<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, 1997
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 November 13, 1997: 29,582,721.
1
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WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 3
and December 31, 1996
Consolidated Statements of Operations for the three
months ended September 30, 1997 and 1996 4
Consolidated Statements of Operations for the nine
months ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 6
Consolidated Statement of Stockholders' Equity 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on From 8-K 15
SIGNATURES 16
2
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WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,102 $ 639
Accounts receivable, less allowances for doubtful accounts
$2,341 and $1,712 at September 30, 1997 and December 31, 1996,
respectively 109,181 88,112
Inventories 105,602 47,351
Other current assets 10,607 7,930
---------- -----------
Total current assets 235,492 144,032
Property, plant, and equipment, net of accumulated depreciation
of $27,453 and $19,729 at September 30, 1997 and December 31,
1996, respectively 83,482 74,777
Other assets 38,661 36,058
Goodwill, less accumulated amortization of $6,486 and $4,818 at
September 30, 1997 and December 31, 1996, respectively 207,886 110,635
---------- -----------
Total assets $ 565,521 $ 365,502
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long term debt $ 5,499 $ 1,736
Accounts payable 34,125 17,509
Deferred revenue 17,845 10,491
Other current liabilities 101,690 53,069
---------- -----------
Total current liabilities 159,159 82,805
Long term debt 339,248 210,470
Redeemable preferred stock 7,859 7,153
Other liabilities 4,666 7,294
---------- -----------
Total liabilities 510,932 307,722
Commitments and contingent liabilities - -
Stockholders' Equity:
Common stock (par value $ .01, 50,000 shares authorized, 29,477
and 28,923 shares issued and outstanding at September 30,
1997 and December 31, 1996, respectively) 295 289
Additional paid-in capital 158,170 145,717
Deferred stock option compensation (661) (826)
Accumulated deficit (101,790) (87,808)
Translation adjustments (1,425) 408
---------- -----------
Total stockholders' equity 54,589 57,780
---------- -----------
Total liabilities and stockholders' equity $ 565,521 $ 365,502
========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
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WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net sales $105,044 $ 98,414
Cost of sales 38,598 36,631
Revaluation of acquired inventory - 3,660
--------- ---------
Gross profit 66,446 58,123
Selling, general and administrative expenses 39,008 38,360
Research and development expenses 6,259 5,544
Goodwill and purchased technology amortization 1,444 1,615
Expensed in-process research and development 55,000 -
--------- ---------
Operating (loss) income (35,265) 12,604
Interest expense, net 2,334 3,706
--------- ---------
(Loss) income before income taxes (37,599) 8,898
Provision for income taxes 3,480 2,502
--------- ---------
Net (loss) income (41,079) 6,396
Less: accretion of and 6% dividend on preferred stock 237 231
--------- ---------
Net (loss) income available to common stockholders ($ 41,316) $ 6,165
========= =========
Net (loss) income per common share ($1.28) $0.19
========= =========
Weighted average common shares outstanding 32,309 31,888
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
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WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net sales $ 313,715 $ 279,692
Cost of sales 115,066 103,944
Revaluation of acquired inventory - 6,100
---------- ----------
Gross profit 198,649 169,648
Selling, general and administrative expenses 116,993 107,752
Research and development expenses 17,851 15,286
Goodwill and purchased technology amortization 4,216 3,977
Expensed in-process research and development 55,000 19,300
---------- ----------
Operating income 4,589 23,333
Interest expense, net 8,317 11,140
---------- ----------
(Loss) income before income taxes (3,728) 12,193
Provision for income taxes 10,254 7,476
---------- ----------
(Loss) income before extraordinary item (13,982) 4,717
Extraordinary item - (loss) on early retirement of debt - (22,264)
---------- ----------
Net (loss) (13,982) (17,547)
Less: accretion of and 6% dividend on preferred stock 705 689
---------- ----------
Net (loss) available to common stockholders ($14,687) ($18,236)
========== ==========
(Loss) income before extraordinary item per common share ($0.46) $0.13
Extraordinary (loss) per common share - ($0.71)
---------- ----------
