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 October 2, 2004 |
|
|
||
|
OR | |
|
||
(
)
|
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from __________ to __________. |
Commission File Number: 01-14010
WATERS CORPORATION
Delaware
(State or other jurisdiction of incorporation or organization) |
13-3668640
(I.R.S. Employer Identification No.) |
34 Maple Street
Milford, Massachusetts 01757
(Address of principal executive offices)
Registrants 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 Registrants common stock as of November 3, 2004: 120,839,223.
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
2
WATERS CORPORATION AND SUBSIDIARIES
The accompanying notes are an integral part of the consolidated financial statements.
3
WATERS CORPORATION AND SUBSIDIARIES
The accompanying notes are an integral part of the consolidated financial statements.
4
WATERS CORPORATION AND SUBSIDIARIES
The accompanying notes are an integral part of the consolidated financial statements.
5
WATERS CORPORATION AND SUBSIDIARIES
The accompanying notes are an integral part of the consolidated financial statements.
6
WATERS CORPORATION AND SUBSIDIARIES
1.
Basis of Presentation and Significant Accounting Policies
Waters Corporation (Waters or the Company), an analytical instrument
manufacturer, designs, manufactures, sells and services, through its Waters
Division, high performance liquid chromatography (HPLC), mass spectrometry
(MS) instrument systems and associated service and support products including
chromatography columns and other consumable products. These systems are
complementary products that can be integrated together and used along with
other analytical instruments. HPLC is a standard technique and 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. MS instruments are used in drug discovery and
development, including clinical trial testing, the analysis of proteins in
disease processes (known as proteomics) and environmental testing. As a
result of the acquisitions of Creon Lab Control AG in July 2003 and NuGenesis
Technologies Corporation in February 2004, Waters Division has entered the
laboratory informatics market (Laboratory Informatics). Laboratory
Informatics consists of laboratory-to-enterprise scale software systems for
managing and storing scientific information collected from a wide variety of
instrumental test methods. Through its TA Instruments Division (TA), the
Company designs, manufactures, sells and services thermal analysis and
rheometry instruments which are used in predicting the suitability of polymers
and viscous liquids for various industrial, consumer goods and health care
products.
The Companys interim fiscal quarter typically ends on the thirteenth
Saturday of each quarter. Since the Companys fiscal year-end is December 31,
the first and fourth fiscal quarters may not consist of thirteen complete
weeks. The Companys third fiscal quarters for 2004 and 2003 ended on October
2, 2004 and September 27, 2003, respectively.
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and note disclosures required by 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
years 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 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 managements opinion that the accompanying interim consolidated
financial statements reflect all adjustments (which are normal and recurring)
necessary for a fair presentation of the results for the interim periods. The
interim consolidated financial statements should be read in conjunction with
the consolidated financial statements included in the Companys annual report
on Form 10-K filing with the Securities and Exchange Commission for the year
ended December 31, 2003.
Stock-Based Compensation:
7
WATERS CORPORATION AND SUBSIDIARIES
The following table illustrates the effect on net income and earnings per
share (EPS) had the Company applied the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) 123 for the Companys five
stock-based compensation plans (in thousands, except per share data).
Product Warranty Costs:
The following is a rollforward of the Companys accrued warranty liability
for the nine months ended October 2, 2004 (in thousands):
Stockholders Equity:
On May 6, 2003, the Companys Board of Directors authorized the Company to
repurchase up to $400.0 million of its outstanding common shares over a
two-year period. During the nine months ended September 27, 2003, the Company
purchased 5,210 shares of its common stock for $151.2 million. The Company
repurchased 4,270 shares of its common stock for $175.0 million during the six
months ended July 3, 2004, thus effectively completing its $400.0 million stock
buyback program. The total shares purchased under this program were 11,810.
At October 2, 2004, the Company had borrowings outstanding under its
domestic credit facilities of $382.0 million principally to finance share
repurchases under these two programs.
On October 25, 2004, the Companys Board of Directors authorized the
Company to repurchase up to $500.0 million in outstanding common shares over a
two-year period. The Company believes that the stock buyback program is
beneficial to shareholders by increasing earnings per share via reducing the
outstanding shares through open market purchases and that it has adequate
financial flexibility to fund these share repurchases given current cash and
debt levels.
8
WATERS CORPORATION AND SUBSIDIARIES
2.
Inventories
Inventories are classified as follows (in thousands):
3.
Acquisitions
NuGenesis:
The acquisition of NuGenesis was accounted for under the purchase method
of accounting and the results of operations of NuGenesis have been included in
the consolidated results of the Company from the acquisition date. The purchase
price of the acquisition was allocated to tangible and intangible assets and
assumed liabilities based on their estimated fair values. The Company has
allocated $13.1 million of the purchase price to intangible assets comprised of
customer lists, trademarks and other purchased intangibles. The excess
purchase price of $34.7 million after this allocation has been accounted for as
goodwill.
The Company considered a number of factors to determine the purchase price
allocation, including engaging a third party valuation firm to independently
appraise the fair value of certain assets acquired. The following table
presents the fair values of assets and liabilities recorded in connection with
the NuGenesis acquisition (in thousands):
In connection with the NuGenesis purchase price allocation, deferred tax
liabilities were established for the amortization of intangible assets for book
purposes that were not deductible for tax purposes in the U.S. In the third
quarter of 2004, the Company transferred the NuGenesis intangible assets to a
foreign wholly-owned subsidiary where the Company expects to deduct the
amortization of the intangible assets for book and tax purposes. As a result,
deferred tax liabilities (included in accrued expenses and other current
liabilities) and goodwill were adjusted by $4.6 million during
the three months ended October 2, 2004.
The Company recorded approximately $1.1 million in purchase accounting
liabilities relating to the NuGenesis acquisition. Approximately $0.3 million
has been utilized as of October 2, 2004.
9
WATERS CORPORATION AND SUBSIDIARIES
The following is a rollforward of the NuGenesis acquisition schedule of
amounts accrued under purchase accounting and related utilization (in
thousands):
Creon:
The acquisition of Creon was accounted for under the purchase method of
accounting and the results of operations of Creon have been included in the
consolidated results of the Company from the acquisition date. The purchase
price of the acquisition was allocated to tangible and intangible assets and
assumed liabilities based on their estimated fair values. In conjunction with
the acquisition, the Company recorded charges of $5.2 million in the third
quarter of 2003 and $0.8 million in the fourth quarter of 2003 for the
write-off of acquired in-process research and development. The technological
feasibility of in-process research and development projects had not been
established at the date of acquisition and they had no alternative future use.
The Company has allocated $4.4 million of the purchase price to intangible
assets comprised of customer lists and other purchased intangibles. The excess
purchase price of $5.6 million after this allocation has been accounted for as
goodwill.
The Company considered a number of factors to determine the purchase price
allocation, including engaging a third party valuation firm to independently
appraise the fair value of certain assets acquired. The following table
presents the fair values of assets and liabilities recorded in connection with
the Creon acquisition (in thousands):
Rheometrics:
10
WATERS CORPORATION AND SUBSIDIARIES
The Company considered a number of factors to determine the purchase price
allocation, including engaging a third party valuation firm to independently
appraise the fair value of certain assets acquired. The following table
presents the fair values of assets and liabilities recorded in connection with
the Rheometrics acquisition (in thousands):
The Company recorded approximately $4.1 million in purchase accounting
liabilities relating to the Rheometrics acquisition. The purchase accounting
liabilities included $1.2 million for severance costs for approximately 65
employees, of which 65 employees were terminated as of October 2, 2004, and
$0.9 million in facilities related costs for three facilities, all of which
have been closed as of October 2, 2004.
The following is a rollforward of the Rheometrics acquisition schedule of
amounts accrued under purchase accounting and related utilization (in
thousands):
Other:
The following represents the pro forma results of the ongoing operations
for Waters, NuGenesis, and Creon as though the acquisitions of NuGenesis and
Creon had occurred at the beginning of the periods shown (in thousands, except
per share data). The pro forma information however, is not necessarily
indicative of the results that would have resulted had the acquisition occurred
at the beginning of the periods presented, nor is it necessarily indicative of
future results. The pro forma results for the three and nine months ended
September 27, 2003 exclude the $5.2 million charge for the write-off of
acquired in-process research and development related to the Creon acquisition.
11
WATERS CORPORATION AND SUBSIDIARIES
The pro forma effects of the Rheometrics and Other acquisitions were
immaterial for the nine months ended October 2, 2004 and September 27, 2003.
4.
Expensed In-Process Research and Development
In connection with the acquisition of Creon, in July 2003, the Company
wrote-off the fair value of purchased in-process research and development
(IPR&D) of various projects for the development of new products and
technologies in the amount of $5.2 million in the third quarter of 2003 and
$0.8 million in the fourth quarter of 2003. Management determined the
valuation of the IPR&D using, among other factors, appraisals. The value was
based primarily on the discounted cash flow method. This valuation included
consideration of (i) the stage of completion of each of the projects, (ii) the
technological feasibility of each of the projects, (iii) whether the projects
had an alternative future use, and (iv) the estimated future residual cash
flows that could be generated from the various projects and technologies over
their respective projected economic lives.
5.
Divestiture of Business
On March 26, 2003, the Company sold the net assets of its mass spectrometry
inorganic product line for approximately $1.2 million in cash and the balance
in notes receivable. Assets sold included inventory and certain accounts
receivable, and liabilities assumed by the acquirer consisted of deferred
service revenue and advance payment obligations, and warranty and installation
obligations. The Company recorded a loss on sale of approximately $5.0
million, including severance costs of approximately $0.3 million. This
business generated sales of approximately $14.0 million per year with no
contribution to earnings.
