-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qcj+wxLRTZaZwJteuRsU+jS9hoJVyrGUYh9n1wIQoOx0btbwZ7/pkaH1AdBEsBiH /XeZJe0AlgVLblV/sdA0Kw== 0000066479-98-000011.txt : 19981116 0000066479-98-000011.hdr.sgml : 19981116 ACCESSION NUMBER: 0000066479-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MILLIPORE CORP CENTRAL INDEX KEY: 0000066479 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 042170233 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09781 FILM NUMBER: 98748972 BUSINESS ADDRESS: STREET 1: 80 ASHBY RD CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 6172759200 MAIL ADDRESS: STREET 1: 80 ASHBY ROAD CITY: BEDFORD STATE: MA ZIP: 01730 FORMER COMPANY: FORMER CONFORMED NAME: MILLIPORE FILTER CORP DATE OF NAME CHANGE: 19661116 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to COMMISSION FILE NUMBER 0-1052 Millipore Corporation (Exact name of registrant as specified in its charter) Massachusetts (State or other jurisdiction of incorporation or organization) 04-2170233 (I.R.S. Employer Identification No.) 80 Ashby Road Bedford, Massachusetts 01730 (Address of principal executive offices) Registrant's telephone number, include area code (781) 533-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The Company had 43,993,229 shares of common stock outstanding as of November 6, 1998. MILLIPORE CORPORATION INDEX TO FORM 10-Q Page No. Part I. Financial Information Item 1. Condensed Financial Statements Consolidated Balance Sheets - September 30,1998 and December 31, 1997 2 Consolidated Statements of Income - Three and Nine Months Ended September 30, 1998 and 1997 3 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997 4 Notes to Consolidated Condensed Financial Statements 5-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-14 Part II. Other Information Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 MILLIPORE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
September December 30, 1998 31, 1997 ASSETS (Unaudited) Current assets Cash $ 1,474 $ 2,240 Short-term investments 42,512 18,029 Accounts receivable, net 155,536 176,585 Inventories 117,616 127,192 Other current assets 9,756 28,362 Total Current Assets 326,894 352,408 Property, plant and equipment,net 225,098 220,094 Intangible assets 77,333 77,394 Deferred income taxes 106,001 88,760 Other assets 22,061 27,588 Total Assets $757,387 $766,244 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 186,272 $165,576 Accounts payable 41,522 46,088 Accrued expenses 81,629 74,856 Dividends payable 4,833 4,369 Accrued retirement plan 6,119 7,088 contributions Accrued income taxes payable 5,811 6,896 Total Current Liabilities 326,186 304,873 Long-term debt 282,749 286,844 Other liabilities 26,355 25,533 Shareholders' equity Common Stock 56,988 56,988 Additional paid-in capital 10,927 10,927 Retained earnings 470,407 490,289 Accumulated other comprehensive (35,583) (21,720) loss 502,739 536,484 Less: Treasury stock, at cost, 13,048 shares in 1998 and 13,291 in 1997 (380,642) (387,490) Total Shareholders' Equity 122,097 148,994 Total Liabilities and Shareholders' Equity $757,387 $ 766,244
The accompanying notes are an integral part of the consolidated condensed financial statements. -2- MILLIPORE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Net sales $159,181 $184,544 $520,015 $555,881 Cost of sales 101,493 82,372 273,429 249,430 Gross profit 57,688 102,172 246,586 306,451 Selling, general & administrative expenses 56,588 58,965 179,084 182,015 Research & development expenses 13,301 14,353 40,346 42,507 Purchased research & development expense - - - 114,091 Restructuring charges 33,641 - 33,641 - Settlement of litigation - - 11,766 - Operating (loss)/income (45,842) 28,854 (18,251) (32,162) Gain on sale of equity securities - 5,304 35,594 7,073 Interest income 877 708 2,252 2,105 Interest expense (7,098) (8,026) (21,229) (22,209) (Loss)/income from continuing operations before income (52,063) 26,840 (1,634) (45,193) taxes (Benefit)/provision for income taxes (15,643) 5,637 (3,457) 14,985 Net (loss)/income from continuing operations (36,420) 21,203 1,823 (60,178) Net loss on disposal of 5,847 - 5,847 - discontinued operations Net (loss)/income $(42,267) $21,203 $(4,024) $(60,178) Basic net (loss)/income per share: (Loss)/income from continuing operations $ (0.83) $0.49 $ 0.04 $(1.38) Net (loss)/income per share $ (0.96) $0.49 $(0.09) $(1.38) Diluted net (loss)/income per share: (Loss)/income from continuing operations $ (0.83) $0.48 $0.04 $(1.38) Net (loss)/income per share $ (0.96) $0.48 $(0.09) $(1.38) Cash dividends declared per common share $ 0.11 $0.10 $0.32 $0.29 Weighted average common shares outstanding: Basic 43,891 43,565 43,814 43,492 Diluted 43,891 44,428 44,279 43,492
