<PAGE>
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 September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________to__________.
Commission File Number: 01-14010
--------
Waters Corporation
------------------
(Exact name of registrant as specified in the charter)
Delaware 13-3668640
-------- ----------
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
34 Maple Street
Milford, Massachusetts 01757
----------------------------
(Address of principal executive offices)
Registrant's telephone number, include area code: (508) 478-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes (X) No ( )
Number of shares outstanding of the Registrant's common stock as of October 24,
1996: 28,899,821
1
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the
three months ended September 30, 1996 and 1995 4
Consolidated Statements of Operations for the
nine months ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995 6
Consolidated Statements of Stockholders' Equity 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,111 $ 3,233
Accounts receivable, less allowances for doubtful accounts and
sales returns of $1,443 and $1,513 at September 30, 1996 and
December 31, 1995, respectively 83,178 76,087
Inventories 51,484 41,459
Other current assets 3,677 2,847
Net current assets - discontinued operations - 3,694
------------- -------------
Total current assets 140,450 127,320
Property, plant, and equipment, net of accumulated depreciation
of $16,873 and $10,154 at September 30, 1996 and December 31,
1995, respectively 74,177 70,261
Other assets 34,910 29,024
Goodwill, less accumulated amortization of $4,105 and $2,364 at
September 30, 1996 and December 31, 1995, respectively 114,243 72,491
Net long term assets - discontinued operations - 720
------------- -------------
Total assets $ 363,780 $ 299,816
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long term debt $ 1,300 $ 1,933
Accounts payable 21,541 16,757
Deferred revenue 10,447 6,945
Accrued retirement plan contributions 4,462 5,362
Accrued interest 2,109 2,527
Other current liabilities 41,503 36,763
------------- -------------
Total current liabilities 81,362 70,287
Loans under Bank Credit Agreement 226,252 83,500
Senior Subordinated Notes - 75,000
Redeemable preferred stock 6,922 6,232
Other liabilities 8,503 6,679
------------- -------------
Total liabilities 323,039 241,698
Commitments and contingent liabilities - -
Stockholders' Equity:
Common stock (par value $.01 per share, 50,000 shares authorized,
28,898 and 28,796 shares issued and outstanding at
September 30, 1996 and December 31, 1995, respectively) 289 288
Additional paid-in capital 145,736 145,318
Deferred stock option compensation (889) (1,076)
Accumulated deficit (102,950) (85,403)
Translation adjustments (1,041) (605)
Minimum pension liability adjustment (404) (404)
------------- -------------
Total stockholders' equity 40,741 58,118
------------- -------------
Total liabilities and stockholders' equity $ 363,780 $ 299,816
============= =============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
3
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Net sales $98,414 $80,634
Cost of sales 36,631 30,761
Revaluation of acquired inventory 3,660 371
---------- ----------
Gross profit 58,123 49,502
Selling, general and administrative expenses 38,360 32,344
Management fee --- 389
Goodwill and purchased technology amortization 1,615 915
Research and development expenses 5,544 4,346
--------- ---------
Income from operations 12,604 11,508
Interest expense, net 3,706 7,614
Unrealized (gains) on future cash flow hedges --- (7,219)
Realized losses on future cash flow hedges --- 550
---------- ----------
Income before income taxes 8,898 10,563
Provision for income taxes 2,502 1,993
---------- ----------
Net income 6,396 8,570
Less: accretion of and 6% dividend on preferred stock 231 228
---------- ----------
Net income available to common stockholders $6,165 $8,342
========== ==========
Net income per common share $0.19 $0.35
========== ==========
Weighted average common shares outstanding 31,888 23,852
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
4
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
------------------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Net sales $279,692 $242,516
Cost of sales 103,944 92,318
Revaluation of acquired inventory 6,100 371
------------ ------------
Gross profit 169,648 149,827
Selling, general and administrative expenses 107,752 94,957
Management fee -- 1,159
Goodwill and purchased technology amortization 3,977 2,718
Expensed in-process research and development 19,300 --
Research and development expenses 15,286 12,860
------------ ------------
Income from operations 23,333 38,133
Interest expense, net 11,140 23,688
Unrealized (gains) on future cash flow hedges -- (872)
Realized losses on future cash flow hedges -- 550
