SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 for the transition period from __________to__________. Commission File Number: 01-14010 Waters Corporation ------------------ (Exact name of registrant as specified in the charter) Delaware 13-3668640 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 34 Maple Street Milford, Massachusetts 01757 ---------------------------- (Address of principal executive offices) Registrant's telephone number, include area code: (508) 478-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes (X) No ( ) Number of shares outstanding of the Registrant's common stock as of August 7, 1998: 29,951,223 ---------- 1
WATERS CORPORATION AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q INDEX Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 3 Consolidated Statements of Earnings for the three months ended June 30, 1998 and 1997 4 Consolidated Statements of Earnings for the six months ended June 30, 1998 and 1997 5 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 2
WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> June 30, 1998 December 31, 1997 ------------- ----------------- (unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 1,598 $ 3,113 Accounts receivable, less allowances for doubtful accounts of $2,851 and $2,785 at June 30, 1998 and December 31, 1997, respectively 112,373 111,022 Inventories 81,510 87,375 Other current assets 16,807 11,614 ----------- ----------- Total current assets 212,288 213,124 Property, plant and equipment, net of accumulated depreciation of $37,319 and $30,074 at June 30, 1998 and December 31, 1997, respectively 89,597 88,668 Other assets 68,038 70,089 Goodwill, less accumulated amortization of $10,001 and $7,543 at June 30, 1998 and December 31, 1997, respectively 180,676 180,178 ----------- ----------- Total assets $ 550,599 $ 552,059 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long term debt $ 7,269 $ 7,394 Accounts payable 33,430 33,061 Deferred revenue and customer advances 25,627 25,289 Other current liabilities 105,699 104,912 ----------- ----------- Total current liabilities 172,025 170,656 Long term debt 279,375 305,340 Redeemable preferred stock 8,575 8,096 Other liabilities 5,637 5,670 ----------- ----------- Total liabilities 465,612 489,762 Commitments and contingent liabilities - - Stockholders' Equity: Common stock (par value $0.01, 50,000 shares authorized, 29,945 and 29,583 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively) 299 296 Additional paid-in capital 164,005 161,476 Deferred stock option compensation (496) (606) Accumulated deficit (75,739) (96,096) Translation adjustments (3,082) (2,773) ----------- ----------- Total stockholders' equity 84,987 62,297 ----------- ----------- Total liabilities and stockholders' equity $ 550,599 $ 552,059 =========== =========== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 3
WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (unaudited) <TABLE> For the Three For the Three Months Ended Months Ended June 30, 1998 June 30, 1997 ------------- ------------- <S> <C> <C> Net sales $149,311 $106,240 Cost of sales 55,848 38,703 -------- -------- Gross profit 93,463 67,537 Selling, general and administrative expenses 51,952 38,909 Research and development expenses 8,246 5,806 Goodwill and purchased technology amortization 2,231 1,415 -------- -------- Operating income 31,034 21,407 Interest expense, net 4,888 2,959 -------- -------- Income from operations before income taxes 26,146 18,448 Provision for income taxes 6,033 3,689 -------- -------- Net income 20,113 14,759 Less: accretion of and 6% dividend on preferred stock 240 234 -------- -------- Net income available to common stockholders $ 19,873 $ 14,525 ======== ======== -------- -------- Net income per basic common share $0.67 $0.50 ======== ======== Weighted average number of basic common shares 29,877 28,957 -------- -------- Net income per diluted common share $0.59 $0.46 ======== ======== Weighted average number of diluted common shares and equivalents 33,519 31,560 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 4
WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (unaudited) <TABLE> For the Six For the Six Months Ended Months Ended June 30, 1998 June 30, 1997 ------------- ------------- <S> <C> <C> Net sales $288,036 $208,671 Cost of sales 107,768 76,468 Revaluation of acquired inventory 16,500 - -------- -------- Gross profit 163,768 132,203 Selling, general and administrative expenses 101,940 77,985 Research and development expenses 16,618 11,592 Goodwill and purchased technology amortization 4,506 2,772 -------- -------- Operating income 40,704 39,854 Interest expense, net 9,951 5,983 -------- -------- Income from operations before income taxes 30,753 33,871 Provision for income taxes 10,396 6,774 -------- -------- Net income 20,357 27,097 Less: accretion of and 6% dividend on preferred stock 479 468 -------- -------- Net income available to common stockholders $ 19,878 $ 26,629 ======== ======== -------- -------- Net income per basic common share $0.67 $0.92 ======== ======== Weighted average number of basic common shares 29,793 28,942 -------- -------- Net income per diluted common share $0.60 $0.84 ======== ======== Weighted average number of diluted common shares and equivalents 33,340 31,714 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 5
WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (unaudited) <TABLE> For the Six Months Ended ------------------------ June 30, 1998 June 30, 1997 ------------- ------------- <S> <C> <C> Cash flows from operating activities: Net income $20,357 $27,097 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,138 8,980 Amortization of debt issuance costs 618 517 Compensatory stock option expense 110 110 Revaluation of acquired inventory 16,500 - Change in operating assets and liabilities: (Increase) in accounts receivable (2,748) (375) (Increase) in inventories (11,200) (2,809) (Decrease) increase in accounts payable and accrued expenses (142) 4,189 Increase in deferred revenue 327 2,623 Other, net (1,118) (822) ------- ------- Net cash provided by operating activities 35,842 39,510 Cash flows from investing activities: Additions to property, plant and equipment (8,490) (5,604) Software capitalization and other intangibles (3,112) (2,328) Business acquisition, net of cash acquired (3,157) - Loans to officers 255 (68) ------- ------- Net cash (used in) investing activities (14,504) (8,000) Cash flows from financing activities: Net (repayments) of bank debt (26,090) (30,291) Stock options exercised 2,989 761 ------- ------- Net cash (used in) financing activities (23,101) (29,530) Effect of exchange rate changes on cash 248 (181) ------- ------- Net change in cash and cash equivalents (1,515) 1,799 Cash and cash equivalents at beginning of period 3,113 639 ------- ------- Cash and cash equivalents at end of period $ 1,598 $ 2,438 ======= ======= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 6
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. Organization and Basis of Presentation Waters Corporation (the "Company") is the world's largest manufacturer, distributor and provider of high performance liquid chromatography ("HPLC") instruments, chromatography columns and other consumables, and related services. HPLC, the largest product segment of the analytical instrument market, is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. With its acquisition of TA Instruments, Inc. ("TAI") in May 1996, the Company is also the world's leader in thermal analysis, a prevalent and complementary technique used in the analysis of polymers. With its September 1997 acquisition of Micromass Limited ("Micromass"), the Company is also a market leader in the development, manufacture, and distribution of mass spectrometry ("MS") instruments, which are complementary products that can be integrated and used along with other analytical instruments, especially HPLC. The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). The consolidated financial statements include the accounts of the Company and its subsidiaries, most of which are wholly owned. All material intercompany balances and transactions have been eliminated. Certain amounts from prior years have been reclassified in the accompanying financial statements in order to be consistent with the current year's classifications. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the dates of the financial statements and (iii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. It is management's opinion that the accompanying interim financial statements reflect all adjustments (which are normal and recurring) necessary for a fair presentation of the results for the interim periods. The interim financial statements should be read in conjunction with the consolidated financial statements included in the Company's 10-K filing with the Securities and Exchange Commission for the year ended December 31, 1997. 2. Acquisitions Micromass Limited Acquisition On September 23, 1997, the Company acquired 100% of the capital stock of Micromass Limited, a company headquartered in Manchester, England, for approximately $175,000 in cash, common stock (375 shares) and promissory notes. The acquisition principally was financed through borrowings under the Company's Bank Credit Agreement. Micromass develops, manufactures, and distributes mass spectrometry instruments, products that are complementary to Waters' existing product offering. Micromass offers products ranging from high-end stand-alone instruments to smaller, easier-to-use detectors that can be integrated and used along with other analytical instruments, especially HPLC. Micromass is a global market leader in the field of mass spectrometry. YMC, Inc. Acquisition On July 31, 1997, the Company acquired all of the capital stock of YMC, Inc. ("YMC"), a U.S. based company, for approximately $9,000 in cash. YMC is a manufacturer and distributor of chromatography chemicals and supplies which augment the Waters consumables business. 7
