SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2001
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 01-14010
WATERS CORPORATION
(Exact name of registrant as specified in its 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, including zip code, of principal executive offices)
Registrant's telephone number, including area code: (508) 478-2000
Securities registered pursuant to
Section 12(b) of the Act: Common Stock, par value $.01 per share
New York Stock Exchange, Inc.
Securities registered pursuant to
Section 12(g) of the Act: None
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 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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. (X)
State the aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 11, 2002: $4,310,247,781.
Indicate the number of shares outstanding of the registrant's common stock as of
March 11, 2002: 131,090,261
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2002 Annual Meeting of Stockholders are
incorporated by reference in Part III.
1
WATERS CORPORATION AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
INDEX
INDEX NO. PAGE
--------- ----
PART I
1. Business................................................................ 3
2. Properties.............................................................. 8
3. Legal Proceedings....................................................... 9
4. Submission of Matters to a Vote of Security Holders.....................11
Executive Officers of the Registrant....................................11
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 12
6. Selected Financial Data.................................................12
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations...........................................................12
7a. Quantitative and Qualitative Disclosures About Market Risk..............19
8. Financial Statements and Supplementary Data.............................20
9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure....................................................42
PART III
10. Directors and Executive Officers of the Registrant......................42
11. Executive Compensation..................................................42
12. Security Ownership of Certain Beneficial Owners and Management..........42
13. Certain Relationships and Related Transactions..........................42
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........42
Signature...............................................................45
2
PART I
ITEM 1: BUSINESS
GENERAL
Waters Corporation ("Waters" or the "Company") is a holding company which owns
all of the outstanding common stock of Waters Technologies Corporation, the
operating subsidiary. Waters was incorporated to acquire ("Acquisition") the
predecessor Waters Chromatography Division ("Predecessor") of Millipore
Corporation ("Millipore") on August 18, 1994. Waters became a publicly traded
company with its initial public offering ("IPO") in November 1995. The Company
has made two significant acquisitions since becoming a public company: Micromass
Limited ("Micromass") in September 1997 and TA Instruments, Inc. ("TAI") in May
1996.
BUSINESS SEGMENTS
The Company operates in the analytical instrument industry, with manufacturing
and distribution expertise in three complementary technologies: high performance
liquid chromatography ("HPLC") instruments, chromatography columns and other
consumables, and related service; mass spectrometry ("MS") instruments that can
be integrated and used along with other analytical instruments, especially HPLC;
and thermal analysis ("TA") and rheology instruments. The Company also operates
in several geographic segments. See Note 15 to the financial statements for
detailed results by geographic segment and products and service revenue. As also
discussed in Note 15 to the financial statements, these three operating segments
have been aggregated into one reporting segment for financial statement
purposes.
BUSINESS
Waters, an analytical instrument manufacturer, is the world's largest
manufacturer and distributor of HPLC instruments, chromatography columns and
other consumables, and related service. The Company believes it has the largest
HPLC market share in the United States, Europe and non-Japan Asia and believes
it 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
Micromass, the Company believes it is a market leader in the development,
manufacture, and distribution of mass spectrometry instruments, which are
complementary products that can be integrated and used along with other
analytical instruments, especially HPLC. Through TAI, the Company believes it is
also the world's leader in thermal analysis, a prevalent and complementary
technique used in the analysis of polymers.
Developed in the 1950's, HPLC today is the standard technique used to
identify and analyze the constituent components of a variety of chemicals and
materials. HPLC's performance capabilities enable it to separate and identify
80% of all known chemicals and materials. As a result, HPLC is used to analyze
substances in a wide variety of industries for research and development
purposes, quality control and process engineering applications. Within the
pharmaceutical and life science industries, its most significant end-use market,
HPLC is used extensively to identify new drugs, to develop manufacturing
methods, and to assure the potency and purity of new pharmaceuticals. HPLC is
used to identify food content for nutritional labeling in the food and beverages
industry and to test water and air purity within the environmental testing
industry. HPLC is also used in a variety of applications in other industries,
such as chemical and consumer products, as well as by universities and
government agencies. In many instances, the Food and Drug Administration ("FDA")
and the U.S. Environmental Protection Agency regulations, and those of their
international counterparts, mandate testing that requires HPLC instrumentation.
Waters manufactures over 100 HPLC instrument types. A complete HPLC system
consists of five basic components: the solvent delivery system, the sample
injector, the separation column, the detector and the data acquisition unit. The
solvent delivery system pumps the solvent through the HPLC system, while the
sample injector injects the sample into the solvent flow. The separation column
then separates the sample into its components for analysis by the detector,
which measures the presence and amount of the constituents. The data acquisition
unit then records and stores the information from the detector. Consumable
products primarily are columns packed with separation media used in the HPLC
testing process and are replaced at regular intervals. The separation column
contains one of several types of packing, typically stationary phase packing
made from silica. As the sample flows through the column, it is separated into
its constituent components.
3
The acquisition of Micromass expanded the Company's product offerings in
mass spectrometry instruments. Micromass is a world leader in the development,
manufacture, sale and support of organic, inorganic, stable isotope and
inductively-coupled plasma ("ICP") mass spectrometers typically combined with
HPLC, chemical electrophoresis, chemical electrophoresis chromatography, gas
chromatography or elemental analysis systems. Mass spectrometry is a powerful
analytical technique that is used to identify unknown compounds, to quantify
known materials, and to elucidate the structural and chemical properties of
molecules by measuring the masses of individual molecules that have been
converted into ions. These products supply a diverse market with a strong
emphasis on the life science, pharmaceutical, biomedical, clinical,
environmental and geochemistry markets worldwide. With the acquisition of
Micromass, Waters became one of the leading worldwide manufacturers of
analytical systems that bring together HPLC and mass spectrometry detection, or
HPLC-MS. Design innovations in HPLC-MS interfacing technology have drastically
improved the operating efficiencies of these systems, greatly simplifying their
operation, driving down their overall cost and making them much more affordable
for the average analytical laboratory. These laboratories previously relied on
expert mass spectrometrists to provide them the information they now get in
minutes. The largest market for HPLC-MS is the pharmaceutical market where new
drug development technologies are placing greater demands on laboratories to
screen and analyze new drug compounds.
The acquisition of TAI expanded the Company's product offerings to include
thermal analysis and rheology products. TAI develops, manufactures, sells and
services thermal analysis and rheology instruments which are used for the
physical characterization of polymers and related materials. Thermal analysis
measures the physical characteristics of materials as a function of temperature.
Changes in temperature affect several characteristics of materials such as their
physical state, weight, dimension and mechanical and electrical properties,
which may be measured by one or more thermal analysis techniques. Consequently,
thermal analysis techniques are widely used in the development, production and
characterization of materials in various industries such as plastics, chemicals,
automobiles, pharmaceuticals and electronics. Rheology instruments complement
thermal analyzers in characterizing materials. Rheology characterizes the flow
properties of materials and measures their viscosity, elasticity and deformation
under different types of loading. The information obtained provides insight with
regard to a material's behavior during manufacture, transport, usage and
storage.
Instruments and data products comprise approximately two thirds of the
Company's total revenue. Consumable products and service comprise the remaining
amount of the Company's revenue.
CUSTOMERS
Waters has a broad and diversified customer base that includes pharmaceutical
accounts, other industrial accounts, universities and government agencies. The
pharmaceutical segment represents the Company's largest sector and includes
multinational pharmaceutical companies, generic drug manufacturers and
biotechnology companies. The Company's other industrial customers include
chemical manufacturers, polymer manufacturers, food and beverage companies and
environmental testing laboratories. The Company also sells to various
universities and government agencies worldwide. Waters' technical support staff
work closely with our customers in developing and implementing applications that
meet their full range of analytical requirements.
The Company does not rely on any single customer or one group of customers
for a material portion of its sales. During fiscal year 2001, no single customer
accounted for more than 3% of the Company's net sales.
RESEARCH AND DEVELOPMENT
Waters maintains an active research and development program focused on the
development and commercialization of products which both complement and updates
the existing product offering. The Company's research and development
expenditures for 2001, 2000 and 1999, were $46.6 million, $42.5 million and
$36.1 million, respectively. Nearly all of the current HPLC products of the
Company have been developed at the Company's main research and development
center located in Milford, Massachusetts, with input and feedback from Waters'
extensive field organization. The majority of the mass spectrometry products
have been developed at facilities in England and nearly all of the current
thermal analysis products have been developed at the Company's research and
development center in New Castle, Delaware. At December 31, 2001, there were
approximately 470 employees involved in the Company's research and development
efforts. Despite the Company's active research and development program, there
can be no assurances that the Company's product development and
commercialization efforts will be successful or that the products developed by
the Company will be accepted by the marketplace.
4
SALES AND SERVICE
Waters has one of the largest sales and service teams in the industry focused
exclusively on HPLC, MS and TA. Across all technologies, using respective
specialized sales and service forces, the Company serves its customer base with
approximately 1,300 field representatives in 95 sales offices throughout the
world. The sales representatives have direct responsibility for account
relationships, while service representatives work in the field to install
instruments and minimize instrument downtime for customers. Technical support
representatives work directly with customers, helping them to develop
applications and procedures. Waters provides customers with comprehensive
product literature and also makes consumable products available through a
dedicated catalog.
MANUFACTURING
Waters provides high quality HPLC products by controlling each stage of
production of its instruments and columns. The Company assembles most of its
instruments at its facility in Milford, Massachusetts, where it performs
machining, wiring, assembly and testing. The Milford facility employs
manufacturing techniques that meet the strict ISO 9002 quality manufacturing
standards and FDA mandated Good Manufacturing Practices. The Company outsources
manufacturing of certain electronic components such as computers, monitors and
circuit boards to outside vendors that can meet the Company's quality
requirements.
The Company manufactures its HPLC columns at its facilities in Taunton,
Massachusetts and Wexford, Ireland, where it processes, sizes and treats silica
and polymer media that are packed into columns, solid phase extraction
cartridges and bulk shipping containers. The Wexford facility also manufactures
and distributes certain data and software components for the Company's HPLC and
mass spectrometry product lines. These facilities meet the same ISO and FDA
standards met by the Milford, Massachusetts facility and are approved by the
FDA. Thermal analysis products are manufactured at the Company's New Castle,
Delaware facility and rheology products are manufactured at the Company's
Leatherhead, England facility.
The Company manufactures its mass spectrometry products at its facilities
in Manchester, England and Cheshire, England. Certain components or modules of
our mass spectrometry instruments are manufactured by outside long-standing
contractors. Each stage of this supply chain is closely monitored by the Company
to maintain our high quality and performance standards. The instruments,
components or modules are then returned to our facilities where our engineers
perform final assembly, calibrations to customer specifications and quality
control procedures.
COMPETITION
The analytical instrument and systems market is highly competitive. The Company
encounters competition from several worldwide instrument manufacturers in both
domestic and foreign markets. Waters competes in its markets primarily on the
basis of instrument performance, reliability and service and, to a lesser
extent, price. Some competitors have instrument businesses that are much larger
than the Company's business, but are typically less focused on Waters' chosen
markets. Some competitors have greater financial and other resources than the
Company.
The market for consumable HPLC products, including separation columns, is
also highly competitive but is more fragmented than the analytical instruments
market. Waters encounters competition in the columns market from chemical
companies that produce column chemicals and small specialized companies that
pack and distribute columns. The Company believes that it is one of the few
suppliers that process silica, packs columns, and distributes its own product.
Waters competes in this market on the basis of reproducibility, reputation and
performance, and, to a lesser extent, price.
PATENTS, TRADEMARKS AND LICENSES
Waters owns a number of United States and foreign patents and has patent
applications pending in the United States and abroad. Certain technology and
software is licensed from third parties. Waters also owns a number of
trademarks. The Company's patents, trademarks and licenses are viewed as
valuable assets to its operations.
5
EMPLOYEES
At December 31, 2001, Waters employed approximately 3,500 employees, 52% of who
are located in the United States. Waters considers its employee relations, in
general, to be good, and Waters' employees are not represented by any union. The
Company believes that its future success depends, in a large part, upon its
continued ability to attract and retain highly skilled employees.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes, and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from sites of past
spills, disposals or other releases of hazardous substances. The Company
believes that it currently conducts its operations, and in the past has operated
its business, in substantial compliance with applicable environmental laws. From
time to time, operations of the Company have resulted or may result in
noncompliance with or liability for cleanup pursuant to environmental laws. The
Company does not currently anticipate any material adverse effect on its
operations, financial condition or competitive position as a result of its
efforts to comply with environmental laws.
With respect to the Predecessor's operations of the Company's HPLC
business, Millipore has been notified that the U.S. Environmental Protection
Agency has determined that a release or a threat of a release of hazardous
substances as defined by CERCLA has occurred at certain sites to which chemical
wastes generated by its manufacturing operations have been sent. In each
instance, Millipore was one of a large number of entities that received
notification from the U.S. Environmental Protection Agency, and Millipore
anticipates that any ultimate liability for remedial costs will be shared by
others. In any instances involving chemical wastes generated by the Predecessor,
Millipore has entered into partial settlements, paid its proportionate financial
obligation and received partial releases.
In connection with the Acquisition, Millipore agreed to retain
environmental liabilities resulting from pre-acquisition operations of the
Company's facilities. Notwithstanding this contractual agreement, under CERCLA
and similar environmental laws, the Company may remain primarily liable to some
parties for environmental cleanup costs.
RISK FACTORS
Forward-Looking Statements:
Certain of the statements in this Form 10-K and the documents incorporated in
this Form are forward-looking statements, including statements regarding, among
other items, (i) the impact of the Company's new products, (ii) the Company's
growth strategies, including its intention to make acquisitions and introduce
new products, (iii) anticipated trends in the Company's business and (iv) the
Company's ability to continue to control costs and maintain quality. You can
identify these forward-looking statements by our use of the words "believes",
"anticipates", "plans", "expects", "may", "will", "would", "intends",
"estimates" and similar expressions, whether in the negative or affirmative.
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) general
changes in the economy or marketplace including currency fluctuations, in
particular with regard to the euro, British pound and Japanese yen, (iii)
changes in the competitive marketplace, including obsolescence resulting from
the introduction of technically advanced new products and pricing changes by the
Company's competitors, (iv) the ability of the Company to generate increased
sales and profitability from new product introductions, (v) the ability of the
Company to replace or increase the amount of its existing revolving credit
agreement in the event the need of a credit facility is required, (vi) the
reduction in capital spending of pharmaceutical customers, (vii) the loss of
intellectual property rights in the Company's research and development efforts,
as well as additional risk factors set forth below. Actual 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.
6
Competition and the Analytical Instrument Market:
The analytical instrument market; in particular, the portion related to the
Company's HPLC, mass spectrometry and thermal analysis product lines; is highly
competitive, and the Company encounters competition from several international
instrument manufacturers and other companies in both domestic and foreign
markets. Many competitors are divisions of significantly larger companies that
have greater financial and other resources, including larger sales forces and
technical staffs, than the Company. There can be no assurances that the
Company's competitors will not introduce more effective and less costly products
than those of the Company, or that the Company will be able to increase its
sales and profitability from new product introductions. There can be no
assurances that the Company's sales and marketing forces will compete
successfully against its competitors in the future.
Additionally, the market may, from time to time, experience low sales
growth. Approximately 63% of the Company's net sales in 2001 were to the
worldwide pharmaceutical industry, which may be periodically subject to
unfavorable market conditions and consolidations. Unfavorable industry
conditions could have a material adverse effect on the Company's results of
operations.