------------ ------------
Income before income taxes 12,193 14,767
Provision for income taxes 7,476 2,670
------------ ------------
Net income before extraordinary item 4,717 12,097
Extraordinary item - (loss) on early retirement of debt (22,264) --
------------ ------------
Net (loss) income (17,547) 12,097
Less: accretion of and 6% dividend on preferred stock 689 676
Net (loss) income available to common stockholders ($18,236) $11,421
============ ============
(Loss) income per common share:
Income per common share from operations $0.13 $0.48
Extraordinary (loss) per common share ($0.71) --
------------ ------------
Net (loss) income per common share ($0.58) $0.48
============ ============
Weighted average common shares outstanding 31,527 23,852
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
5
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
Cash flows from operating activities:
<S> <C> <C>
Net (loss) income ($17,547) $12,097
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Unrealized (gain) on future cash flow hedges - (872)
Depreciation and amortization 6,677 5,986
Amortization of capitalized software and intangible assets 5,383 4,508
Amortization of debt issuance costs 795 2,155
Extraordinary loss on retirement of debt 22,264 -
Compensatory stock option expense 187 941
Expensed in-process research and development 19,300 -
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (3,841) 12,497
Decrease in inventories 1,564 1,863
(Increase) in other current assets (344) (347)
(Increase) in other assets (474) (1,296)
Increase in accounts payable and accrued expenses 2,050 3,627
Increase in deferred revenue 2,522 1,444
(Decrease) increase in accrued retirement plan contributions (3,647) 911
Increase (decrease) in other liabilities 1,850 (4,928)
--------------- ------------
Net cash provided by continuing operations 36,739 38,586
Net cash provided by discontinued operations - 479
--------------- ------------
Net cash provided by operating activities 36,739 39,065
Cash flows from investing activities:
Additions to property, plant and equipment (6,703) (4,800)
Software capitalization and other intangibles (2,534) (2,772)
Loans to officers (391) -
Realized loss on contracts hedging net asset value - (1,103)
Payment to acquire net assets of Phase Separations, Ltd. - (7,469)
Payment to acquire net assets of TA Instruments, Inc. (83,349) -
Proceeds from sale of discontinued operations 4,497 6,477
--------------- ------------
Net cash (used in) investing activities by continuing
operations (88,480) (9,667)
Net cash used in discontinued operations - (154)
--------------- ------------
Net cash (used in) investing activities (88,480) (9,821)
Cash flows from financing activities:
Payments for interest rate protection agreements (1,917) -
Early retirement of Senior Subordinated Notes (91,219) -
Payment for issuance of notes and accrued interest (366) 5,309
Net borrowings (repayments) of bank debt 142,030 (10,620)
Stock options exercised 1,108 -
Dividend paid - (16,195)
--------------- ------------
Net cash provided by (used in) financing activities 49,636 (21,506)
Effect of exchange rate changes on cash 983 252
--------------- ------------
Net change in cash and cash equivalents (1,122) 7,990
Cash and cash equivalents at beginning of period 3,233 16,739
--------------- ------------
Cash and cash equivalents at end of period $2,111 $24,729
=============== ============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
6
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
Minimum
Additional Deferred Cumulative Pension
Common Paid-In Stock Option Accumulated Translation Liability
Stock Capital Compensation Deficit Adjustments Adjustment Total
----- ------- ------------ ------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 $ 288 $ 145,318 $ (1,076) $ (85,403) ($605) ($404) $58,118
Net (loss) for the nine months
ended September 30, 1996 - - - (17,547) - - (17,547)
Stock options exercised 1 1,107 - - - - 1,108
Compensatory stock option expense - - 187 - - - 187
Accretion of and dividend on
preferred stock - (689) - - - - (689)
Translation adjustment for the nine
months ended September 30, 1996 - - - - (436) - (436)
------ ----------- ------- ----------- --------- ------- ---------
Balance - September 30, 1996 $289 $ 145,736 ($889) ($102,950) ($1,041) ($404) $40,741
====== =========== ======= =========== ========= ======= =========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
7
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. Organization and Basis of Presentation
Waters Corporation ("Waters" or the "Company") is a holding company which owns
all and only the common stock of Waters Technologies Corporation. Waters
acquired ("Waters Acquisition") substantially all the assets of the Waters
Chromatography Division (the "Predecessor") of Millipore Corporation
("Millipore") on August 18, 1994.