6.
Goodwill and Other Intangibles
The carrying amount of goodwill was $226.1 million and $197.4 million at
October 2, 2004 and December 31, 2003, respectively. The increase is
attributed to the Companys acquisitions (Note 3) during the period of
approximately $30.0 million, including certain adjustments made in the third
quarter of 2004, and currency translation adjustments of approximately $(1.3)
million.
The Companys intangible assets in the consolidated balance sheets are
detailed as follows (in thousands):
For the three months ended October 2, 2004 and September 27, 2003,
amortization expense for intangible assets was $4.9 million and $3.0 million,
respectively. For the nine months ended October 2, 2004 and September 27,
2003, amortization expense for intangible assets was $13.8 million and $8.7
million, respectively. Amortization expense for intangible assets is estimated
to be approximately $18.8 million for each of the next five years. In the
second and third quarters of 2004, the Company wrote off $7.9 million of fully
amortized purchased intangibles and $2.8 million of fully amortized capitalized
software, respectively, related to
thermal analysis technology no longer used by the Company. Accumulated
amortization for intangible assets increased approximately $0.4 million during
the nine months ended October 2, 2004 due to the effect of foreign currency
translation adjustments.
12
WATERS CORPORATION AND SUBSIDIARIES
7.
Debt
At October 2, 2004 and December 31, 2003, the Company had borrowings of $205.0
million and $100.0 million, respectively, under its $250.0 million Amended
Senior Revolving Credit Agreement (the Amended Credit Agreement). At October
2, 2004 and December 31, 2003, the Companys $125.0 million Term Loan (the
Term Loan) was fully drawn, of which $110.0 million and $125.0 million,
respectively, were classified as long-term. Loans under the Amended Credit
Agreement and Term Loan will bear interest for each quarter at a floating rate
equal to, at the Companys option, 1) the applicable LIBOR rate plus a varying
margin between 0.60% and 1.50% or 2) prime rate. At October 2, 2004, the
interest rates, with respect to the Amended Credit Agreement and Term Loan,
ranged from 2.31% to 2.90%. At December 31, 2003, the interest rates, with
respect to the Amended Credit Agreement and Term Loan, ranged from 1.78% to
1.95%. In May 2004, the Company put in place an additional $25.0 million
committed 364 day revolving credit facility. Loans under the 364 day facility
bear interest at a floating rate equal to, at the Companys option, 1) the
applicable LIBOR rate plus 1.00% or 2) prime rate. At October 2, 2004, the
Company had borrowings of $24.0 million under this facility. The Company and
its foreign subsidiaries had available short-term lines of credit with related
short-term borrowings at October 2, 2004 and December 31, 2003 of $38.7 million
and $21.3 million, respectively.
In February 2004, the Company entered into interest rate swap agreements
with banks, with notional amounts totaling $125.0 million, the purpose of which
are to fix the rate of interest for the $125.0 million floating rate Term Loan.
Under the terms of the agreements, the Company makes or receives a quarterly
net interest payment to or from the banks based on the differential between the
fixed rate on the swaps, which average 1.93%, and the three-month LIBOR rate.
The swaps were to mature in December 2005. The Company had designated these
interest rate swap agreements as cash flow hedges and, accordingly, the changes
in fair value associated with these interest rate swap agreements are recorded
in other comprehensive income. In the second quarter of 2004, the Company
closed the swaps resulting in a deferred gain of $1.6 million recorded in other
comprehensive income, which will be recognized in earnings ratably through
December 2005, the term of the related debt.
Starting in the first quarter of 2004, the Company has entered into zero
cost range forward agreements and short-term forward contracts, with a notional
value of 75.0 million British Pounds, in order to hedge the value of the
Companys net investment in subsidiaries for which the British Pound is their
functional currency. Under the terms of the agreements the Company purchased
an option below the current spot rate to sell British Pounds, and sold an
option to its banks above the current spot rate to buy British Pounds, with
option premiums that offset. The option contracts expired and the forward
contracts were closed out prior to the end of the first quarter, resulting in
zero realized gain or loss. During the second and third quarters, the Company
entered into similar range forward agreements. At October 2, 2004, the
notional value outstanding of the range forward agreements was 75.0 million
British Pounds ($135.7 million at October 2, 2004). The Company has designated
these range forward agreements as a hedge of a net investment and, accordingly,
the changes in fair value associated with these range forward agreements are
recorded in other comprehensive income.
8.
Income Taxes
The Companys effective tax rates for the three months ended October 2, 2004
and September 27, 2003, were 19.1% and 25.4%, respectively. The Company
lowered its year-to-date effective tax rate from 22% to 21% in the three months
ended October 2, 2004, excluding the tax effect of certain net litigation and
restructuring credits. This resulted in an effective tax rate of 19.1% in the
quarter ended October 2, 2004 reflecting the year-to-date change. The change was deemed appropriate
based on managements assessment of profitability in international
jurisdictions with lower effective tax rates. The effective tax rate for the
three months ended September 27, 2003 was impacted by the expensed in-process
research and development charge not being tax deductible.
The Companys effective tax rates for the nine months ended October 2,
2004 and September 27, 2003, were 21.8% and 23.6%, respectively. The change in
effective tax rates for the period was impacted by the net tax effect of the
Perkin-Elmer litigation
settlement received and litigation provisions and restructuring charges made in
the nine months ended October 2, 2004, compared to the tax effect of certain
net litigation provisions, restructuring charges, expensed in-process research
and development and loss on sale of a business incurred in the nine months
ended September 27, 2003. The effective tax rates, excluding these unusual
items and corresponding tax effects, were 21.0% and 23.0% for the nine months
ended October 2, 2004 and September 27, 2003, respectively. This decrease is
primarily attributable to the increase in income in international jurisdictions
with lower effective tax rates.
13
WATERS CORPORATION AND SUBSIDIARIES
9.
Patent Litigation
Applera Corporation:
In March 2002, the Company was informed of a jurys finding that the
Quattro Ultima with Mass Transit ion tunnel technology infringes the patent.
The same jury found that the infringement was not willful and determined
damages in the amount of $47.5 million. The Court entered an injunction in
which the Company is enjoined from making, using and selling in the U.S. the
Quattro Ultima triple quadrupole mass spectrometer incorporating features of
the patent.
In March 2003, the Courts decision was affirmed on appeal. In April 2003,
the Company paid total damages and interest of approximately $53.7 million to
the Plaintiffs. These instruments are manufactured in the United Kingdom and
shipments to the rest of the world outside the United States were not subject
to this litigation. Similar claims were asserted against the Company by the
Plaintiffs in Japan and Canada. Also, in the nine months ended September 27,
2003, the Company reversed approximately $0.9 million of interest as a one-time
credit to interest expense.
Previously, in July 2002, the Company filed a civil action against Applera
Corporation alleging patent infringement of U.S. Patent No. 5,304,798 owned by
the Company. In November 2002, the University of Manitoba (the University)
and Applera Corporation, its licensee, filed a civil action against the Company
alleging patent infringement of U.S. Patent No. 6,331,702 owned by the
University.
On October 31, 2003, MDS, Inc. and Applied Biosystems/MDS Sciex
Instruments filed a civil action against Micromass UK Limited, Waters Limited,
wholly owned subsidiaries of the Company, and the Company, in the High Court of
Justice, Chancery Division, Patents Courts, UK. The case alleged that certain
of the Companys MS products infringe European Patent (UK) No. 0 373 835 (the
European Patent). To the Companys knowledge, the European Patent is owned by
MDS, Inc. and licensed to a joint venture with Applied Biosystems/MDS Sciex
Instruments. The Plaintiffs in this action were seeking an injunction against
the Company to restrain it from infringing the European Patent and an
unspecified award of damages.
On March 2, 2004, the Company and MDS, Inc., through its Applied
Biosystems/MDS Sciex Instruments partnership, and Applied Biosystems entered
into a settlement agreement (the Applera Settlement Agreement) with respect
to the various civil actions pending against each of them, both in the United
States and internationally. Stipulations of Dismissal or their foreign
equivalents (the Stipulations) with respect to the disposal of all such
actions have been entered in the applicable courts and tribunals in each of the
United States, the United Kingdom, Canada and Japan.
The Applera Settlement Agreement provides for the resolution of all patent
infringement claims in the United States made by certain of the parties against
the other and of international cases brought by MDS, Inc. and Applied
Biosystems/MDS Sciex Instruments against the Company with respect to alleged
infringements of those parties patents at issue in the United Kingdom, Canada
and Japan.
In consideration of entering into the Applera Settlement Agreement and the
Stipulations, the Company and MDS, Inc. and Applied Biosystems/MDS Sciex
Instruments have entered into royalty paying license agreements, cross
licensing the use of the technology described in the parties respective patents at issue. In
addition, the Company made a one-time payment to Applied Biosystems/MDS Sciex
Instruments of $18.1 million on March 11, 2004.
The accrued patent litigation expenses in the consolidated balance sheets
as of October 2, 2004 and December 31, 2003 were $0.1 million and $19.9
million, respectively. The accrued expense at October 2, 2004 represents the
Companys best estimate of remaining legal expenses necessary to conclude this
litigation. The change in the liability from December 31, 2003 is attributed
to the one-time payment of $18.1 million and payments of legal fees directly
associated with these cases. There were no charges in the statements of
operations for the three months and nine months ended October 2, 2004 and
September 27, 2003 related to these cases.
