10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 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 46,317,460 shares of common stock outstanding as of October 27, 2000. MILLIPORE CORPORATION INDEX TO FORM 10-Q Page No. Part I. Financial Information Item 1. Condensed Financial Statements Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 2 Consolidated Statements of Income - Three and Nine Months Ended September 30, 2000 and 1999 3 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999 4 Notes to Consolidated Condensed Financial Statements 5-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 11 Part II. Other Information Item 1. Legal Proceedings 11 Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12 MILLIPORE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) September December 30, 31, 1999 2000 ASSETS (Unaudited) Current assets Cash and cash equivalents $ 67,709 $ 32,420 Cash held as collateral 11,035 18,640 Accounts receivable, net 216,017 195,751 Inventories 137,556 105,040 Other current assets 6,469 7,096 Total Current Assets 438,786 358,947 Property, plant and equipment, net 212,533 226,477 Deferred income taxes 115,683 109,822 Intangible assets 63,879 70,238 Other assets 26,274 27,249 Total Assets $ 857,155 $ 792,733 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 72,000 $ 115,645 Accounts payable 66,345 63,053 Accrued expenses 80,146 73,512 Dividends payable 5,086 4,970 Accrued retirement plan contributions 6,376 7,333 Accrued income taxes payable 24,747 5,270 Total Current Liabilities 254,700 269,783 Long-term debt 306,484 313,107 Other liabilities 35,117 32,992 Shareholders' equity Common stock 56,988 56,988 Additional paid-in capital 18,272 18,272 Retained earnings 558,640 491,429 Unearned compensation (1,972) (4,041) Accumulated other comprehensive loss (57,645) (42,292) 574,283 520,356 Less: Treasury stock, at cost, 10,756 shares in 2000 and 11,794 in 1999 (313,429) (343,505) Total Shareholders' Equity 260,854 176,851 Total Liabilities and Shareholders' Equity $ 857,155 $ 792,733 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, 2000 1999 2000 1999 Net sales $239,382 $188,635 $703,153 $556,504 Cost of sales 112,575 86,920 321,491 257,895 Gross profit 126,807 101,715 381,662 298,609 Selling, general & administrative expenses 68,335 64,387 209,246 189,103 Research & development expenses 16,214 13,305 46,215 39,012 Litigation settlement 1,500 - 1,500 - Restructuring reversal (1,500) (5,200) (1,500) (5,200) Operating income 42,258 29,233 126,201 75,694 Net gain on sale of securities - - 4,161 - Interest income 1,006 671 2,539 2,061 Interest expense (6,436) (7,482) (20,729) (22,594) Income before income taxes 36,828 22,412 112,172 55,161 Provision for income taxes 8,102 5,435 25,343 12,312 Net income $ 28,726 $ 16,977 $ 86,829 $ 42,849 Net income per share: Basic $ 0.62 $ 0.38 $ 1.90 $ 0.96 Diluted $ 0.61 $ 0.37 $ 1.84 $ 0.95 Cash dividends declared per share $ 0.11 $ 0.11 $ 0.33 $ 0.33 Weighted average shares outstanding: Basic 46,073 44,994 45,742 44,617 Diluted 47,328 45,681 47,101 45,161 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, 2000 1999 Cash Flows From Operating Activities: Net Income $86,829 $42,849 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring reversal (1,500) (5,200) Depreciation and amortization 34,449 33,324 Gain on sale of securities (4,161) - Deferred tax (benefit) provision (5,861) 1,820 Changes in operating assets and liabilities: Increase in accounts receivable (31,284) (22,833) (Increase) decrease in inventories (40,085) 4,492 Decrease in other current assets and other assets 1,076 1,182 Increase in accounts payable and accrued expenses 18,384 1,774 Decrease in accrued retirement plan contributions (738) (725) Increase in accrued income taxes 15,519 6,069 Increase in other 2,738 3,414 Net cash provided by operating activities 75,366 66,166 Cash Flows From Investing Activities: Additions to property, plant and equipment (27,690) (20,220) Proceeds from sale of securities 7,498 - Proceeds from sale of property 8,808 - Investments in intangibles - (225) Net cash used in investing activities (11,384) (20,445) Cash Flows From Financing Activities: Issuance of treasury stock under stock plans 25,232 6,751 Net change in short-term debt (43,645) (4,890) Dividends paid (15,098) (14,659) Change in cash held as collateral 7,605 (14,386) Net cash used in financing activities (25,906) (27,184) Effect of foreign exchange rates on cash and cash equivalents (2,787) (2,114) Net increase in cash and cash equivalents 35,289 16,423 Cash and cash equivalents on January 1 32,420 36,022 Cash and cash equivalents on September 30 $67,709 $52,445 The accompanying notes are an integral part of the consolidated condensed financial statements. -4- MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in millions, shares in thousands) 1. General: The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions to form 10Q and, accordingly, these footnotes condense or omit certain information and disclosures which substantially duplicate information provided in the Company's latest audited financial statements. These financial statements 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, 1999. In the opinion of management, these financial statements reflect all adjustments necessary for a fair presentation of the results for the interim periods presented. 