Net (loss) per common share ($0.46) ($0.58)
========== ==========
Weighted average common shares outstanding 31,912 31,527
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) ($13,982) ($17,547)
Adjustments to reconcile net (loss) to net cash provided by
operating activities:
Depreciation and amortization 7,841 6,677
Amortization of capitalized software and intangible assets 5,940 5,383
Amortization of debt issuance costs 788 795
Extraordinary loss on retirement of debt - 22,264
Compensatory stock option expense 165 187
Expensed in-process research and development 55,000 19,300
Change in operating assets and liabilities:
(Increase) in accounts receivable (4,534) (3,841)
(Increase) decrease in inventories (3,735) 1,564
(Increase) in other current assets (432) (344)
(Increase) in other assets (693) (474)
Increase in accounts payable and accrued expenses 11,185 2,050
Increase in deferred revenue 2,813 2,522
Increase (decrease) in accrued retirement plan contributions 108 (3,647)
Increase in other liabilities 1,170 1,850
-------- ---------
Net cash provided by operating activities 61,634 36,739
Cash flows from investing activities:
Additions to property, plant and equipment (9,341) (6,703)
Software capitalization and other intangibles (3,494) (2,534)
Loans to officers (102) (391)
Micromass, net of cash acquired (151,145) -
YMC, net of cash acquired (8,223) -
Investment in unaffiliated company (1,147) -
TA Instruments, Inc., net of cash acquired - (83,349)
Proceeds from sale of discontinued operations - 4,497
-------- ---------
Net cash (used in) investing activities (173,452) (88,480)
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)
Net borrowings of bank debt 119,465 142,030
Proceeds from Employee Stock Purchase Plan 178 -
Stock options exercised 1,745 1,108
-------- ---------
Net cash provided by financing activities 121,388 49,636
Effect of exchange rate changes on cash (107) 983
-------- ---------
Net change in cash and cash equivalents 9,463 (1,122)
Cash and cash equivalents at beginning of period 639 3,233
-------- ---------
Cash and cash equivalents at end of period $ 10,102 $ 2,111
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
<PAGE>
<TABLE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(unaudited)
<CAPTION>
Additional Deferred Cumulative
Common Paid-In Stock Option Accumulated Translation
Stock Capital Compensation Deficit Adjustments Total
------ ---------- ------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 $ 289 $ 145,717 $ (826) $ (87,808) $ 408 $ 57,780
Net income for the nine months
ended September 30, 1997 - - - (13,982) - (13,982)
Issuance of common stock for acquisition 3 11,238 - - - 11,241
Issuance of common stock for Employee
Stock Purchase Plan 1 177 - - - 178
Stock options exercised 2 1,743 - - - 1,745
Compensatory stock option expense - - 165 - - 165
Accretion of and dividend on
preferred stock - (705) - - - (705)
Translation adjustment for the nine
months ended September 30, 1997 - - - - (1,833) (1,833)
--------- ----------- --------- ---------- --------- ---------
Balance - September 30, 1997 $ 295 $ 158,170 $ (661) $(101,790) $ (1,425) $ 54,589
========= ============ ========= ========== ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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 (the "Company") is the world's largest
manufacturer, distributor and provider of high performance
liquid chromatography ("HPLC") instruments, chromatography
columns and other consumables, and related services. With its
acquisition of TA Instruments, Inc. ("TAI") in May 1996, the
Company is also the world's leader in thermal analysis, a
prevalent and complementary technique used in the analysis of
polymers. With its September 1997 acquisition of Micromass
Limited ("Micromass"), the Company is also a market leader in
the development, manufacture, and distribution of mass
spectrometry ("MS") instruments, complementary products that can
be integrated and used along with other analytical instruments,
especially HPLC. 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.
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, most
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, 1996.
2. Acquisitions
Micromass Limited Acquisition
The Company entered into an agreement as of September 12, 1997,
to acquire all of the capital stock of Micromass Limited, a
company headquartered in Manchester, England, for approximately
$175 million in cash, common stock, and promissory notes. The
acquisition of Micromass and its subsidiaries was consummated on
September 23, 1997 and was principally financed through
borrowings under the Company's Bank Credit Agreement (See
Footnote #5).