Risk of Disruption:
The Company manufactures HPLC instruments at its facility in Milford,
Massachusetts, separation columns at its facilities in Taunton, Massachusetts
and Wexford, Ireland, mass spectrometry products at its facilities in
Manchester, England and Cheshire, England, thermal analysis products at its
facility in New Castle, Delaware and rheology products at its facility in
Leatherhead, England. Any prolonged disruption to the operations at these
facilities, whether due to labor difficulties, destruction of or damage to
either facility or other reasons, could have a material adverse effect on the
Company's results of operations and financial condition.
Foreign Operations and Exchange Rates:
Approximately 57% of Waters' 2001 net sales were outside of the United States
and were primarily denominated in foreign currencies. As a result, a significant
portion of the Company's sales and operations are subject to certain risks,
including adverse developments in the foreign political and economic
environment, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations and potentially adverse tax consequences.
Additionally, the U.S. dollar value of the Company's net sales varies with
currency exchange rate fluctuations. Significant increases in the value of the
U.S. dollar relative to certain foreign currencies could have a material adverse
effect on Waters' result of operations.
Reliance on Key Management:
The operation of the Company requires managerial and operational expertise. None
of the key management employees has an employment contract with the Company, and
there can be no assurance that such individuals will remain with the Company.
If, for any reason, such key personnel do not continue to be active in
management, the Company's operations could be adversely affected.
Euro Currency Conversion:
Several countries of the European Union adopted the euro as their legal currency
effective January 1, 2002 ("the euro conversion"). A transition period had been
established from January 1, 1999 to January 1, 2002 during which companies
conducting business in these countries could 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 2001, the Company
successfully tested and implemented the euro conversion of its information
technology systems.
7
Protection of Intellectual Property:
The Company vigorously protects its intellectual property rights and seeks
patent coverage on all developments that it regards as material and patentable.
However, there can be no assurances that any patents held by the Company will
not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company. Conversely, there
could be successful claims against us where our intellectual property does not
cover competitor products or is invalidated. See, in particular, the matter
discussed in Item 3: Legal Proceedings, under "Applera Corporation." The
Company's patents, including those licensed from others, expire on various
dates. If the Company is unable to protect its intellectual property rights, it
could have an adverse and material effect on the Company's results of operations
and financial conditions.
Reliance on Customer Demand:
The demand for the Company's products is dependent upon the size of the markets
for its HPLC, MS and TA product, the level of capital expenditures of the
Company's customers, the rate of economic growth in the Company's major markets
and competitive considerations. There can be no assurances that the Company's
results of operations will not be adversely impacted by a change in any of the
factors listed above.
Reliance on Suppliers:
Most of the raw materials, components and supplies purchased by the Company are
available from a number of different suppliers; however, a number of items are
purchased from limited or single sources of supply, and disruption of these
sources could have a temporary adverse effect on shipments and the financial
results of the Company. The Company believes alternative sources could
ordinarily be obtained to supply these materials, but a prolonged inability to
obtain certain materials or components could have an adverse effect on the
Company's financial condition or results of operations and could result in
damage to its relationship with its customers.
ITEM 2: PROPERTIES
Waters operates 16 United States facilities and 81 international facilities,
including field offices. The Company believes its facilities are suitable and
adequate for its current production level and for reasonable growth over the
next two to three years. The Company's primary facilities are summarized in the
table below.
PRIMARY FACILITY LOCATIONS
Location Function /(1)/ Owned/Leased Square Feet (000's)
--------------------------------------------------------------------------------------------
Franklin, MA D Leased 30
Milford, MA M, R, S, A Owned 465
Taunton, MA M Owned 32
Etten-Leur, Netherlands S, D, A Leased 37
St. Quentin, France S, A Leased 30
Singapore S, A Leased 6
Tokyo, Japan R, S, A Leased 28
Wexford, Ireland M, R, S Leased 28
New Castle, DE M, R, S, D, A Leased 71
Leatherhead, England M, R, S, D Leased 10
Beverly, MA S, D, A Leased 66
Cheshire, England M, R, S Leased 28
Manchester, England M, R, S, D, A Leased 89
--------------
/(1)/ M = Manufacturing; R = Research; S = Sales and service; D = Distribution;
A = Administration
8
Waters operates and maintains 11 field offices in the United States and 73
field offices abroad in addition to sales offices in the primary facilities
listed above. The Company's field office locations are listed below.
FIELD OFFICE LOCATIONS /(2)/
United States International
---------------------- -----------------------------------------------------------
Tustin, CA Australia India Sweden
Wood Dale, IL Austria Italy Switzerland
Fairfax, VA Belgium Japan Taiwan
Cary, NC Brazil Korea United Kingdom
Morristown, NJ Canada Mexico
Houston, TX Czech Republic Netherlands
Dublin, CA Denmark Norway
Ann Arbor, MI Finland People's Republic of China
Capitola, CA France Poland
Rolling Meadows, IL Germany Puerto Rico
Spring, TX Hong Kong Russia
Hungary Spain
--------------
/(2)/ Waters operates more than one office within certain states and foreign
countries.
ITEM 3: 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. The Company
does not believe that the matters in which it or its subsidiaries are currently
involved, either individually or in the aggregate, with the exception of the
current litigation with Applera Corporation, are material to the Company or its
subsidiaries.
Applera Corporation:
PE Corporation (since renamed Applera Corporation), MDS Inc. and Applied
Biosystems/MDS Sciex ("the plaintiffs") have filed a civil action against
Micromass UK Limited and Micromass, Inc., wholly owned subsidiaries of the
Company, in the U.S. District Court for the District of Delaware. The plaintiffs
allege that the Quattro Ultima triple quadrupole mass spectrometer infringes
U.S. Patent No. 4,963,736 ("the patent"). The patent is owned by MDS Inc. and
licensed to a joint venture, Applied Biosystems/MDS Sciex. The Company believes
that it does not infringe the patent and alleges the patent is invalid and
unenforceable based on inequitable conduct in the course of obtaining the patent
and the Reexamination Certificate therefor.
In March 2002, the Company was informed of a jury's finding that the
Quattro Ultima with Mass Transit ion tunnel technology infringes the patent. The
same jury has found that the infringement was not willful and determined damages
in the amount of $47.5 million. As of the date this Form 10-K was filed, the
Court had not addressed claims brought by the Company of inequitable conduct.
Favorable rulings on these claims could render the patent unenforceable,
although the outcome is not certain. The Court may also enter an injunction in
which the Company is enjoined from making, using and selling the Quattro Ultima
triple quadrupole mass spectrometer. These instruments are manufactured in the
United Kingdom and shipments to the rest of the world outside of the United
States are not subject to the present litigation. There is a possibility that
similar claims may be asserted against the Company in other countries and for
other products in the mass spectrometry product line. Based on the facts
available to management, the Company believes the outcome of any such claims
should they be brought, cannot be predicted with certainty, but could be
material to the Company's financial position, results of operations and
liquidity.
The Company intends to contest both the jury's verdict and the district
court's underlying patent claim construction vigorously both in post-trial
motions and, if necessary, by way of an appeal to the United States Court of
Appeals for the Federal Circuit. It believes that it has meritorious arguments
and has filed counter claims in connection with the above, alleging antitrust
violations and the invalidity of the asserted patent, among other things.
Management, after reviewing available information relating to this matter, has
determined that it is probable some liability has been incurred. The Company
believes that any liability ultimately incurred will not likely exceed the
provision described below recorded in the quarter ended December 31, 2001
including interest, court costs, legal fees and other charges. However, in the
event of an unanticipated adverse final determination in respect of certain
matters, the Company's consolidated net income for the period in which such
determination occurs could be materially affected. Although sufficient
uncertainties exist to preclude the Company from precisely determining the
amount of its liability, the $75.0 million recorded as a patent litigation
provision in the quarter ended December 31, 2001 in the consolidated statements
of operations, is the Company's best estimate of its exposure based on
information currently available.
9
Other:
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"). The U.S. District Court for the District of
Delaware granted judgment as a matter of law in favor of TAI and enjoined PE
from infringing the TAI patents. PE appealed the District Court judgment in
favor of TAI to the federal appellate court. The District Court's judgment, with
respect to PE's infringement of the TAI patents, was affirmed. The District
Court's judgment with respect to TAI's non-infringement of the PE patent was
reversed and remanded to the District Court for further proceedings. PE appealed
the appellate court decision, that PE failed to preserve certain arguments on
appeal, to the U.S. Supreme Court and that appeal was denied. The Company
believes it has meritorious arguments and should prevail, although the outcome
is not certain. The Company believes that any outcome will not be material to
the Company.
The Company has filed suit in the U.S. against Hewlett-Packard Company and
Hewlett-Packard GmbH ("HP"), seeking a declaration that certain products sold
under the mark Alliance do not constitute an infringement of one or more patents
owned by HP or its foreign subsidiaries ("the HP patents"). The action in the
U.S. was dismissed for lack of controversy. Actions seeking revocation or
nullification of foreign HP patents have been filed by the Company in Germany,
France and England. A German patent tribunal found the HP German patent to be
valid. The Company is appealing the German decision. In Germany, France and
England, HP and its successor, Agilent Technologies Deutschland GmbH, have
brought an action alleging certain features of the Alliance pump may infringe
the HP patent. In England, the High Court of Justice, Chancery Division, has
found the HP patent valid and uninfringed by the Alliance pump. The Company
believes it has meritorious arguments and should prevail, although the outcome
is not certain. The Company believes that any outcome of the proceedings will
not be material to the Company.
Cohesive Technologies, Inc. ("Cohesive") has brought three suits against
the Company in the United States District Court of Massachusetts. Cohesive
alleges that several products of the Company, which are part of a much larger
product line, are an infringement of two Cohesive U.S. Patents. The Company has
denied infringement of such patents and has asserted several defenses. One of
the products alleged to be an infringement is now obsolete and is no longer
sold. During the fourth quarter of 2001, a jury returned a verdict in one of the
suits finding the Company liable for infringement of one of the two patents. The
Company intends to continue to vigorously defend its position. Judgment has not
been entered on the jury's verdict and further proceedings may preclude such
entry. The Company believes it has meritorious positions and should prevail
either through judgment or on appeal, although the outcome is not certain. The
Company believes that any outcome of the proceedings will not be material to the
Company.
Viscotek Corporation ("Viscotek") has filed a civil action against the
Company alleging one option offered by the Company with a high temperature gel
permeation chromatography instrument is an infringement of two of its patents.
These patents are owned by E. I. Du Pont de Nemours and Company ("Du Pont") and
claimed to be exclusively licensed to Viscotek. Du Pont is not a party to the
suit. The Company has answered the complaint and believes it does not infringe
the patents. The Company believes it has meritorious arguments and should
prevail, although the outcome is not certain. The Company believes that any
outcome of the proceedings will not be material to the Company.
10
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Douglas A. Berthiaume, 53, has served as Chairman of the Board of Directors of
the Company since February 1996 and has served as President, Chief Executive
Officer and a Director of the Company since August 1994. From 1990 to 1994,
Mr. Berthiaume served as President of the Waters Chromatography Division of
Millipore. On January 4, 2002, John R. Nelson was promoted to President and
Chief Operating Officer of the Company. Mr. Berthiaume remains as Chairman of
the Board of Directors and Chief Executive Officer and a Director of the
Company. Mr. Berthiaume is a Director of the Children's Hospital Trust, the
Analytical and Life Science Systems Association and Genzyme Corporation.
Arthur G. Caputo, 50, has been Senior Vice President, Worldwide Sales and
Marketing of the Company since August 1994. He joined the Predecessor in October
1977 and has held a number of positions in sales within the Predecessor and
Millipore. Prior to his current position, he was Senior Vice President and
General Manager of Millipore's North American Business Operations responsible
for establishing the Millipore North American Sales Subsidiary and also served
as the General Manager of Waters' North American field sales, support and
marketing functions. On January 4, 2002, Mr. Caputo was promoted to President of
the Waters Division.
Brian K. Mazar, 44, Senior Vice President, Human Resources and Investor
Relations, has directed Human Resources and Investor Relations since August
1994. He joined the Predecessor in 1991 as Director of Human Resources with
responsibility for worldwide human resources functions. From 1986 to 1991, Mr.
Mazar was Director of Human Resources of GeneTrak Systems. Prior thereto, Mr.
Mazar worked at Exxon Corporation and Corning, Inc.
John R. Nelson, 58, has been Senior Vice President, Research, Development
and Engineering of the Company since August 1994. He joined the Predecessor in
August 1976 and has held a variety of positions in marketing as well as research
and development, including Vice President Waters Research Development and
Engineering, Senior Vice President Worldwide Marketing Operations and Senior
Vice President of Product Development. Mr. Nelson is also responsible for the
Company's Micromass Limited and TA Instruments, Inc. operations. On January 4,
2002, Mr. Nelson was promoted to President and Chief Operating Officer of the
Company.
John A. Ornell, 44, became Vice President, Finance and Administration and
Chief Financial Officer in June 2001. He joined Waters in 1990 and most recently
was Vice President, Operations. During his years at Waters, he has also been
Vice President of Manufacturing and Engineering, had responsibility for
Operations Finance and Distribution and had a senior role in the successful
implementation of the Company's worldwide business systems.
Devette W. Russo, 49, Senior Vice President, Chromatography Consumables
Division, has directed the Chromatography Consumables Division since 1990. She
joined the Predecessor in 1975 as a Marketing Communications Account Manager,
and has held a variety of positions within the Predecessor and Millipore in
marketing before assuming her current responsibilities as Senior Vice President,
Chromatography Consumables Division. Prior positions include Director of
Corporate Communications for Millipore and Vice President of Marketing for the
Chemistry Division. Ms. Russo held various marketing and application support
roles before joining the Millipore organization. On January 4, 2002, Ms. Russo
was appointed Senior Vice President, New Business Development.
David A. Terricciano, 46, Vice President, Operations joined Waters in 2001.
Prior to joining Waters, he worked as Vice President and General Manager of
Operations for Perkin-Elmer Instruments. Previously, he held a variety of
positions at B.F Goodrich Aerospace and Honeywell Aerospace.
11
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is registered under the Securities Exchange Act of
1934 and is listed on the New York Stock Exchange under the symbol WAT. As of
March 11, 2002, the Company had approximately 276 common stockholders of record.
The Company has not declared or paid any dividends on its Common Stock in the
past two years and does not plan to pay dividends in the foreseeable future.
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.
The quarterly range of high and low sales prices for the Common Stock as
reported by the New York Stock Exchange (adjusted to reflect a two-for-one stock
split declared by the Company for shareholders of record as of August 4, 2000)
is as follows:
Price Range
-----------
For the quarter ended High Low
--------------------- ---- ---
March 31, 2000 53 3/8 22
June 30, 2000 64 3/4 38 23/32
September 30, 2000 90 3/8 59 5/16
December 31, 2000 88 1/2 62 11/16
March 31, 2001 85 3/8 31 1/2
June 30, 2001 58 1/33 26
September 30, 2001 36 1/2 22 1/3
December 31, 2001 40 19/20 33 13/20
ITEM 6: SELECTED FINANCIAL DATA
Reference is made to information contained in the section entitled "Selected
Financial Data" on page 41 of this Form, included in Item 8, Financial
Statements and Supplementary Data
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
Sales grew by 8% in 2001 and by 13% in 2000. Excluding currency effects, sales
grew 11% in 2001 and by 17% in 2000. Sales growth, before currency effects, in
both years reflected increased customer demand for new products and generally
was broad-based geographically. Operating income, excluding a provision for
patent litigation, for the year ended December 31, 2001 was $224.5 million, a 6%
increase over the $210.8 million generated in 2000. Earnings per diluted common
share were $1.27 in 2001, excluding a provision for patent litigation and an
impairment charge for certain equity investments, an 11% increase over the $1.14
in 2000, which is before the cumulative effect of a change in accounting
principle. In addition, the Company remained essentially debt-free while
generating all-in cash flow of $155.0 million. All-in cash flow is the increase
of cash plus the reduction of debt. In February 2002, the Company entered into
an agreement to replace its existing credit facility. The new credit facility
provides a $250.0 million line of credit and is unsecured in nature.
