SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________TO_______.
Commission File Number: 01-14010
WATERS CORPORATION
(Exact name of registrant as specified in the charter)
DELAWARE 13-3668640
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 478-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes (X) No ( )
Number of shares outstanding of the Registrant's common stock as of August 11, 1999: 61,358,175.
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the three months ended June 30, 1999
and 1998 4
Consolidated Statements of Operations for the six months ended June 30, 1999
and 1998 5
Consolidated Statements of Cash Flows for the six months ended June 30, 1999
and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,032 $ 5,497
Accounts receivable, less allowances for doubtful accounts of
$3,273 and $2,966 at June 30, 1999 and December 31, 1998,
respectively 122,502 136,806
Inventories 80,179 80,281
Other current assets 29,824 29,040
--------- ---------
Total current assets 234,537 251,624
Property, plant and equipment, net of accumulated depreciation
of $49,925 and $45,421 at June 30, 1999 and December 31,
1998, respectively 89,074 89,029
Other assets 60,088 59,554
Goodwill, less accumulated amortization of $13,798 and $12,281 at
June 30, 1999 and December 31, 1998, respectively 173,603 177,494
--------- ---------
Total assets $ 557,302 $ 577,701
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long term debt $ 5,628 $ 4,259
Accounts payable 37,696 36,510
Deferred revenue and customer advances 28,518 29,706
Other current liabilities 108,679 115,098
--------- ---------
Total current liabilities 180,521 185,573
Long term debt 144,391 218,250
Redeemable preferred stock 9,548 9,058
Other liabilities 6,391 14,701
--------- ---------
Total liabilities 340,851 427,582
Stockholders' Equity:
Common stock (par value $0.01, 100,000 shares authorized, 61,312 and
60,594 shares issued and outstanding at June 30,
1999 and December 31, 1998, respectively) 613 606
Additional paid-in capital 188,174 174,414
Deferred stock option compensation (276) (386)
Accumulated earnings (deficit) 30,183 (21,697)
Accumulated other comprehensive (loss) (2,243) (2,818)
--------- ---------
Total stockholders' equity 216,451 150,119
--------- ---------
Total liabilities and stockholders' equity $ 557,302 $ 577,701
--------- ---------
--------- ---------
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The accompanying notes are an integral part of the consolidated financial statements.
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------------
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Net sales $172,280 $149,311
Cost of sales 63,712 55,848
---------- ----------
Gross profit 108,568 93,463
Selling, general and administrative expenses 55,537 51,952
Research and development expenses 9,021 8,246
Goodwill and purchased technology amortization 2,034 2,231
---------- ----------
Operating income 41,976 31,034
Interest expense, net 2,379 4,888
---------- ----------
Income from operations before income taxes 39,597 26,146
Provision for income taxes 10,691 6,033
---------- ----------
Net income 28,906 20,113
Less: accretion of and 6% dividend on preferred stock 245 240
---------- ----------
Net income available to common stockholders $ 28,661 $ 19,873
---------- ----------
---------- ----------
---------- ----------
Net income per basic common share $ 0.47 $ 0.33
---------- ----------
---------- ----------
Weighted average number of basic common shares 61,222 59,754
---------- ----------
Net income per diluted common share $ 0.43 $ 0.30
---------- ----------
---------- ----------
Weighted average number of diluted common shares and equivalents 66,167 67,038
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The accompanying notes are an integral part of the consolidated financial statements.
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
--------------------------------
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Net sales $332,642 $288,036
Cost of sales 124,334 107,768
Revaluation of acquired inventory - 16,500
---------- ----------
Gross profit 208,308 163,768
Selling, general and administrative expenses 110,041 101,940
Research and development expenses 17,707 16,618
Goodwill and purchased technology amortization 4,079 4,506
---------- ----------
Operating income 76,481 40,704
Interest expense, net 5,412 9,951
---------- ----------
Income from operations before income taxes 71,069 30,753
Provision for income taxes 19,189 10,396
---------- ----------
Net income 51,880 20,357
Less: accretion of and 6% dividend on preferred stock 489 479
---------- ----------
Net income available to common stockholders $ 51,391 $ 19,878
---------- ----------
---------- ----------
---------- ----------
Net income per basic common share $ 0.84 $ 0.33
---------- ----------
---------- ----------
Weighted average number of basic common shares 61,060 59,586
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Net income per diluted common share $ 0.78 $ 0.30
---------- ----------
---------- ----------
Weighted average number of diluted common shares and equivalents 66,014 66,680
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The accompanying notes are an integral part of the consolidated financial statements.
