Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 3, 2010

or

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Act of 1934

For the transition period from              to             

Commission File Number 001-09781 (0-1052)

MILLIPORE CORPORATION

(Exact name of registrant as specified in its charter)

 

Massachusetts   04-2170233
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
290 Concord Road, Billerica, MA   01821
(Address of principal executive offices)   (Zip Code)

(978) 715-4321

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x   Accelerated filer   ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)   Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

As of May 1, 2010, there were 56,234,916 shares of the registrant’s Common Stock outstanding.


Table of Contents

 

Index to Form 10-Q

 

PART I.

   FINANCIAL INFORMATION   

Item 1

   Financial Statements (unaudited)   
   Condensed Consolidated Statements of Operations for the three months ended April 3, 2010 and April 4, 2009    3
   Condensed Consolidated Balance Sheets at April 3, 2010 and December 31, 2009    4
   Condensed Consolidated Statements of Cash Flows for the three months ended April 3, 2010 and April 4, 2009    5
   Notes to Condensed Consolidated Financial Statements    6

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    18

Item 3

   Quantitative and Qualitative Disclosures about Market Risk    30

Item 4

   Controls and Procedures    30

PART II.

   OTHER INFORMATION   

Item 6

   Exhibits    31

Signatures

   32

Exhibits

   33
   In this Form 10-Q, unless the context otherwise requires, the terms “Millipore”, the “Company”, “we” or “us” shall mean Millipore Corporation and its subsidiaries.   

 

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Table of Contents

PART I

 

ITEM 1.  FINANCIAL STATEMENTS

Condensed Consolidated Statements of Operations

 

     Three Months Ended  
(In thousands, except per share data) (Unaudited)    April 3,
2010
     April 4,
2009
 

Revenues

   $ 463,033       $ 407,940   

Cost of revenues

     203,671         184,621   

Gross profit

     259,362         223,319   

Selling, general and administrative expenses

     141,141         126,788   

Research and development expenses

     30,084         25,203   

Operating profit

     88,137         71,328   

Gain on business acquisition

             8,542   

Interest income

     113         242   

Interest expense

     (14,259      (14,609

Income before provision for income taxes

     73,991         65,503   

Provision for income taxes

     16,776         11,949   

Net income

     57,215         53,554   

Less: Net income attributable to noncontrolling interest

             529   

Net income attributable to Millipore

   $ 57,215       $ 53,025   

Earnings per share:

       

Basic

   $ 1.02       $ 0.96   

Diluted

   $ 0.99       $ 0.95   

Weighted average shares outstanding:

       

Basic

     55,934         55,352   

Diluted

     57,906         55,779   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

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PART I

 

Condensed Consolidated Balance Sheets

 

(In thousands, except per share data) (Unaudited)    April 3, 2010      December 31, 2009  
Assets        

Current assets:

       

Cash and cash equivalents

   $ 222,676       $ 168,333   

Accounts receivable (less allowance for doubtful accounts of $3,465 and $3,495 at April 3, 2010 and December 31, 2009, respectively)

     314,539         280,930   

Inventories

     237,913         257,809   

Deferred income taxes

     72,921         61,211   

Other current assets

     35,684         33,985   

Total current assets

     883,733         802,268   

Property, plant and equipment, net

     574,111         595,611   

Deferred income taxes

     13,587         40,175   

Intangible assets, net

     324,223         337,696   

Goodwill

     1,016,534         1,017,683   

Other assets

     16,941         17,356   

Total assets

   $ 2,829,129       $ 2,810,789   
Liabilities and Shareholders’ Equity        

Current liabilities:

       

Short-term debt

   $ 11,084       $ 42,851   

Accounts payable

     88,579         75,056   

Income taxes payable

     20,854         16,739   

Accrued expenses and other current liabilities

     177,426         185,061   

Total current liabilities

     297,943         319,707   

Deferred income taxes

     14,456         17,681   

Long-term debt

     873,724         890,242   

Other liabilities

     81,189         80,125   

Total liabilities

     1,267,312         1,307,755   

Commitments and contingencies (Note 16)

       

Shareholders’ equity:

       

Common stock, par value $1.00 per share, 120,000 shares authorized;

56,226 shares issued and outstanding as of April 3, 2010;

55,688 shares issued and outstanding as of December 31, 2009

     56,226         55,688   

Additional paid-in capital

     348,796         330,380   

Retained earnings

     1,201,576         1,144,361   

Accumulated other comprehensive loss

     (44,781      (27,395

Total shareholders’ equity

     1,561,817         1,503,034   

Total liabilities and shareholders’ equity

   $ 2,829,129       $ 2,810,789   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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PART I

 

Condensed Consolidated Statements of Cash Flows

 

     Three Months Ended  
(In thousands) (Unaudited)    April 3,
2010
     April 4,
2009
 

Cash flows from operating activities:

           

Net income

   $ 57,215       $ 53,554   

Adjustments to reconcile net income to net cash provided by operating activities:

       

Depreciation and amortization

     30,260         30,523   

Stock-based compensation

     7,486         5,791   

Amortization of deferred financing costs

     849         844   

Amortization of debt discount

     3,965         3,704   

Deferred income tax (benefit) provision

     (1,306      6,829   

Gain on business acquisition

             (8,542

Business acquisition inventory fair value adjustment

             610   

Other

     (2,547      4,161   

Changes in operating assets and liabilities, net of effects of business acquisitions:

       

Accounts receivable

     (40,471      (22,464

Inventories

     11,384         2,250   

Other assets

     449         5,535   

Accounts payable

     15,676         9,493   

Accrued expenses and other current liabilities

     (7,333      (2,922

Income taxes payable

     11,505         (681

Other liabilities

     1,125         (4,458

Net cash provided by operating activities

     88,257         84,227   

Cash flows from investing activities:

       

Additions to property, plant and equipment

     (11,577      (15,708

Acquisition of business, net of cash acquired

             (18,766

Other

     (748      (1,362

Net cash used for investing activities

     (12,325      (35,836

Cash flows from financing activities:

       

Proceeds from issuance of common stock under stock plans

     16,876         1,710   

Repayments under long-term revolving credit facility, net

             (67,174

Net (repayments) borrowings of short-term debt

     (32,289      71,747   

Other

             (460

Net cash (used for) provided by financing activities

     (15,413      5,823   

Effect of foreign exchange rates on cash and cash equivalents

     (6,176      2,446   

Net increase in cash and cash equivalents

     54,343         56,660   

Cash and cash equivalents at beginning of year

     168,333         115,462   

Cash and cash equivalents at end of period

   $ 222,676       $ 172,122   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

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Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data) (Unaudited)

1.  GENERAL

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. The condensed consolidated balance sheet as of December 31, 2009 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of our management, these condensed consolidated financial statements reflect all significant adjustments necessary for a fair statement of the results for the interim periods presented. The accompanying unaudited condensed consolidated financial statements are not necessarily indicative of future trends or our operations for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Our interim fiscal quarters end on the thirteenth Saturday of each quarter. Since the fiscal year-end is December 31, the first and fourth fiscal quarters may not consist of precisely thirteen weeks. The first fiscal quarters of 2010 and 2009 ended on April 3, 2010 and April 4, 2009, respectively.

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIE”) and the evaluation of when consolidation of a VIE is required, which we adopted as of January 1, 2010. The amendment did not have an effect on our consolidated financial statements.

2.  PROPOSED TRANSACTION WITH MERCK KGaA

On February 28, 2010, we entered into a definitive agreement under which Concord Investments Corp., a fully owned subsidiary of Merck KGaA, will acquire all outstanding shares of our common stock for $107 per share in cash. This business combination will create a world-class partner for the Life Science sector with significant businesses in high-margin specialty products and an attractive growth profile.