In March 2002, the Company was informed, as a result of a jury's finding on
a civil action filed by competitors, that the Quattro Ultima triple quadrupole
mass spectrometer sold in the U.S. infringes on their U.S. patent. The jury has
determined damages in the amount of $47.5 million. As of the date this Form 10-K
was filed, the court had not addressed certain claims brought by the Company,
which could mitigate damages. The Company intends to contest the jury's findings
vigorously through appeals. The Company has recorded a $75.0 million patent
litigation charge in the fourth quarter of 2001 as a result of this matter
including interest, court costs, legal fees and other charges. Management
believes that some liability has been incurred and this is the Company's best
estimate of its exposure based on information currently available.
During 2001, approximately 57% of the Company's combined net sales were
derived from operations outside the United States. The Company believes that the
geographic diversity of its sales reduces its dependence on any particular
region. The U.S. dollar value of these revenues varies with currency exchange
fluctuations, and such fluctuations can affect the Company's results from period
to period.
12
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Sales:
Net sales for 2001 were $859.2 million and were an increase of 8% compared to
$795.1 million for 2000. Excluding the adverse effects of a stronger U.S. dollar
in 2001, particularly with the euro and the Japanese yen, 2001 net sales
increased by 11% over 2000. Overall orders and sales reflected continued strong
demand across all major geographies especially from our life science customers.
HPLC and MS sales in 2001 grew slightly more than 10% in constant currencies
over 2000 while TA sales were flat. Order backlog remained unchanged for the
year before considering the recent $19.0 million order from GeneProt(TM), Inc.
Sales of high-end mass spectrometry products were strong for 2001 in all of our
life science applications.
Gross Profit:
Gross profit for 2001 was $548.0 million compared to $506.8 million for 2000, an
increase of $41.2 million or 8%. Gross profit as a percentage of sales increased
to 63.8% in 2001 from 63.7% in 2000. This was primarily due to productivity
improvements realized from volume growth and cost savings efficiencies, and a
modest shift in sales mix toward higher margin chemistry and service product
lines. Both were partially offset by the adverse effects of currency translation
to the Company's sales.
Selling, General, and Administrative Expenses:
Selling, general and administrative expenses for 2001 and 2000 were $269.7
million and $246.4 million, respectively. As a percentage of net sales, selling,
general and administrative expenses increased to 31.4% for 2001 from 31.0% for
2000. The $23.3 million or 9% increase in 2001 resulted primarily from increased
headcount, particularly in after-sales technical support and service labor
largely within our mass spectrometry business. Headcount rose from 3,158 at
December 31, 2000 to 3,483 at December 31, 2001 or 10%. This increase in
headcount and related costs were required to support increased current and
future sales levels, and were slightly reduced by the effects of currency
translation. Foreign currency transaction gains and losses were negligible in
fiscal year 2001.
Research and Development Expenses:
Research and development expenses were $46.6 million for 2001 and $42.5 million
for 2000, an increase of $4.1 million or 10%. The Company continued to invest
significantly in the development of new and improved HPLC, mass spectrometry,
thermal analysis and rheology products.
Patent Litigation Provision:
In 2001, the Company recorded a $75.0 million pre-tax charge for patent
litigation. There was no such charge in 2000.
Goodwill and Purchased Technology Amortization:
Goodwill and purchased technology amortization was $7.1 million for both 2001
and 2000 as there was relatively no change in the nature or amortization periods
of the asset components. In 2002, goodwill amortization will cease in accordance
with recently issued accounting standards. Goodwill amortization was
approximately $4.0 million in 2001.
Operating Income:
Operating income for 2001, excluding a provision for patent litigation, was
$224.5 million compared to $210.8 million for 2000. This increase of $13.7
million or 6% for the year is attributed to production efficiencies and
continued focus on cost controls in all operating areas. Operating income as a
percentage of sales decreased slightly from 26.5% in 2000 to 26.1% in 2001
essentially due to marginal increases in operating expenses in relation to sales
growth unfavorably impacted by currency translation.
Other Expense:
In 2001, the Company recorded a $7.1 million pre-tax charge for an
other-than-temporary impairment to the carrying amount of certain equity
investments. There was no such charge in 2000.
Interest Income (Expense), Net:
Net interest income for 2001 and 2000 was $5.0 million and $0.1 million,
respectively. The change primarily reflected the elimination of debt under the
Company's Bank Credit Agreement during 2000 and interest earned on investments
of cash generated from the Company's positive cash flow, offset slightly by
lower yields.
13
Provision for Income Taxes:
The Company's effective income tax rate was 22.3% in 2001 and 26% in 2000. The
2001 tax rate decreased primarily due to the continued favorable shift in the
mix of taxable income to lower tax rate jurisdictions and tax benefits provided
by the provision for patent litigation.
Income before Cumulative Effect of Change in Accounting Principle:
Net income before the cumulative effect of an accounting change for 2001 and
2000 was $114.5 million and $156.1 million, respectively, resulting in a
decrease of $41.6 million or 27%. The decrease was primarily due to a $75.0
million pre-tax charge against income in 2001 for patent litigation and, to a
certain extent, the unfavorable impact of currency translation offset by sales
growth, favorable interest income dynamics and the impact of a decrease in the
Company's effective income tax rate.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Sales:
Net sales for 2000 were $795.1 million, compared to $704.4 million for the year
ended December 31, 1999, an increase of 13%. Excluding the impact of currency on
2000 net sales compared to 1999, net sales increased 17%. Sales were
particularly strong to life science customers and for mass spectrometry products
in general. Sales of time-of-flight mass spectrometry products continued to
perform well with sales growing in excess of 50% in 2000 as a result of
expanding customer needs in proteomics, drug discovery and drug development
application areas. Currency translation reduced sales growth rates by four
percentage points in 2000 primarily due to weakening of European currencies,
which was partially offset by appreciation of the Japanese yen.
Gross Profit:
Gross profit for 2000 was $506.8 million, compared to $447.3 million for 1999,
an increase of $59.5 million or 13%. Gross profit as a percentage of sales
increased to 63.7% in 2000 from 63.5% in 1999, as the Company continues to
benefit from productivity improvements, which were offset, to a certain extent,
by the effects of currency translation.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses for 2000 were $246.4 million,
compared to $226.6 million for 1999. As a percentage of net sales, selling,
general and administrative expenses decreased to 31.0% for 2000 from 32.2% for
1999 as a result of higher sales volume and expense controls. The $19.8 million
or 9% increase 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 $42.5 million for 2000 compared to $36.1
million for 1999, a $6.4 million or 18% increase from prior year levels. The
Company continued 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 for 2000 was $7.1 million,
compared to $8.1 million for 1999, a decrease of $1.0 million or 12%. The
expense decreased because a portion of purchased technology reached full
amortization in 1999.
Operating Income:
Operating income for 2000 was $210.8 million, an increase of $34.3 million or
19% from the prior year. Waters improved operating income levels on the strength
of sales growth, volume leverage and continued focus on cost controls in all
operating areas.
Interest Income (Expense), Net:
Net interest income was $.1 million in 2000 compared to net interest expense of
($8.9) million in 1999. The current year change primarily reflected payment of
outstanding debt balances during the year under the Company's Bank Credit
Agreement and investment of cash generated from operations.
Provision for Income Taxes:
The Company's effective income tax rate was 26% in 2000 and 27% in 1999. The
2000 tax rate decreased primarily due to a favorable shift in the mix of taxable
income to lower tax rate jurisdictions.
14
Income before Cumulative Effect of Change in Accounting Principle:
Income from operations before the cumulative effect of an accounting change for
2000 was $156.1 million, compared to $122.3 million for 1999, an increase of
$33.8 million or 28%. The improvement over the prior year was a result of sales
growth, productivity improvement across all operating areas, a decline in
interest expense and the impact of a decrease in the Company's effective income
tax rate.
Change in Revenue Recognition Accounting:
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 $10.8 million (net
of an income tax benefit of $3.8 million), which is included in income for the
year ended December 31, 2000. The adoption of SAB 101 had virtually no effect on
the Company's 2000 results of operations excluding the cumulative effect. For
the year ended December 31, 2000, the Company recognized $17.6 million in
revenue, which is the entire amount of revenue associated with the cumulative
effect adjustment as of January 1, 2000.
EURO CURRENCY CONVERSION
Several countries of the European Union adopted the euro as their legal currency
effective January 1, 2002 ("the euro conversion"). A transition period had been
established from January 1, 1999 to January 1, 2002 during which companies
conducting business in these countries could 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 2001, the Company
successfully tested and implemented the euro conversion of its information
technology systems.
LIQUIDITY AND CAPITAL RESOURCES
During 2001, net cash provided by the Company's operating activities was $189.2
million, primarily as a result of net income for the year after adding back the
provision for patent litigation, depreciation, amortization and the tax benefit
related to stock option activity, less working capital needs. The $189.2 million
is an increase of $13.6 million over 2000 and is mostly due to the increase in
the Company's net income, excluding the non-cash impact of the 2001 provision
for patent litigation.
In terms of working capital, excluding the provision for patent litigation,
$21.1 million was used as accounts receivable grew relatively proportionate to
sales growth while days-sales-outstanding stood at 67 days at December 31, 2001
compared to 68 days at December 31, 2000. Approximately $15.9 million was used
for inventory growth related to current sales expectations and new product
inventory related to future sales. Within liabilities, an increase in accounts
payable and other current liabilities, and deferred revenue and customer
advances provided $11.0 million, excluding a tax benefit of $20.5 million on the
provision for patent litigation. In addition, the Company received $9.0 million
of proceeds from the exercise of stock options and its employee stock purchase
plan, and $6.8 million from the settlement of its debt swap agreements. Primary
uses of cash flow during the year were $3.7 million of bank debt repayment,
$42.4 million of property, plant and equipment and software capitalization
investments, and $6.6 million for investments in unaffiliated companies and
business acquisitions.
In February 2002, the Company entered into an agreement to replace its
existing credit facility, unsecured in nature, in the amount of $250.0 million.
The Company has commitments for lease agreements, expiring at various dates
through 2019, covering certain buildings, office equipment and automobiles.
Future minimum rents payable as of December 31, 2001 under non-cancelable leases
with initial terms exceeding one year are $13.0 million, $11.1 million, $8.7
million and $6.3 million for the years 2002, 2003, 2004 and 2005, respectively.
Future minimum rents payable from 2006 through 2019 are $25.7 million. In
addition, the Company has various ongoing license and collaboration agreements
in conjunction with its research and development efforts. The Company also has
disbursed $19.0 million in the first quarter of 2002 as part of certain minority
equity investments and an acquisition of a foreign distributor. The Company
believes that the existing cash and cash equivalent balance of $226.8 million
and expected cash flow from operating activities together with borrowings
available from its credit facility will be sufficient to fund working capital,
capital spending requirements, and any adverse final determination of ongoing
patent litigation in the foreseeable future.
15
The Company is not aware of any undisclosed risks and uncertainties,
including but not limited to product technical obsolescence, regulatory
compliance, protection of intellectual property rights, changes in
pharmaceutical industry spending, competitive advantages, current and pending
litigation, and changes in foreign exchanges rates, that are reasonably likely
to occur and could materially and negatively affect the Company's existing cash
balance or its ability to borrow funds from its credit facility. The Company
also believes there are no provisions in the new credit facility, its real
estate leases, and supplier and collaborative agreements that would accelerate
payments, require additional collateral or impair our ability to continue to
enter into critical transactions. As a publicly held company, the Company has
not paid any dividends and does not plan to pay any dividends in the foreseeable
future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Summary:
The preparation of consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, Waters evaluates its estimates, including
those related to revenue recognition, product returns and allowances, bad debts,
inventory valuation, equity investments, goodwill and intangible assets, income
taxes, warranty and installation provisions, contingencies and litigation.
Waters bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. The Company believes the following critical accounting policies
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
Revenue Recognition:
Sales of products and services are generally recorded based on product shipment
and performance of service, respectively. Proceeds received in advance of
product shipment or performance of service are recorded as deferred revenue in
the consolidated balance sheets. Once the product is shipped all advance
payments received associated with that particular order are reclassified to
accounts receivable. Shipping and handling costs are included in cost of sales
net of amounts invoiced to the customer per the order. Our products generally
carry one year of warranty. These costs are accrued at the point of shipment.
Once the warranty period has expired, the customer may purchase a service
contract. Service contract billings are generally invoiced to the customer at
the beginning of the contract term and amortized on a straight-line basis to
sales over the contract term. At December 31, 2001 the Company had a deferred
revenue liability of $49.0 million.
Product shipments, including those for demonstration or evaluation, and
service contracts are not recorded as revenues until a valid purchase order or
master agreement is received specifying fixed terms and prices. Revenues are
adjusted accordingly for changes in contract terms or if collectibility is not
reasonably assured. Revenue related to installation of certain products is
deferred when the product is shipped and recognized when installation is
complete. The larger of the contractual cash holdback or the fair value of the
installation service is deferred and recognized under a multiple element
arrangement in accordance with SAB 101. The Company changed its method of
revenue recognition for products requiring installation effective January 1,
2000. Previously, the Company recognized revenue related to both the sale and
the installation of certain products at the time of shipment and accrued all
associated costs. Estimates of the fair value of installation revenue deferred
are based on comparable values from contracts in the same product family where
installation is quoted or billed separately.
Loss Provisions on Accounts Receivable and Inventory:
Waters maintains allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. Waters
does not request collateral from our customers but collectibility is enhanced
through the use of credit card payments and letters of credit. We assess
collectibility based on a number of factors including, but not limited to, past
transaction history with the customer, the credit-worthiness of the customer,
independent credit reports, industry trends and the macro-economic environment.
Sales returns and allowances are estimates of future product returns related to
current period revenue. Material differences may result in the amount and timing
of our revenue for any period if management made different judgments or utilized
different estimates for sales returns and allowances for doubtful accounts. Our
accounts receivable balance at December 31, 2001 was $182.2 million, net of
allowances for sales returns and doubtful accounts of $3.8 million.
Historically, the Company has not experienced significant bad debt losses.
Waters values all of its inventories at the lower of cost or market on a
first-in, first-out basis ("FIFO"). Waters estimates revisions to its inventory
valuations based on technical obsolescence, historical demand, projections of
future demand including that in our current backlog of orders, and
16
industry and market conditions. If actual future demand or market conditions are
less favorable than those projected by management, additional valuation
provisions may be required. Our inventory balance at December 31, 2001 was
$102.7 million, net of valuation provisions.