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
-----------------------------------------
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Cash flows from operating activities:
Net income $51,880 $20,357
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 12,938 13,138
Amortization of debt issuance costs 368 618
Compensatory stock option expense 110 110
Tax benefit related to stock option plans 9,353 4,927
Revaluation of acquired inventory - 16,500
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable 8,148 (2,748)
(Increase) in inventories (2,823) (11,200)
(Decrease) in accounts payable and other current liabilities (1,914) (5,069)
(Decrease) increase in deferred revenue and customer advances (216) 327
Other, net (1,960) (1,118)
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Net cash provided by operating activities 75,884 35,842
Cash flows from investing activities:
Additions to property, plant and equipment (8,817) (8,490)
Software capitalization and other intangibles (2,518) (3,112)
Business acquisition, net of cash acquired - (3,157)
Loans to officers 218 255
------- -------
Net cash (used in) investing activities (11,117) (14,504)
Cash flows from financing activities:
Net (repayment) of bank debt (72,490) (26,090)
Proceeds from stock plans 4,905 2,989
------- -------
Net cash (used in) financing activities (67,585) (23,101)
Effect of exchange rate changes on cash (647) 248
------- -------
Net change in cash and cash equivalents (3,465) (1,515)
Cash and cash equivalents at beginning of period 5,497 3,113
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Cash and cash equivalents at end of period $ 2,032 $ 1,598
------- -------
------- -------
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The accompanying notes are an integral part of the consolidated financial statements.
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
Waters Corporation ("Waters" or the "Company"), an analytical instrument manufacturer, is the world's largest manufacturer and distributor of high performance liquid chromatography ("HPLC") instruments, chromatography columns and other consumables, and related service. HPLC, the largest product segment of the analytical instrument market, is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. Through its TA Instruments, Inc. ("TAI") subsidiary, the Company is also the world's leader in thermal analysis, a prevalent and complementary technique used in the analysis of polymers. Through its Micromass Limited ("Micromass") subsidiary, the Company is also a market leader in the development, manufacture, and distribution of mass spectrometry ("MS") instruments, which are complementary products that can be integrated and used along with other analytical instruments, especially HPLC.
The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated. Certain amounts from prior years have been reclassified in the accompanying financial statements in order to be consistent with the current year's classifications.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the dates of the financial statements and (iii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
It is management's opinion that the accompanying interim financial statements reflect all adjustments (which are normal and recurring) necessary for a fair presentation of the results for the interim periods. The interim financial statements should be read in conjunction with the consolidated financial statements included in the Company's 10-K filing with the Securities and Exchange Commission for the year ended December 31, 1998.
2. INVENTORIES
Inventories are classified as follows:
June 30, December 31,
1999 1998
---- ----
Raw materials $28,636 $27,327
Work in progress 13,487 9,572
Finished goods 38,056 43,382
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Total Inventories $80,179 $80,281
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3. INCOME TAXES
The Company's effective tax rate for the three months ended June 30, 1999 and 1998, was 27% and 23%, respectively. The Company's effective tax rate for the six months ended June 30, 1999 and 1998, was 27% and 22%, respectively, before nondeductible, acquisition-related expenses.
