FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
COMMISSION FILE NUMBER 0-1052
Millipore Corporation
(Exact name of registrant as specified in its charter)
Massachusetts
(State or other jurisdiction of incorporation or organization)
04-2170233
(I.R.S. Employer Identification No.)
80 Ashby Road
Bedford, Massachusetts 01730
(Address of principal executive offices)
Registrant's telephone number, include area code (781) 533-6000
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
The Company had 43,993,229 shares of common stock outstanding as
of November 6, 1998.
MILLIPORE CORPORATION
INDEX TO FORM 10-Q
Page No.
Part I. Financial Information
Item 1. Condensed Financial Statements
Consolidated Balance Sheets -
September 30,1998 and December 31, 1997 2
Consolidated Statements of Income -
Three and Nine Months Ended September 30,
1998 and 1997 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998
and 1997 4
Notes to Consolidated Condensed
Financial Statements 5-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9-14
Part II. Other Information
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<TABLE>
MILLIPORE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
September December
30, 1998 31, 1997
ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash $ 1,474 $ 2,240
Short-term investments 42,512 18,029
Accounts receivable, net 155,536 176,585
Inventories 117,616 127,192
Other current assets 9,756 28,362
Total Current Assets 326,894 352,408
Property, plant and equipment,net 225,098 220,094
Intangible assets 77,333 77,394
Deferred income taxes 106,001 88,760
Other assets 22,061 27,588
Total Assets $757,387 $766,244
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Notes payable $ 186,272 $165,576
Accounts payable 41,522 46,088
Accrued expenses 81,629 74,856
Dividends payable 4,833 4,369
Accrued retirement plan 6,119 7,088
contributions
Accrued income taxes payable 5,811 6,896
Total Current Liabilities 326,186 304,873
Long-term debt 282,749 286,844
Other liabilities 26,355 25,533
Shareholders' equity
Common Stock 56,988 56,988
Additional paid-in capital 10,927 10,927
Retained earnings 470,407 490,289
Accumulated other comprehensive (35,583) (21,720)
loss
502,739 536,484
Less: Treasury stock, at cost,
13,048 shares in 1998 and 13,291
in 1997 (380,642) (387,490)
Total Shareholders' Equity 122,097 148,994
Total Liabilities and Shareholders'
Equity $757,387 $ 766,244
</TABLE>
The accompanying notes are an integral part of the consolidated
condensed financial statements.
-2-
<TABLE>
MILLIPORE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $159,181 $184,544 $520,015 $555,881
Cost of sales 101,493 82,372 273,429 249,430
Gross profit 57,688 102,172 246,586 306,451
Selling, general &
administrative expenses 56,588 58,965 179,084 182,015
Research & development
expenses 13,301 14,353 40,346 42,507
Purchased research &
development expense - - - 114,091
Restructuring charges 33,641 - 33,641 -
Settlement of litigation - - 11,766 -
Operating (loss)/income (45,842) 28,854 (18,251) (32,162)
Gain on sale of equity
securities - 5,304 35,594 7,073
Interest income 877 708 2,252 2,105
Interest expense (7,098) (8,026) (21,229) (22,209)
(Loss)/income from continuing
operations before income (52,063) 26,840 (1,634) (45,193)
taxes
(Benefit)/provision for
income taxes (15,643) 5,637 (3,457) 14,985
Net (loss)/income from
continuing operations (36,420) 21,203 1,823 (60,178)
Net loss on disposal of 5,847 - 5,847 -
discontinued operations
Net (loss)/income $(42,267) $21,203 $(4,024) $(60,178)
Basic net (loss)/income per
share:
(Loss)/income from
continuing operations $ (0.83) $0.49 $ 0.04 $(1.38)
Net (loss)/income per
share $ (0.96) $0.49 $(0.09) $(1.38)
Diluted net (loss)/income per
share:
(Loss)/income from
continuing operations $ (0.83) $0.48 $0.04 $(1.38)
Net (loss)/income per
share $ (0.96) $0.48 $(0.09) $(1.38)
Cash dividends declared per
common share $ 0.11 $0.10 $0.32 $0.29
Weighted average common
shares outstanding:
Basic 43,891 43,565 43,814 43,492
Diluted 43,891 44,428 44,279 43,492
</TABLE>
The accompanying notes are an integral part of the consolidated
condensed financial statements.
