UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 3, 2015
or
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
.
Commission File Number: 01-14010
Waters
Corporation
(Exact name of registrant as specified in its charter)
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Delaware |
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13-3668640 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
34 Maple Street
Milford, Massachusetts 01757
(Address, including zip code, of principal executive offices)
(508) 478-2000
(Registrants 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 x 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.
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Large accelerated filer |
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x |
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Accelerated filer |
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¨ |
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Non-accelerated filer |
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¨ (Do not check if smaller reporting company) |
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Smaller reporting company |
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¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes ¨ No x
Indicate the number of shares outstanding of the registrants common stock as of October 30, 2015: 81,663,790
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
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Page |
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PART I |
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FINANCIAL INFORMATION |
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Item 1. |
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Financial Statements |
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Consolidated Balance Sheets (unaudited) as of October 3, 2015 and December 31, 2014 |
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1 |
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Consolidated Statements of Operations (unaudited) for the three months ended October 3, 2015 and September 27, 2014
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2 |
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Consolidated Statements of Operations (unaudited) for the nine months ended October 3, 2015 and September 27, 2014
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3 |
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Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended October 3, 2015 and
September 27, 2014 |
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4 |
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Consolidated Statements of Cash Flows (unaudited) for the nine months ended October 3, 2015 and September 27, 2014
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5 |
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Condensed Notes to Consolidated Financial Statements (unaudited) |
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6 |
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Item 2. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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20 |
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Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
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28 |
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Item 4. |
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Controls and Procedures |
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28 |
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PART II |
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OTHER INFORMATION |
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Item 1. |
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Legal Proceedings |
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29 |
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Item 1A. |
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Risk Factors |
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29 |
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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29 |
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Item 6. |
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Exhibits |
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30 |
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Signature |
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31 |
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WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
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October 3, 2015 |
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December 31, 2014 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
459,518 |
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$ |
422,177 |
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Investments |
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1,851,216 |
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1,633,211 |
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Accounts receivable, less allowances for doubtful accounts and sales returns of $6,651 and $7,179 at October 3, 2015 and
December 31, 2014, respectively |
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416,311 |
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433,616 |
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Inventories |
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281,786 |
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246,430 |
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Other current assets |
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85,016 |
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118,302 |
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Total current assets |
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3,093,847 |
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2,853,736 |
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Property, plant and equipment, net |
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325,554 |
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321,583 |
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Intangible assets, net |
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222,806 |
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232,371 |
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Goodwill |
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352,151 |
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354,838 |
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Other assets |
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126,886 |
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115,406 |
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Total assets |
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$ |
4,121,244 |
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$ |
3,877,934 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Notes payable and debt |
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$ |
175,176 |
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$ |
225,243 |
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Accounts payable |
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61,710 |
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65,704 |
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Accrued employee compensation |
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39,809 |
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47,198 |
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Deferred revenue and customer advances |
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157,992 |
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129,706 |
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Accrued income taxes |
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5,388 |
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15,143 |
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Accrued warranty |
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13,107 |
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13,266 |
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Other current liabilities |
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82,772 |
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85,335 |
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Total current liabilities |
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535,954 |
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581,595 |
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Long-term liabilities: |
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Long-term debt |
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1,455,000 |
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1,240,000 |
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Long-term portion of retirement benefits |
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77,353 |
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85,230 |
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Long-term income tax liabilities |
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19,482 |
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20,397 |
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Other long-term liabilities |
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64,899 |
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56,046 |
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Total long-term liabilities |
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1,616,734 |
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1,401,673 |
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Total liabilities |
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2,152,688 |
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1,983,268 |
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Commitments and contingencies (Notes 6, 7 and 10) |
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Stockholders equity: |
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Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at October 3, 2015 and December 31,
2014 |
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Common stock, par value $0.01 per share, 400,000 shares authorized, 157,252 and 156,716 shares issued, 81,654 and 83,147 shares
outstanding at October 3, 2015 and December 31, 2014, respectively |
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1,573 |
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1,567 |
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Additional paid-in capital |
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1,451,601 |
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1,392,494 |
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Retained earnings |
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4,712,512 |
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4,394,513 |
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Treasury stock, at cost, 75,598 and 73,569 shares at October 3, 2015 and December 31, 2014, respectively |
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(4,070,314 |
) |
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(3,815,203 |
) |
Accumulated other comprehensive loss |
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(126,816 |
) |
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(78,705 |
) |
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Total stockholders equity |
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1,968,556 |
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1,894,666 |
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Total liabilities and stockholders equity |
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$ |
4,121,244 |
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$ |
3,877,934 |
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The accompanying notes are an integral part of the interim consolidated
financial statements.
1
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
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Three Months Ended |
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October 3, 2015 |
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September 27, 2014 |
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Product sales |
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$ |
336,933 |
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$ |
331,165 |
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Service sales |
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163,645 |
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162,000 |
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Total net sales |
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500,578 |
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493,165 |
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Cost of product sales |
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138,014 |
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133,868 |
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Cost of service sales |
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68,790 |
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68,354 |
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Total cost of sales |
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206,804 |
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202,222 |
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Gross profit |
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293,774 |
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290,943 |
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Selling and administrative expenses |
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124,655 |
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122,226 |
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Research and development expenses |
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30,703 |
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27,279 |
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Purchased intangibles amortization |
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2,573 |
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2,725 |
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Operating income |
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135,843 |
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138,713 |
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Interest expense |
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(9,017 |
) |
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(9,062 |
) |
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Interest income |
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2,736 |
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1,762 |
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Income from operations before income taxes |
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129,562 |
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131,413 |
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Provision for income taxes |
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13,281 |
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17,916 |
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Net income |
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$ |
116,281 |
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$ |
113,497 |
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Net income per basic common share |
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$ |
1.42 |
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$ |
1.36 |
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Weighted-average number of basic common shares |
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82,036 |
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83,663 |
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Net income per diluted common share |
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$ |
1.40 |
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$ |
1.34 |
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Weighted-average number of diluted common shares and equivalents |
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82,784 |
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84,401 |
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The accompanying notes are an integral part of the interim consolidated financial statements.
