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 September 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 November 8, 2001: 130,803,972. 1
WATERS CORPORATION AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q INDEX <TABLE> <CAPTION> Page ---- <S> <C> PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 3 Consolidated Statements of Operations for the three months ended September 30, 2001 and 2000 4 Consolidated Statements of Operations for the nine months ended September 30, 2001 and 2000 5 Consolidated Statements of Cash Flows for the nine months ended September 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 13 Risk 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 </TABLE> 2
WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> September 30, 2001 December 31, 2000 ------------------ ----------------- (unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 164,230 $ 75,509 Accounts receivable, less allowances for doubtful accounts of $3,113 and $2,815 at September 30, 2001 and December 31, 2000, respectively 166,780 167,713 Inventories 115,043 87,275 Other current assets 18,802 13,299 ---------------- --------------- Total current assets 464,855 343,796 Property, plant and equipment, net of accumulated depreciation of $82,364 and $68,357 at September 30, 2001 and December 31, 2000, respectively 114,292 102,608 Other assets 81,283 80,486 Goodwill, less accumulated amortization of $22,331 and $19,464 at September 30, 2001 and December 31, 2000, respectively 164,617 165,455 ---------------- --------------- Total assets $ 825,047 $ 692,345 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 1,124 $ 4,879 Accounts payable 44,410 43,310 Accrued compensation 9,653 18,299 Deferred revenue and customer advances 45,026 40,044 Accrued retirement plan contributions 3,301 4,405 Accrued income taxes 64,290 45,653 Accrued other taxes 4,623 3,590 Other current liabilities 58,172 60,353 ---------------- --------------- Total current liabilities 230,599 220,533 Other liabilities 19,180 20,031 ---------------- --------------- Total liabilities 249,779 240,564 Stockholders' equity: Common stock, par value $0.01 per share, 400,000 shares authorized, 130,773 and 129,811 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively 1,308 1,298 Additional paid-in capital 221,219 213,261 Retained earnings 361,342 245,383 Accumulated other comprehensive (loss) (8,601) (8,161) ---------------- --------------- Total stockholders' equity 575,268 451,781 ---------------- --------------- Total liabilities and stockholders' equity $ 825,047 $ 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 September 30 -------------------------------------------- 2001 2000 ---- ---- <S> <C> <C> Net sales $202,694 $191,953 Cost of sales 73,120 70,293 -------------- -------------- Gross profit 129,574 121,660 Selling, general and administrative expenses 66,913 59,712 Research and development expenses 11,794 10,394 Goodwill and purchased technology amortization 1,755 1,755 -------------- -------------- Operating income 49,112 49,799 Interest income, net 1,211 322 -------------- -------------- Income before income taxes 50,323 50,121 Provision for income taxes 12,077 13,030 -------------- -------------- Net income $ 38,246 $ 37,091 ============== ============== -------------- -------------- Net income per basic common share $ 0.29 $ 0.29 ============== ============== Weighted average number of basic common shares 130,752 128,485 -------------- -------------- Net income per diluted common share $ 0.28 $ 0.27 ============== ============== Weighted average number of diluted common shares and equivalents 136,704 137,430 </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> Nine Months Ended September 30 ------------------------------------------ 2001 2000 ---- ---- <S> <C> <C> Net sales $610,529 $569,563 Cost of sales 221,963 208,410 --------------- -------------- Gross profit 388,566 361,153 Selling, general and administrative expenses 199,989 181,167 Research and development expenses 34,573 31,313 Goodwill and purchased technology amortization 5,274 5,326 --------------- -------------- Operating income 148,730 143,347 Interest income (expense), net 3,848 (722) --------------- -------------- Income before income taxes 152,578 142,625 Provision for income taxes 36,619 37,081 --------------- -------------- Income before cumulative effect of change in accounting principle 115,959 105,544 Cumulative effect of change in accounting principle - (10,771) --------------- -------------- Net income $115,959 $ 94,773 =============== ============== Income per basic common share: Net income per basic common share before cumulative effect of change in accounting principle $ 0.89 $ 0.83 Cumulative effect of change in accounting principle - (0.08) --------------- -------------- Net income per basic common share $ 0.89 $ 0.75 =============== ============== Weighted average number of basic common shares 130,486 126,984 Income per diluted common share: Net income per diluted common share before cumulative effect of change in accounting principle $ 0.84 $ 0.77 Cumulative effect of change in accounting principle - (0.08) --------------- -------------- Net