The accompanying notes are an integral part of the consolidated condensed financial statements. -3- MILLIPORE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30, 1998 1997 Cash Flows From Operating Activities: Net loss $(4,024) $(60,178) Adjustments to reconcile net loss to net cash provided: Restructuring charges 42,816 - Net loss on disposal of discontinued 5,847 - operations Purchased research and development - 114,091 expense Write-off of acquired inventory step- - 5,000 up Depreciation and amortization 33,036 30,358 Gain on sale of equity securities (35,594) (7,073) Deferred tax benefit (16,176) - Change in operating assets and liabilities, net: Decrease (increase) in accounts 21,212 (20,354) receivable Decrease (increase) in inventories 5,736 (11,024) Decrease (increase) in other 716 (8,783) current assets Decrease (increase) in other assets 1,245 (2,382) (Decrease) in accounts payable and (27,814) (11,578) accrued expenses (Decrease) increase in accrued retirement plan contributions (1,103) 1,648 (Decrease) in accrued income taxes (1,085) (389) Other 150 4,782 Net cash provided by operating 24,962 34,118 activities Cash Flows From Investing Activities: Additions to property, plant and (42,227) (28,464) equipment Acquisition of Tylan, net of cash - (159,158) acquired Proceeds from sale of equity 35,594 7,073 securities Investment in intangibles (3,453) (6,541) Net cash used by discontinued (2,216) (3,246) operations Net cash used in investing activities (12,302) (190,336) Cash Flows From Financing Activities: Issuance of treasury stock under stock 4,890 5,178 plans Increase in short-term debt 20,771 79,583 Proceeds from issuance of long-term - 197,950 debt Payments on long-term debt - (126,018) Dividends paid (13,578) (12,185) Net cash provided by financing 12,083 144,508 activities Effect of foreign exchange rates on cash and short-term investments (1,026) (4,065) Net increase (decrease) in cash and 23,717 (15,775) short-term investments Cash and short-term investments on 20,269 46,870 January 1 Cash and short-term investments on $43,986 $31,095 September 30 The accompanying notes are an integral part of the consolidated condensed financial statements.
-4- MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (In thousands) 1. General: The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and, accordingly, these footnotes condense or omit certain information and disclosures normally included in financial statements. These financial statements, which in the opinion of management reflect all adjustments necessary for a fair presentation, should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The accompanying unaudited consolidated condensed financial statements are not necessarily indicative of future trends or the Company's operations for the entire year. 2. Inventories: Inventories consisted of the following: September 30, December 31, 1998 1997 Raw materials $38,302 $42,518 Work in 19,436 16,545 process Finished 59,878 68,129 goods Total $117,616 $127,192 3. Property, Plant and Equipment: Accumulated depreciation on property, plant and equipment was $197,103 at September 30,1998, and $166,585 at December 31, 1997. 4. Acquisitions: During the first quarter of 1998, the Company finalized the allocation of the purchase price relating to the acquisition of Tylan General, Inc. as discussed in Note C to the Company's financial statements for the year ended December 31, 1997. The final accrual for additional costs associated with the acquisition was $32,000. The final adjusted purchase price included current assets of $42,544, property and equipment of $15,559, other assets of $16,477 and liabilities of $22,042. Intangible assets valued at $28,742 are being amortized over their estimated useful lives ranging from 6 to 20 years. 5.Legal Proceedings: On May 2, 1997, the Environmental Quality Board ("EQB") of Puerto Rico served an administrative order on Millipore Cidra, Inc., a wholly-owned subsidiary of the Company. The administrative order ("EQB order") alleged: (i) that the nitrocellulose filter membrane scrap produced by Millipore Cidra's manufacturing operations is a hazardous waste as defined in EQB regulations; (ii) that Millipore Cidra, Inc. failed to manage, transport and dispose of the nitrocellulose membrane scrap as a hazardous waste; and (iii) that such failure violated EQB regulations. The EQB order proposed penalties in the amount of $96,500 and ordered Millipore Cidra, Inc. to manage the nitrocellulose membrane scrap as a hazardous waste. The Company recorded a charge of $5,000 in the first quarter of 1998 reflecting its costs to settle this matter. The Company also recorded a charge of $3,100 in the first quarter of 1998 reflecting its costs to settle a separate lawsuit with an intervening party in the EQB administrative case described above. The Company recorded a charge of $3,666 in the first quarter of 1998 to settle a patent lawsuit with Mott Metallurgical Corporation. In the lawsuit, each party claimed infringement of one of its patents by the other. As part of the settlement, the parties agreed to cross license the two patents at issue. -5- MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (In thousands) The Company and Waters Corporation were engaged in an arbitration proceeding and a related litigation in the Superior Court, Middlesex, Massachusetts, both of which commenced in the second quarter of 1995 with respect to the amount of assets required to be transferred by the Company's Retirement Plan in connection with the Company's divestiture of its former Chromatography Division. In the second quarter of 1996, Waters filed a Complaint in the Federal District Court of Massachusetts