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. EARNINGS PER SHARE
Basic and diluted EPS calculations are detailed as follows:
------------------------------------------------
Six Months Ended June 30, 1999
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- -----------
Net income $51,880
Less: Accretion of and 6% dividend on preferred stock 489
------------- --------------- -----------
Income per basic common share from operations $51,391 61,060 $ 0.84
------------- --------------- -----------
------------- --------------- -----------
Effect of dilutive securities:
Options outstanding 4,819
Options exercised 135
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Income per diluted common share from operations $51,391 66,014 $ 0.78
------------- --------------- -----------
------------- --------------- -----------
------------------------------------------------
Six Months Ended June 30, 1998
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- -----------
Net income $20,357
Less: Accretion of and 6% dividend on preferred stock 479
------------- --------------- -----------
Income per basic common share from operations $19,878 59,586 $ 0.33
------------- --------------- -----------
------------- --------------- -----------
Effect of dilutive securities:
Options outstanding 6,974
Options exercised 120
------------- --------------- -----------
Income per diluted common share from operations $19,878 66,680 $ 0.30
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Three Months Ended June 30, 1999
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- -----------
Net income $28,906
Less: Accretion of and 6% dividend on preferred stock 245
------------- --------------- -----------
Income per basic common share from operations $28,661 61,222 $ 0.47
------------- --------------- -----------
------------- --------------- -----------
Effect of dilutive securities:
Options outstanding 4,908
Options exercised 37
------------- --------------- -----------
Income per diluted common share from operations $28,661 66,167 $ 0.43
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WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------
Three Months Ended June 30, 1998
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- -----------
Net income $20,113
Less: Accretion of and 6% dividend on preferred stock 240
------------- --------------- -----------
Income per basic common share from operations $19,873 59,754 $ 0.33
------------- --------------- -----------
------------- --------------- -----------
Effect of dilutive securities:
Options outstanding 7,180
Options exercised 104
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Income per diluted common share from operations $19,873 67,038 $ 0.30
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For both the three month and six month periods ended June 30, 1999 and June 30, 1998, the Company had no stock option securities that were antidilutive.
5. COMPREHENSIVE INCOME
Comprehensive income details follow:
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
Net income $ 51,880 $ 20,357 $ 28,906 $ 20,113
Other comprehensive income (loss) 575 (241) (556) (282)
------------- ------------- -------------- -------------
Comprehensive income $ 52,455 $ 20,116 $ 28,350 $ 19,831
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6. BUSINESS SEGMENT INFORMATION
SFAS 131 establishes standards for reporting information about operating segments in annual financial statements of public business enterprises. The Company evaluated its business activities that are regularly reviewed by the Chief Executive Officer for which discrete financial information is available. As a result of this evaluation, the Company determined that it has three operating segments: Waters, TAI and Micromass.
Waters is in the business of manufacturing and distributing HPLC instruments, columns and other consumables, and related service; TAI is in the business of manufacturing and distributing thermal analysis and rheology instruments; and Micromass is in the business of manufacturing and distributing mass spectrometry instruments that can be integrated and used along with other analytical instruments, particularly HPLC. For all three of these operating segments within the analytical instrument industry; economic characteristics, production processes, products and services, types and classes of customers, methods of distribution, and regulatory environments are similar. Because of these similarities, the three segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the one reportable segment of the Company.
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. STOCK SPLIT
On February 25, 1999, the Board of Directors approved a two-for-one common stock split, in the form of a 100% stock dividend, contingent upon shareholder approval of a charter amendment increasing authorized common stock. At the Company's Annual Meeting on May 4, 1999, shareholders approved the charter amendment. Shareholders of record on May 27, 1999 received the stock dividend on or about June 10, 1999. Earnings per share amounts, after giving retroactive effect to the two-for-one stock split, are disclosed in the financial statements and the notes to the financial statements.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133. SFAS 137 amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, which was issued in June 1998 and was to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 137 defers the effective date of SFAS 133 to June 15, 2000. Earlier application is permitted. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. While management has not determined the impact of the new standard, it is not expected to be material to the Company.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES:
Net sales for the three month period ended June 30, 1999 (the "1999 Quarter")
and the six month period ended June 30, 1999 (the "1999 Period") were $172.3
million and $332.6 million, respectively, compared to $149.3 million for the
three month period ended June 30, 1998 (the "1998 Quarter") and $288.0 million
for the six month period ended June 30, 1998 (the "1998 Period"), an increase of
15% for the quarter and 15% for the period. Excluding the adverse effects of a
stronger U.S. dollar, net sales increased by 16% over the 1998 Quarter; however,
there was no impact over the 1998 Period. Pharmaceutical customer demand was
particularly strong and was generally broad-based across all geographies.