Through the date of this filing, Millipore announced key milestones relating to the proposed transaction, including: the transaction was approved by the boards of directors of both companies; the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act expired; the Special Shareholder’s Meeting to vote on the proposed transaction will take place on June 3, 2010; and the Company filed its definitive proxy with the Securities and Exchange Commission. The proposed transaction is expected to be completed in the early part of the third quarter of 2010.

During the three months ended April 3, 2010, we recorded $2,346 of costs consisting primarily of legal and regulatory fees associated with this proposed transaction in our condensed consolidated statement of operations as selling, general and administrative expenses.

Our revenues from Merck KGaA as a customer were not material for the three months ended April 3, 2010 and April 4, 2009, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data) (Unaudited)

 

3.  STOCK-BASED COMPENSATION

We grant stock options and restricted stock units to employees, officers, and directors under our current stock plan. The following table presents grants of stock options and restricted stock units:

 

     Three Months Ended  
      April 3,
2010
     April 4,
2009
 

Stock options

   341       430   

Restricted stock units

   180       228   

Performance-based restricted stock units

   92 (a)     111 (a) 

 

(a)   Represents target number of shares estimated to be earned at the time of grant.

The following table presents stock-based compensation expense included in our condensed consolidated statements of operations:

 

     Three Months Ended  
      April 3,
2010
     April 4,
2009
 

Stock-based compensation expense in:

     

Cost of revenues

   $ 973       $ 615   

Selling, general and administrative expenses

     5,489         4,490   

Research and development expenses

     1,024         686   

Income before provision for income taxes

     7,486         5,791   

Provision for income taxes

     (2,540      (1,994

Net income attributable to Millipore

   $ 4,946       $ 3,797   

4.  GOODWILL

The following table presents changes in goodwill:

 

Balance at December 31, 2009

   $ 1,017,683   

Effect of foreign exchange rate changes

     (1,149

Balance at April 3, 2010

   $ 1,016,534   

We had no accumulated impairment losses through April 3, 2010.

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data) (Unaudited)

 

5.  INTANGIBLE ASSETS

Intangible assets consisted of the following:

 

April 3, 2010    Gross Intangible
Assets
   Accumulated
Amortization
     Net Intangible
Assets
   Estimated
Useful Life

Patented and unpatented technologies

   $ 94,126    $ (49,321    $ 44,805    5 – 20 years

Trademarks and trade names

     42,767      (22,635      20,132    5 – 20 years

Customer relationships

     412,099      (159,370      252,729    15 – 18 years

Licenses and other

     16,185      (9,628      6,557    1.5 – 20 years

Total

   $ 565,177    $ (240,954    $ 324,223   
December 31, 2009                          

Patented and unpatented technologies

   $ 93,621    $ (47,323    $ 46,298    5 – 20 years

Trademarks and trade names

     42,797      (21,955      20,842    5 – 20 years

Customer relationships

     412,554      (148,807      263,747    15 – 18 years

Licenses and other

     16,062      (9,253      6,809    1.5 – 20 years

Total

   $ 565,034    $ (227,338    $ 337,696   

Amortization expense for the three months ended April 3, 2010 and April 4, 2009 was $13,832 and $14,544, respectively.

The estimated aggregate future amortization expense for intangible assets owned as of April 3, 2010 is as follows:

 

Remainder of 2010

   $ 41,546

2011

     49,802

2012

     43,711

2013

     38,240

2014

     32,539

2015

     27,578

Thereafter

     90,807

Total

   $ 324,223

6.  BASIC AND DILUTED EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (“EPS”):

 

     Three Months Ended
      April 3,
2010
   April 4,
2009

Numerator:

     

Net income attributable to Millipore

   $ 57,215    $ 53,025

Denominator:

     

Weighted average common shares outstanding for basic EPS

     55,934      55,352

Dilutive effect of stock-based compensation awards

     889      427

Dilutive effect of our $565,000 3.75% convertible senior notes

     1,083     

Weighted average common shares outstanding for diluted EPS

     57,906      55,779

Earnings per share:

     

Basic

   $ 1.02    $ 0.96

Diluted

   $ 0.99    $ 0.95

 

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MILLIPORE FORM 10-Q


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data) (Unaudited)

 

For the three months ended April 3, 2010 and April 4, 2009, outstanding stock options and restricted stock units amounting to 195 and 1,281, respectively, were excluded from the calculation of diluted earnings per share because of their antidilutive effect. Performance-based restricted stock units were excluded from the calculation of diluted earnings per share because they are considered contingently issuable shares and the underlying targeted financial metrics have not been achieved.

The proposed acquisition by Merck KGaA resulted in an increase in our stock price during the three months ended April 3, 2010, which caused shares issuable for the conversion premium upon conversion of our $565,000 3.75 percent convertible senior notes (the “Convertible Notes”) to be dilutive to earnings as of April 3, 2010. Shares issuable for the conversion premium on the Convertible Notes were excluded from diluted earnings per share for the three months ended April 4, 2009 because our stock price had not exceeded the conversion price.

7.  INVENTORIES

Inventories, stated at the lower of first-in, first-out (“FIFO”) cost or market, consisted of the following:

 

     

April 3,

2010

   December 31,
2009

Raw materials

   $ 43,653    $ 46,339

Work in process

     76,352      85,740

Finished goods

     117,908      125,730

Total inventories

   $ 237,913    $ 257,809

8.  PROPERTY, PLANT AND EQUIPMENT

Accumulated depreciation on property, plant and equipment was $400,924 at April 3, 2010 and $399,907 at December 31, 2009.

9.  DEBT

Short-term debt

Our short-term debt consisted of the following:

 

     

April 3,

2010

  

December 31,

2009

Revolving credit facilities

   $ 10,679    $ 41,846

Operating bank facilities

     405      1,005

Total short-term debt

   $ 11,084    $ 42,851

We have revolving credit facilities with two Japanese banks. These credit facilities provide for cumulative borrowings of ¥7,000,000, or $74,011, with an interest rate of TIBOR plus an applicable margin. Interest is payable at the end of an interest period based upon the term of the borrowing. These credit facilities expire in December 2010 and are subject to annual renewal at terms consistent with the initial agreements. As of April 3, 2010, we had ¥5,990,000, or $63,332, available for borrowing under these credit facilities.

Operating bank facilities consist of bank overdrafts.

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data) (Unaudited)

 

Long-term debt

Our long-term debt consisted of the following:

 

     

April 3,

2010

   December 31,
2009

Revolving credit facility

   $    $

3.75% convertible senior notes due 2026, net of discount

     537,117      533,186

5.875% senior notes due 2016, net of discount

     336,607      357,056

Total long-term debt

   $ 873,724    $ 890,242

At April 3, 2010, we had 465,000, or $627,615, available for borrowing under our primary revolving credit agreement (“the Revolver”). The Revolver expires in June 2011. At April 3, 2010, we were in compliance with all financial covenants under the Revolver.

As of April 3, 2010, our Convertible Notes had a fair value of $709,781 and our 5.875 percent senior notes had a fair value of $371,170. Fair value was determined from available market prices using current interest rates, non-performance risk, and term to maturity.

The following table sets forth balance sheet information regarding the Convertible Notes:

 

     

April 3,

2010

   December 31,
2009

Principal value of the liability component

   $ 565,000    $ 565,000

Unamortized value of the liability component

     27,883      31,814

Net carrying value of the liability component

   $ 537,117    $ 533,186

Interest expense on the Convertible Notes is recognized based on an effective interest rate of 6.94 percent. This rate represents the contractual coupon interest and the discount amortization as shown below:

 

     

April 3,

2010

  

April 4,

2009

Interest expense – coupon

   $ 5,297    $ 5,297

Interest expense – debt discount amortization

   $ 3,931    $ 3,672

10.  INCOME TAXES

Our effective tax rate was 23 percent for the three months ended April 3, 2010 versus 18 percent for the prior year comparable period. Our effective tax rate for the prior year comparable period was lower because of the $8,542 non-taxable gain on the Guava acquisition. The higher current year rate was also attributable to a shift in the jurisdictional mix of our profits to higher tax rate jurisdictions this year and $1.5 million U.S. R&D credits recognized in the prior year comparable period. The R&D credit provisions expired at the end of fiscal year 2009, which resulted in a higher effective tax rate for the current period.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data) (Unaudited)

 

Over the next twelve months, we may need to record up to $3,900 of previously unrecognized tax benefits in the event of statue of limitations closures and settlements of tax audits.