14
WATERS CORPORATION AND SUBSIDIARIES
Hewlett-Packard Company:
The Company recorded a provision of $7.8 million in the first quarter of
2004 for estimated damages and fees to be incurred with respect to the ongoing
litigation for the England and France suits, excluding the effect of the recent
suit filed in March 2004. This provision represents managements best estimate
of the probable and reasonably estimable loss related to this litigation. No
provision has been made for the Germany suit and the Company believes the
outcome, if the plaintiff ultimately prevails, will not have a material impact
on the Companys financial position. The accrued patent litigation expense in
the consolidated balance sheets at October 2, 2004 was $5.0 million for the
England and France suits. The liability includes a provision of $0.8 million
made in 2002. The change in the liability through October 2, 2004 is
attributable to a payment of initial deposits of potential damages of $3.2
million and payments of legal fees directly associated with the cases.
Perkin-Elmer Corporation:
On remand to the District Court in October 2002, a jury found PE liable to
TA for damages of $13.3 million and found TA did not infringe the PE patent.
In May 2003, the District Court entered judgment on the jurys verdict in favor
of the Company. PE has appealed the judgment with respect to TAs
non-infringement of the PE patent. A hearing on the matter was held on May 4,
2004. On May 5, 2004, the United States Court of Appeals for the Federal
Circuit affirmed the judgment of non-infringement of the PE Patent. On May 11,
2004, PE, now known as Applera Corporation, paid the Company $17.4 million,
including $0.2 million in post-judgment interest which has been classified as
interest income in the consolidated statements of operations. Approximately
$0.1 million in legal fees were incurred and were offset against the recording
of settlement proceeds.
10.
Environmental Contingency
In July 2003, the Company entered into a settlement agreement (the
Environmental Settlement Agreement) with the Commonwealth
of Massachusetts, acting by and through the Attorney General and the Department
of Environmental Protection, with respect to alleged non-compliance with state
environmental laws at its Taunton, Massachusetts facility. Pursuant to the
terms of a final judgment entered in the Superior Court of the Commonwealth on
July 10, 2003, the Company paid a civil penalty of $5.9 million. In addition,
the Company has agreed to conduct Supplemental Environmental Projects in the
amount of $0.6 million, comprised of investments in capital infrastructure, to
study the effects of bio-filtration on certain air emissions from the Taunton
facility and for the purchase of equipment in connection therewith. Pursuant
to the terms of the Environmental Settlement Agreement, the Company has also
agreed to undertake a variety of actions to ensure that air emissions from the
facility do not exceed certain limits and that the facility is brought into
full compliance with all applicable environmental regulations. A provision of
$1.2 million was included in the statement of operations for the three months
ended March 29, 2003.
15
WATERS CORPORATION AND SUBSIDIARIES
11.
Restructuring and Other Unusual Charges, net
2004 Restructuring:
The following is a rollforward of the Companys 2004 restructuring
liability (in thousands):
2002 Restructuring:
The following is a rollforward of the Companys 2002 integration
restructuring liability (in thousands):
16
WATERS CORPORATION AND SUBSIDIARIES
12.
Earnings Per Share
Basic and diluted earnings per share calculations are detailed as follows (in
thousands):
17
WATERS CORPORATION AND SUBSIDIARIES
For the three months and nine months ended October 2, 2004, the Company
had 1,295 stock option securities that were antidilutive. For the three months
and nine months ended September 27, 2003, the Company had 3,595 and 3,641 stock
option securities that were antidilutive, respectively. These securities were
not included in the computation of diluted EPS. The effect of dilutive
securities was calculated using the treasury stock method.
13.
Comprehensive Income
Comprehensive income details follow (in thousands):
18
WATERS CORPORATION AND SUBSIDIARIES
14.
Retirement Plans
The components of net periodic pension cost related to the Waters Retirement
Plan are as follows (in thousands):
For the three months and nine months ended October 2, 2004, the Company
contributed $10.0 million to the Waters Retirement Plan (the Plan). The
Company does not expect to make any additional contributions for the rest of
the year.
The Company sponsors various non-U.S. retirement plans. The components of
net periodic pension cost related to these plans are as follows (in thousands):
15.
Business Segment Information
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
two operating segments: Waters Division and TA Division.
Waters Division is in the business of manufacturing, distributing and
servicing HPLC instruments, columns, other consumables and mass spectrometry
instruments that can be integrated and used along with other analytical
instruments. As a result of the acquisitions of Creon Lab Control AG in July
2003 and NuGenesis Technologies Corporation in February 2004, Waters Division
has entered the laboratory informatics market (Laboratory Informatics).
Laboratory Informatics consists of laboratory-to-enterprise scale software
systems for managing and storing scientific information collected from a wide
variety of instrumental test methods. TA Division is in the business of
manufacturing, distributing and servicing thermal analysis and rheometry
instruments. The Companys two operating segments have similar economic
characteristics, product processes, products and services, types and classes of
customers, methods of distribution, and regulatory environments. Because of
these similarities, the two 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.
19
WATERS CORPORATION AND SUBSIDIARIES
16.
Recent Accounting Standards Changes and Developments
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued an
Exposure Draft, Share-Based Payments, which is a proposed amendment to SFAS
No. 123, Accounting for Stock-Based Compensation. The Exposure Draft would
require all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of operations based on their
fair values. The FASB recently announced that a final standard would be
effective for public companies for fiscal periods beginning after June 15,
2005. The final standard is expected to offer alternative methods for
determining fair value. At the present time, the Company has not yet
determined which valuation method it will use.
In October 2004, the American Jobs Creation Act of 2004 (AJCA) was
signed into law. The AJCA contains a series of provisions, several of which
are pertinent to the Company. The AJCA creates a temporary incentive for U.S.
multinational corporations to repatriate accumulated income abroad by providing
an 85% dividends received deduction for certain dividends from controlled
foreign corporations. It has been the Companys practice to permanently
reinvest all foreign earnings into foreign operations and the Company currently
still plans to continue to reinvest foreign earnings permanently into its
foreign operations. Should the Company determine that it plans to repatriate
any foreign earnings, it will be required to establish an income tax expense
and related tax liability on such earnings.
20
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Business and Financial Overview:
Waters business in the third quarter continued to benefit from stable
pharmaceutical customer demand, improved industrial chemical customer demand
and the impact of new product initiatives. Sales grew 15% in the three month
period ended October 2, 2004 (the 2004 Quarter) over the three month period
ended September 27, 2003 (the 2003 Quarter). Sales for the nine month period
ended October 2, 2004 (the 2004 Period) were $780.4 million, an increase of
14% over the nine month period ended September 27, 2003 (the 2003 Period).
Excluding currency effects, sales grew 11% in the 2004 Quarter and 9% in the
2004 Period. Geographically, business was strongest in the U.S. and Asia,
trended positively in Europe from lower second quarter results and was
particularly weak in Canada as government spending for research initiatives
appeared to decline.
From a product line perspective and excluding the impact of currency
translation, high performance liquid chromatography (HPLC) grew 10% in the
2004 Quarter and benefited from initial volume shipments of the ACQUITY UPLC
system. In mass spectrometry (MS), sales grew 5% in the 2004 Quarter, slower
than orders, as bookings increased for the newly launched Q-Tof Premier, an
instrument that the Company plans to begin shipping in the fourth quarter, and
displaced orders and sales for the existing Q-Tof Ultima product. Waters
Laboratory Informatics sales grew at a slower rate than expected due to a delay
in shipments of the E-Lab Notebook product, now planned to begin in the fourth
quarter, and continued efforts to fully integrate the newly acquired NuGenesis
Technologies Corporation (NuGenesis) business into Waters operations.
However, in the Laboratory Informatics area, the acquisitions of NuGenesis and
Creon Lab Control AG contributed an incremental $3.9 million and $14.2 million
to sales growth in the 2004 Quarter and 2004 Period, respectively. Thermal
Analysis (TA) continued a strong 2004 performance with sales growth of 17% in
the 2004 Quarter, benefiting from stronger industrial chemical customer demand
and performance differentiated the products.
Operating income was $63.8 million and $193.5 million in the 2004 Quarter
and 2004 Period, respectively, increases of 35% over the same periods in 2003.
The 2004 Period included the benefit of a litigation judgment in the amount of
$17.1 million from Perkin-Elmer Corporation. The 2004 Period also included
litigation provisions and restructuring charges of $7.8 million. The 2003
Quarter and 2003 Period included expensed in-process research and development
of $5.2 million. The 2003 Period included a loss on sale of a business of $5.0
million, restructuring charges of $1.1 million and litigation provisions of
$1.5 million. The remaining increase in operating income of $11.3 million and
$28.5 million for the 2004 Quarter and 2004 Period is primarily a result of
sales volume growth, reductions in manufacturing costs and operating expense
leverage, and the effects of currency translations.
Operating cash flows increased to $191.0 million in the 2004 Period
compared to $91.4 million in the 2003 Period. The 2003 Period included
approximately $59.6 million in litigation payments while the 2004 Period
included net litigation payments of approximately $4.0 million. The remaining
increase of approximately 29% is primarily due to the increase in net income.
