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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTIONS 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, 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 November 9, 1998: 30,113,716.
----------
1
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 3
and December 31, 1997
Consolidated Statements of Operations for the three
months ended September 30, 1998 and 1997 4
Consolidated Statements of Operations for the nine
months ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
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)
September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,558 $ 3,113
Accounts receivable, less allowances
for doubtful accounts of $3,063 and
$2,785 at September 30, 1998 and
December 31, 1997, respectively 119,784 111,022
Inventories 82,904 87,375
Other current assets 17,683 11,614
--------- ---------
Total current assets 223,929 213,124
Property, plant and equipment, net of
accumulated depreciation of $41,569 and
$30,074 at September 30, 1998 and
December 31, 1997, respectively 88,579 88,668
Other assets 62,782 70,089
Goodwill, less accumulated amortization
of $11,141 and $7,543 at September 30,
1998 and December 31, 1997, respectively 178,972 180,178
--------- ---------
Total assets $ 554,262 $ 552,059
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of
long term debt $ 7,106 $ 7,394
Accounts payable 34,914 33,061
Deferred revenue and customer advances 27,218 25,289
Other current liabilities 108,689 104,912
--------- ---------
Total current liabilities 177,927 170,656
Long term debt 252,205 305,340
Redeemable preferred stock 8,816 8,096
Other liabilities 7,378 5,670
--------- ---------
Total liabilities 446,326 489,762
Commitments and contingent liabilities - -
Stockholders' Equity:
Common stock (par value $0.01, 50,000
shares authorized, 30,066 and 29,583
shares issued and outstanding at
September 30, 1998 and December 31,
1997, respectively) 301 296
Additional paid-in capital 165,183 161,476
Deferred stock option compensation (441) (606)
Accumulated deficit (53,783) (96,096)
Translation adjustments (3,324) (2,773)
--------- ---------
Total stockholders' equity 107,936 62,297
--------- ---------
Total liabilities and stockholders' equity $ 554,262 $ 552,059
========= =========
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
--------------------------
September 30, 1998 September 30, 1997
------------------ ------------------
Net sales $151,793 $105,044
Cost of sales 57,832 38,598
-------- --------
Gross profit 93,961 66,446
Selling, general and administrative
expenses 49,276 39,008
Research and development expenses 8,512 6,259
Expensed in-process research and
development - 55,000
Goodwill and purchased technology
amortization 2,537 1,444
-------- --------
Operating income (loss) 33,636 (35,265)
Interest expense, net 4,416 2,334
-------- --------
Income (loss) from operations before
income taxes 29,220 (37,599)
Provision for income taxes 7,264 3,480
-------- --------
Net income (loss) 21,956 (41,079)
Less: accretion of and 6% dividend
on preferred stock 241 237
-------- --------
Net income (loss) available to
common stockholders $ 21,715 ($ 41,316)
======== ========
-------- --------
Net income (loss) per basic common share $0.72 ($1.42)
======== ========
Weighted average number of basic
common shares 30,014 29,074
-------- --------
Net income (loss) per diluted common share $0.67 ($1.42)
======== ========
Weighted average number of diluted
common shares and equivalents 32,411 29,074
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 Nine Months Ended
-------------------------
September 30, 1998 September 30, 1997
------------------ ------------------
Net sales $439,829 $313,715
Cost of sales 165,600 115,066
Revaluation of acquired inventory 16,500 -
-------- --------
Gross profit 257,729 198,649
Selling, general and administrative
expenses 151,216 116,993
Research and development expenses 25,130 17,851
Expensed in-process research and
development - 55,000
Goodwill and purchased technology
amortization 7,043 4,216
-------- --------
Operating income 74,340 4,589
Interest expense, net 14,367 8,317
-------- --------
Income (loss) from operations
before income taxes 59,973 (3,728)
Provision for income taxes 17,660 10,254
-------- --------
Net income (loss) 42,313 (13,982)
Less: accretion of and 6% dividend on
preferred stock 720 705
Net income (loss) available to common -------- --------
stockholders $ 41,593 ($ 14,687)
======== ========
-------- --------
Net income (loss) per basic common share $1.39 ($0.51)
======== ========
Weighted average number of basic
common shares 29,859 28,986
-------- --------
Net income (loss) per diluted common share $1.29 ($0.51)
======== ========
Weighted average number of diluted
common shares and equivalents 32,206 28,986
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 Nine Months Ended
-------------------------
September 30, 1998 September 30, 1997
------------------ ------------------