GROSS PROFIT: Gross profit for the 1999 Quarter and the 1999 Period was $108.6 million and $208.3 million, respectively, compared to $93.5 million for the 1998 Quarter and $163.8 million for the 1998 Period, an increase of $15.1 million or 16% for the quarter and $44.5 million or 27% for the period. Excluding the $16.5 million nonrecurring charge for revaluation of acquired inventory in the 1998 Period related to purchase accounting for the acquisition of Micromass, gross profit increased by 16% in the 1999 Period. Gross profit as a percentage of sales increased to 63.0% in the 1999 Quarter from 62.6% in the 1998 Quarter, primarily as a result of increased efficiencies in the Company's manufacturing operations and lower raw material costs. Gross profit as a percentage of sales remained 62.6% for the 1999 and 1998 Periods.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses for the 1999 Quarter and the 1999
Period were $55.5 million and $110.0 million, respectively, compared to $52.0
million for the 1998 Quarter and $101.9 million for the 1998 Period. As a
percentage of net sales, selling, general and administrative expenses decreased
to 32% for the 1999 Quarter from 35% for the 1998 Quarter and 33% for the 1999
Period from 35% for the 1998 Period as a result of higher sales volume and
expense controls. The $3.7 million or 7% increase for the quarter and $8.1
million or 8% increase for the period in total expenditures primarily resulted
from increased headcount required to support increased sales levels.
RESEARCH AND DEVELOPMENT EXPENSES:
Research and development expenses were $9.0 million for the 1999 Quarter and
$17.7 million for the 1999 Period, compared to $8.2 million for the 1998 Quarter
and $16.6 million for the 1998 Period, an increase of $0.8 million or 10% from
the 1998 Quarter and $1.1 million or 7% from the 1998 Period, respectively. The
Company continued to invest significantly in the development of new and improved
HPLC, thermal analysis, rheology, and mass spectrometry products.
GOODWILL AND PURCHASED TECHNOLOGY AMORTIZATION:
Goodwill and purchased technology amortization for the 1999 Quarter and the 1999
Period was $2.0 million and $4.1 million, respectively, compared to $2.2 million
for the 1998 Quarter and $4.5 million for the 1998 Period, a decrease of $0.2
million or 9% for the quarter and $0.4 million or 9% for the period.
OPERATING INCOME:
Operating income for the 1999 Quarter and the 1999 Period was $42.0 million and
$76.5 million, respectively, compared to $31.0 million for the 1998 Quarter and
$40.7 million for the 1998 Period, an increase of $11.0 million or 35% for the
quarter and $35.8 million or 88% for the period. Operating income for the 1998
Period included a $16.5 million nonrecurring acquisition related charge.
Excluding the revaluation of acquired inventory charge in 1998 in connection
with the Micromass acquisition, operating income was $57.2 million for the 1998
Period, resulting in a comparative $19.3 million or 34% increase for the 1999
Period. Waters improved operating income levels on the strength of sales growth,
volume leverage and continued focus on cost reduction in all operating areas.
INTEREST EXPENSE, NET:
Net interest expense decreased by $2.5 million or 51% for the quarter and $4.6
million or 46% for the period, from $4.9 million and $10.0 million in the 1998
Quarter and 1998 Period, respectively, to $2.4 million and $5.4 million in the
1999 Quarter and 1999 Period, respectively. The current quarter and period
decrease primarily reflected lower average debt levels as a result of repayments
from the Company's cash flow.
PROVISION FOR INCOME TAXES:
The Company's effective income tax rate, excluding the nonrecurring,
nondeductible charge related to the revaluation of acquired inventory in the
1998 Period, was 27% in the 1999 Period and 22% in the 1998 Period. The
Company's effective income tax rate was 27% in the 1999 Quarter and 23% in the
1998 Quarter. The 1999 tax rate primarily increased because remaining net
operating loss carryforwards were utilized in the 1998 Period.
NET INCOME:
Income for the 1999 Quarter and the 1999 Period was $28.9 million and $51.9
million, respectively, compared to $20.1 million for the 1998 Quarter and $20.4
million for the 1998 Period. Excluding the nonrecurring acquisition related
charge, the Company generated $36.9 million of income in the 1998 Period. The
improvement over the 1998 Period was a result of sales growth, productivity
improvement in all operating areas, and a decline in interest expense.
YEAR 2000
Year 2000 ("Y2K") issues concern the ability of information systems to properly recognize and process date-sensitive information beyond December 31, 1999.
