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, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________TO__________. COMMISSION FILE NUMBER: 01-14010 WATERS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN THE CHARTER) DELAWARE 13-3668640 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 34 MAPLE STREET Milford, Massachusetts 01757 (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 478-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes (X) No ( ) Number of shares outstanding of the Registrant's common stock as of August 10, 2001: 130,769,710.
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, 2001 and 3 December 31, 2000 Consolidated Statements of Operations for the three months ended June 30, 2001 and 2000 4 Consolidated Statements of Operations for the six months ended June 30, 2001 and 2000 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 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 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 2
WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> June 30, 2001 December 31, 2000 (unaudited) ---------------- ---------------- <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 134,514 $ 75,509 Accounts receivable, less allowances for doubtful accounts of $2,945 and $2,815 at June 30, 2001 and December 31, 2000, respectively 162,315 167,713 Inventories 107,478 87,275 Other current assets 16,862 13,299 ---------------- ---------------- Total current assets 421,169 343,796 Property, plant and equipment, net of accumulated depreciation of $76,170 and $68,357 at June 30, 2001 and December 31, 2000, respectively 109,873 102,608 Other assets 80,323 80,486 Goodwill, less accumulated amortization of $20,744 and $19,464 at June 30, 2001 and December 31, 2000, respectively 164,757 165,455 ---------------- ---------------- Total assets $ 776,122 $ 692,345 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable 2,179 4,879 Accounts payable 47,415 43,310 Accrued compensation 9,246 18,299 Deferred revenue and customer advances 44,881 40,044 Accrued retirement plan contributions 4,155 4,405 Accrued income taxes 58,092 45,653 Accrued other taxes 4,013 3,590 Other current liabilities 58,462 60,353 ---------------- ---------------- Total current liabilities 228,443 220,533 Other liabilities 19,905 20,031 ---------------- ---------------- Total liabilities 248,348 240,564 Stockholders' equity Common stock, par value $0.01 per share, 400,000 shares authorized, 130,752 and 129,811 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 1,308 1,298 Additional paid-in capital 220,978 213,261 Retained earnings 323,096 245,383 Accumulated other comprehensive (loss) (17,608) (8,161) ---------------- ---------------- Total stockholders' equity 527,774 451,781 ---------------- ---------------- Total liabilities and stockholders' equity $ 776,122 $ 692,345 ================ ================ </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 3
WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (unaudited) <TABLE> <CAPTION> Three Months Ended June 30 --------------------------------------- 2001 2000 ----------- ---------- <S> <C> <C> Net sales $206,803 $197,408 Cost of sales 75,545 71,777 ----------- ---------- Gross profit 131,258 125,631 Selling, general and administrative expenses 67,169 61,060 Research and development expenses 11,741 10,557 Goodwill and purchased technology amortization 1,771 1,760 ----------- ---------- Operating income 50,577 52,254 Interest income (expense), net 1,151 (343) ----------- ---------- Income before income taxes 51,728 51,911 Provision for income taxes 12,415 13,506 ----------- ---------- Net income $39,313 $38,405 =========== ========== ----------- ---------- Net income per basic common share $ 0.30 $ 0.30 =========== ========== Weighted average number of basic common shares 130,564 126,914 ----------- ---------- Net income per diluted common share $ 0.29 $ 0.28 =========== ========== Weighted average number of diluted common shares and equivalents 137,564 136,222 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 4
WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30 ---------------- 2001 2000 ---- ---- <S> <C> <C> Net sales $407,835 $377,610 Cost of sales 148,843 138,117 -------- -------- Gross profit 258,992 239,493 Selling, general and administrative expenses 133,076 121,455 Research and development expenses 22,779 20,919 Goodwill and purchased technology amortization 3,519 3,571 -------- -------- Operating income 99,618 93,548 Interest income (expense), net 2,637 (1,044) -------- -------- Income before income taxes 102,255 92,504 Provision for income taxes 24,542 24,051 -------- -------- Income before cumulative effect of change in accounting principle 77,713 68,453 Cumulative effect of change in accounting principle - (10,771) -------- -------- Net income $ 77,713 $ 57,682 ======== ======== Income per basic common share: Net income per basic common share before cumulative effect of change in accounting principle $ 0.60 $ 0.54 Cumulative effect of change in accounting principle - (0.09) -------- -------- Net income per basic common share $ 0.60 $ 0.45 ======== ======== Weighted average number of basic common shares 130,363 126,246 Income per diluted common share: Net income per diluted common share before cumulative effect of change in accounting principle $ 0.56 $ 0.50 Cumulative effect of change in accounting principle - (0.08) -------- -------- Net income per diluted common share $ 0.56 $ 0.42 ======== ======== Weighted average number of diluted common shares and equivalents 137,785 135,720 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 5
WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (unaudited) <TABLE> <CAPTION> For the Six Months Ended -------------------------------------------------- June 30, 2001 June 30, 2000 ------------------- ------------------- <S> <C> <C> Cash flows from operating activities: Net income $ 77,713 $ 57,682 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (1,494) (3,476) Depreciation 9,781 8,681 Amortization of intangibles 5,986 5,630 Compensatory stock option expense - 110 Tax benefit related to stock option plans 1,181 9,887 Change in operating assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable (3,387) 10,010 (Increase) in inventories (24,130) (5,856) (Increase) in other current assets (4,127) (4,113) (Increase) in other assets (3,881) (1,049) Increase in accounts payable and other current liabilities 13,454 3,001 Increase in deferred revenue and customer advances 6,531 4,778 Increase (decrease) increase in other liabilities 481 (1,311) ------------------- ------------------- Net cash provided by operating activities 78,108 83,974 Cash flows from investing activities: Additions to property, plant, equipment, software capitalization and other intangibles (22,907) (15,831) Investments in unaffiliated companies (2,000) - Business acquisitions, net of cash acquired (2,580) - Loan repayments from officers 723 328 ------------------- ------------------- Net cash (used in) investing activities (26,764) (15,503) Cash flows from financing activities: Net (repayment) of bank debt (2,700) (81,827) Proceeds from stock plans 6,546 12,741 Proceeds from debt swap 6,526 - ------------------- ------------------- Net cash provided by (used in) financing activities 10,372 (69,086) Effect of exchange rate changes on cash and cash equivalents (2,711) (727) ------------------- ------------------- Increase (decrease) in cash and cash equivalents 59,005 (1,342) Cash and cash equivalents at beginning of period 75,509 3,803 ------------------- ------------------- Cash and cash equivalents at end of period $ 134,514 $ 2,461 =================== =================== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 6
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. ORGANIZATION AND BASIS OF PRESENTATION Waters Corporation ("Waters" or the "Company"), an analytical instrument manufacturer, is the world's largest manufacturer and distributor of high performance liquid chromatography ("HPLC") instruments, chromatography columns and other consumables, and related service. The Company has the largest HPLC market share in the United States, Europe and non-Japan Asia and has a leading position in Japan. HPLC, the largest product segment of the analytical instrument market, is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. Through its Micromass Limited ("Micromass") subsidiary, the Company is 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. Through its TA Instruments, Inc. ("TAI") subsidiary, the Company is also the world's leader in thermal analysis, a prevalent and complementary technique used in the analysis of polymers. As discussed in Note 7 to the financial statements, these three operating segments have been aggregated into one reporting segment for financial statement purposes. The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the Unites States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated. Certain amounts from prior years have been reclassified in the accompanying financial statements in order to be consistent with the current year's classifications. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the dates of the financial statements and (iii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. It is management's opinion that the accompanying interim financial statements reflect all adjustments (which are normal and recurring) necessary for a fair presentation of the results for the interim periods. The interim financial statements should be read in conjunction with the consolidated financial statements included in the Company's Form 10-K filing with the Securities and Exchange Commission for the year ended December 31, 2000. 2. ACCOUNTING CHANGES Revenue Recognition Effective January 1, 2000, the Company changed its method of revenue recognition for certain products requiring installation in accordance with Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements. Previously, the Company recognized revenue related to both the sale and the installation of certain products at the time of shipment. The larger of the contractual cash holdback or the fair value of the installation service is now deferred when the product is shipped and recognized as a multiple element arrangement in accordance with SAB 101 when installation is complete. The cumulative effect of the change on prior years resulted in a charge to income of $10,771 (net of an income tax benefit of $3,785), which is included in income for the six months ended June 30, 2000 (the "2000 period"). The adoption of SAB 101 had virtually no effect on the Company's results of operations for the 2000 period, excluding the cumulative effect. 7
