<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 AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
for the transition period from __________to__________.
Commission File Number: 01-14010
Waters Corporation
------------------
(Exact name of registrant as specified in the charter)
Delaware 13-3668640
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
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 August 7, 1998: 29,951,223
----------
1
<PAGE>
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, 1998
and December 31, 1997 3
Consolidated Statements of Earnings for the three
months ended June 30, 1998 and 1997 4
Consolidated Statements of Earnings for the six months
ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 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
2
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
June 30, 1998 December 31, 1997
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,598 $ 3,113
Accounts receivable, less allowances
for doubtful accounts of $2,851 and
$2,785 at June 30, 1998 and December
31, 1997, respectively 112,373 111,022
Inventories 81,510 87,375
Other current assets 16,807 11,614
----------- -----------
Total current assets 212,288 213,124
Property, plant and equipment, net of
accumulated depreciation of $37,319
and $30,074 at June 30, 1998 and
December 31, 1997, respectively 89,597 88,668
Other assets 68,038 70,089
Goodwill, less accumulated amortization
of $10,001 and $7,543 at June 30, 1998
and December 31, 1997, respectively 180,676 180,178
----------- -----------
Total assets $ 550,599 $ 552,059
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of
long term debt $ 7,269 $ 7,394
Accounts payable 33,430 33,061
Deferred revenue and customer advances 25,627 25,289
Other current liabilities 105,699 104,912
----------- -----------
Total current liabilities 172,025 170,656
Long term debt 279,375 305,340
Redeemable preferred stock 8,575 8,096
Other liabilities 5,637 5,670
----------- -----------
Total liabilities 465,612 489,762
Commitments and contingent liabilities - -
Stockholders' Equity:
Common stock (par value $0.01, 50,000
shares authorized, 29,945 and 29,583
shares issued and outstanding at
June 30, 1998 and December 31, 1997,
respectively) 299 296
Additional paid-in capital 164,005 161,476
Deferred stock option compensation (496) (606)
Accumulated deficit (75,739) (96,096)
Translation adjustments (3,082) (2,773)
----------- -----------
Total stockholders' equity 84,987 62,297
----------- -----------
Total liabilities and stockholders' equity $ 550,599 $ 552,059
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
For the Three For the Three
Months Ended Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net sales $149,311 $106,240
Cost of sales 55,848 38,703
-------- --------
Gross profit 93,463 67,537
Selling, general and
administrative expenses 51,952 38,909
Research and development expenses 8,246 5,806
Goodwill and purchased technology
amortization 2,231 1,415
-------- --------
Operating income 31,034 21,407
Interest expense, net 4,888 2,959
-------- --------
Income from operations before
income taxes 26,146 18,448
Provision for income taxes 6,033 3,689
-------- --------
Net income 20,113 14,759
Less: accretion of and 6% dividend
on preferred stock 240 234
-------- --------
Net income available to common
stockholders $ 19,873 $ 14,525
======== ========
-------- --------
Net income per basic common share $0.67 $0.50
======== ========
Weighted average number of basic
common shares 29,877 28,957
-------- --------
Net income per diluted common share $0.59 $0.46
======== ========
Weighted average number of diluted
common shares and equivalents 33,519 31,560
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
For the Six For the Six
Months Ended Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net sales $288,036 $208,671
Cost of sales 107,768 76,468
Revaluation of acquired inventory 16,500 -
-------- --------
Gross profit 163,768 132,203
Selling, general and administrative
expenses 101,940 77,985
Research and development expenses 16,618 11,592
Goodwill and purchased technology
amortization 4,506 2,772
-------- --------
Operating income 40,704 39,854
Interest expense, net 9,951 5,983
-------- --------
Income from operations before
income taxes 30,753 33,871
Provision for income taxes 10,396 6,774
-------- --------
Net income 20,357 27,097
Less: accretion of and 6% dividend
on preferred stock 479 468
-------- --------
Net income available to common
stockholders $ 19,878 $ 26,629
======== ========
-------- --------
Net income per basic common share $0.67 $0.92
======== ========
Weighted average number of basic
common shares 29,793 28,942
-------- --------
Net income per diluted common share $0.60 $0.84
======== ========
Weighted average number of diluted
common shares and equivalents 33,340 31,714