The Company has been engaged in a concerted effort to ready its business systems and products in anticipation of Y2K. A special internal project team led by senior management was organized in 1997 in an attempt to ensure that all material business systems, instrument products and applications software are compliant by January 1, 2000. Currently, the companywide planning and inventory phases have been completed. The assessment phase was substantially completed by December 31, 1998, and included the examination of products, worldwide operations, manufacturing systems, business computer systems, manufacturing, warehousing and servicing equipment, network hardware and software, telephone systems, desktop application software, mainframe operating systems, and environmental operations. Currently, the Company believes that most of its internal systems and related software are likely to be Y2K compliant. The Company is continuing to examine its material software and systems for Y2K compliance and take corrective action to minimize any significant detrimental effects on operations.
The remediation and testing phases of the Company's systems and associated contingency planning have been substantially completed. Based on the results of remaining testing, the contingency planning will be completed prior to year end. The Company has no plans to engage in third party validation of its Y2K efforts. To date, approximately $10.75 million has been spent over the past four years in connection with bringing the Company's internal systems into compliance, primarily capital expenditures for entirely new business and communications systems which replaced predecessor systems. The remaining costs to fix Y2K problems are estimated at less than $0.25 million, including capital expenditures to replace certain predecessor capital items. These costs do not include any allocation for the time devoted by regular employees of the Company to addressing Y2K problems, as the Company does not separately track such time. The Company does not expect the costs relating to the Y2K remediation phase to have a material effect on the Company.
The Company has made public statements to customers regarding its state of Year 2000 readiness for its products; however, the possibility of product liability claims still exists. The Company also recognizes that Y2K disruptions in customer operations could result in reduced sales and cash flow and increased inventory or receivables. While these events are possible, the Company believes that its customer base is broad enough to minimize the effects of a single occurrence. To date, the Company has received communications from many of its major customers which indicate an awareness of Y2K issues.
The Company is in the process of obtaining certificates of compliance from its major systems vendors. Additionally, the Company is in the process of surveying its financial services, utilities, and communication providers, as well as its critical suppliers to ensure that they are compliant. Results so far have indicated that the majority of the Company's critical suppliers are actively addressing and resolving Y2K issues. Despite these efforts, however, interruption of supplier operations due to Y2K issues could potentially affect Company operations. The Company uses multiple suppliers, and, in some instances, maintains an inventory of parts and supplies, which may reduce the risks of interruption, but cannot eliminate the potential for disruption due to third party failure.
The Company currently has identified contingency alternatives for many elements of Year 2000 risk. The contingency planning is intended to be completed prior to year end. The plan will address customer problems as well as temporary remedies in the event of failure of Company or third party systems. The Company will continue to review its business interruption contingency plans as it completes its testing and remediation phases during the year. However, there can be no assurance that any contingency plans will prevent Y2K problems from occurring.
While the Company believes its efforts will provide reasonable assurance that material disruptions are not likely to occur due to internal failure, the potential for interruption still exists. Specifically, the Company and its subsidiaries could be materially adversely affected if utilities, private businesses and governmental entities with which they do business or that provide essential services are not Y2K compliant. The Company currently believes that the greatest risk of disruption in its businesses exists in certain international markets. Such interruptions could cause, among other things, temporary plant closings, delays in the delivery of products, delays in the receipt of supplies, invoice and collection errors, and inventory and supply obsolescence. Recovery under existing insurance policies may be available depending upon the circumstances of a Y2K related event.
The estimates and conclusions herein are based on management's best estimates of future events. Risks that could cause results to differ from these estimates and conclusions include the uncertainties involved in discovering and correcting the potential Y2K sensitive problems which could have a serious impact on specific facilities and the ability of suppliers and customers to bring their systems into Y2K compliance.
EURO CURRENCY CONVERSION
Several countries of the European Union will adopt the euro as their legal currency effective July 1, 2002. A transition period has been established from January 1, 1999 to July 1, 2002 during which companies conducting business in these countries may use the euro or their local currency. The Company has considered the potential impact of the euro conversion on pricing competition, its information technology systems, and currency risk and risk management. Currently, the Company does not expect that the euro conversion will result in any material increase in costs to the Company or have a material adverse effect on its business or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
During the 1999 Period, net cash provided by the Company's operating activities was $75.9 million, primarily as a result of net income for the period after adding back depreciation and amortization. In addition, the Company received $4.9 million of proceeds from the exercise of stock options. Primary uses of this cash flow during the period were $72.5 million of net bank debt repayment and $11.3 million of property, plant and equipment and software capitalization investment.