alleging that the Company's operation of the Retirement Plan violated ERISA and certain sections of the Internal Revenue Code. Judgments in the Company's favor were handed down by both the Massachusetts Superior Court and the Federal District Court in May 1997 and July 1997, respectively. Waters appealed the federal court judgment, which was affirmed by the United States Court of Appeals for the First Circuit by opinion dated April 3, 1998. On June 2, 1998, the Company transferred $2,439 (including interest through the date of transfer) from its Retirement Plan to the Waters Retirement Plan as provided by the amended and restated Purchase and Sale Agreement. In order to fund the transfer, in the second quarter of 1998 the Company made a contribution of $2,255 to its Retirement Plan in accordance with ERISA funding requirements. 6. Restructuring Charges and Provision for Excess Inventory: In the second quarter of 1998, the Company announced a restructuring program which was undertaken to improve the competitive position of the Company by streamlining worldwide operations and reducing the overall cost structure. The program includes the consolidation of certain manufacturing operations, realignment of various international subsidiary organizations to focus on operating business units and discontinuance of non-strategic product lines. In the third quarter of 1998, the Company recorded an expense associated with these activities of $42,816 ($29,115 after tax) including a restructuring charge of $33,641 and a $9,175 charge against cost of sales for inventory and fixed asset write-offs associated with the rationalization of its product offering and elimination of non- strategic business lines. The $33,641 restructuring charge included $18,290 of employee severance costs, $13,302 write-down of real and intangible assets to net realizable value and $2,049 of contract termination costs. The restructuring initiatives combined with the consolidation of the Company's microelectronics plants will result in the elimination of 620 positions worldwide and will be substantially completed by the end of 1998 with the remainder completed in 1999. The Company also recorded an incremental provision for excess and obsolete inventory of $6,000 during the third quarter in response to adverse changes in demand attributable to recessionary conditions in Asia and the slowdown in semiconductor industry. 7. Loss on Discontinued Operations: In August 1994 the Company sold it's Waters Chromatography Division and, in a separate transaction, sold certain assets of its non-membrane bioscience business. At that time the Company recorded a $40,000 reserve in connection with these transactions representing the estimate of costs to abandon facilities, terminate employees, transfer employee benefit obligations and to provide ongoing administrative and contract support services. During the third quarter of 1998 the Company completed its accounting for these divestitures which resulted in the recording of a $7,542 ($5,847 net of income taxes) loss on the disposal of discontinued operations. This charge reflects the final determination of the value of the remaining assets and liabilities associated with these divested operations. At this point the Company has fulfilled all of its past and current responsibilities under these transitional service agreements and resolved all remaining questions relating to these transactions. 8.Gain on Sale of Equity Securities: In partial consideration for the sale of its non-membrane bioscience instrument division in 1994, the Company received four thousand shares of preferred stock of PerSeptive Biosystems, Inc. ("PerSeptive"). The preferred stock was redeemable in four equal annual installments of $10,000, commencing in August 1995, in the equivalent value as of each redemption date of common stock, $0.01 par value of PerSeptive. Effective January 22, 1998, PerSeptive completed a merger with The Perkin-Elmer Corporation ("Perkin-Elmer") and became a wholly- owned subsidiary of Perkin-Elmer. Pursuant to this merger all of the Company's remaining holdings in PerSeptive, which consisted of 2,213,357 shares of common stock and one thousand shares of preferred stock were converted into 586,541 shares of Perkin-Elmer common stock. In the first quarter of 1998, the Company sold all 586,541 shares of its Perkin-Elmer common stock and recognized a net gain of $32,500. The Company also sold all of its common shares of Glyko Biomedical in the first quarter of 1998 and recognized a gain of $3,100. -6- MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (In thousands) 9. Basic and Diluted Earnings Per Share: The following table sets forth the computation of basic and diluted earnings per share. For the three months ended September 30, 1998 and the nine months ended September 30, 1997, the dilutive securities for stock options were not included in the computation of diluted earnings per share as the effect would be anti-dilutive.