Cash flows from operating activities:
Net income (loss) $ 42,313 ($ 13,982)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 20,167 13,781
Amortization of debt issuance costs 929 788
Compensatory stock option expense 165 165
Revaluation of acquired inventory 16,500 -
Expensed in-process research and
development - 55,000
Change in operating assets and liabilities:
(Increase) in accounts receivable (7,322) (4,534)
(Increase) in inventories (11,197) (3,735)
Increase in accounts payable and other
current liabilities 4,250 11,185
Increase in deferred revenue and
customer advances 1,507 2,813
Other, net 1,041 153
-------- --------
Net cash provided by operating
activities 68,353 61,634
Cash flows from investing activities:
Additions to property, plant and equipment (10,760) (9,341)
Software capitalization and other
intangibles (4,414) (3,494)
Investment in unaffiliated company - (1,147)
Business acquisitions, net of cash acquired (3,157) (159,368)
Loans to officers 221 (102)
-------- --------
Net cash (used in) investing activities (18,110) (173,452)
Cash flows from financing activities:
Net (repayments) borrowings of bank debt (53,422) 119,465
Proceeds from employee stock purchase plan 607 178
Stock options exercised 3,803 1,745
-------- --------
Net cash (used in) provided by
financing activities (49,012) 121,388
Effect of exchange rate changes on cash (786) (107)
-------- --------
Net change in cash and cash equivalents 445 9,463
Cash and cash equivalents at beginning of
period 3,113 639
Cash and cash equivalents at end of -------- --------
period $ 3,558 $ 10,102
======== ========
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 (the "Company"), an analytic instrument
manufacturer, is the world's largest manufacturer, distributor
and provider of high performance liquid chromatography ("HPLC")
instruments, chromatography columns and other consumables, and
related services. 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 TA
Instruments, Inc. ("TAI") subsidiary, the Company is also the
world's leader in thermal analysis, a prevalent and
complementary technique used in the analysis of polymers.
Through its Micromass Limited ("Micromass") subsidiary, the
Company is also 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.
The accompanying unaudited interim financial statements have
been prepared in accordance with generally accepted accounting
principles ("GAAP"). The consolidated financial statements
include the accounts of the Company and its subsidiaries. All
material intercompany balances and transactions have been
eliminated. Certain amounts from prior years have been
reclassified in the accompanying financial statements in order
to be consistent with the current year's classifications.
The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that
affect (i) the reported amounts of assets and liabilities, (ii)
disclosure of contingent assets and liabilities at the dates of
the financial statements and (iii) the reported amounts of
revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
It is management's opinion that the accompanying interim
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, 1997.
2. Acquisitions
Micromass Limited Acquisition
On September 23, 1997, the Company acquired 100% of the capital
stock of Micromass Limited, a company headquartered in
Manchester, England, for approximately $175,000 in cash, common
stock (375 shares) and promissory notes. The acquisition
principally was financed through borrowings under the Company's
Bank Credit Agreement. Micromass develops, manufactures, and
distributes mass spectrometry instruments, products that are
complementary to Waters' existing product offering. Micromass
offers products ranging from high-end stand-alone instruments to
smaller, easier-to-use detectors that can be integrated and used
along with other analytical instruments, especially HPLC.
Micromass is a global market leader in the field of mass
spectrometry.
YMC, Inc. Acquisition
On July 31, 1997, the Company acquired all of the capital stock
of YMC, Inc. ("YMC"), a U.S. based company, for approximately
$9,000 in cash. YMC is a manufacturer and distributor of
chromatography chemicals and supplies which augment the Waters
consumables product line.
7
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro Forma Results of Operations
The following unaudited Pro Forma results of operations for the
nine months ended September 30, 1998 and 1997 give effect to the
Company's acquisitions as if the transactions had occurred at
the beginning of each such period. The financial data are based
on the historical consolidated financial statements for the
Company, Micromass and YMC, and include related adjustments.
The Pro Forma results of operations exclude the non-recurring
charges that were recorded in conjunction with the Micromass
acquisition in 1998 and 1997 and do not purport to represent (i)
what the Company's results of operations actually would have
been if the Micromass 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.