-3-
<TABLE>
MILLIPORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended September
30,
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(4,024) $(60,178)
Adjustments to reconcile net loss to
net cash provided:
Restructuring charges 42,816 -
Net loss on disposal of discontinued 5,847 -
operations
Purchased research and development - 114,091
expense
Write-off of acquired inventory step- - 5,000
up
Depreciation and amortization 33,036 30,358
Gain on sale of equity securities (35,594) (7,073)
Deferred tax benefit (16,176) -
Change in operating assets and
liabilities, net:
Decrease (increase) in accounts 21,212 (20,354)
receivable
Decrease (increase) in inventories 5,736 (11,024)
Decrease (increase) in other 716 (8,783)
current assets
Decrease (increase) in other assets 1,245 (2,382)
(Decrease) in accounts payable and (27,814) (11,578)
accrued expenses
(Decrease) increase in accrued
retirement plan contributions (1,103) 1,648
(Decrease) in accrued income taxes (1,085) (389)
Other 150 4,782
Net cash provided by operating 24,962 34,118
activities
Cash Flows From Investing Activities:
Additions to property, plant and (42,227) (28,464)
equipment
Acquisition of Tylan, net of cash - (159,158)
acquired
Proceeds from sale of equity 35,594 7,073
securities
Investment in intangibles (3,453) (6,541)
Net cash used by discontinued (2,216) (3,246)
operations
Net cash used in investing activities (12,302) (190,336)
Cash Flows From Financing Activities:
Issuance of treasury stock under stock 4,890 5,178
plans
Increase in short-term debt 20,771 79,583
Proceeds from issuance of long-term - 197,950
debt
Payments on long-term debt - (126,018)
Dividends paid (13,578) (12,185)
Net cash provided by financing 12,083 144,508
activities
Effect of foreign exchange rates on
cash and short-term investments (1,026) (4,065)
Net increase (decrease) in cash and 23,717 (15,775)
short-term investments
Cash and short-term investments on 20,269 46,870
January 1
Cash and short-term investments on $43,986 $31,095
September 30
The accompanying notes are an integral part of the consolidated
condensed financial statements.
</TABLE>
-4-
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands)
1. General: The accompanying unaudited consolidated condensed
financial statements have been prepared in accordance with the
instructions to Form 10-Q and, accordingly, these footnotes condense
or omit certain information and disclosures normally included in
financial statements. These financial statements, which in the
opinion of management reflect all adjustments necessary for a fair
presentation, should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997. The accompanying
unaudited consolidated condensed financial statements are not
necessarily indicative of future trends or the Company's operations
for the entire year.
2. Inventories: Inventories consisted of the following:
September 30, December 31,
1998 1997
Raw materials $38,302 $42,518
Work in 19,436 16,545
process
Finished 59,878 68,129
goods
Total $117,616 $127,192
3. Property, Plant and Equipment: Accumulated depreciation on
property, plant and equipment was $197,103 at September 30,1998, and
$166,585 at December 31, 1997.
4. Acquisitions: During the first quarter of 1998, the Company
finalized the allocation of the purchase price relating to the
acquisition of Tylan General, Inc. as discussed in Note C to the
Company's financial statements for the year ended December 31, 1997.
The final accrual for additional costs associated with the
acquisition was $32,000. The final adjusted purchase price included
current assets of $42,544, property and equipment of $15,559, other
assets of $16,477 and liabilities of $22,042. Intangible assets
valued at $28,742 are being amortized over their estimated useful
lives ranging from 6 to 20 years.
5.Legal Proceedings: On May 2, 1997, the Environmental Quality Board
("EQB") of Puerto Rico served an administrative order on Millipore
Cidra, Inc., a wholly-owned subsidiary of the Company. The
administrative order ("EQB order") alleged: (i) that the
nitrocellulose filter membrane scrap produced by Millipore Cidra's
manufacturing operations is a hazardous waste as defined in EQB
regulations; (ii) that Millipore Cidra, Inc. failed to manage,
transport and dispose of the nitrocellulose membrane scrap as a
hazardous waste; and (iii) that such failure violated EQB
regulations. The EQB order proposed penalties in the amount of
$96,500 and ordered Millipore Cidra, Inc. to manage the
nitrocellulose membrane scrap as a hazardous waste. The Company
recorded a charge of $5,000 in the first quarter of 1998
reflecting its costs to settle this matter.