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Numerator: Net (loss)/income $(42,267) $21,203 $(4,024) $(60,178) Denominator: For basic earnings per share: Weighted average shares 43,891 43,565 43,814 43,492 outstanding Effect of dilutive - 863 465 - securities-stock options For diluted earnings per share: Weighted average shares 43,891 44,428 44,279 43,492 outstanding Net (loss)/income per share: Basic $(0.96) $0.49 $(0.09) $(1.38) Diluted $(0.96) $0.48 $(0.09) $(1.38)
10. New Accounting Pronouncements: The Company has adopted Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income", which requires that all components of comprehensive income and total comprehensive income be reported and that changes be shown in a financial statement displayed with the same prominence as other financial statements. The Company has elected to disclose this information in its statement of stockholders' equity. For the three months and nine months ended September 30, 1998 and 1997, total comprehensive (loss)/income, was comprised of the following:
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Net (loss)/income $(42,267) $21,203 $(4,024) $(60,178) Foreign currency translation 9,372 (8,323) 4,712 (19,827) Unrealized holding (loss)/gain on equity (387) 10,061 (18,575) 7,337 securities arising during period, net of tax Total comprehensive $(33,282) $22,941 $(17,887) $(72,668) (loss)/income
-7- MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (In thousands) In July 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for fiscal years beginning after December 15, 1997. The interim reporting disclosures are not required in the first year of adoption. SFAS 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. SFAS 131 changes current practice under SFAS 14 by establishing a new framework on which to base segment reporting. The "management" approach expands the required disclosures for each segment. The Company will adopt SFAS 131 in the fourth quarter ended December 31, 1998 and has not yet determined the impact of such adoption on its segment reporting as currently presented. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132 establishes new increased requirements for disclosure of a Company's pensions and other postretirement benefit obligations. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997, but may be adopted earlier. The Company will adopt the increased disclosure requirements of SFAS No. 132 in the fourth quarter ended December 31, 1998. In March 1998, Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was issued which provides guidance on applying generally accepted accounting principles in addressing whether and under what conditions the costs of internal-use software should be capitalized. SOP 98-1 is effective for transactions entered into in fiscal years beginning after December 15, 1998, however, earlier adoption is encouraged. The Company adopted the guidelines of SOP 98-1 as of January 1, 1998 and the impact of such adoption was not material to the results of operations or cash flows for the period ended September 30, 1998. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2000 for the Company. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company is currently assessing the impact of this new statement on its consolidated financial position, liquidity and results of operations. -8- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) Forward Looking Statements The following discussion and analysis includes certain forward- looking statements which are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Potential risks and uncertainties that could affect the Company's future operating results include, without limitation; foreign exchange rates; increased regulatory concerns on the part of the biopharmaceutical industry; further consolidation of drug manufacturers; competitive factors such as new membrane technology, and/or a new method of chip manufacture which relies less heavily on purified chemicals and gases; availability of component products on a timely basis; inventory risks due to shifts in market demand; change in product mix; conditions in the economy in general, including uncertainties in selected Asian economies, and in the microelectronics manufacturing market in particular; the difficulty in integrating acquired companies; failure to realize the savings contemplated by certain restructuring activities; potential environmental liabilities; the inability to utilize technology in current or planned products due to overriding rights by third parties, and the risk factors and uncertainties described in Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Results of Operations Consolidated net sales for the third quarter of 1998 were $159,181, a decrease of 14% from sales for the same period last year. Revenues decreased 10% as measured in local currency terms for the third quarter of 1998. The Company reported a loss of $0.96 per share for the third quarter compared to a profit of $0.48 per share for the same period last year. The loss for the third quarter of 1998 includes unusual expenses totaling $56,358 ($39,702 after tax). Excluding these expenses which are detailed below, and a gain on sale of equity securities reported in the same period of the prior year, the Company would have reported a loss from continuing operations of $0.06 per share in the third quarter versus a gain of $0.39 per share for the same period last year.