Micromass develops, manufactures, and distributes mass
spectrometry instruments, products that are complementary to
Waters' existing product offering. Micromass offers products
ranging from high-end stand-alone instruments to smaller, easier-
to-use detectors that can be integrated and used along with
other analytical instruments, especially HPLC. Micromass is a
global market leader in the field of mass spectrometry. Net
sales for Micromass were approximately $91,000 in 1996.
The acquisition of Micromass was accounted for by the purchase
method and the results of its operations have been consolidated
with the Company's results from September 30, 1997, the
effective accounting date of the acquisition. In conjunction
with the acquisition, the Company recorded a non-recurring
charge of $55,000 for the write-off of acquired in-process
research and development and revalued acquired inventory by
$33,000, which amount will be amortized within cost of sales
over a period of approximately 6 months commencing in the fourth
quarter of 1997. The Company also recorded other intangible
assets and goodwill of approximately $90,000 (subject to final
adjustment) in the transaction which will be amortized up to a
period of 40 years using the straight line method of
amortization.
8
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WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YMC, Inc. Acquisition
The Company consummated a purchase and sale agreement on July
31, 1997, to acquire all of the capital stock of YMC, Inc.
("YMC"), a U.S. based company, for approximately $8 million in
cash, subject to certain adjustments. The acquisition of YMC
was accounted for by the purchase method. YMC is a manufacturer
and distributor of chromatography chemicals and supplies which
augment the Waters consumables business. YMC's 1996 revenues
were approximately $6,500.
TA Instruments, Inc. Acquisition
The Company entered into an agreement on March 28, 1996, to
acquire all of the capital stock of TA Instruments, Inc. ("TAI"),
a U.S. based company, for approximately $83 million in cash. The
acquisition was consummated on May 1, 1996 and was financed
through borrowings under the revolving credit facility under the
Bank Credit Agreement.
Pro Forma Results of Operations
The following unaudited Pro Forma results of operations for the
nine month periods ended September 30, 1997 and 1996 give effect
to the Company's acquisitions as if the transactions had
occurred at the beginning of each such period. The financial
data are based on the historical consolidated financial
statements for the Company, Micromass, YMC and TAI and the
assumptions and adjustments made upon the acquisitions. The Pro
Forma results of operations exclude the non-recurring charges
that were recorded in conjunction with the acquisitions in 1997
and 1996 and do not (i) purport to represent what the Company's
results of operations actually would have been if the
acquisitions 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, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net sales $390,290 $349,570
Income before extraordinary item $ 44,304 $ 25,561
Net income $ 44,304 $ 3,297
Income before extraordinary item
per common share $1.37 $ 0.80
Net income per common share $1.37 $ 0.10
</TABLE>
9
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. Inventories
Inventories are classified as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials $ 21,225 $14,860
Work in progress 15,554 6,180
Finished goods 68,823 26,311
------------- ------------
Total Inventories $105,602 $47,351
============= ============
</TABLE>
4. Income Taxes
The Company's effective tax rate for the three and nine month
periods ended September 30, 1997 and September 30, 1996,
excluding non-recurring acquisition related charges, was 20%.
The three and nine month periods ended September 30, 1997 and
September 30, 1996 were benefited by net operating loss
carryforwards.
5. Debt
In September 1997, the Company amended its Bank Credit Agreement
increasing the maximum availability to $450,000 and securing the
approval of the Company's acquisition of Micromass and subsequent
issuance of promissory notes and Company stock.
In September 1997, the Company entered into an interest rate
swap agreement with Bankers Trust Company effective September
30, 1997 and expiring December 31, 2001. The Company swapped
$82,000 in 1997 ($135,000 in 1998, $151,000 in 1999, $143,000 in
2000 and $93,000 in 2001) in notional amount of floating
rate LIBOR borrowings for an equivalent notional amount of
borrowings at a fixed interest rate of 6.3%. At September 30,
1997, the fair value of this agreement was $510.
In June 1997, the Company amended its Bank Credit Agreement
reducing its LIBOR-based interest rates by 25 basis points and
relaxing certain debt covenants.
