Item 1. Business.
The Company
Millipore Corporation was incorporated under the laws of Massachusetts on May 3, 1954. Millipore is a market leader in the field of separations technology and develops, manufactures and sells products which are used primarily for the analysis, identification and purification of liquids and gases. In addition, Millipore sells products to monitor and control critical aspects of the manufacturing process for integrated circuits (semiconductors). Millipore's separations products are based on a variety of membrane and other technologies that effect separations through physical and chemical methods and are applied primarily to biological and environmental laboratory research and testing, to pharmaceutical and food and beverage research, manufacturing and quality control operations and to the purification and control of process liquids and gases for integrated circuit ("IC") manufacturing operations. Millipore's IC process control products use electro-mechanical, pressure differential and related technologies to permit IC manufacturers to monitor and control the flow and condition of process gases used in the IC fabrication process. Millipore is an integrated multinational manufacturer of these products. Millipore's role as a market leader has been recognized by independent surveys of filtration markets. Unless the context otherwise requires, the terms "Millipore" or the "Company" mean Millipore Corporation and its subsidiaries.
Information About Operating Segments
Millipore operates in two business segments: Biopharmaceutical & Research and Microelectronics. Millipore has traditionally organized its business and management structures around the markets and customers which it serves. The Biopharmaceutical & Research segment includes products and services sold to pharmaceutical companies, biotechnology companies, food and beverage companies, university and government laboratories and research institutes; the Microelectronics segment includes products and services sold to semiconductor fabrication companies as well as OEM and material suppliers to those companies. While there is some overlap in the products sold to each business segment, the economic environments in which these two segments operate are distinct. The Biopharmaceutical & Research business segment is characterized by customer needs for reliability and consistency of standardized products used in validated production processes and for assured continuity and comparability of analytical results; this segment has demonstrated relatively stable patterns of revenue growth and profitability. While technical innovation is important to the Biopharmaceutical & Research business segment, the adoption of new technologies and products often requires that a lengthy validation process be completed prior to adoption. On the other hand, the Microelectronics business segment is characterized by rapid technological change and economic cycles with dramatic shifts in revenue growth and decline with corresponding impacts on profitability. During 1999 approximately 73% of Millipore's net sales were made to customers in the Biopharmaceutical & Research segment and approximately 27% to customers in the Microelectronics segment. In addition, approximately 60% of Millipore's net sales were made to customers outside the Americas. Industry and geographic segment information is discussed in Note P to the Millipore Corporation Consolidated Financial Statements (the "Financial Statements") included in Item 8 below, which Note is hereby incorporated herein by reference.
Products, Technologies and Applications
Millipore sells approximately 7,000 products which are listed in its catalogs and are sold as standard items, systems or devices. For special applications, the Company assembles custom products, usually based upon standard modules and components. In certain instances, the Company also designs and engineers process filtration systems and process chromatography systems to meet specific needs of the customer. The Company's products also include, in some cases, proprietary software designed to operate and/or integrate certain of its other products or systems (particularly membrane ultrafiltration and chromatography systems and gas monitoring equipment).
Biopharmaceutical & Research Business Segment. The products sold to customers in the Biopharmaceutical & Research business segment include disc filters, OEM membranes, filter devices and ancillary equipment and supplies, filter-based test kits, laboratory water purification systems, cartridge filters and housings of various sizes and configurations, process liquid chromatography media and systems and process filtration systems.
The principal separation technologies utilized by products sold to Biopharmaceutical & Research segment customers are based on membrane filters and on certain chemistries and resins as well as liquid chromatography. Membranes are used to filter either the wanted or the unwanted particulate, bacterial, molecular or viral entities from fluids. Some of the Company's newer membrane materials also use affinity, ion-exchange or electrical charge mechanisms to effect the desired separation. Membranes are incorporated into both microfiltration and ultrafiltration devices, cartridges and modules of different configurations to address a variety of customer fluid separation needs. Liquid chromatography media is used in process chromatography systems to remove contaminants at the molecular level from biopharmaceutical products. The Company's laboratory water purification products combine membrane, resin and other separations technologies to provide ultrapure water for critical applications.
Customers use the Company's products in the Biopharmaceutical & Research segment to gain knowledge about a molecule, compound or microorganism by detecting, identifying and quantifying the relevant components of a fluid sample. In addition Millipore products are used for the purification of small and large volumes of critical fluids. The Company's products are also used by pharmaceutical manufacturing and research operations to isolate and purify specific components of fluid streams for analysis and to concentrate identified compounds for further processing. Biopharmaceutical & Research segment customers use the Company's laboratory water purification products to provide ultrapure water for critical laboratory analysis and for clinical testing.
Microelectronics Business Segment. The products sold to customers in the Microelectronics business segment include polymeric cartridge filters and housings of various sizes, materials and configurations, metal filters, precision liquid dispense filtration pumps, resin based gas purifiers and gas monitors as well as mass flow controllers and pressure and vacuum control products.
Membrane products sold to customers in the Microelectronics business segment are based on essentially the same membrane technologies described above but with membranes and housings made from distinct polymers as required by the nature of the liquids being purified. Gas purification and monitoring products rely on resin based chemistries which react with process gases to either remove contaminants or to monitor the purity of the process gas. Gas purification products also include metal filters which operate as both screen and depth filters to exclude contaminants from process gas streams. In addition, the Company's IC process control products use electro-mechanical, pressure differential and thermal-dynamic technologies to create pressurized or vacuum environments to precisely measure and control the flow of IC process gases.
The Company's separations products are used by Microelectronics customers in manufacturing operations to remove contaminants in a process liquid stream and to purify and precisely dispense process liquids during critical IC fabrication operations. The Company's products are also used in process gas applications to precisely monitor and control the purity of and rate at which process gases are introduced into the IC process chamber, the conditions in the chamber during processing and the rate at which the gas is evacuated from the IC process chamber.
Customers and Markets
Within each customer group served by Millipore, the Company focuses its sales efforts upon those segments where customers have specific requirements which can be satisfied by the Company's products.
Biopharmaceutical & Research Business Segment. Major customer groups served by this business segment include pharmaceutical/biotechnology and food and beverage companies and government, university
and private research and testing analytical laboratories. The Company's products are used by the pharmaceutical/biotechnology industry in sterilization, including virus reduction, and sterility testing of products such as antibiotics, vaccines, vitamins and protein solutions; concentration and fractionation of biological molecules such as vaccines and blood protein products; cell harvesting; isolation and purification of compounds from complex mixtures and the purification of water for laboratory use. The Company's membrane and chromatography products also play an important role in the development of new drugs by offering customers a continuum of products capable of being scaled-up to match customer needs at different stages during the development process from laboratory research through full scale drug production. In addition, Millipore has developed and is developing products for biopharmaceutical applications in order to meet the purification requirements of the biotechnology industry. The Company also sells its analytical products, filter cartridges and laboratory water purification systems to chemical manufacturers and processors.
The Food and Beverage Industry uses the Company's products for quality control and process applications principally to monitor for microbiological contamination; and to prevent spoilage by removal of bacteria and yeast from products such as wine, beer, bottled juices and water.
Universities, governments and private and corporate research and testing laboratories, environmental science laboratories and regulatory agencies purchase a wide range of the Company's products. Typical applications include: purification of proteins; cell culture, and cell structure studies and interactions; concentration of biological molecules; fractionation of complex molecular mixtures; and collection of microorganisms. The Company's water purification products are used extensively by these organizations to prepare high purity water for sensitive assays and the preparation of tissue culture media.
Sales to the Biopharmaceutical & Research business segment accounted for approximately 73% of Millipore's 1999 and 1998 consolidated sales, and 65% of 1997 consolidated sales.
Microelectronics Business Segment. Major customer groups served by this business segment include IC manufacturers and OEM manufacturers that sell a variety of equipment used in the manufacture of ICs to IC manufacturers. IC manufacturers use the Company's products to purify (by removing particles and unwanted contaminating molecules), deliver, control and monitor the liquids and gases used in the manufacturing processes of semiconductors and other microelectronics components. The Company's mass flow and pressure control products and precision liquid dispense filtration products are sold to OEM capital equipment suppliers to semiconductor manufacturers as well as directly to manufacturers of ICs. Sales to the Microelectronics business segment accounted for approximately 27% of Millipore's 1999 and 1998 consolidated sales as contrasted with 35% of 1997 consolidated sales. As noted above, this business segment has experienced historic volatility, and the effect of such volatility has, in the past, affected Millipore's sales growth.
While no single customer is material to the Company taken as a whole, the Microelectronics business segment does rely on a relatively narrow group of customers, some of whom purchase significant quantities of the Company's products.
Sales and Marketing
The Company sells its products to both business segments within the United States primarily to end users through its own direct sales force and, in the case of analytical products, to a limited extent through an independent distributor. The Company sells its products to both business segments in international markets through the sales forces of its subsidiaries and branches located in more than 30 major industrialized and developing countries as well as through independent distributors in other parts of the world. As of December 31, 1999, the Company's marketing, sales and service forces consisted of approximately 1,300 employees worldwide of which approximately 1,000 were employed in the Biopharmaceutical & Research business segment and approximately 300 were employed in the Microelectronics business segment.
The Company's marketing efforts focus on application development for existing products and on new and differentiated products for other existing, newly identified and proposed customer uses. The Company seeks to
educate customers as to the variety of analytical, purification and process control problems which may be addressed by its products and to adapt its products and technologies to separations and process control problems identified by its customers.
The Company believes that its technical support services are important to its marketing efforts. These services include assisting in defining the customer's needs, evaluating alternative solutions, designing a specific system to perform the desired separation; training users, and assisting customers in compliance with relevant government regulations. In addition, the Company maintains a network of service centers located in the United States and in key international markets to support its process gas measurement/control products as well as its laboratory water products.
Research and Development
In its role as a pioneer of membrane separations, Millipore has traditionally placed heavy emphasis on research and development. This emphasis has permitted Millipore to be the first company to introduce a number of major new enabling separations membranes and membrane devices (examples include: nitrocellulose microfiltration membrane in 1954, compact high purity laboratory water systems in 1972, membrane based syringe filter devices in 1973, membrane based filters for intravenous drug therapy in 1975, tangential flow filtration cassette devices in 1975, polyvinylidene fluoride membrane in 1978, continuous electro-deionization water purification systems in 1988, composite ultrafiltration membranes in 1989, melt-cast PFA membranes in 1990, composite microfiltration membranes for the removal of viruses from solution in 1991, ultra-high weight polythylene membrane in 1993, high flow high efficiency metal membrane for gas filtration in 1996 and non-dewetting PTFE membrane in 1997). Research and development activities include the extension and enhancement of existing separations technologies to respond to new applications, the development of new membranes, and the upgrading of membrane based systems to afford the user greater purification capabilities. Research and development efforts also identify new separations applications to which disposable separations devices would be responsive, and develop new configurations into which membrane and ion exchange separations media can be fabricated to efficiently respond to the applications identified. Instruments, hardware, and accessories are also developed to incorporate membranes, modules and devices into total separations systems. Research and development activities related to the Company's IC process control products focuses upon developments which will address the evolving needs of IC manufacturers and development of enabling technologies which will anticipate those needs. Introduction of new applications frequently requires considerable market development prior to the generation of revenues. Millipore performs most of its own research and development and does not provide material amounts of research services for others. Millipore's aggregate research and development expenses in 1999, 1998 and 1997 were $52,140,000, $53,578,000 and $55,899,000, respectively. For discussion of research and development write-offs relating to the Tylan acquisition, see Management's Discussion and Analysis of Financial Condition and Results of Operations--Acquisitions and Note C to the Financial Statements, which discussions are hereby incorporated herein by reference.