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) Accounting for Derivatives and Hedging Activities Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard ("SFAS") 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value as either assets or liabilities. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income ("OCI") and are recognized in earnings when the hedged item affects earnings; ineffective portions of changes in fair value are recognized in earnings. The impact of adopting SFAS 133 on January 1, 2001 was not material to the Company. The Company currently uses derivative instruments to manage exposures to foreign currency risks. The Company's objectives for holding derivatives are to minimize foreign currency risk using the most effective methods to eliminate or reduce the impact of foreign currency exposure. The Company documents all relationships between hedging instruments and hedged items, and links all derivatives designated as fair value, cash flow or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific forecasted transactions. The Company also assesses and documents, both at the hedges' inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows associated with the hedged items. The Company has operations in various countries and currencies throughout the world. As a result, the Company's financial position, results of operations and cash flows can be affected by fluctuations in foreign currency exchange rates. The Company uses debt swap agreements to mitigate partially such effects. In May and June 2001, the Company closed outstanding debt swap agreements, in European and Japanese currencies, and entered into a new debt swap agreement in Japanese yen, with a notional amount totaling $27.0 million and a term of six months. The debt swap agreement has been designated as a foreign currency hedge of a net investment in foreign operations. For the six months ended June 30, 2001, the Company recorded a realized gain of $6.5 million in OCI relating to the closed swap agreements, which partially offset hedged foreign exchange impacts. The Company also enters into forward foreign exchange contracts, not designated as cash flow hedging instruments under SFAS 133, principally to hedge the impact of currency fluctuations on certain intercompany balances. Principal hedged currencies include the euro, Japanese yen and British pound. The periods of these forward contracts typically range from three months to one year. At June 30, 2001 and December 31, 2000, the Company held forward foreign exchange contracts with notional amounts totaling approximately $45.0 million and $60.0 million, respectively. 3. INVENTORIES Inventories are classified as follows: June 30, December 31, 2001 2000 ------------------ ------------------ Raw materials $ 43,420 $32,760 Work in progress 27,207 20,269 Finished goods 36,851 34,246 ------------------ ------------------ Total inventories $107,478 $87,275 ================== ================== 4. INCOME TAXES The Company's effective tax rate for the three months ended June 30, 2001 and 2000, was 24% and 26%, respectively. The Company's effective tax rate for the six months ended June 30, 2001 and 2000, was 24% and 26%, respectively. 8
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 5. EARNINGS PER SHARE Basic and diluted EPS calculations are detailed as follows: <TABLE> <CAPTION> --------------------------------------------------------- Three Months Ended June 30, 2001 --------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------------- --------------- ----------- <S> <C> <C> <C> Net income per basic common share $39,313 130,564 $0.30 ================= =========== =========== Effect of dilutive securities: Options outstanding 6,899 Options exercised 101 ----------------- ----------- ----------- Net income per diluted common share $39,313 137,564 $0.29 ================= =========== =========== --------------------------------------------------------- Three Months Ended June 30, 2000 --------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------------- --------------- ----------- Net income per basic common share $38,405 126,914 $0.30 ================= =========== =========== Effect of dilutive securities: Options outstanding 8,758 Options exercised 550 ----------------- ----------- ----------- Net