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") and the
requirements of the Securities and Exchange Commission. The consolidated
financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly owned. All material intercompany balances and
transactions have been eliminated. Certain amounts from prior years have been
reclassified in the accompanying financial statements in order to be consistent
with the current year's classifications.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect (i) the reported
amounts of assets and liabilities, (ii) disclosure of contingent assets and
liabilities at the dates of the financial statements, and (iii) the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
It is management's opinion that the accompanying interim financial statements
reflect all adjustments (which are normal and recurring) necessary for a fair
presentation of the results for the interim periods. The interim financial
statements should be read in conjunction with the consolidated financial
statements included in the Company's 10-K filing with the Securities and
Exchange Commission for the year ended December 31, 1995.
2. Discontinued Operations
On December 31, 1994, the Company announced a plan to sell its process mass
spectrometry business. The results of this business have been classified as
discontinued operations in the consolidated statements of operations. The
largest operation was sold in July 1995 for proceeds, net of associated costs,
of approximately $6,500. Remaining operations were sold in January 1996 for
proceeds, net of associated costs, of approximately $4,500.
3. Inventories
<TABLE>
<CAPTION>
Inventories are classified as follows:
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials $17,690 $10,719
Work in progress 6,863 4,201
Finished goods 26,931 26,539
------- -------
Total Inventories $51,484 $41,459
======= =======
</TABLE>
4. Material Transactions/Transition Agreement
In connection with the consummation of the Waters Acquisition, the Company and
Millipore entered into a Transition Support and Service Agreement (the
"Transition Agreement") whereby Millipore agreed to (i) lease office space, (ii)
8
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
transfer certain personnel, (iii) provide management information systems,
administrative, distribution and facilities management support services, (iv)
provide access to its telephone network, and (v) supply certain professional
support services. The Company believes that the costs incurred under the
Transition Agreement are representative of the charges that would be levied by
independent third parties for similar services. The Company incurred net
expenses pursuant to this agreement of $1,286 and $3,696 for the three month and
nine month periods ended September 30, 1996, respectively. The net expenses for
the corresponding periods in 1995 were $930 and $4,423, respectively. The
Company had a net balance payable to Millipore of approximately $148 as of
September 30, 1996 and $973 as of September 30, 1995. The Company sold product
and services totaling $7 and $79 to Millipore during the three month and nine
month periods ended September 30, 1996, respectively. During the three month
and nine month periods ended September 30, 1995, the Company sold product and
services to Millipore totaling $73 and $479, respectively.
5. Income Taxes
The Company's effective tax rate for the three and nine month periods ended
September 30, 1996 was 20%, after the revaluation of acquired inventory and
expensed in-process research and development charges related to the TAI
Acquisition (defined below), which are not tax deductible. The Company's
effective tax rates for the corresponding periods in 1995 were 18.9% and 18.3%,
respectively. The Company's 1996 U.S. taxable income will be offset by net
operating loss carryforwards.