In addition, the Company has followed a practice of supplementing its internal research and development efforts by licensing newly developed technology from unaffiliated third parties and/or acquiring distribution rights with respect thereto, when it believes it is in its long term interests to do so.
Millipore has been granted a number of patents and licenses and has other patent applications pending both in the United States and abroad. While these patents and licenses are viewed as valuable assets, Millipore's patent position is not of material importance to its operations. Millipore also owns a number of trademarks, the most significant being "Millipore."
Competition
The Company faces intense competition in all of its markets. The Company believes that its principal competitors in the Biopharmaceutical & Research business segment include Pall Corporation, Barnstead Thermolyne Corporation, Sartorius GmbH, Qiagen NV, Amersham Pharmacia Biotech A.B. and United States
principal competitors in the Microelectronics business segment are Pall Corporation, United States Filter Corporation, Aera and MKS Instruments. Certain of the Company's competitors are larger and have greater resources than the Company. However, the Company believes that, within the markets it serves, it offers a broader line of products, making use of a wider range of separations and IC process control technologies and addressing a broader range of applications than any single competitor.
While price is an important factor, the Company competes primarily on the basis of technical expertise, product quality and responsiveness to customer needs, including service and technical support.
Environmental Matters
The Company is subject to numerous federal, state and foreign laws and regulations that impose strict requirements for the control and abatement of air, water and soil pollutants and the manufacturing, storage, handling and disposal of hazardous substances and waste. The Company is in substantial compliance with all applicable environmental requirements. Compliance with the foregoing environmental laws during 1999, 1998 and 1997 has had no material effect on the Company's capital expenditures, earnings or competitive position. However, because regulatory standards under environmental laws and regulations are becoming increasingly stringent, there can be no assurance that future developments will not cause the Company to incur material environmental liabilities or costs.
Other Information
Since April of 1988, the Company has had in place a shareholder rights plan (the "Rights Plan") pursuant to which Millipore declared a dividend to its shareholders of the right to purchase (a "Right") one additional share of Millipore Common Stock for each share of Millipore Common Stock owned, at a price of $80 for each share (after giving effect to the 1995 two for one stock split). In April of 1998, the Rights Plan was amended and restated to, among other things, extend the expiration date until April 30, 2008, to increase the purchase price on the exercise of a Right to $200, to permit the Directors to exchange certain of the Rights for shares of Company Common Stock (on a 1 for 1 basis) under certain circumstances and to make certain other updating changes. The Rights Plan, as amended and restated, is designed to protect Millipore's shareholders from attempts by others to acquire Millipore on terms or by using tactics that could deny all shareholders the opportunity to realize the full value of their investment. The Rights will be exercisable only if a person or group of affiliated or associated persons acquires beneficial ownership of 20% or more of the outstanding shares of the Company Common Stock or commences a tender or exchange offer that would result in a person or group owning 20% or more of the outstanding Common Stock. In such event, or in the event that Millipore is subsequently acquired in a merger or other business combination, each Right will entitle its holder to purchase, at the then current exercise price, shares of the common stock of the surviving company having a value equal to twice the exercise price.
Millipore's products are made from a wide variety of raw materials which are generally available in quantity from alternate sources of supply. Accordingly, as a general matter, Millipore is not substantially dependent upon any single supplier. However, see Management's Discussion and Analysis of Financial Condition and Results of Operations--Business Outlook and Uncertainties, for a discussion of the Company's need to develop alternate sources for a critical raw material used to manufacture one of the Company's membranes, which discussion is hereby incorporated herein by reference.
As of December 31, 1999, Millipore employed approximately 4,600 persons worldwide, of whom approximately 2,050 were employed in the United States and approximately 2,550 were employed overseas.
Executive Officers of Millipore
The following is a list, as of March 3, 2000, of the Executive Officers of Millipore. All of the officers of Millipore Corporation listed below were elected to serve until the first Directors Meeting following the
2000 Annual Stockholders Meeting; Divisional officers were appointed to the Corporate Executive Committee (the Company's senior policy setting management body) effective January 10, 2000.
Mr. Zadel was elected President, Chief Executive Officer and Chairman on February 20, 1996. Mr. Zadel had been, since 1986, President and Chief Executive Officer of Ciba Corning Diagnostics Corp., a company that develops, manufactures and sells medical diagnostic products. Prior to that he was Senior Vice President of Corning Glass Works' (now Corning Inc.) Americas Operations (1985) and Vice President of business development (1983). Mr. Zadel currently serves on the Boards of Directors of Kulicke and Soffa Industries, Inc. and Matritech, Inc. Mr. Zadel is Chairman of the Board of Directors of the Massachusetts High Technology Council (February 1999). He has also served as the Chairman of the Health Industry Manufacturers Association (1994-1995).
Mr. Lunger was elected Executive Vice President, Chief Operating Officer of Millipore in January 2000; prior to that Mr. Lunger was Vice President, Chief Financial Officer and Treasurer of Millipore, a position he
assumed upon joining the Company in June 1997. Prior to joining Millipore, Mr. Lunger had been, since 1995, Senior Vice President and Chief Financial Officer of Oak Industries, Inc., a developer, manufacturer and supplier of components to the telecommunications industry. From 1994 until 1995, Mr. Lunger had been acting Chief Executive Officer and Chief Administrative Officer of Nashua Corporation, a conglomerate with diverse businesses ranging from office supplies to photo finishing. During the period 1983-1994, Mr. Lunger served in various business operations and financial management positions with Raychem Corporation, an international material science company serving the telecommunication, automotive, energy and defense markets, including Vice President and Group General Manager (1992-1994); Vice President and Assistant Sector General Manager (1991-1992) and Vice President, Finance (1988-1991).
Ms. Allen was elected Vice President, Treasurer and Chief Financial Officer of Millipore in January 2000. Since joining Millipore in 1983 she held a wide variety of positions in the Company's financial organization, most recently as Corporate Controller and Chief Accounting Officer of Millipore. Prior to joining Millipore, Ms. Allen practiced public accounting for six years with Arthur Young and Company.
Mr. Carroll joined Millipore in 1986 as Vice President/Finance for the Membrane Products Division following a ten-year career in the general practice audit division of Coopers and Lybrand. In 1988, Mr. Carroll assumed the position of Vice President of Information Systems (worldwide) and in December of 1990, he became the Vice President of Finance for the Company's Waters Chromatography Division. Mr. Carroll was elected Corporate Vice President, Chief Financial Officer and Treasurer in February, 1992. In 1997 Mr. Carroll was elected President of Millipore Asia Ltd. in which position he served until 1999 when he was appointed to his current position as General Manager, Gas Division of the Microelectronics Divisions. Mr. Carroll remains a Vice President of Millipore Corporation.
Mr. Lary was elected a Vice President of Millipore Corporation in November 1994, and is responsible for the worldwide operations of the Company. From May of 1993 until his election as a Corporate Vice President, Mr. Lary served as Senior Vice President and General Manager of the Americas Operation. For the ten years prior to that time, he served as Senior Vice President of the Membrane Operations Division of Millipore.
Ms. Nikka was elected Vice President for Human Resources of Millipore Corporation in November 1996. Ms. Nikka was Vice President at Fidelity Investments from 1991 to November 1996. Prior to joining Fidelity in 1991, Ms. Nikka was Vice President of Human Resources at Symbolics, Inc.
Mr. Rudin was elected Vice President and General Counsel of Millipore Corporation in December 1996. Prior to joining Millipore, Mr. Rudin served Ciba Corning Diagnostics Corporation as Senior Vice President and General Counsel (since 1993) and as Vice President and General Counsel (1988-1993). Prior to that, Mr. Rudin was Assistant Division Counsel for the Pharmaceutical Division of Ciba-Geigy Corporation. Mr. Rudin was appointed Clerk of Millipore Corporation in 1999.
Mr. Takahashi joined Millipore in 1979 as President and Chief Executive Officer of its Japanese subsidiary, Nihon Millipore Ltd. Mr. Takahashi was elected as a Vice President of Millipore Corporation on February 8, 1996.
Mr. Baly joined Millipore's French subsidiary in 1972 as an Application Specialist. From 1984 until 1991 Mr. Baly served as Vice President and General Manager for Europe; in 1991 he was appointed President of Millipore Asia Ltd. Mr. Baly has served in his current position as the Vice President of the Analytical Divisions of Millipore since July of 1994.
Mr. Goel joined Millipore in 1977 as a product development engineer for high purity water products. From 1988 through 1998 Mr. Goel served as Vice President Membrane Research & Development, Analytical Laboratory. In January 1999 Mr. Goel was appointed to his current position of Vice President, Corporate Technology Operations.
Mr. Lambo joined Millipore in 1977 as Product Manager for its Biochemical Product Line. Since June of 1993 Mr. Lambo has served as the Vice President & General Manager of the BioProcess Division.
Mr. Pandraud joined Millipore's French subsidiary in 1978 as an Application Specialist for the contamination laboratory market. From 1994 until 1999 Mr. Pandraud served as the Vice President & General Manager of the Laboratory Water Division. In July 1999 he was appointed to his current position as Vice President & General Manager, Microelectronics Divisions.
Ms. Vogt joined Millipore in 1981 as a Financial Analyst. In 1990 Ms. Vogt was appointed Vice President of Marketing for the Analytical Division and in 1995 she was made Vice President of Marketing and Research & Development for the Analytical Division. From 1997 until 1999 she served as General Manager of the Analytical Products Division of the Millipore Analytical Divisions. In July 1999 Ms. Vogt was appointed to her current position of Vice President & General Manager, Laboratory Water Division.
Item 2.
Item 2. Properties.
Millipore operates 15 manufacturing sites located in the United States, France, Japan, Ireland, United Kingdom, Brazil and China. The following table identifies the major production sites which are owned by Millipore and describes the purpose, floor space and land area of each.
- ------------------------------------------------------------------------------- B&R = Biopharmaceutical & Research business segment Micro. = Microelectronics Business Segment
Millipore owns a total of approximately 1.25 million square feet of facilities worldwide which are used for office, research and development, manufacturing (including the manufacturing facilities listed above) and warehouse purposes. All of these facilities are owned in fee and are not subject to any material encumbrances.
In addition to its owned properties, Millipore currently leases various manufacturing, sales, warehouse, and administrative facilities throughout the world. Such leases expire at different times through 2008. The aggregate area of rented space is approximately 1,000,000 square feet and cost was approximately $12,325,000 in 1999. The following leased facilities are the most significant:
1. A lease of a 198,000 square foot building located on 13 acres in Allen, Texas (Dallas-Fort Worth vicinity). This lease expires in 2008 and provides for two 5 year extension options. This facility is used to support the Microelectronics business segment.
2. A lease of premises abutting the Company's Bedford headquarters; this lease makes 75,000 square feet of building available to Millipore, provides for a term expiring in 2005 and contains rights of first refusal and options with respect to the purchase of the premises by Millipore and the sale of the premises to Millipore. This building supports both business segments.
3. A lease of a 134,000 square foot building which is adjacent to the leased property referred to in the preceding paragraph for a term ending in 2006, with renewal options for an aggregate of 20 years, as
well as a purchase option. This building is used primarily to serve the Biopharmaceutical & Research business segment
4. A lease of a building of 130,000 square feet located in Burlington, Massachusetts, approximately 5 miles from Millipore's Bedford headquarters. This lease was amended during 1997 to, among other things, extend the initial term until February 2002 and to provide for a single 3-year extension option. This building supports both business segments.
With the exception of the Allen lease described above, in the opinion of Millipore, no single lease is material to the Company's operations.
The facilities located in Allen, Texas, Cidra, Puerto Rico, Danvers, Massachusetts and Yonezawa, Japan currently operate at approximately 50%, 60%, 70% and 70%, of capacity, respectively. All of the other above listed owned and leased major facilities are fully utilized.