income per diluted common share $38,405 136,222 $0.28 ================= =========== =========== --------------------------------------------------------- Six Months Ended June 30, 2001 --------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------------- --------------- ----------- Net income per basic common share before cumulative effect of change in accounting principle $77,713 130,363 $0.60 ================= =========== =========== Effect of dilutive securities: Options outstanding 7,193 Options exercised 229 ----------------- ----------- ----------- Net income per diluted common share before cumulative effect of change in accounting principle $77,713 137,785 $0.56 ================= =========== =========== -------------------------------------------------------- Six Months Ended June 30, 2000 -------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------------- ----------- ----------- Net income per basic common share before cumulative effect of change in accounting principle $68,453 126,246 $0.54 ================= =========== =========== Effect of dilutive securities: Options outstanding 8,550 Options exercised 924 ----------------- ----------- ----------- Net income per diluted common share before cumulative effect of change in accounting principle $68,453 135,720 $0.50 ================= =========== =========== </TABLE> 9
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) For the three months and six months ended June 30, 2001, the Company had 1,688 and 1,643 stock option securities that were antidilutive, respectively. For the three months and six months ended June 30, 2000, the Company had 0 and 22 stock option securities that were antidilutive, respectively. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method. 6. COMPREHENSIVE INCOME Comprehensive income details follow: <TABLE> <CAPTION> Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ----------------- ------------------ ------------------ ---------------- <S> <C> <C> <C> <C> Net income $39,313 $38,405 $ 77,713 $57,682 Other comprehensive income (loss): Foreign currency translation adjustments, net of (4,245) (4,502) (13,044) (8,442) tax Appreciation and realized gain on derivative instruments 1,983 371 6,526 3,995 Change in unrealized (loss) on investment, net of (479) - (2,929) - tax ----------------- ------------------ ------------------ ---------------- Comprehensive income $36,572 $34,274 $ 68,266 $53,235 ================= ================== ================== ================ </TABLE> 7. BUSINESS SEGMENT INFORMATION SFAS 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in annual financial statements of public business enterprises. The Company evaluated its business activities that are regularly reviewed by the Chief Executive Officer for which discrete financial information is available. As a result of this evaluation, the Company determined that it has three operating segments: Waters, Micromass and TAI. Waters is in the business of manufacturing and distributing HPLC instruments, chromatography columns and other consumables, and related service; Micromass is in the business of manufacturing and distributing mass spectrometry instruments that can be integrated and used along with other analytical instruments, particularly HPLC; and TAI is in the business of manufacturing and distributing thermal analysis and rheology instruments. For all three of these operating segments within the analytical instrument industry; economic characteristics, production processes, products and services, types and classes of customers, methods of distribution, and regulatory environments are similar. Because of these similarities, the three segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the one reportable segment of the Company. 8. STOCKHOLDERS' EQUITY On February 27, 2001, the Board of Directors approved an amendment to the Company's Certificate of Incorporation to increase authorized common stock from two hundred million to four hundred million shares, contingent upon shareholder approval at the Company's Annual Meeting. Shareholders approved the amendment at the Annual Meeting on May 3, 2001. 9. INTEREST INCOME Interest income for the three months ended June 30, 2001 and 2000 was $1.4 million and $1.0 million, respectively. Interest income for the six months ended June 30, 2001 and 2000 was $3.3 million and $2.0 million, respectively. 10