The Company also recorded a charge of $3,100 in the first quarter
of 1998 reflecting its costs to settle a separate lawsuit with an
intervening party in the EQB administrative case described above.
The Company recorded a charge of $3,666 in the first quarter of
1998 to settle a patent lawsuit with Mott Metallurgical
Corporation. In the lawsuit, each party claimed infringement of
one of its patents by the other. As part of the settlement, the
parties agreed to cross license the two patents at issue.
-5-
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands)
The Company and Waters Corporation were engaged in an arbitration
proceeding and a related litigation in the Superior Court,
Middlesex, Massachusetts, both of which commenced in the second
quarter of 1995 with respect to the amount of assets required to
be transferred by the Company's Retirement Plan in connection with
the Company's divestiture of its former Chromatography Division.
In the second quarter of 1996, Waters filed a Complaint in the
Federal District Court of Massachusetts alleging that the
Company's operation of the Retirement Plan violated ERISA and
certain sections of the Internal Revenue Code. Judgments in the
Company's favor were handed down by both the Massachusetts
Superior Court and the Federal District Court in May 1997 and July
1997, respectively. Waters appealed the federal court judgment,
which was affirmed by the United States Court of Appeals for the
First Circuit by opinion dated April 3, 1998. On June 2, 1998,
the Company transferred $2,439 (including interest through the
date of transfer) from its Retirement Plan to the Waters
Retirement Plan as provided by the amended and restated Purchase
and Sale Agreement. In order to fund the transfer, in the second
quarter of 1998 the Company made a contribution of $2,255 to its
Retirement Plan in accordance with ERISA funding requirements.
6. Restructuring Charges and Provision for Excess Inventory: In the
second quarter of 1998, the Company announced a restructuring program
which was undertaken to improve the competitive position of the
Company by streamlining worldwide operations and reducing the overall
cost structure. The program includes the consolidation of certain
manufacturing operations, realignment of various international
subsidiary organizations to focus on operating business units and
discontinuance of non-strategic product lines. In the third quarter
of 1998, the Company recorded an expense associated with these
activities of $42,816 ($29,115 after tax) including a restructuring
charge of $33,641 and a $9,175 charge against cost of sales for
inventory and fixed asset write-offs associated with the
rationalization of its product offering and elimination of non-
strategic business lines. The $33,641 restructuring charge included
$18,290 of employee severance costs, $13,302 write-down of real and
intangible assets to net realizable value and $2,049 of contract
termination costs. The restructuring initiatives combined with the
consolidation of the Company's microelectronics plants will result in
the elimination of 620 positions worldwide and will be substantially
completed by the end of 1998 with the remainder completed in 1999.
The Company also recorded an incremental provision for excess and
obsolete inventory of $6,000 during the third quarter in response
to adverse changes in demand attributable to recessionary
conditions in Asia and the slowdown in semiconductor industry.
7. Loss on Discontinued Operations: In August 1994 the Company sold
it's Waters Chromatography Division and, in a separate
transaction, sold certain assets of its non-membrane bioscience
business. At that time the Company recorded a $40,000 reserve in
connection with these transactions representing the estimate of
costs to abandon facilities, terminate employees, transfer
employee benefit obligations and to provide ongoing administrative
and contract support services.
During the third quarter of 1998 the Company completed its
accounting for these divestitures which resulted in the recording
of a $7,542 ($5,847 net of income taxes) loss on the disposal of
discontinued operations. This charge reflects the final
determination of the value of the remaining assets and liabilities
associated with these divested operations. At this point the
Company has fulfilled all of its past and current responsibilities
under these transitional service agreements and resolved all
remaining questions relating to these transactions.
8.Gain on Sale of Equity Securities: In partial consideration for
the sale of its non-membrane bioscience instrument division in
1994, the Company received four thousand shares of preferred stock
of PerSeptive Biosystems, Inc. ("PerSeptive"). The preferred
stock was redeemable in four equal annual installments of $10,000,
commencing in August 1995, in the equivalent value as of each
redemption date of common stock, $0.01 par value of PerSeptive.