11.  EQUITY AND COMPREHENSIVE INCOME

The following table presents a summary of the changes in equity for the three months ended April 3, 2010 and April 4, 2009.

 

    Three Months Ended April 3, 2010   Three Months Ended April 4, 2009  
    

Millipore

Shareholders’
Equity

  Total Equity   Millipore
Shareholders’
Equity
   

Noncontrolling

Interest

    Total Equity  

Equity, beginning of year

  $ 1,503,034   $ 1,503,034   $ 1,305,969      $ 6,326      $ 1,312,295   

Stock plan activities

    11,468     11,468     (1,795            (1,795

Stock based compensation expense

    7,486     7,486     5,791               5,791   

Dividends paid to noncontrolling interest

                   (460     (460

Comprehensive income

    39,829     39,829     60,278        342        60,620   

Equity, end of period

  $ 1,561,817   $ 1,561,817   $ 1,370,243      $ 6,208      $ 1,376,451   

The following tables present the components of comprehensive income, net of taxes.

 

    Three Months Ended April 3, 2010     Three Months Ended April 4, 2009  
    

Millipore

Shareholders’
Equity

    Total     Millipore
Shareholders’
Equity
   

Noncontrolling

Interest

    Total  

Net income

  $ 57,215      $ 57,215      $ 53,025      $ 529      $ 53,554   

Net foreign currency translation adjustments

    (19,104     (19,104     2,855        (187     2,668   

Change in fair value of cash flow hedges

    (639     (639     3,939               3,939   

Net realized gain on interest rate swap

    2,277        2,277                        

Net realized loss on cash flow hedges

    (819     (819     (31            (31

Net realized loss on cash flow hedges reclassified to earnings

    884        884        247               247   

Net changes in additional pension liability adjustments

    15        15        243               243   

Total comprehensive income

  $ 39,829      $ 39,829      $ 60,278      $ 342      $ 60,620   

12.  DERIVATIVE INSTRUMENTS AND HEDGING

The purpose of our hedging activities is to mitigate the impact of volatility associated with foreign currency transactions and interest rate exposures related to an anticipated debt refinancing. We do not hold derivative instruments for trading or speculative purposes.

Cash Flow Hedges

We utilize foreign currency forward exchange contracts to hedge anticipated intercompany sales transactions in certain foreign currencies and designate these derivative instruments as cash flow hedges when appropriate. We enter into forward exchange contracts that match the currency, timing, and notional amounts of the underlying forecasted transactions. Therefore, no ineffectiveness resulted, or was recorded, through the consolidated statement of operations in any of the periods

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data) (Unaudited)

 

presented. Our forward exchange contracts are primarily short term in nature with maximum contract durations of fifteen months. At April 3, 2010, these forward exchange contracts had aggregate U.S. dollar equivalent notional amounts of $303,347 and aggregate U.S. dollar equivalent fair values amounting to a net gain of $2,646. The net gain or loss from these cash flow hedges reported in accumulated other comprehensive income will be reclassified to earnings and recorded in revenues in our consolidated statement of operations when the related inventory is sold to third-party customers. The amounts ultimately recognized will vary based on fluctuations of the hedged currencies through the contract maturity dates. At April 3, 2010, we had $211 in net realized losses in accumulated other comprehensive income which will be recognized as a reduction to revenues in the 2010 second quarter.

In August 2009, we entered into forward starting interest rate swap agreements with an aggregate notional amount of $300 million. The purpose of these swaps is to hedge interest rate exposures related to an anticipated fixed-rate debt financing in December 2011 with a term of at least 10 years. On April 2, 2010, the interest rate swaps were settled, which resulted in a gain of $2,277, net of tax of $1,423, that was recorded in accumulated other comprehensive income. This gain will be recognized in earnings as an adjustment to interest expense in our consolidated statement of operations in the same period that the hedged interest payments are recorded in our statement of operations or when the probability that the anticipated fixed-rate debt financing will occur is remote.

Net Investment Hedge

We designated our 5.875 percent senior notes, which are denominated in Euro, as a hedge of the foreign currency exposures of our net investment in a European subsidiary. Foreign exchange gains or losses on the hedge, which are caused by the remeasurement of the Euro debt to U.S. dollars, are recorded in other comprehensive income as a component of cumulative translation adjustment. At April 3, 2010 and December 31, 2009, the cumulative net loss on these senior notes included in accumulated other comprehensive income was $23,647 and $44,181, respectively.

Embedded Derivatives

The contingent interest feature of the Convertible Notes represents an embedded derivative that requires separate recognition at fair value apart from the Convertible Notes. As a result, we are required to separate the value of this feature from the Convertible Notes and record a liability on the condensed consolidated balance sheet. At April 3, 2010 and December 31, 2009, the contingent interest feature had no value.

Other Derivatives

In addition to cash flow hedges and the net investment hedge, we also enter into foreign currency forward exchange contracts to mitigate the impact of foreign exchange risk related to foreign currency denominated intercompany debt and foreign currency receivable and payable balances. Both realized and unrealized gains and losses resulting from changes in the fair value of these derivative instruments are recorded through current earnings because we do not designate these forward exchange contracts as hedges. The aggregate U.S. dollar equivalent notional amount of these forward exchange contracts was $253,549 at April 3, 2010. Cash paid or received upon settlement of these forward exchange contracts is included in operating activities in the condensed consolidated statements of cash flows.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data) (Unaudited)

 

Fair values of derivative instruments at April 3, 2010 are summarized in the following table:

 

     Asset Derivatives    Liability Derivatives
     

Balance Sheet

Location

   Fair
value
   Balance Sheet
Location
  

Fair

Value

Cash flow hedges – foreign exchange contracts

   Other current
assets
   $ 6,613    Accrued
expenses
   $ 3,967

Foreign exchange contracts not designated as hedges

   Other current
assets
     4,158    Accrued
expenses
     350

Total derivatives

        $ 10,771         $ 4,317

Amounts in the table above represent gross unrealized gains and losses and do not reflect the actual recorded values in our balance sheet because gains and losses offset in certain cases. Actual unrealized gains included in other current assets were $4,852 for cash flow hedges and $3,862 for derivatives not qualifying for hedge accounting. Actual unrealized losses included in accrued expenses were $2,206 for cash flow hedges and $54 for derivatives not qualifying for hedge accounting.

Fair values of derivative instruments at December 31, 2009 are summarized in the following table:

 

 

     Asset Derivatives    Liability Derivatives
     

Balance Sheet

Location

   Fair
value
   Balance Sheet
Location
   Fair
Value

Cash flow hedges – foreign exchange contracts

   Other current
assets
   $ 2,638    Accrued
expenses
   $ 4,192

Cash flow hedges – interest rate swap

   Other current
assets
     4,940    Accrued
expenses
    

Foreign exchange contracts not designated as hedges

   Other current
assets
     2,136    Accrued
expenses
     1,024

Total derivatives

        $ 9,714         $ 5,216

Amounts in the table above represent gross unrealized gains and losses and do not reflect the actual recorded values in our balance sheet because gains and losses offset in certain cases. Actual unrealized gains included in other current assets were $1,015 for foreign exchange contracts designated as cash flow hedges and $1,619 for foreign exchange contracts not qualifying for hedge accounting. Actual unrealized losses included in accrued expenses were $2,569 for foreign exchange contracts designated as cash flow hedges and $507 for foreign exchange contracts not qualifying for hedge accounting.