2
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
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Nine Months Ended |
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October 3, 2015 |
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September 27, 2014 |
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Product sales |
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$ |
971,842 |
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$ |
937,225 |
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Service sales |
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483,880 |
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468,249 |
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Total net sales |
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1,455,722 |
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1,405,474 |
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Cost of product sales |
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398,168 |
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387,646 |
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Cost of service sales |
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206,589 |
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204,148 |
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Total cost of sales |
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604,757 |
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|
591,794 |
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Gross profit |
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850,965 |
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813,680 |
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Selling and administrative expenses |
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367,066 |
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380,791 |
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Research and development expenses |
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90,209 |
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|
79,002 |
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Purchased intangibles amortization |
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7,547 |
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|
8,018 |
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Operating income |
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386,143 |
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|
345,869 |
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Interest expense |
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(27,038 |
) |
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(24,522 |
) |
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Interest income |
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7,576 |
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|
4,920 |
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Income from operations before income taxes |
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|
366,681 |
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|
326,267 |
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Provision for income taxes |
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|
48,682 |
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|
|
45,939 |
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|
|
|
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Net income |
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$ |
317,999 |
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|
$ |
280,328 |
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Net income per basic common share |
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$ |
3.85 |
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$ |
3.32 |
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Weighted-average number of basic common shares |
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|
82,552 |
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|
84,375 |
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Net income per diluted common share |
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$ |
3.82 |
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$ |
3.29 |
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Weighted-average number of diluted common shares and equivalents |
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|
83,305 |
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|
85,162 |
|
The accompanying notes are an integral part of the interim consolidated financial statements.
3
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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October 3, 2015 |
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September 27, 2014 |
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October 3, 2015 |
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September 27, 2014 |
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Net income |
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$ |
116,281 |
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$ |
113,497 |
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$ |
317,999 |
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$ |
280,328 |
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Other comprehensive loss: |
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Foreign currency translation |
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(10,931 |
) |
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(48,671 |
) |
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(53,322 |
) |
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(16,071 |
) |
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Unrealized gains (losses) on investments before income taxes |
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1,814 |
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(645 |
) |
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2,397 |
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|
91 |
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Income tax (expense) benefit |
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(68 |
) |
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|
42 |
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(97 |
) |
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11 |
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Unrealized gains (losses) on investments, net of tax |
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1,746 |
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(603 |
) |
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|
2,300 |
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|
102 |
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Retirement liability adjustment before reclassifications |
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(511 |
) |
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1,070 |
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(931 |
) |
Amounts reclassified to selling and administrative expenses |
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1,478 |
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|
516 |
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3,320 |
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1,548 |
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Retirement liability adjustment before income taxes |
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|
967 |
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|
516 |
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4,390 |
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|
617 |
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Income tax expense |
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|
(325 |
) |
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|
(400 |
) |
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(1,479 |
) |
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|
(603 |
) |
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Retirement liability adjustment, net of tax |
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|
642 |
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|
116 |
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|
2,911 |
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14 |
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Other comprehensive loss |
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(8,543 |
) |
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(49,158 |
) |
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(48,111 |
) |
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(15,955 |
) |
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Comprehensive income |
|
$ |
107,738 |
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$ |
64,339 |
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$ |
269,888 |
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|
$ |
264,373 |
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|
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|
The accompanying notes are an integral part of the interim consolidated financial statements.
4
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
|
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|
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|
|
|
Nine Months Ended |
|
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
317,999 |
|
|
$ |
280,328 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provisions for doubtful accounts on accounts receivable |
|
|
766 |
|
|
|
2,051 |
|
Provisions on inventory |
|
|
3,683 |
|
|
|
3,603 |
|
Stock-based compensation |
|
|
24,957 |
|
|
|
24,460 |
|
Deferred income taxes |
|
|
1,821 |
|
|
|
(9,151 |
) |
Depreciation |
|
|
33,202 |
|
|
|
34,661 |
|
Amortization of intangibles |
|
|
33,693 |
|
|
|
35,889 |
|
Building impairment |
|
|
|
|
|
|
4,093 |
|
Gain on sale of building |
|
|
(1,377 |
) |
|
|
|
|
Change in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Decrease in accounts receivable |
|
|
6,121 |
|
|
|
23,588 |
|
Increase in inventories |
|
|
(39,171 |
) |
|
|
(36,812 |
) |
Decrease (increase) in other current assets |
|
|
2,183 |
|
|
|
(9,348 |
) |
Increase in other assets |
|
|
(11,614 |
) |
|
|
(10,949 |
) |
Increase in accounts payable and other current liabilities |
|
|
4,234 |
|
|
|
3,887 |
|
Increase in deferred revenue and customer advances |
|
|
31,099 |
|
|
|
23,737 |
|
Decrease in other liabilities |
|
|
(954 |
) |
|
|
(20,111 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
406,642 |
|
|
|
349,926 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to property, plant, equipment and software capitalization |
|
|
(72,250 |
) |
|
|
(70,437 |
) |
Business acquisitions, net of cash acquired |
|
|
(9,408 |
) |
|
|
(23,672 |
) |
Payments for intellectual property licenses |
|
|
|
|
|
|
(1,800 |
) |
Purchases of investments |
|
|
(1,467,078 |
) |
|
|
(1,731,043 |
) |
Maturities and sales of investments |
|
|
1,249,073 |
|
|
|
1,504,528 |
|
Proceeds from sale of building |
|
|
5,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(294,509 |
) |
|
|
(322,424 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from debt issuances |
|
|
285,073 |
|
|
|
336,430 |
|
Payments on debt |
|
|
(120,140 |
) |
|
|
(229,770 |
) |
Payments of debt issuance costs |
|
|
(2,382 |
) |
|
|
(1,400 |
) |
Proceeds from stock plans |
|
|
28,948 |
|
|
|
43,287 |
|
Purchases of treasury shares |
|
|
(255,111 |
) |
|
|
(261,570 |
) |
Excess tax benefit related to stock option plans |
|
|
5,689 |
|
|
|
8,605 |
|
Proceeds from (payments for) debt swaps and other derivative contracts |
|
|
5 |
|
|
|
(366 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(57,918 |
) |
|
|
(104,784 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(16,874 |
) |
|
|
(6,546 |
) |
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
37,341 |
|
|
|
(83,828 |
) |
Cash and cash equivalents at beginning of period |
|
|
422,177 |
|
|
|
440,796 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
459,518 |
|
|
$ |
356,968 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the interim consolidated financial statements.
5
WATERS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1 Basis of
Presentation and Summary of Significant Accounting Policies
Waters Corporation
(Waters® or the Company) is an analytical instrument manufacturer that primarily designs, manufactures, sells and services, through its Waters Division, high
performance liquid chromatography (HPLC), ultra performance liquid chromatography (UPLC® and together with HPLC, referred to as LC) and mass spectrometry
(MS) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together
(LC-MS) and sold as integrated instrument systems using a common software platform. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological
composition of materials, and to purify a full range of compounds. MS instruments are used in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as proteomics),
nutritional safety analysis and environmental testing. LC-MS instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. Through its TA Division (TA®), the Company primarily designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments, which are used in predicting the suitability and stability of fine
chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of software-based products
that interface with the Companys instruments, as well as other suppliers instruments, and are typically purchased by customers as part of the instrument system.
The Companys interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Companys fiscal year end is
December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Companys third fiscal quarters for 2015 and 2014 ended on October 3, 2015 and September 27, 2014, respectively.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form
10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles (GAAP) in the United States of America. The consolidated financial statements include the accounts of the Company
and its subsidiaries, most of which are wholly owned. All material inter-company balances and transactions have been eliminated.