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 December 30, 2000 31, 1999 Raw materials $ 53.3 $ 38.1 Work in process 30.4 26.1 Finished goods 53.9 40.8 Total $ 137.6 $ 105.0 3. Property, Plant and Equipment: Accumulated depreciation on property, plant and equipment was $218.8 at September 30, 2000 and $206.9 at December 31, 1999. 4.Restructuring Charges: In the third quarter of 1998, the Company initiated a restructuring program resulting in a charge of $33.6. In the third quarter of 2000, the Company reversed $1.5 in restructuring reserves primarily related to additional proceeds from the sale of facilities. This reversal is in addition to the $5.2 restructuring reserve reversal in the third quarter of 1999 which was related to favorable experience in employee separations and lease cancellation costs. As of September 30, 2000, 615 employees, of the planned 620 employees, had left the Company. The remaining balance as of September 30, 2000 relates to employee severance payments and lease cancellation costs which will be completed by the early part of 2001. The following is a summary of the restructuring program reserve balances at September 30, 2000: Cash & Balance at non-cash Reserve Balance at December 31, activity reversal September 1999 30, 2000 Employee Severance $ 3.5 $ 1.9 $ 0.5 $ 1.1 Lease cancellation costs 2.5 (0.3) 1.0 1.8 Other costs 1.6 1.4 - 0.2 Total $ 7.6 $ 3.0 $ 1.5 $ 3.1 -5- MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in millions, shares in thousands) 5. Business Segment Information: The Company has two reportable business segments: Microelectronics and Bioscience. The Bioscience business segment was previously referred to as Biopharmaceutical & Research. The results for the Bioscience and the Microelectronics segments and for Corporate operations are presented below in "local currencies". Local currency results represent the foreign currency balances translated, in all periods presented, at Millipore's budgeted exchange rates for 2000, thus excluding the impact of fluctuations in the actual foreign currency rates. The Company's management uses this presentation for internal evaluation of the financial performance of the Company's business segments because it believes that the local currency results provides a clearer presentation of underlying business trends. The U.S. dollar results represent the foreign currency balances translated at actual exchange rates. Three Months Nine Months Ended Ended September 30, September 30, Consolidated Net Sales 2000 1999 2000 1999 Bioscience $155.6 $137.0 $466.0 $420.1 Microelectronics 90.9 53.4 250.7 143.9 Foreign exchange (7.1) (1.8) (13.5) (7.5) Total net sales $239.4 $188.6 $703.2 $556.5 Three Months Nine Months Ended Ended Consolidated Operating September 30, September 30, Income 2000 1999 2000 1999 Bioscience $37.4 $29.2 $111.6 $91.1 Microelectronics 20.5 5.0 58.1 10.1 Corporate (14.1) (8.2) (42.9) (25.9) Litigation settlement (1.5) - (1.5) - Restructuring reversal 1.5 5.2 1.5 5.2 Foreign exchange (1.5) (2.0) (0.6) (4.8) Total operating income $42.3 $29.2 $126.2 $75.7 6. Basic and Diluted Earnings Per Share: The following table sets forth the computation of basic and diluted earnings per share: Three Months Nine Months Ended Ended September 30, September 30, 2000 1999 2000 1999 Net income $28.7 $17.0 $86.8 $42.8 For basic earnings per share: Weighted average shares outstanding 46,073 44,994 45,742 44,617 Effect of dilutive securities-stock options 1,255 687 1,359 544 Diluted weighted average shares outstanding 47,328 45,681 47,101 45,161 Net income per share: Basic $0.62 $ 0.38 $ 1.90 $ 0.96 Diluted $0.61 $ 0.37 $ 1.84 $ 0.95 -6- MILLIPORE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in millions, shares in thousands) 7. Comprehensive Income: The following table presents the components of comprehensive income, net of taxes: Three Months Nine Months Ended Ended September 30, September 30, 2000 1999 2000 1999 Unrealized holding gains on marketable securities $ 0.8 $(0.1) $ 7.7 $ 1.1 Reclassification adjustment for gains realized in net income - - (4.7) (0.3) Net unrealized (loss) gain on securities available for sale 0.8 (0.1) 3.0 0.8 Foreign currency translation adjustments (9.1) 8.6 (18.3) (9.1) Other comprehensive loss (8.3) 8.5 (15.3) (8.3) Net income 28.7 17.0 86.8 42.8 Total comprehensive income $ 20.4 $ 25.5 $ 71.5 $ 34.5 8. New Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for the Company January 1, 2001. 