Millipore is of the opinion that all the facilities owned or leased by it are well maintained, appropriately insured, in good operating condition and suitable for their present uses.
Item 3.
Item 3. Legal Proceedings.
The Company currently is not a party to any material legal proceeding and the Company knows of no material legal proceeding contemplated by any governmental authority. 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. APB is seeking an injunction against the alleged infringement as well as damages. The Company believes that its ISOPAK product does not infringe the patents in question. The Company intends to vigorously defend this action. In any event, the outcome of this suit will not have a material adverse impact on the Company's financial condition or results of operations. The Company first disclosed this matter in a press release issued during the third quarter of 1999.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
This item is not applicable.
PART II
Item 5.
Item 5. Market for Millipore's Common Stock, and Related Stockholder Matters.
Millipore's Common Stock, $1.00 par value, is listed on the New York Stock Exchange and is traded under the symbol "MIL". The following table sets forth, for the indicated fiscal periods, the high and low sales prices of Millipore's Common Stock (as reported on the New York Stock Exchange Composite Tape) and the dividends declared (on a per share basis). As of March 3, 2000 there were approximately 2,962 shareholders of record.
Item 6.
Item 6. Selected Financial Data.
The following selected consolidated financial data for Millipore are derived from the Company's Financial Statements and related notes thereto. The following selected consolidated financial data should be read in connection with and is qualified in its entirety by Millipore's Financial Statements and related notes thereto and other financial information included elsewhere in this Form 10-K report.
Millipore Corporation--Five-year Summary of Operations
- -------- (1) See Note K on page below, Note B on page below, Note O on page below of the Notes to the Financial Statements. (2) Reflects the acquisitions of Tylan General Inc. in January 1997 and Amicon Separation Science Business in December 1996. (3) Represents a loss on the disposal of discontinued operations related to the sale of the Company's Waters Chromatography Division and certain assets of its non-membrane bioscience business.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in connection with Millipore's Consolidated Financial Statements and related notes thereto and other financial information included elsewhere in this Form 10-K report.
Results of Operations
The Company reported a profit per share of $1.42 and $0.22 for 1999 and 1998, respectively, compared to a loss of $0.89 per share for 1997. Excluding unusual items, the Company would have reported diluted earnings per share of $1.35, $0.60 and $1.65 for 1999, 1998 and 1997, respectively.
The Company initiated a restructuring program in 1998 to streamline worldwide operations and reduce the overall cost structure. This program is discussed in its entirety in Restructuring Items. Reference is also made to the discussion of Gross Margins, Gain on Sale of Equity Securities, Acquisitions and Legal Proceedings below for additional information related to the other unusual items on the following schedule.
Summary of Unusual Items:
Local Currency Results
The following discussion of Net Sales, Gross Profit Margins and Operating Expenses refers to revenue, margins and expenses in "local currencies". Local currency results represent the foreign currency balances translated, in all periods presented, at Millipore's 1999 budgeted exchange rates, 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 provide a clearer presentation of the underlying business trends. The U.S. dollar results represent the foreign currency balances translated at actual exchange rates.
Net Sales
Net sales, measured in U.S. dollars, increased 10 percent in 1999, compared to a decrease of 8 percent in 1998. The net sales increase in 1999 as compared to 1998 was primarily due to the beginning of a recovery in the semiconductor industry coupled with continued growth in the biopharmaceutical business and positive net currency effects. Growth in the Americas and Asia/Pacific regions was heavily influenced by the improvements in the semiconductor industry. The net sales decrease in 1998 compared to 1997 was primarily due to the downturn in the semiconductor industry, economic difficulties in Asian markets and negative currency effects.
During 1999 as compared to 1998 the Japanese yen strengthened against the U.S. dollar by approximately 13 percent and the Euro weakened against the U.S. dollar by approximately 5 percent. The positive effect from the stronger yen more than offset the decline in the Euro resulting in an increase in reported sales growth by 2 percentage points over the preceding year. In 1998 the reported sales growth was negatively impacted by 3 percent as a result of the Japanese yen which weakened against the U.S. dollar by approximately 8 percent, as did the European currencies, although to a lesser extent. As a general matter, a stronger U.S. dollar will adversely affect the sales growth of both business segments. However, since the Microelectronics segment has a higher percentage of sales in Asia, strengthening of the dollar against Asian currencies will have a somewhat larger impact on that segment. Similarly, the Biopharmaceutical & Research segment has a higher percentage of sales in Europe than the Microelectronics segment. Therefore, strengthening of the dollar against the European currencies will have a larger impact on the Biopharmaceutical & Research segment sales growth. Non-currency related price changes have not significantly affected the comparability of sales during the past three years.
Sales growth by business segment and geography, measured in local currencies and U.S. dollars, is summarized in the table below.
Biopharmaceutical & Research sales, measured in local currencies, increased 8 percent in 1999 compared to 1998. The growth was broad-based across product lines and geographies. Sales growth was strongest for the biotechnology and pharmaceutical markets utilizing laboratory research applications, water filtration devices and consumable filtration products and systems used in drug production. Revenue growth from the sale of process systems was positive, although to a lesser extent than other product lines. However, the order pattern for process systems is variable and large orders are received on a periodic basis which may positively or negatively impact growth comparisons. The growth for this segment was positively impacted in 1999 by the increase in new drugs approved and in production.
Biopharmaceutical & Research sales, measured in local currencies, increased 7 percent in 1998 compared to 1997. The growth of the Biopharmaceutical & Research segment in 1998 reflected the combination of increased demand for consumable products and process equipment used in the production of sterile drugs and analytical and water filtration devices used in research laboratories. The growth in the Americas and Europe for this segment was attributed to an increase in the number of new drugs approved and in production. This segment was adversely affected in Asia by a decrease in demand as a result of region-wide recessionary pressures.
Microelectronics segment sales growth measured in local currency increased 9 percent in 1999 compared to 1998. During 1999, the Company's sales growth has been positively impacted by improvements in the semiconductor industry and strengthening of the Asian economies. Recent industry results and published reports indicate a reduction in excess capacity in the semiconductor industry and increase in overall semiconductor demand which generally signals an upturn in this market. Sales growth for this segment was positive in the Asia/Pacific region and, to a lesser extent, the Americas region offset by a decline in sales in Europe.
Microelectronics segment sales growth, measured in local currency, decreased 28 percent in 1998 as compared to 1997. The decrease in 1998 sales was directly attributable to the continuation of the semiconductor industry slump, which began in the middle of 1996. The reduction in equipment sales from the Microelectronics segment was the result of a decrease in new plant construction and upgrades. Sales of consumable purification devices also declined although to a lesser extent, consistent with lower worldwide semiconductor plant capacity utilization.
Gross Profit Margins
Gross profit margins in local currencies were 53.9 percent in 1999, 48.1 percent in 1998, and 53.3 percent in 1997. Excluding unusual items, gross profit margins in 1998 were 50.2 percent and 54.0 percent in 1997. The unusual items recorded in 1998 were a $9.2 million charge for the write-off of inventory and manufacturing equipment associated with product line rationalization activities and a provision of $6.0 million for excess and obsolete inventory. The unusual item recorded in 1997 was the effect of an inventory write-up to net realizable value of $5.0 million related to acquisition accounting for Tylan General Inc. ("Tylan"). Gross profit margin percentages were higher in 1999 than those in 1998 as a result of Company-wide increased volume as well as savings realized from the restructuring initiatives which began in the third quarter of 1998. Gross profit margin percentages were lower in 1998 as compared to 1997, excluding the unusual items recorded in both years, reflecting the impact of significantly reduced volumes in the Company's manufacturing plants serving the Microelectronics segment 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 Allen, Texas facility.
Operating Expenses
Selling, general and administrative ("S,G&A") expenses in local currencies increased 7 percent in 1999 and decreased 1 percent in 1998. The increase in 1999 compared to 1998 was primarily attributable to $14.7 million of incremental variable employee compensation earned in 1999 over amounts earned in the preceding year. The decrease in 1998 compared to 1997 was due to cost containment programs initiated as part of the restructuring activities and reductions in employee compensation programs due to the financial performance of the Company in that year. The Company continues to invest in sales, service and marketing resources focused on maintaining or improving customer services, supporting the launch of new products and development of future sales initiatives aimed at improving the Company's competitive positions. As a percentage of sales S,G&A expenses decreased slightly in 1999 as compared to 1998 and increased 1 percent in 1998 as compared to 1997.
Research and development expenses in local currencies decreased 3 percent in 1999 and 4 percent in 1998. The decreases in 1999 and 1998 were primarily due to the elimination of research and development expenses for non-strategic product lines in the Microelectronics segment and the Microelectronics consolidation into the Allen, Texas facility thus eliminating duplicate operations.
Litigation settlements totaling $11.8 million were recorded in the first quarter of 1998 and are described under "Legal Proceedings" below.
Restructuring Items
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 restructuring program was initiated to bring operating costs in line with lower revenues resulting from the financial difficulties in Asian economies, the strong U.S. dollar and the continuation of the semiconductor industry slump. The combination of the restructuring programs and the 1998 Microelectronics plant consolidation resulted in estimated savings of approximately $40.0 million in 1999. The savings resulted from reduced wages, facility related costs, depreciation and amortization and were primarily reflected as reductions in cost of sales.
Key initiatives of the restructuring program included:
1. Discontinue non-strategic product lines and rationalize product offerings to improve product line focus. The non-strategic product lines consisted of high pressure liquid chromatography equipment, semiconductor fab monitoring and control software and various filtration devices. The rationalization of product offerings was a result of management's review which identified specific products with limited profitability or products which were inconsistent with current strategic marketing plans, such as non-standard products. These actions to improve product line focus were completed by September 30, 1998.
2. Consolidate certain manufacturing operations to eliminate duplicate manufacturing processes. Identified manufacturing operations in Ireland and the U.S. are in the process of being consolidated into existing facilities within the Company, which will result in similar production activities occurring at the same location. The consolidation of manufacturing operations will be completed in 2000.
3. Realign European country organizational structure to focus on operating business units and establish a regional transaction service center, resulting in the consolidation of financial and administrative activities into a single location. The Company completed the transition to the service center during 1999.
4. Reduce administrative and management infrastructure costs in Asia. These cost reductions resulted in a lower overhead structure for administrative and management infrastructure in Asia and were achieved through reduced facility costs and administrative positions as offices in the region were consolidated during 1998.
5. Renegotiate marketing, research and development and supply agreements. These agreements were amended to eliminate the cost of maintaining certain exclusivity rights and to reduce purchasing commitments for non-strategic products. These actions were completed during 1999.
6. Streamline the supply chain management function through the centralization of worldwide procurement functions and the consolidation of vendors to significantly reduce the aggregate number of vendors, resulting in cost savings and shorter cycle time within the procurement function as well as materials cost reductions. These actions were completed during 1999.
In the third quarter of 1998, the Company recorded an expense associated with these activities of $42.8 million ($29.1 million after tax) including a restructuring charge of $33.6 million and a $6.2 million charge for inventory and $3.0 million of fixed asset write-offs against cost of sales. The $33.6 million restructuring charge included $18.3 million of employee severance costs, $9.5 million write-off of real and intangible assets associated with discontinued product lines and with the termination of certain rights under two technology development collaboration agreements, $3.8 million of lease cancellation costs and $2.0 million of contract termination costs.
During 1999, approximately $5.7 million of restructuring costs, consisting primarily of severance, were paid. The Company reevaluated the accrual for the restructuring program and in the third quarter of 1999 reversed $5.2 million of the remaining balance. The reversal reflects a lower estimate for employee severance and lease cancellation costs. Although the planned number of employee positions had been eliminated, the reduction in severance cost is attributed to higher levels of attrition than originally anticipated and to impacted employees filling open positions as demand increased due to improved sales volume. At December 31, 1999, approximately $7.6 million remains accrued and will be substantially paid in 2000.