6. Debt
In January 1996, the Company entered into a three-year debt swap agreement with
the Bank of Boston. The Company swapped $22,000 in notional amount of floating
rate LIBOR borrowings for 2,330,240 yen notional amount of borrowings at a fixed
interest rate of 1.525% per annum. At representative interest rates and current
exchange rates in effect at January 23, 1996, the effective date of the
agreement, the Company would lower its annual interest costs by approximately
$900 over the term of the swap agreement.
In June 1996, the Company entered into an additional three-year debt swap
agreement with Bankers Trust Company. The Company swapped $7,500 in notional
amount of floating rate LIBOR borrowings for 817,500 yen notional amount of
borrowings at a fixed interest rate of 2.02% per annum. At representative
interest rates and current exchange rates in effect at June 26, 1996, the
effective date of the agreement, the Company would lower its annual interest
costs by approximately $266 over the term of the swap agreement. The Company
could also incur higher or lower principal repayments over the term of either
swap agreement.
In March 1996, the Company increased the maximum availability under its senior
credit facility (the "Bank Credit Agreement") to $300,000 in order to repurchase
its 12 3/4% Senior Subordinated Notes (the "Senior Subordinated Notes") and
provide additional financial flexibility. The availability under the Bank
Credit Agreement will decrease under certain circumstances, including upon
certain asset sales, issuance of equity, and incurrence of debt. The line of
credit will further decrease by $45,000 at November 22, 1998 and 1999, and will
terminate on the earlier of the date on which a Change of Control Event (as
defined in the Bank Credit Agreement) occurs and November 22, 2000.
In April 1996, the Company consummated a tender offer (the "Tender Offer") to
repurchase $75,000 in principal amount of the Company's Senior Subordinated
Notes. The aggregate purchase price paid by the Company in connection with the
Tender Offer was $90,600. The Company funded this redemption through additional
borrowings under the Bank Credit Agreement. In the second quarter of 1996, the
Company recorded an extraordinary loss of $22,264 related to the early
extinguishment of the Senior Subordinated Notes.
At October 24, 1996, the Company had aggregate borrowings outstanding under the
Bank Credit Agreement of $226,445 and approximately $73,555 in additional
borrowings available.
9
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
In March and April 1996, the Company entered into several interest rate
protection agreements. These agreements provide payments to the Company if the
three month LIBOR rate, as defined, exceeds 8% in 1996, 6% in 1997, and 6.5% in
1998 and 1999 on aggregate borrowings of $183,000 in 1996 and 1997 and $70,000
and $30,000 in 1998 and 1999, respectively.
7. TA Instruments, Inc. Acquisition
The Company entered into an Agreement and Plan of Merger on March 28, 1996 to
acquire all of the capital stock of TA Instruments, Inc. ("TAI") for $83,349 in
cash ("TAI Acquisition"). The TAI Acquisition was consummated on May 1, 1996
and was financed through borrowings under the revolving credit facility under
the Bank Credit Agreement. TAI develops, manufactures, sells, and services
thermal analysis and rheology instrumentation which is used for the physical
characterization of polymers and related materials. Thermal analysis and
rheology are among the most prevalent techniques employed in the analysis of
polymers and other organic/inorganic materials. TAI is the global market leader
in the field of thermal analysis. Net sales for TAI were approximately $47,000
in 1995.
In conjunction with the TAI Acquisition, the Company recorded non-recurring
charges of $19,300 for the immediate write-off of acquired in-process research
and development and $6,100 for the revaluation of acquired inventory which was
amortized over a period of 5 months and charged to cost of sales during the
second and third quarters of 1996. The Company also recorded goodwill in the
transaction which will be amortized over a 40 year period using the straight
line method of amortization. The TAI Acquisition was accounted for by the
purchase method and the results of its operations have been consolidated with
the Company's results from May 1, 1996, the date of the acquisition.