Unaudited Pro Forma Results For the Nine Months Ended
-----------------------------------------------------
September 30, 1998 September 30, 1997
------------------ ------------------
Net sales $ 439,829 $ 390,290
Net income $ 58,093 $ 44,304
Net income per basic
common share $ 1.95 $ 1.51
Net income per diluted
common share $ 1.80 $ 1.37
3. Inventories
Inventories are classified as follows:
September 30, December 31,
1998 1997
---- ----
Raw materials $26,231 $22,092
Work in progress 13,322 15,315
Finished goods 43,351 33,468
Revaluation of acquired inventory - 16,500
------- -------
Total Inventories $82,904 $87,375
======= =======
4. Income Taxes
The Company's effective tax rate for the three months ended
September 30, 1998 and 1997, was 25% and 20%, respectively
before nondeductible, acquisition-related expenses. The
Company's effective tax rate for the nine months ended September
30, 1998 and 1997, was 23% and 20%, respectively, before
nondeductible acquisition-related expenses.
8
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. Earnings Per Share
SFAS 128, which now governs earnings per share computations,
requires the following reconciliation of the basic and diluted
EPS calculations:
Nine Months Ended September 30, 1998
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $42,313
Less: Accretion of and 6%
dividend on preferred stock 720
Income per basic common ------- ------ --------
share from operations $41,593 29,859 $ 1.39
======= ====== ========
Effect of dilutive securities:
Options outstanding 2,246
Options exercised 101
Income per diluted common ------- ------ --------
share from operations $41,593 32,206 $ 1.29
======= ====== ========
Nine Months Ended September 30, 1997
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net (loss) $(13,982)
Less: Accretion of and 6%
dividend on preferred stock 705
(Loss) per basic common -------- ------ -------
share from operations $(14,687) 28,986 $(0.51)
======== ====== =======
Effect of dilutive securities:
(Loss) per diluted common -------- ------ -------
share from operations $(14,687) 28,986 $(0.51)
======== ====== =======
Three Months Ended September 30, 1998
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $21,956
Less: Accretion of and 6%
dividend on preferred stock 241
Income per basic common ------- ------ -----
share from operations $21,715 30,014 $0.72
======= ====== =====
Effect of dilutive securities:
Options outstanding 2,371
Options exercised 26
Income per diluted common ------- ------ -----
share from operations $21,715 32,411 $0.67
======= ====== =====
9
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended September 30, 1997
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net (loss) $(41,079)
Less: Accretion of and 6%
dividend on preferred stock 237
(Loss) per basic common -------- ------ -------
share from operations $(41,316) 29,074 $(1.42)
======== ====== =======
Effect of dilutive securities:
(Loss) per diluted common -------- ------ -------
share from operations $(41,316) 29,074 $(1.42)
======== ====== =======
For both the three month and nine month periods ended
September 30, 1998, the Company had no stock option securities
that were antidilutive. For both the three month and nine month
periods ended September 30, 1997, the Company had 5,080 stock
option securities that were antidilutive. These securities could
potentially dilute basic EPS in the future, and were not included
in the computation of diluted EPS because to do so would have
been antidilutive for the periods presented.
6. Comprehensive Income
SFAS 130 establishes standards for reporting and display of
comprehensive income and its components. The components of
other comprehensive income for the Company include primarily
foreign currency translation adjustments. The computation of
comprehensive income follows:
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Net income (loss) $ 42,313 $ (13,982) $ 21,956 $ (41,079)
Other comprehensive
(loss) income (551) (1,833) (242) 214
---------- ---------- ---------- ----------
Comprehensive
income (loss) $ 41,762 $ (15,815) $ 21,714 $ (40,865)
========== ========== =========== ==========
7. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, which is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Earlier application is
permitted. The statement establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
In February 1998, the Financial Accounting Standards Board
issued SFAS 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, which is effective for periods beginning
after December 15, 1997, but excludes interim periods during
1998. The statement standardizes employers' disclosure
requirements about pension and other postretirement benefit plans
by requiring additional information on changes in the benefit
obligations and fair values of plan assets and eliminating
certain disclosures that are no longer useful. It does not
change the measurement or recognition of those plans.
10
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
In June 1997, the Financial Accounting Standards Board issued
SFAS 131, Disclosures about Segments of an Enterprise and Related
Information, which is effective for periods beginning after
December 15, 1997, but excludes interim periods during 1998. The
statement establishes standards for reporting information about
operating segments in annual financial statements of public
business enterprises and in interim financial reports issued to
shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers.