Capital expenditures related to property, plant, equipment, software
capitalization and other intangibles in the 2004 Period were $47.4 million
compared to $27.0 million in the 2003 Period. The 2004 Period included an
$18.1 million purchase of a 250,000 square foot building adjacent to the
Companys headquarters. The Company intends to use this building to consolidate
certain functions and facilities in Massachusetts later in 2004 and early 2005.
In June 2004, the Company effectively concluded its $400.0 million stock
buyback program previously announced in May 2003. The Company repurchased
approximately 11.8 million shares under this program.
On October 25, 2004, the Companys Board of Directors authorized the
Company to repurchase up to $500.0 million in outstanding common shares over a
two-year period. The Company believes that the share repurchase program is
beneficial to shareholders by increasing earnings per share through reducing
the outstanding shares and that it is likely to have adequate financial
flexibility to fund these share repurchases given current cash and debt levels.
21
Results of Operations
Sales:
The following commentary is with respect to the Companys sales
performance by product line excluding the effects of currency translation.
Within the Waters Division, chromatography sales grew approximately 10% in
the 2004 Quarter and 11% in the 2004 Period. Chemistry grew approximately 9%
in the 2004 Quarter and 12% in the 2004 Period, primarily as a result of
continued strength in sales related to pharmaceutical production. Service grew
13% in the 2004 Quarter and 14% in the 2004 Period due to increased sales of
service plans to the installed base of customers. HPLC instrument sales grew
9% in the 2004 Quarter compared with the 2003 Quarter and grew 9% in the 2004
Period. The increase in sales during the 2004 Quarter and 2004 Period is
attributable to the launch and delivery of the Companys new ACQUITY UPLC
system and purchase decisions for other instruments by the Companys customers
for new and replacement products. Geographically, HPLC sales in the U.S. and
Asia strengthened approximately 12% and 8%, respectively, in the 2004 Quarter
and 14% and 18%, respectively, in the 2004 Period. Sales in Europe grew 10%
and 5% in the 2004 Quarter and 2004 Period, respectively, as business
conditions within pharmaceutical accounts improved, while weak government
spending depressed sales to Canada.
Within the Waters Division, MS sales grew 5% in the 2004 Quarter and
declined 5% in the 2004 Period. The sales in the U.S. and Asia/Japan grew 11%
and 39%, respectively, in the 2004 Quarter largely due to sales of the Quattro
Premier and Quattro Micro tandem quadrupole systems. Offsetting this growth in
the 2004 Quarter were declines in Europe of approximately 9%. MS sales growth
was impacted by a decline of Q-Tof system sales as the Company is in the
transition of launching a new Q-Tof Premier instrument in the fourth quarter
of 2004.
Through the acquisitions of Creon Lab Control AG in July 2003 and
NuGenesis Technologies Corporation in February 2004, sales of Laboratory
Informatics products were $4.8 million in the 2004 Quarter and $15.1 million in
the 2004 Period, compared to $0.9 million in the 2003 Quarter and 2003 Period.
Within the TA Instruments Division, sales continued to be strong with
sales growth of 17% and 12% for the 2004 Quarter and 2004 Period, respectively.
The growth of this business was predominantly in Europe, North America and Asia
with increased steady spending by core industrial chemical and pharmaceutical
companies. The Company recently established a direct operation in China, which
augmented Asias growth in the quarter.
Gross Profit:
22
Selling and Administrative Expenses:
Research and Development Expenses:
Litigation Provisions:
Loss on Sale of Business:
Restructuring and Other
Unusual Charges, Net:
The following is a rollforward of the Companys 2004 restructuring
liability (in thousands):
23
2002 Restructuring:
The following is a rollforward of the Companys 2002 integration
restructuring liability (in thousands):
Interest Expense:
Interest Income:
Provision for Income Taxes:
The Companys effective tax rates for the nine months ended October 2,
2004 and September 27, 2003, were 21.8% and 23.6%, respectively. The change in
effective tax rates for the period was impacted by the net tax effect of the
Perkin-Elmer litigation settlement received and litigation provisions and
restructuring charges made in the nine months ended October 2, 2004, compared
to the tax effect of certain net litigation provisions, restructuring charges,
expensed in-process research and development and loss on sale of a business
incurred in the nine months ended September 27, 2003. The effective tax rates,
excluding these unusual items and corresponding tax effects, were 21.0% and
23.0% for the nine months ended October 2, 2004 and September 27, 2003,
respectively. This decrease is primarily attributable to the increase in
income in international jurisdictions with lower effective tax rates.
24
Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):
Net cash provided from operating activities was $191.0 million and $91.4
million in the 2004 Period and 2003 Period, respectively. The primary sources
of net cash provided from operating activities were net income, the adding back
of depreciation and amortization, and the increase in the tax benefit related
to stock option plans from stock options exercised. Included in the net income
for the 2004 Period was $17.1 million in proceeds for the Perkin-Elmer
litigation judgment. Depreciation and amortization increased in the 2004
Period primarily from the effect of the Laboratory Informatics acquisitions.
The changes in accounts receivable are directly related to the timing of the
Companys sales within the quarter, and its collection efforts.
Days-sales-outstanding (DSO) remained approximately the same at 79 days at
October 2, 2004 and September 27, 2003. The DSO at October 2, 2004 improved
approximately 1 day compared to September 27, 2003 using constant currency
exchange rates. The change in inventories in the 2004 Period and the 2003
Period is consistent with general business cycles for inventory in the
Companys production planning for fourth quarter sales. In particular, the
inventory build-up at October 2, 2004 is related to the development of new
products, primarily the ACQUITY UPLC and the Q-Tof Premier.
The changes in accounts payable and other current liabilities are mostly
related to the timing of payments of income tax, compensation, and retirement
accruals. The increases in deferred revenue and customer advances are from
invoicing for annual service contracts at the beginning of each fiscal year and
overall growth in the service business. Accrued litigation decreased by $15.6
million primarily due to the $18.1 million payment to Applied Biosystems/MDS
Sciex Instruments for the settlement of a patent litigation matter and a $3.2
million payment for the Hewlett-Packard patent litigation matter, offset by a
$7.8 million provision for the Hewlett-Packard patent litigation in the first
quarter of 2004. The remaining change in accrued litigation is attributed to
payment of legal fees directly associated with existing litigation accruals.
25
Net cash used in investing activities totaled $89.8 million in the 2004
Period compared to $11.1 million in the 2003 Period. Additions to fixed assets
and intangible assets were $47.4 million in the 2004 Period and $27.0 million
in the 2003 Period. Included in the 2004 Period was a 250,000 square foot
building purchase adjacent to the Companys headquarters for $18.1 million.
The Company intends to use this building to consolidate certain functions and
facilities in Massachusetts later in 2004 and early 2005. Aside from the
purchase of this building, fixed asset additions were consistent with capital
spending trends and expectations throughout the respective years. Business
acquisitions were $42.4 million and $35.2 million in respective 2004 and 2003
Periods, as the Company continues to seek growth opportunities through
acquisitions. Included in the 2003 Period was approximately $49.9 million of
cash provided by a decrease in restricted cash. The Company held approximately
$49.9 million of restricted cash at December 31, 2002 in connection with the
standby letter of credit issued by the Company in 2002 for the unfavorable
judgment in the Applera patent litigation. Due to the March 2003 affirmed
judgment in the case, the Company paid $53.7 million to Applera in April 2003.
As a result of that payment, the Company will no longer be required to maintain
a restricted cash balance.
Regarding cash provided by (used in) financing activities, the Company
completed its $200.0 million stock repurchase program during the 2003 Period by
purchasing $100.6 million of the Companys common stock. On May 6, 2003 the
Companys Board of Directors authorized the Company to repurchase up to an
additional $400.0 million in outstanding common shares over a two-year period.
During the 2003 Period, the Company purchased 5,210 shares of its common stock
for $151.2 million. The Company believes that the share repurchase program is
beneficial to shareholders by increasing earnings per share via reducing the
outstanding shares through open market purchases. The Company repurchased
4,270 shares of its common stock for approximately $175.0 million during the
2004 Period. As of October 2, 2004, 11,810 shares have been purchased under the
2003 program for $399.0 million, effectively concluding the 2003 program. The
Company believes it has the resources to fund this effort as well as to pursue
acquisition opportunities in the future. From other financing activities, the
Company received $38.8 million of proceeds from the exercise of stock options
and the purchase of shares pursuant to employee stock purchase plans.
On October 25, 2004, the Companys Board of Directors authorized the
Company to repurchase up to $500.0 million in outstanding common shares over a
two-year period. The Company believes that the share repurchase program is
beneficial to shareholders by increasing earnings per share via reducing the
outstanding shares through open market purchases and that it has adequate
financial flexibility to fund these share repurchases given current cash and
debt levels.
The Company had net borrowings at the end of the 2004 Period of $392.7
million, primarily relating to borrowings in the U.S. under the Companys
$250.0 million Amended Senior Revolving Credit Agreement (the Amended Credit
Agreement) and $125.0 million Term Loan Facility (the Term Loan), for the
stock repurchases. Loans under the Amended Credit Agreement bear interest for
each calendar quarter at an annual rate equal to, at the Companys option, 1)
the applicable LIBOR rate plus a varying margin between 0.60% and 1.50% or 2)
the prime rate. At October 2, 2004, the interest rates, with respect to the
Amended Credit Agreement and Term Loan, ranged from 2.31% to 2.90%. At
December 31, 2003, the interest rates, with respect to the Amended Credit
Agreement and Term Loan, ranged from 1.78% to 1.95%. In May 2004, the Company
put in place an additional $25.0 million committed 364 day revolving credit
facility. Loans under the 364 day facility will bear interest at a floating
rate equal to, at the Companys option, 1) the applicable LIBOR rate plus 1.00%
or 2) prime rate. At October 2, 2004, the Company had borrowings of $24.0
million under this facility. The Company and its foreign subsidiaries had
available short-term lines of credit with related short-term borrowings at
October 2, 2004 and December 31, 2003 of $38.7 million and $21.3 million,
respectively.