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. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" which is effective for the Company beginning with the fourth quarter of 2000. SAB 101 provides guidance related to revenue recognition based on interpretations and practices followed by the SEC and requires any changes in revenue recognition to be reported as a cumulative change in accounting principles at the time of implementation in accordance with APB Opinion No. 20, "Accounting Changes". The Company is currently in the process of evaluating the impact SAB 101 will have on the financial position or results of operations of the Company. 9. Legal Settlement: In the third quarter of 2000, the Company agreed in principle, to settle a patent lawsuit and recorded a charge of $1.5 million for past royalties. -7- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Business Realignment On October 3, 2000, the Company announced its plans to separate into two distinct companies by making its Microelectronics business an independent, publicly traded company. The Company is planning an initial public offering for less than 20 percent of the shares in the new Microelectronics company. Subsequent to the initial public offering, the Company plans to distribute to its shareholders the remaining shares of the common stock held by the Company. The transaction is expected to be tax-free to the Company and to its shareholders. The completion of the realignment is expected in the third quarter 2001 and is contingent upon receiving certain tax and regulatory approvals, accommodation of certain debt covenants and market conditions. The full impact of the realignment on the Company's financial position, results of operations and cash flows cannot be predicted at this time. However, certain expenses are expected to be incurred in future periods in order to implement the realignment. Local Currency Results The following discussion of the Results of Operations includes reference to revenue, margins and expenses in "local currencies". Local currency results represent the foreign currency balances translated, in all periods presented, at Millipore's budgeted exchange rates for 2000, thus excluding the impact of fluctuations in the actual foreign currency rates. The Company's management uses this presentation for internal evaluation of the financial performance of the Company's business segments because it believes that the local currency results provides a clearer presentation of underlying business trends. The U.S. dollar results represent the foreign currency balances translated at actual exchange rates. Results of Operations Consolidated net sales for the third quarter of 2000 were $239 million, an increase of 27% over sales for the same period last year. The Company reported earnings, excluding unusual items in both quarters, of $0.61 per share for the third quarter of 2000 compared to earnings of $0.30 per share for the third quarter of 1999. Including the unusual items in both quarters, earnings were $0.61 and $0.37 per share for the third quarter of 2000 and 1999, respectively. The unusual items included reversal of restructuring reserves in the third quarters of 2000 and 1999 and a litigation settlement in the third quarter of 2000. The following table summarizes sales growth by business segment and geography in the third quarter of 2000 as compared to the third quarter of 1999 (U.S. dollars in millions): September 30, Sales Growth 2000 1999 in U.S. Local Dollars Currency Bioscience $ 148 $ 135 9% 14% Microelectronics 91 54 72% 70% Total $ 239 $ 189 27% 30% Americas $ 105 $ 78 35% 35% Europe 55 57 -3% 11% Asia/Pacific 79 54 47% 42% Total $ 239 $ 189 27% 30% In the third quarter of 2000 the Japanese yen strengthened against the U.S. dollar by approximately 5%, while the Euro weakened against the U.S. dollar by approximately 15% compared to the third quarter of 1999. The significant weakening of the European currencies adversely affected sales growth. This was partially offset by the stronger yen and an increase in volume of yen denominated sales. -8- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Business Segment Results Bioscience Segment: Bioscience sales, in local currency, increased 14% in the third quarter of 2000 compared to the third quarter of 1999. Positive sales growth, in local currency, was reported in all geographies with the most significant growth in the Americas. Sales growth in Europe continued to be positive, although to a lesser extent than the other regions primarily due to the timing of large systems hardware sales. Sales growth was strongest for products used in life science laboratory research and in hardware and consumables used in the