Valuation of Equity Investments:
Waters holds minority equity interests in companies having operations or
technology in areas within our strategic focus, some of which are publicly
traded and have highly volatile share prices. For investments where the company
is not publicly traded, we obtain and review quarterly and annual financial
statements and progress of technological expectations. We record an investment
impairment charge when we believe an investment has experienced a decline in
value that is other-than-temporary. Future adverse changes in market conditions
or poor operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly requiring
an impairment charge in the future. In the fourth quarter of 2001, the Company
recorded a $7.1 million charge to other expense, in the consolidated statements
of operations, for the impairment of certain equity investments.
Long-Lived Assets, Intangible Assets and Goodwill:
We assess the impairment of identifiable intangibles, long-lived assets and
related goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important which could
trigger an impairment review include but are not limited to the following:
.. significant underperformance relative to expected historical or projected
future operating results;
.. significant negative industry or economic trends;
.. significant changes or developments in strategic technological
collaborations or legal matters which affect the Company's capitalized
patent, trademark and intellectual properties such as licenses.
When we determine that the carrying value of intangibles, long-lived assets
and related goodwill may not be recoverable based upon the existence of one or
more of the above indicators, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model. Net
intangible assets, long-lived assets, and goodwill amounted to $338.2 million
as of December 31, 2001. In 2002, Statement of Financial Accounting Standards
("SFAS") 142, Goodwill and Other Intangible Assets became effective and as a
result, we will cease to amortize approximately $163.5 million of goodwill. We
had recorded approximately $4.0 million of amortization on these amounts during
2001 and would have recorded approximately the same amount of amortization in
2002. In lieu of amortization, we are required to perform an initial impairment
review of our goodwill in 2002 and an annual impairment review thereafter. We
expect to complete our initial review during the first half of 2002. We
currently do not expect to record an impairment charge upon completion of the
initial impairment review. However, there can be no assurance that at the time
the review is completed a material impairment charge will not be recorded.
Warranty:
Product warranties are recorded at the time revenue is recognized for certain
product shipments. While Waters engages in extensive product quality programs
and processes, including actively monitoring and evaluating the quality of its
component suppliers, our warranty obligation is affected by product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from our previous estimates, revisions to the estimated
warranty liability would be required.
Income Taxes:
As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as depreciation, amortization, and inventory reserves, for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheets. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and to the extent we believe that recovery is not likely,
we must establish a valuation allowance. In the event that actual results differ
from these estimates, or we adjust these estimates in future periods, we may
need to establish an additional valuation allowance which could materially
impact our financial position and results of operations.
The Company has realized significant income tax benefits associated with
the exercise of its nonqualified stock options. The corresponding credit was to
additional paid-in-capital. Because of the magnitude of the stock option
exercises, the Company believes that it is more likely than not that the U.S.
deferred tax assets will not be realized, therefore, a valuation allowance has
reduced to zero all the deferred tax assets relating to U.S. income. The
remaining deferred tax asset of $1.8 million at December 31, 2001 relates to
foreign deferred tax assets that are expected to be utilized.
17
Litigation:
As described in Item 3 of this Form 10-K, the Company is a party to various
pending litigation matters. With respect to each pending claim, management
determines whether it can reasonably estimate whether a loss is probable and, if
so, the probable range of that loss. If and when management has determined, with
respect to a particular claim, both that a loss is probable and that it can
reasonably estimate the range of that loss, the Company records a charge equal
to either its best estimate of that loss or the lowest amount in that probable
range of loss. The Company will disclose additional exposures when the range of
loss is subject to considerable interpretation.
With respect to the claims described in Item 3, management of the Company
to date has been able to make both of these determinations, and thus has
recorded a charge, only with respect to the claim described under the heading
"Applera Corporation." As developments occur in these matters and additional
information becomes available, management of the Company will reassess the
probability of any losses and of their range, which may result in its recording
charges or additional charges, which could materially impact the Company's
results of operation or financial position.
RECENT ACCOUNTING STANDARDS CHANGES
In June 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 2001. The impact of impairment, if any, of goodwill on
the Company's financial statements has not yet been determined.
In June 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 will 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 August 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.
18
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial risk in several areas including changes in
foreign exchange rates and interest rates. The Company attempts to minimize its
exposures by using certain financial instruments, for purposes other than
trading, in accordance with the Company's overall risk management guidelines.
Further information regarding the Company's accounting policies for financial
instruments and disclosures of financial instruments can be found in Notes 2 and
6 to the Company's consolidated financial statements.
FOREIGN EXCHANGE
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, and
these agreements are designated as foreign currency hedges of a net investment
in foreign operations. These agreements effectively swap higher U.S. dollar
fixed rate borrowings for lower fixed rate borrowings denominated in the
respective currencies. The effects of these debt swap agreements and interest
income earned from the investment of cash in 2001, 2000 and 1999 were $6.2
million, $4.5 million and $3.2 million, respectively. During 2001, the Company
opened and subsequently closed debt swap agreements, in European and Japanese
currencies. In December 2001, the Company entered into new debt swap agreements
in Japanese yen, with a notional amount totaling $27.0 million, with a term of
three months and an interest rate of .15%. For the year ended December 31, 2001,
the Company recorded a cumulative net pre-tax gain of $7.8 million in
accumulated other comprehensive (loss), which consisted of a realized gain of
$6.8 million relating to the closed debt swap agreements and an unrealized gain
of $1.0 million relating to the new Japanese yen swap agreements, both of which
partially offset hedged foreign exchange impacts. At December 31, 2000, the
Company did not have any open debt swap agreements and for the year ended
December 31, 2000, a realized gain of $15.2 million was recognized in
accumulated other comprehensive (loss).
Assuming a hypothetical adverse change of 10% in year-end exchange rates (a
weakening of the U.S. dollar), the fair market value of the debt swap agreements
as of December 31, 2001 would decrease by $2.9 million.
The Company also enters into forward foreign exchange contracts,
principally to hedge the impact of currency fluctuations on certain intercompany
balances. Principal hedged currencies include the euro and British pound. The
periods of these forward contracts typically range from three to six months and
have varying notional amounts which are intended to be consistent with changes
in intercompany balances. Gains and losses on these forward contracts are
recorded in selling, general and administrative expenses in the consolidated
statement of operations. At December 31, 2001 and December 31, 2000, the Company
held forward foreign exchange contracts with notional amounts totaling
approximately $54.1 million and $60.0 million, respectively.
INTEREST RATES
The Company is exposed to the risk of interest rate fluctuations when borrowing
in connection with its credit agreement. As a result, the Company may
periodically attempt to minimize its interest rate exposures by using certain
financial instruments such as interest swap agreements for the purposes other
than trading. At December 31, 2001 and 2000, there were no outstanding interest
swap agreements.
The Company is exposed to the risk of interest rate fluctuations from the
investments of cash generated from operations. The Company's cash equivalents
represent highly liquid investments, with original maturities of 90 days or
less, in repurchase agreements and money market funds. Cash equivalents are
convertible to a known amount of cash and carry an insignificant risk of change
in value. The Company periodically maintained balances in various operating
accounts in excess of federally insured limits.
19
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Waters Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and comprehensive
income, and of cash flows present fairly, in all material respects, the
financial position of Waters Corporation and Subsidiaries at December 31, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the accompanying financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 22, 2002, except as to Note 17
which is as of March 21, 2002
20
Waters Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------
December 31 (In thousands, except per share data) 2001 2000
------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $226,798 $ 75,509
Accounts receivable, less allowances for doubtful accounts and sales
returns of $3,812 and $2,815 at December 31, 2001 and 2000, respectively 182,164 167,713
Inventories 102,718 87,275
Other current assets 11,064 13,299
------------ ------------
Total current assets 522,744 343,796
Property, plant and equipment, net 114,207 102,608
Other assets 86,481 80,486
Goodwill, less accumulated amortization of $23,072 and $19,464 at December 31,
2001 and 2000, respectively 163,479 165,455
------------ ------------
Total assets $886,911 $692,345
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt $ 1,140 $ 4,879
Accounts payable 35,979 43,310
Accrued compensation 20,176 24,066
Deferred revenue and customer advances 46,014 37,292
Accrued retirement plan contributions 8,660 4,405
Accrued income taxes 41,643 45,653
Accrued other taxes 5,925 3,590
Accrued patent litigation 75,000 --
Other current liabilities 46,469 54,586
------------ ------------
Total current liabilities 281,006 217,781
Other liabilities 24,160 22,783
------------ ------------
Total liabilities 305,166 240,564
Stockholders' equity:
Common stock, par value $.01 per share, 400,000 shares authorized, 130,918
and 129,811 shares issued and outstanding at December 31, 2001 and 2000,
respectively 1,309 1,298
Additional paid-in capital 232,907 211,161
Retained earnings 359,926 245,383
Accumulated other comprehensive (loss) (12,397) (6,061)
------------ ------------
Total stockholders' equity 581,745 451,781
------------ ------------
Total liabilities and stockholders' equity $886,911 $692,345
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
21
Waters Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (In thousands, except per share data) 2001 2000 1999
----------------------------------------------------------------------------------------------------------------------------
Net sales $859,208 $795,071 $704,400
Cost of sales 311,232 288,264 257,136
------------ ------------ ------------
Gross profit 547,976 506,807 447,264
Selling, general and administrative expenses 269,706 246,390 226,593
Research and development expenses 46,602 42,513 36,094
Patent litigation provision (Note 17) 75,000 -- --
Goodwill and purchased technology amortization 7,141 7,077 8,068
------------ ------------ ------------
Operating income 149,527 210,827 176,509
Other expense (Note 3) (7,066) -- --
Interest expense (1,258) (4,316) (12,187)
Interest income 6,223 4,451 3,239
------------ ------------ ------------
Income from operations before income taxes 147,426 210,962 167,561
Provision for income taxes 32,883 54,849 45,243
------------ ------------ ------------
Income before cumulative effect of change in accounting
principle 114,543 156,113 122,318
Cumulative effect of change in accounting principle (Note 2) -- (10,771) --
------------ ------------ ------------
Net income 114,543 145,342 122,318
Accretion of and 6% dividend on preferred stock -- -- (825)
Gain on redemption of preferred stock -- -- 383
------------ ------------ ------------
Net income available to common stockholders $114,543 $145,342 $121,876
============ ============ ============
Income per basic common share:
Net income per basic common share before cumulative
effect of change in accounting principle $ .88 $ 1.22 $ .99
Cumulative effect of change in accounting principle -- (.08) --
------------ ------------ ------------
Net income per basic common share $ .88 $ 1.14 $ .99
============ ============ ============
Weighted average number of basic common shares 130,559 127,568 123,013
============ ============ ============
Income per diluted common share:
Net income per diluted common share before cumulative
effect of change in accounting principle $ .83 $ 1.14 $ .92
Cumulative effect of change in accounting principle -- (.08) --
------------ ------------ ------------
Net income per diluted common share $ .83 $ 1.06 $ .92
============ ============ ============
Weighted average number of diluted common shares and equivalents 137,509 136,743 132,632
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
22
Waters Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (In thousands) 2001 2000 1999
---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $114,543 $145,342 $122,318
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss provisions on accounts receivable and inventory (98) -- 607
Deferred income taxes 1,841 (4,444) 1,499
Depreciation 20,638 17,380 15,663
Amortization of goodwill and other intangibles 13,313 (12,522) 14,181
Compensatory stock option expense -- 166 220
Tax benefit related to stock option plans 12,739 12,330 9,747
Change in operating assets and liabilities, net of acquisitions:
(Increase) in accounts receivable (21,090) (24,214) (16,341)
(Increase) in inventories (15,931) (11,381) (1,306)
Decrease (increase) in other current assets 1,181 2,138 (1,039)
(Increase) in other assets (3,593) (8,879) (1,426)
(Decrease) increase in accounts payable and other currrent
liabilities (19,132) 24,854 6,251
Increase in deferred revenue and customer advances 9,594 8,092 2,302
Increase in accrued patent litigation 75,000 -- --
Increase (decrease) in other liabilities 145 1,680 (1,880)
-------------- --------------- --------------
Net cash provided by operating activities 189,150 175,586 150,796
Cash flows from investing activities:
Additions to property, plant, equipment, software capitalization
and other intangibles (42,408) (35,368) (24,416)
Investments in unaffiliated companies (4,000) (15,223) (2,412)
Business acquisitions, net of cash acquired (2,580) (1,710) --
Loan repayments from officers 723 614 1,098
-------------- --------------- --------------
Net cash (used in) investing activities (48,265) (51,687) (25,730)
Cash flows from financing activities:
Repayment of bank debt (3,739) (90,390) (127,240)
Redemption of preferred stock -- -- (9,500)
Proceeds from stock plans 9,018 23,813 11,173
Proceeds (payments) from debt swaps 6,803 15,202 (588)
-------------- --------------- --------------
Net cash provided by (used in) financing activities 12,082 (51,375) (126,155)
-------------- --------------- --------------
Effect of exchange rate changes on cash and cash equivalents (1,678) (818) (605)
-------------- --------------- --------------
Increase (decrease) in cash and cash equivalents 151,289 71,706 (1,694)
Cash and cash equivalents at beginning of period 75,509 3,803 5,497
-------------- --------------- --------------
Cash and cash equivalents at end of period $226,798 $ 75,509 $ 3,803
============== =============== ==============
Supplemental cash flow information:
Cash acquired in business acquisitions -- $ 1,174 --
Income taxes paid $ 36,619 $ 26,456 $ 29,014
Interest paid $ 756 $ 3,497 $ 12,214
Supplemental non-cash transaction:
Issuance of note for acquisition -- $ 2,834 --
The accompanying notes are an integral part of the consolidated financial
statements.