The following unaudited Pro Forma results of operations for the nine month
periods ended September 30, 1996 and September 30, 1995 give effect to the TAI
Acquisition as if the transaction had occurred at the beginning of each such
period. The financial data are based on the historical consolidated financial
statements for the Company and TAI and the assumptions and adjustments made upon
the TAI Acquisition. The Pro Forma results of operations do not (i) purport to
represent what the Company's results of operations actually would have been if
the TAI Acquisition had occurred as of the beginning of the periods, or (ii)
what such results will be for any future periods. The financial data are based
upon assumptions that the Company believes are reasonable and should be read in
conjunction with the Consolidated Financial Statements and accompanying notes
thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Pro Forma Results
-----------------
For the Nine Months Ended
-------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Net sales $ 293,887 $ 275,609
Income from continuing operations $ 4,269 $ 13,085
Net (loss) income $ (17,995) $ 13,085
Income per common share from continuing
operations $ .11 $ .52
Net (loss) income per common share $ (.59) $ .52
</TABLE>
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Recent Events
On October 24, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission, which has not yet become effective, for a
secondary offering of approximately 2 million shares of common stock. Shares are
being sold by certain selling shareholders of the Company. The Company will not
receive any proceeds from the offering.
On May 1, 1996, the Company acquired all of the capital stock of TA Instruments,
Inc. ("TAI"), a U.S. based company. TAI develops, manufactures, sells, and
services thermal analysis and rheology instrumentation which is used for the
physical characterization of polymers and related materials. The following
discussion of the results of operations for the three and nine months ended
September 30, 1996 include the results of TAI's operations since the acquisition
date.
Results of Operations
Net Sales:
Net sales for the three month period ended September 30, 1996 (the "1996
Quarter") and nine month period ended September 30, 1996 (the "1996 Period"),
which include TAI results from May 1, 1996, were $98.4 million and $279.7
million, respectively, compared to $80.6 million for the three month period
ended September 30, 1995 (the "1995 Quarter") and $242.5 million for the nine
month period ended September 30, 1995 (the "1995 Period"), an increase of 22%
for the Quarter and 15% for the Period. Excluding unfavorable currency effects,
consolidated net sales grew by 26% for the Quarter and 19% for the Period.
Further excluding the effects of TAI, the Waters traditional HPLC business grew
11% for the Quarter and 10% for the Period as compared to the 1995 Quarter and
Period. Growth was generally broad based across geographies and end-user
markets. The U.S. business grew strongly during the 1996 Quarter and Period,
improving over the past several years during which revenues were largely flat,
and reflecting the success of the Company's general business initiatives and
new product innovations. In March 1996, Waters introduced its new family of
Alliance/TM/ HPLC systems which provide customers with more accurate and
consistent results and increased sampler handling capacity, and are more compact
and easier to maintain than conventional component systems.
Gross Profit:
Gross profit increased to $58.1 million in the 1996 Quarter and $169.6 million
in the 1996 Period from $49.5 million in the 1995 Quarter and $149.8 million in
the 1995 Period, an increase of $8.6 million or 17% for the Quarter and $19.8
million or 13% for the Period. In the 1996 Period, the Company recorded a $6.1
million charge for revaluation of acquired inventory resulting from the TAI
acquisition. Of this amount, $3.7 million was amortized during the 1996
Quarter. In the 1995 Quarter and Period, the Company recorded a $.4 million
charge for revaluation of acquired inventory resulting from the acquisition of
Phase Separations Limited. Excluding the effects of these charges, gross profit
increased $11.9 million or 24% for the 1996 Quarter and $25.6 million or 17% for
the 1996 Period. Gross profit as a percentage of sales, excluding the inventory
revaluation charges, improved to 62.8% during the 1996 Quarter and 1996 Period,
from 61.9% during the 1995 Quarter and 1995 Period. During the 1996 Period, the
Company continued to improve manufacturing productivity.