</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>
For the Six Months Ended
------------------------
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $20,357 $27,097
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 13,138 8,980
Amortization of debt issuance costs 618 517
Compensatory stock option expense 110 110
Revaluation of acquired inventory 16,500 -
Change in operating assets and liabilities:
(Increase) in accounts receivable (2,748) (375)
(Increase) in inventories (11,200) (2,809)
(Decrease) increase in accounts payable
and accrued expenses (142) 4,189
Increase in deferred revenue 327 2,623
Other, net (1,118) (822)
------- -------
Net cash provided by operating activities 35,842 39,510
Cash flows from investing activities:
Additions to property, plant and equipment (8,490) (5,604)
Software capitalization and other intangibles (3,112) (2,328)
Business acquisition, net of cash acquired (3,157) -
Loans to officers 255 (68)
------- -------
Net cash (used in) investing activities (14,504) (8,000)
Cash flows from financing activities:
Net (repayments) of bank debt (26,090) (30,291)
Stock options exercised 2,989 761
------- -------
Net cash (used in) financing activities (23,101) (29,530)
Effect of exchange rate changes on cash 248 (181)
------- -------
Net change in cash and cash equivalents (1,515) 1,799
Cash and cash equivalents at beginning of period 3,113 639
------- -------
Cash and cash equivalents at end of period $ 1,598 $ 2,438
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
6
<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. 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. 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, 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, 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, 1997.
2. Acquisitions
Micromass Limited Acquisition
On September 23, 1997, the Company acquired 100% of the capital
stock of Micromass Limited, a company headquartered in
Manchester, England, for approximately $175,000 in cash, common
stock (375 shares) and promissory notes. The acquisition
principally was financed through borrowings under the Company's
Bank Credit Agreement. Micromass develops, manufactures, and
distributes mass spectrometry instruments, products that are
complementary to Waters' existing product offering. Micromass
offers products ranging from high-end stand-alone instruments to
smaller, easier-to-use detectors that can be integrated and used
along with other analytical instruments, especially HPLC.
Micromass is a global market leader in the field of mass
spectrometry.
YMC, Inc. Acquisition
On July 31, 1997, the Company acquired all of the capital stock
of YMC, Inc. ("YMC"), a U.S. based company, for approximately
$9,000 in cash. YMC is a manufacturer and distributor of
chromatography chemicals and supplies which augment the Waters
consumables business.
7
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro Forma Results of Operations
The following unaudited Pro Forma results of operations for the
six months ended June 30, 1998 and 1997 give effect to the
Company's acquisitions as if the transactions had occurred at
the beginning of each such period. The financial data are based
on the historical consolidated financial statements for the
Company, Micromass and YMC and include related adjustments. The
Pro Forma results of operations exclude the non-recurring
charges that were recorded in conjunction with the Micromass
acquisition in 1998 and 1997 and do not purport to represent (i)
what the Company's results of operations actually would have
been if the Micromass acquisition had occurred as of the
beginning of the periods or (ii) what such results will be for
any future periods. The financial data are based upon
assumptions that the Company believes are reasonable and should
be read in conjunction with the Consolidated Financial
Statements and accompanying notes thereto included elsewhere in
this report.
<TABLE>
Unaudited Pro Forma Results
---------------------------
For the Six Months Ended
------------------------
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net sales $288,036 $259,420
Net income $ 36,378 $ 30,394
Net income per basic common share $ 1.22 $ 1.04
Net income per diluted common share $ 1.09 $ 0.95
</TABLE>
3. Inventories
Inventories are classified as follows:
<TABLE>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Raw materials $25,477 $22,092
Work in progress 10,459 15,315
Finished goods 45,574 33,468
Revaluation of acquired inventory - 16,500
------- -------
Total Inventories $81,510 $87,375
======= =======
</TABLE>
4. Income Taxes
The Company's effective tax rate for the three months ended June
30, 1998 and 1997, was 23% and 20%, respectively. The Company's
effective tax rate for the six months ended June 30, 1998 and
1997, was 22% and 20%, respectively, before nondeductible
acquisition related expenses.