The preparation of
consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the
dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions.
It is managements
opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial
statements should be read in conjunction with the consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission on
February 27, 2015.
Cash, Cash Equivalents and Investments
Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified
as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than U.S. dollars. As of October 3, 2015 and December 31, 2014,
$2,275 million out of $2,311 million and $1,971 million out of $2,055 million, respectively, of the Companys total cash, cash equivalents and investments were held by foreign subsidiaries and may be subject to material tax effects on
distribution to U.S. legal entities.
Property, Plant and Equipment
During the three and nine months ended September 27, 2014, the Company recorded a $4 million impairment charge related to a write-down in the fair value
of a building in the U.K., which was designated as held for sale. The carrying value of the building was $4 million and was included in other current assets in the consolidated balance sheet at December 31, 2014. During the three months ended
October 3, 2015, the Company sold the building for $5 million in cash, which resulted in a gain on the sale of $1 million.
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
Fair Value Measurements
In accordance with the accounting standards for fair value measurements and disclosures, certain of the Companys assets and liabilities are measured at
fair value on a recurring basis as of October 3, 2015 and December 31, 2014. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data
points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting
entity to develop its own assumptions.
The following table represents the Companys assets and liabilities measured at fair value on a recurring
basis at October 3, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at October 3, 2015 |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
629,048 |
|
|
$ |
|
|
|
$ |
629,048 |
|
|
$ |
|
|
Corporate debt securities |
|
|
1,233,772 |
|
|
|
|
|
|
|
1,233,772 |
|
|
|
|
|
Time deposits |
|
|
80,931 |
|
|
|
|
|
|
|
80,931 |
|
|
|
|
|
Equity securities |
|
|
147 |
|
|
|
|
|
|
|
147 |
|
|
|
|
|
Other cash equivalents |
|
|
29,000 |
|
|
|
|
|
|
|
29,000 |
|
|
|
|
|
Waters 401(k) Restoration Plan assets |
|
|
33,842 |
|
|
|
|
|
|
|
33,842 |
|
|
|
|
|
Foreign currency exchange contracts |
|
|
38 |
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,006,778 |
|
|
$ |
|
|
|
$ |
2,006,778 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
4,116 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,116 |
|
Foreign currency exchange contracts |
|
|
575 |
|
|
|
|
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,691 |
|
|
$ |
|
|
|
$ |
575 |
|
|
$ |
4,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
The following table represents the Companys assets and liabilities measured at fair value on a
recurring basis at December 31, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2014 |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
626,772 |
|
|
$ |
|
|
|
$ |
626,772 |
|
|
$ |
|
|
Foreign government securities |
|
|
24,998 |
|
|
|
|
|
|
|
24,998 |
|
|
|
|
|
Corporate debt securities |
|
|
984,105 |
|
|
|
|
|
|
|
984,105 |
|
|
|
|
|
Time deposits |
|
|
64,240 |
|
|
|
|
|
|
|
64,240 |
|
|
|
|
|
Equity securities |
|
|
147 |
|
|
|
|
|
|
|
147 |
|
|
|
|
|
Other cash equivalents |
|
|
29,000 |
|
|
|
|
|
|
|
29,000 |
|
|
|
|
|
Waters 401(k) Restoration Plan assets |
|
|
33,935 |
|
|
|
|
|
|
|
33,935 |
|
|
|
|
|
Foreign currency exchange contracts |
|
|
123 |
|
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,763,320 |
|
|
$ |
|
|
|
$ |
1,763,320 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
3,612 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,612 |
|
Foreign currency exchange contracts |
|
|
651 |
|
|
|
|
|
|
|
651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,263 |
|
|
$ |
|
|
|
$ |
651 |
|
|
$ |
3,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values of the Companys cash equivalents, investments, 401(k) restoration plan assets and foreign currency
exchange contracts are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party
pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the
prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources. After completing these validation procedures, the Company did not adjust or override any fair value
measurements provided by third-party pricing services as of October 3, 2015 and December 31, 2014.
Fair Value of Contingent Consideration
The fair value of the Companys liability for contingent consideration related to the July 2014 acquisition of Medimass Research, Development and
Service Kft. is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are
recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the development of future products, estimated sales of those products and
a discount rate reflective of the Companys creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Although there is no contractual limit, the fair value of future
contingent consideration payments was estimated to be approximately $4 million at both October 3, 2015 and December 31, 2014, based on the Companys best estimate, as the earnout is based on future sales of certain products through
2034. There have been no changes in significant assumptions since December 31, 2014 and the change in fair value since then is primarily due to change in time value of money.
Fair Value of Other Financial Instruments
The
Companys cash, accounts receivable, accounts payable and variable interest rate debt are recorded at cost, which approximates fair value. The carrying value of the Companys fixed interest rate debt was $450 million and $550 million at
October 3, 2015 and December 31, 2014, respectively. The fair value of the Companys fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current
market conditions for the Company. The fair value of the Companys fixed interest rate debt was estimated to be $456 million and $558 million at October 3, 2015 and December 31, 2014, respectively, using Level 2 inputs.
8
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
Derivative Transactions
The Company enters into foreign currency exchange contracts to manage exposures to changes in foreign currency exchange rates on certain inter-company balances
and short-term assets and liabilities. Principal hedged currencies include the Euro, Japanese yen, British pound and Brazilian real. At October 3, 2015 and December 31, 2014, the Company held forward foreign exchange contracts with
notional amounts totaling $107 million and $110 million, respectively.
The Companys foreign currency exchange contracts included in the
consolidated balance sheets are classified as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 3, 2015 |
|
|
December 31, 2014 |
|
Other current assets |
|
$ |
38 |
|
|
$ |
123 |
|
Other current liabilities |
|
$ |
575 |
|
|
$ |
651 |
|
The following is a summary of the activity in cost of sales in the statements of operations related to the forward foreign
exchange contracts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
Realized gains (losses) on closed contracts |
|
$ |
810 |
|
|
$ |
(266 |
) |
|
$ |
5 |
|
|
$ |
(366 |
) |
Unrealized losses on open contracts |
|
|
(71 |
) |
|
|
(43 |
) |
|
|
(9 |
) |
|
|
(1,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative net pre-tax gains (losses) |
|
$ |
739 |
|
|
$ |
(309 |
) |
|
$ |
(4 |
) |
|
$ |
(1,366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
In May 2014, the Companys Board of Directors authorized the Company to repurchase up to $750 million of its outstanding common stock over a three-year
period and authorized the extension of the May 2012 program until May 2015. During the nine months ended October 3, 2015 and September 27, 2014, the Company repurchased 2.0 million and 2.4 million shares of the Companys
outstanding common stock at a cost of $249 million and $255 million, respectively, under the May 2012 and May 2014 authorizations. As of October 3, 2015, the Company repurchased an aggregate of 7.6 million shares at a cost of $750 million
under the May 2012 repurchase program, which is now completed. The Company has a total of $520 million authorized for future repurchases under the May 2014 plan. In addition, the Company repurchased $6 million and $7 million of common stock related
to the vesting of restricted stock units during the nine months ended October 3, 2015 and September 27, 2014, respectively. The Company believes that it has the financial flexibility to fund these share repurchases given current cash
levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Companys sales and profits.