The restructuring initiatives combined with the 1998 consolidation of the Company's Microelectronics plants resulted in the elimination of 620 positions worldwide. Notification to employees was completed in the third quarter of 1998, however a small number of these employees will continue in their existing positions through 2000 with their related salary costs charged to operations as incurred. Under the terms of the severance agreements, the Company expects to pay severance and associated benefits through 2000.
During the third quarter of 1998, the Company also recorded in Cost of Sales an incremental provision for excess and obsolete inventory of $6.0 million in response to adverse changes in demand attributable to declining business conditions in Asia and the slowdown in the semiconductor industry.
Gain on Sale of Equity Securities
The gain on sale of equity securities in 1998 primarily reflects the sale of the Company's equity holdings in PerSeptive Biosystems. As of December 31, 1997, the Company held 2.2 million shares of PerSeptive Biosystems common stock and 1,000 shares of PerSeptive Biosystems preferred stock. On January 22, 1998, PerSeptive merged with The Perkin-Elmer Corporation. Pursuant to the merger, all of the Company's holdings of common and preferred shares in PerSeptive were converted into an aggregate of 587,000 shares of Perkin-Elmer common stock. In the first quarter of 1998, the Company sold all of its shares of Perkin-Elmer stock for approximately $32.5 million in cash. The Company also sold all of its common shares of Glyko Biomedical Ltd. in the first quarter of 1998 and recognized a gain of $3.1 million.
Gain on sale of equity securities in 1997 reflected the sale of a portion of the Company's holdings in PerSeptive Biosystems common shares.
Net Interest Expense
Net interest expense in 1999 was $0.7 million more than 1998. This increase is attributed to higher average interest rates resulting from the 1998 renegotiation of the Company's revolving Credit Agreement and higher effective interest due to the impact of foreign exchange under the yen debt swap agreements which was somewhat offset by lower average borrowings. Net interest expense in 1998 was $1.2 million less than 1997, primarily as a result of the yen debt swap agreement entered into during December 1997.
Provision for Income Taxes
The effective income tax rate in 1999, 1998 and 1997 was 21.0 percent, excluding the effect of the restructuring items recorded in 1999 and 1998 and the non-tax deductible write-off of purchased research and development associated with the Tylan acquisition in 1997.
Earnings Per Share
Earnings per share in 1999 were impacted by the reversal of the restructuring charges. Earnings per share in 1998 were impacted by restructuring charges and several unusual items and 1997 earnings per share included write-offs of purchased research and development associated with the Company's acquisition of Tylan. The impact of these items is reflected in the Summary of Unusual Items on page 11 above.
Additionally, in 1999 as compared to 1998, earnings per share were positively impacted by $0.02 per share as a result of the net currency impact of the stronger Japanese yen offset by the weaker European currencies. Earnings per share were adversely impacted in 1998 by the comparatively stronger U.S. dollar, reducing earnings by $0.33 per share as compared to 1997.
Acquisitions
On January 22, 1997, the Company completed its cash tender offer for all of the outstanding common shares of Tylan General, Inc. ("Tylan") for $16.00 per share. Tylan became a wholly owned subsidiary of the Company on January 27, 1997. The aggregate purchase price was $133.0 million, plus the assumption of Tylan's outstanding debt, net of cash, totaling $23.6 million. This acquisition was accounted for as a purchase and resulted in a write-off for in-process research and development ("IPR&D") of $114.1 million in the first quarter of 1997.
Included in the IPR&D write-off were two major IPR&D projects acquired as a part of Tylan. The first of these was a project to develop intracavity laser spectroscopy technologies for application in semiconductor and related industries. This project had an estimated fair value of $53.5 million, was expected to require the investment of an additional $3.2 million and twenty- two man years to complete (generally, the Company regards 2,000 hours as comprising one "man year"). If proven to be technologically feasible, it was expected that this project would yield a break-through enabling technology and would become a major revenue source for the Company. The products expected to result from this project were to be used in monitoring moisture and other contaminant levels within vacuum deposition chambers for semiconductor manufacturing. The valuable element of this project was that the expected future products would be differentiated from Tylan's current products, would offer enhanced sensitivity and the ability to monitor corrosive gas streams and would also have applications for different target gases and sample environments. While Tylan retained management direction over this project, development was performed by a third party pursuant to a development and license agreement.
Under this development and license agreement Tylan directed the research with the objective of developing intracavity laser spectroscopy technologies for application in semiconductor, flat panel, and fiber optic manufacturing industries. According to this agreement, Tylan was to have the rights and responsibilities to utilize the technology, were it to be successfully developed, and to manufacture products for sale to the above industries. This agreement provided for aggregate development fees of $8.0 million, payable $0.3 million at signing and the balance in equal quarterly installments thereafter over the five year term of the agreement. The agreement was terminable at will by Tylan but required the payment of a termination fee equal to six quarters of development fees ($2.4 million). Development fees were charged against research and development expense.
This project was written off because, at the time of the Tylan acquisition, it was very early in the development process and had not achieved technological feasibility. There was also significant uncertainty as to the precise configuration and market requirements of the expected products based on the intracavity laser spectroscopy technology. In addition, there was considerable uncertainty as to how long it would take to develop a commercializable product from this technology. Further, technological feasibility for potential alternative future uses of this technology had not been achieved.
As a result of the prolonged downturn in the microelectronics industry, the Company reprioritized research and development programs and further development of this project was suspended in late 1997. This resulted in a decision to terminate the third party development and license agreement in December 1997 and the termination fee was charged to the acquisition reserve. The Company retains certain post-termination residual rights to this technology and is currently re-evaluating the future of this project.
The second significant IPR&D project acquired with Tylan which has been written off was the development of a new more versatile, sensitive and easily manufactured transducer based on thin film technology. This project had an estimated fair value of $15.0 million, was expected to require the investment of an additional $1.2 million and ten man years to complete and was anticipated to generate significant revenues over the estimated life of the resulting products. If proven technologically feasible, the valuable element of this project was that it was expected to generate a transducer which was superior to current transducers in that it could operate in both high and low pressure environments with enhanced sensitivity and would be easier and less expensive to manufacture.
This project was written off because, as of the date of the Tylan acquisition, it was unknown whether or not the thin film transducer technology could be manufactured successfully on a large scale. Significant issues relating to manufacturability and whether product physical dimensions and other product criteria could be achieved remained to be resolved. In addition, there was uncertainty concerning customer acceptance of this product. Further, the technology underlying this project had no alternative future uses not included in its estimated fair value within the markets served by the Company.
This project successfully achieved technological feasibility and yielded one commercializable product which was launched during 1999. However, the objective of ease and cost effectiveness to manufacture continues to be a challenge. Accordingly, the current revenue projection for the resulting products is approximately one-third of
the original estimate. The estimated cost to complete this project is currently expected to be less than one-half of the original estimate.
In addition, to the foregoing IPR&D projects, the Tylan acquisition included eight other IPR&D projects with an aggregate value of $45.6 million, not considered to be individually significant and which were expected to cost an aggregate of $2.5 million and twenty-nine man years to complete. These projects were written off because technological feasibility had not been demonstrated as of the date of the acquisition of Tylan. As of December 31, 1999, three of these eight projects have been completed, two have been cancelled, one is ongoing, one has had a major change in its scope and has been integrated into a post acquisition project and one has been suspended. As of December 31, 1999, an aggregate of $5.4 million had been invested on these individually insignificant Tylan IPR&D projects and it was estimated that an additional $0.2 million would be required to achieve technological feasibility for the one ongoing project. The reasons for the aggregate increase in investment in these insignificant IPR&D projects included the change in the direction of three of these IPR&D projects to adapt to the evolving needs of the target customer base, the unanticipated technical complexity in adapting promising miniaturization technologies from other industries to Tylan product applications and the expansion of the scope of certain of these projects since the date of the Tylan acquisition.
On May 18, 1999, the Company acquired all outstanding shares of Bioprocessing Corporation Limited ("Bioprocessing") in exchange for 660,000 shares of Millipore common stock. The transaction was accounted for as a pooling-of-interests. The consolidated financial statements for prior periods were not restated because the addition of Bioprocessing did not have a material impact on the Company's results of operations. Bioprocessing develops, manufactures and sells a wide range of proprietary products and services for the chromatographic purification of proteins.
Market Risk
The Company is exposed to market risks, which include changes in interest rates and changes in foreign currency exchange rates as measured both against the U.S. dollar and each other. The Company manages these market risks through its normal financing and operating activities and, when appropriate, through the use of derivative financial instruments. The Company does not invest in derivative financial instruments for speculative purposes.
Foreign Exchange
The Company derives approximately 60 percent of its revenues from customers outside of the Americas. This business is transacted through the Company's network of international subsidiaries generally in the local currency. This exposes the Company to risks associated with changes in foreign currency that can impact revenues, net income and cash flow. Approximately 30% of the Company's sales are derived from Europe where the U.S. dollar strengthened against the Euro during 1999. Continued strengthening of the U.S. dollar against the Euro may negatively impact the results of operations of the Company. 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. The Company has significant exposure against the Japanese yen which strengthened against the U.S. dollar in 1999. Generally, a stronger yen has a positive impact on results of operations. The Company is exposed to changes in the Japanese yen that can not be mitigated through normal financing or operating activities. Accordingly, the net equity exposure risk is managed through the use of debt swap agreements.
Historically, the Company entered into foreign currency option contracts to sell yen on a continuing basis in amounts and timing consistent with the underlying currency transactions. This program was discontinued in 1999. The gains on these transactions, if any, partially offset the realized foreign exchange losses on the underlying exposure. In 1998 and 1997, gains, net of premium costs, of $2.2 million and $4.4 million,
respectively were realized from these contracts and were recorded in cost of sales. At December 31, 1999, the Company had open option contracts to sell yen aggregating $27.1 million. All open options expire within 12 months. Premiums to purchase foreign currency option contracts are amortized over the life of the contract.
The Company's net equity exposure to the Japanese yen has been 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 percent was swapped for an equivalent value of yen at a weighted average exchange rate of 114.6 yen to the dollar and a weighted average fixed interest rate of 3.6 percent. The swap agreements mature in 2003 and 2004. See Capital Resources and Liquidity below for a discussion of cash collateralization requirements under these agreements.
Although the Company manages its foreign currency exchange risk through the above activities, when the U.S. dollar strengthens against the basket of currencies in which the Company transacts its business, generally sales and net income will be adversely impacted.
Credit Risk
The Company is exposed to concentrations of credit risk in cash and cash equivalents, trade receivables and derivative financial instruments.
Cash and cash equivalents are placed with major financial institutions with high quality credit ratings. The amount placed with any one institution is limited by policy.
Trade receivables credit risk exposure is limited due to the large number of customers and their dispersion across different industries and geographies.
The Company is exposed to credit related risks associated with the potential nonperformance by counterparties to the debt swap agreements. The counterparties to these contracts are major financial institutions. The Company continually monitors its positions and the credit ratings of its counterparties and limits the amount of contracts it enters into with any one party.
Capital Resources and Liquidity
Cash flow provided from operations was $105.1 million in 1999, $51.3 million in 1998 and $51.8 million in 1997. Reported cash flow from operations was reduced by $9.9 million in 1999, $28.1 million in 1998 and $23.3 million in 1997 for costs associated with the 1998 restructuring program and the integration of acquisitions made during 1996 and 1997. Excluding the restructuring and acquisition related expenditures, cash flow from operations was $115.0 million in 1999, $79.4 million in 1998 and $75.1 million in 1997.