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data) (Unaudited)

 

The effect of derivative instruments that were designated as hedges on our condensed consolidated financial statements is summarized below:

 

     Amount of Gain
(Loss)
Recognized in
OCI
(Effective Portion)
    Statement of
Operations
Location
(Effective
Portion)
 

Amount of Gain
(Loss)

Reclassified
from

Accumulated

OCI into Income
(Effective

Portion)

   

Statement of
Operations

Location

(Ineffective Portion)

  Amount of Gain
(Loss)
Recorded
(Ineffective
Portion)

Three months ended April 3, 2010

         

Cash flow hedges:

         

Foreign exchange contracts

  $ 2,899      Revenues   $ (1,429   Selling, general and
administrative
expenses
  $

Interest rate swaps

    (1,240   Interest
expense
         Selling, general and
administrative
expenses
   

Net investment hedge

    20,534                  

Total

  $ 22,193        $ (1,429     $

Three months ended April 4, 2009

         

Cash flow hedges:

         

Foreign exchange contracts

  $ 6,008      Revenues   $ (162   Selling, general and
administrative
expenses
  $

Net investment hedge

    12,496                  

Total

  $ 18,504        $ (162     $

The effect of derivative instruments not designated as hedges on our condensed consolidated financial statements for the three months ended April 3, 2010 and April 4, 2009 is as follows:

 

      Statement of Operations
Location
  

Amount of Gain (Loss)

Recorded

Three months ended April 3, 2010

     

Foreign exchange contracts

   Selling, general and
administrative expenses
   $(2,776)

Three months ended April 4, 2009

     

Foreign exchange contracts

   Selling, general and
administrative expenses
   $(738)

13.  FAIR VALUE MEASUREMENTS

We hold cash equivalents, derivatives, certain other assets, and certain other liabilities that are carried at fair value. We generally determine fair value using a market approach based on quoted prices of identical instruments, when available. When market quotes of identical instruments are not readily accessible or available, we determine fair value based on quoted market prices of similar instruments. Nonperformance risk of counter-parties is considered in determining the fair value of derivative instruments in an asset position while the impact of our own credit standing is considered in determining the fair value of our obligations.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data) (Unaudited)

 

Our valuation techniques are based on both observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:

 

Level 1:    Quoted prices for identical instruments in active markets.
Level 2:    Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3:    Instruments whose significant value drivers are unobservable.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:

 

     April 3, 2010
      Level 1    Level 2    Level 3    Balance
Assets            

Cash equivalents1

   $    $ 107,166    $    $ 107,166

Derivatives

   $    $ 8,714    $          –    $ 8,714

Marketable securities2

   $ 1,317    $    $    $ 1,317
Liabilities            

Derivatives

   $    $ 2,260    $    $ 2,260

Deferred compensation3

   $ 11,283    $    $    $ 11,283
     December 31, 2009
      Level 1    Level 2    Level 3    Balance
Assets            

Cash equivalents1

   $    $ 115,165    $    $ 115,165

Derivatives

   $    $ 7,574    $    $ 7,574

Marketable securities2

   $ 1,128    $    $    $ 1,128
Liabilities            

Derivatives

   $    $ 3,076    $    $ 3,076

Deferred compensation3

   $ 8,794    $    $    $ 8,794

 

1   Valued at their ending balances as reported by the financial institution that hold our cash equivalents, which approximates fair value.
2   Relates to investments in marketable securities associated with certain of our non-qualified deferred compensation plans, which are included in Other assets.
3   Relates to our obligations to pay benefits under certain of our non-qualified deferred compensation plans and supplemental savings plan for senior executives, which are included in Other liabilities.

There were no assets or liabilities that were measured at fair value on a nonrecurring basis during the three months ended April 3, 2010.

14. COSTS ASSOCIATED WITH EXIT ACTIVITIES

On September 10, 2008, we took actions to optimize the performance of our global supply chain and reduce our cost structure to improve operational efficiency. These actions were partly in response to the market conditions that caused revenue declines in our Bioprocess Division in 2008. These actions were also part of our long term strategy to further improve the

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data) (Unaudited)

 

efficiency of our global supply chain, primarily through consolidation of our manufacturing locations. We have substantially completed this program as of April 3, 2010. We expect to complete this program in 2010 with the closing of one more facility and do not anticipate significant additional charges relating to this program going forward.

The following table summarizes expected, incurred, and remaining costs associated with these actions at April 3, 2010:

 

      Severance
and
Retention
Costs
     Facility Exit
and Lease
Termination
Costs
     Accelerated
Depreciation
    

Other

Costs

     Total  

Expected costs

   $ 7,000       $ 1,921       $ 2,876       $ 10,792       $ 22,589   

Costs incurred through 2009

     (6,844      (1,506      (2,876      (9,234      (20,460

Costs incurred in the three months ended
April 3, 2010

     (41      (56              (531      (628

Remaining expected costs at April 3, 2010

   $ 115       $ 359       $       $ 1,027       $ 1,501   

The following table summarizes the accrual balances and utilization by cost type associated with these actions at April 3, 2010:

 

      Severance
and
Retention
Costs
     Facility Exit
and Lease
Termination
Costs
     Accelerated
Depreciation
   Other
Costs
     Total  

Balance at December 31, 2009

   $ 1,497       $ 1,076       $    $       $ 2,573   

Expense

     41         56                 –      531         628   

Payments/utilization

     (453      (310           (531      (1,294

Foreign currency translation

     (46      3                      (43

Balance at April 3, 2010

   $ 1,039       $ 825       $    $        –       $ 1,864   

During the three months ended April 3, 2010, we recorded costs associated with these exit activities in our condensed consolidated statement of operations of $612, $14, and $2 in cost of revenues, selling, general and administrative expenses and research and development expenses, respectively.

15.  NONCONTROLLING INTEREST

On November 20, 2009, we acquired the remaining 60% ownership of our joint venture in India (the “India JV”) for $58,082 in cash. Prior to November 20, 2009, we owned a 40% equity interest in our India JV which we consolidated as we determined that substantially all of the activities of the India JV involved us or were conducted on our behalf.

16.  CONTINGENCIES

The proposed acquisition by Merck KGaA resulted in two putative shareholder class actions challenging the exchange have been filed in Massachusetts naming Millipore, Merck, Sub and certain officers and directors of Millipore as defendants. The first such case is Elliot v. Millipore Corporation, et al., No. 10-0853 (filed March 2, 2010) (“Elliot”), and the second such case is United Union of Roofers, Waterproofers and Allied Workers Local Union No. 8 v. Millipore Corporation et al., No. 10-0855 (filed March 4, 2010) (“United Union of Roofers”). The complaints, which are similar, allege claims for breach of fiduciary duty against the individual defendants and for aiding and abetting a breach of fiduciary duty against the

 

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(In thousands, except per share data) (Unaudited)

 

corporate defendants. The complaints seek equitable relief including an order enjoining the exchange. The complaints generally allege that the consideration offered in the proposed transaction is inadequate and the process through which the proposed transaction was approved was unfair. The plaintiff in United Union of Roofers has notified the Elliot parties that it intends to seek consolidation of the two actions. Millipore is defending the lawsuit and along with the other defendants served a motion to dismiss Elliot on April 26, 2010.

We are also subject to a number of claims and legal proceedings which, in the opinion of our management, are incidental to our normal business operations. In our opinion, although final settlement of these suits and claims may impact our financial statements in a particular period, they are not expected to, in the aggregate, have a material adverse effect on our financial position, cash flows or results of operations.