Product Warranty Costs
The Company accrues estimated
product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating
the quality of its component suppliers, the Companys warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is
based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.
9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
The following is a summary of the activity of the Companys accrued warranty liability for the nine
months ended October 3, 2015 and September 27, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period |
|
|
Accruals for Warranties |
|
|
Settlements Made |
|
|
Balance at End of Period |
|
Accrued warranty liability: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2015 |
|
$ |
13,266 |
|
|
$ |
5,834 |
|
|
$ |
(5,993 |
) |
|
$ |
13,107 |
|
September 27, 2014 |
|
$ |
12,962 |
|
|
$ |
5,292 |
|
|
$ |
(5,773 |
) |
|
$ |
12,481 |
|
Subsequent Events
The
Company did not have any material subsequent events.
2 Marketable Securities
The Companys marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2015 |
|
|
|
Amortized Cost |
|
|
Unrealized Gain |
|
|
Unrealized Loss |
|
|
Fair Value |
|
U.S. Treasury securities |
|
$ |
627,630 |
|
|
$ |
1,465 |
|
|
$ |
(47 |
) |
|
$ |
629,048 |
|
Corporate debt securities |
|
|
1,233,267 |
|
|
|
895 |
|
|
|
(390 |
) |
|
|
1,233,772 |
|
Time deposits |
|
|
80,931 |
|
|
|
|
|
|
|
|
|
|
|
80,931 |
|
Equity securities |
|
|
77 |
|
|
|
70 |
|
|
|
|
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,941,905 |
|
|
$ |
2,430 |
|
|
$ |
(437 |
) |
|
$ |
1,943,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
92,682 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
92,682 |
|
Investments |
|
|
1,849,223 |
|
|
|
2,430 |
|
|
|
(437 |
) |
|
|
1,851,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,941,905 |
|
|
$ |
2,430 |
|
|
$ |
(437 |
) |
|
$ |
1,943,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
|
Amortized Cost |
|
|
Unrealized Gain |
|
|
Unrealized Loss |
|
|
Fair Value |
|
U.S. Treasury securities |
|
$ |
626,683 |
|
|
$ |
246 |
|
|
$ |
(157 |
) |
|
$ |
626,772 |
|
Foreign government securities |
|
|
24,998 |
|
|
|
|
|
|
|
|
|
|
|
24,998 |
|
Corporate debt securities |
|
|
984,668 |
|
|
|
125 |
|
|
|
(688 |
) |
|
|
984,105 |
|
Time deposits |
|
|
64,240 |
|
|
|
|
|
|
|
|
|
|
|
64,240 |
|
Equity securities |
|
|
77 |
|
|
|
70 |
|
|
|
|
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,700,666 |
|
|
$ |
441 |
|
|
$ |
(845 |
) |
|
$ |
1,700,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
67,051 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
67,051 |
|
Investments |
|
|
1,633,615 |
|
|
|
441 |
|
|
|
(845 |
) |
|
|
1,633,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,700,666 |
|
|
$ |
441 |
|
|
$ |
(845 |
) |
|
$ |
1,700,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 3, 2015 |
|
|
December 31, 2014 |
|
Due in one year or less |
|
$ |
1,063,640 |
|
|
$ |
872,872 |
|
Due after one year through three years |
|
|
799,180 |
|
|
|
763,003 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,862,820 |
|
|
$ |
1,635,875 |
|
|
|
|
|
|
|
|
|
|
3 Inventories
Inventories are classified as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 3, 2015 |
|
|
December 31, 2014 |
|
Raw materials |
|
$ |
94,226 |
|
|
$ |
84,952 |
|
Work in progress |
|
|
21,814 |
|
|
|
16,749 |
|
Finished goods |
|
|
165,746 |
|
|
|
144,729 |
|
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
281,786 |
|
|
$ |
246,430 |
|
|
|
|
|
|
|
|
|
|
4 Acquisitions
The
Company accounts for business acquisitions under the accounting standards for business combinations. The results of each acquisition have been included in the Companys consolidated results as of the acquisition date and the purchase price of
an acquisition is allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values. Any excess of the fair value consideration transferred over the estimated fair values of the net assets acquired is
recognized as goodwill.
On May 22, 2015, the Company acquired the net assets of the
ElectroForce® business of the Bose Corporation (ElectroForce), a manufacturer of testing systems, for approximately $9 million in cash. ElectroForces core business is the
manufacturing of dynamic mechanical testing systems used to characterize medical devices, biologic and engineered materials. The ElectroForce test instruments are based on unique motor designs that are quiet, energy-efficient, scalable and deliver
high performance over a wide range of force and frequency. ElectroForce was acquired to expand the TA Divisions product offering into new markets, while leveraging the technology, infrastructure and customer bases of the combined
organizations. The Company has allocated $4 million of the purchase price to intangible assets comprised of technology, customer relationships and trade name. The Company is amortizing the technology and customer relationships over ten years and
five years, respectively. The remaining purchase price of $1 million was accounted for as goodwill, which is deductible for tax purposes.
The principal
factor that resulted in recognition of goodwill in the acquisition of ElectroForce is that the purchase price was based, in part, on cash flow projections assuming the integration of any acquired technology, distribution channels and products with
the Companys products, which is of considerably greater value than utilizing the acquired companys technology, customer access or products on a stand-alone basis. The goodwill also includes value assigned to assembled workforce, which
cannot be recognized as an intangible asset.
In this acquisition, the sellers provided the Company with customary representations, warranties and
indemnification, which would be settled in the future if and when a breach of the contractual representation or warranty condition occurs. The impact of the acquisition of ElectroForce on the Companys revenues and net income since the
acquisition date for the nine months ended October 3, 2015 was immaterial.
11
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
The fair values of the assets and liabilities acquired were determined using various income-approach
valuation techniques, which use Level 3 inputs. The following table presents the fair values as of the acquisition date, as determined by the Company, of 100% of the assets and liabilities owned and recorded in connection with the acquisition of
ElectroForce (in thousands):
|
|
|
|
|
Accounts receivable and other current assets |
|
$ |
1,520 |
|
Inventory |
|
|
4,489 |
|
Property, plant and equipment |
|
|
699 |
|
Intangible assets |
|
|
3,700 |
|
Goodwill |
|
|
1,118 |
|
|
|
|
|
|
Total assets acquired |
|
|
11,526 |
|
Accrued expenses and other current liabilities |
|
|
2,118 |
|
|
|
|
|
|
Cash consideration paid |
|
$ |
9,408 |
|
|
|
|
|
|
5 Goodwill and Other Intangibles
The carrying amount of goodwill was $352 million and $355 million at October 3, 2015 and December 31, 2014, respectively. During the nine months
ended October 3, 2015, the Companys acquisition increased goodwill by $1 million (see Note 4) and the effect of foreign currency translation decreased goodwill by $4 million.