Summary of Unusual Expenses: Three Months Ended September 30, 1998 1997 Cost of sales Write-off of inventory and manufacturing $9,175 $ - equipment Provision for excess and obsolete inventory 6,000 - Decrease in gross margin (15,175) - Operating expenses Restructuring charges 33,641 - Gain on sale of equity securities - 5,304 (Loss) income from continuing operations (48,816) 5,304 before income taxes Tax (benefit) provision (14,961) 1,114 Net (loss) income from continuing operations (33,855) 4,190 Net loss on disposal of discontinued 5,847 - operations($7,542 before taxes) Net (loss) income $(39,702) $4,190 Net (loss) income per share $(0.90) $ 0.09
-9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) The following table summarizes revenue growth by market and geography in the third quarter of 1998 as compared to the third quarter of 1997 (in millions): % % Increase/ September 30, Increase/ (Decrease) 1998 1997 (Decrease) Local Currency Microelectronics $ 35 $ 66 (47%) (42%) Mfg. BioPharmaceutical 55 49 12% 15% Mfg. Analytical 69 70 (1%) 3% Laboratory Total $ 159 $185 (14%) (10%) Americas $ 68 $ 79 (14%) (13%) Europe 54 50 8% 7% Asia/Pacific 37 56 (34%) (21%) Total $ 159 $185 (14%) (10%) Sales to microelectronics customers, in local currency, decreased 42% in the third quarter of 1998 compared to the third quarter of 1997. The Company continued to be negatively impacted by the semiconductor industry downturn and the ongoing economic difficulties in Asian markets. The softness in demand from Asian customers continues unabated and is expected to remain at current levels through at least the fourth quarter of 1998. The sale of Millipore's microelectronics products is equally dependent on both semiconductor manufacturing capacity utilization and the purchase of new equipment. The outlook for the semiconductor industry is uncertain. On the one hand, recent industry reports suggest an increase in demand for semiconductors. On the other hand, the demand for semiconductor manufacturing equipment continues its negative trend. Accordingly the Company expects to report significantly negative quarter on quarter growth comparison for microelectronics products for the fourth quarter of 1998. Sales to the BioPharmaceutical sector, in local currency, increased 15% in the third quarter of 1998 as compared to the third quarter of 1997. This result is the combination of a 21% increase in the sales to pharmaceutical and biotech customers offset by a 16% decrease in sales to food and beverage customers primarily in Asia. For the remaining three months of 1998, continued quarter on quarter growth in the BioPharmaceutical sector is anticipated. In the third quarter of 1998 as compared to the third quarter of 1997, sales growth in the Analytical Laboratory business was 3%, in local currency, reflecting a 5% growth rate in North America and Europe offset by a 3% decline in Japan. Similar growth trends are expected in the fourth quarter. In the third quarter of 1998 as compared to the third quarter of 1997, the U.S. dollar strengthened against most European and Asian currencies. Since the end of the third quarter of 1998, the U.S. dollar has weakened against most European and Asian currencies. If foreign exchange rates remain at October 30, 1998 levels, then expected fourth quarter sales growth in dollars would be approximately 2 percentage points higher than local currency growth rates reported in the fourth quarter of 1997. Projected full year 1998 reported sales growth rates are anticipated to be approximately 3 percentage points lower than local currency growth rates. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) In the second quarter of 1998, the Company announced a restructuring program to improve the competitive position of the Company by streamlining worldwide operations and reducing the overall cost structure. The program includes the consolidation of manufacturing operations, the realignment of various international subsidiary organizations to focus on operating business units and the discontinuance of non-strategic product lines. Key initiatives include: 1. Discontinue non-strategic product lines and consolidate certain manufacturing operations thus eliminating duplicate manufacturing processes and improve the product line focus. 2. Realign European country organizational structure to focus on operating business units and establish regional transaction service centers. 3. Reduce administrative and management costs in Asia to reflect the downturn in the Asian economies. 4. Renegotiate marketing, research and vendor contractual agreements. 