The Company believes that the cash and cash equivalent balance of $471.2
million at the end of the 2004 Period and expected cash flow from operating
activities together with borrowings available from the Amended Credit Agreement
and other short-term domestic facilities will be sufficient to fund working
capital, capital spending requirements, authorized share repurchase amounts and
any adverse final determination of ongoing litigation for at least the next
twelve months. Management believes, as of the date of this report, that its
financial position along with expected future cash flows from earnings based on
historical trends and the ability to raise funds from a number of financing
alternatives and external sources, will be sufficient to meet future operating
and investing needs beyond the next twelve months.
Contractual Obligations and Commercial Commitments:
A summary of the Companys contractual obligations and commercial commitments
is included in the Companys annual report on Form 10-K for the year ended
December 31, 2003. The Company reviewed its contractual obligations and
commercial commitments as of October 2, 2004, and determined that there were no
significant changes.
The Company paid $42.9 million in the first quarter of 2004 for the
acquisition of NuGenesis Technologies Corporation (NuGenesis). As part of
this acquisition, the Company assumed a facility lease which is expected to
increase rent expense for 2004 by approximately $1.0 million. Capital
expenditures in 2004 are expected to be modestly higher than 2003 levels,
excluding the recent building purchase, due to expected capital needs to
support the growth in the business. The Company has commitments for lease
agreements, expiring at various dates through 2019, covering certain buildings,
office equipment and automobiles.
26
From time to time, the Company and its subsidiaries are involved in
various litigation matters arising in the ordinary course of business. The
Company believes that any outcome of such matters, either individually or in
the aggregate, will not be material to its financial position or results of
operations.
During the third fiscal quarter of 2004, the Company contributed $10.0
million to the Companys retirement plans. The Company does not expect to make
any additional contributions for the rest of the year.
The Company is not aware of any undisclosed risks and uncertainties,
including but not limited to product technical obsolescence, regulatory
compliance, protection of intellectual property rights, changes in
pharmaceutical industry spending, competitive advantages, current and pending
litigation, and changes in foreign exchanges rates, that are reasonably likely
to occur and could materially and negatively affect the Companys existing cash
balance or its ability to borrow funds from its 364 day credit facility. The
Company also believes there are no provisions in the Amended Credit Agreement,
its real estate leases, or its supplier and collaborative agreements that would
accelerate payments, require additional collateral or impair its ability to
continue to enter into critical transactions. 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 Companys annual report on Form 10-K for the year ended December 31,
2003, the Companys most critical accounting policies and estimates upon which
its financial status depends 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. The Company reviewed its policies and
determined that those policies remain the Companys most critical accounting
policies for the 2004 Period. The Company did not make any changes in those
policies during the 2004 Period.
Forward-Looking Information
Safe Harbor Statement under Private Securities Litigation Reform Act of 1995
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Companys market risk during the
nine months ended October 2, 2004. For additional information regarding the
Companys market risk as of December 31, 2003, refer to the Companys Form
10-K, Item 7a for the year ended December 31, 2003 as filed with the SEC.
27
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
(b) Changes in Internal Controls
Part II:
OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in the Companys legal proceedings during
the three months ended October 2, 2004. For additional information, refer to
the Companys Form 10-Q, Item 1 for the three months ended July 3, 2004 as
filed with the SEC.
Item 2. Unregistered Sales of Securities and Use of Proceeds
On October 25, 2004, the Companys Board of Directors authorized the Company to
repurchase up to $500.0 million in outstanding common shares over a two-year
period. As of November 4, 2004, the Company has repurchased 275,000 shares of
its common stock under this program for approximately $11.6 million (an average
of $42.30 per share), representing all of the shares repurchased under this
program. The total remaining amount of common stock the Company is authorized
to repurchase under this program is approximately $488.4 million.
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
28
29
WATERS CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
30
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
October 2, 2004
December 31, 2003
$
471,171
$
356,781
228,322
214,260
140,961
128,810
16,955
15,548
857,409
715,399
129,111
108,162
83,952
72,164
226,099
197,417
36,899
37,719
$
1,333,470
$
1,130,861
$
267,697
$
121,309
15,000
50,067
43,884
28,907
19,802
66,514
55,923
9,516
14,025
46,064
42,638
9,335
8,255
9,679
11,051
5,136
20,747
40,973
40,887
548,888
378,521
110,000
125,000
29,579
28,863
11,234
8,000
150,813
161,863
699,701
540,384
1,411
1,367
354,638
289,046
831,065
678,529
(598,870
)
(423,874
)
(175
)
45,700
45,409
633,769
590,477
$
1,333,470
$
1,130,861
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
Three Months Ended
October 2, 2004
September 27, 2003
$
190,517
$
173,039
74,291
57,342
264,808
230,381
74,235
68,332
36,774
26,713
111,009
95,045
153,799
135,336
71,967
66,743
17,001
15,106
1,228
1,179
(158
)
(135
)
5,160
63,761
47,283
(2,564
)
(312
)
3,009
1,862
64,206
48,833
12,266
12,419
$
51,940
$
36,414
$
0.43
$
0.30
119,519
122,240
$
0.42
$
0.29
122,597
126,709
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
Nine Months Ended
October 2, 2004
September 27, 2003
$
564,410
$
513,196
215,972
169,936
780,382
683,132
217,374
204,632
107,289
80,112
324,663
284,744
455,719
398,388
219,234
197,033
48,766
42,456
3,578
3,234
(9,277
)
1,500
5,031
(54
)
1,079
5,160
193,472
142,895
(6,329
)
(1,128
)
8,000
5,407
195,143
147,174
42,607
34,685
$
152,536
$
112,489
$
1.28
$
0.91
119,452
124,000
$
1.24
$
0.87
123,168
128,568
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
Nine Months Ended
October 2, 2004
September 27, 2003
$
152,536
$
112,489
5,031
207
1,320
4,037
735
5,160
(124
)
(1,068
)
16,288
16,538
13,757
8,670
26,560
8,531
(12,852
)
15,983
(15,940
)
1,238
(1,152
)
2,655
2,296
(7,024
)
9,645
(25,707
)
7,105
6,761
(15,611
)
(60,120
)
4,213
171
190,965
91,363
(47,381
)
(26,988
)
(42,369
)
(35,204
)
1,183
49,944
(89,750
)
(11,065
)
146,388
178,445
38,845
16,309
(174,996
)
(251,808
)
882
(3,236
)
11,119
(60,290
)
2,056
4,800
114,390
24,808
356,781
263,312
$
471,171
$
288,120
Table of Contents
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company has five stock-based compensation plans. The Company uses the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion (APB) 25, Accounting for Stock Issued to Employees, and related
interpretations, including Financial Interpretation (FIN) 44, Accounting for
Certain Transactions Involving Stock Compensation, for its plans. No
compensation expense has been recognized for its fixed employee stock option
plans and its employee stock purchase plan since all stock option awards are
granted with the exercise price at the current fair value of the Companys
common stock as of the date of the award. The cost of time-based restricted
stock awards is initially recorded as deferred compensation and expensed over
the respective vesting period. Stock-based compensation expense recorded,
related to restricted stock awards, was immaterial for the three months and
nine months ended October 2, 2004 and September 27, 2003.
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company accrues estimated product warranty costs at the time of sale, which
are included in cost of sales in the consolidated statements of operations.
While the Company engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its component
supplies, the Companys warranty obligation is affected by product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. The amount of the accrued warranty liability is based on
historical information such as past experience, product failure rates, number
of units repaired and estimated costs of material and labor. The liability is
reviewed for reasonableness at least quarterly.
Balance
Accruals for
Settlements
Balance
December 31, 2003
Warranties
Made
October 2, 2004
$
11,051
$
13,746
$
(15,118
)
$
9,679
On June 25, 2002, the Companys 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 ended March 29, 2003, the Company
purchased 4,399 shares of its common stock for $100.6 million, thus completing
its $200.0 million stock buyback program. The total shares purchased under
this program were 8,477.
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
October 2, 2004
December 31, 2003
$
50,245
$
41,768
12,223
14,031
78,493
73,011
$
140,961
$
128,810
In February 2004, the Company acquired all of the capital stock of NuGenesis
Technologies Corporation (NuGenesis), a company headquartered in Westborough,
Massachusetts, for approximately $42.9 million in cash. NuGenesis develops and
markets the NuGenesis® Scientific Data Management System (SDMS).
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Balance
Amounts
Utilization
October 2, 2004
$
660
$
660
400
(323
)
77
$
1,060
$
(323
)
$
737
In July 2003, the Company acquired all of the capital stock of Creon Lab
Control AG (Creon), a company headquartered in Cologne, Germany, for
approximately $16.3 million in cash. Creon specializes in Laboratory
Information Management Software (LIMS) solutions.
On January 15, 2003, the Company acquired the worldwide rheometry business of
Rheometric Scientific, Inc. (Rheometrics) for
approximately $16.5 million in cash. This transaction was accounted for under
the purchase method of accounting and the results of operations of Rheometrics
have been included in the consolidated results of the Company from the
acquisition date. This business was integrated into the existing worldwide TA
operations. The purchase price of the acquisition was allocated to tangible
and intangible assets and assumed liabilities based on their estimated fair
values.