8
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. Earnings Per Share
SFAS 128, which now governs earnings per share computations,
requires the following reconciliation of the basic and diluted
EPS calculations:
<TABLE>
Six Months Ended June 30, 1998
------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net income $ 20,357
Less: Accretion of and 6%
dividend on preferred stock 479
Income per basic common ----------- ------------- ---------
share from operations $ 19,878 29,793 $ 0.67
=========== ============= =========
Effect of dilutive securities:
Options outstanding 3,487
Options exercised 60
Income per diluted common ----------- ------------- ---------
share from operations $ 19,878 33,340 $ 0.60
=========== ============= =========
</TABLE>
<TABLE>
Six Months Ended June 30, 1997
------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net income $ 27,097
Less: Accretion of and 6%
dividend on preferred stock 468
Income per basic common ----------- ------------- ---------
share from operations $ 26,629 28,942 $ 0.92
=========== ============= =========
Effect of dilutive securities:
Options outstanding 2,761
Options exercised 11
Income per diluted common ----------- ------------- ---------
share from operations $ 26,629 31,714 $ 0.84
=========== ============= =========
</TABLE>
<TABLE>
Three Months Ended June 30, 1998
--------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net income $ 20,113
Less: Accretion of and 6%
dividend on preferred stock 240
Income per basic common ----------- ------------- ---------
share from operations $ 19,873 29,877 $ 0.67
=========== ============= =========
Effect of dilutive securities:
Options outstanding 3,590
Options exercised 52
Income per diluted common ----------- ------------- ---------
share from operations $ 19,873 33,519 $ 0.59
=========== ============= =========
</TABLE>
9
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
Three Months Ended June 30, 1997
--------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net income $ 14,759
Less: Accretion of and 6%
dividend on preferred stock 234
Income per basic common ----------- ------------ ---------
share from operations $ 14,525 28,957 $ 0.50
=========== ============ =========
Effect of dilutive securities:
Options outstanding 2,583
Options exercised 20
Income per diluted common ----------- ------------ ---------
share from operations $ 14,525 31,560 $ 0.46
=========== ============ =========
</TABLE>
For both the three month and six month periods ended June 30, 1998,
the Company had no stock option securities that were antidilutive.
For both the three month and six month periods ended June 30, 1997,
the Company had three hundred and fifty-nine thousand stock option
securities that were antidilutive. These securities could potentially
dilute basic EPS in the future, and were not included in the computation of
diluted EPS because to do so would have been antidilutive for the
periods presented.
6. Comprehensive Income
SFAS 130, which establishes standards for reporting and display
of comprehensive income and its components, requires the
following calculation of the tax effects allocated to each
component of other comprehensive income and rollforward of
accumulated other comprehensive income:
<TABLE>
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 20,357 $ 27,097 $ 20,113 $ 14,759
Foreign currency
translation adjustments
before income taxes (309) (2,047) (366) (1,857)
(Benefit) for income
taxes (68) (409) (84) (371)
Other comprehensive ---------- ---------- ---------- ----------
(loss) (241) (1,638) (282) (1,486)
---------- ---------- ---------- ----------
Comprehensive income $ 20,116 $ 25,459 $ 19,831 $ 13,273
========== ========== ========== ==========
</TABLE>
<TABLE>
Accumulated
Foreign Other
Currency Comprehensive
Items Income
-------- -------------
<S> <C> <C>
Balance, December 31, 1997 $(2,773) $(2,773)
Change during 1st Quarter 57 57
Change during 2nd Quarter (366) (366)
------- -------
Balance, June 30, 1998 $(3,082) $(3,082)
======= =======
</TABLE>
10
<PAGE>
WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
Accumulated
Foreign Other
Currency Comprehensive
Items Income
-------- -------------
<S> <C> <C>
Balance, December 31, 1996 $ 408 $ 408
Change during 1st Quarter (190) (190)
Change during 2nd Quarter (1,857) (1,857)
------- -------
Balance, June 30, 1997 $(1,639) $(1,639)
======= =======
</TABLE>
7. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, which is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Earlier application is
permitted. The statement establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
In February 1998, the Financial Accounting Standards Board
issued SFAS 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, which is effective for periods beginning
after December 15, 1997, but excludes interim periods during
1998. The statement standardizes employers' disclosure
requirements about pension and other postretirement benefit plans
by requiring additional information on changes in the benefit
obligations and fair values of plan assets and eliminating
certain disclosures that are no longer useful. It does not
change the measurement or recognition of those plans.