In May 1997, the Company entered into a one-year debt swap
agreement with Bankers Trust Company to hedge the U.S. dollar
value of its investment in the net assets of its Canadian
subsidiary and certain European subsidiaries, effective in
January 1998. The Company swapped $33,200 in notional amount of
floating rate LIBOR borrowings for equivalent notional amounts
in Canadian dollars and five European currencies of borrowings
at fixed interest rates averaging approximately 2.4% per annum.
At representative interest rates and currency exchange rates in
effect at May 2, 1997, the transaction date of the agreement,
the Company lowered its annual interest costs by approximately
$1,134 over the term of the swap agreement. The Company could
also incur higher or lower principal payments over the term of
the swap agreement. At currency exchange rates in effect on
September 30, 1997, the principal repayment amount would have
been $29,248.
6. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
SFAS 131, Disclosures about Segments of an Enterprise and
Related information, which is effective for periods beginning
after December 15, 1997. The statement establishes standards
10
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WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
for reporting information about operating segments in annual
financial statements of public business enterprises and requires
that those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers.
In June 1997, the Financial Accounting Standards Board issued
SFAS 130, Reporting Comprehensive Income, which is effective for
periods beginning after December 15, 1997. The statement
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. The
statement requires that all items recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as
other financial statements.
In February 1997, the Financial Accounting Standards Board
issued SFAS 128, Earnings Per Share, which is effective for
periods ending after December 15, 1997. The statement
simplifies the existing computational guidelines and revises the
disclosure requirements for earnings per share.
While management has not calculated the impact of these new
standards, they are not expected to be material to the Company.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Recent Events
On September 12, 1997, the Company entered into an agreement to
acquire all of the capital stock of Micromass Limited, a company
headquartered in Manchester, England, for approximately $175
million in cash, common stock, and promissory notes. Micromass
develops, manufactures, and distributes mass spectrometry
instruments, products that are complementary to Waters' existing
product offering. Micromass offers products ranging from high-
end stand-alone instruments to smaller, easier-to-use detectors
that can be integrated and used along with other analytical
instruments, especially HPLC. Micromass is a global market
leader in the field of mass spectrometry. Net sales for
Micromass were approximately $91 million in 1996.
On July 31, 1997, pursuant to the Company's previous public
announcement, the Company consummated a purchase and sale
agreement to acquire all of the capital stock of YMC, Inc.
("YMC"), a U.S. based company, for approximately $8 million in
cash, subject to certain adjustments. YMC is a manufacturer and
distributor of chromatography chemicals and supplies which
augment the Waters consumables business. YMC's 1996 revenues
were approximately $6.5 million.
In June 1997, the Financial Accounting Standards Board issued
SFAS 131, Disclosures about Segments of an Enterprise and Related
information, which is effective for periods beginning after
December 15, 1997. The statement establishes standards for
reporting information about operating segments in annual
financial statements of public business enterprises and requires
that those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers.
In June 1997, the Financial Accounting Standards Board issued
SFAS 130, Reporting Comprehensive Income, which is effective for
periods beginning after December 15, 1997. The statement
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements.
The statement requires that all items recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the
same prominence as other financial statements.
In February 1997, the Financial Accounting Standards Board
issued SFAS 128, Earnings Per Share, which is effective for
periods ending after December 15, 1997. The statement
simplifies the existing computational guidelines and revises the
disclosure requirements for earnings per share.
While management has not calculated the impact of the new above-
mentioned standards, they are not expected to be material to the
Company.
Results of Operations
Net Sales:
Net sales for the three month period ended September 30, 1997
(the "1997 Quarter") and the nine month period ended September
30, 1997 (the "1997 Period"), were $105.0 million and $313.7
million, respectively, compared to $98.4 million for the three
month period ended September 30, 1996 (the "1996 Quarter") and
$279.7 million for the nine month period ended September 30,
1996 (the "1996 Period"), an increase of 7% for the quarter and
12% for the period. Excluding the adverse effects of the
stronger U.S. dollar, the consolidated Waters business grew 12%
over the 1996 Quarter and 17% over the 1996 Period. Growth in
the Company's HPLC business was geographically broad based for
the quarter and period. Pharmaceutical industry sales, which
account for over 45% of the HPLC business, continued the strong
growth experienced in 1996. Sales of the Company's thermal
analysis products were also strong and contributed to the
Company's overall sales growth in the 1997 Quarter and Period.