23
Waters Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Additional Deferred Retained
Common Paid-in Stock Option Earnings
(In thousands) Stock Capital Compensation (Deficit)
-----------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 $1,212 $173,808 $(386) $ (21,697)
Comprehensive income, net of tax:
Net income - - - 122,318
Other comprehensive (loss):
Net foreign currency adjustments (Note 12) - - - -
Other comprehensive (loss) - - - -
Comprehensive income - - - -
Accretion of preferred stock - (92) - (230)
Dividend payable on preferred stock - (153) - (350)
Gain on redemption of preferred stock - 383 - -
Issuance of common stock for Employee Stock
Purchase Plan - 1,251 - -
Compensatory stock option expense - - 220 -
Stock options exercised 33 9,889 - -
Tax benefit related to stock option plans - 9,747 - -
----------- -------------- -------------- --------------
Balance December 31, 1999 $1,245 $194,833 $(166) $100,041
----------- -------------- -------------- --------------
Comprehensive income, net of tax:
Net income - - - 145,342
Other comprehensive (loss):
Net foreign currency adjustments (Note 12) - - - -
Unrealized loss on investments, net - - - -
Other comprehensive (loss) - - - -
Comprehensive income - - - -
Issuance of common stock for Employee Stock
Purchase Plan 1 1,608 - -
Compensatory stock option expense - - 166 -
Stock options exercised 52 22,152 - -
Tax benefit related to stock option plans - 12,330 - -
Valuation allowance related to stock option deferred
Tax asset - (19,762) - -
----------- -------------- -------------- --------------
Balance December 31, 2000 $1,298 $211,161 $ - $245,383
----------- -------------- -------------- --------------
Comprehensive income, net of tax:
Net income - - - 114,543
Other comprehensive (loss):
Net foreign currency adjustments (Note 12) - - - -
Minimum pension liability adjustment - - - -
Unrealized loss on investments, net - - - -
Other comprehensive (loss) - - - -
Comprehensive income - - - -
Issuance of common stock for Employee Stock
Purchase Plan 1 2,228 - -
Stock options exercised 10 6,779 - -
Tax benefit related to stock option plans - 12,739 - -
----------- -------------- -------------- --------------
Balance December 31, 2001 $1,309 $232,907 $ - $359,926
=========== ============== ============== ==============
Accumulated
Other Total Statement of
Comprehensive Stockholders' Comprehensive
(In thousands) (Loss) Equity Income
---------------------------------------------------------------------------------------- --------------
Balance December 31, 1998 $(2,818) $150,119
Comprehensive income, net of tax:
Net income - 122,318 $122,318
Other comprehensive (loss):
Net foreign currency adjustments (Note 12) (973) (973) (973)
-------------- -------------- --------------
Other comprehensive (loss) (973) (973) (973)
--------------
Comprehensive income - - $121,345
==============
Accretion of preferred stock - (322)
Dividend payable on preferred stock - (503)
Gain on redemption of preferred stock - 383
Issuance of common stock for Employee Stock
Purchase Plan - 1,251
Compensatory stock option expense - 220
Stock options exercised - 9,922
Tax benefit related to stock option plans - 9,747
-------------- --------------
Balance December 31, 1999 $(3,791) $292,162
-------------- --------------
Comprehensive income, net of tax:
Net income - 145,342 $145,342
Other comprehensive (loss):
Net foreign currency adjustments (Note 12) (1,524) (1,524) (1,524)
Unrealized loss on investments, net (746) (746) (746)
-------------- -------------- --------------
Other comprehensive (loss) (2,270) (2,270) (2,270)
--------------
Comprehensive income - - $143,072
==============
Issuance of common stock for Employee Stock
Purchase Plan - 1,609
Compensatory stock option expense - 166
Stock options exercised - 22,204
Tax benefit related to stock option plans - 12,330
Valuation allowance related to stock option deferred
Tax asset - (19,762)
-------------- --------------
Balance December 31, 2000 $(6,061) $451,781
-------------- --------------
Comprehensive income, net of tax:
Net income - 114,543 $114,543
Other comprehensive (loss):
Net foreign currency adjustments (Note 12) (2,403) (2,403) (2,403)
Minimum pension liability adjustment (4,679) (4,679) (4,679)
Unrealized loss on investments, net 746 746 746
-------------- -------------- --------------
Other comprehensive (loss) (6,336) (6,336) (6,336)
--------------
Comprehensive income - - $108,207
==============
Issuance of common stock for Employee Stock
Purchase Plan - 2,229
Stock options exercised - 6,789
Tax benefit related to stock option plans - 12,739
-------------- --------------
Balance December 31, 2001 $(12,397) $581,745
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1 | DESCRIPTION OF BUSINESS, 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 believes it has the
largest HPLC market share in the United States, Europe and non-Japan Asia and
believes it 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 believes it 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 believes it is also the
world's leader in thermal analysis, a prevalent and complementary technique used
in the analysis of polymers. As discussed in Note 15 to the financial
statements, these three operating segments have been aggregated into one
reporting segment for financial statement purposes.
2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use Of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the Unites States of America 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.
Risks And Uncertainties
The Company is subject to risks common to companies in the analytical instrument
industry, including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, and compliance with regulations of the
U.S. Food and Drug Administration and similar foreign regulatory authorities and
agencies.
Reclassification
Certain amounts in previous years' financial statements have been reclassified
to conform to current presentation.
Principles Of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, most of which are wholly owned. The Company consolidates
entities in which it owns or controls fifty percent or more of the voting shares
unless control is likely to be temporary. All material intercompany balances and
transactions have been eliminated.
Translation Of Foreign Currencies
For most of the Company's foreign operations, assets and liabilities are
translated into U.S. dollars at exchange rates prevailing on the balance sheet
date while revenues and expenses are translated at average exchange rates
prevailing during the period. Any resulting translation gains or losses are
included in accumulated other comprehensive (loss) in the consolidated balance
sheets. During 2001, approximately 57% of the Company's net sales were derived
from operations outside the United States. Gains and losses from foreign
currency transactions are included in selling, general and administrative
expenses in the consolidated statements of operations and were not material in
2001 and 2000.
Cash And Cash Equivalents
Cash equivalents primarily represent highly liquid investments, with original
maturities of 90 days or less, in repurchase agreements and money market funds
which are convertible to a known amount of cash and carry an insignificant risk
of change in value. The Company has periodically maintained balances in various
operating accounts in excess of federally insured limits.
Concentration Of Credit Risk
The Company sells its products and service to a significant number of large and
small customers throughout the world, with approximately 63% of 2001 net sales
to the pharmaceutical industry. None of the Company's individual customers
account for more than 3% of annual Company sales. The Company performs
continuing credit evaluation of its customers and generally does not require
collateral, but in certain circumstances may require letters of credit or
deposits. Historically, the Company has not experienced significant bad debt
losses.
25
Inventory
The Company values all of its inventories at the lower of cost or market on a
first-in, first-out basis ("FIFO").
Income Taxes
Deferred income taxes are recognized for temporary differences between financial
statement and income tax basis of assets and liabilities.
Property, Plant And Equipment
Property, plant and equipment is recorded at cost. Expenditures for maintenance
and repairs are charged to expense while the costs of significant improvements
are capitalized. Depreciation is provided using the straight-line method over
the following estimated useful lives: buildings and improvements - thirty years,
leasehold improvements - fifteen years or life of lease, and production and
other equipment - three to ten years. Upon retirement or sale, the cost of
assets disposed and the related accumulated depreciation are eliminated from the
balance sheet and related gains or losses are reflected in income.
Software Development Costs
The Company capitalizes software development costs for products offered for sale
in accordance with Statement of Financial Accounting Standard ("SFAS") 86.
Capitalized costs are amortized to cost of sales on a straight-line basis over
the estimated useful lives of the related software products, generally three to
five years. Capitalized software costs included in other assets were $21,585 and
$16,975 at December 31, 2001 and 2000, net of accumulated amortization of
$13,177 and $8,419, respectively.
The Company capitalizes internal software development costs in accordance
with Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. Capitalized internal software
development costs are amortized on a straight-line basis over ten years. For the
years ended December 31, 2001 and 2000, capitalized internal software included
in property, plant and equipment totaled $2,505 and $2,890, net of accumulated
amortization of $1,345 and $960, respectively.
Patent, Trademark And Intellectual Property Costs
Other assets includes costs associated with acquiring and successfully defending
Company patents, trademarks and intellectual properties such as licenses. These
costs are amortized over their expected useful lives. Patent, trademark and
intellectual property costs included in other assets totaled $14,561 and $7,245,
net of accumulated amortization of $3,487 and $1,858, at December 31, 2001 and
2000, respectively.
Purchased Technology And Goodwill
Purchased technology and other intangibles are recorded at their fair market
value as of the acquisition date and amortized over estimated useful lives
ranging from four to fifteen years. Goodwill has been amortized on a
straight-line basis over its useful life, primarily forty years for current
goodwill components. Purchased technology and other intangibles included in
other assets totaled $24,287 and $24,703, net of accumulated amortization of
$19,308 and $16,668, at December 31, 2001 and 2000, respectively.
Debt Issuance Costs
Debt issuance costs are amortized over the life of the related debt using the
effective interest method. At December 31, 2001 and 2000, debt issuance costs
included in other assets amounted to $124 and $336, net of accumulated
amortization of $3,539 and $3,327, respectively.
Investments
The Company accounts for its investments that represent less than twenty percent
ownership using SFAS 115, Accounting for Certain Investments in Debt and Equity
Securities. This standard requires that certain debt and equity securities be
adjusted to market value at the end of each accounting period. Unrealized market
gains and losses are charged to earnings if the securities are traded for
short-term profit. Otherwise, these securities are considered available-for-sale
investments and unrealized gains and losses are charged or credited to other
comprehensive income (loss) in stockholders' equity. Realized gains and losses
on sales of investments are included in the consolidated statements of
operations.
Investments for which the Company does not have the ability to exercise
significant influence and for which there is not a readily determinable market
value are accounted for under the cost method of accounting. The Company
periodically evaluates the carrying value of its investments accounted for under
the cost method of accounting and carries them at the lower of cost or estimated
net realizable value. For investments in which the Company owns or controls
between twenty and forty-nine percent of the voting shares, or over which it
exerts significant influence over operating and financial policies, the equity
method of accounting is used. The Company's share of net income or losses of
equity investments is included in the consolidated statements of operations and
was not material in any period presented. All investments at December 31, 2001
and 2000 are included in other assets.
Asset Impairment
The Company reviews its long-lived assets and goodwill for impairment in
accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of. Whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable, the
Company evaluates the net realizable value of the asset, relying on a number of
factors including but not limited to operating results, business plans, economic
projections and anticipated future cash flows. Any change in the carrying amount
of an asset as a result of the Company's evaluation is recorded in other expense
in the consolidated statements of operations.
26
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, which was approved by
shareholders at the Annual Meeting on May 3, 2001.
On July 13, 2000, the Board of Directors approved a two-for-one common
stock split, in the form of a 100% stock dividend. Shareholders of record on
August 4, 2000 received the stock dividend on or about August 25, 2000. All
share and per share amounts have been retroactively restated to reflect the
stock split.
On February 29, 2000, the Board of Directors approved an amendment to the
Company's Certificate of Incorporation to increase authorized common stock from
one hundred million to two hundred million shares, and on May 4, 2000,
shareholders approved the amendment.
Hedge Transactions
Effective January 1, 2001, the Company adopted 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 are affected by fluctuations in foreign currency exchange rates.
The Company uses debt swap agreements to partially mitigate such effects, and
these agreements are designated as foreign currency hedges of a net investment
in foreign operations. These agreements effectively swap higher U.S. dollar
fixed rate borrowings for lower fixed rate borrowings denominated in the
respective currencies. The effects of these debt swap agreements are included in
interest income for the years presented. During 2001, the Company opened and
subsequently closed debt swap agreements, in European and Japanese currencies.
In December 2001, the Company entered into new debt swap agreements in Japanese
yen, with a notional amount totaling $27,000, with a term of three months and an
interest rate of .15%. For the year ended December 31, 2001, the Company
recorded a cumulative net pre-tax gain of $7,800 in OCI, which consisted of a
realized gain of $6,803 relating to the closed debt swap agreements and an
unrealized gain of $997 relating to the new Japanese yen swap agreements, both
of which partially offset hedged foreign exchange impacts. At December 31, 2000,
the Company did not have any open debt swap agreements and for the year ended
December 31, 2000, a realized gain of $15,202 was recognized in accumulated
other comprehensive (loss).
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 and British pound. The periods of these
forward contracts typically range from three to six months and have varying
notional amounts which are intended to be consistent with changes in
intercompany balances. Gains and losses on these forward contracts are recorded
in selling, general and administrative expenses in the consolidated statements
of operations. Foreign currency gains and losses from currency fluctuations on
intercompany balances and these forward contracts were not material for the
years presented. At December 31, 2001 and December 31, 2000, the Company held
forward foreign exchange contracts with notional amounts totaling approximately
$54,100 and $60,000, respectively.
Revenue Recognition And Change In Accounting
Sales of products and services are generally recorded based on product shipment
and performance of service, respectively. Proceeds received in advance of
product shipment or performance of service are recorded as deferred revenue in
the consolidated balance sheets.
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 year ended December 31, 2000. The adoption of SAB 101 had virtually no
effect on the Company's 2000 results of operations excluding the cumulative
effect. For the year ended December 31, 2000, the Company recognized $17,561 in
revenue, which is the entire amount of revenue associated with the cumulative
effect adjustment as of January 1, 2000.
27
The following unaudited Pro Forma results of operations for the year ended
December 31, 1999 give effect to the adoption of SAB 101 as if the change in
accounting occurred at the beginning of that period.
Year Ended
Unaudited Pro Forma Results December 31, 1999
--------------------------- -----------------
Net income available to common stockholders $ 118,860
Net income per basic common share $.97
Net income per diluted common share $.90
Product Warranty Costs
The Company provides for estimated warranty costs at the time of sale which are
included in cost of sales in the consolidated statements of operations.
Field Service Expenses
All expenses of the Company's field service organization are included in
selling, general and administrative expenses in the consolidated statements of
operations.
Advertising Costs
All advertising costs are expensed as incurred and included in selling, general
and administrative expenses in the consolidated statements of operations.
Advertising expenses for 2001, 2000 and 1999 were $7,621, $7,774 and $7,161,
respectively.
Research And Development Costs
Internal research and development costs are expensed as incurred. Third-party
research and development costs are expensed when the contracted work is
performed.
Income (Loss) Per Share
In accordance with SFAS 128, Earnings Per Share, the Company presents two
earnings per share ("EPS") amounts. Income (loss) per basic common share is
based on income available to common shareholders and the weighted average number
of common shares outstanding during the periods presented. Income (loss) per
diluted common share includes additional dilution from potential common stock,
such as stock issuable pursuant to the exercise of stock options outstanding and
the conversion of debt. Accretion, cumulative dividends and gain on redemption
of preferred stock have been included in computing income (loss) per share.
Comprehensive Income (Loss)
The Company accounts for comprehensive income (loss) in accordance with SFAS
130, Reporting Comprehensive Income. The statement establishes standards for
reporting and displaying comprehensive income and its components 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.
Retirement Plans
The Company adopted SFAS 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits. The statement standardizes employer 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.
Recent Accounting Standards Changes
In June 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 2001. The impact of impairment, if any, of goodwill on
the Company's financial statements has not yet been determined.
In June 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 will 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.
28
In August 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.
3 | BUSINESS INVESTMENTS AND ACQUISITIONS
In June 2000, the Company formed a strategic alliance with Variagenics, Inc.
("Variagenics") to develop and commercialize genetic variance reagent kits for
use in the clinical development of pharmaceutical products. Variagenics is a
leader in applying genetic variance information to the drug development process.
In July 2000, the Company paid Variagenics $7.5 million for a minority common
stock equity ownership and $3.0 million for a license to manufacture and sell
reagents, and warrants to purchase common stock. The warrants to purchase
Variagenics common stock are exercisable at $14 per share for a period of 5
years. The warrants were valued at approximately $.7 million using the
Black-Scholes model. The Company could pay up to $4.0 million in future
milestone payments and is obligated to pay royalties on net sales of the reagent
kits. The common stock and warrant investments in Variagenics are included in
other assets and carried at fair value with unrealized gains and losses reported
as a separate component of other comprehensive income (loss). The carrying
amount of the common stock and warrants in Variagenics was approximately $1.7
million and $6.9 million at December 31, 2001 and 2000, respectively. The
license is being amortized on a straight-line basis over its useful life of 15
years.
In the fourth quarter of 2001, the Company recorded a $7.1 million charge
to other expense, in the consolidated statements of operations, for the
impairment of certain equity investments, primarily the equity investment in
Variagenics, Inc. At December 31, 2001, no other investments and long-lived
assets were determined to be impaired.
In November 2000, the Company entered into an agreement to make a minority
equity investment in GeneProt(TM), Inc. ("GeneProt") of $3.6 million Series B
Preferred Stock, which is included in other assets at December 31, 2001 and 2000
and accounted for under the cost method of accounting. In December 2001, the
Company formed a strategic alliance with GeneProt to collaborate on product
development in the application of mass spectrometry equipment to
industrial-scale proteomics drug discovery. As part of the strategic alliance,
the Company will purchase $10.0 million of Series B Preferred Stock equity
securities and GeneProt will purchase up to $20.0 million of mass spectrometry
equipment, related systems, and services. The additional investment in GeneProt
equity securities was made in February 2002 as part of a second round of equity
financing and will be accounted for under the cost method of accounting. The
shipment of mass spectrometry products is planned for later in 2002 and will be
recognized as sales. The products' prices were at fair values consistent with
other orders of this magnitude. The equity investment and sales arrangement were
considered on an arms-length basis.