In June 1997, the Financial Accounting Standards Board issued
SFAS 131, Disclosures about Segments of an Enterprise and Related
Information, which is effective for periods beginning after December
15, 1997, but excludes interim periods during 1998. The
statement establishes standards for reporting information about
operating segments in annual financial statements of public
business enterprises and in interim financial reports issued to
shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers.
While management has not determined the impact of the new
above-mentioned standards, they are not expected to be material
to the Company.
In June 1997, the Financial Accounting Standards Board issued
SFAS 130, Reporting Comprehensive Income, which is effective for
periods beginning after December 15, 1997. The statement
establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. The
statement requires that all components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company has
adopted SFAS 130 in the accompanying financial statements.
Footnote disclosure has been provided for interim periods.
In February 1997, the Financial Accounting Standards Board
issued SFAS 128, Earnings Per Share, which is effective for
periods ending after December 15, 1997. The statement changes
computational guidelines and disclosure requirements for earnings
per share. The Company has adopted SFAS 128 in the accompanying
financial statements and has restated all prior period earnings
per share data.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Recent Events
On September 23, 1997, the Company acquired all of the capital
stock of Micromass, a company headquartered in Manchester,
England, for approximately $175 million in cash, common stock and
promissory notes. The acquisition principally was financed
through borrowings under the Company's Bank Credit Agreement.
Micromass develops, manufactures, and distributes mass
spectrometry instruments, products that are complementary to the
Company's existing product offering. Micromass offers products
ranging from high-end stand-alone instruments to smaller, easier-
to-use detectors that can be integrated and used along with other
analytical instruments, especially HPLC. Micromass is a global
market leader in the field of mass spectrometry.
On September 4, 1997, the Company increased the maximum
availability under its Bank Credit Agreement to $450 million in
order to finance the acquisition of Micromass.
On July 31, 1997, the Company acquired all of the capital
stock of YMC, Inc. ("YMC"), a U.S. based company, for
approximately $9 million in cash. YMC is a manufacturer and
distributor of chromatography chemicals and supplies which
augment the Company's consumables business.
Results of Operations
Net Sales:
Net sales for the three month period ended June 30, 1998 (the
"1998 Quarter") and the six month period ended June 30, 1998 (the
"1998 Period") were $149.3 million and $288.0 million,
respectively, compared to $106.2 million for the three month
period ended June 30, 1997 (the "1997 Quarter") and $208.7
million for the six month period ended June 30, 1997 (the "1997
Period"), an increase of 41% for the quarter and 38% for the
period. Excluding the adverse effects of a stronger U.S. dollar,
net sales increased by 45% over the 1997 Quarter and 41% over the
1997 Period. The Company's core HPLC and thermal analysis
businesses grew by 11% as compared to the 1997 Quarter and the
1997 Period, while the impact of the Micromass acquisition
resulted in the remaining 34% and 30% points of growth,
respectively. HPLC growth was generally broad-based across all
geographies, except Japan and the Pacific Rim. Customer demand
was strong in the U.S. and Europe, offsetting Asia's weakness.
Pharmaceutical customer demand was especially strong across all
geographies. The Company's sales of mass spectrometry products
grew strongly as well.