Gross Profit:
Gross profit increased to $66.4 million in the 1997 Quarter and
$198.6 million in the 1997 Period from $58.1 million in the 1996
Quarter and $169.6 million in the 1996 Period, an increase of
$8.3 million or 14% for the quarter and $29.0 million or 17% for
the period, primarily due to increased sales volumes in the
traditional HPLC business and the TAI acquisition. During the
1996 Period, the Company recorded a $6.1 million charge for
revaluation of acquired inventory resulting from the TAI
acquisition. Excluding the effects of this charge, gross profit
increased 7% for the 1997 Quarter and 12% for the 1997 Period.
Gross profit as a percentage of sales, excluding the inventory
revaluation charge, was 63.3% during the 1997 Quarter and Period
12
<PAGE>
as compared to 62.8% during the 1996 Quarter and Period,
reflecting continued leverage from increased sales and improved
manufacturing productivity.
Selling, General, and Administrative Expenses:
Selling, general and administrative expenses increased to $39.0
million in the 1997 Quarter and $117.0 million in the 1997
Period, as compared to $38.4 million in the 1996 Quarter and
$107.8 million in the 1996 Period. Selling, general and
administrative expenses increased $0.6 million or 2% for the
1997 quarter. For the 1997 period, selling, general and
administrative expenses increased $9.2 million or 9% primarily
due to the acquisition of TAI. Selling, general and
administrative expenses declined in the 1997 Period as a
percentage of net sales from 38.5% to 37.3%, reflecting general
expense controls.
Research and Development Expenses:
Research and development expenses increased $0.7 million or 13%
over the 1996 Quarter and $2.6 million or 17% over the 1996
Period, primarily due to the Company's continued investment in
the development of new and improved products.
Expensed In-Process Research and Development:
In the 1997 Quarter, the Company wrote off $55.0 million of
acquired in-process research and development expenses related to
the Micromass acquisition. In the second quarter of 1996, the
Company wrote off $19.3 million of the TAI purchase price related
to in-process research and development acquired in the
transaction. Generally accepted accounting principles prohibit
capitalization of acquired research and development.
Operating Income:
The Company generated a net operating loss of $35.3 million in
the 1997 Quarter and net operating income of $4.6 million in the
1997 Period. In comparison, the Company generated net operating
income of $12.6 million in the 1996 Quarter and $23.3 million
in the 1996 Period. The loss during the 1997 Quarter and Period
was due to the impact of the write-off of in-process research
and development expenses associated with the Micromass
acquisition. Excluding the effects of acquisition charges for
Micromass in 1997 and TAI in 1996, operating income increased
$3.5 million or 21% over the 1996 Quarter and $10.9 million or
22% over the 1996 Period due to HPLC sales growth, results of
TAI operations, and a continuing focus on cost containment and
improved productivity in operating areas.
Interest Expense:
Interest expense decreased $1.4 million or 37% to $2.3 million
in the 1997 Quarter compared to $3.7 million in the 1996
Quarter. Interest expense decreased to $8.3 million in the 1997
Period, from $11.1 million in the 1996 Period. In April 1996,
the Company completed a successful tender for its Senior
Subordinated Notes, financing the repurchase with borrowings
under a New Bank Credit Agreement with lower interest rates. The
resulting interest expense reduction was partially offset by the
higher average debt levels as a result of the TAI acquisition.
The Company's average debt levels have since been reduced
through the application of operating cash flows generated during
1996 and 1997, resulting in a decrease in interest expense
during the 1997 Quarter and Period. Further, the Company
entered into various debt swap agreements to hedge its
investment in the net assets of its Japanese and European
subsidiaries during 1996. These agreements have also allowed
the Company to lower its interest expense during the 1997
Quarter and Period compared to the 1996 Quarter and Period.
Provision (Benefit) for Income Taxes:
The Company's effective tax rate for the three and nine month
periods ended September 30, 1997 and September 30, 1996,
excluding non-recurring acquisition related charges, was 20%.
The three and nine month periods ended September 30, 1997 and
September 30, 1996 were benefited by net operating loss
carryforwards.