The increase in cash flow from operations in 1999 over 1998, excluding the restructuring and acquisition expenditures, is primarily a result of improved income from operations, increases in accounts payable due to higher revenues in the fourth quarter of 1999, accrued expenses primarily resulting from variable compensation programs and continued asset management initiatives launched in 1998. Partially offsetting this is an increase in account receivables resulting from significantly higher sales volume in the second half of 1999 combined with the increased revenues in geographies with traditionally longer payment cycles. This has resulted in days sales outstanding in accounts receivable increasing from 77 days in 1998 to 82 days in 1999. The Company continues to aggressively manage its collection activities and does not anticipate increased collections risk.
The improvement in 1998 cash flow from operations over 1997, excluding the restructuring and acquisition related expenditures, is the result of a decrease in working capital offset by a significant decline in operating income before restructuring charges and unusual items. The favorable working capital comparisons were a combination of a decrease in accounts receivable balances, lower inventory levels and a reduction in other current
assets. The improvement in receivables reflects the impact of the lower sales volume and improved collection experience. The improvement in inventory utilization was attributable to asset management initiatives launched in 1998 and reserve actions taken as part of the 1998 restructuring program. The reduction in other current assets reflects the sale of equity securities in 1998. The decline in 1998 operating income resulted from the downturn in the semiconductor industry, the financial difficulties in Asia and the strength of the U.S. dollar.
During 2000 the Company expects to spend approximately $9.0 million in cash for costs accrued in connection with the restructuring program and for costs to complete the integration of acquisitions acquired in 1996 and 1997. This will be funded by cash flow from operating activities.
Cash generated by the Company during 1999 was used to reduce short-term debt, to invest in property, plant and equipment and to pay dividends. Property, plant and equipment expenditures for 1999 were less than 1998 expenditures by $28.5 million primarily due expenditures in 1998 of $10.0 million for the expansion of the Biopharmaceutical membrane manufacturing facility in Cork, Ireland and $24.4 million for the construction of the new Microelectronics manufacturing facility in Allen, Texas. This decrease was offset in part by $4.0 million for expenditures made in 1999 to complete the membrane manufacturing facility. The Company expects capital expenditures for 2000 to be in the range of $50.0 to $55.0 million. Depreciation expense in 2000 is expected to be slightly higher than in 1999 as a result of the increased capital expenditures in 2000. The Company has no significant commitments for capital expenditures at December 31, 1999. The Company also received $9.5 million in cash for the sale of securities in Waters Corporation.
Cash generated by the Company during 1998 was used to invest in property, plant and equipment, and to pay dividends. Property, plant and equipment expenditures for 1998 exceeded 1997 expenditures by $18.7 million primarily due to $10.0 million spent for the expansion of the Biopharmaceutical membrane manufacturing facility in Cork, Ireland and $24.4 million spent for the construction of the new Microelectronics manufacturing facility in Allen, Texas. The total cost of the Allen facility was approximately $28.0 million.
In 1997, cash generated from operating activities, along with increased borrowings, was used for the acquisition of Tylan, the purchase of certain other assets and technology and capital expenditures. During 1997 the Company continued to invest in capacity expansions and the upgrade of manufacturing facilities and in information technology systems and equipment.
The Company maintains an unsecured Revolving Credit Agreement, dated January 22, 1997, with a consortium of commercial banks (the "Credit Agreement") which currently makes $250 million available to the Company. During 1999 the Company reduced its borrowings under the Credit Agreement by $55.0 million so that, at December 31, 1999, the Company had additional borrowing capacity thereunder of $135 million. The Credit Agreement was renegotiated during 1998 to waive defaults under certain financial covenants relating to operating cash flow and interest coverage and to permit less restrictive operating cash flow and interest coverage covenants for 1999 and a portion of 2000. The Company also agreed to an additional minimum earnings covenant as well as to increases in both the interest rate and the facility fees. As renegotiated, interest is payable under the Credit Agreement at a floating U.S. dollar deposit rate, defined as LIBOR, plus a margin in the range of 0.23 to 1.125 percent.
The Company also has an additional $10.0 million of other short-term borrowing capacity available of which $0.7 million was outstanding at December 31, 1999.
In November 1998 Moody's Investor Services and Standard & Poors Corporation graded the Company's debt at a rating of Ba2 and BB+, respectively. Both ratings are characterized as below "investment grade". The Company expects that these ratings may make it more difficult for the Company to access money markets should it become necessary to do so.
In addition, the foregoing debt ratings coupled with the strengthening of the Japanese yen triggered a requirement to provide cash collateralization under one of the Company's yen denominated debt swap
agreements in the event that the net value of its position was below the net value of the counterparty's position. In the event that the Company's debt rating improves, these agreements provide for less stringent collateralization requirements. While this collateralization requirement will not impact the Company's foreign exchange exposure, it could impact short-term liquidity if there were a serious deterioration in the value of the Company's swap position. The amount of the cash collateral is dependent, among other things, on the exchange rate of the yen to the U.S. dollar; generally, as the yen strengthens, the amount of cash collateral required from the Company increases. At December 31, 1999, this cash collateralization amount was $18.6 million.
The Company believes that its balances of cash and cash equivalents, funds available under the Credit Agreement and cash flows expected to be generated by future operating activities will be sufficient to meet its cash requirements over the next twelve to twenty-four months.
Dividends
The quarterly dividend was $0.11 per share throughout 1999. The Company paid dividends of $19.6 million in 1999.
Euro
On January 1, 1999, several member countries of the European Union established fixed conversion rates between their existing sovereign "legacy" currencies, and adopted the Euro as their new common legal currency. As of that date, the Euro began trading 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. In the first quarter of 1999, the Company began invoicing certain customers and intercompany transactions in the Euro.
Year 2000
The Company has been aware of the "Year 2000" issue that had the potential to affect products and systems that were not designed to properly handle the transition between the twentieth and twenty-first centuries. The Company recognized the need to ensure that its business operations would not be adversely impacted by the Year 2000, and it authorized an internal team to assess the Company's Year 2000 readiness, to determine the steps necessary to achieve readiness, and to facilitate the necessary readiness preparations.
Through December 31, 1999, the Company incurred approximately $1.5 million in its Year 2000 assessment and remediation program, and it does not expect to incur any further costs in this program.
Prior to the end of 1999, the Company completed its readiness assessment and its implementation of all steps that it determined necessary to make the Company ready for the Year 2000, including its contingency plans for handling anticipated readiness risks. The Company's transition from 1999 to 2000 occurred without any business disruption. With the transition into the Year 2000 complete, the Year 2000 issue has not had, and the Company believes it will not have, a material impact on the Company's business, financial conditions or results of operations.
Legal Proceedings
The $11.8 million settlement of litigation charge taken in 1998 related to 3 matters:
1. A proceeding arising out of an administrative order issued by the Environmental Quality Board ("EQB") of Puerto Rico alleging that the Company's wholly owned subsidiary failed to properly manage, transport and dispose of nitrocellulose membrane scrap as a hazardous waste; and proposed penalties in the amount of $96.5 million. The Company settled this proceeding in 1998 and recorded a charge of $5.0 million.
2. A private lawsuit brought by an intervening party in the EQB administrative case described above; the Company recorded a charge of $3.1 million in the 1998 reflecting its costs to settle this suit.
3. A patent lawsuit with Mott Metallurgical Corporation in which each party claimed infringement of one of its patents by the other. The Company recorded a charge of $3.7 million in 1998 to settle this suit; the parties also agreed to cross license the two patents at issue.
As has been previously disclosed, Millipore has, in the past, been named as a potentially responsible party ("PRP") under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("Superfund") by the U.S. Environmental Protection Agency ("EPA") with respect to a "release" (as defined in Section 101 of Superfund), at twelve sites to which chemical wastes generated by the manufacturing operations of Millipore or one of its divisions may have been sent. The Company has settled its liability pursuant to consent decrees releasing Millipore from further liability with respect to certain covered matters at all of these Superfund sites. However, as is typical with consent decrees in such Superfund proceedings, EPA and the relevant state agencies have reserved the right to maintain actions against the settling parties, including the Company, in the event certain events occur or do not occur at those sites. The Company does not expect that the conditions in the consent decrees permitting these governmental parties to "re-open" the cases will occur. In any event, the Company believes that the aggregate of any future potential liabilities should not have a material adverse effect on the Company's future results of operations or financial condition in light of the advanced stage of funded remedial action at each site and the likely availability of contribution from numerous other financially solvent PRPs participating at each such Superfund site.
Business Outlook and Uncertainties
The following statements are based on current expectations. These statements are forward looking and actual results may differ materially.
Sales: The semiconductor industry in which the Microelectronics business segment participates is highly cyclical. The downturn, which began in the middle of 1996, continued into 1999. This business segment reported four sequential quarters of increased sales during 1999. Additionally, recent industry results and published reports indicate that an industry wide growth cycle has begun. While some published reports suggest that this growth cycle could last for up to three years, there can be no assurance as to the extent and duration of this growth cycle or as to its positive impact on Millipore. The Company does anticipate, however, that these industry wide improvements will result in stronger sales growth in 2000.
The Biopharmaceutical & Research segment has demonstrated relatively stable patterns of revenue growth. Customers in this segment, particularly those involved in the production of sterile drugs, purchase products for use in validated production processes. Accordingly, it is important to participate in the development of new drugs in order to be designed into the ultimate manufacturing process. Adoption of new technologies and products requires a lengthy validation process prior to adoption. The growth of this segment is highly dependent on the development and approval of new drugs. It is difficult to ascertain the number or timing of such approvals, however, the number of drugs at various stages in the approval process has increased over the past two years. The remaining driver of this segment is research and development spending. Recently published industry reports in the area of life science anticipate increased research and development spending. However the impact on the Company is unknown.
During 1999, the Company has seen reduced sales growth in the European region, an area which impacts the Biopharmaceutical & Research segment more than the Microelectronics segment. The economic pressures in Europe combined with the U.S. dollar strengthening against most European currencies may adversely affect the Biopharmaceutical & Research segment in 2000. Both of the Company's business segments were adversely impacted by the financial difficulties in the Asian economies, which began in late 1997 and continued through 1998. During 1999, this region has shown some recovery, although the economic pressures in Europe have offset it. The continuation of these conditions in Europe would moderate the growth rate of both segments.
Approximately 60 percent of the Company's sales are to customers outside of the Americas and are generally made in local currency. As previously noted, currencies had a net positive impact to both sales and earnings in 1999 as compared to 1998. This was the composite result of a stronger yen in 1999 mostly offset by the weak Euro. Since the end of 1999, the dollar has begun to strengthen against the yen and the Euro. Therefore, if rates of exchange remain at the March 3, 2000 level, there could be a slight negative impact on sales for the first quarter and full year 2000 as compared to 1999.
Gross Margins: The Company expects gross margin percentages in 2000 to improve as compared with those of 1999. Margins will benefit from the impact of increased volume in the Company's manufacturing plants to support anticipated sales growth. Somewhat offsetting the increased volume impact will be margin reductions due to sales growth for process systems which traditionally have lower gross margins. To the extent that foreign currency exchange rates relative to the U.S. dollar remain at March 3, 2000 levels, first quarter 2000 and full year margins will not be significantly impacted by foreign currency exchange rate fluctuations.
In December 1999 the Company's sole supplier of a critical raw material used in the manufacture of one type of membrane incorporated into products sold by the Biopharmaceutical & Research business segment advised the Company that it would discontinue manufacture of that raw material during the second half of 2000. This raw material is also used as a critical component in the production of other widely used industrial products. Millipore products which use this membrane accounted for approximately $100 million in 1999 sales. The Company does not currently anticipate difficulty in establishing satisfactory transitional supply arrangements or in establishing alternative sources of supply for this raw material. However, while the Company is diligently pursuing transitional and alternative supply arrangements, there can be no assurance that it will be successful.