Gross Profit:
Gross profit increased to $93.5 million in the 1998 Quarter and
$163.8 million in the 1998 Period from $67.5 million in the 1997
Quarter and $132.2 million in the 1997 Period, an increase of $26.0
million or 39% for the quarter and $31.6 million or 24% for the
period. Excluding the $16.5 million non-recurring charge in the
1998 Period for revaluation of acquired inventory related to
purchase accounting for the Micromass acquisition, gross profit
increased by 36% over the 1997 Period. Gross profit as a
percentage of sales excluding the inventory revaluation charge
decreased to 62.6% in both the 1998 Quarter and Period, from
63.6% and 63.4% in the 1997 Quarter and Period, reflecting the
inclusion of Micromass' results after its September 1997
acquisition. (Micromass' gross margins are lower than Waters'
historical gross margins, but its operating expenses are
commensurately lower, and its operating margins are comparable to
those of Waters.) Excluding the impact of Micromass' results,
gross profit as a percentage of sales increased in the 1998
Period, primarily as a result of increased efficiencies in the
Company's manufacturing operations and lower raw material costs.
Selling, General, and Administrative Expenses:
Selling, general and administrative expenses increased to $52.0
million in the 1998 Quarter and $101.9 million in the 1998
Period, as compared to $38.9 million in the 1997 Quarter and
$78.0 million in the 1997 Period, primarily due to inclusion of
expenses of acquired companies. As a percentage of net sales,
selling, general and administrative expenses decreased to 35% for
both the 1998 Quarter and Period, from 37% for both the 1997
Quarter and Period as a result of higher sales volume and expense
controls.
Research and Development Expenses:
Research and development expenses were $8.2 million for the 1998
Quarter and $16.6 million for the 1998 Period, compared to $5.8
million for the 1997 Quarter and $11.6 million for the 1997
Period, a $2.4 million or 42% increase for the quarter and a $5.0
million or 43% increase for the period. Current year spending
increased due to the inclusion of expenses of acquired
12
<PAGE>
companies. The Company continues to invest significantly in the
development of new and improved HPLC, thermal analysis, rheology,
and mass spectrometry products.
Goodwill and Purchased Technology Amortization:
Goodwill and purchased technology amortization was $2.2 million
for the 1998 Quarter and $4.5 million for the 1998 Period, an
increase of $0.8 million from the 1997 Quarter and $1.7 million
from the 1997 Period. This increase was primarily related to the
acquisition of Micromass.
Operating Income:
Operating income was $31.0 million for the 1998 Quarter and $40.7
million for the 1998 Period, an increase of $9.6 million from the
1997 Quarter and $0.9 million from the 1997 Period. This smaller
increase over the period reflected a final $16.5 million non-
recurring charge in the first quarter of 1998 related to the
revaluation of acquired inventory in connection with the
Micromass acquisition. Excluding this non-recurring charge,
operating income was $57.2 million for the 1998 Period and
represented a $17.4 million or 44% increase over the 1997 Period.
The increased operating income levels for the 1998 Period were
the result of strong sales growth, volume leverage, and continued
focus on cost reduction in all operating areas and the accretive
impact of acquisitions.
Interest Expense, Net:
Net interest expense increased by $1.9 million or 65% for the
1998 Quarter and by $4.0 million or 66% for the 1998 Period, from
$3.0 million in the 1997 Quarter and $6.0 million in the 1997
Period to $4.9 million in the 1998 Quarter and $10.0 million in
the 1998 Period. The current period increase reflected increased
debt levels incurred to finance the Micromass acquisition.
Provision for Income Taxes:
The Company's effective tax rate for the three months ended June 30,
1998 and 1997, was 23% and 20%, respectively. The Company's effective
tax rate for the six months ended June 30, 1998 and 1997, was 22%
and 20%, respectively, before nondeductible acquisition related expenses.
Net Income:
Income from operations was $20.1 million for the 1998 Quarter and
$20.4 million for the 1998 Period, compared to $14.8 million for
the 1997 Quarter and $27.1 million for the 1997 Period. Excluding
the $16.5 million non-recurring charge in 1998 for the revaluation
of acquired inventory, the Company generated $36.9 million of income
in the 1998 Period compared to $27.1 million in the 1997 Period.
The improvement over the prior year was a result of sales growth,
continued focus on cost reductions in all operating areas and the
accretive impact of acquisitions.
Liquidity and Capital Resources:
During the 1998 Period, net cash provided by the Company's
operating activities was $35.8 million, primarily as a result of
net income for the period after adding back non-recurring non-
cash charges, depreciation and amortization, and after an $11.2
million investment in inventory. Primary uses of cash flows
during the period were $11.6 million invested in property, plant
and equipment and software capitalization; $3.2 million used for
a business acquisition; and $26.1 million of bank debt repayments.