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 10. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued SFAS 141, Business Combinations and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. SFAS 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, in fiscal year 2002. The impact of SFAS 141 and SFAS 142 on the Company's financial statements has not yet been determined. 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Sales: Net sales for the three month period ended June 30, 2001 (the "2001 Quarter") and the six month period ended June 30, 2001 the ("2001 Period") were $206.8 million and $407.8 million, respectively, compared to $197.4 million for the three month period ended June 30, 2000 (the "2000 Quarter") and $377.6 million for the six month period ended June 30, 2000 (the "2000 Period"), an increase of 5% for the quarter and 8% for the period. Excluding the adverse effects of a stronger U.S. dollar, net sales increased by 9% over the 2000 Quarter and 12% over the 2000 Period. Sales growth for the 2001 Quarter slowed from recent historical levels, principally in the mass spectrometry product line. This resulted from a slowing of order closure rates, particularly with large pharmaceutical accounts. The Company's HPLC product line continued to perform well with sales growth in the low double digits, excluding currency effects. Thermal analysis sales were down slightly as the industrial chemical customer base for this product line continued to be weak. Currency reduced reported sales growth in the 2001 Quarter by four percentage points primarily due to the weakening of the euro and Japanese yen. Gross Profit: Gross profit for the 2001 Quarter and the 2001 Period was $131.3 million and $259.0 million, respectively, compared to $125.6 million for the 2000 Quarter and $239.5 million for the 2000 Period, an increase of $5.7 million or 4% for the quarter and $19.5 million or 8% for the period. Gross profit as a percentage of sales remained relatively stable decreasing to 63.5% in the 2001 Quarter from 63.6% in the 2000 Quarter. Gross profit as a percentage of sales increased to 63.5% in the 2001 Period from 63.4% in the 2000 Period. Selling, General, and Administrative Expenses: Selling, general and administrative expenses for the 2001 Quarter and the 2001 Period were $67.2 million and $133.1 million, respectively, compared to $61.1 million for the 2000 Quarter and $121.5 million for the 2000 Period. As a percentage of net sales, selling, general and administrative expenses increased to 32.5% for the 2001 Quarter from 30.9% for the 2000 Quarter and 32.6% for the 2001 Period from 32.2% for the 2000 Period as a result of lower sales growth in the 2001 Quarter, offset by continued expense controls. The $6.1 million or 10% increase for the quarter and $11.6 million or 10% increase for the period in total expenditures primarily resulted from increased headcount and related costs required to support increased sales levels, reduced by the effects of currency translation. Research and Development Expenses: Research and development expenses were $11.8 million for the 2001 Quarter and $22.8 million for the 2001 Period, compared to $10.6 million for the 2000 Quarter and $20.9 million for the 2000 Period, an increase of $1.2 million or 11% from the 2000 Quarter and $1.9 million or 9% from the 2000 Period, respectively. The Company continued to invest significantly in the development of new and improved HPLC, mass spectrometry, thermal analysis and rheology products. Goodwill and Purchased Technology Amortization: Goodwill and purchased technology amortization for the 2001 Quarter and the 2001 Period was $1.8 million and $3.5 million, respectively, relatively even with the $1.8 million for the 2000 Quarter and $3.6 million for the 2000 Period. Operating Income: Operating income for the 2001 Quarter and the 2001 Period was $50.6 million and $99.6 million, respectively, compared to $52.3 million for the 2000 Quarter and $93.5 million for the 2000 Period, a decrease of $1.7 million or 3% for the quarter and an increase of $6.1 million or 6% for the period. The decrease for the 2001 Quarter is attributed to the increase in selling, general and administrative expenses being slightly greater than the increase in gross profit due to the slower sales growth. The 2001 Period increase resulted from overall sales growth and productivity improvements across all operating areas. Interest Income (Expense), Net: Net interest income for the 2001 Quarter and the 2001 Period was $1.2 million and $2.6 million, respectively, compared to net interest (expense) of ($.3) million for the 2000 Quarter and ($1.0) million for the 2000 Period. The change primarily reflected the cumulative effects of the Company's cash flow, offset by lower yields on investments. 12
Provision for Income Taxes: The Company's effective income tax rate was 24% in the 2001 Quarter and 2001 Period and 26% in the 2000 Quarter and 2000 Period. The 2001 tax rate decreased primarily due to the continued favorable shift in the mix of taxable income to lower tax rate jurisdictions. Income before Cumulative Effect of Change in Accounting Principle: Net income for the 2001 Quarter and income before the cumulative effect of an accounting change for the 2001 Period was $39.3 million and $77.7 million, respectively, compared to $38.4 million for the 2000 Quarter and $68.5 million for the 2000 Period, an increase of $.9 million or 2% from the 2000 Quarter and $9.2 million or 14% from the 2000 Period, respectively. The improvement over 2000 was a result of sales growth, productivity improvements across all operating