In December 2000, the Company entered into an agreement to make a minority
equity investment of $7.5 million in Caprion Pharmaceuticals Inc. ("Caprion").
Caprion applies proprietary processes in sub-cellular biology in combination
with its use of the Company's mass spectrometry products. As of December 31,
2001 and 2000, the Company had paid $7.5 million and $3.5 million, respectively,
under this agreement. The investment in Caprion is included in other assets and
has been accounted for under the cost method of accounting. Sales to Caprion
during 2001 were approximately $4.0 million.
During 2001 and 2000, the Company also made business acquisitions totaling
$2.6 million and $1.7 million, respectively. The business acquisitions were
accounted for as purchases and the results of operations of the acquired
companies have been included in the consolidated results of the Company from the
acquisition date. The purchase price of the acquisitions have been allocated to
tangible and intangible assets and any assumed liabilities based on respective
fair market values. Any excess purchase price after this allocation has been
accounted for as goodwill. Fixed assets and intangible assets are being
amortized over their expected useful lives.
In the first quarter of 2002, the Company made a business acquisition
totaling approximately $5.5 million for the net assets of a foreign distributor
and other minority equity investments totaling $3.5 million.
29
4 | PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
------------------------------------------------------------------------------
December 31 2001 2000
------------------------------------------------------------------------------
Land and land improvements $ 3,962 $ 3,840
Buildings and leasehold improvements 47,620 43,605
Production and other equipment 143,884 117,341
Construction in progress 5,162 6,179
----------- -----------
Total property, plant and equipment 200,628 170,965
Less: accumulated depreciation and amortization (86,421) (68,357)
----------- -----------
Property, plant and equipment, net $114,207 $102,608
=========== ===========
5 | INVENTORIES
Inventories are classified as follows:
------------------------------------------------------------------------------
December 31 2001 2000
------------------------------------------------------------------------------
Raw materials $ 31,965 $ 32,760
Work in progress 26,305 20,269
Finished goods 44,448 34,246
----------- -----------
Total inventories $102,718 $ 87,275
=========== ===========
6 | DEBT
The Company's Bank Credit Agreement ("Agreement") provided a $450.0 million line
of credit through June 2002. Loans under the Agreement bore interest for each
calendar quarter at an annual rate equal to, at the Company's option, 1) the
applicable LIBOR rate plus a varying margin between .30% and 1.00% or 2) prime
rate. Margins on LIBOR borrowings varied with the Company's financial
performance. At December 31, 2001 and 2000, the Company had no aggregate
borrowings outstanding under the Agreement and had additional amounts available
to borrow of $442.6 million and $442.8 million, respectively, after outstanding
letters of credit. Borrowings were collateralized by substantially all of the
Company's assets. The Company was also required to meet certain covenants, none
of which was considered restrictive to operations. In February 2002, the Company
entered into an agreement to replace its existing credit facility. The new
credit facility provides a $250.0 million line of credit, is unsecured in nature
and has a five year term.
The Company's foreign subsidiaries also had available short-term lines of
credit totaling $32.9 million at December 31, 2001 and $33.2 million at December
31, 2000. At December 31, 2001 and 2000, related short-term borrowings were $1.1
million at a weighted average interest rate of 5.154% and $2.0 million at a
weighted average interest rate of 7.70%, respectively. In addition, at December
31, 2000 the Company had a short-term note payable of $2.8 million related to an
acquisition which bore interest at a fixed rate of 6.0%.
30
7 | INCOME TAXES
Income tax data for 2001, 2000 and 1999 follow in the tables below:
---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
---------------------------------------------------------------------------------------------------------------------------
The components of income from operations before
income taxes were as follows:
Domestic $ 48,677 $ 54,263 $ 66,082
Foreign 98,749 156,699 101,479
---------- ---------- ----------
Total $147,426 $210,962 $167,561
========== ========== ==========
The components of the current and deferred income tax provision
from operations were as follows:
Current $ 31,680 $ 59,293 $ 41,560
Deferred 1,203 (4,444) 3,683
---------- ---------- ----------
Total $ 32,883 $ 54,849 $ 45,243
========== ========== ==========
The components of the provision for income taxes from
operations were as follows:
Federal $ 13,303 $ 13,589 $ 16,428
State 1,592 2,195 1,187
Foreign 17,988 39,065 27,628
---------- ---------- ----------
Total $ 32,883 $ 54,849 $ 45,243
========== ========== ==========
The differences between income taxes computed at the United
States statutory rate and the provision for income taxes
are summarized as follows:
Federal tax computed at U.S. statutory income tax rate $ 51,599 $ 73,837 $ 58,646
Foreign sales corporation (2,283) (2,999) (3,075)
State income tax, net of federal income tax benefit 1,035 1,427 772
Deferred tax assets (benefited) (711) (5,498) (4,891)
Net effect of foreign operations (16,875) (12,814) (7,243)
Other, net 118 896 1,034
---------- ---------- ----------
Provision for income taxes $ 32,883 $ 54,849 $ 45,243
========== ========== ==========
The tax effects of temporary differences and carryforwards
which gave rise to deferred tax assets and deferred tax
(liabilities) were as follows:
Tax benefit of net operating losses and credits $103,831 $ 96,534 $ 27,778
Goodwill amortization 6,334 6,426 10,496
Deferred compensation 7,703 9,610 9,908
Inventory 1,960 3,794 2,586
Other 4,611 7,176 645
Depreciation and capitalized software (13,838) (10,760) (9,890)
Valuation allowance (108,801) (109,139) (22,565)
---------- ---------- ----------
Total deferred taxes $ 1,800 $ 3,641 $ 18,958
========== ========== ==========
The income tax benefits associated with nonqualified stock option
compensation expense recognized for tax purposes and credited to additional
paid-in capital were $12.7 million, $12.3 million and $9.7 million for the years
ended December 31, 2001, 2000 and 1999, respectively. The deferred tax benefit
of net operating losses and credits is broken out as follows: $65.4 million in
U.S. operating loss carryforwards that begin to expire in 2019; $29.6 million in
foreign tax credits that begin to expire in 2005; $3.3 million in research and
development credits that begin to expire in 2009; $3.5 million in Alternative
Minimum Tax credits with no expiration date; and $2.0 million in foreign net
operating losses with no expiration date. Because of the magnitude of the stock
option exercises, the Company believes that it is more likely than not that the
U.S. deferred tax assets will not be realized, therefore, a valuation allowance
has reduced to zero all the deferred tax assets relating to U.S. income. The
remaining deferred tax assets relate to foreign deferred tax assets which are
expected to be utilized. To the extent that the deferred tax assets relate to
stock option deductions, the resultant benefits, if and when realized, will be
credited to stockholders' equity.
Deferred tax assets included in other current assets totaled $1.8 million,
$3.6 million and $5.6 million at December 31, 2001, 2000 and 1999, respectively.
Deferred tax assets included in other assets were zero at December 31, 2001 and
2000 and $13.4 million at December 31, 1999. The goodwill amortization amount
arises from the difference between the book and tax treatment of goodwill and
in-process research and development charges.
At December 31, 2001, there were unremitted earnings of foreign
subsidiaries of approximately $240.5 million. The Company has not provided U.S.
income taxes or foreign withholding taxes on these earnings as it is the
Company's intention to permanently reinvest the earnings outside the U.S. The
Company's effective tax rate for the years ended December 31, 2001, 2000 and
1999 was 22.3%, 26% and 27%, respectively.
31
8 | COMMITMENTS AND CONTINGENCIES
Lease agreements, expiring at various dates through 2019, cover buildings,
office equipment and automobiles. Rental expense was approximately $12,355 in
2001, $12,695 in 2000 and $11,812 in 1999. Future minimum rents payable as of
December 31, 2001 under non-cancelable leases with initial terms exceeding one
year are as follows:
--------------------------------------------------
2002 $13,024
2003 11,054
2004 8,685
2005 6,260
2006 and thereafter 25,698
The Company has disbursed $19,000 in the first quarter of 2002 as part of
minority equity investments and an acquisition. This is described in more detail
in Note 3, Business Investments and Acquisitions.
From time to time, the Company and its subsidiaries are involved in various
litigation matters arising in the ordinary course of business. The Company
believes it has meritorious arguments and any outcome, either individually or
in the aggregate, with the exception of the current litigation with Applera
Corporation, will not be material to the financial position or results of
operations. See Note 17, Subsequent Event, for further information.
9 | REDEEMABLE PREFERRED STOCK
In conjunction with the August 18, 1994 acquisition of the predecessor HPLC
business of Millipore Corporation ("Millipore"), the Company authorized and
issued one hundred shares of Redeemable Preferred Stock ("Preferred Stock") with
a par value of $.01 per share. The Preferred Stock had a liquidation value of
$10,000 and earned an annual 6% cumulative dividend on the liquidation value
with any accumulated but unpaid dividends added to the liquidation value. The
Company could, at any time, redeem the Preferred Stock at the current
liquidation value but in no event later than August 18, 2006. The Preferred
Stock was recorded at its estimated fair value of $5,000 on the date of
issuance. The excess of the liquidation value over the fair market value was
being accreted by periodic charges to additional paid-in capital or available
retained earnings since the date of issue.
On November 2, 1999, the Company redeemed all outstanding shares of
Preferred Stock, including cumulative unpaid dividends, for $9,500 in cash. The
carrying value of the one hundred shares of Preferred Stock and cumulative
dividends payable was $9,883 on that date and the transaction resulted in a gain
on redemption of $383 which was credited to additional paid-in capital.
During the year ended December 31, 1999, $322 for accretion and $503 for
unpaid dividends were charged against additional paid-in capital or available
retained earnings.
10 | STOCK COMPENSATION AND PURCHASE PLANS
Basis of Accounting
The Company has four stock-based compensation plans, which are described below.
The Company uses the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations, including FASB Interpretation 44,
Accounting for Certain Transactions Involving Stock Compensation, for its plans.
Accordingly, no compensation expense has been recognized for its fixed employee
stock option plans and its employee stock purchase plan under SFAS 123,
Accounting for Stock-Based Compensation. Had compensation expense for the
Company's four stock-based compensation plans been recorded based on the fair
value of awards at grant date consistent with the alternative method prescribed
by SFAS 123, the Company's pro forma net income for 2001, 2000 and 1999, would
have been $95,589, $135,404 and $115,857, respectively. Basic income per share
for 2001, 2000, and 1999 would have been $.73, $1.06 and $.94, respectively.
Diluted income per share for 2001, 2000, and 1999 would have been $.70, $.99 and
$.87, respectively. The pro forma amounts include amortized fair values
attributable to options granted after December 31, 1994 only and, therefore, are
not likely to be representative of the effects on reported net income for future
years.
The fair value of each option grant under SFAS 123 was estimated on the
date of grant using the Black-Scholes option-pricing model. Relevant data are
described below:
---------------------------------------------------------------------------------------------------------
Significant Assumptions Used to Estimate Option Fair Values 2001 2000 1999
---------------------------------------------------------------------------------------------------------
Options issued 2,251 1,733 1,868
Risk-free interest rate 5.5% 5.4% 6.2%
Expected life in years 7.5 7.5 7.5
Expected volatility .565 .524 .437
Expected dividends 0 0 0
32
-----------------------------------------------------------------------------------------------------------------------------
Weighted Average Exercise Price and Fair Values of Options on the Date of Grant 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Exercise price $36.73 $70.64 $23.06
Fair value $23.79 $42.85 $13.31
The following table details the weighted average remaining contractual life
of options outstanding at December 31, 2001 by range of exercise prices:
Weighted Weighted
Average Remaining Contractual Average
Exercise Number of Shares Exercise Life of Options Number of Shares Exercise
Price Range Outstanding Price Outstanding Exercisable Price
---------------- ---------------- -------- --------------------- ---------------- ---------
$ 1.02 to $ 2.00 265 $ 1.02 2.8 years 265 $ 1.02
$ 2.01 to $ 5.00 7,214 $ 3.71 2.7 years 7,214 $ 3.71
$ 5.01 to $10.00 860 $ 8.56 4.4 years 850 $ 8.56
$10.01 to $15.00 1,376 $10.69 5.9 years 1,014 $10.69
$15.01 to $20.00 1,794 $19.68 6.9 years 992 $19.68
$20.01 to $30.00 1,820 $23.22 8.0 years 663 $23.09
$30.01 to $40.00 2,177 $36.25 9.9 years 0 $ 0.00
$40.01 to $80.97 1,690 $71.49 8.9 years 331 $71.36
----------------------------------------------------- -----------------------------
17,196 $18.98 5.6 years 11,329 $ 9.14
===================================================== =============================
Stock Option Plans
On May 7, 1996, the Company's shareholders approved the 1996 Long-Term Incentive
Plan ("1996 Plan"), which provides for the granting of 4,000 shares of Common
Stock, in the form of incentive or non-qualified stock options, stock
appreciation rights ("SARs"), restricted stock or other types of awards. Under
the 1996 Plan, the exercise price for stock options may not be less than the
fair market value of the underlying stock at the date of grant. On December 2,
1997, the Board of Directors approved an additional 8,000 shares of Common Stock
for issue under the 1996 Plan. The 1996 Plan is scheduled to terminate on May 7,
2006, unless extended for a period of up to five years by action of the Board of
Directors. Options generally will expire no later than ten years after the date
on which they are granted and will become exercisable as directed by the
Compensation Committee of the Board of Directors. A SAR may be granted alone or
in conjunction with an option or other award. No SARs, restricted stock, or
other types of awards were outstanding as of December 31, 2001.
The Company's 1994 Stock Option Plan ("1994 Plan") provided for the
granting of 20,141 options to purchase shares of Common Stock to certain key
employees of the Company. The exercise price of the options was determined by a
committee of the Board of Directors of the Company. Options granted have a term
of ten years and vest in five equal installments on the first five anniversaries
after the grant.
On May 7, 1996, the Company's shareholders approved the 1996 Non-Employee
Director Deferred Compensation Plan ("Deferred Compensation Plan") and the 1996
Non-Employee Director Stock Option Plan ("Director Stock Option Plan"). Under
the Deferred Compensation Plan, outside directors may elect to defer their fees
and credit such fees to either a cash account which earns interest at a
market-based rate or to a common stock unit account, for which four hundred
thousand shares of Common Stock have been reserved. Under the Director Stock
Option Plan, each outside director will receive an annual option to purchase
four thousand shares of Common Stock. Two hundred thousand shares of Common
Stock may be issued under the plan. Options have a term of ten years and, with
the exception of options granted in 1996, which vest in one year, vest in five
equal installments on the first five anniversaries following the date of grant
and have option prices no less than fair market value at the date of grant.