Selling, General, and Administrative Expenses:
Selling, general and administrative expenses increased to $38.4 million in the
1996 Quarter as compared to $32.3 million in the 1995 Quarter, an increase of
$6.1 million or 18.9%. Selling, general and administrative expenses for the
1996 Period increased $12.8 million or 13.5% to $107.8 million, up from $95.0
million in the 1995 Period. Selling, general and administrative expenses, as a
percentage of net sales, declined from the 1995 Quarter and Period.
Management Fee:
Until November 1995, the Company paid AEA Investors Inc. and Bain Capital, Inc.
an annual fee of $1.5 million plus out of pocket expenses for general
management, financial and other corporate advisory services. The agreement was
terminated in conjunction with the Company's November 1995 initial public
offering of stock (the "Offering").
11
<PAGE>
Goodwill and Purchased Technology Amortization:
Goodwill and purchased technology amortization increased by $.7 million or 77%
in the 1996 Quarter as compared to the 1995 Quarter and $1.3 million or 46% in
the 1996 Period as compared to the 1995 Period. The increase was primarily
related to the acquisition of TA Instruments, Inc. on May 1, 1996.
Expensed In-Process Research and Development:
In the 1996 Period, the Company wrote off $19.3 million of the TAI purchase
price related to acquired in-process research and development. Generally
accepted accounting principles prohibit capitalization of acquired research and
development expenditures.
Research and Development Expenses:
Research and development expenses increased to $5.5 million in the 1996 Quarter
from $4.3 million in the 1995 Quarter, an increase of $1.2 million or 28%.
Research and development expenses increased to $15.3 million in the 1996 Period
from $12.9 million in the 1995 Period, an increase of $2.4 million or 19%. These
increases reflect the Company's continued commitment to new product development.
In March 1996, Waters introduced its new Alliance/TM/ HPLC systems. Alliance/TM/
systems are modular and allow scientists the flexibility to create tailored
systems, which deliver more consistent and accurate results and are more compact
and easier to maintain than conventional component systems.
Operating Income:
Income from continuing operations was $12.6 million for the 1996 Quarter as
compared to $11.5 million for the 1995 Quarter, reflecting the impact of the
revaluation of acquired inventory associated with the TAI acquisition. As a
result of these charges and expensed in-process research and development
charges, the Company experienced a corresponding decrease in income from
operations for the Period from $38.1 million in the 1995 Period to $23.3 million
in the 1996 Period. Excluding the effects of the nonrecurring charges related
to the acquisition of TAI, a nonrecurring charge in 1995 for the revaluation of
acquired inventory related to the acquisition of Phase Separations Limited, and
1995 management fees under the terminated management services agreement,
operating income for the Quarter increased to $16.3 million, a 33% increase over
the 1995 Quarter, and operating income for the Period increased to $48.7
million, a 23% increase over the 1995 Period. Improved 1996 results reflected
HPLC sales growth, improved productivity, and the inclusion of TAI operating
results from the date of acquisition.
Interest Expense:
Contemporaneously with the Company's November 1995 Offering, the Company retired
$25 million of Senior Subordinated Notes and all outstanding indebtedness under
the original bank credit agreement with proceeds from the Offering and its new
bank agreement. In April 1996, the Company consummated a tender offer to
repurchase and retire the remaining $75 million of Senior Subordinated Notes
(the "Tender Offer"). The Company's average debt levels for the 1996 Quarter
and Period were substantially lower than debt levels for the 1995 Quarter and
Period due to the application of net proceeds from the Offering and strong
operating cash flows generated during 1996. The reduced indebtedness and more
favorable interest rates under the new bank credit agreement resulted in a 51%
decrease in interest expense for the 1996 Quarter to $3.7 million as compared to
$7.6 million in the 1995 Quarter. Interest expense for the 1996 Period
decreased $12.6 million or 53%, from $23.7 million in 1995 to $11.1 million in
1996.