income per diluted common share $ 0.84 $ 0.69 =============== ============== Weighted average number of diluted common shares and equivalents 137,560 136,369 </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 Nine Months Ended ---------------------------------------------- September 30, 2001 September 30, 2000 ------------------ ------------------ <S> <C> <C> Cash flows from operating activities: Net income $ 115,959 $ 94,773 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (1,959) (3,881) Depreciation 15,417 14,070 Amortization of intangibles 8,993 8,396 Compensatory stock option expense - 166 Tax benefit related to stock option plans 888 15,100 Change in operating assets and liabilities, net of acquisitions: (Increase) in accounts receivable (1,028) (9,053) (Increase) in inventories (27,954) (11,866) (Increase) in other current assets (5,471) (4,945) (Increase) in other assets (3,577) (5,315) Increase in accounts payable and other current liabilities 12,472 17,290 Increase in deferred revenue and customer advances 5,267 3,723 Increase (decrease) in other liabilities 897 (2,912) --------- -------- Net cash provided by operating activities 119,904 115,546 Cash flows from investing activities: Additions to property, plant, equipment, software capitalization and other intangibles (33,958) (26,999) Investments in unaffiliated companies (4,000) (7,595) Business acquisitions, net of cash acquired (2,580) (1,709) Loan repayments from officers 723 312 --------- -------- Net cash (used in) investing activities (39,815) (35,991) Cash flows from financing activities: Net (repayment) of bank debt (3,755) (77,849) Proceeds from stock plans 7,080 18,300 Proceeds from debt swap 6,526 - --------- -------- Net cash provided by (used in) financing activities 9,851 (59,549) Effect of exchange rate changes on cash and cash equivalents (1,219) (613) --------- -------- Increase in cash and cash equivalents 88,721 19,393 Cash and cash equivalents at beginning of period 75,509 3,803 --------- -------- Cash and cash equivalents at end of period $ 164,230 $ 23,196 ========= ======== </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 consolidated financial statements, these three operating segments have been aggregated into one reporting segment for financial statement purposes. The accompanying unaudited interim consolidated 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 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 consolidated financial statements reflect all adjustments (which are normal and recurring) necessary for a fair presentation of the results for the interim periods. The interim consolidated 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 nine months ended September 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 nine months ended September 30, 2001, the Company recorded a cumulative net pre-tax gain of $5.3 million in OCI, which consisted of a realized gain of $6.5 million relating to the closed debt swap agreements offset by an unrealized loss of $1.2 million relating to the new Japanese yen swap agreement, both of 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 September 30, 2001 and December 31, 2000, the Company held forward foreign exchange contracts with notional amounts totaling approximately $58.5 million and $60.0 million, respectively. 3. Inventories Inventories are classified as follows: September 30, December 31, 2001 2000 ------------- -------------- Raw materials $ 42,594 $32,760 Work in progress 28,229 20,269 Finished goods 44,220 34,246 ------------- -------------- Total inventories $115,043 $87,275 ============= ============== 4. Income Taxes The Company's effective tax rate for the three months ended September 30, 2001 and 2000, was 24% and 26%, respectively. The Company's effective tax rate for the nine months ended September 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 September 30, 2001 ------------------------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount -------------------- --------------------- ----------------- <S> <C> <C> <C> Net income per basic common share $38,246 130,752 $0.29 =================== ===================== ================= Effect of dilutive securities: Options outstanding 5,951 Options exercised 1 ------------------- --------------------- ----------------- Net income per diluted common share $38,246 136,704 $0.28 =================== ===================== ================= <CAPTION> ------------------------------------------------------------------------ Three Months Ended September 30, 2000 ------------------------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ------------------- --------------------- ----------------- <S> <C> <C> <C> Net income per basic common share $37,091 128,485 $0.29 =================== ===================== ================= Effect of dilutive securities: Options outstanding 8,555 Options exercised 390 ------------------- --------------------- ----------------- Net income per diluted common share $37,091 137,430 $0.27 =================== ===================== ================= </TABLE> <TABLE> <CAPTION> Nine Months Ended September 30, 2001 -------------------------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount --------------------- --------------------- ----------------- <S> <C> <C> <C> Net income per basic common share before cumulative effect of change in accounting principle $115,959 130,486 $0.89 =================== ===================== ================= Effect of dilutive securities: Options outstanding 6,920 Options exercised 154 ------------------- --------------------- ----------------- Net income per diluted common share before cumulative effect of change in accounting principle $115,959 137,560 $0.84 =================== ===================== ================= <CAPTION> ------------------------------------------------------------------------ Nine Months Ended September 30, 2000 ------------------------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount -------------------- --------------------- ----------------- <S> <C> <C> <C> Net income per basic common share before cumulative effect of change in accounting principle $105,544 126,984 $0.83 =================== ===================== ================= Effect of dilutive securities: Options outstanding 8,114 Options exercised 1,271 ------------------- --------------------- ----------------- Net income per diluted common share before cumulative effect of change in accounting principle $105,544 136,369 $0.77 =================== ===================== ================= </TABLE> 9
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) For the three months and nine months ended September 30, 2001, the Company had 1,688 and 1,690 stock option securities that were antidilutive, respectively. For the three months and nine months ended September 30, 2000, the Company had 0 and 2 stock option securities that were antidilutive, respectively. These antidilutive 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 <TABLE> <CAPTION> Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ----------------- ------------------ ------------------ ------------------ <S> <C> <C> <C> <C> Net income $38,246 $37,091 $115,959 $ 94,773 Other comprehensive income (loss): Foreign currency translation adjustments, net of tax 10,455 (8,033) (2,589) (16,475) Appreciation (depreciation) and realized gain on derivative instruments (1,223) 5,289 5,303 9,284 Change in unrealized gain (loss) on investment, net of tax (225) 2,916 (3,154) 2,916 ----------------- ------------------ ------------------ ------------------ Comprehensive income $47,253 $37,263 $115,519 $ 90,498 ================= ================== ================== ================== </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. Interest Income Interest income for the three months ended September 30, 2001 and 2000 was $1.5 million and $1.1 million, respectively. Interest income for the nine months ended September 30, 2001 and 2000 was $4.8 million and $3.1 million, respectively. 10
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 9. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") 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. Goodwill amortization was approximately $4.0 million in fiscal year 2000 and is expected to be approximately the same in fiscal year 2001. The impact of impairment, if any, of goodwill on the Company's financial statements has not yet been determined. In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. The provisions of SFAS 143 apply to all entities that incur obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002, and with thus be adopted by the Company, as required, in fiscal year 2003. The Company does not expect the application of SFAS 143 to have a material impact on its financial position or results of operations. In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. The objectives of SFAS 144 are to address significant issues relating to the implementation of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and to develop a single model (based on the framework established in SFAS 121) for long-lived assets to be disposed of by sale, whether previously held or newly acquired. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. The Company does not expect the application of SFAS 144 to have a material impact on its financial position or results of operations. 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 September 30, 2001 (the "2001 Quarter") and the nine month period ended September 30, 2001 (the "2001 Period") were $202.7 million and $610.5 million, respectively, compared to $192.0 million for the three month period ended September 30, 2000 (the "2000 Quarter") and $569.6 million for the nine month period ended September 30, 2000 (the "2000 Period"), an increase of 6% for the quarter and 7% for the period. Excluding the adverse effects of a stronger U.S. dollar, net sales increased by 8% over the 2000 Quarter and 11% over the 2000 Period. Sales growth decelerated for the quarter, principally due to the Company's inability to convert strong mass spectrometry orders into shipments during the later part of the quarter. This was due, in part, to normal manufacturing setbacks on newly introduced mass spectrometry products. The Company's HPLC product line grew at a low double digit rate, excluding currency