While management has not determined the impact of the new
above-mentioned standards, they are not expected to be material
to the Company.
In June 1997, the Financial Accounting Standards Board issued
SFAS 130, Reporting Comprehensive Income, which is effective for
periods beginning after December 15, 1997. The statement
establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. The
statement requires that all components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company has
adopted SFAS 130 in the accompanying financial statements.
Footnote disclosure has been provided for interim periods.
In February 1997, the Financial Accounting Standards Board
issued SFAS 128, Earnings Per Share, which is effective for
periods ending after December 15, 1997. The statement changes
computational guidelines and disclosure requirements for earnings
per share. The Company has adopted SFAS 128 in the accompanying
financial statements and has restated all prior period earnings
per share data.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Recent Events
On September 23, 1997, the Company acquired all of the capital
stock of Micromass, a company headquartered in Manchester,
England, for approximately $175 million in cash, common stock and
promissory notes. The acquisition principally was financed
through borrowings under the Company's Bank Credit Agreement.
Micromass develops, manufactures, and distributes mass
spectrometry instruments, products that are complementary to the
Company's existing product offering. Micromass offers products
ranging from high-end stand-alone instruments to smaller, easier-
to-use detectors that can be integrated and used along with other
analytical instruments, especially HPLC. Micromass is a global
market leader in the field of mass spectrometry.
On September 4, 1997, the Company increased the maximum
availability under its Bank Credit Agreement to $450 million in
order to finance the acquisition of Micromass.
On July 31, 1997, the Company acquired all of the capital
stock of YMC, Inc. ("YMC"), a U.S. based company, for
approximately $9 million in cash. YMC is a manufacturer and
distributor of chromatography chemicals and supplies which
augment the Company's consumables product line.
Results of Operations
Net Sales:
Net sales for the three month period ended September 30, 1998
(the "1998 Quarter") and the nine month period ended September
30, 1998 (the "1998 Period") were $151.8 million and $439.8
million, respectively, compared to $105.0 million for the three
month period ended September 30, 1997 (the "1997 Quarter") and
$313.7 million for the nine month period ended September 30, 1997
(the "1997 Period"), an increase of 45% for the quarter and 40%
for the period. Excluding the adverse effects of a stronger U.S.
dollar, net sales increased by 46% over the 1997 Quarter and 43%
over the 1997 Period. The Company's core HPLC and thermal
analysis products grew by 13% as compared to the 1997 Quarter and
12% as compared to the 1997 Period, while the impact of the
Micromass acquisition resulted in the remaining 33% and 31%
points of growth, respectively. HPLC growth was generally broad-
based across all geographies, except the Pacific Rim. Customer
demand was particularly strong in the U.S. and Europe, offsetting
Pacific Rim weakness. Japan had moderate sales growth for the
1998 Quarter. Pharmaceutical customer demand was especially
strong across all geographies. The Company's sales of mass
spectrometry products grew strongly as well.
Gross Profit:
Gross profit increased to $94.0 million in the 1998 Quarter and
$257.7 million in the 1998 Period from $66.4 million in the 1997
Quarter and $198.6 million in the 1997 Period, an increase of
$27.6 million or 42% for the quarter and $59.1 million or 30% for
the period. Excluding the $16.5 million non-recurring charge in
the 1998 Period for revaluation of acquired inventory related to
purchase accounting for the Micromass acquisition, gross profit
increased by 38% over the 1997 Period. Gross profit as a
percentage of sales excluding the inventory revaluation charge
decreased to 61.9% in the 1998 Quarter and to 62.3% in the 1998
Period, from 63.3% in both the 1997 Quarter and Period,
reflecting the inclusion of Micromass' results after its
September 1997 acquisition. (Micromass' mass spectrometry gross
margins are lower than Waters' HPLC historical gross margins, but
its operating expenses are commensurately lower, and its
operating margins are comparable to those of Waters.) Excluding
the impact of Micromass' results, gross profit as a percentage of
sales increased in the 1998 Period, primarily as a result of
increased efficiencies in the Company's manufacturing operations
and lower raw material costs.
Selling, General, and Administrative Expenses:
Selling, general and administrative expenses increased to $49.3
million in the 1998 Quarter and $151.2 million in the 1998
Period, as compared to $39.0 million in the 1997 Quarter and
$117.0 million in the 1997 Period, primarily due to inclusion of
expenses of acquired companies. As a percentage of net sales,
selling, general and administrative expenses decreased to 32% for
the 1998 Quarter and to 34% for the 1998 Period, from 37% for
both the 1997 Quarter and Period as a result of higher sales
volume and expense controls.