5. Streamline the supply chain management function and consolidate vendors resulting in cost savings and better customer response. In the third quarter of 1998, the Company recorded an expense associated with these activities of $42,816 ($29,115 after tax) including a restructuring charge of $33,641 and a $9,175 charge against cost of sales for inventory and fixed asset write-offs associated with the rationalization of its product offering and elimination of non-strategic business lines. The $33,641 restructuring charge included $18,290 of employee severance costs, $13,302 write-down of real and intangible assets to net realizable value and $2,049 of contract termination costs. The restructuring initiatives combined with the consolidation of the Company's microelectronics plants will result in the elimination of 620 positions worldwide and will be substantially completed by the end of 1998 with the remainder completed in 1999. When fully implemented these collective actions, are expected to yield annual savings of $38,000. The Company also recorded an incremental provision for excess and obsolete inventory of $6,000 during the third quarter in response to adverse changes in demand attributable to recessionary conditions in Asia and the slowdown in semiconductor industry. Gross profit margins in the third quarter of 1998 were 36% of sales compared to 55% of sales in the third quarter of 1997. Gross profit margins in the third quarter of 1998 were 46% of sales excluding the effect of a $9,175 charge for the write-off of inventory and manufacturing equipment associated with product line rationalization activities and a provision of $6,000 for excess and obsolete inventory. Gross margin percentages were lower than those in the same period last year reflecting the impact of significantly reduced volumes in the Company's microelectronics manufacturing plants combined with duplicative manufacturing costs resulting from concurrent operations at three existing plants located in California and Texas and operations at the new manufacturing facility in Allen, Texas. The redundant facilities were closed in September 1998 and their operations consolidated into the new Allen, Texas facility. The Company expects gross margin percentages in the fourth quarter of 1998 to approximate those reported in the second quarter of 1998. Total operating expenses increased 41% from total operating expenses for the third quarter of 1997 due to restructuring charges of $33,641 recorded in the third quarter of 1998. Excluding the restructuring charges, total operating expenses decreased 5% from operating expenses for the third quarter of 1997 primarily due to decreases in selling, general and administrative expenses attributable to cost containment programs and the U.S. dollar strengthening against European and Asian currencies, as well as a decrease in research and development spending. Net interest expense in the third quarter of 1998 was lower than the third quarter of 1997 due primarily to lower interest rates. The Company expects that interest expense in the fourth quarter and for the year ended 1998 will be slightly lower than 1997 due primarily to lower interest rates. -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) The effective income tax rate for the third quarter of 1998 including the restructuring program was 30%. Excluding the effect of the restructuring program, the effective income tax rate was 21%. The effective income tax rate for the full year of 1997 was 21.0%. The Company expects to sustain the 21.0% tax rate for the remainder of 1998. Third quarter net loss included an additional after-tax charge of $5,847 related to previously discontinued operations. In 1994 the Company sold it's Waters Chromatography Division and, in a separate transaction, sold certain assets of its non-membrane bioscience business. This charge reflects the final determination of the value of the remaining assets and liabilities associated with these divested operations. The accounting for these transactions is now complete. A substantial portion of the Company's business is conducted outside of the United States through its foreign subsidiaries. This exposes the Company to risks associated with foreign currency rate fluctuations, which can impact the Company's revenue and net income. The Company had entered into foreign currency option contracts to sell yen, on a continuing basis in amounts and timing consistent with the underlying currency exposure so that the gains or losses on these transactions partially offset the realized foreign exchange gains or losses on the underlying exposure. The gains or losses resulting from these transactions are recorded in cost of sales. In the third quarter of 1998, a gain of $402 was realized on the Company's foreign exchange contracts compared to a gain of $1,005 in the third quarter of 1997. As of September 30, 1998, the Company has only forward option contracts to sell yen. In the event of a significant strengthening of the U.S. dollar against the yen, the exercise of these forward options will partially mitigate losses incurred by the Company on the underlying currency exposure. The Company is exposed to a number of external market