Net Income (Loss) before Extraordinary Item:
The net loss before extraordinary items was $41.1 million in the
1997 Quarter and $14.0 million in the 1997 Period. The Company
generated net income before extraordinary items of $6.4 million
in the 1996 Quarter and $4.7 million in the 1996 Period. These
results reflect Micromass and TAI non-recurring acquisition
charges. Excluding the effects of these charges, net income
before extraordinary items was $13.9 million in the 1997 Quarter
and $41.0 million in the 1997 Period, $10.1 million in the 1996
Quarter and $30.1 million in the 1996 Period. The 1997 increases
of $3.9 million or 38% compared to the 1996 Quarter, and $10.9
million or 36% compared to the 1996 Period, reflect HPLC sales
growth, results of TAI operations, a continuing focus on cost
containment and improved productivity in operating areas, and a
reduction in interest expense.
13
<PAGE>
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 a net loss of $41.1 million in the 1997
Quarter and $14.0 million in the 1997 Period compared to income
of $6.4 million in the 1996 Quarter and a loss of $17.5 million
in the 1996 Period. The net loss in the 1997 Quarter and Period
was due to the aforementioned Micromass acquisition charges.
The net loss in the 1996 Period was due to the TAI acquisition
charges and charges for the early extinguishment of debt.
Liquidity and Capital Resources:
During the 1997 Period, the Company generated operating cash
flow of $61.6 million primarily as a result of net income for
the period after adjusting for non-cash expenses. Primary uses
of cash flows during the Period were $151.1 million used to
acquire Micromass (including acquired debt repayment), $8.2
million used to acquire YMC and $12.8 million invested in
property, plant and equipment, software capitalization and other
intangibles.
In September 1997, the Company amended its Bank Credit Agreement
increasing the maximum availability under the Bank Credit
Agreement to $450 million and securing the approval of the
Company's acquisition of Micromass and subsequent issuance of
promissory notes and Company stock.
In September 1997, the Company entered into an interest rate swap
agreement with Bankers Trust Company effective September 30, 1997
and expiring December 31, 2001. The Company swapped $82 million
in 1997 ($135 million in 1998, $151 million in 1999, $143 million
in 2000 and $93 million in 2001) in notional amount of floating
rate LIBOR borrowings for an equivalent notional amount of
borrowings at a fixed interest rate of 6.3%. At September 30,
1997, the fair value of this agreement was $0.5 million.
In June 1997, the Company amended its Bank Credit Agreement
reducing its LIBOR-based interest rates by 25 basis points and
relaxing certain debt covenants.
In May 1997, the Company entered into a one-year debt swap
agreement with Bankers Trust Company to hedge the U.S. dollar
value of its investment in the net assets of its Canadian
subsidiary and certain European subsidiaries, effective in
January 1998. The Company swapped $33.2 million in notional
amount of floating rate LIBOR borrowings for equivalent notional
amounts in Canadian dollars and 5 European currencies of
borrowings at fixed interest rates averaging approximately 2.4%
per annum. At representative interest rates and currency
exchange rates in effect at May 2, 1997, the transaction date of
the agreement, the Company lowered its annual interest costs by
approximately $1.1 million over the term of the swap agreement.
The Company could also incur higher or lower principal payments
over the term of the swap agreement. At currency exchange rates
in effect on September 30, 1997, the principal repayment amount
would have been $29.2 million.
The Company believes that existing cash balances and current
cash flow from operating activities together with borrowing
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, 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
From time to time, the Company and its subsidiaries are
involved in various litigation matters arising in the
ordinary course of its business. None of the matters in
which the Company or its subsidiaries are currently
involved, either individually or in the aggregate, is
material to the Company or it subsidiaries.
The Company has asserted a claim contending that Millipore
Corporation has understated the amount of assets it is
obligated to transfer from the Millipore Retirement Plan to
the Waters successor plan. The Federal court has recently
ruled in favor of Millipore's position with respect to the
claim. The Company appealed the decision in October, 1997.
The Company believes it has meritorious arguments and
should prevail although the outcome is not certain.
Regardless, the outcome is not expected to have a material
impact on the Company's financial position.