17.  RECENT ACCOUNTING PRONOUNCEMENTS

In October 2009, the Emerging Issues Task Force (“the EITF”) reached consensus on an amendment to the accounting and disclosure requirements for revenue arrangements with multiple deliverables. The amendment eliminates the use of the residual method of allocation and requires, instead, that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price. When applying the relative selling price allocation method, the selling price for each of the deliverables shall be determined using vendor-specific objective evidence (“VSOE”), if it exists, otherwise third-party evidence (“TPE”). If neither VSOE nor TPE exists, the amendment allows a vendor to use its best estimate of selling price. This amendment is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, this amendment may be applied retrospectively to all periods presented. Earlier application is permitted as of the beginning of an entity’s fiscal year. We plan to adopt this amendment as of January 1, 2011 and do not believe this amendment will have a material effect on our consolidated financial statements.

 

 

 

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PART I

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Basis of Presentation

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Condensed Consolidated Financial Statements and related notes thereto and other financial information included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2009. We will also be disclosing certain non-GAAP information in the Management’s Discussion and Analysis. A reconciliation of our GAAP financial measures to our non-GAAP financial measures and information about the use of non-GAAP measures begins on page 28 under the heading “Use of Non-GAAP Financial Measures.”

Our interim fiscal quarters end on the thirteenth Saturday of each quarter. Since our fiscal year-end is December 31, the first and fourth fiscal quarters may not consist of precisely thirteen weeks. The first fiscal quarters of 2010 and 2009 ended on April 3, 2010 and April 4, 2009, respectively.

General Overview

Millipore is a global leader in the life science tools market. Together with our customers, we help to advance the research, development, and production of drugs. Our innovative products and services are used to support life science research, drug discovery, process development, drug manufacturing, and quality assurance. We help customers to improve laboratory productivity and work flows, prioritize potential drugs, optimize manufacturing productivity, and support commercial scale manufacturing.

We manage our business globally and are organized in two operating divisions. Our Bioscience Division provides products and technologies to support life science research and development activities. Our Bioprocess Division provides products and services to support pharmaceutical and biotechnology manufacturing.

The breadth of our product offering and our global scale make us a strategic supplier to the life science industry and provide us with access to many different segments of the market. Our products and services are primarily used by a diverse, global customer base including biotechnology and pharmaceutical companies, academic institutions, and research laboratories. In addition, we derive most of our revenues from consumable products. These attributes allow us to target growth on a number of dimensions and make our business less susceptible to economic downturns.

PROPOSED TRANSACTION WITH MERCK KGaA

On February 28, 2010, we entered into a definitive agreement under which Concord Investments Corp., a fully owned subsidiary of Merck KGaA, will acquire all outstanding shares of our common stock for $107 per share in cash. This business combination will create a world-class partner for the Life Science sector with significant businesses in high-margin specialty products and an attractive growth profile.

Through the date of this filing, Millipore announced key milestones relating to the proposed transaction, including: the transaction was approved by the boards of directors of both companies; the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act expired; the Special Shareholder’s Meeting to vote on the proposed transaction will take place on June 3, 2010; and the Company filed its definitive proxy with the Securities and Exchange Commission. The proposed transaction is expected to be completed in the early part of the third quarter of 2010.

 

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During the three months ended April 3, 2010, we recorded $2.3 million of costs consisting primarily of legal and regulatory fees associated with this proposed transaction in our condensed consolidated statement of operations as selling, general and administrative expenses.

The following table sets forth revenues derived from the Bioprocess and Bioscience divisions as a percentage of our total revenues.

 

     Three Months Ended  
      April 3,
2010
    April 4,
2009
 

Bioprocess

   56   56

Bioscience

   44   44

Total

   100   100

The following table sets forth the composition of our revenues by geography.

 

     Three Months Ended  
      April 3,
2010
    April 4,
2009
 

Americas

   41   40

Europe

   36   40

Asia/Pacific

   23   20

Total

   100   100

The following tables set forth reported and organic revenue growth rates by division compared with the prior year.

 

     Bioprocess     Bioscience     Consolidated  
     Three Months Ended     Three Months Ended     Three Months Ended  
      April 3,
2010
    April 4,
2009
    April 3,
2010
    April 4,
2009
    April 3,
2010
    April 4,
2009
 

Reported growth

   12   6   15   (1 )%    14   3

Less: Foreign currency translation

   3   (7 )%    6   (7 )%    5   (7 )% 

Acquisition

         1     1

Organic growth

   9   13   9   5   9   9

Consolidated revenues of $463.0 million for the three months ended April 3, 2010 increased $55.1 million, or 14 percent, versus the prior year comparable period. Adjusting for a 5 percentage point favorable effect from foreign currency translation, our consolidated revenues for the three months ended April 3, 2010 grew 9 percent. We delivered strong revenue growth as we benefited from the contribution of new products and a strengthening economic environment. Our results were well-balanced between both divisions. From a geographic perspective, we generated double-digit revenue growth in North America and Asia. Our Bioscience Division revenue growth was attributable to higher laboratory instrumentation sales and increased demand from pharmaceutical customers, two areas which rebounded from last year. Bioprocess Division revenue growth was primarily the result of continued higher spending by our biotechnology customers.

 

 

 

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Operating profit increased to $88.1 million for the three months ended April 3, 2010 from $71.3 million in the prior year comparable period. Higher revenues, favorable impact from changes in foreign currency exchange rates, and lower costs related to the global supply chain initiatives were the primary drivers of the increase. This profit expansion enabled us to continue to invest in research and development in accordance with our innovation strategy and absorb the effects of an unfavorable product mix and higher employee-related costs. Our gross margin increased to 56 percent for the three months ended April 3, 2010 from 55 percent in the prior year comparable period.

Diluted GAAP and non-GAAP earnings per share (“EPS”) were $0.99 and $1.21, respectively, for the three months ended April 3, 2010 and increased by $0.04 and $0.15, respectively, versus the prior year comparable period. (Please see our non-GAAP reconciliation which begins on page 28.) Higher operating profit contributed to higher GAAP EPS, which was offset by a higher tax rate in the current period and the absence this year of the $8.5 million non-taxable gain resulting from our Guava business acquisition. Diluted EPS was also adversely impacted by shares issuable upon conversion of the 3.75 percent convertible notes becoming dilutive as a result of the increase in our stock price during the three months ended April 3, 2010 and an increase in dilution of stock-based compensation awards.

Free cash flow is an important operating metric that we define as net cash provided by operating activities less additions to property, plant and equipment. We generated $76.7 million of free cash flow for the three months ended April 3, 2010, a 12 percent increase over the prior year comparable period. This growth was primarily attributable to a significant improvement in our inventory management as a result of our working capital initiatives. Over the past year, we have lowered our days of inventory outstanding from 129 days at April 4, 2009 to 109 days at April 3, 2010.

Results of Operations

REVENUES

The following table sets forth revenues and percent of revenue growth by division compared with the prior year.

 

    Three Months Ended  
($ in millions):   April 3,
2010
  April 4,
2009
  Growth  

Bioprocess

  $ 258.3   $ 230.0   12

Bioscience

    204.7     177.9   15

Total

  $ 463.0   $ 407.9   14

Bioprocess Division

Bioprocess revenues of $258.3 million for the three months ended April 3, 2010 increased $28.3 million, or 12 percent, versus the prior year comparable period. Excluding the favorable effect of foreign currency translation, Bioprocess revenues increased 9 percent. The revenue growth was primarily attributable to higher sales of our downstream bioprocessing products used in biopharmaceutical manufacturing, which was a result of the following: higher spending levels by our North America biotechnology customers as these customers are accelerating their production of monoclonal antibodies; increased revenues related to disposable manufacturing as companies continue to migrate to single use, disposable technologies that eliminate the need for cleaning and sterilization, thus shortening the time between processing runs; and higher revenues in Asia, particularly in China and Singapore, due to biotechnology industry growth in the region and more stringent regulatory compliance standards in China.