Operating Expenses: The Company expects that operating expenses in local currencies, as a percentage of sales, in 2000 may somewhat improve as compared to the percentage achieved in the previous year.
Interest Expense: The Company expects net interest expense in 2000 will be slightly lower than 1999 as a result of lower average debt.
Provision for Income Taxes: The effective tax rate in 2000 is projected to be in the range of 21 percent, consistent with the effective rate for 1999, excluding the effect of restructuring items. The tax rate estimate is based on the Company's current expectations for 2000 income and current tax law and, therefore is subject to change. In addition, since the Company's revenues are expected to reflect a higher proportion of income generated by its Microelectronics business segment, the products of which are primarily manufactured in the United States, it is anticipated that a trend increasing the effective income tax rate will develop during subsequent years as less revenue is derived from manufacturing sites located in foreign lower tax rate jurisdictions. Further, in the event that the Company's cash needs significantly increase above those currently projected and outstrip the resources identified under Capital Resources and Liquidity above, then an additional upward influence on the Company's tax rate could develop if the Company chose to meet this need by the repatriation of cash indefinitely re- invested in foreign operations.
Capital Spending: The Company expects to spend between $50.0 to $55.0 million for fixed asset additions in 2000. The Company does not believe it needs to significantly expand or add manufacturing capacity in 2000 to handle its anticipated 2000 sales growth. The Company will continue to invest in tooling within its manufacturing plants, upgrades of its research and development labs and in information technology. Accordingly, the Company also expects that 2000 depreciation expense will be higher than reported in 1999.
Capital Resources and Liquidity: The Company expects that the ongoing cash collateralization requirement under the yen denominated debt swap agreement discussed under Capital Resources and Liquidity above will likely require the renegotiation of a debt covenant under the Credit Agreement if the value of the Company's swap position deteriorates below that at December 31, 1999. Further, if the deterioration in the value of that position were substantial then the resulting increase in the cash deposited as collateral under that swap agreement would result in an adverse impact on short-term liquidity.
Forward-Looking Statements
The matters discussed in this Form 10-K Annual Report, as well as in future oral and written statements by management of the Company, that are forward- looking statements, 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. When used herein or in such statements, the words "anticipate", "believe", "estimate", "expect", "may", "will", "should" or the negative thereof and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. In addition to the matters discussed herein, 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 raw materials or 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 the microelectronics manufacturing market in particular; potential environmental liabilities; the inability to utilize technology in current or planned products due to overriding rights by third parties, and the other risk factors described elsewhere in this Form 10-K Annual Report, and in particular the matters described in Item 1 above under the heading "Environmental Matters". Specific reference is also made to the risks and uncertainties described in the Registration Statement on Form S-3 (Registration 333-80781) filed by the Company in connection with its offering of 660,000 shares of its Common Stock, $1.00 par value in November 1999 (in particular, to those risks described under "Risk Factors") and to the Registration Statement on Form S-3 (Registration 333-23025) filed by the Company in connection with its offering of $300 million of Debt Securities in May 1997 (in particular, to those risks described under "Factors Which May Affect Future Results"). See also "Legal Proceedings" and "Business Outlook and Uncertainties" above.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information called for by this item is set forth under the heading "Market Risk" in Management's Discussion and Analysis contained in Item 7 above which information is hereby incorporated by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The information called for by this item is set forth in the Financial Statements at the end of this report commencing at the pages indicated below:
All of the foregoing Financial Statements are hereby incorporated by reference.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure.
This item is not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of Millipore.
The information called for by this item with respect to registrant's directors and compliance with Section 16(a) of the Securities Exchange Act of 1934 as amended is set forth under the caption "Management and Election of Directors--Nominees for Election as Directors" in Millipore's definitive Proxy Statement for Millipore's Annual Meeting of Stockholders to be held on April 27, 2000, and to be filed with the Securities and Exchange Commission on or about March 17, 2000, which information is hereby incorporated herein by reference.
Information called for by this item with respect to registrant's executive officers is set forth under "Executive Officers of Millipore" in Item 1 of this report.
Item 11.
Item 11. Executive Compensation.
The information called for by this item is set forth under the caption "Management and Election of Directors--Executive Compensation" in Millipore's definitive Proxy Statement for Millipore's Annual Meeting of Stockholders to be held on April 27, 2000, and to be filed with the Securities and Exchange Commission on or about March 17, 2000, which information is hereby incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by this item is set forth under the caption "Ownership of Millipore Common Stock" in Millipore's definitive Proxy Statement for Millipore's Annual Meeting of Stockholders to be held April 27, 2000, and to be filed with the Securities and Exchange Commission on or about March 17, 2000, which information is hereby incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information called for by this item with respect to registrant's directors relationships and related transactions is set forth under the caption "Management and Election of Directors--Nominees for Election as Directors" in Millipore's definitive Proxy Statement for Millipore's Annual Meeting of Stockholders to be held on April 27, 2000, and to be filed with the Securities and Exchange Commission on or about March 17, 2000, which information is hereby incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this Report:
1. Financial Statements.
2. Financial Statement Schedules.
No financial statement schedules have been included because they are not applicable or not required under Regulation S-X.
3. List of Exhibits.
A. The following exhibits are incorporated by reference:
- -------- *A "management contract or compensatory plan"
B. The following Exhibits are filed herewith:
- -------- *A "management contract or compensatory plan"
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed by Registrant during the last quarter of the fiscal year ended December 31, 1999.
(c) Exhibits.
The Company hereby files as exhibits to this Annual Report on Form 10-K those exhibits listed in Item 14(a)(3)(B) above, which are attached hereto.
(d) Financial Statement Schedules.
No financial statement schedules have been included because they are not applicable or are not required under Regulation S-X.
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.
Millipore Corporation
Dated: March 10, 2000 /s/ Jeffrey Rudin By: _________________________________ Jeffrey Rudin, Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated.
MILLIPORE CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MILLIPORE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of the consolidated financial statements
MILLIPORE CORPORATION
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements
MILLIPORE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31, 1999, 1998 and 1997 (In thousands, except per share data)
The accompanying notes are an integral part of the consolidated financial statements
MILLIPORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
NOTE A--Summary of Significant Accounting Policies
Nature of Operations
Millipore Corporation and its subsidiaries are engaged primarily in the development, manufacture and sale of products which are based on separations technology and which are used for the analysis, identification and purification of liquids and gases. Millipore also generates revenues from the manufacture and sale of products based on electro-mechanical and pressure differential technologies to monitor and control critical aspects of the manufacturing process for integrated circuits (semiconductors). Millipore is an integrated multinational manufacturer and markets its products throughout the world. The principal customer groups to which the Company's products are sold include pharmaceutical companies, biotechnology companies, food and beverage companies, university and government laboratories and research institutes as well as semiconductor fabrication companies and OEM and material suppliers to the semiconductor industry.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany balances and transactions have been eliminated.
Translation of Foreign Currencies
For all of the Company's foreign subsidiaries, assets and liabilities are translated at exchange rates prevailing on the balance sheet date, revenues and expenses are translated at average exchange rates prevailing during the period, and elements of shareholders' equity are translated at historical rates. Any resulting translation gains and losses are reported separately in shareholders' equity. The aggregate transaction gains and losses included in the consolidated statements of income are not material.
Cash Equivalents
Cash equivalents consisting primarily of time deposits are carried at cost plus accrued interest, which approximates market value. All cash equivalents have maturities of three months or less.
Cash Held as Collateral
The Company is required to provide cash collateralization on one of its yen denominated debt swap agreements. 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.
Inventories
The Company values its inventories at actual cost on a first-in, first-out (FIFO) basis.
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 which extend the life of the underlying asset are capitalized. Assets are primarily depreciated using straight-line methods. Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are eliminated and related gains or losses are reflected in income.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
The estimated useful lives of the Company's depreciable assets are as follows:
Intangible Assets
Intangible assets consist primarily of patents, acquired technology, trade names, licenses and goodwill. The assets are recorded at cost and amortized on a straight-line basis over periods ranging from 3 to 20 years. On a periodic basis the value of the intangible assets is reviewed to determine if impairment has taken place due to changed business conditions or technological obsolescence. The amount of such impairment, if any, is computed by comparing the future cash flows associated with the underlying intangible asset to the then current net book value. If an impairment exists, the net book value of the intangible asset is reduced accordingly.
Marketable Securities
The Company's investments in equity securities are categorized as available- for-sale as defined by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Equity securities are included in Other Assets in the accompanying consolidated balance sheets and are recorded at fair value. The cost of each investment is determined primarily on a specific identification method. Unrealized holding gains and losses are reflected, net of income tax, as a separate component of accumulated other comprehensive income (loss). As of December 31, 1999, marketable securities had a fair value of $2,193, and a cost of $1,201.
Financial Instruments
The Company has entered into U.S. dollar to Japanese yen debt swap agreements and had entered into foreign exchange option contracts to manage interest and foreign currency exchange rate exposures. The Company does not hold or issue derivative financial instruments for trading purposes.
The cash differential paid or received under the interest rate component of the debt swap agreements are accrued and recognized as an adjustment to interest expense. Net amounts receivable or payable to counterparties are included in Long-Term Debt. Cash flows related to the interest rate swap are classified as part of Operating Activities in the Consolidated Statement of Cash Flows consistent with the interest payments on the underlying debt. The U.S. dollar to Japanese yen swap is designated and is effective as a hedge of the Company's net investment exposure. Unrealized gains and losses are recorded as an adjustment of the underlying Long-Term Debt and the cumulative Translation Adjustments in Shareholders' Equity. The ultimate gain or loss realized upon maturity of the agreements is recognized as a translation adjustment in Shareholders' Equity.
The Company had entered into option contracts to hedge against significant fluctuations in the value of the U.S. dollar versus the Japanese yen. Gains realized on the exercise of the option contracts are recorded as an offset to the loss on the underlying transactions. Contract premiums are recorded in Other Current Asset and amortized over the term of the contract. The realized gains and the amortization of the contract premiums are recorded in cost of sales. Cash flows related to the exercise of the option contracts are included in Operating Activities in the Consolidated Statement of Cash Flows.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
Income Taxes
Deferred tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. With respect to the unremitted earnings of the Company's foreign and Puerto Rican subsidiaries, deferred taxes are provided only on amounts expected to be repatriated.
Treasury Stock
Treasury stock is recorded at its cost on the date acquired and is reissued at its weighted average cost. The excess of cost over the proceeds of reissued treasury stock is charged to retained earnings.
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing the net income (loss) for the period by the weighted average number of shares outstanding for the period. Diluted net income (loss) per share is calculated by considering the impact of common stock equivalents (outstanding stock options) as if they were converted into common stock at the beginning of the period. Common stock equivalents are not included in periods of net losses as they are anti- dilutive.
Revenue Recognition
Sales of products and services are recorded principally at the time of product shipment or performance of services. Certain contract revenues associated with the Company's process equipment business are recorded on the percentage of completion method. Revenue is recognized based on the ratio of hours expended compared to the total estimated hours to complete the construction of the process equipment. The cumulative impact of any revisions in estimates of the percent complete is reflected in the period in which the changes become known.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash and cash equivalents, accounts receivable and debt swap agreements.
The Company places its temporary cash and cash equivalents with high credit qualified financial institutions, and, by policy, limits the amount of credit exposure to any one financial institution.
Concentrations of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company's customer base, and their dispersion across different industries and geographies. The Company performs ongoing credit evaluations of its customers and generally does not require collateral.