The Companys intangible assets included in the consolidated balance sheets are detailed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2015 |
|
December 31, 2014 |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Weighted- Average Amortization Period |
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Weighted- Average Amortization Period |
Capitalized software |
|
$ |
335,517 |
|
|
$ |
202,468 |
|
|
7 years |
|
$ |
334,280 |
|
|
$ |
196,477 |
|
|
7 years |
Purchased intangibles |
|
|
163,144 |
|
|
|
117,632 |
|
|
11 years |
|
|
163,855 |
|
|
|
112,279 |
|
|
11 years |
Trademarks and IPR&D |
|
|
13,967 |
|
|
|
|
|
|
|
|
|
14,095 |
|
|
|
|
|
|
|
Licenses |
|
|
5,499 |
|
|
|
3,995 |
|
|
6 years |
|
|
5,371 |
|
|
|
3,634 |
|
|
6 years |
Patents and other intangibles |
|
|
61,773 |
|
|
|
32,999 |
|
|
8 years |
|
|
56,513 |
|
|
|
29,353 |
|
|
8 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
579,900 |
|
|
$ |
357,094 |
|
|
8 years |
|
$ |
574,114 |
|
|
$ |
341,743 |
|
|
8 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended October 3, 2015, the Company acquired $4 million of purchased intangibles as a result of the
acquisition of ElectroForce (see Note 4). During the nine months ended October 3, 2015, the effect of foreign currency translation decreased the gross carrying value of intangible assets and accumulated amortization for intangible assets by $31
million and $18 million, respectively. Amortization expense for intangible assets was $12 million for both the three months ended October 3, 2015 and September 27, 2014. Amortization expense for intangible assets was $34 million and $36
million for the nine months ended October 3, 2015 and September 27, 2014, respectively. Amortization expense for intangible assets is estimated to be approximately $44 million per year for each of the next five years.
6 Debt
In June 2013, the Company entered into a
credit agreement that provides for a $1.1 billion revolving facility and a $300 million term loan facility. In April 2015, Waters entered into an amendment to this agreement (the Amended Credit Agreement). The Amended Credit
Agreement provides for an increase of the revolving commitments from $1.1 billion to $1.3 billion and extends the maturity of the original credit agreement from June 25, 2018 until April 23, 2020. The Company plans to use future proceeds
from the revolving facility for general corporate purposes.
The interest rates applicable to the Amended Credit Agreement are, at the Companys
option, equal to either the alternate base rate calculated daily (which is a rate per annum equal to the greatest of (a) the prime rate in effect on
12
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
such day, (b) the federal funds effective rate in effect on such day plus 1/2% per annum, or (c) the adjusted LIBO rate on such day (or if such day is not a business day, the
immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 2, 3 or 6 month adjusted LIBO rate, in each case, plus an interest rate margin based upon the
Companys leverage ratio, which can range between 0 to 12.5 basis points for alternate base rate loans and between 80 basis points and 117.5 basis points for adjusted LIBO rate loans. The facility fee on the Amended Credit Agreement ranges
between 7.5 basis points and 20 basis points. The Amended Credit Agreement requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive
fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the Amended Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default
that are customary for investment grade credit facilities.
At October 3, 2015, $125 million of the outstanding portion of the revolving facility was
classified as short-term liabilities in the consolidated balance sheet due to the fact that the Company expects to repay this portion of the borrowing under the revolving line of credit within the next twelve months. The remaining $705 million of
the outstanding portion of the revolving facility was classified as long-term liabilities in the consolidated balance sheet, as this portion is not expected to be repaid within the next twelve months.
As of October 3, 2015 and December 31, 2014, the Company had a total of $500 million and $600 million of outstanding senior unsecured notes,
respectively. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any
time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for Series H senior unsecured notes. In the event of a change in control of the Company (as defined in the
note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with
an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include
customary negative covenants, affirmative covenants, representations and warranties and events of default.
The Company had the following outstanding debt
at October 3, 2015 and December 31, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 3, 2015 |
|
|
December 31, 2014 |
|
Foreign subsidiary lines of credit |
|
$ |
176 |
|
|
$ |
243 |
|
Senior unsecured notes - Series A - 3.75%, due February 2015 |
|
|
|
|
|
|
100,000 |
|
Senior unsecured notes - Series C - 2.50%, due March 2016 |
|
|
50,000 |
|
|
|
|
|
Credit agreements |
|
|
125,000 |
|
|
|
125,000 |
|
|
|
|
|
|
|
|
|
|
Total notes payable and debt |
|
|
175,176 |
|
|
|
225,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes - Series B - 5.00%, due February 2020 |
|
|
100,000 |
|
|
|
100,000 |
|
Senior unsecured notes - Series C - 2.50%, due March 2016 |
|
|
|
|
|
|
50,000 |
|
Senior unsecured notes - Series D - 3.22%, due March 2018 |
|
|
100,000 |
|
|
|
100,000 |
|
Senior unsecured notes - Series E - 3.97%, due March 2021 |
|
|
50,000 |
|
|
|
50,000 |
|
Senior unsecured notes - Series F - 3.40%, due June 2021 |
|
|
100,000 |
|
|
|
100,000 |
|
Senior unsecured notes - Series G - 3.92%, due June 2024 |
|
|
50,000 |
|
|
|
50,000 |
|
Senior unsecured notes - Series H - floating rate*, due June 2024 |
|
|
50,000 |
|
|
|
50,000 |
|
Credit agreements |
|
|
1,005,000 |
|
|
|
740,000 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
1,455,000 |
|
|
|
1,240,000 |
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
1,630,176 |
|
|
$ |
1,465,243 |
|
|
|
|
|
|
|
|
|
|
* |
Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.25%. |
As of October 3, 2015 and December 31, 2014, the Company had a total amount available to borrow of $468 million and $533 million, respectively,
after outstanding letters of credit, under the credit agreements. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.06% and 2.31% at October 3, 2015 and
December 31, 2014, respectively. As of October 3, 2015, the Company was in compliance with all debt covenants.
13
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $98 million
and $88 million at October 3, 2015 and December 31, 2014, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. At October 3, 2015 and December 31, 2014, the weighted-average interest rates
applicable to these short-term borrowings were 2.00% and 1.48%, respectively.