 

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To a lesser extent, the Bioprocess revenue increase was the result of continued growth in process monitoring tools products. Demand for on-site testing products, particularly our disposable NovaSeptum® products, continued to increase, as drug companies are adopting disposable sampling technology to monitor contamination earlier in the drug manufacturing process.

Bioscience Division

Bioscience revenues of $204.7 million for the three months ended April 3, 2010 increased $26.8 million, or 15 percent, versus the prior year comparable period. Excluding the favorable effect of foreign currency translation, Bioscience revenues increased 9 percent. The division’s revenue growth benefited from increased spending from pharmaceutical customers and higher sales of laboratory instrumentation products. These two areas were weak last year and benefited from an improving economic environment in the three months ended April 3, 2010, particularly in North America and Asia. Bioscience revenue growth was also attributable to successful new product launches and a $3.3 million revenue from a technology license.

REVENUES BY GEOGRAPHY

Revenues and the percent of revenue growth by geography, as compared with the prior year, are summarized in the table below:

 

    Three Months Ended  
($ in millions):   April 3,
2010
  April 4,
2009
  Growth  

Americas

  $ 188.9   $ 165.2   14

Europe

    166.7     162.9   2

Asia/Pacific

    107.4     79.8   35

Total

  $ 463.0   $ 407.9   14

Reported and organic growth rates by geography, as compared with the prior year, are summarized below:

 

     Americas     Europe     Asia/Pacific  
     Three Months Ended     Three Months Ended     Three Months Ended  
      April 3,
2010
    April 4,
2009
    April 3,
2010
    April 4,
2009
    April 3,
2010
    April 4,
2009
 

Reported growth

   14   13   2   (5 )%    35   1

Less: Foreign currency translation

        (1 )%    7   (16 )%    7   2

 Acquisition

        1        1          

Organic growth

   14   13   (5 )%    10   28   (1 )% 

From a geographic perspective, reported revenues increased in all regions, $23.7 million in the Americas, $3.8 million in Europe, and $27.6 million in Asia/Pacific, during the three months ended April 3, 2010 versus the prior year comparable period. Excluding the effects of foreign currency translation, revenues increased 14 percent in the Americas, decreased 5 percent in Europe, and increased 28 percent in Asia/Pacific. The increase in the Americas was primarily the result of higher spending by our Bioprocess biotechnology customers and Bioscience pharmaceutical customers as well as the $3.3 million revenue from a technology license. The decrease in Europe was primarily attributable to general economic conditions and the timing of purchases by certain larger Bioprocess customers. The increase in Asia/Pacific was primarily driven by revenue growth in our downstream bioprocessing products in China and Singapore and higher Bioscience revenues in Japan as the economy began to improve.

 

 

 

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GROSS PROFIT MARGIN

 

     Three Months Ended  
($ in millions):    April 3,
2010
    April 4,
2009
 

Gross profit

   $ 259.4      $ 223.3   

Gross profit margin

     56     55

Gross profit increased $36.1 million, or 16 percent, versus the prior year comparable period. Gross profit margin improved from 55 percent of revenues last year to 56 percent of revenues this year. The primary drivers of the increase in gross profit margin were favorable foreign currency, a decrease in inventory write-offs due to our working capital improvement actions implemented last year, lower costs associated with our global supply chain initiatives, and a slight impact from price increases. The favorable foreign currency impact was primarily the result of a weaker U.S. dollar, versus the prior year comparable period. Generally, when the Japanese Yen strengthens against the U.S. dollar and Euro, our gross profit margin is favorably impacted because substantially all of our manufacturing activities are in the United States, Ireland, and France. We incurred charges associated with our global supply chain initiatives amounting to $0.6 million and $3.3 million in the three months ended April 3, 2010 and April 4, 2009, respectively. By the end of fiscal year 2010, we expect to complete these initiatives by incurring approximately $1.5 million of planned additional costs.

These favorable effects were partly offset by an unfavorable product mix in our upstream bioprocessing products and, to a lesser extent, higher salary and facility costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

     Three Months Ended  
($ in millions):    April 3,
2010
    April 4,
2009
 

Selling, general and administrative expenses

   $ 141.1      $ 126.8   

Percentage of revenues

     30     31

Selling, general and administrative (“SG&A”) expenses increased $14.3 million, or 11 percent, versus the prior year comparable period. Excluding the adverse effect of foreign currency translation, SG&A expenses increased $10.2 million, or 8 percent. The increase was primarily attributable to increased employee-related costs driven by: salary increases; higher incentive compensation costs; and higher costs related to our non-employee director deferred compensation plan resulting from an increase in the Millipore stock price. Additionally, acquisition and related integration expenses increased due to the proposed acquisition by Merck KGaA. Amortization expense for the three months ended April 3, 2010 affecting SG&A was $11.5 million versus $12.0 million in the prior year comparable period.

RESEARCH AND DEVELOPMENT EXPENSES

 

     Three Months Ended  
($ in millions):    April 3,
2010
    April 4,
2009
 

Research and development expenses

   $ 30.1      $ 25.2   

Percentage of revenues

     6     6

 

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Research and development (“R&D”) expenses increased $4.9 million, or 19 percent, versus the prior year comparable period. Excluding the adverse effect of foreign currency translation, R&D expenses increased $4.5 million, or 18 percent. The increase was primarily attributable to increased employee-related costs driven by salary increases, higher incentive compensation costs, and increased headcount. Additionally, technology partner payments have increased as a result of our strategy to enhance our internal R&D capabilities through technology collaborations and license arrangements with third parties. We expect 2010 full year R&D expenses to be approximately 7 percent of revenues.

INTEREST INCOME/EXPENSE

 

     Three Months Ended  
($ in millions):    April 3,
2010
    April 4,
2009
 

Interest income

   $ 0.1      $ 0.2   

Interest expense

   $ 14.3      $ 14.6   

Average interest rate during the period

     6.3     5.5

Interest expense decreased $0.3 million, or 2 percent, versus the prior year comparable period. Excluding the adverse effect of foreign currency translation, interest expense decreased $0.5 million, or 3 percent. The decrease was the result of lower overall debt balances.

PROVISION FOR INCOME TAXES

 

     Three Months Ended  
      April 3,
2010
    April 4,
2009
 

Effective income tax rate

   23   18

Our effective tax rate was 23 percent for the three months ended April 3, 2010 versus 18 percent for the prior year comparable period. Our effective tax rate for the prior year comparable period was lower because of the $8.5 million non-taxable gain on the Guava acquisition. The higher current year rate was also attributable to a shift in the jurisdictional mix of our profits to higher tax rate jurisdictions this year and $1.5 million U.S. R&D credits recognized in the prior year comparable period. The R&D credit provisions expired in December 2009, thus resulting in a higher effective tax rate for the current period. On a full year basis, we expect our effective tax rate to be approximately 22 percent.

Over the next twelve months, we may need to record up to $3,900 of previously unrecognized tax benefits in the event of statute of limitations closures and settlements of tax audits.

 

 

 

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OPERATING PROFIT, NET INCOME ATTRIBUTABLE TO MILLIPORE AND DILUTED EARNINGS PER SHARE

 

     Three Months Ended  
($ in millions, except per share data):    April 3,
2010
    April 4,
2009
 

Operating profit

   $ 88.1      $ 71.3   

Operating profit margin

     19.0     17.5

Net income attributable to Millipore

   $ 57.2      $ 53.0   

Diluted earnings per share

   $ 0.99      $ 0.95   

Non-GAAP net income attributable to Millipore*

   $ 70.2      $ 59.2   

Non-GAAP earnings per share*

   $ 1.21      $ 1.06   

 

* See non-GAAP reconciliation on page 29 for more information.