Effective January 22, 1998, PerSeptive completed a merger with
The Perkin-Elmer Corporation ("Perkin-Elmer") and became a wholly-
owned subsidiary of Perkin-Elmer. Pursuant to this merger all of
the Company's remaining holdings in PerSeptive, which consisted of
2,213,357 shares of common stock and one thousand shares of
preferred stock were converted into 586,541 shares of Perkin-Elmer
common stock. In the first quarter of 1998, the Company sold all
586,541 shares of its Perkin-Elmer common stock and recognized a
net gain of $32,500. The Company also sold all of its common
shares of Glyko Biomedical in the first quarter of 1998 and
recognized a gain of $3,100.
-6-
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands)
9. Basic and Diluted Earnings Per Share: The following table sets
forth the computation of basic and diluted earnings per share. For
the three months ended September 30, 1998 and the nine months ended
September 30, 1997, the dilutive securities for stock options were
not included in the computation of diluted earnings per share as the
effect would be anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Numerator:
Net (loss)/income $(42,267) $21,203 $(4,024) $(60,178)
Denominator:
For basic earnings per
share:
Weighted average shares 43,891 43,565 43,814 43,492
outstanding
Effect of dilutive - 863 465 -
securities-stock options
For diluted earnings per
share:
Weighted average shares 43,891 44,428 44,279 43,492
outstanding
Net (loss)/income per share:
Basic $(0.96) $0.49 $(0.09) $(1.38)
Diluted $(0.96) $0.48 $(0.09) $(1.38)
</TABLE>
10. New Accounting Pronouncements: The Company has adopted Statement
of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income", which requires that all components of
comprehensive income and total comprehensive income be reported and
that changes be shown in a financial statement displayed with the
same prominence as other financial statements. The Company has
elected to disclose this information in its statement of
stockholders' equity. For the three months and nine months ended
September 30, 1998 and 1997, total comprehensive (loss)/income, was
comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net (loss)/income $(42,267) $21,203 $(4,024) $(60,178)
Foreign currency translation 9,372 (8,323) 4,712 (19,827)
Unrealized holding
(loss)/gain on equity (387) 10,061 (18,575) 7,337
securities arising during
period, net of tax
Total comprehensive $(33,282) $22,941 $(17,887) $(72,668)
(loss)/income
</TABLE>
-7-
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands)
In July 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", which is effective for fiscal years
beginning after December 15, 1997. The interim reporting
disclosures are not required in the first year of adoption. SFAS
131 specifies revised guidelines for determining an entity's
operating segments and the type and level of financial information
to be disclosed. SFAS 131 changes current practice under SFAS 14
by establishing a new framework on which to base segment
reporting. The "management" approach expands the required
disclosures for each segment. The Company will adopt SFAS 131 in
the fourth quarter ended December 31, 1998 and has not yet
determined the impact of such adoption on its segment reporting as
currently presented.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits".
SFAS No. 132 establishes new increased requirements for disclosure
of a Company's pensions and other postretirement benefit
obligations. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997, but may be adopted earlier. The Company
will adopt the increased disclosure requirements of SFAS No. 132
in the fourth quarter ended December 31, 1998.
In March 1998, Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use"
("SOP 98-1"), was issued which provides guidance on applying
generally accepted accounting principles in addressing whether and
under what conditions the costs of internal-use software should be
capitalized. SOP 98-1 is effective for transactions entered into
in fiscal years beginning after December 15, 1998, however,
earlier adoption is encouraged. The Company adopted the
guidelines of SOP 98-1 as of January 1, 1998 and the impact of
such adoption was not material to the results of operations or
cash flows for the period ended September 30, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" effective January
1, 2000 for the Company. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires
that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The
Company is currently assessing the impact of this new statement on
its consolidated financial position, liquidity and results of
operations.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands)
Forward Looking Statements
The following discussion and analysis includes certain forward-
looking statements which are based on current management expectations
that involve substantial risks and uncertainties which could cause
actual results to differ materially from the results expressed in, or
implied by, these forward-looking statements. Potential risks and
uncertainties that could affect the Company's future operating
results include, without limitation; foreign exchange rates;
increased regulatory concerns on the part of the biopharmaceutical
industry; further consolidation of drug manufacturers; competitive
factors such as new membrane technology, and/or a new method of chip
manufacture which relies less heavily on purified chemicals and
gases; availability of component products on a timely basis;
inventory risks due to shifts in market demand; change in product
mix; conditions in the economy in general, including uncertainties in
selected Asian economies, and in the microelectronics manufacturing
market in particular; the difficulty in integrating acquired
companies; failure to realize the savings contemplated by certain
restructuring activities; potential environmental liabilities; the
inability to utilize technology in current or planned products due to
overriding rights by third parties, and the risk factors and
uncertainties described in Management's Discussion and Analysis in
the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
Results of Operations
Consolidated net sales for the third quarter of 1998 were $159,181, a
decrease of 14% from sales for the same period last year. Revenues
decreased 10% as measured in local currency terms for the third
quarter of 1998. The Company reported a loss of $0.96 per share for
the third quarter compared to a profit of $0.48 per share for the
same period last year. The loss for the third quarter of 1998
includes unusual expenses totaling $56,358 ($39,702 after tax).