The Company believes that existing cash balances and current cash flow from operating activities together with borrowings available under the Bank Credit Agreement will be sufficient to fund working capital, capital spending and debt service requirements of the Company in the foreseeable future.
CAUTIONARY STATEMENT
Certain statements contained herein are forward looking. Many factors could cause actual results to differ from these statements, including, but not limited to, obsolescence resulting from the introduction of technologically advanced products by other companies, pressure on prices from competitors with significantly greater financial resources, regulatory obstacles to new product introductions, reduction in capital spending of pharmaceutical customers, and market risk. Please refer also to the Company's Form 10-K for additional risk factors.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of its business. The Company does not believe that the matters in which it or its subsidiaries are currently involved, either individually or in the aggregate, are material to the Company or its subsidiaries.
The Company, through its subsidiary TAI, asserted a claim against The Perkin-Elmer Corporation ("PE") alleging patent infringement of three patents owned by TAI ("the TAI patents"). PE counterclaimed for infringement of a patent owned by PE ("the PE patent"). PE withdrew its claim for infringement preserving its right to appeal rulings interpreting the claims of the PE patent. The U.S. District Court for the District of Delaware granted judgment as a matter of law in favor of TAI and enjoined PE from infringing the TAI patents. PE has appealed the District Court judgment in favor of TAI. PE has also filed a motion for post-judgment relief. The Company believes it has meritorious arguments and should prevail, although the outcome is not certain. The Company believes that any outcome will not be material to the Company.
The Company has filed suit in the U.S. against Hewlett-Packard Company and Hewlett-Packard GmbH ("HP"), seeking a declaration that certain products sold under the mark Alliance do not constitute an infringement of one or more patents owned by HP or its foreign subsidiaries ("the HP patents"). The action in the U.S. was dismissed for lack of controversy. Actions seeking revocation or nullification of foreign HP patents have been filed by the Company in Germany, France and England. A German patent tribunal found the HP German patent to be valid. The Company intends to pursue an appeal of the German decision. In England, HP has brought an action alleging certain features of the Alliance pump may infringe the HP patent. The Company believes it has meritorious arguments and should prevail, although the outcome is not certain. The Company believes that any outcome of the proceedings will not be material to the Company.
Cohesive Technologies, Inc. ("Cohesive") has filed an infringement action against the Company alleging that one product, in a large product line, infringes one or more issued Cohesive patents. The Company has denied infringement. The Company believes it has meritorious arguments and should prevail, although the outcome is not certain. The Company believes that any outcome of the proceedings will not be material to the Company.
Item 2. Changes in Securities
On February 25, 1999, the Board of Directors approved an amendment to
the Company's Certificate of Incorporation to increase authorized
common stock from fifty million to one hundred million shares. The
Board of Directors also approved a two-for-one common stock split
through the payment of a stock dividend in an amount equal to one share
of common stock for each share of common stock issued and outstanding,
contingent upon shareholder approval of the amendment to the
Certificate of Incorporation at the Company's Annual Meeting. On May 4,
1999, shareholders approved the amendment. Shareholders of record on
May 27, 1999 received the stock dividend on or about June 10, 1999.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Waters Corporation annual meeting of stockholders was held on
May 4, 1999, at which the following matters were submitted to a
vote of security holders: the election of directors of the Company as
previously reported to the Commission, the ratification of auditors
for the Company, the amendment to the Company's Certificate of
Incorporation to increase the number of shares of authorized common
stock from 50,000,000 to 100,000,000 shares, and the Company's
Management Incentive Plan.
As of March 25, 1999, the record date for said meeting, there were 30,592,284 shares of Waters Corporation common stock entitled to vote at the meeting. At such meeting, the holders of 26,532,741 shares were represented in person or by proxy, constituting a quorum. At such meeting, the vote with respect to the matters proposed to the stockholders was as follows:
Matter For Withheld or Against ------ --- ------------------- Election of Directors For Joshua Bekenstein 26,502,020 30,721 For Michael J. Berendt, Ph.D. 26,501,724 31,017 For Douglas A. Berthiaume 26,502,874 29,867 For Philip Caldwell 26,493,871 38,870 For Edward Conard 26,501,475 31,266 For Thomas P. Salice 26,501,935 30,806 For Laurie H. Glimcher, M.D. 26,502,469 30,272 For William J. Miller 26,501,705 31,036 Ratification of Auditors 26,524,100 8,641 Amendment to Increase Authorized Shares 25,961,417 571,324 Approval of Management Incentive Plan 25,932,503 600,238 |
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit 3.11 - Certificate of Amendment of Second Amended and
Restated Certificate of Incorporation of Waters Corporation, as
amended May 12, 1999.