12
Research and Development Expenses:
Research and development expenses were $8.5 million for the 1998
Quarter and $25.1 million for the 1998 Period, compared to $6.3
million for the 1997 Quarter and $17.9 million for the 1997
Period, a $2.2 million or 35% increase for the quarter and a $7.2
million or 40% increase for the period. Current year spending
increased due to the inclusion of expenses of acquired companies.
The Company continues to invest significantly in the development
of new and improved HPLC, thermal analysis, rheology, and mass
spectrometry products.
Goodwill and Purchased Technology Amortization:
Goodwill and purchased technology amortization was $2.5 million
for the 1998 Quarter and $7.0 million for the 1998 Period, an
increase of $1.1 million from the 1997 Quarter and $2.8 million
from the 1997 Period. This increase was primarily related to the
acquisition of Micromass.
Operating Income:
Operating income was $33.6 million for the 1998 Quarter and $19.7
million for the 1997 Quarter, after excluding the expensed in-
process research and development charge, an increase of $13.9
million from the 1997 Quarter. Excluding the revaluation of
acquired inventory in the 1998 Period and expensed in-process
research and development in the 1997 Period, both in connection
with the Micromass acquisition, operating income was $90.8
million for the 1998 Period and $59.6 million for the 1997
Period, representing a $31.2 million or 52% increase over the
1997 Period. The increased operating income levels for the 1998
Quarter and Period were the result of strong sales growth, volume
leverage, continued focus on cost reduction in all operating
areas and the accretive impact of acquisitions.
Interest Expense, Net:
Net interest expense increased by $2.1 million or 91% for the
1998 Quarter and by $6.1 million or 73% for the 1998 Period. The
current quarter and period increases reflected increased debt
levels incurred to finance the Micromass acquisition.
Provision for Income Taxes:
The Company's effective tax rate for the three months ended
September 30, 1998 and 1997, was 25% and 20%, respectively
before nondeductible, acquisition-related expenses. The
Company's effective tax rate for the nine months ended September
30, 1998 and 1997, was 23% and 20%, respectively, before
nondeductible acquisition-related expenses.
Net Income (Loss):
Income from operations was $22.0 million for the 1998 Quarter and
$42.3 million for the 1998 Period, compared to a $41.1 million
loss for the 1997 Quarter and a $14.0 million loss for the 1997
Period. Excluding the $16.5 million non-recurring charge in 1998
for the revaluation of acquired inventory and the $55.0 million
non-recurring charge in 1997 for the expensed in-process research
and development, the Company generated $58.8 million of income in
the 1998 Period compared to $41.0 million in the 1997 Period.
The improvement over the prior year was a result of sales growth,
continued focus on cost reductions in all operating areas and the
accretive impact of acquisitions.
Year 2000
Year 2000 ("Y2K") issues concern the inability of information
systems to properly recognize and process date-sensitive
information beyond January 1, 2000.
The Company has been engaged in a concerted effort to ready
its business systems and products in anticipation of Y2K. A
special internal project team led by senior management was
organized in 1997 in an attempt to ensure that all material
business systems, instrument products and applications software
are compliant by January 1, 2000. Currently, the companywide
planning and inventory phases have been completed. The
assessment phase is planned to be substantially completed by
December 31, 1998, and includes the examination of products,
worldwide operations, manufacturing systems, business computer
systems, manufacturing, warehousing and servicing equipment,
network hardware and software, telephone systems, desktop
application software, mainframe operating systems, and
environmental operations. Currently, the Company believes that
most of its internal systems and related software are likely to
be Y2K compliant. The Company is continuing to identify
material software and systems which may be noncompliant and
bring such software and systems into compliance in time to
minimize any significant detrimental effects on operations.
13
The remediation and testing phases of the Company's systems
are scheduled to be completed by the middle of 1999. Based on
the results of the testing phase, a contingency plan will be
established. The Company has no plans to engage in third party
validation of its Y2K efforts. To date, approximately $8.0
million has been spent in connection with bringing the Company's
internal systems into compliance, primarily capital expenditures
for entirely new business systems which replaced predecessor
systems. The remaining costs to fix Y2K problems are estimated
at less than $3.0 million, including capital expenditures to
replace certain predecessor capital items. The Company does not
expect the costs relating to the Y2K remediation phase to have a
material effect on the Company.