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro Forma Results of Operations The following unaudited Pro Forma results of operations for the six months ended June 30, 1998 and 1997 give effect to the Company's acquisitions as if the transactions had occurred at the beginning of each such period. The financial data are based on the historical consolidated financial statements for the Company, Micromass and YMC and include related adjustments. The Pro Forma results of operations exclude the non-recurring charges that were recorded in conjunction with the Micromass acquisition in 1998 and 1997 and do not purport to represent (i) what the Company's results of operations actually would have been if the Micromass acquisition had occurred as of the beginning of the periods or (ii) what such results will be for any future periods. The financial data are based upon assumptions that the Company believes are reasonable and should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto included elsewhere in this report. <TABLE> Unaudited Pro Forma Results --------------------------- For the Six Months Ended ------------------------ June 30, 1998 June 30, 1997 ------------- ------------- <S> <C> <C> Net sales $288,036 $259,420 Net income $ 36,378 $ 30,394 Net income per basic common share $ 1.22 $ 1.04 Net income per diluted common share $ 1.09 $ 0.95 </TABLE> 3. Inventories Inventories are classified as follows: <TABLE> June 30, December 31, 1998 1997 -------- ------------ <S> <C> <C> Raw materials $25,477 $22,092 Work in progress 10,459 15,315 Finished goods 45,574 33,468 Revaluation of acquired inventory - 16,500 ------- ------- Total Inventories $81,510 $87,375 ======= ======= </TABLE> 4. Income Taxes The Company's effective tax rate for the three months ended June 30, 1998 and 1997, was 23% and 20%, respectively. The Company's effective tax rate for the six months ended June 30, 1998 and 1997, was 22% and 20%, respectively, before nondeductible acquisition related expenses. 8
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 5. Earnings Per Share SFAS 128, which now governs earnings per share computations, requires the following reconciliation of the basic and diluted EPS calculations: <TABLE> Six Months Ended June 30, 1998 ------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- <S> <C> <C> <C> Net income $ 20,357 Less: Accretion of and 6% dividend on preferred stock 479 Income per basic common ----------- ------------- --------- share from operations $ 19,878 29,793 $ 0.67 =========== ============= ========= Effect of dilutive securities: Options outstanding 3,487 Options exercised 60 Income per diluted common ----------- ------------- --------- share from operations $ 19,878 33,340 $ 0.60 =========== ============= ========= </TABLE> <TABLE> Six Months Ended June 30, 1997 ------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- <S> <C> <C> <C> Net income $ 27,097 Less: Accretion of and 6% dividend on preferred stock 468 Income per basic common ----------- ------------- --------- share from operations $ 26,629 28,942 $ 0.92 =========== ============= ========= Effect of dilutive securities: Options outstanding 2,761 Options exercised 11 Income per diluted common ----------- ------------- --------- share from operations $ 26,629 31,714 $ 0.84 =========== ============= ========= </TABLE> <TABLE> Three Months Ended June 30, 1998 -------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- <S> <C> <C> <C> Net income $ 20,113 Less: Accretion of and 6% dividend on preferred stock 240 Income per basic common ----------- ------------- --------- share from operations $ 19,873 29,877 $ 0.67 =========== ============= ========= Effect of dilutive securities: Options outstanding 3,590 Options exercised 52 Income per diluted common ----------- ------------- --------- share from operations $ 19,873 33,519 $ 0.59 =========== ============= ========= </TABLE> 9
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> Three Months Ended June 30, 1997 -------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- <S> <C> <C> <C> Net income $ 14,759 Less: Accretion of and 6% dividend on preferred stock 234 Income per basic common ----------- ------------ --------- share from operations $ 14,525 28,957 $ 0.50 =========== ============ ========= Effect of dilutive securities: Options outstanding 2,583 Options exercised 20 Income per diluted common ----------- ------------ --------- share from operations $ 14,525 31,560 $ 0.46 =========== ============ ========= </TABLE> For both the three month and six month periods ended June 30, 1998, the Company had no stock option securities that were antidilutive. For both the three month and six month periods ended June 30, 1997, the Company had three hundred and fifty-nine thousand stock option securities that were antidilutive. These securities could potentially dilute basic EPS in the future, and were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented. 6. Comprehensive Income SFAS 130, which establishes standards for reporting and display of comprehensive income and its components, requires the following calculation of the tax effects allocated to each component of other comprehensive income and rollforward of accumulated other comprehensive income: <TABLE> Six Months Six Months Three Months Three Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 1998 1997 1998 1997 ---------- ---------- ------------ ------------ <S> <C> <C> <C> <C> Net income $ 20,357 $ 27,097 $ 20,113 $ 14,759 Foreign currency translation adjustments before income taxes (309) (2,047) (366) (1,857) (Benefit) for income taxes (68) (409) (84) (371) Other comprehensive ---------- ---------- ---------- ---------- (loss) (241) (1,638) (282) (1,486) ---------- ---------- ---------- ---------- Comprehensive income $ 20,116 $ 25,459 $ 19,831 $ 13,273 ========== ========== ========== ========== </TABLE> <TABLE> Accumulated Foreign Other Currency Comprehensive Items Income -------- ------------- <S> <C> <C> Balance, December 31, 1997 $(2,773) $(2,773) Change during 1st Quarter 57 57 Change during 2nd Quarter (366) (366) ------- ------- Balance, June 30, 1998 $(3,082) $(3,082) ======= ======= </TABLE> 10
WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> Accumulated Foreign Other Currency Comprehensive Items Income -------- ------------- <S> <C> <C> Balance, December 31, 1996 $ 408 $ 408 Change during 1st Quarter (190) (190) Change during 2nd Quarter (1,857) (1,857) ------- ------- Balance, June 30, 1997 $(1,639) $(1,639) ======= ======= </TABLE> 7. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities, which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is permitted. The statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In February 1998, the Financial Accounting Standards Board issued SFAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which is effective for periods beginning after December 15, 1997, but excludes interim periods during 1998. The statement standardizes employers' disclosure requirements about pension and other postretirement benefit plans by requiring additional information on changes in the benefit obligations and fair values of plan assets and eliminating certain disclosures that are no longer useful. It does not change the measurement or recognition of those plans. In June 1997, the Financial Accounting Standards Board issued SFAS 131, Disclosures about Segments of an Enterprise and Related Information, which is effective for periods beginning after December 15, 1997, but excludes interim periods during 1998. The statement establishes standards for reporting information about operating segments in annual financial statements of public business enterprises and in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. While management has not determined the impact of the new above-mentioned standards, they are not expected to be material to the Company. In June 1997, the Financial Accounting Standards Board issued SFAS 130, Reporting Comprehensive Income, which is effective for periods beginning after December 15, 1997. The statement establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. The statement requires that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company has adopted SFAS 130 in the accompanying financial statements. Footnote disclosure has been provided for interim periods. In February 1997, the Financial Accounting Standards Board issued SFAS 128, Earnings Per Share, which is effective for periods ending after December 15, 1997. The statement changes computational guidelines and disclosure requirements for earnings per share. The Company has adopted SFAS 128 in the accompanying financial statements and has restated all prior period earnings per share data. 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Events On September 23, 1997, the Company acquired all of the capital stock of Micromass, a company headquartered in Manchester, England, for approximately $175 million in cash, common stock and promissory notes. The acquisition principally was financed through borrowings under the Company's Bank Credit Agreement. Micromass develops, manufactures, and distributes mass spectrometry instruments, products that are complementary to the Company's existing product offering. Micromass offers products ranging from high-end stand-alone instruments to smaller, easier- to-use detectors that can be integrated and used along with other analytical instruments, especially HPLC. Micromass is a global market leader in the field of mass spectrometry. On September 4, 1997, the Company increased the maximum availability under its Bank Credit Agreement to $450 million in order to finance the acquisition of Micromass. On July 31, 1997, the Company acquired all of the capital stock of YMC, Inc. ("YMC"), a U.S. based company, for approximately $9 million in cash. YMC is a manufacturer and distributor of chromatography chemicals and supplies which augment the Company's consumables business. Results of Operations Net Sales: Net sales for the three month period ended June 30, 1998 (the "1998 Quarter") and the six month period ended June 30, 1998 (the "1998 Period") were $149.3 million and $288.0 million, respectively, compared to $106.2 million for the three month period ended June 30, 1997 (the "1997 Quarter") and $208.7 million for the six month period ended June 30, 1997 (the "1997 Period"), an increase of 41% for the quarter and 38% for the period. Excluding the adverse effects of a stronger U.S. dollar, net sales increased by 45% over the 1997 Quarter and 41% over the 1997 Period. The Company's core HPLC and thermal analysis businesses grew by 11% as compared to the 1997 Quarter and the 1997 Period, while the impact of the Micromass acquisition resulted in the remaining 34% and 30% points of growth, respectively. HPLC growth was generally broad-based across all geographies, except Japan and the Pacific Rim. Customer demand was strong in the U.S. and