Operating profit increased $16.8 million, or 23.6 percent, versus the prior comparable period, primarily as a result of higher revenues and favorable effect of foreign currency translation. These increases were partially offset by higher employee-related costs and higher investments in research and development. On a GAAP basis, the 8 percent increase in net income attributable to Millipore was the result of higher operating profit which was partially offset by a higher tax rate in the current period and the absence this year of the $8.5 million non-taxable gain on the Guava acquisition. On a non-GAAP basis, the 19 percent increase in net income attributable to Millipore was the result of higher operating profit.

Capital Resources and Liquidity

The following table shows information about our capitalization as of the dates indicated.

 

(In millions, except ratio amounts)   

April 3,

2010

  

December,

2009

Total debt

   $ 884.8    $ 933.1

Cash and cash equivalents

   $ 222.7    $ 168.3

Net debt*

   $ 662.1    $ 764.8

 

* Non-GAAP. See page 28 for more information.

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our primary sources of liquidity are internally generated cash flows and borrowings under our revolving credit facility. Significant factors affecting the management of our ongoing cash requirements are the adequacy of available bank lines of credit and our ability to attract long-term capital with satisfactory terms. The sources of our liquidity are subject to all of the risks of our business and could be adversely affected by, among other factors, a decrease in demand for our products, our ability to integrate acquisitions, deterioration in certain financial ratios, and market changes in general.

 

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The cost of additional or replacement financing is partly a function of our debt to capitalization levels, credit standing, and financial market conditions. Our credit ratings are reviewed regularly by major debt rating agencies such as Standard & Poor’s and Moody’s Investors Service. The chart below summarizes our ratings at April 3, 2010.

 

      Moody’s   

Standard

& Poor’s

Primary revolving credit facility

   Baa2    BBB

5.875% senior notes

   Ba2    BBB

3.75% convertible senior notes

      BB-

Millipore corporate rating

   Ba1    BB+

We believe our future operating cash flows will be sufficient to meet our future operating and investing cash needs. The availability of borrowings under our primary revolving credit facility and our ability to obtain equity financing provide additional potential sources of liquidity should they be required. We intend to utilize excess cash generated from our operations to fund future acquisitions while preserving an appropriate level of cash needed for our operations. We may from time to time seek to retire or purchase our outstanding obligations. We may also seek to repurchase shares of our common stock. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors.

In August 2009, we entered into forward starting interest rate swap agreements with an aggregate notional amount of $300.0 million. The purpose of these swaps is to hedge interest rate exposures related to an anticipated fixed-rate debt financing in December 2011 with a term of at least 10 years. On April 2, 2010, the interest rate swaps were settled, resulting in a gain of $2.3 million, net of tax of $1.4 million, which was recorded in accumulated other comprehensive income. This gain will be recognized in earnings as an adjustment to interest expense in our consolidated statement of operations in the same period when the hedged interest payments are recorded in our statement of operations or when the probability that the anticipated fixed-rate debt financing will occur is remote.

CASH FLOWS

The following table summarizes our sources and uses of cash over the periods indicated.

 

     Three Months Ended  
($ in millions)    April 3,
2010
     April 4,
2009
 

Net cash provided by operating activities

   $ 88.3       $ 84.2   

Less: additions to property, plant and equipment

     (11.6      (15.7

Free cash flow*

   $ 76.7       $ 68.5   

Net cash used in investing activities

   $ (12.3    $ (35.8

Net cash (used in) provided by financing activities

   $ (15.4    $ 5.8   

Increase in cash and cash equivalents

   $ 54.3       $ 56.7   

 

* Non-GAAP. See page 28 for more information.

OPERATING CASH FLOWS

Cash provided by operating activities was $88.3 million for the three months ended April 3, 2010 and was primarily attributable to our net income of $57.2 million, non-cash items totaling $38.7 million (primarily depreciation and amortization expenses, stock-based compensation expense, and debt discount amortization), and a net working capital increase of $7.7 million. Our working capital increase was primarily the result of an increase in accounts receivable and a decrease in

 

 

 

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accrued expenses offset by decrease in inventory and increases in accounts payable and income taxes payable balances. The increase in accounts receivable since year end was primarily attributable to the higher overall revenues as well as timing of our sales during the quarter. Days sales outstanding was 63 days at April 3, 2010, compared to 59 days at December 31, 2009 and 67 days at April 4, 2009. The decrease in accrued expenses since year end was primarily attributable to payments made to employees under the 2009 management incentive plan paid during the three months ended April 3, 2010. The decrease in inventory was attributable to two main factors. First, continued global supply chain initiatives contributed to reductions in inventory levels. Secondly, the timing of product sales as well as overall revenue increases helped reduce inventory levels. Days of inventory was 109 days at April 3, 2010, compared to 118 days at December 31, 2009 and 129 days at April 4, 2009. At the end of 2009, we accelerated cash payments to take advantage of early vendor payment discounts, which decreased our December 31, 2009 accounts payable balance. For the three months ended April 3, 2010, the amount of early payment discount opportunities decreased causing accounts payable to increase as of April 3, 2010. Lastly, the increase in income taxes payable was attributable to an increase in profitability in higher tax rate jurisdictions.

INVESTING CASH FLOWS

Cash used for investing activities was $12.3 million during the three months ended April 3, 2010. We paid $11.6 million for capital expenditures and expect our full year 2010 capital expenditures to be approximately $80 million.

FINANCING CASH FLOWS

Cash used for financing activities was $15.4 million during the three months ended April 3, 2010 resulting from net repayments of short-term debt of $32.3 million, which was offset by proceeds of $16.9 million from exercises of employee stock options. Increases in stock option exercises were attributable to the higher stock price as a result of the proposed Merck KGaA transaction.

FINANCING COMMITMENTS

Short-term debt

Short-term debt consisted of borrowings under our operating bank facilities and two short-term revolving credit facilities in Japan. These two credit facilities provide for cumulative borrowings of ¥7.0 billion, or $74.0 million, with an interest rate of TIBOR plus an applicable margin. Interest is payable at the end of an interest period based upon the term of the borrowing. These credit facilities expire in December 2010 and are subject to automatic annual renewals subject to termination by either Millipore or the banks. As of April 3, 2010, we had ¥6.0 billion, or $63.3 million, available for borrowing under these credit facilities. We are not required to comply with any debt covenants under these agreements.

Primary revolving credit facility

At April 3, 2010, we had a commitment under our primary revolving credit agreement amounting to 465.0 million, or $627.6 million. This credit agreement expires in June 2011.

We are required to maintain certain leverage and interest coverage ratios set forth in the primary revolving credit agreement. As of April 3, 2010, we were compliant with all financial covenants specified in this credit agreement. The agreement also includes limitations on our ability to incur additional indebtedness; to merge, consolidate, or sell assets; to create liens; and to make payments in respect of capital stock or subordinated debt, as well as other customary covenants and representations.

 

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The following table summarizes the financial covenant requirements and our compliance with these covenants as of April 3, 2010:

 

Covenant    Requirement    Actual at
April 3, 2010

Maximum leverage ratio

   3.50    2.0

Minimum interest coverage ratio

   3.50    10.22

As of April 3, 2010, we had no borrowings under our primary revolving credit facility.

3.75% convertible senior notes due 2026

In June 2006, we issued $565.0 million in aggregate principal amount of 3.75 percent convertible senior notes (the “Convertible Notes”) in a private placement offering. The estimated fair value of a similar debt instrument without the conversion feature was $483.7 million at the time of issuance. The resulting $81.3 million discount on the debt is being amortized through interest expense over the period from June 2006 through December 2011, which represents the expected life of the debt. As a result, our Convertible Notes have a 6.94 percent effective interest rate.

As of April 3, 2010, the Convertible Notes had a carrying value of $537.1 million, net of $27.9 million of unamortized discount, and a fair value of $709.8 million. The fair value was determined from available market prices using current interest rates, non-performance risk, and term to maturity.

5.875% senior notes due 2016

In June 2006, we issued 250.0 million, or $337.4 million, in aggregate principal amount of 5.875 percent senior notes (the “Euro Notes”).