The Company has evaluated the impact of Year 2000 issues on its
existing systems. The Company expects that the impact will not
be material.
The Company believes that existing cash balances and current
cash flow from operating activities together with borrowings
available under the Bank Credit Agreement will be sufficient to
fund working capital, capital spending and debt service
requirements of the Company in the foreseeable future.
Cautionary Statement:
Certain statements contained herein are forward looking. Many
factors could cause actual results to differ from these
statements, including loss of market share through competition,
introduction of competing products by other companies, pressure
on prices from competitors and/or customers, regulatory
obstacles to new product introductions, lack of acceptance
13
<PAGE>
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.
Part II: Other Information
Item 1. Legal Proceedings
From time to time, the Company and its subsidiaries are
involved in various litigation matters arising in the
ordinary course of its business. None of the matters in
which the Company or its subsidiaries are currently
involved, either individually or in the aggregate, is
material to the Company or its subsidiaries.
The Company and its wholly owned subsidiary, Micromass
Limited, are aware that a patent infringement action has
been filed in the U.S. District Court for the District of
Connecticut but has not been served. As a matter of convenience,
settlement discussions are taking place. The patents relate
to electrospray mass spectrometer products.
The Company, through its subsidiary TAI, asserted a claim
against The Perkin-Elmer Corporation ("PE") alleging patent
infringement of three patents owned by TAI ("the TAI
patents"). PE counterclaimed for infringement of a patent
owned by PE ("the PE patent"). PE withdrew its claim for
infringement preserving its right to appeal rulings
interpreting the claims of the PE patent. A jury returned a
verdict finding that no valid claims of the TAI patents were
infringed by PE. TAI has appealed the verdict with the U.S.
District Court for the District of Delaware.
The Company has filed revocation and nullification actions
against Hewlett-Packard Company and Hewlett-Packard GmbH
("HP"), seeking revocation or nullification of certain
foreign HP patents in Europe. The patents relate to the
Company's Alliance product.
The Company believes it has meritorious arguments and should
prevail in the above legal proceedings, although the
outcomes are not certain. The Company believes that any
outcomes of the proceedings will not be material to the
Company.
The Company had asserted a claim contending that Millipore
had understated the amount of assets it was obligated to
transfer from the Millipore Retirement Plan to the Waters
successor plan. The Federal court had subsequently ruled in
favor of Millipore's position with respect to the claim. On
appeal, the May 19, 1997 Federal court ruling in favor of
Millipore's position with respect to the claim was upheld,
and $2,439,561 was transferred to the Waters Retirement Plan
on June 2, 1998.
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
The Waters Corporation annual meeting of stockholders was
held on May 12, 1998, 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,
and the reservation of an additional two million shares of
the Company's common stock for issuance upon the exercise of
stock options granted under the Company's Long-Term
Performance Incentive Plan for senior executives of the
Company.
As of March 23, 1998, the record date for said meeting,
there were 29,790,227 shares of Waters Corporation common
stock entitled to vote at the meeting. At such meeting, the
holders of 25,932,568 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:
<TABLE>
Matter For Withheld or Against
------ --- -------------------
<S> <C> <C>
Election of Directors
For Joshua Bekenstein 25,891,784 40,784
For Michael J. Berendt, Ph.D. 25,895,578 36,990
For Douglas A. Berthiaume 25,896,550 36,018
14
<PAGE>
For Philip Caldwell 25,889,026 43,542
For Edward Conard 25,897,406 35,162
For Thomas P. Salice 25,896,956 35,612
For Laurie H. Glimcher, M.D. 25,890,521 42,047
For William J. Miller 25,890,642 41,926
Ratification of Auditors 25,911,136 21,432
Reservation of Additional
Shares 14,503,599 11,428,969
</TABLE>
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 June 30, 1998.
15
<PAGE>
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, 1998 Waters Corporation
/s/ Philip S. Taymor
--------------------------
Philip S. Taymor
Senior Vice President and
Chief Financial Officer
16
<PAGE>
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