7 Income Taxes
The Companys effective tax rate was 10.3% and 13.6% for the three months ended October 3, 2015 and September 27, 2014, respectively. The
Companys effective tax rate was 13.3% and 14.1% for the nine months ended October 3, 2015 and September 27, 2014, respectively. The differences between the effective tax rates for 2015 as compared to 2014 were primarily attributable
to differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates, and the recognition of a $2 million discrete benefit for additional U.K. tax credits in the three months ended
October 3, 2015. In the third quarter of 2015, the Company entered into a new agreement with Singapore tax authorities that extended a 0% contractual tax rate through March 2021. The contractual tax rate is dependent upon achievement of certain
contractual milestones, which the Company expects to meet. The current statutory tax rate in Singapore is 17%.
The Company accounts for its uncertain tax
return reporting positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned
tax authorities possess full knowledge of those reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of
money.
The following is a summary of the activity of the Companys unrecognized tax benefits for the nine months ended October 3, 2015 and
September 27, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
Balance at the beginning of the period |
|
$ |
19,596 |
|
|
$ |
24,716 |
|
Net changes in uncertain tax benefits |
|
|
(861 |
) |
|
|
(3,268 |
) |
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
18,735 |
|
|
$ |
21,448 |
|
|
|
|
|
|
|
|
|
|
With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years
ended on or before December 31, 2011. However, carryforward attributes that were generated in years beginning on or before January 1, 2012 may still be adjusted upon examination by tax authorities if the attributes are utilized. The
Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities. As of
October 3, 2015, the Company expects to record additional reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of approximately $5 million within the next twelve months due to the lapsing of
statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.
8 Stock-Based Compensation
The Company maintains
various shareholder-approved, stock-based compensation plans which allow for the issuance of incentive or non-qualified stock options, stock appreciation rights, restricted stock or other types of awards (e.g. restricted stock units).
The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all
share-based payments to employees be recognized in the statements of operations based on their grant date fair values. The Company recognizes the expense using the straight-line attribution method. The stock-based compensation expense recognized in
the consolidated statements of operations is based on awards that ultimately are expected to vest; therefore, the amount of expense has been reduced for estimated forfeitures. The stock-based compensation accounting standards require forfeitures to
be estimated at the
14
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If actual results
differ significantly from these estimates, stock-based compensation expense and the Companys results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards,
the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.
The consolidated statements of operations for the three and nine months ended October 3, 2015 and September 27, 2014 include the following
stock-based compensation expense related to stock option awards, restricted stock, restricted stock unit awards and the employee stock purchase plan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
Cost of sales |
|
$ |
668 |
|
|
$ |
633 |
|
|
$ |
1,990 |
|
|
$ |
2,061 |
|
Selling and administrative expenses |
|
|
6,626 |
|
|
|
6,355 |
|
|
|
19,686 |
|
|
|
19,345 |
|
Research and development expenses |
|
|
1,053 |
|
|
|
1,119 |
|
|
|
3,281 |
|
|
|
3,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
8,347 |
|
|
$ |
8,107 |
|
|
$ |
24,957 |
|
|
$ |
24,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
In
determining the fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date
of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate
indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience
for the population of non-qualified stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the input to the
Black-Scholes model. The relevant data used to determine the value of the stock options granted during the nine months ended October 3, 2015 and September 27, 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Options Issued and Significant Assumptions Used to Estimate Option Fair Values |
|
October 3, 2015 |
|
|
September 27, 2014 |
|
Options issued in thousands |
|
|
115 |
|
|
|
32 |
|
Risk-free interest rate |
|
|
1.4 |
% |
|
|
1.9 |
% |
Expected life in years |
|
|
4 |
|
|
|
4 |
|
Expected volatility |
|
|
0.291 |
|
|
|
0.245 |
|
Expected dividends |
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant |
|
October 3, 2015 |
|
|
September 27, 2014 |
|
Exercise price |
|
$ |
121.33 |
|
|
$ |
99.22 |
|
Fair value |
|
$ |
30.85 |
|
|
$ |
22.38 |
|
15
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
The following table summarizes stock option activity for the plans for the nine months ended October 3,
2015 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
Price per Share |
|
Weighted-Average Exercise Price |
|
Outstanding at December 31, 2014 |
|
|
3,280 |
|
|
$ 37.84 to $113.36 |
|
$ |
82.85 |
|
Granted |
|
|
115 |
|
|
$113.88 to $134.37 |
|
$ |
121.33 |
|
Exercised |
|
|
(342 |
) |
|
$ 37.84 to $ 98.21 |
|
$ |
74.44 |
|
Canceled |
|
|
(72 |
) |
|
$ 79.05 to $ 87.06 |
|
$ |
83.25 |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 3, 2015 |
|
|
2,981 |
|
|
$ 38.09 to $134.37 |
|
$ |
85.29 |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
During
the nine months ended October 3, 2015, the Company granted ten thousand shares of restricted stock. The fair value of these awards on the grant date was $113.88 per share.
Restricted Stock Units
The following table summarizes
the unvested restricted stock unit award activity for the nine months ended October 3, 2015 (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Weighted-Average Price |
|
Unvested at December 31, 2014 |
|
|
533 |
|
|
$ |
94.38 |
|
Granted |
|
|
150 |
|
|
$ |
119.46 |
|
Vested |
|
|
(144 |
) |
|
$ |
85.40 |
|
Forfeited |
|
|
(12 |
) |
|
$ |
99.75 |
|
|
|
|
|
|
|
|
|
|
Unvested at October 3, 2015 |
|
|
527 |
|
|
$ |
103.85 |
|
|
|
|
|
|
|
|
|
|
Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year
period.
9 Earnings Per Share
Basic and diluted
earnings per share (EPS) calculations are detailed as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 3, 2015 |
|
|
|
Net Income (Numerator) |
|
|
Weighted- Average Shares (Denominator) |
|
|
Per Share Amount |
|
Net income per basic common share |
|
$ |
116,281 |
|
|
|
82,036 |
|
|
$ |
1.42 |
|
Effect of dilutive stock option, restricted stock and restricted stock unit securities |
|
|
|
|
|
|
748 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share |
|
$ |
116,281 |
|
|
|
82,784 |
|
|
$ |
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 27, 2014 |
|
|
|
Net Income (Numerator) |
|
|
Weighted- Average Shares (Denominator) |
|
|
Per Share Amount |
|
Net income per basic common share |
|
$ |
113,497 |
|
|
|
83,663 |
|
|
$ |
1.36 |
|
Effect of dilutive stock option, restricted stock and restricted stock unit securities |
|
|
|
|
|
|
738 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share |
|
$ |
113,497 |
|
|
|
84,401 |
|
|
$ |
1.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 3, 2015 |
|
|
|
Net Income (Numerator) |
|
|
Weighted- Average Shares (Denominator) |
|
|
Per Share Amount |
|
Net income per basic common share |
|
$ |
317,999 |
|
|
|
82,552 |
|
|
$ |
3.85 |
|
Effect of dilutive stock option, restricted stock and restricted stock unit securities |
|
|
|
|
|
|
753 |
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share |
|
$ |
317,999 |
|
|
|
83,305 |
|
|
$ |
3.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 27, 2014 |
|
|
|
Net Income (Numerator) |
|
|
Weighted- Average Shares (Denominator) |
|
|
Per Share Amount |
|
Net income per basic common share |
|
$ |
280,328 |
|
|
|
84,375 |
|
|
$ |
3.32 |
|
Effect of dilutive stock option, restricted stock and restricted stock unit securities |
|
|
|
|
|
|
787 |
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share |
|
$ |
280,328 |
|
|
|
85,162 |
|
|
$ |
3.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended October 3, 2015, the Company had 0.6 million and 0.7 million stock options
that were antidilutive, respectively, due to having higher exercise prices than the Companys average stock price during the period. For both the three and nine months ended September 27, 2014, the Company had 0.5 million stock
options that were antidilutive. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.