The following table summarizes stock option activity for the plans:
-------------------------------------------------------------------------------------------------------------
Weighted Average
Number of Shares Price Per Share Exercise Price
-------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 21,148 $ 1.02 to $19.68 $ 5.86
Granted 1,868 $23.06 $ 23.06
Exercised (3,272) $ 1.02 to $19.68 $ 3.03
Canceled (62) $ 8.56 to $19.68 $ 12.29
---------- ---------------- -------
Outstanding at December 31, 1999 19,682 $ 1.02 to $23.06 $ 7.94
Granted 1,733 $25.75 to $72.06 $ 70.64
Exercised (5,239) $ 1.02 to $23.06 $ 4.24
Canceled (85) $ 8.05 to $23.06 $ 17.59
---------- ---------------- -------
Outstanding at December 31, 2000 16,091 $ 1.02 to $72.06 $ 15.84
Granted 2,251 $28.23 to $80.97 $ 36.73
Exercised (1,046) $ 1.02 to $23.06 $ 6.51
Canceled (100) $ 8.56 to $72.06 $ 44.22
---------- ---------------- -------
Outstanding at December 31, 2001 17,196 $ 1.02 to $80.97 $ 18.98
========== ================ =======
Options exercisable at December 31, 2001, 2000, and 1999 were 11,329,
10,648 and 14,058, respectively. The weighted average exercise prices of options
exercisable at December 31, 2001, 2000, and 1999 were $9.14, $6.03 and $4.45,
respectively. Available stock options for grant at December 31, 2001 were 1,241.
33
Employee Stock Purchase Plan
On February 26, 1996, the Company adopted the 1996 Employee Stock Purchase Plan
under which eligible employees may contribute up to 15% of their earnings toward
the quarterly purchase of the Company's Common Stock. The plan makes available
1,000 shares of the Company's Common Stock commencing October 1, 1996. As of
December 31, 2001, approximately 361 shares have been issued under the plan.
Each plan period lasts three months beginning on January 1, April 1, July 1 and
October 1 of each year. The purchase price for each share of stock is the lesser
of 90% of the market price on the first day of the plan period or 100% of the
market price on the last day of the plan period. No compensation expense is
recorded in connection with the plan.
11 | EARNINGS PER SHARE
Basic and diluted EPS calculations are detailed as follows:
------------------------------------------------
Year Ended 2001
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------- --------------- ------------
Net income per basic common share before cumulative
effect of change in accounting principle $114,543 130,559 $.88
=============== =============== ============
Effect of dilutive securities:
Options outstanding 6,782
Options exercised and cancellations 168
--------------- --------------- ------------
Net income per diluted common share before cumulative
effect of change in accounting principle $114,543 137,509 $.83
=============== =============== ============
------------------------------------------------
Year Ended 2000
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------- --------------- ------------
Net income per basic common share before cumulative
effect of change in accounting principle $156,113 127,568 $1.22
=============== =============== ============
Effect of dilutive securities:
Options outstanding 7,882
Options exercised and cancellations 1,293
--------------- --------------- ------------
Net income per diluted common share before cumulative
effect of change in accounting principle $156,113 136,743 $1.14
=============== =============== ============
------------------------------------------------
Year Ended 1999
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------- --------------- ------------
Net income per basic common share before cumulative
effect of change in accounting principle $122,318
Accretion of and 6% dividend on preferred stock (825)
Gain on redemption of preferred stock 383
---------------
Income per basic common share $121,876 123,013 $.99
=============== =============== ============
Effect of dilutive securities:
Options outstanding 8,787
Options exercised and cancellations 832
--------------- --------------- ------------
Income per diluted common share $121,876 132,632 $.92
=============== =============== ============
For the years ended December 31, 2001, 2000, and 1999, the Company had
1,688, 114 and 0 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.
34
12 | COMPREHENSIVE INCOME
Comprehensive income details follow:
-------------------------------------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
-------------------------------------------------------------------------------------------------------
Net income $114,543 $145,342 $122,318
Foreign currency adjustments
Foreign currency translation before income taxes (11,497) (17,548) (7,012)
Income tax (benefit) (4,024) (6,142) (2,454)
----------- ----------- -----------
Foreign currency translation, net of tax (7,473) (11,406) (4,558)
Net appreciation and realized gains on derivative instruments 7,800 15,202 5,516
Income tax 2,730 5,320 1,931
----------- ----------- -----------
Net appreciation and realized gains on derivative
instruments, net of tax 5,070 9,882 3,585
----------- ----------- -----------
Net foreign currency adjustments (2,403) (1,524) (973)
Minimum pension liability adjustment (4,679) -- --
Unrealized (loss) on investments before income taxes 1,148 (1,148) --
Income tax (benefit) 402 (402) --
----------- ----------- -----------
Unrealized (loss) on investments, net of tax 746 (746) --
----------- ----------- -----------
Other comprehensive (loss) (6,336) (2,270) (973)
----------- ----------- -----------
Comprehensive income $108,207 $143,072 $121,345
=========== =========== ===========
As described in Note 3 of these financial statements, the Company
reclassified the unrealized loss on its investment in Variagenics, Inc. to other
expense in the consolidated statements of operations in 2001. The $746
unrealized loss on investments, net of tax, in Variagenics at December 31, 2000
has been included in the asset impairment charge recorded in other expense in
the consolidated statements of operations for 2001.
35
13 | RETIREMENT PLANS
The Company has two retirement plans for U.S. employees: the Waters Employee
Investment Plan, a defined contribution plan, and the Waters Retirement Plan, a
defined benefit cash balance plan.
U.S. employees are eligible to participate in the Waters Employee
Investment Plan after one month of service. Employees may contribute from 1% to
20% of eligible pay on a pre-tax basis. In 2002, the maximum employee
contribution percentage of eligible pay increased from 20% to 30%. After one
year of service, the Company makes a matching contribution of 50% for
contributions up to 6% of eligible pay. Employees are 100% vested in employee
and company matching contributions. For the years ended December 31, 2001, 2000
and 1999, the Company's matching contributions amounted to $2,431, $2,136 and
$1,984, respectively.
U.S. employees are eligible to participate in the Waters Retirement Plan
after one year of service. Annually, the Company credits each employee's account
as a percentage of eligible pay based on years of service. In addition, each
employee's account is credited for investment returns at the beginning of each
year for the prior year at the average 12 month Treasury Bill rate plus 0.5%,
limited to a minimum rate of 5% and a maximum rate of 10%. An employee does not
vest until the completion of five years of service at which time the employee
becomes 100% vested.
The net periodic pension cost under SFAS 87, Employers' Accounting for
Pensions, is made up of several components that reflect different aspects of the
Company's financial arrangements as well as the cost of benefits earned by
employees. These components are determined using the projected unit credit
actuarial cost method and are based on certain actuarial assumptions. The
Company's accounting policy is to reflect in the projected benefit obligation
all benefit changes to which the Company is committed as of the current
valuation date; use a market-related value of assets to determine pension
expense; amortize increases in prior service costs on a straight-line basis over
the expected future service of active participants as of the date such costs are
first recognized; and amortize cumulative actuarial gains and losses in excess
of 10% of the larger of the market-related value of plan assets and the
projected benefit obligation over the expected future service of active
participants. Summary data for the Waters Retirement Plan are presented in the
following tables:
--------------------------------------------------------------------------------------------------------
Reconciliation of Projected Benefit Obligation 2001 2000
--------------------------------------------------------------------------------------------------------
Benefit obligation, January 1 $ 27,849 $ 22,710
Service cost 2,994 2,695
Interest cost 2,305 2,010
Employee rollovers 76 149
Actuarial loss 1,408 941
Disbursements (493) (656)
----------- -----------
Benefit obligation, December 31 $ 34,139 $ 27,849
=========== ===========
--------------------------------------------------------------------------------------------------------
Reconciliation of Fair Value of Assets 2001 2000
--------------------------------------------------------------------------------------------------------
Fair value of assets, January 1 $ 22,953 $ 22,886
Actual return on plan assets (2,085) (2,666)
Company contributions 3,265 3,240
Disbursements (493) (656)
Employee rollovers 76 149
----------- -----------
Fair value of assets, December 31 $ 23,716 $ 22,953
=========== ===========
--------------------------------------------------------------------------------------------------------
Reconciliation of Funded Status, December 31 2001 2000
--------------------------------------------------------------------------------------------------------
Projected benefit obligation $ (34,139) $ (27,849)
Fair value of plan assets 23,716 22,953
----------- -----------
Projected benefit obligation (in excess of) fair value of plan assets (10,423) (4,896)
Unrecognized prior service cost (1,027) (1,126)
Unrecognized net actuarial loss 9,219 3,186
Minimum pension liability adjustment (Note 12) (4,679) --
----------- -----------
Accrued (liability) $ (6,910) $ (2,836)
=========== ===========
The projected benefit obligation was calculated using the following
weighted average assumptions:
Discount rate 7.25% 7.50%
Return on assets 9.00% 9.00%
Increases in compensation levels 4.75% 4.75%
36
---------------------------------------------------------------------------------------------------
Components of Net Periodic Pension Cost, Year Ended December 31 2001 2000 1999
---------------------------------------------------------------------------------------------------
Service cost $ 2,994 $ 2,695 $ 2,878
Interest cost 2,305 2,010 1,696
Return on plan assets (2,540) (2,171) (1,645)
Net amortization:
Prior service cost (99) (99) (99)
Net actuarial (gain) -- (5) --
--------- --------- ---------
Net periodic pension cost $ 2,660 $ 2,430 $ 2,830
========= ========= =========
---------------------------------------------------------------------------------------------------
Reconciliation of (Accrued) Pension Cost 2001 2000 1999
---------------------------------------------------------------------------------------------------
(Accrued) pension cost, January 1 $(2,836) $(3,646) $(4,894)
FAS 87 (cost) (2,660) (2,430) (2,830)
Contributions made during the year 3,265 3,240 4,078
Minimum pension liability adjustment (Note 12) (4,679) -- --
--------- --------- ---------
(Accrued) pension cost, December 31 $(6,910) $(2,836) $(3,646)
========= ========= =========
The Company sponsors various non-U.S. retirement plans. The Company's
accrued pension cost for the Japanese defined benefit plan was $4,314 and $4,552
at December 31, 2001 and 2000, respectively, and is included in other
liabilities in the consolidated balance sheets.
The Company also sponsors other unfunded employee benefit plans in the
U.S., including a post-retirement health care plan. This plan provides
reimbursement for medical expenses and is contributory. The Company's accrued
post-retirement benefit obligation for this plan was $2,678 and $2,636 at
December 31, 2001 and 2000, respectively, and is included in other liabilities
in the consolidated balance sheets.
14 | RELATED PARTY TRANSACTIONS
In 1996 and 1995, the Company made loans to certain executive officers of the
Company. The loans were collateralized by a pledge of shares of common stock
held by these executive officers. The 1995 loans bore interest at 5.83% per
annum and matured on December 1, 2000. The 1996 loans bore interest at 5.65% per
annum and matured on January 8, 2001. Loans receivable of $723 at December 31,
2000 are included in other assets in the consolidated balance sheets and were
collected during 2001.
37
15 | BUSINESS SEGMENT INFORMATION
SFAS 131 establishes standards for reporting information about operating
segments in annual financial statements of public business enterprises. It also
establishes standards for related disclosures about products and service,
geographic areas and major customers. 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, 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. The accounting policies of the
reportable segment are the same as those described in the Summary of Significant
Accounting Policies. Please refer to the consolidated financial statements for
financial information regarding the one reportable segment of the Company. The
Company sells products and service within this reportable segment, detailed as
follows:
--------------------------------------------------------------------------------
Revenue 2001 2000 1999
--------------------------------------------------------------------------------
Products $696,613 $652,106 $569,504
Service 162,595 142,965 134,896
-------------------------------------------
Total $859,208 $795,071 $704,400
===========================================
Geographic information is presented below:
------------------------------------------------------------------------------------------------------------------------------------
United
States Europe Japan Asia Other Int'l Elimination Total
------------------------------------------------------------------------------------------------------------------------------------
2001
Sales:
Unaffiliated sales $ 373,000 $ 250,231 $ 63,281 $ 40,561 $ 73,951 $ -- $ 801,024
Unaffiliated export sales to Japan 17 21,038 -- -- -- -- 21,055
Unaffiliated export sales to Asia 7,679 15,402 -- -- -- -- 23,081
Unaffiliated export sales to Other Int'l 10,350 3,698 -- -- -- -- 14,048
Transfers between areas 191,629 92,751 -- -- -- (284,380) --
--------- --------- --------- --------- --------- --------- ---------
Total sales $ 582,675 $ 383,120 $ 63,281 $ 40,561 $ 73,951 $(284,380) $ 859,208
========= ========= ========= ========= ========= ========= =========
Long-lived assets:
Unaffiliated $ 235,531 $ 113,454 $ 2,252 $ 6,096 $ 6,834 $ -- $ 364,167
Between affiliates 269,978 24,011 2,181 -- 511 (296,681) --
--------- --------- --------- --------- --------- --------- ---------
Total long-lived assets $ 505,509 $ 137,465 $ 4,433 $ 6,096 $ 7,345 $(296,681) $ 364,167
========= ========= ========= ========= ========= ========= =========
2000
Sales:
Unaffiliated sales $ 343,336 $ 228,971 $ 64,228 $ 34,512 $ 60,982 $ -- $ 732,029
Unaffiliated export sales to Japan -- 26,581 -- -- -- -- 26,581
Unaffiliated export sales to Asia 7,677 10,927 -- -- -- -- 18,604
Unaffiliated export sales to Other Int'l 12,929 4,928 -- -- -- -- 17,857
Transfers between areas 162,935 93,344 -- -- -- (256,279) --
--------- --------- --------- --------- --------- --------- ---------
Total sales $ 526,877 $ 364,751 $ 64,228 $ 34,512 $ 60,982 $(256,279) $ 795,071
========= ========= ========= ========= ========= ========= =========
Long-lived assets:
Unaffiliated $ 230,048 $ 97,606 $ 3,298 $ 3,407 $ 14,190 $ -- $ 348,549
Between affiliates 272,294 24,011 2,181 -- 3,811 (302,297) --
--------- --------- --------- --------- --------- --------- ---------
Total long-lived assets $ 502,342 $ 121,617 $ 5,479 $ 3,407 $ 18,001 $(302,297) $ 348,549
========= ========= ========= ========= ========= ========= =========
1999
Sales:
Unaffiliated sales $ 289,538 $ 228,181 $ 65,137 $ 27,603 $ 51,134 $ -- $ 661,593
Unaffiliated export sales to Japan -- 16,119 -- -- -- -- 16,119
Unaffiliated export sales to Asia 5,831 5,007 -- -- -- -- 10,838
Unaffiliated export sales to Other Int'l 14,326 1,524 -- -- -- -- 15,850
Transfers between areas 182,471 59,510 -- -- -- (241,981) --
--------- --------- --------- --------- --------- --------- ---------
Total sales $ 492,166 $ 310,341 $ 65,137 $ 27,603 $ 51,134 $(241,981) $ 704,400
========= ========= ========= ========= ========= ========= =========
Long-lived assets:
Unaffiliated $ 221,907 $ 100,516 $ 3,279 $ 192 $ 11,213 $ -- $ 337,107
Between affiliates 227,246 24,011 2,181 -- 3,795 (257,233) --
--------- --------- --------- --------- --------- --------- ---------
Total long-lived assets $ 449,153 $ 124,527 $ 5,460 $ 192 $ 15,008 $(257,233) $ 337,107
========= ========= ========= ========= ========= ========= =========
The United States category includes Puerto Rico. The Other category
includes Canada, South America, Australia, India, Eastern Europe and Central
Europe. Transfer sales between geographical areas are generally made at a
discount from list price. None of the Company's individual customers account for
more than 3% of annual Company sales.