Excluding these expenses which are detailed below, and a gain on sale
of equity securities reported in the same period of the prior year,
the Company would have reported a loss from continuing operations of
$0.06 per share in the third quarter versus a gain of $0.39 per share
for the same period last year.
<TABLE>
<CAPTION>
Summary of Unusual Expenses: Three Months Ended
September 30,
1998 1997
<S> <C> <C>
Cost of sales
Write-off of inventory and manufacturing $9,175 $ -
equipment
Provision for excess and obsolete inventory 6,000 -
Decrease in gross margin (15,175) -
Operating expenses
Restructuring charges 33,641 -
Gain on sale of equity securities - 5,304
(Loss) income from continuing operations (48,816) 5,304
before income taxes
Tax (benefit) provision (14,961) 1,114
Net (loss) income from continuing operations (33,855) 4,190
Net loss on disposal of discontinued 5,847 -
operations($7,542 before taxes)
Net (loss) income $(39,702) $4,190
Net (loss) income per share $(0.90) $ 0.09
</TABLE>
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands)
The following table summarizes revenue growth by market and geography
in the third quarter of 1998 as compared to the third quarter of 1997
(in millions):
%
% Increase/
September 30, Increase/ (Decrease)
1998 1997 (Decrease) Local
Currency
Microelectronics $ 35 $ 66 (47%) (42%)
Mfg.
BioPharmaceutical 55 49 12% 15%
Mfg.
Analytical 69 70 (1%) 3%
Laboratory
Total $ 159 $185 (14%) (10%)
Americas $ 68 $ 79 (14%) (13%)
Europe 54 50 8% 7%
Asia/Pacific 37 56 (34%) (21%)
Total $ 159 $185 (14%) (10%)
Sales to microelectronics customers, in local currency, decreased 42%
in the third quarter of 1998 compared to the third quarter of 1997.
The Company continued to be negatively impacted by the semiconductor
industry downturn and the ongoing economic difficulties in Asian
markets. The softness in demand from Asian customers continues
unabated and is expected to remain at current levels through at least
the fourth quarter of 1998. The sale of Millipore's microelectronics
products is equally dependent on both semiconductor manufacturing
capacity utilization and the purchase of new equipment. The outlook
for the semiconductor industry is uncertain. On the one hand, recent
industry reports suggest an increase in demand for semiconductors. On the
other hand, the demand for semiconductor manufacturing equipment
continues its negative trend. Accordingly the Company expects to
report significantly negative quarter on quarter growth comparison
for microelectronics products for the fourth quarter of 1998.
Sales to the BioPharmaceutical sector, in local currency, increased
15% in the third quarter of 1998 as compared to the third quarter of
1997. This result is the combination of a 21% increase in the sales
to pharmaceutical and biotech customers offset by a 16% decrease in
sales to food and beverage customers primarily in Asia. For the
remaining three months of 1998, continued quarter on quarter growth
in the BioPharmaceutical sector is anticipated.
In the third quarter of 1998 as compared to the third quarter of
1997, sales growth in the Analytical Laboratory business was 3%, in
local currency, reflecting a 5% growth rate in North America and
Europe offset by a 3% decline in Japan. Similar growth trends are
expected in the fourth quarter.