risks including changes in foreign currency exchange and interest rates. Foreign currency exchange risks are managed on a global basis netting exposures to take advantage of natural offsets and cross currency flows. The Company has a net equity exposure to the Japanese Yen which has been effectively hedged through debt swap agreements covering both principal and interest. Pursuant to these agreements $110,000 of debt with a weighted average fixed interest rate of 6.7 % was swapped for an equivalent value of Yen debt with a weighted average fixed interest rate of 3.6%. The maturities of the swap agreements match those of the underlying debt. The financial impact of these hedging instruments is offset by changes in exposure of the underlying net assets being hedged. The Company does not enter into derivative financial instruments for trading purposes. Euro On January 1, 1999, several member countries of the European Union will establish fixed conversion rates between their existing sovereign currencies, and adopt the Euro as their new common legal currency. As of that date, the Euro will trade on currency exchanges and the legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. The Euro conversion may affect cross-border competition by creating greater cross-border price transparency. The Company is assessing its pricing/marketing strategy in order to ensure that it remains competitive in a broader European market. The Company is also assessing its information technology systems to allow for transactions to take place in both the legacy currencies and the Euro and the eventual elimination of the legacy currencies, and reviewing whether certain existing contracts will need to be modified. The currency risk and risk management for operations in participating countries may be reduced as the legacy currencies are converted to the Euro. Final accounting, tax and governmental legal and regulatory guidance is not available. The Company is evaluating issues involving introduction of the Euro. Based on current information and current assessments, the Company does not expect that the Euro conversion will have a material adverse effect on its business or financial condition. -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) Year 2000 The Company is aware of the "Year 2000" issue that will affect certain products and systems that were not properly designed to handle the transition between the twentieth and twenty-first centuries. The Company has recognized the need to ensure that its business operations will not be adversely impacted by the Year 2000. Accordingly, the Company has authorized an internal team to assess the Company's Year 2000 readiness and to determine the steps necessary to address its Year 2000 issues. Among the areas that have been or are being assessed are the Company's internal software systems, its manufacturing equipment, its facilities and its products. In addition, the team has begun the assessment of the Year 2000 readiness of the Company's key suppliers and financial institutions. As part of the assessment of its Year 2000 readiness, the Company has identified and is testing its key internal information systems as well as its facilities, manufacturing and other key systems for Year 2000 compliance, and the Company expects to complete testing by December 1998. By mid-1999, the Company expects to complete implementation of all modifications or replacements necessary to make all key systems Year 2000 compliant. The Company has nearly completed its testing of the Year 2000 compliance of its products. A large majority of the Company's products do not present Year 2000 compliance issues, and for those products that do present issues the Company has communicated with its customers regarding appropriate solutions. In addition to testing of the Company's internal systems and its products, the Company has begun implementing its plan of communication with its suppliers and financial institutions regarding their Year 2000 readiness and the Year 2000 compliance of the products and services that they provide to the Company. The Company expects to identify any important Year 2000 readiness issues of its key supply-chain partners by the end of 1998, and to develop contingency plans where reasonably possible for dealing with risks raised by such non-readiness on or before March 1999. The Company currently estimates that the total costs that will be incurred in its Year 2000 assessment and remediation program will be in the range of $1,000 to $3,000, of which approximately $500 has been incurred through September 30, 1998. Incremental spending has not been and is not expected to be material because most Year 2000 readiness costs will be met with amounts that are normally budgeted for procurement and maintenance of the Company's information systems and infrastructure. The redirection of spending to the implementation of its Year 2000 