Exhibit 10.14 - 1999 Management Incentive Plan.
Exhibit 27 - Financial Data Schedule
B. No reports on Form 8-K were filed during the three months ended June 30, 1999.
WATERS CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 11, 1999 Waters Corporation
/s/ PHILIP S. TAYMOR
---------------------------------------------
Philip S. Taymor
Senior Vice President and Chief Financial
Officer
|
EXHIBIT 3.11
CERTIFICATE OF AMENDMENT
OF
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
WATERS CORPORATION
WATERS CORPORATION, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), does hereby certify, pursuant to Section 242 of the General Corporation Law of the State of Delaware, that:
FIRST: The name of the Corporation is Waters Corporation.
SECOND: The Certificate of Incorporation of the Corporation was originally filed with the Secretary of State of Delaware on December 6, 1991.
THIRD: The Second Amended and Restated Certificate of Incorporation of the Corporation is amended to effect a change in Article FOURTH thereof, relating to the authorized capital stock of the Corporation, accordingly the first paragraph of Article FOURTH of the Second Amended and Restated Certificate of Incorporation shall be amended to read in its entirety as follows:
The total number of shares of all classes which the Corporation shall have the authority to issue is One Hundred Five Million (105,000,000) shares, all with a par value of One Cent ($.01) per share, of which Five Million (5,000,000) shares shall be designated as Preferred Stock, and One Hundred Million (100,000,000) shares shall be designated as Common Stock.
FOURTH: This amendment of the Second Amended and Restated Certificate of Incorporation has been duly adopted by the vote of the Board of Directors of the Corporation, at a duly called Regular Meeting of the Board, and thereafter duly adopted by the vote of the Corporation's stockholders at the Annual Meeting of Stockholders.
FIFTH: This amendment has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Waters Corporation has caused this certificate to be signed by Douglas A. Berthiaume, its Chairman, President and Chief Executive Officer, and attested by Victor J. Paci, its Secretary, as of this 12th day of May, 1999.
WATERS CORPORATION
By: /s/ Douglas A. Berthiaume
----------------------------
Chairman, President and
Chief Executive Officer
ATTEST:
By: /s/ Victor J. Paci
-------------------
Secretary
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EXHIBIT 10.14
WATERS CORPORATION
1999 MANAGEMENT INCENTIVE PLAN
1. PURPOSE.
The purposes of this 1999 Management Incentive Plan (the "PLAN") of Waters Corporation (the "COMPANY") are to promote the interests of the Company and its stockholders by strengthening the Company's ability to attract, motivate and retain key employees upon whose judgment, initiative and efforts the financial success and growth of the business of the Company largely depend, and to provide a means and the incentive for such employees to maintain and enhance the long-term performance and profitability of the Company.
2. ADMINISTRATION.
The Compensation Committee of the Board of Directors (the "COMMITTEE") has and may exercise such powers and authority of the Board as may be necessary or appropriate for it to carry out its function as described in this Plan; provided, however, that if the Committee does not consist exclusively of "outside directors" within the meaning of Section 162(m) of the Internal Revenue Code, then a subcommittee of the Committee shall be formed, consisting of the members of the Committee who do qualify as outside directors, which shall have the exclusive authority to carry out the responsibilities of the Committee under this Plan. The Committee shall make all determinations required under the Plan, including participant eligibility, performance objectives and incentive payments. All interpretations, determinations and actions by the Committee will be final, conclusive and binding upon all parties.
With respect to the Company's senior executives (each, a "PARTICIPANT"), the Plan will be administered by the Committee as described herein. The Committee will establish one or more performance objectives (the "PERFORMANCE OBJECTIVES") for each Participant that will be used in determining the Participant's incentive payment under the Plan for a fiscal year of the Company (a "Plan Year"), within the first ninety (90) days of such Plan Year and in any event while it remains substantially uncertain whether the Participant's Performance Objectives will be met for the Plan Year. At the conclusion of each Plan Year, the Committee will review the Company's audited financial results against each Participant's Performance Objectives. Based on the review of actual results against Performance Objectives, the Committee will determine the amount of the incentive payment earned by each Participant, if any.