In the third quarter of 1998 as compared to the third quarter of
1997, the U.S. dollar strengthened against most European and Asian
currencies. Since the end of the third quarter of 1998, the U.S.
dollar has weakened against most European and Asian currencies. If
foreign exchange rates remain at October 30, 1998 levels, then
expected fourth quarter sales growth in dollars would be
approximately 2 percentage points higher than local currency growth
rates reported in the fourth quarter of 1997. Projected full year
1998 reported sales growth rates are anticipated to be approximately
3 percentage points lower than local currency growth rates.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands)
In the second quarter of 1998, the Company announced a restructuring
program to improve the competitive position of the Company by
streamlining worldwide operations and reducing the overall cost
structure. The program includes the consolidation of manufacturing
operations, the realignment of various international subsidiary
organizations to focus on operating business units and the
discontinuance of non-strategic product lines.
Key initiatives include:
1. Discontinue non-strategic product lines and consolidate certain
manufacturing operations thus eliminating duplicate manufacturing
processes and improve the product line focus.
2. Realign European country organizational structure to focus on
operating business units and establish regional transaction service
centers.
3. Reduce administrative and management costs in Asia to reflect
the downturn in the Asian economies.
4. Renegotiate marketing, research and vendor contractual
agreements.
5. Streamline the supply chain management function and consolidate
vendors resulting in cost savings and better customer response.
In the third quarter of 1998, the Company recorded an expense
associated with these activities of $42,816 ($29,115 after tax)
including a restructuring charge of $33,641 and a $9,175 charge
against cost of sales for inventory and fixed asset write-offs
associated with the rationalization of its product offering and
elimination of non-strategic business lines. The $33,641
restructuring charge included $18,290 of employee severance costs,
$13,302 write-down of real and intangible assets to net realizable
value and $2,049 of contract termination costs.
The restructuring initiatives combined with the consolidation of the
Company's microelectronics plants will result in the elimination of
620 positions worldwide and will be substantially completed by the
end of 1998 with the remainder completed in 1999. When fully
implemented these collective actions, are expected to yield annual
savings of $38,000.
The Company also recorded an incremental provision for excess and
obsolete inventory of $6,000 during the third quarter in response to
adverse changes in demand attributable to recessionary conditions in
Asia and the slowdown in semiconductor industry.
Gross profit margins in the third quarter of 1998 were 36% of sales
compared to 55% of sales in the third quarter of 1997. Gross profit
margins in the third quarter of 1998 were 46% of sales excluding the
effect of a $9,175 charge for the write-off of inventory and
manufacturing equipment associated with product line rationalization
activities and a provision of $6,000 for excess and obsolete
inventory. Gross margin percentages were lower than those in the
same period last year reflecting the impact of significantly reduced
volumes in the Company's microelectronics manufacturing plants
combined with duplicative manufacturing costs resulting from
concurrent operations at three existing plants located in California
and Texas and operations at the new manufacturing facility in Allen,
Texas. The redundant facilities were closed in September 1998 and
their operations consolidated into the new Allen, Texas facility.
The Company expects gross margin percentages in the fourth quarter of
1998 to approximate those reported in the second quarter of 1998.
Total operating expenses increased 41% from total operating expenses
for the third quarter of 1997 due to restructuring charges of $33,641
recorded in the third quarter of 1998. Excluding the restructuring
charges, total operating expenses decreased 5% from operating
expenses for the third quarter of 1997 primarily due to decreases in
selling, general and administrative expenses attributable to cost
containment programs and the U.S. dollar strengthening against
European and Asian currencies, as well as a decrease in research and
development spending.
Net interest expense in the third quarter of 1998 was lower than the
third quarter of 1997 due primarily to lower interest rates. The
Company expects that interest expense in the fourth quarter and for
the year ended 1998 will be slightly lower than 1997 due primarily to
lower interest rates.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands)
The effective income tax rate for the third quarter of 1998 including
the restructuring program was 30%. Excluding the effect of the
restructuring program, the effective income tax rate was 21%. The
effective income tax rate for the full year of 1997 was 21.0%. The
Company expects to sustain the 21.0% tax rate for the remainder of
1998.
Third quarter net loss included an additional after-tax charge of
$5,847 related to previously discontinued operations. In 1994 the
Company sold it's Waters Chromatography Division and, in a separate
transaction, sold certain assets of its non-membrane bioscience
business. This charge reflects the final determination of the value
of the remaining assets and liabilities associated with these
divested operations. The accounting for these transactions is now
complete.
