters proposed to the
stockholders was as follows:
Matter For Withheld or Against
------ --- -------------------
Election of Directors
For All Nominees 22,372,973 33,703
Election of Auditors 22,398,647 8,029
Approval and adoption of the Company's
Long-Term Performance Incentive
Plan 20,102,262 2,304,414
Approval and adoption of the Company's
Employee Stock Purchase Plan 21,765,195 641,481
Approval and adoption of the Company's
Non-Employee Director Deferred
Compensation Plan 22,259,241 147,435
Approval and adoption of the Company's
Non-Employee Director Stock
Option Plan 22,152,611 254,065
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) A report on Form 8-K was filed on May 15, 1996 relating to the
consummation of the Purchase and Sale Agreement, dated March 28,
1996, to acquire all of the capital stock of TA Instruments, Inc.
15
WATERS CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: August 9, 1996 Waters Corporation
/s/ Philip S. Taymor
--------------------
Philip S. Taymor
Senior Vice President and Chief Financial
Officer
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