Unrealized/Realized (Gains) Losses on Future Cash Flow Hedges:
During 1995, the Company periodically entered into forward exchange contracts to
economically hedge a significant portion of the U.S. dollar value of its
anticipated future international cash flows. Generally accepted accounting
principles required that those contracts outstanding at period end be valued at
current market value with the resulting unrealized gain or loss reflected in the
statements of operations even though they economically hedged anticipated future
cash flows. During the 1995 Quarter and 1995 Period, the Company recorded $7.2
million and $.9 million, respectively, for unrealized gains on future cash flow
hedges. During the 1995 Quarter and Period, the Company also recorded realized
losses of $.6 million for contracts that had matured. In the fourth quarter of
1995, the Company ceased to hedge anticipated future international cash flows
and therefore liquidated those particular forward currency contracts.
12
<PAGE>
Provision for Income Taxes:
The Company's effective income tax rate for the 1996 Quarter and Period was 20%,
after excluding the revaluation of acquired inventory and expensed in-process
research and development charges related to the TAI acquisition, which are not
tax deductible. The effective income tax rates for the 1995 Quarter and Period
were 18.9% and 18.3%, respectively. The Company's 1996 U.S. taxable income will
be offset by net operating loss carryforwards.
Net Income before Extraordinary Item:
The Company generated net income before extraordinary items of $6.4 million in
the 1996 Quarter and $4.7 million in the 1996 Period which was lower than $8.6
million for the 1995 Quarter and $12.1 million for the 1995 Period,
respectively. The lower 1996 net income was the result of the TAI Acquisition
related charges totaling $3.7 million for the Quarter and $25.4 million for the
Period ($6.1 million for revaluation of acquired inventory and $19.3 million for
expensed in-process research and development). Excluding the effects of these
charges, net income before extraordinary items was $10.1 million for the 1996
Quarter and $30.1 million for the 1996 Period. The improvement over the prior
year was a result of sales growth, continued focus on cost reduction, and
interest expense reduction.
Extraordinary Item:
During the 1996 Period, the Company repurchased $75 million in principal amount
of its Senior Subordinated Notes. The Company recorded a $22.3 million charge
associated with the early extinguishment of this debt.
Net Income (Loss):
The Company generated net income of $6.4 million in the 1996 Quarter compared to
$8.6 million net income in the 1995 Quarter. Net loss for the Period was $17.5
million compared to net income of $12.1 million in the 1995 Period. The decline
was the result of the aforementioned TAI acquisition charges and charges for the
early extinguishment of debt. Income per share of $.19 for the 1996 Quarter and
loss per share of $.58 for the 1996 Period was lower than $.35 income per share
in the 1995 Quarter and $.48 income per share in the 1995 Period. Income per
share, before the effect of the TAI acquisition and extraordinary charges was
$.31 for the 1996 Quarter and $.93 for the 1996 Period.
Liquidity and Capital Resources:
The Company generated $36.7 million in operating cash flows during the 1996
Period primarily as a result of the $17.5 million net loss, more than offset by
$12.1 million of depreciation and amortization, $22.3 million of extraordinary
loss on the extinguishment of debt (see "Tender Offer" below), and the $25.4
million of noncash, nonrecurring charges related to the TAI acquisition.
Net cash used in investing activities of $88.5 million during the 1996 Period
was the result of $83.3 million used to acquire TAI and $9.2 million used for
additions to property, plant and equipment and software capitalization, offset
by proceeds from the sale of remaining discontinued Extrel operations.
Net cash provided by financing activities of $49.6 million during the 1996
Period primarily reflected $83.3 million used to acquire TAI, net of other
borrowings and repayments of bank debt and $1.9 million used to purchase
interest rate protection agreements.
In April 1996, the Company consummated the Tender Offer for an aggregate
repurchase price of $90.6 million. The Company funded this redemption through
additional borrowings under the Bank Credit Agreement. Prior to the commencement
of the Tender Offer, the Bank Credit Agreement was amended in March 1996 to
provide for aggregate borrowings, as defined, totaling $300 million and to
permit the expected completion of the acquisition of TA Instruments, Inc.