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to these contracts are major financial institutions. The Company continually monitors its positions and the credit ratings of its counterparties and limits the amount of contracts it enters into with any one party.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior years' financial statements to conform with the 1999 presentation.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001 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.
NOTE B--Restructuring Program 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 included the consolidation of certain manufacturing operations, realignment of various international subsidiary organizations to focus on operating business units, discontinuance of non-strategic product lines and the rationalization of its product offerings to improve product line focus. This rationalization process included a management review of product offerings to identify and eliminate specific products with limited profitability as well as products which were inconsistent with current strategic marketing plans, such as non-standard products. 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 $6,244 charge against cost of sales for inventory provisions and $2,931 for fixed asset write-offs. The non-strategic product lines consisted of high pressure liquid chromatography equipment, semiconductor fab monitoring and control software and various filtration devices. The $33,641 restructuring charge included $18,290 of employee severance costs, $3,847 of lease cancellation costs, $2,049 of marketing, research and supply contract termination costs, $7,667 for the write-off of intangible assets including those associated with the discontinued product lines consisting of both unpatented completed technology and tradenames as well as with termination of certain rights under two technology development collaborations and $1,788 for the write-off of fixed assets. As of September 30, 1998, there were no assets that remained in use which had been written off. During the fourth quarter of 1998 assets which had been held for disposal relating to one of the non-strategic product lines were divested. There are no remaining assets being held for disposal.
During the third quarter of 1999, the Company reevaluated the accrual for the restructuring program and reversed $5,200 of the remaining balance. The reversal reflected a lower estimate for severance pay and lease cancellation costs. Although the planned number of employee positions had been eliminated, the reduction in severance cost was attributed to higher levels of attrition than originally anticipated and impacted employees filling open positions as demand increased due to improved sales volume.
The restructuring initiatives combined with the consolidation of the Company's Microelectronics plants resulted in the elimination of 620 positions worldwide (400 positions in manufacturing operations, 160 in selling,
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
general and administrative positions and 60 in research and development). Notification to employees was completed in 1998, although a small number of the employees affected will continue working in their existing positions through 2000 with their related salary costs charged to operations as incurred. As of December 31, 1999, 600 employees had left the Company pursuant to this initiative. Under the terms of the severance agreements, the Company expects to pay severance and associated benefits through 2000.
Following is a summary of the restructuring charges and related reserve balances at December 31, 1998 and 1999:
The Company also recorded an incremental provision for excess and obsolete inventory of $6,000 during the third quarter of 1998 in response to adverse changes in demand attributable to recessionary conditions in Asia and the slowdown in the semiconductor industry.
NOTE C--Acquisitions
On May 18, 1999, the Company acquired all outstanding shares of Bioprocessing Corporation Limited ("Bioprocessing") in exchange for 660,000 shares of Millipore common stock. The transaction was accounted for as a pooling-of-interests. The consolidated financial statements for prior periods were not restated because the addition of Bioprocessing did not have a material impact on the Company's results of operations and financial position. Bioprocessing develops, manufactures and sells a wide range of proprietary products and services for the chromatographic purification of proteins.
In 1996 and 1997 the Company acquired Amicon Separation Science Business ("Amicon") and Tylan General, Inc. ("Tylan"), respectively. The integration activities relating to the Amicon business were substantially completed as of December 31, 1999 except for the integration of a manufacturing operations which was delayed pending the construction of a facility to receive this operation and the resolution of certain vendor agreement termination disputes both of which the Company expects complete in 2000. The remaining liability as of December 31, 1999 consists of $1,651 for the integration of the manufacturing operations and costs associated with the termination of a supply agreement. The integration activities for Tylan were completed with final cash payments of $1,200 for contractual agreements continuing through 2000.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
Following is a summary of the remaining reserve as of December 1998 and 1999 for the acquisitions of Tylan and Amicon:
The acquisition of Tylan General Inc. included in-process research and development for which technological feasibility had not been achieved resulting in charges to earnings of $114,000 in the first quarter of 1997. This charge was taken because neither the projects nor any potential alternative future uses for the technology on which the projects were based had achieved technological feasibility. The estimation of the fair value of the purchased in-process research and development is primarily the responsibility of management. In determining the valuation of in-process research and development projects for the acquisition, the discounted cash flow approach was used. A range of discount rates from 25 percent to 35 percent was applied depending upon the relative risk of the in-process technology and the market risks for the related product. Revenue projections reflected the estimated useful life of the technology and ranged from 5 to 12 years. Cash flows were reduced in contemplation of on-going operating needs (including working capital) to support the technology and by amounts associated with the use of "core technology" in products under development. The assumptions made regarding pricing, margins and expenses were consistent with the acquired company's historical trends.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
NOTE D--Basic and Diluted Earnings per Share
For 1997, basic and diluted earnings per share are the same, as the Company was in a loss position. The following table sets forth the computation of basic and diluted earnings per share for 1999, 1998 and 1997:
NOTE E--Inventories
Inventories at December 31, stated at the lower of first-in, first-out (FIFO) cost or market, consisted of the following:
NOTE F--Property, Plant and Equipment
Property, plant and equipment at December 31 consisted of the following:
Depreciation expense for the years ended 1999, 1998, and 1997 was $34,151, $36,778 and $32,797, respectively.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
NOTE G--Notes Payable
Short-term borrowings and related lines of credit at December 31 are summarized as follows:
The Company has entered into an unsecured Revolving Credit Agreement ("the agreement") with a group of banks. The agreement allows for borrowings of up to a maximum $250,000 and expires on January 22, 2002. Individual borrowings under the agreement are made on terms not to exceed six months. At December 31, 1999 the Company had $135,000 available under this facility. Interest is payable on outstanding borrowings at a floating rate of LIBOR plus a margin. The agreement also calls for a facility fee. The exact amount of the margin and the facility fee is dependent on the Company's debt rating. The agreement calls for the Company to maintain certain financial covenants relating to operating cash flow, interest coverage and minimum earnings. As of December 31, 1999 and 1998, the Company was in compliance with all covenants.
The Company also has an additional $10,000 of other short-term borrowing capacity available of which $645 was outstanding at December 31, 1999.
NOTE H--Long-term Debt
Long-term debt at December 31 consisted of the following:
Interest on the 7.2% unsecured notes and the 7.5% unsecured notes is payable semi-annually in April and October. At December 31, 1999, these notes had a fair market value of $96,820 and $90,480, respectively.
Interest on the 7.23% notes is payable semi-annually in March and September. As this note is not publicly traded, a determination of the fair value is not readily determinable. However, the Company believes that the above carrying values approximate fair value. The 7.23% notes call for the Company to maintain the same covenants as the Revolving Credit Agreement disclosed in Note G.
The Company has two yen denominated swap agreements including a swap of $80,000 in debt service obligations for a yen denominated obligation of 8,760,000 yen, bearing interest at a rate of 4.49 percent and maturing in 2004 and a swap of $30,000 in debt service obligations for a yen denominated obligation of
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
3,840,000 yen, bearing interest at a rate of 1.39 percent and maturing in 2003. The effect of foreign currency exchange rate fluctuations resulting from the yen swap agreements open at December 31, 1999 are included in translation adjustments.
In November 1998 Moody's Investor Services and Standard & Poors Corporation graded the Company's debt at a rating of Ba2 and BB+, respectively. Both ratings are characterized as below "investment grade". This rating coupled with the strengthening of the yen triggered a requirement to provide cash collateralization under one of the Company's yen denominated debt swap agreements in the event that the net value of the Company's position falls below the net value of the counterparty's position. In the event that the Company's debt rating improves, these agreements provide for less stringent collateralization requirements. The amount of the cash collateral is dependent, among other things, on the exchange rate of the yen to the U.S. dollar; generally, as the yen strengthens, the amount of cash collateral required from the Company increases. At December 31, 1999, this cash collateralization amount was $18,640.
The Company capitalized interest costs associated with the construction of certain capital assets of $1,121 in 1999, $1,282 in 1998 and $753 in 1997. Interest paid on short-term and long-term debt during 1999, 1998, and 1997 amounted to $30,804, $30,690 and $25,579 respectively.
NOTE I--Foreign Exchange
A significant volume of the Company's business is transacted in currencies other than the U.S. dollar. This exposes the Company to risks associated with currency rate fluctuations, which impact the Company's sales and net income. From time to time, 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 gains on these transactions partially offset the realized foreign exchange losses on the underlying exposure. In 1998 and 1997, the Company realized gains, net of premiums under these contracts, of $2,232 and $4,375, respectively. At December 31, 1999, the Company had option contracts to sell yen aggregating $27,101. In the event of a significant strengthening of the U.S. dollar against the yen, the exercise of these options will partially mitigate losses which would be incurred by the Company on the underlying currency exposure. The unamortized premiums associated with these option contracts was $308 as of December 31, 1999.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
NOTE J--Income Taxes
The Company's provisions for income taxes are summarized as follows:
A summary of the differences between the Company's consolidated effective tax rate and the United States statutory federal income tax rate is as follows:
Tax exemptions relating to Puerto Rico and Ireland operations are effective through 2004 and 2010, respectively. Income taxes paid (net of refunds) during 1999, 1998, and 1997 were $5,700, $20,359, and $18,704, respectively.
The Company has not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. These earnings amounted to approximately $169,500 at December 31, 1999. If earnings of such foreign subsidiaries were not indefinitely reinvested, a deferred tax liability of approximately $47,083 would have been required.
At December 31, 1999, the Company has foreign tax credit carryforwards of approximately $16,900 that expire in the years 2000 through 2004. General business credit carryforwards of approximately $4,889 expire in the years 2001 through 2010. Net operating loss carryforwards of $99,431 expire through the year 2019. In addition, the Company has alternative minimum tax credit carryforwards of approximately $15,666, which can be carried forward indefinitely.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
Significant components of the Company's net deferred tax assets are as follows:
The valuation allowance is provided primarily against foreign tax credit carryforwards and foreign tax credits on unremitted earnings which can be utilized against future taxable income in the United States. The increase in valuation allowance for the year results from the growth in foreign tax credits and changes in the geographic mix of income. Although realization is not assured, the Company believes it is more likely than not that the remainder of the deferred tax asset, net of the valuation allowance, will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.
NOTE K--Legal Proceedings
The $11,766 settlement of litigation charge taken in 1998 was for the following 3 matters:
1. A proceeding related to an administrative order issued by the Environmental Quality Board ("EQB") of Puerto Rico alleging that the Company's wholly owned subsidiary failed to properly manage, transport and dispose of nitrocellulose membrane scrap as a hazardous waste; and proposed penalties in the amount of $96,500. The Company settled this proceeding in 1998 and recorded a charge of $5,000.
2. A private lawsuit brought by an intervening party in the EQB administrative case described above; the Company recorded a charge of $3,100 in the 1998 reflecting its costs to settle this suit.
3. A patent lawsuit with Mott Metallurgical Corporation in which each party claimed infringement of one of its patents by the other. The Company recorded a charge of $3,666 in 1998 to settle this suit; the parties also agreed to cross license the two patents at issue.
Millipore has, in the past, been named as a potentially responsible party ("PRP") under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("Superfund") by the U.S. Environmental Protection Agency ("EPA") with respect to a "release" (as defined in Section 101 of Superfund), at twelve sites to which chemical wastes generated by the manufacturing operations of Millipore or one of its divisions may have been sent. The Company has settled its liability pursuant to consent decrees releasing Millipore from further liability with respect to certain covered matters at all of these Superfund sites. However, as is typical with consent decrees in such Superfund proceedings, EPA and the relevant state agencies have reserved the right to maintain actions against the settling
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
parties, including the Company, in the event certain events occur or do not occur at those sites. The Company does not expect that the conditions in the consent decrees permitting these governmental parties to "re-open" the cases will occur. In any event, the Company believes that the aggregate of any future potential liabilities should not have a material adverse effect on the Company's future results of operations or financial condition in light of the advanced stage of funded remedial action at each site and the likely availability of contribution from numerous other financially solvent PRPs participating at each such Superfund site.