3. DETERMINATION OF INCENTIVE PAYMENT
Within the first ninety (90) days of each Plan Year and while it remains substantially uncertain whether a Participant's Performance Objectives will be met for the Plan Year, the Committee will establish a schedule of potential incentive payments for such Participant if and to the extent that the Performance Objectives for such Participant have been met for the Plan Year. Incentive payments will be paid to the Participant in cash within two and one-half months following the close of the Plan Year, or if so elected prior to the beginning of the Plan Year, at such later time and upon such terms and conditions as the Participant and Company may agree. Incentive payments will be conditioned upon the Company's achievement of certain Performance Objectives. The amount of the incentive payment will increase as the Company achieves a greater percentage of (or exceeds) the Participant's Performance
Objectives. Each Participant will become eligible to receive an incentive payment only if the Company achieves, at a minimum, ninety percent (90%) of such Participant's Performance Objectives. The maximum amount of any Participant's incentive payment under the Plan will not exceed three hundred percent (300%) of the Participant's base salary as of the beginning of that Plan Year.
4. PERFORMANCE OBJECTIVE CRITERIA
The business criteria on which each Participant's Performance Objectives are based will be determined by the Committee for each Plan Year. Such business criteria may include, without limitation, one or more objectively verifiable measures, such as, for example, growth in the Company's financial performance, or improvement in the Company's income statement or balance sheet position. Achievement of a Participant's Performance Objectives will be determined and certified as to in writing (including in minutes of its meetings) by the Committee based on the Company's audited financial statements and its financial records at the end of each Plan Year before any payment of incentive compensation will be made under the Plan to such Participant for such Plan Year.
5. GENERAL PROVISIONS.
No member of the Committee will be liable for any action taken or determination made in good faith by the Committee with respect to the Plan.
Nothing in the Plan or in any instrument executed in connection with the Plan will confer upon any Participant any right to continue in the employ of the Company or any of its affiliates or affect the right of the Company to terminate the employment of any Participant at any time, with or without cause (or, if applicable, as may otherwise be specified in the Participant's employment agreement).
6. AMENDMENT AND TERMINATION.
The Board of Directors shall have the power, in its discretion, to amend, modify, suspend or terminate the Plan at any time, subject to applicable law. To preserve the Plan's qualification under Section 162(m) of the Internal Revenue Code, any material modification of the Plan will require the approval of a majority of the Company's stockholders.
7. EFFECTIVE DATE.
The Plan will become effective upon its adoption by the Board of Directors, and by the Company's stockholders at the annual meeting of stockholders on May 4, 1999.
| ARTICLE 5 |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1999 |
| PERIOD START | JAN 01 1999 |
| PERIOD END | JUN 30 1999 |
| CASH | 2,032 |
| SECURITIES | 0 |
| RECEIVABLES | 125,775 |
| ALLOWANCES | 3,273 |
| INVENTORY | 80,179 |
| CURRENT ASSETS | 234,537 |
| PP&E | 138,999 |
| DEPRECIATION | 49,925 |
| TOTAL ASSETS | 557,302 |
| CURRENT LIABILITIES | 180,521 |
| BONDS | 144,391 |
| PREFERRED MANDATORY | 9,548 |
| PREFERRED | 0 |
| COMMON | 613 |
| OTHER SE | 215,838 |
| TOTAL LIABILITY AND EQUITY | 557,302 |
| SALES | 332,642 |
| TOTAL REVENUES | 332,642 |
| CGS | 124,334 |
| TOTAL COSTS | 124,334 |
| OTHER EXPENSES | 131,827 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 5,412 |
| INCOME PRETAX | 71,069 |
| INCOME TAX | 19,189 |
| INCOME CONTINUING | 51,880 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 51,880 |
| EPS BASIC | .84 1 |
| EPS DILUTED | .78 1 |
| 1 | A 100% stock dividend was paid with respect to the Company's Common Stock on June 10, 1999. Financial Data Schedules relating to prior periods have not been restated to reflect the stock dividend. |