Europe, offsetting Asia's weakness. Pharmaceutical customer demand was especially strong across all geographies. The Company's sales of mass spectrometry products grew strongly as well. Gross Profit: Gross profit increased to $93.5 million in the 1998 Quarter and $163.8 million in the 1998 Period from $67.5 million in the 1997 Quarter and $132.2 million in the 1997 Period, an increase of $26.0 million or 39% for the quarter and $31.6 million or 24% for the period. Excluding the $16.5 million non-recurring charge in the 1998 Period for revaluation of acquired inventory related to purchase accounting for the Micromass acquisition, gross profit increased by 36% over the 1997 Period. Gross profit as a percentage of sales excluding the inventory revaluation charge decreased to 62.6% in both the 1998 Quarter and Period, from 63.6% and 63.4% in the 1997 Quarter and Period, reflecting the inclusion of Micromass' results after its September 1997 acquisition. (Micromass' gross margins are lower than Waters' historical gross margins, but its operating expenses are commensurately lower, and its operating margins are comparable to those of Waters.) Excluding the impact of Micromass' results, gross profit as a percentage of sales increased in the 1998 Period, primarily as a result of increased efficiencies in the Company's manufacturing operations and lower raw material costs. Selling, General, and Administrative Expenses: Selling, general and administrative expenses increased to $52.0 million in the 1998 Quarter and $101.9 million in the 1998 Period, as compared to $38.9 million in the 1997 Quarter and $78.0 million in the 1997 Period, primarily due to inclusion of expenses of acquired companies. As a percentage of net sales, selling, general and administrative expenses decreased to 35% for both the 1998 Quarter and Period, from 37% for both the 1997 Quarter and Period as a result of higher sales volume and expense controls. Research and Development Expenses: Research and development expenses were $8.2 million for the 1998 Quarter and $16.6 million for the 1998 Period, compared to $5.8 million for the 1997 Quarter and $11.6 million for the 1997 Period, a $2.4 million or 42% increase for the quarter and a $5.0 million or 43% increase for the period. Current year spending increased due to the inclusion of expenses of acquired 12
companies. The Company continues to invest significantly in the development of new and improved HPLC, thermal analysis, rheology, and mass spectrometry products. Goodwill and Purchased Technology Amortization: Goodwill and purchased technology amortization was $2.2 million for the 1998 Quarter and $4.5 million for the 1998 Period, an increase of $0.8 million from the 1997 Quarter and $1.7 million from the 1997 Period. This increase was primarily related to the acquisition of Micromass. Operating Income: Operating income was $31.0 million for the 1998 Quarter and $40.7 million for the 1998 Period, an increase of $9.6 million from the 1997 Quarter and $0.9 million from the 1997 Period. This smaller increase over the period reflected a final $16.5 million non- recurring charge in the first quarter of 1998 related to the revaluation of acquired inventory in connection with the Micromass acquisition. Excluding this non-recurring charge, operating income was $57.2 million for the 1998 Period and represented a $17.4 million or 44% increase over the 1997 Period. The increased operating income levels for the 1998 Period were the result of strong sales growth, volume leverage, and continued focus on cost reduction in all operating areas and the accretive impact of acquisitions. Interest Expense, Net: Net interest expense increased by $1.9 million or 65% for the 1998 Quarter and by $4.0 million or 66% for the 1998 Period, from $3.0 million in the 1997 Quarter and $6.0 million in the 1997 Period to $4.9 million in the 1998 Quarter and $10.0 million in the 1998 Period. The current period increase reflected increased debt levels incurred to finance the Micromass acquisition. Provision for Income Taxes: The Company's effective tax rate for the three months ended June 30, 1998 and 1997, was 23% and 20%, respectively. The Company's effective tax rate for the six months ended June 30, 1998 and 1997, was 22% and 20%, respectively, before nondeductible acquisition related expenses. Net Income: Income from operations was $20.1 million for the 1998 Quarter and $20.4 million for the 1998 Period, compared to $14.8 million for the 1997 Quarter and $27.1 million for the 1997 Period. Excluding the $16.5 million non-recurring charge in 1998 for the revaluation of acquired inventory, the Company generated $36.9 million of income in the 1998 Period compared to $27.1 million in the 1997 Period. The improvement over the prior year was a result of sales growth, continued focus on cost reductions in all operating areas and the accretive impact of acquisitions. Liquidity and Capital Resources: During the 1998 Period, net cash provided by the Company's operating activities was $35.8 million, primarily as a result of net income for the period after adding back non-recurring non- cash charges, depreciation and amortization, and after an $11.2 million investment in inventory. Primary uses of cash