biopharmaceutical markets which collectively accounts for approximately 45% of the sales of this business segment. Bioscience operating income, in local currency, increased 28% in the third quarter of 2000 over the third quarter of 1999 primarily as a result of the increased sales and manufacturing efficiencies combined with improved operating expense leverage. Microelectronics Segment: Microelectronics sales, in local currency, increased 70% in the third quarter of 2000 compared to the same period last year. Sales growth was positive in all geographies with the most significant growth in Asia. Sequential quarter sales growth was 7% from the second to the third quarter of 2000. Microelectronics operating income, in local currency, increased from $5.0 million or 9% of sales in the third quarter of 1999 to $20.5 million or 23% of sales in the third quarter of 2000. The increase is primarily due to the significant sales growth coupled with improved gross profit margins and operating expense leverage. The gross profit margins were positively impacted by both the higher sales volumes offset somewhat by new product start-up costs. Corporate Expenses: Corporate expenses, in local currency increased from $8.2 million to $14.1 million in the third quarter of 2000 as compared to the same quarter of the prior year. The increased expenses related primarily to additional spending due to higher sales volumes. Consolidated Results Gross profit margins were 53% of sales, in local currencies, in the third quarter of 2000 compared to 55% in 1999. The 2% decline in gross profit margins reflected a higher mix of lower margin Microelectronics sales. Selling, general and administrative expenses (SG&A), in local currencies, increased 9% in the third quarter of 2000 as compared to the third quarter of 1999. This increase is primarily attributed to increased headcount to support the higher sales volume. As a percentage of net sales, SG&A expenses in local currencies decreased approximately 5 percentage points. Research and development (R&D) expenses, in local currencies, increased 23% in the third quarter of 2000 as compared to the third quarter of 1999. This increase is due to additional R&D program costs and increased headcounts. As a percentage of sales, R&D expenses in local currencies remained constant at 7%. In the third quarter of 2000, the Company agreed in principle, to settle a patent lawsuit and recorded a charge of $1.5 million for past royalties. In the third quarter of 2000 as compared to the same period of the prior year operating income, in U.S. dollars, was adversely effected by the impact of the weakened Euro offset by a stronger yen. If current foreign exchange rates remain in effect for the full fourth quarter of 2000, then foreign exchange will have a more significant negative impact on operating income as compared to the third quarter of 2000 and the fourth quarter of 1999. Net interest expense decreased in the third quarter of 2000 as compared to the third quarter of 1999 primarily as a result of additional interest income and lower average borrowings offset by a slight increase in average rates. In the second quarter of 2000, the Company adjusted its expected full year tax rate from operations from 21%, as reported in the first quarter of 2000, to 22%. The increase was due to improved results in countries with higher tax rates. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Foreign Exchange A substantial portion of the Company's business is conducted outside of the United States through its foreign subsidiaries and generally in local currencies. Approximately 25% of the Company's sales are derived from Europe where the U.S. dollar continued to strengthen against the Euro during the second quarter of 2000. The Company is able to partially mitigate the impact of fluctuations in the Euro by active management of cross border currency flows and material sourcing. Additionally, the Company has significant exposure to changes in the Japanese yen that cannot be mitigated through normal financing or operating activities. Accordingly, the net equity exposure to the Japanese yen is managed through the use of debt swap agreements. Generally, when the U.S. dollar strengthens against currencies in which the Company transacts its business, sales and net income will be adversely impacted. Restructuring Charges In the third quarter of 1998, the Company initiated a restructuring program resulting in a restructuring charge of $33.6 million. In the third quarter of 2000, the Company reversed $1.5 in restructuring reserves primarily related to additional proceeds from the sale of facilities. This reversal is in addition to the $5.2 restructuring reserve reversal in the third quarter of 1999 which was related to favorable experience in employee separations and lease cancellation costs. As of September 30, 2000, 