In January 1996, the Company entered into a three-year debt swap agreement with
the Bank of Boston. The Company swapped $22 million in notional amount of
floating rate LIBOR borrowings for 2,300 million yen notional amount of
borrowings at a fixed interest rate of 1.525% per annum. At representative
interest rates and current exchange rates in effect at January 23, 1996, the
effective date of the agreement, the Company would lower its annual interest
costs by approximately $.9 million over the term of the swap agreement.
13
<PAGE>
In June 1996, the Company entered into an additional three-year debt swap
agreement with Bankers Trust Company. The Company swapped $7.5 million in
notional amount of floating rate LIBOR borrowings for 818 million yen notional
amount of borrowings at a fixed interest rate of 2.02% per annum. At
representative interest rates and current exchange rates in effect at June 26,
1996, the effective date of the agreement, the Company would lower its annual
interest costs by approximately $.3 million over the term of the swap agreement.
The Company could also incur higher or lower principal repayments over the term
of either swap agreement.
In March and April 1996, the Company entered into several interest rate
protection agreements. These agreements provide payments to the Company if the
three month LIBOR rate, as defined, exceeds 8% in 1996, 6% in 1997, and 6.5% in
1998 and 1999 on aggregate borrowings of $183,000 in 1996 and 1997 and $70,000
and $30,000 in 1998 and 1999, respectively.
At October 24, 1996, the Company had aggregate borrowings outstanding under the
Bank Credit Agreement of $226.4 million and approximately $73.6 million
additional borrowings available.
The Company believes that existing cash balances and cash flow from operating
activities together with borrowings available under the Bank Credit Agreement
will be sufficient to fund future working capital needs, capital spending
requirements and debt service requirements of the Company in the foreseeable
future.
Cautionary Statement:
Certain statements contained herein are forward looking. Many factors could
cause actual results to differ from these statements, including loss of market
share through competition, introduction of competing products by other
companies, pressure on prices from competitors and/or customers, regulatory
obstacles to new product introductions, lack of acceptance of new products by
the HPLC industry, changes in the healthcare market and the pharmaceutical
industry, changes in distribution of the Company's products, and interest rate
and foreign exchange fluctuations.
14
<PAGE>
Part II: Other information
Item 1. Legal Proceedings
The Company is not party to any legal proceedings other than
litigation incidental to normal business activities. The outcome of
such litigation is not expected to have a material adverse effect on
the Company.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule.
(b) No reports on Form 8-K were filed during the three months ended
September 30, 1996.
15
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: October 24, 1996 Waters Corporation
/s/ Philip S. Taymor
--------------------
Philip S. Taymor
Senior Vice President and Chief Financial
Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,111
<SECURITIES> 0
<RECEIVABLES> 84,621
<ALLOWANCES> 1,443
<INVENTORY> 51,484
<CURRENT-ASSETS> 140,450
<PP&E> 91,050
<DEPRECIATION> 16,873
<TOTAL-ASSETS> 363,780
<CURRENT-LIABILITIES> 81,362
<BONDS> 226,252
6,922
0
<COMMON> 289
<OTHER-SE> 40,452
<TOTAL-LIABILITY-AND-EQUITY> 363,780
<SALES> 279,692
<TOTAL-REVENUES> 279,692
<CGS> 103,944
<TOTAL-COSTS> 110,044
<OTHER-EXPENSES> 146,315
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,140
<INCOME-PRETAX> 12,193
<INCOME-TAX> 7,476
<INCOME-CONTINUING> 4,717
<DISCONTINUED> 0
<EXTRAORDINARY> (22,264)
<CHANGES> 0
<NET-INCOME> (17,547)
<EPS-PRIMARY> ($0.58)
<EPS-DILUTED> ($0.58)
</TABLE>