areas, favorable interest income dynamics and the impact of a decrease in the Company's effective income tax rate. EURO CURRENCY CONVERSION Several countries of the European Union will adopt the euro as their legal currency effective July 1, 2002. A transition period has been established from January 1, 1999 to July 1, 2002 during which companies conducting business in these countries may use the euro or their local currency. The Company has considered the potential impact of the euro conversion on pricing competition, information technology systems, currency risk and risk management. Currently, the Company does not expect that the euro conversion will result in any material increase in costs to the Company or have a material adverse effect on its business or financial condition. LIQUIDITY AND CAPITAL RESOURCES During the 2001 Period, net cash provided by the Company's operating activities was $78.1 million, primarily as a result of net income for the period after adding back depreciation and amortization, less working capital needs of approximately $13.2 million. In terms of working capital, $24.1 million of cash was used for inventory growth, offset by cash provided by an increase in accounts payable and other current liabilities. In addition to cash from operating activities, cash was provided by $6.5 million of proceeds received by the Company from the exercise of stock options and its employee stock purchase plan, and $6.5 million from the settlement of debt swap agreements. The Company spent $22.9 million on property, plant, equipment and software capitalization investments during the period. The Company believes that existing cash and cash equivalent balances of $134.5 million and expected cash flow from operating activities together with borrowings available under the Bank Credit Agreement will be sufficient to fund working capital and capital spending requirements of the Company in the foreseeable future. As a publicly held company, the Company has not paid any dividends and does not plan to pay any dividends in the foreseeable future. FORWARD-LOOKING INFORMATION Safe Harbor Statement under Private Securities Litigation Reform Act of 1996 Certain statements contained herein are forward looking. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including (i) changes in the HPLC, mass spectrometry and thermal analysis portions of the analytical instrument marketplace as a result of economic or regulatory influences, (ii) changes in the competitive marketplace, including new products and pricing changes by the Company's competitors and (iii) the ability of the Company to generate increased sales and profitability from new product introductions, as well as additional risk factors set forth in the Company's Form 10-K. Factual results or events could differ materially from the plans, intentions and expectations disclosed in the forward- looking statements we make, whether because of these factors or for other reasons. We do not assume any obligations to update any forward-looking statement we make. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risk during the six months ended June 30, 2001. For additional information, refer to the Company's Form 10-K, Item 7a for the year ended December 31, 2000. 13
PART II: OTHER INFORMATION Item 1. Legal Proceedings There were no material developments during the quarter for which this report is filed. 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 3, 2001, 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 and the approval of an amendment to the Company's Certificate of Incorporation to increase the number of shares of authorized common stock from 200,000,000 to 400,000,000 shares. As of March 19, 2001, the record date for said meeting, there were 130,439,242 shares of Waters Corporation common stock entitled to vote at the meeting. At such meeting, the holders of 109,599,153 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> <CAPTION> Matter For Withheld Against Abstain - ---------------------------------------------- ----------- --------- ------- ------- <S> <C> <C> <C> <C> Election of Directors: For Joshua Bekenstein 109,045,208 553,945 For Michael J. Berendt, Ph.D. 109,370,119 229,034 For Douglas A. Berthiaume 105,886,926 3,712,227 For Philip Caldwell 109,369,713 229,440 For Edward Conard 109,042,909 556,244 For Laurie H. Glimcher, M.D. 109,372,019 227,134 For William J. Miller 109,371,978 227,175 For Thomas P. Salice 109,049,949 549,204 Amendment to Increase Authorized Shares 105,061,094 4,505,494 32,565 </TABLE> Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K A. None B. The Registrant filed a report on Form 8-K on the following date during the quarter for which this report is filed: May 8, 2001 This report is included information under Item 9, in order to assure compliance with SEC Regulation FD. 14
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 13, 2001 Waters Corporation /s/ John Ornell --------------- John Ornell Vice President and Chief Financial Officer 15