615 employees, of the planned 620 employees, had left the Company. The remaining balance as of September 30, 2000 relates primarily to employee severance payments and lease cancellation costs which will be completed by the early part of 2001. These final costs were originally anticipated to occur at the end of 2000 and were extended to the early part of 2001 pending completion of leased facility transition work. Capital Resources and Liquidity Cash generated by operations in the first nine months of 2000 was $75.4 million compared to $66.2 million in the first nine months of 1999. This increase in cash flow was primarily the result of improved operating income offset by increased accounts receivable and inventories. The increase in accounts receivable was attributable to increased sales volume. Accounts receivable days sales outstanding decreased from 85 days in the third quarter of 1999 to 81 days in the third quarter of 2000. The Company continues to aggressively manage its collection activities. Inventory levels were increased to meet anticipated levels of future sales predominately in the Microelectronics business segment. Operating cash flow generated by the Company during the first nine months of 2000 was used to invest in property, plant and equipment, pay down debt and pay dividends. The Company expects to spend approximately $45 million for property, plant and equipment during 2000. During the first nine months of 2000, the Company received $8.8 million from the sale of property, $7.5 million from the sale of securities and $25.2 million from the exercise of employee stock options. The Company is required to provide cash collateralization on one of its yen denominated debt swap agreements if (and to the extent that) the net value of the Company's position falls below the net value of the counterparty's position. While this will not impact the Company's foreign exchange exposure, it could impact short- term liquidity and compliance with certain debt covenants if there were a serious deterioration in the value of the Company's swap position. The amount of the collateral is dependent, among other things, on the exchange rate of the yen to the U.S. dollar and is restricted as to withdrawal or alternative usage. Forward Looking Statements The foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contain certain forward looking statements which are subject to substantial risks and uncertainties that could affect the Company's future operating results. These risks and uncertainties include, without limitation, fluctuation in foreign exchange rates, deterioration in the Company's swap positions and its impact on short term liquidity, uncertainties in the microelectronics and biosciences markets, difficulties in separating the microelectronics and biosciences businesses as well as the additional risks and uncertainties described in our Form 10-K for the year ended December 31, 1999. Events and circumstances could differ materially from the plans, intentions and expectations described in the forward-looking statements contained in this report because of the risks and uncertainties listed above or due to other reasons. We do not assume any obligation to update any forward-looking statements that we make. -10- Item 3. Quantitative and Qualitative Disclosures About Market Risk The mitigating actions enumerated above under "Foreign Exchange" in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K have effectively limited the impact of exchange rate fluctuations and credit risk on the Company's results of operations and financial position to a level which is not material. Part II - Other Information Item 1. Legal Proceedings On July 21, 1999 Amersham Pharmacia Biotech AB ("APB") of Sweden filed a complaint in the High Court of Justice in the United Kingdom against the Company and two of its subsidiaries alleging that the sale of the Company's ISOPAK chromatography valve infringed one or more of the claims contained in certain APB patents. On October 26, 2000 the High Court ruled that the Company's current valve does not infringe the APB patents. The Court also ruled that an earlier version of the product, discontinued in early 1998, did infringe one of APB's patents. A hearing on damages with respect to this latter product will now be scheduled. The Company does not believe, however, that any damage award will be material to its financial condition or results of operations. Item 6. Exhibits and Reports on Form 8-K a. Exhibits 27 Article 5 Financial Data Schedule - for the nine months ended September 30, 2000 b. Report on Form 8-K No reports on Form 8-K have been filed by the Company during the fiscal quarter ended September 30, 2000. 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 November14, 2000 /s/Donald B. Melson Date Donald B. Melson Corporate Controller and Chief Accounting Officer