readiness program may in some instances delay productivity improvements. The Year 2000 presents a number of risks and uncertainties that could affect the Company notwithstanding the successful implementation of its Year 2000 readiness program. Those risks and uncertainties include, but are not limited to, failure of utilities or transportation systems, competition for personnel skilled in remediation of Year 2000 issues, and the nature of government responses to the Year 2000. Though the Company continues to believe that the Year 2000 will not have a material impact on its business, financial condition or results of operations, the occurrence of any of the above risks or uncertainties or the failure to successfully implement the Company's Year 2000 readiness program could result in such a material impact. Capital Resources And Liquidity Cash generated by operations in the first nine months of 1998 was $24,962 compared to $34,118 in the first nine months of 1997. During the first nine months of 1998, cash expenditures amounting to $21,044 were charged against restructuring reserves established during 1997; $11,101 of employee costs, $5,777 of contract termination costs, and $4,166 of other integration expenses. -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) Cash generated by the Company during the first nine months of 1998 was used to invest in property, plant and equipment, and pay dividends. Property, plant and equipment expenditures for the first nine months of 1998 exceeded those for the same period in 1997 by $13,763 primarily due to $18,715 spent for the construction of the new manufacturing facility in Allen, Texas. The total cost of this facility will be approximately $28,000. The Company expects property, plant and equipment expenditures to increase over the remainder of 1998 as it completes this facility and expands its Cork, Ireland operation. In May 1998, the Company reduced the maximum funds available under the unsecured revolving credit agreement, dated as of January 22, 1997, as amended, (the "Credit Agreement") from $350,000 to $250,000. The Company's financial results for the fiscal period ended September 30, 1998 made it necessary for the Company to renegotiate certain financial covenants relating to operating cash flow and interest coverage under Credit Agreement,and under the $100,000 6.88% note due in 2004. Pursuant to this renegotiation, the lenders involved waived defaults under those covenants and accepted less restrictive operating cash flow and interest coverage covenants for the near term. The Company agreed to an additional minimum earnings covenant, the payment of amendment fees totaling approximately $700, and to increases in both the interest rate and the facility fees thereunder. Interest is payable under the Credit Agreement at a floating U.S. dollar deposit rate, defined as LIBOR, plus a margin. The Company agreed to an increase in this margin from a range of .18% to .65% to a range of .23% to 1.125%. The Company also agreed to an increase in the facility fee under the Credit Agreement from a rate ranging from .1% to .25% to a rate ranging from .125% to .375%. The interest rate under the $100,000 note due 2004 will also increase from 6.88% to 7.23% as of November 2, 1998 unless the Company either pays down the outstanding principal on that note to $50,000 or pays an amendment fee of $1,500 prior to November 30, 1998. On November 10, 1998 Moody's Investor Services announced that it was downgrading the Company's debt rating to Ba2 from Baa3; a rating which Moody's characterizes as below "investment grade". The Company expects that this development may make it more difficult for the Company to access money markets should it become necessary to do so. -14- Part II - Other Information Item 5. Other Information The deadline for receipt of timely notice of stockholder proposals for submission to the Millipore 1999 Annual Meeting of Stockholders without inclusion in Millipore's 1999 Proxy Statement is February 3, 1999. Unless such notice is received by Millipore at 80 Ashby Road, Bedford, Massachusetts 01730, Attention Jeffrey Rudin, Vice President and General Counsel, on or before the foregoing date, proxies with respect to such meeting will confer discretionary voting authority with respect to any such matter. Item 6. Exhibits and Reports on Form 8-K a.Exhibit 27 Financial Data Schedule for the nine months ended September 30, 1998 -15- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Millipore Corporation Registrant November 13, 1998 /s/ Kathleen B. Allen Date Kathleen B. Allen Chief Accounting Officer -16- EX-27 2
5 1,000 9-MOS DEC-31-1998 SEP-30-1998 1,474 42,512 155,536 0 117,616 326,894 422,201 197,103 757,387 326,186 0 56,988 0 0 65,109 757,387 520,015 520,015 273,429 273,429 264,837 0 21,229 (1,634) (3,457) 1,823 5,847 0 0 (4,024) (0.09) (0.09)
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