The Company is also subject to a number of other claims and legal proceedings which, in the opinion of the Company's management, are incidental to the Company's normal business operations. In the opinion of the Company, although final settlement of these suits and claims may impact the Company's financial statements in a particular period, they will not, in the aggregate, have a material adverse effect on the Company's financial position.
NOTE L--Leases
Operating lease agreements cover sales offices, manufacturing and warehouse space. These leases have expiration dates through 2008. Certain land and building leases contain renewal options for periods ranging from one to ten years and purchase options at fair market value. Rental expense was $12,325 in 1999, $12,033 in 1998, and $11,849 in 1997. At December 31, 1999 future minimum rents payable under noncancelable leases with initial terms exceeding one year were as follows:
At December 31, 1999, the Company had long-term lease obligations related to two Tylan General, Inc. manufacturing sites vacated as part of the acquisition integration. Amounts associated with these leases are excluded from the above presentation. Costs expected to be incurred by the Company to vacate these premises prior to completion of each respective lease term are accrued as discussed in Note C.
As part of the restructuring program the Company established regional transaction service centers resulting in the elimination of duplicate facilities. The Company will vacate these facilities in 2000. Accordingly, future rents payable under these leases are included through 2000. Costs expected to be incurred by the Company to vacate these premises prior to completion of each respective lease term are accrued as discussed in Note B.
NOTE M--Stock Plans
1999 Stock Incentive Plan
During 1999, the Company adopted the "1999 Stock Incentive Plan" (the 1999 Plan), which combined the features of the "1995 Combined Stock Option Plan" and the "Long Term Restricted Stock Incentive Plan". The 1999 Plan provides for the issuance of stock options and restricted stock to key employees as incentive compensation. The 1999 Plan allows for the issuance of 4,000,000 shares of common stock of which a maximum of 250,000 shares can be issued as restricted stock. The exercise price of the stock options may not be less than the fair market value of the stock at the date of grant and the stock options must expire no later than 10 years from the date of grant.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
The 1999 Plan provides that the restricted stock, which is awarded to key members of senior management at no cost to them, cannot be sold, assigned, transferred or pledged during a restriction period which is normally four years but in some cases may be less. In most instances, shares are subject to forfeiture should employment terminate during the restriction period. The restricted stock is recorded at its fair market value on the award date; the related deferred compensation is amortized to Selling, General and Administrative expenses over the restriction period. At the end of 1999, 1998 and 1997, 167,000, 139,000 and 117,000 shares, respectively, were outstanding as restricted shares. As of December 31, 1999, 187,000 shares of Millipore common stock were available for future awards of restricted stock under this plan.
Non-Employee Director Stock Option Plan
During 1999, the Company adopted the 1999 Stock Option Plan for Non-Employee Directors (the "Directors Plan") which replaced the 1989 Non-Employee Director Stock Option Plan. The Directors Plan allows for the issuance of 250,000 shares of common stock. Each newly elected eligible director is awarded a stock option to purchase 4,000 shares of common stock on the date of his or her first election. Following the initial grant, each director shall automatically be awarded options to purchase 2,000 shares of common stock for each subsequent year of service as a director. The exercise price of the stock options may not be less than the fair market value of the stock at the date of grant. At December 31, 1999, 130,000 options were outstanding.
Employees' Stock Purchase Plan
During 1999, the Company's Employees' Stock Purchase Plan ("ESPP") was amended to allow for the issuance of up to 1,300,000 shares of common stock. The amended plan allows eligible employees to purchase the stock at 85% of the lesser of the fair market value of the common stock on June 1, the beginning of the plan year, or the closing price at the end of each subsequent quarter. Each employee may purchase up to 10% (up to a maximum of $25,000) of eligible compensation.
In 1999, 1998 and 1997, shares issued under the ESPP were 51,000, 38,000 and 33,000, respectively. As of December 31, 1999, 1,249,000 shares of Millipore common stock were available for sale to employees under the ESPP.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
Stock option activity under both the 1999 Stock Option Plan and the Non- Employee Director Stock Option Plan is presented as follows:
The following table summarizes information about stock options at December 31, 1999:
Accounting for Stock Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's net income and basic earnings per share would have been reduced by $5,174 or $0.11 per share in 1999, $3,748 or $0.08 per share in 1998, and $2,112 or $0.05 per share in 1997. The weighted average fair value of options granted under the stock option plan was $12.86 in 1999, $8.29 in 1998, and $11.13 in 1997. The weighted average fair value of shares issued under the employee stock purchase plan was $9.07 in 1999, and $4.61 in
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
1998 and 1997. The pro forma expense amounts assume that the fair value assigned to the option grants was amortized over the vesting period of the options, which is four years, while the fair value assigned to grants under the stock purchase plan is recognized in full at the date of grant.
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes model with the following assumptions in 1999, 1998 and 1997: expected life of five years and an expectation of no annual dividend increase per year. The expected volatility was 35 percent in 1999, 30 percent in 1998 and 25 percent in 1997. The weighted average risk-free interest rate was 6.2 percent in 1999, 4.5 percent in 1998 and 5.9 percent in 1997. This rate approximated that of 5 year U.S. government interest bearing securities.
Non-Employee Director Deferred Compensation Agreements
Non-Employee Directors may elect to defer their fees earned as Directors. The fees are converted to deferred compensation phantom stock units based on 100% of the fair market value of Millipore Common Stock on the semi-annual conversion dates. Upon retirement or earlier termination of service from the Board of Directors, the phantom stock units are converted at fair market value of Millipore Common Stock on the date of conversion to cash equivalents and distributed in annual installments over ten years.
NOTE N--Employee Retirement Plans
Participation and Savings Plan
The Millipore Corporation Employees' Participation and Savings Plan ("Participation and Savings Plan"), maintained for the benefit of all U.S. employees, combines both a defined contribution plan ("Participation Plan") and an employee savings plan ("Savings Plan"). Contributions to the Participation Plan are allocated among the U.S. employees of the Company who have completed at least two years of continuous service on the basis of the compensation they received during the year for which the contribution is made. The Savings Plan allows employees to make certain tax-deferred voluntary contributions upon hire date which the Company matches after 1 year of service with a 25 percent contribution (50 percent contribution for employees with 10 or more years of service). Total expense under the Participation and Savings Plan was $6,979 in 1999, $7,392 in 1998 and $6,700 in 1997.
Retirement Plan
The Company's Retirement Plan for Employees of Millipore Corporation ("Retirement Plan") is a defined benefit plan for all U.S. employees which provides benefits to the extent that assets of the Participation Plan, described above, do not provide guaranteed retirement income levels. Guaranteed retirement income levels are determined based on years of service and salary level as integrated with Social Security benefits. Employees are eligible under the Retirement Plan after one year of continuous service and are vested after five years of service. For accounting purposes, the Company uses the projected unit credit method of actuarial valuation.
The actuarial method for funding purposes is the entry age normal method. The Company contributes annually to the Retirement Plan, subject to Internal Revenue Service and ERISA funding limitations. No contributions were required for 1999, 1998 and 1997. Plan assets are invested primarily in mutual funds and money market funds.
In addition to the Retirement Plan, the Company sponsors several unfunded defined benefit postretirement plans covering all U.S. employees, which are included in Other Benefits. The plans provide medical and life insurance benefits and are, depending on the plan, either contributory or non- contributory.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
Plan data as of December 31, 1997 includes assets and obligations pertaining to employees of the Company's former Waters Division, as the assets subject to these former employees had not yet been transferred to Waters Corporation. In the second quarter of 1998, the Company transferred $2,440 of plan assets (including interest through the date of the transfer) and $400 of benefit obligations from its Retirement Plan to the Waters Retirement Plan. In order to fund the transfer, the Company made a contribution of $2,255 to its Retirement Plan in accordance with ERISA funding requirements. These amounts had been previously accrued and included in net loss on disposal of discontinued operations in 1994.
The following tables summarize the funded status of the Employee Retirement Plans and amounts reflected in the Company's consolidated balance sheets at December 31, based on Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
For measurement purposes, a 5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to remain at this level.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects.
NOTE O--Gain on Sale of Equity Securities
The $9,500 of proceeds on sale of securities in 1999 reflects the sale by the Company of 100 shares of Series A Preferred Stock of Waters Corporation which the Company received in connection with the divestiture of its Waters Chromatography Division in 1994.
The gain on sale of equity securities in 1998 primarily reflects the sale of all of the Company's shares of Perkin-Elmer stock for approximately $32,500 in cash. The Company also sold all of its common shares of Glyko Biomedical Ltd. in 1998 and recognized a gain of $3,100.
NOTE P--Business Segment Information
The Company has two reportable business segments--Biopharmaceutical & Research and Microelectronics.
In the Biopharmaceutical & Research segment the Company develops, manufactures and sells consumable products and capital equipment to pharmaceutical companies, biotechnology companies, food and beverage companies, university and government laboratories and research institutes. In this segment the Company also provides process design, engineering and repair services to its customers. The Company's product offerings to the Biopharmaceutical & Research segment include membranes, membrane based filter and separation devices, test kits, laboratory water purification systems, resin and membrane based cartridge filters, laboratory test equipment and manufacturing process equipment. These products are used in laboratory and research applications for detecting and identifying molecules, compounds or micro-organisms in a fluid sample. Filters, separation devices and process equipment sold to customers in the Biopharmaceutical & Research segment are used in the manufacture of pharmaceutical products, diagnostic devices and beverages to isolate and purify specific components or to remove contaminants in a fluid stream. The products are sold worldwide principally through a direct sales force. Distributors are used in selected regions and for specific product lines.
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
In the Microelectronics segment the Company develops, manufactures and sells consumables and capital equipment to semiconductor fabrication companies as well as OEM suppliers to those companies. The Company also provides capital equipment warranty and repair services to customers in this segment. Microelectronics products include membrane and metal based filters, housings, precision liquid dispense filtration pumps, resin based gas purifiers and mass flow and pressure controllers. The products are used by customers in manufacturing operations to remove contaminants in process fluid streams and process gas applications to purify process gases, to measure and control flow rates in process gas streams and to control and monitor pressure and vacuum levels in process chambers. Microelectronics products are sold worldwide through a direct sales force and through distributors in selected regions.
The operating segment results for Biopharmaceutical & Research, Microelectronics and Corporate included below are presented in "local currencies". For comparability of financial results, the foreign currency balances, in all periods presented, are translated at Millipore's 1999 budgeted exchange rates which differ from actual rates of exchange. This provides a clearer presentation of underlying trends in the Company's business, before the impact of foreign currency translation. The foreign exchange impact is shown separately and reconciles the local currency reporting to the consolidated results at the actual rates of exchange.
Operating Segments:
MILLIPORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
Geographical Segments:
The Company attributes net sales and long-lived assets to different geographic areas on the basis of the location of the customer. The Company has three geographic regions. The United States represents greater than 90% of the Americas region. Net sales and long-lived asset information by geographic area in U.S. dollars as of December 31, 1999, 1998 and 1997 and for each of the three years ended December 31, 1999 is presented as follows:
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Millipore Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity, and of cash flows, present fairly, in all material respects, the financial position of Millipore Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, 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 the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts January 19, 2000
MILLIPORE CORPORATION
Quarterly Results (Unaudited)
The Company's unaudited quarterly results are summarized below.
INDEX TO EXHIBITS
- -------- *+ Incorporated by reference to Note D to Financial Statements on page ++++ EDGAR Filing only