flows during the period were $11.6 million invested in property, plant and equipment and software capitalization; $3.2 million used for a business acquisition; and $26.1 million of bank debt repayments. The Company has evaluated the impact of Year 2000 issues on its existing systems. The Company expects that the impact will not be material. The Company believes that existing cash balances and current cash flow from operating activities together with borrowings available under the Bank Credit Agreement will be sufficient to fund working capital, capital spending and debt service requirements of the Company in the foreseeable future. Cautionary Statement: Certain statements contained herein are forward looking. Many factors could cause actual results to differ from these statements, including loss of market share through competition, introduction of competing products by other companies, pressure on prices from competitors and/or customers, regulatory obstacles to new product introductions, lack of acceptance 13
of new products, changes in the healthcare market and the pharmaceutical industry, changes in distribution of the Company's products, and interest rate and foreign exchange fluctuations. Part II: Other Information Item 1. Legal Proceedings From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of its business. None of the matters in which the Company or its subsidiaries are currently involved, either individually or in the aggregate, is material to the Company or its subsidiaries. The Company and its wholly owned subsidiary, Micromass Limited, are aware that a patent infringement action has been filed in the U.S. District Court for the District of Connecticut but has not been served. As a matter of convenience, settlement discussions are taking place. The patents relate to electrospray mass spectrometer products. The Company, through its subsidiary TAI, asserted a claim against The Perkin-Elmer Corporation ("PE") alleging patent infringement of three patents owned by TAI ("the TAI patents"). PE counterclaimed for infringement of a patent owned by PE ("the PE patent"). PE withdrew its claim for infringement preserving its right to appeal rulings interpreting the claims of the PE patent. A jury returned a verdict finding that no valid claims of the TAI patents were infringed by PE. TAI has appealed the verdict with the U.S. District Court for the District of Delaware. The Company has filed revocation and nullification actions against Hewlett-Packard Company and Hewlett-Packard GmbH ("HP"), seeking revocation or nullification of certain foreign HP patents in Europe. The patents relate to the Company's Alliance product. The Company believes it has meritorious arguments and should prevail in the above legal proceedings, although the outcomes are not certain. The Company believes that any outcomes of the proceedings will not be material to the Company. The Company had asserted a claim contending that Millipore had understated the amount of assets it was obligated to transfer from the Millipore Retirement Plan to the Waters successor plan. The Federal court had subsequently ruled in favor of Millipore's position with respect to the claim. On appeal, the May 19, 1997 Federal court ruling in favor of Millipore's position with respect to the claim was upheld, and $2,439,561 was transferred to the Waters Retirement Plan on June 2, 1998. Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders The Waters Corporation annual meeting of stockholders was held on May 12, 1998, at which the following matters were submitted to a vote of security holders: the election of directors of the Company as previously reported to the Commission, the ratification of auditors for the Company, and the reservation of an additional two million shares of the Company's common stock for issuance upon the exercise of stock options granted under the Company's Long-Term Performance Incentive Plan for senior executives of the Company. As of March 23, 1998, the record date for said meeting, there were 29,790,227 shares of Waters Corporation common stock entitled to vote at the meeting. At such meeting, the holders of 25,932,568 shares were represented in person or by proxy, constituting a quorum. At such meeting, the vote with respect to the matters proposed to the stockholders was as follows: <TABLE> Matter For Withheld or Against ------ --- ------------------- <S> <C> <C> Election of Directors For Joshua Bekenstein 25,891,784 40,784 For Michael J. Berendt, Ph.D. 25,895,578 36,990 For Douglas A. Berthiaume 25,896,550 36,018 14
For Philip Caldwell 25,889,026 43,542 For Edward Conard 25,897,406 35,162 For Thomas P. Salice 25,896,956 35,612 For Laurie H. Glimcher, M.D. 25,890,521 42,047 For William J. Miller 25,890,642 41,926 Ratification of Auditors 25,911,136 21,432 Reservation of Additional Shares 14,503,599 11,428,969 </TABLE> Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K A. Exhibit 27 - Financial Data Schedule B. No reports on Form 8-K were filed during the three months ended June 30, 1998. 15
WATERS CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 11, 1998 Waters Corporation /s/ Philip S. Taymor -------------------------- Philip S. Taymor Senior Vice President and Chief Financial Officer 16