A substantial portion of the Company's business is conducted outside
of the United States through its foreign subsidiaries. This exposes
the Company to risks associated with foreign currency rate
fluctuations, which can impact the Company's revenue and net income.
The Company had entered into foreign currency option contracts to
sell yen, on a continuing basis in amounts and timing consistent with
the underlying currency exposure so that the gains or losses on these
transactions partially offset the realized foreign exchange gains or
losses on the underlying exposure. The gains or losses resulting from
these transactions are recorded in cost of sales. In the third
quarter of 1998, a gain of $402 was realized on the Company's foreign
exchange contracts compared to a gain of $1,005 in the third quarter
of 1997. As of September 30, 1998, the Company has only forward
option contracts to sell yen. In the event of a significant
strengthening of the U.S. dollar against the yen, the exercise of
these forward options will partially mitigate losses incurred by the
Company on the underlying currency exposure. The Company is exposed
to a number of external market risks including changes in foreign
currency exchange and interest rates. Foreign currency exchange
risks are managed on a global basis netting exposures to take
advantage of natural offsets and cross currency flows. The Company
has a net equity exposure to the Japanese Yen which has been
effectively hedged through debt swap agreements covering both
principal and interest. Pursuant to these agreements $110,000 of
debt with a weighted average fixed interest rate of 6.7 % was swapped
for an equivalent value of Yen debt with a weighted average fixed
interest rate of 3.6%. The maturities of the swap agreements match
those of the underlying debt. The financial impact of these hedging
instruments is offset by changes in exposure of the underlying net
assets being hedged. The Company does not enter into derivative
financial instruments for trading purposes.
Euro
On January 1, 1999, several member countries of the European Union
will establish fixed conversion rates between their existing
sovereign currencies, and adopt the Euro as their new common legal
currency. As of that date, the Euro will trade on currency exchanges
and the legacy currencies will remain legal tender in the
participating countries for a transition period between January 1,
1999 and January 1, 2002.
The Euro conversion may affect cross-border competition by creating
greater cross-border price transparency. The Company is assessing its
pricing/marketing strategy in order to ensure that it remains
competitive in a broader European market. The Company is also
assessing its information technology systems to allow for
transactions to take place in both the legacy currencies and the Euro
and the eventual elimination of the legacy currencies, and reviewing
whether certain existing contracts will need to be modified. The
currency risk and risk management for operations in participating
countries may be reduced as the legacy currencies are converted to
the Euro. Final accounting, tax and governmental legal and regulatory
guidance is not available. The Company is evaluating issues involving
introduction of the Euro. Based on current information and current
assessments, the Company does not expect that the Euro conversion
will have a material adverse effect on its business or financial
condition.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands)
Year 2000
The Company is aware of the "Year 2000" issue that will affect
certain products and systems that were not properly designed to
handle the transition between the twentieth and twenty-first
centuries. The Company has recognized the need to ensure that its
business operations will not be adversely impacted by the Year 2000.
Accordingly, the Company has authorized an internal team to assess
the Company's Year 2000 readiness and to determine the steps
necessary to address its Year 2000 issues. Among the areas that have
been or are being assessed are the Company's internal software
systems, its manufacturing equipment, its facilities and its
products. In addition, the team has begun the assessment of the Year
2000 readiness of the Company's key suppliers and financial
institutions.
As part of the assessment of its Year 2000 readiness, the Company has
identified and is testing its key internal information systems as
well as its facilities, manufacturing and other key systems for Year
2000 compliance, and the Company expects to complete testing by
December 1998. By mid-1999, the Company expects to complete
implementation of all modifications or replacements necessary to make
all key systems Year 2000 compliant.
The Company has nearly completed its testing of the Year 2000
compliance of its products. A large majority of the Company's
products do not present Year 2000 compliance issues, and for those
products that do present issues the Company has communicated with its
customers regarding appropriate solutions.
In addition to testing of the Company's internal systems and its
products, the Company has begun implementing its plan of
communication with its suppliers and financial institutions regarding
their Year 2000 readiness and the Year 2000 compliance of the
products and services that they provide to the Company. The Company
expects to identify any important Year 2000 readiness issues of its
key supply-chain partners by the end of 1998, and to develop
contingency plans where reasonably possible for dealing with risks
raised by such non-readiness on or before March 1999.