10 Retirement Plans
The Company sponsors various
retirement plans. The summary of the components of net periodic pension costs for the plans for the three and nine months ended October 3, 2015 and September 27, 2014 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
|
|
U.S. Pension Plans |
|
|
U.S. Retiree Healthcare Plan |
|
|
Non-U.S. Pension Plans |
|
|
U.S. Pension Plans |
|
|
U.S. Retiree Healthcare Plan |
|
|
Non-U.S. Pension Plans |
|
Service cost |
|
$ |
|
|
|
$ |
(91 |
) |
|
$ |
1,337 |
|
|
$ |
|
|
|
$ |
196 |
|
|
$ |
1,212 |
|
Interest cost |
|
|
1,570 |
|
|
|
116 |
|
|
|
402 |
|
|
|
1,623 |
|
|
|
111 |
|
|
|
592 |
|
Expected return on plan assets |
|
|
(2,223 |
) |
|
|
(129 |
) |
|
|
(410 |
) |
|
|
(2,179 |
) |
|
|
(112 |
) |
|
|
(392 |
) |
Net amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit) |
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
(13 |
) |
|
|
(47 |
) |
Net actuarial loss (gain) |
|
|
1,101 |
|
|
|
|
|
|
|
273 |
|
|
|
692 |
|
|
|
(18 |
) |
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit) |
|
$ |
448 |
|
|
$ |
(104 |
) |
|
$ |
1,616 |
|
|
$ |
136 |
|
|
$ |
164 |
|
|
$ |
1,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
|
|
U.S. Pension Plans |
|
|
U.S. Retiree Healthcare Plan |
|
|
Non-U.S. Pension Plans |
|
|
U.S. Pension Plans |
|
|
U.S. Retiree Healthcare Plan |
|
|
Non-U.S. Pension Plans |
|
Service cost |
|
$ |
|
|
|
$ |
433 |
|
|
$ |
4,011 |
|
|
$ |
|
|
|
$ |
594 |
|
|
$ |
3,636 |
|
Interest cost |
|
|
4,596 |
|
|
|
352 |
|
|
|
1,206 |
|
|
|
4,813 |
|
|
|
347 |
|
|
|
1,776 |
|
Expected return on plan assets |
|
|
(6,859 |
) |
|
|
(373 |
) |
|
|
(1,230 |
) |
|
|
(6,795 |
) |
|
|
(326 |
) |
|
|
(1,176 |
) |
Net amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit) |
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
(39 |
) |
|
|
(141 |
) |
Net actuarial loss (gain) |
|
|
2,459 |
|
|
|
|
|
|
|
819 |
|
|
|
1,662 |
|
|
|
(26 |
) |
|
|
291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit) |
|
$ |
196 |
|
|
$ |
412 |
|
|
$ |
4,848 |
|
|
$ |
(320 |
) |
|
$ |
550 |
|
|
$ |
4,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended October 3, 2015, the Company contributed $4 million to the Companys U.S. pension
plans. During fiscal year 2015, the Company expects to contribute a total of approximately $6 million to $11 million to the Companys defined benefit plans.
11 Business Segment Information
The Companys
business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: Waters
Division and TA Division.
Waters Division is primarily in the business of designing, manufacturing, distributing and servicing LC and MS instruments,
columns and other chemistry consumables that can be integrated and used along with other analytical instruments. TA Division is primarily in the business of designing, manufacturing, distributing and servicing thermal analysis, rheometry and
calorimetry instruments. The Companys two divisions are its operating segments and each has similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution and regulatory
environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the one
reportable segment of the Company.
Net sales for the Companys products and services are as follows for the three and nine months ended
October 3, 2015 and September 27, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
Product net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waters instrument systems |
|
$ |
219,196 |
|
|
$ |
213,122 |
|
|
$ |
625,276 |
|
|
$ |
595,670 |
|
Chemistry |
|
|
78,173 |
|
|
|
77,853 |
|
|
|
234,095 |
|
|
|
229,633 |
|
TA instrument systems |
|
|
39,564 |
|
|
|
40,190 |
|
|
|
112,471 |
|
|
|
111,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales |
|
|
336,933 |
|
|
|
331,165 |
|
|
|
971,842 |
|
|
|
937,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waters service |
|
|
148,206 |
|
|
|
146,038 |
|
|
|
438,104 |
|
|
|
423,155 |
|
TA service |
|
|
15,439 |
|
|
|
15,962 |
|
|
|
45,776 |
|
|
|
45,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service sales |
|
|
163,645 |
|
|
|
162,000 |
|
|
|
483,880 |
|
|
|
468,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
500,578 |
|
|
$ |
493,165 |
|
|
$ |
1,455,722 |
|
|
$ |
1,405,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
12 Recent Accounting Standard Changes and Developments
Recently Issued Accounting Standards
In May 2014, amended
accounting guidance was issued regarding the recognition of revenue from contracts with customers. The objective of this guidance is to significantly enhance comparability and clarify principles of revenue recognition practices across entities,
industries, jurisdictions and capital markets. This guidance was originally effective for annual and interim reporting periods beginning after December 15, 2016; however, the Financial Accounting Standards Board has amended the standard in
August 2015 to delay the effective period by one year. Adoption prior to December 15, 2016 is not permitted. The Company is currently evaluating its adoption method and the potential impact that the adoption of this standard will have on the
Companys financial position, results of operations and cash flows.
In April 2015, accounting guidance was issued which requires debt issuance costs
to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. Subsequently, the Securities and Exchange Commission staff announced that it will not object when debt issuance costs related to a
revolving debt arrangement are presented as an asset regardless of whether or not there is an outstanding balance on the revolving debt arrangement. This guidance is effective for annual and interim reporting periods beginning after
December 15, 2015 and early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of this standard will have on the Companys financial position, results of operations and cash flows.