As of April 3, 2010, the Euro Notes had a carrying value of $336.6 million, net of $0.8 million of unamortized original issue discount, and a fair value of $371.2 million. This fair value was determined from available market prices using current interest rates, non-performance risk, and term to maturity.

Legal Matters

The proposed acquisition by Merck KGaA resulted in two putative shareholder class actions challenging the exchange have been filed in Massachusetts naming Millipore, Merck, Sub and certain officers and directors of Millipore as defendants. The first such case is Elliot v. Millipore Corporation, et al., No. 10-0853 (filed March 2, 2010) (“Elliot”), and the second such case is United Union of Roofers, Waterproofers and Allied Workers Local Union No. 8 v. Millipore Corporation et al., No. 10-0855 (filed March 4, 2010) (“United Union of Roofers”). The complaints, which are similar, allege claims for breach of fiduciary duty against the individual defendants and for aiding and abetting a breach of fiduciary duty against the corporate defendants. The complaints seek equitable relief including an order enjoining the exchange. The complaints generally allege that the consideration offered in the proposed transaction is inadequate and the process through which the proposed transaction was approved was unfair. The plaintiff in United Union of Roofers has notified the Elliot parties that it intends to seek consolidation of the two actions. Millipore is defending the lawsuit and along with the other defendants served a motion to dismiss Elliot on April 26, 2010.

 

 

 

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Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our most critical accounting policies have a significant impact on the preparation of these condensed consolidated financial statements. These policies include estimates and significant judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continue to have the same critical accounting policies and estimates as we described in Item 7, beginning on page 55, of our Annual Report on Form 10-K for the year ended December 31, 2009. Those policies and estimates were identified as those relating to revenue recognition, inventory valuation, valuation of long-lived assets, stock-based compensation, income taxes, and employee retirement plans. We continue to evaluate our estimates and judgments on an on-going basis. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We base our estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.

New Accounting Pronouncements

For a description of recent accounting pronouncements, see Note 17 “Recent Accounting Pronouncements” in the Notes to condensed consolidated financial statements in this Form 10-Q.

Use of Non-GAAP Financial Measures

Millipore provides non-GAAP supplemental information to its financial results. Non-GAAP net income attributable to Millipore and diluted earnings per share exclude costs related to global supply chain initiatives, acquisition and related integration expenses, costs related to the proposed acquisition, amortization of purchased intangible assets, inventory fair value adjustments related to business acquisitions, gain on business acquisition, and non-cash interest expense on our Convertible Notes. We define free cash flow as net cash provided by operating activities less additions to property, plant, and equipment. We define net debt as our debt less cash and cash equivalents.

We believe that the non-GAAP financial measures provide useful and supplementary information to investors regarding our operating performance, although they may not be directly comparable to measures used by other companies. It is our belief that these non-GAAP financial measures have been particularly useful to investors over the last few years because of the significant changes that have occurred outside of our day-to-day business in accordance with the execution of our strategy. Non-GAAP information should not be construed as an alternative to GAAP information as the items excluded from the non-GAAP measures often have a material impact on our financial results. Management uses, and investors should use, non-GAAP measures in conjunction with our GAAP results.

 

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Reconciliation of GAAP to Non GAAP Financial Measures

Operating Results—three months ended April 3, 2010

 

(dollars in thousands, except EPS data)   

Net income

Attributable to Millipore

   Diluted EPS

GAAP results, three months ended April 3, 2010

   $ 57,215    $ 0.99

Non-GAAP adjustments:

     

Costs related to global supply chain initiatives1

     404      0.01

Costs related to proposed acquistion3

     1,511      0.02

Purchased intangibles amortization2

     8,645      0.15

Non-cash interest expense on convertible debt4

     2,474      0.04

Total non-GAAP adjustments

     13,034      0.22

Non-GAAP results, three months ended April 3, 2010

   $ 70,249    $ 1.21

Operating Results—three months ended April 4, 2009

 

(dollars in thousands, except EPS data)   

Net Income

Attributable To Millipore

     Diluted EPS  

GAAP results, three months ended April 4, 2009

   $ 53,025       $ 0.95   

Non-GAAP adjustments:

     

Costs related to global supply chain initiatives1

     2,466         0.04   

Business acquisition inventory fair value adjustment2

     391         0.01   

Acquisition and related integration expenses3

     574         0.01   

Purchased intangibles amortization2

     8,979         0.16   

Gain on business acquisition2

     (8,542      (0.15

Non-cash interest expense on convertible debt4

     2,299         0.04   

Total non-GAAP adjustments

     6,167         0.11   

Non-GAAP results, three months ended April 4, 2009

   $ 59,192       $ 1.06   

 

(1)   We exclude severance and relocation costs, facility closure costs, and accelerated depreciation associated with our global supply chain initiatives because they are material expenses in excess of our normal operating costs. We undertook these initiatives to significantly reduce our cost structure and improve operational efficiency primarily through the consolidation of manufacturing locations.
(2)   We exclude the amortization of purchased intangible assets, gain on business acquisition, and inventory fair value adjustments from business acquisitions because (i) the amounts are non-cash, (ii) we can not influence the timing and amount of future expense recognition, and (iii) excluding such expenses provides investors and management better visibility into the components of operating expenses.
(3)   We exclude costs related to the proposed acquisition and acquisition and related integration expenses to make year-over-year comparisons because these are incremental costs to our day-to-day business and can be material.
(4)   Non-cash interest expense on our Convertible Notes is the incremental interest expense as a result of a change in accounting principles. This interest expense is non-cash and we can not control the amount of this expense without modifying our capital structure.

Forward-Looking Statements

The matters discussed in this Form 10-Q, as well as in future oral and written statements by our management, that are forward-looking statements are based on our current management expectations. These expectations 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. These risks and uncertainties include, without limitation, the risk factors and uncertainties set forth in Item 1A (Risk Factors) and elsewhere in our Form 10-K for the year ended December 31, 2009.

 

 

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There has been no significant change in our exposure to market risk since December 31, 2009. For discussion of our exposure to market risk, refer to Part II Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2009 under the heading “Market Risk.”

 

 

ITEM 4.  CONTROLS AND PROCEDURES.

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the fiscal quarter covered by this report. Based upon that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective. There has been no change in our internal control over financial reporting during the quarter ended April 3, 2010 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

 

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ITEM 6.   EXHIBITS

a. Exhibits Filed or Furnished Herewith.

 

Exhibits Filed Herewith
10.1    Form of Amendment No. 1 to Executive Termination Agreement
31.1    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) / Rule 15d-14(a)
31.2    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) / Rule 15d-14(a)
Exhibits Furnished Herewith
32.1    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

 

 

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MILLIPORE CORPORATION

 

     Signature    Title    Date

By:

 

/s/    CHARLES F. WAGNER, JR.        

Charles F. Wagner, Jr.

  

Vice President and Chief Financial Officer (on behalf of the registrant as its Principal Financial Officer)

   May 12, 2010

By:

 

/s/    ANTHONY L. MATTACCHIONE        

Anthony L. Mattacchione

  

Vice President, Corporate Controller and Chief Accounting Officer (on behalf of the registrant as its Principal Accounting Officer)

   May 12, 2010

 

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Exhibit Index

 

Exhibit Number    Exhibit Title
10.1    Form of Amendment No. 1 to Executive Termination Agreement
31.1    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/Rule 15d-14(a)
31.2    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/Rule 15d-14(a)
32.1    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

 

 

 

MILLIPORE FORM 10-Q

  33

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Martin D. Madaus, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Millipore Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 12, 2010     /s/    MARTIN D. MADAUS
    Martin D. Madaus
    President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Charles F. Wagner, Jr., certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Millipore Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 12, 2010     /s/    CHARLES F. WAGNER, JR.
    Charles F. Wagner, Jr.
    Chief Financial Officer