The Company currently estimates that the total costs that will be
incurred in its Year 2000 assessment and remediation program will be
in the range of $1,000 to $3,000, of which approximately $500 has
been incurred through September 30, 1998. Incremental spending has
not been and is not expected to be material because most Year 2000
readiness costs will be met with amounts that are normally budgeted
for procurement and maintenance of the Company's information systems
and infrastructure. The redirection of spending to the
implementation of its Year 2000 readiness program may in some
instances delay productivity improvements.
The Year 2000 presents a number of risks and uncertainties that could
affect the Company notwithstanding the successful implementation of
its Year 2000 readiness program. Those risks and uncertainties
include, but are not limited to, failure of utilities or
transportation systems, competition for personnel skilled in
remediation of Year 2000 issues, and the nature of government
responses to the Year 2000.
Though the Company continues to believe that the Year 2000 will not
have a material impact on its business, financial condition or
results of operations, the occurrence of any of the above risks or
uncertainties or the failure to successfully implement the Company's
Year 2000 readiness program could result in such a material impact.
Capital Resources And Liquidity
Cash generated by operations in the first nine months of 1998 was
$24,962 compared to $34,118 in the first nine months of 1997. During
the first nine months of 1998, cash expenditures amounting to $21,044
were charged against restructuring reserves established during 1997;
$11,101 of employee costs, $5,777 of contract termination costs, and
$4,166 of other integration expenses.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands)
Cash generated by the Company during the first nine months of 1998 was
used to invest in property, plant and equipment, and pay dividends.
Property, plant and equipment expenditures for the first nine months
of 1998 exceeded those for the same period in 1997 by $13,763
primarily due to $18,715 spent for the construction of the new
manufacturing facility in Allen, Texas. The total cost of this
facility will be approximately $28,000. The Company expects
property, plant and equipment expenditures to increase over the
remainder of 1998 as it completes this facility and expands its Cork,
Ireland operation.
In May 1998, the Company reduced the maximum funds available under
the unsecured revolving credit agreement, dated as of January 22,
1997, as amended, (the "Credit Agreement") from $350,000 to $250,000.
The Company's financial results for the fiscal period ended September
30, 1998 made it necessary for the Company to renegotiate certain
financial covenants relating to operating cash flow and interest
coverage under Credit Agreement,and under the $100,000 6.88% note due
in 2004. Pursuant to this renegotiation, the lenders involved waived
defaults under those covenants and accepted less restrictive operating
cash flow and interest coverage covenants for the near term. The
Company agreed to an additional minimum earnings covenant, the payment
of amendment fees totaling approximately $700, and to increases
in both the interest rate and the facility fees thereunder. Interest
is payable under the Credit Agreement at a floating U.S. dollar deposit
rate, defined as LIBOR, plus a margin. The Company agreed to an increase
in this margin from a range of .18% to .65% to a range of .23% to 1.125%.
The Company also agreed to an increase in the facility fee under the
Credit Agreement from a rate ranging from .1% to .25% to a rate ranging
from .125% to .375%. The interest rate under the $100,000 note due 2004
will also increase from 6.88% to 7.23% as of November 2, 1998 unless
the Company either pays down the outstanding principal on that note to
$50,000 or pays an amendment fee of $1,500 prior to November 30,
1998.
On November 10, 1998 Moody's Investor Services announced that it was
downgrading the Company's debt rating to Ba2 from Baa3; a rating
which Moody's characterizes as below "investment grade". The Company
expects that this development may make it more difficult for the
Company to access money markets should it become necessary to do so.
-14-
Part II - Other Information
Item 5. Other Information
The deadline for receipt of timely notice of stockholder proposals
for submission to the Millipore 1999 Annual Meeting of Stockholders
without inclusion in Millipore's 1999 Proxy Statement is February 3,
1999. Unless such notice is received by Millipore at 80 Ashby Road,
Bedford, Massachusetts 01730, Attention Jeffrey Rudin, Vice
President and General Counsel, on or before the foregoing date,
proxies with respect to such meeting will confer discretionary
voting authority with respect to any such matter.
Item 6. Exhibits and Reports on Form 8-K
a.Exhibit 27 Financial Data Schedule for the nine months ended
September 30, 1998
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Millipore Corporation
Registrant
November 13, 1998 /s/ Kathleen B. Allen
Date Kathleen B. Allen
Chief Accounting Officer
-16-
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