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
$
3,932
1,784
15,007
5,450
679
26,852
3,046
6,408
885
10,339
$
16,513
During the nine months ended October 2, 2004, the Company acquired various
tangible and intangible assets of certain Asian distributors totaling
approximately $1.4 million. In the first quarter of 2003, the Company made
similar acquisitions in Asia and Ireland totaling approximately $2.9 million.
Three months ended
Nine months ended
Three months ended
Nine months ended
October 2, 2004
October 2, 2004
September 27, 2003
September 27, 2003
$
264,808
$
781,698
$
235,285
$
702,217
51,940
149,671
40,918
114,536
0.43
1.25
0.33
0.92
0.42
1.22
0.32
0.89
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PE Corporation (since renamed Applera Corporation), MDS, Inc. and Applied
Biosystems/MDS Sciex (the Plaintiffs) 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 Court) on February
18, 2000. The Plaintiffs alleged 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 Instruments.
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company filed suit in the United States 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 United States 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. In Germany, France and England, HP and its
successor, Agilent Technologies Deutschland GmbH, have brought an action
alleging that certain features of the Alliance pump may infringe the HP
patents. In England, the Court of Appeal has found the HP patent valid and
infringed. The Companys petitions for leave to appeal to the House of Lords
were denied. A trial on damages was scheduled for November 2004. In March 2004,
Agilent Technologies GmbH brought a new action against the Company alleging
that certain features of the Alliance pump continue to infringe the HP patents.
The Company believes it has meritorious defenses to this new action. At a
hearing held in the U.K. on June 8, 2004, the U.K. court postponed the
previously scheduled November 2004 damages trial until March 2005. Instead,
the court scheduled the trial in the new action for November 2004. In France,
the Paris District Court has found the HP patent valid and infringed by the
Alliance pump. The Company appealed the French decision and on April 12, 2004,
the French appeals court affirmed the Paris District Courts finding of
infringement. The Company has filed a further appeal in the case. In the German
case, a German court has found the patent infringed. The Company has appealed
the German decision and believes it has meritorious defenses.
The Company, through its subsidiary TA, asserted a claim against The
Perkin-Elmer Corporation (PE) alleging patent infringement of three patents
owned by TA (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 TA and enjoined PE
from infringing the TAI patents. PE appealed the District Court judgment in
favor of TA to the federal appellate court. The District Courts judgment,
with respect to PEs infringement of the TAI patents, was affirmed. The
District Courts judgment with respect to TAs non-infringement of the PE
patent was reversed and remanded to the District Court for further proceedings.
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
In January 2004, the Company initiated a restructuring effort to realign its
personnel between various support functions and field sales and service
organizations around the world. As a result, 70 employees were to be
terminated, all of which had left the Company as of October 2, 2004. The
provision of $2.1 million represents costs incurred, including severance costs,
for the 70 people and other directly related incremental costs of this
realignment effort.
Balance
Reserve
Balance
December 31, 2003
Charges
Utilization
Reversals
October 2, 2004
$
$
1,968
$
(1,968
)
$
$
115
(115
)
$
$
2,083
$
(2,083
)
$
$
In July 2002, the Company took action to restructure and combine the Companys
field sales, service and distribution organizations of its Micromass and HPLC
operations. In May 2003, the Company took action to restructure and combine
the Companys Micromass and HPLC manufacturing operations. The objective of
these integrations was to leverage the strengths of both divisions and align
and reduce operating expenses. The integration efforts impacted the U.S.,
Canada, continental Europe and the United Kingdom. Approximately 55 employees
were to be terminated, all of which had left the Company as of October 2, 2004.
In addition, the Company committed to closing two sales and distribution
facilities, both of which were closed as of October 2, 2004. During the nine
months ended October 2, 2004, the Company reversed approximately $2.2 million
in restructuring accruals, primarily attributable to a change in plans with
respect to two facilities previously selected for closure and distributor
contract settlements being less than previously estimated.
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended October 2, 2004
Income
Shares
Per Share
(Numerator)
(Denominator)
Amount
$
51,940
119,519
$
0.43
2,345
733
$
51,940
122,597
$
0.42
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine months ended October 2, 2004
Income
Shares
Per Share
(Numerator)
(Denominator)
Amount
$
152,536
119,452
$
1.28
2,168
1,548
$
152,536
123,168
$
1.24
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months
Three Months
Nine Months
Nine Months
Ended
Ended
Ended
Ended
October 2,
September 27,
October 2,
September 27,
Components of Net Periodic Pension Cost
2004
2003
2004
2003
$
1,383
$
1,085
$
4,149
$
3,255
847
807
2,541
2,421
(743
)
(707
)
(2,229
)
(2,121
)
(25
)
(25
)
(75
)
(75
)
212
99
636
297
$
1,674
$
1,259
$
5,022
$
3,777
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Table of Contents
Table of Contents
Sales for the 2004 Quarter and the 2004 Period were $264.8 million and $780.4
million, respectively, compared to $230.4 million for the 2003 Quarter and
$683.1 million for the 2003 Period, an increase of 15% for the quarter and 14%
for the period. Currency translation increased reported sales growth in the
2004 Quarter and 2004 Period by 4% and 5%, respectively, primarily due to the
strengthening of the Euro, British Pound, Japanese Yen and Canadian dollar
against the U.S. dollar. Product sales were $190.5 million and $564.4 million
in the 2004 Quarter and 2004 Period, respectively, compared to $173.0 million
and $513.2 million in the 2003 Quarter and 2003 Period, increases of 10% both
for the quarter and period. The increase in product sales, aside from the
effect of foreign currency translation, is primarily due to the continued
strength of the HPLC, MS and TA sales growth in the 2004 Quarter and Period,
the recent launch of the ACQUITY UPLC system and the impact of acquired
businesses. Service sales were $74.3 million and $216.0 million in the 2004
Quarter and 2004 Period, respectively, compared to $57.3 million and $169.9
million in the 2003 Quarter and 2003 Period, an increase of 30% for the quarter
and 27% for the period. The increase, aside from the effect of foreign
currency translation, is primarily attributed to growth in the Companys
instrument installed base and sales of service contracts, including the effect
of the Companys recent acquisitions.
Gross profit for the 2004 Quarter and 2004 Period was $153.8 million and $455.7
million, respectively, compared to $135.3 million and $398.4 million for the
2003 Quarter and 2003 Period, respectively, increases of 14% for the quarter
and period. Gross profit as a percentage of sales decreased to 58.1% in the
2004 Quarter from 58.7% in the 2003 Quarter. Gross profit as a percentage of
sales increased to 58.4% in the 2004 Period from 58.3% in the 2003 Period.
While the Company continues to benefit from lower costs resulting from material
and manufacturing supply chain cost reduction programs particularly in the HPLC
product line, in the 2004 Quarter the Company experienced a decline in gross
profit percentage as a result of additional service resources added to the
Waters division and Laboratory Informatics service businesses in support of the
service product line growth. In addition, within mass spectrometry there was a
product mix shift away from the high margin Q-Tof product line. For the 2004
Period, the slight increase in gross profit percentage is a result of the
continuing manufacturing cost reductions and the impact of currency translation
offset by the costs of additional service resources.
Table of Contents
Selling and administrative expenses for the 2004 Quarter and 2004 Period were
$72.0 million and $219.2 million, respectively, compared to $66.7 million for
the 2003 Quarter and $197.0 million for the 2003 Period. As a percentage of
sales, selling and administrative expenses decreased to 27.2% for the 2004
Quarter and 28.1% for the 2004 Period compared to 29.0% in the 2003 Quarter and
28.8% in the 2003 Period. The Company has benefited from leveraging its field
sales and support workforce and related overhead costs. The $5.3 million or 8%
increase in total selling and administrative expenses for the 2004 Quarter
included an increase of approximately $2.0 million as a result of currency
translation and $2.0 million from the Laboratory Informatics acquisitions.
Annual merit increases effective April 2004 across most divisions, other
headcount additions and related fringe benefits and indirect costs, offset by
reductions in legal patent litigation expenses accounted for approximately $1.3
million of the increase over the 2003 Quarter. The $22.2 million or 11%
increase in total selling and administrative expenses for the 2004 Period
included an increase of approximately $8.7 million as a result of currency
translation and $8.6 million from the Laboratory Informatics acquisitions.
Annual merit increases effective in April of both years across most divisions,
other headcount additions and related fringe benefits and indirect costs,
offset by reductions in legal patent litigation expenses, accounted for
approximately $4.9 million of the increase over the 2003 Period.
Research and development expenses were $17.0 million for the 2004 Quarter and
$48.8 million for the 2004 Period compared to $15.1 million for the 2003
Quarter and $42.5 million for the 2003 Period, an increase of 13% for the
quarter and 15% for the period. Research and development expenses increased
$1.9 million for the 2004 Quarter and $6.3 million for the 2004 Period due to
the effects of currency translation and the inclusion of acquisitions,
specifically Laboratory Informatics, and development of new and improved HPLC,
mass spectrometry, thermal analysis and rheometry products.