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 11 - Statement Regarding Computation of Per Share
Earnings
Exhibit 27 - Financial Data Schedule
B. No reports on Form 8-K were filed during the three months
ended September 30, 1997.
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: November 13, 1997 Waters Corporation
/s/ Philip S. Taymor
Philip S. Taymor
Senior Vice President and Chief
Financial Officer
16
<PAGE>
Exhibit 11
WATERS CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Primary earnings per share For the three months For the nine months
ended September 30, ended September 30,
1997 1996 1997 1996
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Common stock outstanding, beginning of period 29,015 28,831 28,923 28,796
Weighted average shares issued in conjunction with Micromass acquisition 29 - 10 -
Weighted average common stock equivalent shares 5,142 5,338 4,970 5,189
Weighted average shares issued upon exercise of stock options 30 56 53 46
Less: Assumed purchase of treasury shares (1,907) (2,337) (2,044) (2,504)
---------- ---------- --------- ----------
Weighted average number of common shares 32,309 31,888 31,912 31,527
========== ========== ========= ==========
(Loss) income before extraordinary item $(41,079) $ 6,396 $(13,982) $ 4,717
Extraordinary item - (loss) on early retirement of debt - - - (22,264)
---------- ---------- --------- ----------
Net (loss) income $(41,079) $ 6,396 $(13,982) $(17,547)
Less: accretion of and 6% dividend on preferred stock 237 231 705 689
---------- ---------- --------- ----------
Net (loss) income available to common stockholders $(41,316) $ 6,165 $(14,687) $(18,236)
========== ========== ========= ==========
(Loss) income before extraordinary item per common share $ (1.28) $ 0.19 $ (0.46) $ 0.13
Extraordinary (loss) per common share - - - (0.71)
---------- ---------- ---------- ----------
Net (loss) income per common share $ (1.28) $ 0.19 $ (0.46) $ (0.58)
========== ========== ========== ==========
Fully diluted earnings per share For the three months For the nine months
ended September 30, ended September 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Common stock outstanding, beginning of period 29,015 28,831 28,923 28,796
Weighted average shares issued in conjunction with Micromass acquisition 29 - 10 -
Weighted average common stock equivalent shares 5,143 5,338 4,972 5,189
Weighted average shares issued upon exercise of stock options 30 56 53 46
Less: Assumed purchase of treasury shares (1,574) (2,337) (1,733) (2,504)
---------- ---------- ---------- ----------
Weighted average number of common shares 32,643 31,888 32,225 31,527
========== ========== ========== ==========
(Loss) income before extraordinary item $(41,079) $ 6,396 $ (13,982) $ 4,717
Extraordinary item - (loss) on early retirement of debt - - - (22,264)
---------- ---------- ---------- ----------
Net (loss) income $(41,079) $ 6,396 $ (13,982) $(17,547)
Less: accretion of and 6% dividend on preferred stock 237 231 705 689
---------- ---------- ---------- ----------
Net (loss) income available to common stockholders $(41,316) $ 6,165 $ (14,687) $(18,236)
========== ========== ========== ==========
(Loss) income before extraordinary item per common share $ (1.27) $ 0.19 $ (0.46) $ 0.13
Extraordinary (loss) per common share - - - (0.71)
---------- ---------- ---------- ----------
Net (loss) income per common share $ (1.27) $ 0.19 $ (0.46) $ (0.58)
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 10102
<SECURITIES> 0
<RECEIVABLES> 111522
<ALLOWANCES> 2341
<INVENTORY> 105602
<CURRENT-ASSETS> 235492
<PP&E> 110935
<DEPRECIATION> 27453
<TOTAL-ASSETS> 565521
<CURRENT-LIABILITIES> 159159
<BONDS> 339248
7859
0
<COMMON> 295
<OTHER-SE> 54294
<TOTAL-LIABILITY-AND-EQUITY> 565521
<SALES> 313715
<TOTAL-REVENUES> 313715
<CGS> 115066
<TOTAL-COSTS> 115066
<OTHER-EXPENSES> 194060
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8317
<INCOME-PRETAX> (3728)
<INCOME-TAX> 10254
<INCOME-CONTINUING> (13982)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14687)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