effects. Thermal analysis sales improved during the quarter, reaching low double digit growth as the market reacted favorably to newly launched products. Overall orders and sales reflected continued strong demand across all major geographies, with order backlog increasing over $7.0 million. Gross Profit: Gross profit for the 2001 Quarter and the 2001 Period was $129.6 million and $388.6 million, respectively, compared to $121.7 million for the 2000 Quarter and $361.2 million for the 2000 Period, an increase of $7.9 million or 7% for the quarter and $27.4 million or 8% for the period. Gross profit as a percentage of sales increased to 63.9% in the 2001 Quarter from 63.4% in the 2000 Quarter. Gross profit as a percentage of sales increased to 63.6% in the 2001 Period from 63.4% in the 2000 Period due to productivity improvements and a modest shift in sales mix to higher margin chemistry and service product lines, both of which were partially offset by the adverse effects of currency translation. Selling, General, and Administrative Expenses: Selling, general and administrative expenses for the 2001 Quarter and the 2001 Period were $66.9 million and $200.0 million, respectively, compared to $59.7 million for the 2000 Quarter and $181.2 million for the 2000 Period. As a percentage of net sales, selling, general and administrative expenses increased to 33.0% for the 2001 Quarter from 31.1% for the 2000 Quarter, and 32.8% for the 2001 Period from 31.8% for the 2000 Period. The $7.2 million or 12% increase for the quarter and $18.8 million or 10% increase for the period in total expenditures primarily resulted from increased headcount and related costs required to support increased current and future sales levels, slightly reduced by the effects of currency translation. In addition, the Company incurred unexpected foreign currency transaction losses in the 2001 Quarter due to rapid changes in currency translation rates and unusual cross-rate movements. Research and Development Expenses: Research and development expenses were $11.8 million for the 2001 Quarter and $34.6 million for the 2001 Period, compared to $10.4 million for the 2000 Quarter and $31.3 million for the 2000 Period, an increase of $1.4 million or 13% from the 2000 Quarter and $3.3 million or 10% 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 $5.3 million, respectively, consistent with the $1.8 million for the 2000 Quarter and $5.3 million for the 2000 Period. Operating Income: Operating income for the 2001 Quarter and the 2001 Period was $49.1 million and $148.7 million, respectively, compared to $49.8 million for the 2000 Quarter and $143.3 million for the 2000 Period, a decrease of $0.7 million or 1% for the quarter and an increase of $5.4 million or 4% for the period. The decrease for the 2001 Quarter is attributed to the increase in operating expenses being slightly greater than the effects of favorable gross margins and 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 $3.8 million, respectively, compared to net interest income (expense) of $.3 million for the 2000 Quarter and ($0.7) 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 $38.2 million and $116.0 million, respectively, compared to $37.1 million for the 2000 Quarter and $105.5 million for the 2000 Period, an increase of $1.1 million or 3% from the 2000 Quarter and $10.5 million or 10% from the 2000 Period, respectively. The improvement over 2000 was a result of sales growth, 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 January 1, 2002 ("the Euro conversion"). A transition period has been established from January 1, 1999 to January 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. During the quarter, the Company successfully tested and implemented the Euro conversion of its information technology systems. Liquidity and Capital Resources During the 2001 Period, net cash provided by the Company's operating activities was $119.9 million, primarily as a result of net income for the period after adding back depreciation and amortization, less working capital needs of approximately $18.7 million. In terms of working capital, $28.0 million of cash was used for inventory growth, including new product inventory related to future sales, 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 $7.1 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. During the period, the Company spent $34.0 million on property, plant, equipment and software capitalization investments and $6.6 million for investments in unaffiliated companies and business acquisitions. The Company believes that existing cash and cash equivalent balances of $164.2 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 on its common stock 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 nine months ended September 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 Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K A. None B. No reports on Form 8-K were filed during the three months ended September 30, 2001. 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: November 9, 2001 Waters Corporation /s/ John Ornell ---------------------------------- John Ornell Vice President and Chief Financial Officer 15