The Company recorded the benefit of a litigation judgment in the second quarter
of 2004 in the amount of $17.1 million and a provision of $7.8 million in the
first quarter of 2004. The benefit received in the 2004 Period was related to
the conclusion of the Companys litigation with Perkin-Elmer. The provision in
the 2004 Period is related to the ongoing patent infringement suit with
Hewlett-Packard. There were no charges incurred in the 2003 Quarter and 2003
Period related to these cases. The Company recorded a $1.2 million charge in
the 2003 Period for a previously disclosed environmental matter concerning the
Companys Taunton facility.
The Company recorded a $5.0 million charge relating to the loss on sale of the
inorganic mass spectrometry product line in the 2003 Period. There was no such
charge in the 2004 Period.
2004 Restructuring:
In January 2004, the Company initiated a restructuring effort to realign its
personnel between various support functions and field sales and service
organizations around the world. As a result, 70 employees were terminated, all
of which had left the Company as of October 2, 2004. The provision of $2.1
million represents costs incurred, including severance costs, for the 70 people
and other directly related incremental costs of this realignment effort.
Balance
Reserve
Balance
December 31, 2003
Charges
Utilization
Reversals
October 2, 2004
$
$
1,968
$
(1,968
)
$
$
115
(115
)
$
$
2,083
$
(2,083
)
$
$
Table of Contents
In July 2002, the Company took action to restructure and combine the Companys
field sales, service and distribution organizations of its Micromass and HPLC
operations. In May 2003, the Company took action to restructure and combine
the Companys Micromass and HPLC manufacturing operations. The objective of
these integrations is to leverage the strengths of both divisions and align and
reduce operating expenses. The integration efforts impacted the U.S., Canada,
continental Europe and the United Kingdom. Approximately 55 employees were
terminated, all of which had left the Company as of October 2, 2004. In
addition, the Company committed to closing two sales and distribution
facilities, both of which were closed as of October 2, 2004. During the nine
months ended October 2, 2004, the Company reversed approximately $2.2 million
in restructuring accruals, primarily attributable to a change in plans with
respect to two facilities previously selected for closure and distributor
contract settlements being less than previously estimated.
Interest expense was $2.6 million for the 2004 Quarter and $6.3 million for the
2004 Period, compared to $0.3 million for the 2003 Quarter and $1.1 million for
the 2003 Period. Interest expense for the 2003 Period included an adjustment
of an estimate for interest expense, due to a reduction of $0.9 million
relating to the final calculation of interest expense paid in connection with
the Applera litigation. Excluding this change in estimate, interest expense for
the 2003 Period would have been $2.0 million. The increase for the quarter and
the adjusted increase for the period are due primarily to interest expense on
additional borrowings against the Companys credit facility to fund the stock
repurchase program.
Interest income was $3.0 million for the 2004 Quarter and $8.0 million for the
2004 Period, compared to $1.9 million for the 2003 Quarter and $5.4 million for
the 2003 Period. The increase in interest income for the 2004 Quarter and the
2004 Period is primarily attributed to increases in the Companys cash balances
and the recording of $0.2 million in the 2004 Period for post-judgment interest
income from the settlement of the litigation with Perkin-Elmer.
The Companys effective tax rates for the three months ended October 2, 2004
and September 27, 2003, were 19.1% and 25.4%, respectively. The Company
lowered its year-to-date effective tax rate from 22% to 21% in the three months
ended October 2, 2004, excluding the tax effect of certain net litigation and
restructuring credits. This resulted in an effective tax rate of 19.1% in the
quarter ended October 2, 2004 reflecting the year-to-date change. The change was deemed appropriate
based on managements assessment of profitability in international
jurisdictions with lower effective tax rates. The effective tax rate for the
three months ended September 27, 2003 was impacted by the expensed in-process
research and development charge not being tax deductible.
Table of Contents
Nine Months Ended
October 2, 2004
September 27, 2003
$
152,536
$
112,489
30,045
25,208
26,560
8,531
(12,852
)
15,983
(15,940
)
1,238
9,645
(25,707
)
7,105
6,761
(15,611
)
(60,120
)
9,477
6,980
190,965
91,363
(89,750
)
(11,065
)
11,119
(60,290
)
2,056
4,800
$
114,390
$
24,808
Table of Contents
Table of Contents
The statements included in this quarterly report on Form 10-Q may contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, (the Exchange Act) regarding future results and
events, including statements regarding expected financial results, future
growth and customer demand and uncertainty relating to patent litigation that
involve a number of risks and uncertainties. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed
forward-looking statements. Without limiting the foregoing, the words,
believes, anticipates, plans, expects, intends, appears,
estimates, projects, and similar expressions are intended to identify
forward-looking statements. The Companys actual future results may differ
significantly from the results discussed in the forward-looking statements
within this quarterly report for a variety of reasons, including and without
limitation, inability of the Company to effect purchases of Company stock at
prices or on terms acceptable to the Company, or as a result of market
conditions or the restrictions, if any, placed on trading in the Companys
stock, shipments of new product introductions expected in the upcoming
quarters, such as the ACQUITY UPLC and tandem quadrupole systems, loss of
market share through competition, introduction of competing products by other
companies, pressures on prices from competitors and/or customers, the outcome
of ongoing patent litigation, regulatory obstacles to new product
introductions, lack of acceptance of new products, changes in the demands of
the Companys healthcare and pharmaceutical company customers, changes in the
healthcare market and the pharmaceutical industry, changes in the distribution
of the Companys products, the availability of component parts from suppliers,
and foreign exchange fluctuations. Such factors and others are discussed more
fully in the section entitled Risk Factors of the Companys annual report on
Form 10-K for the year ended December 31, 2003, as filed with the Securities
and Exchange Commission (the SEC), which Risk Factors discussion is
incorporated by reference in this quarterly report. The forward-looking
statements included in this quarterly report represent the Companys estimates
or views as of the date of this quarterly report and should not be relied upon
as representing the Companys estimates or views as of any date subsequent to
the date of this quarterly report. The Company specifically disclaims any
obligation to update these forward-looking statements in the future.
Table of Contents
The Companys management, with the participation of the Companys chief
executive officer and chief financial officer, evaluated the effectiveness of
the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the
Exchange Act)) as of the end of the period covered by this quarterly report
on Form 10-Q. Based on this evaluation, the Companys chief executive officer
and chief financial officer concluded that the Companys disclosure controls
and procedures were (1) designed to ensure that material information relating
to the Company, including its consolidated subsidiaries, is made known to the
Companys chief executive officer and chief financial officer by others within
those entities, particularly during the period in which this report was being
prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms.
No change in the Companys internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the three months ended October 2, 2004 that has materially affected, or
is reasonably likely to materially affect, the Companys internal control over
financial reporting.
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
Table of Contents
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.
Form of Director Stock Option Agreement
Form of Director Restricted Stock Agreement
Form of Executive Officer Stock Option Agreement
Table of Contents
Date: November 10, 2004
Waters Corporation
/s/ John Ornell
John Ornell
Authorized Officer and Vice President,
Finance and Administration and Chief
Financial Officer
Exhibit 10.27
WATERS CORPORATION
2003 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
THIS AGREEMENT dated as of <<GRANT DATE>> between Waters Corporation, a corporation organized under the laws of the State of Delaware (the "Company"), and <<NAME>> (the "Optionee"), a director of Waters Corporation.
1. GRANT OF OPTION. Pursuant and subject to the Company's 2003 Equity Incentive Plan (as the same may be amended from time to time, the "Plan"), the Company grants to you, the Optionee, an option (the "Option") to purchase from the Company all or any part of a total of <<OPTIONS GRANTED>> shares (the "Optioned Shares") of the common stock, par value $.01 per share, in the Company (the "Stock"), at a price of $<<OPTION PRICE>> per share. The Grant Date of this Option is as of <<GRANT DATE>>.
2. CHARACTER OF OPTION. This Option is not intended to be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
3. DURATION OF OPTION. Subject to the following sentence, this Option shall expire at 5:00 p.m. ET on the 10th anniversary of the Grant Date. However, if your employment or other association with the Company and its Affiliates ends before that date, this Option shall expire at 5:00 p.m. ET on the date specified in the preceding sentence or, if earlier, the date specified in whichever of the following applies :
(a) If the termination of your employment or other association is on account of your retirement, death or disability, the first anniversary of the date your employment or other association ends.
(b) If the termination of your employment or other association is due to any other reason, the first anniversary of the date your employment or other association ends.
4. EXERCISE OF OPTION.
No portion of the Option is vested as of the date hereof. For the next five years, on each anniversary of the date hereof, 20% of the Option granted hereunder will vest and such vested portion of the Option will be exercisable. Subject to the terms of the Plan, however, during any period that this Option remains outstanding after your employment or other association with the Company and its Affiliates ends, you may exercise it only to the extent it was exercisable immediately prior to the end of your employment or other association.
(b) The procedure for exercising this Option is described in
Section 7.1(g) of the Plan. You may pay the exercise price due on exercise by
(i) cash or check payable to the order of the Company in an amount equal to the
exercise price of the shares to be purchased
or, (ii) to the extent permitted by applicable law, through and under the terms and conditions of any formal cashless exercise program authorized by the Company.
5. TRANSFER OF OPTION. You may not transfer this Option except by will or the laws of descent and distribution, and, during your lifetime, only you may exercise this Option.
6. INCORPORATION OF PLAN TERMS. This Option is granted subject to all of the applicable terms and provisions of the Plan, including but not limited to the provision for acceleration of vesting of this Option set forth in Section 8 (Adjustment Provision) and the limitations on the Company's obligation to deliver Optioned Shares upon exercise set forth in Section 9 (Settlement of Awards).