38
16 | QUARTERLY RESULTS
The Company's unaudited quarterly results are summarized below:
-------------------------------------------------------------------------------------------------------------------------
2001 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------------------------------------------------------------------------------------------------------------------------
Net sales $201,032 $206,803 $202,694 $248,679 $859,208
Cost of sales 73,298 75,545 73,120 89,269 311,232
----------- ----------- ----------- ---------- -----------
Gross profit 127,734 131,258 129,574 159,410 547,976
Selling, general and administrative expenses 65,907 67,169 66,913 69,717 269,706
Research and development expenses 11,038 11,741 11,794 12,029 46,602
Patent litigation provision -- -- -- 75,000 75,000
Goodwill and purchased technology amortization 1,748 1,771 1,755 1,867 7,141
----------- ----------- ----------- ---------- -----------
Operating income 49,041 50,577 49,112 797 149,527
Other expense -- -- -- (7,066) (7,066)
Interest income, net 1,486 1,151 1,211 1,117 4,965
----------- ----------- ----------- ---------- -----------
Income (loss) from operations before income taxes 50,527 51,728 50,323 (5,152) 147,426
Provision for income taxes 12,127 12,415 12,077 (3,736) 32,883
----------- ----------- ----------- ---------- -----------
Net income (loss) $ 38,400 $ 39,313 $ 38,246 $ (1,416) $114,543
=========== =========== =========== ========== ===========
Net income (loss) per basic common share $ .30 $ .30 $ .29 $ (.01) $ .88
=========== =========== =========== ========== ===========
Weighted average number of basic common shares 130,166 130,564 130,752 130,815 130,559
=========== =========== =========== ========== ===========
Net income (loss) per diluted common share $ .28 $ .29 $ .28 $ (.01) $ .83
=========== =========== =========== ========== ===========
Weighted average number of diluted common shares
and equivalents 137,933 137,564 136,704 130,815 137,509
=========== =========== =========== ========== ===========
-------------------------------------------------------------------------------------------------------------------------
2000 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------------------------------------------------------------------------------------------------------------------------
Net sales $180,202 $197,408 $191,953 $225,508 $795,071
Cost of sales 66,340 71,777 70,293 79,854 288,264
----------- ----------- ----------- ---------- -----------
Gross profit 113,862 125,631 121,660 145,654 506,807
Selling, general and administrative expenses 60,395 61,060 59,712 65,223 246,390
Research and development expenses 10,362 10,557 10,394 11,200 42,513
Goodwill and purchased technology amortization 1,811 1,760 1,755 1,751 7,077
----------- ----------- ----------- ---------- -----------
Operating income 41,294 52,254 49,799 67,480 210,827
Interest (expense) income, net (701) (343) 322 857 135
----------- ----------- ----------- ---------- -----------
Income from operations before income taxes 40,593 51,911 50,121 68,337 210,962
Provision for income taxes 10,545 13,506 13,030 17,768 54,849
----------- ----------- ----------- ---------- -----------
Income before cumulative effect of change in
accounting principle 30,048 38,405 37,091 50,569 156,113
Cumulative effect of change in accounting principle (10,771) -- -- -- (10,771)
----------- ----------- ----------- ---------- -----------
Net income $ 19,277 $ 38,405 $ 37,091 $ 50,569 $145,342
=========== =========== =========== ========== ===========
Income per basic common share:
Net income per basic common share before
cumulative effect of change in accounting principle $ .24 $ .30 $ .29 $ .39 $ 1.22
Cumulative effect of change in accounting principle (.09) -- -- -- (.08)
----------- ----------- ----------- ---------- -----------
Net income per basic common share $ .15 $ .30 $ .29 $ .39 $ 1.14
=========== =========== =========== ========== ===========
Weighted average number of basic common shares 125,602 126,914 128,485 129,347 127,568
=========== =========== =========== ========== ===========
Income per diluted common share:
Net income per diluted common share before
cumulative effect of change in accounting principle $ .22 $ .28 $ .27 $ .37 $ 1.14
Cumulative effect of change in accounting principle (.08) -- -- -- (.08)
----------- ----------- ----------- ---------- -----------
Net income per diluted common share $ .14 $ .28 $ .27 $ .37 $ 1.06
=========== =========== =========== ========== ===========
Weighted average number of diluted common shares
and equivalents 135,184 136,222 137,430 137,795 136,743
=========== =========== =========== ========== ===========
39
17 | SUBSEQUENT EVENT
PE Corporation (since renamed Applera Corporation), MDS Inc. and Applied
Biosystems/MDS Sciex ("the plaintiffs") have filed a civil action against
Micromass UK Limited and Micromass, Inc., wholly owned subsidiaries of the
Company, in the U.S. District Court for the District of Delaware. The plaintiffs
allege that the Quattro Ultima triple quadrupole mass spectrometer infringes
U.S. Patent No. 4,963,736 ("the patent"). The patent is owned by MDS Inc. and
licensed to a joint venture, Applied Biosystems/MDS Sciex. The Company believes
that it does not infringe the patent and alleges the patent is invalid and
unenforceable based on inequitable conduct in the course of obtaining the patent
and the Reexamination Certificate therefor.
In March 2002, the Company was informed of a jury's finding that the
Quattro Ultima with Mass Transit ion tunnel technology infringes the patent. The
same jury has found that the infringement was not willful and determined damages
in the amount of $47.5 million. As of the date the Company's Annual Report was
published, the Court had not addressed claims brought by the Company of
inequitable conduct. Favorable rulings on these claims could render the patent
unenforceable, although the outcome is not certain. The Court may also enter an
injunction in which the Company is enjoined from making, using and selling the
Quattro Ultima triple quadrupole mass spectrometer. These instruments are
manufactured in the United Kingdom and shipments to the rest of the world
outside of the United States are not subject to the present litigation. There is
a possibility that similar claims may be asserted against the Company in other
countries and for other products in the mass spectrometry product line. Based on
the facts available to management, the Company believes the outcome of any such
claims should they be brought, cannot be predicted with certainty, but could be
material to the Company's financial position, results of operations and
liquidity.
The Company intends to contest both the jury's verdict and the district
court's underlying patent claim construction vigorously both in post-trial
motions and, if necessary, by way of an appeal to the United States Court of
Appeals for the Federal Circuit. It believes that it has meritorious arguments
and has filed counter claims in connection with the above, alleging antitrust
violations and the invalidity of the asserted patent, among other things.
Management, after reviewing available information relating to this matter, has
determined that it is probable some liability has been incurred. The Company
believes that any liability ultimately incurred will not likely exceed the
provision described below recorded in the quarter ended December 31, 2001
including interest, court costs, legal fees and other charges. However, in the
event of an unanticipated adverse final determination in respect of certain
matters, the Company's consolidated net income for the period in which such
determination occurs could be materially affected. Although sufficient
uncertainties exist to preclude the Company from precisely determining the
amount of its liability, the $75.0 million recorded as a patent litigation
provision in the quarter ended December 31, 2001 in the consolidated statements
of operations, is the Company's best estimate of its exposure based on
information currently available.
40
SELECTED FINANCIAL DATA
Year ended December 31,
In thousands, except per share and employees data 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales $859,208 $795,071 $704,400 $618,813 $465,470
Income from operations before income taxes $147,426 $210,962 $167,561 $101,547 $ 7,467
Income (loss) before cumulative effect of change in
accounting principle $114,543 $156,113 $122,318 $ 74,399 $ (8,288)
Cumulative effect of change in accounting principle - (10,771) - - -
---------- ---------- ----------- ---------- ----------
Net income (loss) 114,543 145,342 122,318 74,399 (8,288)
Less: Accretion of and dividend on preferred stock, net of gain -- -- 442 963 942
---------- ---------- ----------- ---------- ----------
Net income (loss) available to common stockholders $114,543 $145,342 $121,876 $ 73,436 $ (9,230)
========== ========== =========== ========== ==========
Income (loss) per common share before cumulative
effect of change in accounting principle:
Basic $ .88 $ 1.22 $ .99 $ .61 $ (.08)
Weighted average number of basic common shares 130,559 127,568 123,013 119,720 116,508
Diluted $ .83 $ 1.14 $ .92 $ .57 $ (.08)
Weighted average number of diluted common shares and equivalents 137,509 136,743 132,632 129,284 116,508
BALANCE SHEET AND OTHER DATA:
Cash and cash equivalents $226,798 $ 75,509 $ 3,803 $ 5,497 $ 3,113
Working capital $241,738 $126,015 $ 49,489 $ 53,459 $ 45,843
Total assets $886,911 $692,345 $586,345 $577,701 $552,059
Long-term debt, including current maturities $ -- $ -- $ 91,080 $218,250 $305,340
Stockholders' equity $581,745 $451,781 $292,162 $150,119 $ 62,297
Employees 3,483 3,158 2,968 2,758 2,640
41
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
a. Information concerning the Registrant's directors is set forth in the Proxy
Statement under the headings "Election of Directors" and "Directors Meetings
and Compensation." Such information is incorporated herein by reference.
b. Information required by Item 405 of Regulation S-K is set forth in the Proxy
Statement under the heading "Section 16(A) Beneficial Ownership Reporting
Compliance." Such information is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
Information concerning compensation of the Registrant's executive officers is
set forth in the Proxy Statement under the heading "Management Compensation."
Such information is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners." Such information is incorporated herein
by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is set
forth in the Proxy Statement under the heading "Certain Relationships and
Related Transactions." Such information is incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statement Schedules:
WATERS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 2001, 2000 and 1999
Balance at Balance at
Beginning of Period Additions Deductions End of Period
-----------------------------------------------------------------------
Allowance for Doubtful Accounts
and Sales Returns:
2001 $2,815 $1,240 $ (243) $3,812
2000 $3,741 $1,263 $(2,189) $2,815
1999 $2,966 $1,197 $ (422) $3,741
42
(2) Exhibits:
Exhibit
Number Description of Document
------ -----------------------
2.1 Agreement for the Sale and Purchase of Micromass Limited dated
as of September 12, 1997, between Micromass Limited, Schroder
UK Buy-Out Fund III Trust I and Others, Waters Corporation and
Waters Technologies Corporation. Incorporated by reference to
the Registrant's Report on Form 8-K, filed on October 8, 1997
and amended on December 5, 1997.
3.1 Second Amended and Restated Certificate of Incorporation of
Waters Corporation. (1)
3.11 Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation of Waters Corporation, as amended
May 12, 1999. (3)
3.12 Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation of Waters Corporation, as amended
July 27, 2000. (6)
3.13 Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation of Waters Corporation, as amended
May 25, 2001.
3.2 Amended and Restated Bylaws of Waters Corporation, as amended
to date. (1)
10.1 Amended and Restated Credit Agreement, dated as of June 16,
1997 among Waters Corporation, Waters Technologies
Corporation, Bankers Trust Company and other Lenders party
thereto. (5)
10.2 First Amendment to Amended and Restated Credit Agreement dated
as of September 4, 1997. (5)
10.21 Second Amendment to Amended and Restated Credit Agreement,
dated as of February 7, 2000. (5)
10.22 Third Amendment to Amended and Restated Credit Agreement dated
as of September 14, 2000. (7)
10.23 Fourth Amendment to Amended and Restated Credit Agreement
dated as of March 15, 2001. (8)
10.3 Waters Corporation Second Amended and Restated 1996 Long-Term
Performance Incentive Plan. (5)
10.4 Waters Corporation 1996 Employee Stock Purchase Plan.
Incorporated by reference to Exhibit B of the 1996 Proxy
Statement.
10.41 December 1999 Amendment to the Waters Corporation 1996
Employee Stock Purchase Plan. (4)
10.42 March 2000 Amendment to the Waters Corporation 1996 Employee
Stock Purchase Plan. (4)
10.43 June 1999 Amendment to the Waters Corporation 1996 Employee
Stock Purchase Plan. (8)
10.44 July 2000 Amendment to the Waters Corporation 1996 Employee
Stock Purchase Plan. (8)
10.5 Waters Corporation 1996 Non-Employee Director Deferred
Compensation Plan. Incorporated by reference to Exhibit C of
the 1996 Proxy Statement.
10.51 First Amendment to the Waters Corporation 1996 Non-Employee
Director Deferred Compensation Plan. (5)
10.6 Waters Corporation Amended and Restated 1996 Non-Employee
Director Stock Option Plan. (5)
10.7 Agreement and Plan of Merger among Waters Corporation, TA
Merger Sub, Inc. and TA Instruments, Inc. dated as of March
28, 1996. Incorporated by reference to the Registrant's
Report on Form 8-K dated March 29, 1996.
10.8 Offer to Purchase and Consent Solicitation Statement, dated
March 7, 1996, of Waters Technologies Corporation.
Incorporated by reference to the Registrant's Report on Form
8-K dated March 11, 1996.
10.9 WCD Investors, Inc. Amended and Restated 1994 Stock Option
Plan (including Form of Amended and Restated Stock Option
Agreement). (2)
10.91 Amendment to the WCD Investors, Inc. Amended and Restated 1994
Stock Option Plan. (5)
43
10.10 Waters Corporation Retirement Plan. (2)
10.11 Registration Rights Agreement made as of August 18, 1994, by
and among WCD Investors, Inc., AEA Investors, Inc., certain
investment funds controlled by Bain Capital, Inc. and other
stockholders of Waters Corporation. (2)
10.12 Form of Indemnification Agreement, dated as of August 18,
1994, between WCD Investors, Inc. and its directors and
executive officers. (2)
10.13 Form of Management Subscription Agreement, dated as of August
18, 1994, between WCD Investors, Inc. and certain members of
management. (2)
10.14 1999 Management Incentive Plan. (3)
21.1 Subsidiaries of Waters Corporation.
23.1 Consent of PricewaterhouseCoopers LLP
--------------
(1) Incorporated by reference to the Registrant's Report on Form
10-K dated March 29, 1996.
(2) Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (File No. 333-3810).
(3) Incorporated by reference to the Registrant's Report on Form
10-Q dated August 11, 1999.
(4) Incorporated by reference to the Registrant's Report on Form
10-K dated March 30, 2000.
(5) Incorporated by reference to the Registrant's Report on Form
10-Q dated May 8, 2000.
(6) Incorporated by reference to the Registrant's Report on Form
10-Q dated August 8, 2000.
(7) Incorporated by reference to the Registrant's Report on Form
10-Q dated November 14, 2000.
(8) Incorporated by reference to the Registrant's Report on Form
10-K dated March 27, 2001.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three-month period ended
December 31, 2001.
(c) See (3) above.
(d) Not Applicable.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 28, 2002 Waters Corporation
/s/ John A. Ornell
-----------------------
John A. Ornell
Vice President, Finance
and Administration and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on March 28, 2002.
Chairman of the Board of Directors,
Chief Executive Officer
/s/ Douglas A. Berthiaume (principal executive officer)
---------------------------
Douglas A. Berthiaume
Vice President, Finance and
Administration and Chief Financial Officer
(principal financial officer and principal
/s/ John A. Ornell accounting officer)
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John A. Ornell
/s/ Joshua Bekenstein Director
-----------------------
Joshua Bekenstein
/s/ Dr. Michael J. Berendt Director
----------------------------
Dr. Michael J. Berendt
/s/ Philip Caldwell Director
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Philip Caldwell
/s/ Edward Conard Director
-------------------
Edward Conard
/s/ Dr. Laurie H. Glimcher Director
----------------------------
Dr. Laurie H. Glimcher
/s/ William J. Miller Director
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William J. Miller
/s/ Thomas P. Salice Director
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Thomas P. Salice
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