The Company has made public statements to customers
regarding its state of compliance for its products; however, the
possibility of product liability claims still exists. The
Company also recognizes that Y2K disruptions in customer
operations could result in reduced sales and cash flow and
increased inventory or receivables. While these events are
possible, the Company believes that its customer base is broad
enough to minimize the effects of a single occurrence. However,
the Company is in the process of surveying the status of its
major customers.
The Company is in the process of obtaining certificates of
compliance from its major systems vendors. Additionally, the
Company is in the process of surveying its financial services,
utilities, and communication providers, as well as its critical
suppliers to ensure that they are compliant. Despite these
efforts, however, interruption of supplier operations due to Y2K
issues could potentially affect Company operations. The Company
uses multiple suppliers which may reduce the risks of
interruption, but cannot eliminate the potential for disruption
due to third party failure.
While the Company believes its efforts will provide
reasonable assurance that material disruptions are not likely to
occur due to internal failure, the potential for interruption
still exists. Specifically, the Company and its subsidiaries
could be materially adversely affected if utilities, private
businesses and governmental entities with which they do business
or that provide essential services are not Y2K compliant. The
Company currently believes that the greatest risk of disruption
in its businesses exists in certain international markets. Such
interruptions could cause, among other things, temporary plant
closings, delays in the delivery of products, delays in the
receipt of supplies, invoice and collection errors, and
inventory and supply obsolescence. Recovery under existing
insurance policies may be available depending upon the
circumstances of a Y2K related event.
The estimates and conclusions herein are based on
management's best estimates of future events. Risks that could
cause results to differ from these estimates and conclusions
include the uncertainties involved in discovering and correcting
the potential Y2K sensitive problems which could have a serious
impact on specific facilities and the ability of suppliers and
customers to bring their systems into Y2K compliance.
Liquidity and Capital Resources
During the 1998 Period, net cash provided by the Company's
operating activities was $68.4 million, primarily as a result of
net income for the period after adding back non-recurring non-
cash charges, depreciation and amortization, and after an $11.2
million investment in inventory. Primary uses of cash flows
during the period were $15.2 million invested in property, plant
and equipment and software capitalization; $3.2 million used for
a business acquisition; and $53.4 million of bank debt
repayments.
The Company believes that existing cash balances and current
cash flow from operating activities together with borrowings
available under the Bank Credit Agreement will be sufficient to
fund working capital, capital spending 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, changes in the healthcare market and the
pharmaceutical industry, changes in distribution of the
Company's products, and interest rate and foreign exchange
fluctuations.
14
Part II: Other Information
Item 1. Legal Proceedings
From time to time, the Company and its subsidiaries are
involved in various litigation matters arising in the
ordinary course of its business. None of the matters in
which the Company or its subsidiaries are currently
involved, either individually or in the aggregate, is
material to the Company or its subsidiaries.
The Company and its wholly owned subsidiary, Micromass
Limited, are aware that a patent infringement action has
been filed in the U.S. District Court for the District of
Connecticut but has not been served. As a matter of
convenience, settlement discussions are taking place. The
patents relate to electrospray mass spectrometer products.
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"). PE withdrew its claim for
infringement preserving its right to appeal rulings
interpreting the claims of the PE patent. A jury returned a
verdict finding that no valid claims of the TAI patents were
infringed by PE. TAI has appealed the verdict with the U.S.
District Court for the District of Delaware.
The Company has filed revocation and nullification actions
against Hewlett-Packard Company and Hewlett-Packard GmbH
("HP"), seeking revocation or nullification of certain
foreign HP patents in Europe. HP has filed a counterclaim
in the United Kingdom alleging that the Company's products
infringe one or more claims of one United Kingdom patent.
The patents relate to the Company's Alliance product.
The Company believes it has meritorious arguments and should
prevail in the above legal proceedings, although the
outcomes are not certain. The Company believes that any
outcomes of the proceedings will not be material to 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
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit 27 - Financial Data Schedule
B. No reports on Form 8-K were filed during the three months
ended September 30, 1998.
15
WATERS CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: November 10, 1998 Waters Corporation
/s/ Philip S. Taymor
--------------------
Philip S. Taymor
Senior Vice President and Chief
Financial Officer
16