7. MISCELLANEOUS. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof and shall be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guardian, or other legal representative of you. Capitalized terms used but not defined herein shall have the meaning assigned under the Plan. This Agreement may be executed in one or more counterparts all of which together shall constitute but one instrument.
8. TAX CONSEQUENCES. The Company makes no representation or warranty as to the tax treatment to you of your receipt or exercise of this Option or upon your sale or other disposition of the Optioned Shares. You should rely on your own tax advisors for such advice.
IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument as of the date first above written.
WATERS CORPORATION
By: Douglas A. Berthiaume
Title: Chairman, President and Chief Executive Officer
Electronic Signature of Optionee
Exhibit 10.28
WATERS CORPORATION
2003 EQUITY INCENTIVE PLAN
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT dated as of <<GRANT DATE>> between Waters Corporation, a corporation organized under the laws of the State of Delaware (the "Company"), and <<NAME>> (the "Participant"), a director of Waters Corporation.
1. ISSUANCE OF COMMON STOCK. Pursuant and subject to the Company's 2003 Equity Incentive Plan (as the same may be amended from time to time, the "Plan"), the Company hereby agrees to issue to the Participant without cash consideration, and the Participant agrees to receive from the Company, an aggregate of <<SHARES>> shares (the "Restricted Shares") of the common stock, par value $.01 per share, in the Company (the "Stock"). The date of this Restricted Stock Award (the "Award") is as of <<GRANT DATE>> (the "Award Date"). Upon receipt by the Company of a copy of this Agreement duly executed and completed by the Participant, the Company shall issue in the name of Participant, but hold in escrow, a duly executed certificate evidencing the Restricted Shares endorsed with the legend set forth in Section 7.2(b) of the Plan
2. RESTRICTIONS ON TRANSFER. None of the Restricted Shares or any
beneficial interest therein shall be sold, transferred, assigned, pledged,
encumbered or otherwise disposed of in any way at any time (including, without
limitation, by operation of law) other than (i) to the Company or its assignees
or (ii) to any other person on (but only upon) death by will, bequest or
operation of law (a "Permitted Transferee"). All Permitted Transferees of
Restricted Shares or any interest therein shall be required as a condition of
such transfer to agree in writing, in form satisfactory to the Company, that
they shall receive and hold such Restricted Shares or interest subject to the
provisions of this Agreement. Any sale, transfer, assignment, pledge,
encumbrance or other disposition of the Restricted Shares other than in
accordance with this section shall be void. The Company shall not be required
(i) to transfer on its books any Restricted Shares sold, transferred or
otherwise disposed of in violation of this section or (ii) to treat as owner of
any Restricted Shares, or to pay dividends in respect of Restricted Shares to,
any person purporting to have acquired Restricted Shares or any beneficial
interest therein unless such Restricted Shares or interest were acquired in
compliance with the provisions of this section.
3. FORFEITURE AND VESTING OF RESTRICTED SHARES. In the event of the termination of employment or other association with the Company of the Participant by the Company and its affiliates at any time before the <<VESTING DATE>> anniversary of the Award Date, the Restricted Shares shall be immediately forfeited by the Participant and each Permitted Transferee and the Company shall immediately reacquire from the Participant and each Permitted Transferee all of the Restricted Shares (subject to adjustment as provided in the Plan in the event of any stock split or other corporate action affecting the Restricted Shares) for no cash consideration. The Restricted Shares, if not theretofore forfeited, shall fully vest upon the <<VESTING DATE>> anniversary of the Award Date and shall not thereafter be subject to forfeiture.
4. INCORPORATION OF PLAN TERMS. This Award is granted subject to all of the applicable terms and provisions of the Plan, including but not limited to the provision for acceleration of vesting of these Restricted Shares set forth in Section 8 (Adjustment Provisions) and the limitations on the Company's obligation to deliver Restricted Shares set forth in Section 9 (Settlement of Awards).
5. MISCELLANEOUS. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof and shall be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guardian, or other legal representative of you. Capitalized terms used but not defined herein shall have the meaning assigned under the Plan. This Agreement may be executed in one or more counterparts all of which together shall constitute but one instrument.
6. TAX CONSEQUENCES. The Company makes no representation or warranty as to the tax treatment to the Participant or any Permitted Transferee of the receipt of this Award or upon the sale or other disposition of the Restricted Shares. The Participant should rely on his/her own tax advisors for such advice. In the event that the Participant makes an election under Section 83(b) of the Internal Revenue Code of 1986, the Participant will promptly file a copy of the election with the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument as of the date first above written.
WATERS CORPORATION
By: Douglas A. Berthiaume _________________________________________ Title: Chairman, President and Electronic Signature of Participant Chief Executive Officer _________________________________________ <<NAME>> |
Exhibit 10.29
WATERS CORPORATION
2003 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
THIS AGREEMENT dated as of <<GRANT DATE>> between Waters Corporation, a corporation organized under the laws of the State of Delaware (the "Company"), and <<NAME>> (the "Optionee"), an employee of Waters Corporation.
1. GRANT OF OPTION. Pursuant and subject to the Company's 2003 Equity Incentive Plan (as the same may be amended from time to time, the "Plan"), the Company grants to you, the Optionee, an option (the "Option") to purchase from the Company all or any part of a total of <<OPTIONS GRANTED>> shares (the "Optioned Shares") of the common stock, par value $.01 per share, in the Company (the "Stock"), at a price of $<<OPTION PRICE>> per share. The Grant Date of this Option is as of <<GRANT DATE>>.
2. CHARACTER OF OPTION. This Option is not intended to be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
3. DURATION OF OPTION. Subject to the following sentence, this Option shall expire at 5:00 p.m. ET on the 10th anniversary of the Grant Date. However, if your employment or other association with the Company and its Affiliates ends before that date, this Option shall expire at 5:00 p.m. ET on the date specified in the preceding sentence or, if earlier, the date specified in whichever of the following applies :
(a) If the termination of your employment or other association is on account of your retirement, death or disability, the first anniversary of the date your employment or other association ends.
(b) If the termination of your employment or other association is due to any other reason, the first anniversary of the date your employment or other association ends.
4. EXERCISE OF OPTION.
No portion of the Option is vested as of the date hereof. Except as set forth in the Change of Control/Severance Agreement dated as of February 24, 2004 between the Company and the Optionee (the "Change of Control/Severance Agreement"), for the next five years, on each anniversary of the date hereof, 20% of the Option granted hereunder will vest and such vested portion of the Option will be exercisable. However, during any period that this Option remains outstanding after your employment or other association with the Company and its Affiliates ends, you may exercise it only to the extent it was exercisable immediately prior to the end of your employment or other association.
(b) The procedure for exercising this Option is described in
Section 7.1(g) of the Plan. You may pay the exercise price due on exercise by
(i) cash or check payable to the
order of the Company in an amount equal to the exercise price of the shares to be purchased or, (ii) to the extent permitted by applicable law, through and under the terms and conditions of any formal cashless exercise program authorized by the Company.
5. TRANSFER OF OPTION. The Option granted hereunder may be transferred or assigned by Optionee to such Optionee's family member in accordance with the provisions of Section 7.1(f). of the Plan.
6. INCORPORATION OF PLAN TERMS. This Option is granted subject to all of the applicable terms and provisions of the Plan, including but not limited to the provision for acceleration of vesting of this Option set forth in Section 8 (Adjustment Provision) and the limitations on the Company's obligation to deliver Optioned Shares upon exercise set forth in Section 9 (Settlement of Awards).
7. MISCELLANEOUS. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof and shall be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guardian, or other legal representative of you. Capitalized terms used but not defined herein shall have the meaning assigned under the Plan. This Agreement may be executed in one or more counterparts all of which together shall constitute but one instrument.
8. TAX CONSEQUENCES. The Company makes no representation or warranty as to the tax treatment to you of your receipt or exercise of this Option or upon your sale or other disposition of the Optioned Shares. You should rely on your own tax advisors for such advice.
IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument as of the date first above written.
WATERS CORPORATION
By: Douglas A. Berthiaume
Title: Chairman, President and Chief Executive Officer
EMPLOYEE
Electronic Signature of Optionee
Exhibit 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Douglas A. Berthiaume, the Chief Executive Officer of Waters Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waters Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 10, 2004 /s/ Douglas A. Berthiaume -------------------------------- Douglas A. Berthiaume Chief Executive Officer |
Exhibit 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John Ornell, the Chief Financial Officer of Waters Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waters Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 10, 2004 /s/ John Ornell ----------------------------- John Ornell Chief Financial Officer |
Exhibit 32.1
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
The certification set forth below is hereby made solely for the purpose of satisfying the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 and may not be relied upon or used for any other purposes.
In connection with the Quarterly Report of Waters Corporation (the
"Company") on Form 10-Q for the period ended October 2, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas
A. Berthiaume, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge: (1) the Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and (2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Date: November 10, 2004 By: /s/ Douglas A. Berthiaume --------------------------------- Douglas A. Berthiaume Chief Executive Officer |
Exhibit 32.2
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
The certification set forth below is hereby made solely for the purpose of satisfying the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 and may not be relied upon or used for any other purposes.
In connection with the Quarterly Report of Waters Corporation (the
"Company") on Form 10-Q for the period ended October 2, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, John
Ornell, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge: (1) the Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Date: November 10, 2004 By: /s/John Ornell -------------------------------- John Ornell Chief Financial Officer |