In the third quarter of 2015, accounting guidance was issued which clarifies the measurement of inventory. The new guidance requires inventory to be measured
at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective for
annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the potential impact that the adoption of this standard will have on the Companys financial position, results of operations and cash flows.
19
Item 2: |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Business and Financial Overview
The Company has two
operating segments: the Waters Division and the TA Division (TA®). The Waters Divisions products and services primarily consist of high performance liquid chromatography
(HPLC), ultra performance liquid chromatography (UPLC® and together with HPLC, referred to as LC), mass spectrometry (MS) and chemistry
consumable products and related services. TA products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Companys products are used by life science (including
pharmaceutical), biochemical, industrial, nutritional safety, environmental, academic and governmental customers. These customers use the Companys products to detect, identify, monitor and measure the chemical, physical and biological
composition of materials and to predict the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids in various industrial, consumer goods and healthcare products.
The Companys operating results for the three and nine months ended October 3, 2015 and September 27, 2014 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
|
% Change |
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
|
% Change |
|
Product sales |
|
$ |
336,933 |
|
|
$ |
331,165 |
|
|
|
2 |
% |
|
$ |
971,842 |
|
|
$ |
937,225 |
|
|
|
4 |
% |
Service sales |
|
|
163,645 |
|
|
|
162,000 |
|
|
|
1 |
% |
|
|
483,880 |
|
|
|
468,249 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
500,578 |
|
|
|
493,165 |
|
|
|
2 |
% |
|
|
1,455,722 |
|
|
|
1,405,474 |
|
|
|
4 |
% |
Total cost of sales |
|
|
206,804 |
|
|
|
202,222 |
|
|
|
2 |
% |
|
|
604,757 |
|
|
|
591,794 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
293,774 |
|
|
|
290,943 |
|
|
|
1 |
% |
|
|
850,965 |
|
|
|
813,680 |
|
|
|
5 |
% |
Gross profit as a % of sales |
|
|
58.7 |
% |
|
|
59.0 |
% |
|
|
|
|
|
|
58.5 |
% |
|
|
57.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
124,655 |
|
|
|
122,226 |
|
|
|
2 |
% |
|
|
367,066 |
|
|
|
380,791 |
|
|
|
(4 |
%) |
Research and development expenses |
|
|
30,703 |
|
|
|
27,279 |
|
|
|
13 |
% |
|
|
90,209 |
|
|
|
79,002 |
|
|
|
14 |
% |
Purchased intangibles amortization |
|
|
2,573 |
|
|
|
2,725 |
|
|
|
(6 |
%) |
|
|
7,547 |
|
|
|
8,018 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
135,843 |
|
|
|
138,713 |
|
|
|
(2 |
%) |
|
|
386,143 |
|
|
|
345,869 |
|
|
|
12 |
% |
Operating income as a % of sales |
|
|
27.1 |
% |
|
|
28.1 |
% |
|
|
|
|
|
|
26.5 |
% |
|
|
24.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(6,281 |
) |
|
|
(7,300 |
) |
|
|
(14 |
%) |
|
|
(19,462 |
) |
|
|
(19,602 |
) |
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes |
|
|
129,562 |
|
|
|
131,413 |
|
|
|
(1 |
%) |
|
|
366,681 |
|
|
|
326,267 |
|
|
|
12 |
% |
Provision for income tax expense |
|
|
13,281 |
|
|
|
17,916 |
|
|
|
(26 |
%) |
|
|
48,682 |
|
|
|
45,939 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
116,281 |
|
|
$ |
113,497 |
|
|
|
2 |
% |
|
$ |
317,999 |
|
|
$ |
280,328 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share |
|
$ |
1.40 |
|
|
$ |
1.34 |
|
|
|
4 |
% |
|
$ |
3.82 |
|
|
$ |
3.29 |
|
|
|
16 |
% |
Sales in the third quarter of 2015 grew 2% for the quarter and 4% year-to-date, as the strong demand for the Companys
products and services were negatively affected by the foreign currency translation, which reduced sales growth by 7% for both the quarter and year-to-date. The negative impact on sales growth from foreign currency translation resulted primarily from
the weakening of the Euro and Japanese yen against the U.S. dollar, which reduced Europes sales by 15% and 16% for the quarter and year-to-date, respectively, and reduced Japans sales by 14% and 15% for the quarter and year-to-date,
respectively. The 2015 sales growth for both the quarter and year-to-date was driven by life science, industrial chemical and nutritional safety customers, particularly in the U.S. and Asia, excluding Japan. Acquisitions had a minimal impact on
sales year-to-date. Year-to-date sales growth in 2015 also benefited by an estimated 1% from additional calendar days in the first nine months of 2015 as compared with the first nine months of 2014.
20
In 2015, instrument system sales grew 2% and 4% for the quarter and year-to-date, respectively, and recurring
revenues (combined chemistry consumable and service sales) increased 1% and 3%, respectively. Sales growth for both instrument systems and recurring revenues were negatively impacted by foreign currency translation. The increase in instrument system
sales can be attributed to the higher customer demand for LC and LC-MS instrument systems and the increase in recurring revenues is primarily due to the increase in service sales resulting from a larger installed customer base.
The Companys sales growth by customer end-market for both the quarter and year-to-date were negatively impacted by the European and Japanese foreign
currency translation discussed above. Despite the negative effect of foreign currency on sales, the Companys customer end-market sales were able to grow as follows:
|
|
|
Sales to life science customers grew 2% and 5% for the quarter and year-to-date, respectively, with sales growth in all regions, except Europe and Japan. Year-to-date, life science customers had double-digit sales
growth in all regions, except Europe and Japan. |
|
|
|
Combined sales to industrial chemical, nutritional safety and environmental customers increased by 5% for both the quarter and year-to-date. Sales in the quarter were strongest in Asia, excluding Japan, while
year-to-date sales were driven by the U.S. and Asia, excluding Japan. |
|
|
|
Combined global sales to governmental and academic customers declined by 5% and 2% for the quarter and year-to-date, respectively. In the
quarter, sales in the U.S. and China grew at a double-digit rate and Japans sales grew 8%, while sales to all other regions declined. Year-to-date sales increased in both the U.S. and China but declined in all other regions. |
The increase in gross profit dollars for both the quarter and year-to-date was primarily a result of higher sales volumes. In the third quarter, gross profit
margin percentage declined slightly as the favorable change in sales mix, resulting from higher margin instrument system sales, was offset by unfavorable foreign currency translation on sales. The year-to-date gross profit margin percentage was
higher as a result of leverage achieved on higher sales volumes and was offset somewhat by the unfavorable impact on sales from foreign currency translation. This negative impact on sales was mitigated partially by the favorable effects of foreign
currency translation on operating costs of the Companys European manufacturing and distribution facilities.
Based on current foreign currency
exchange rates and forecasts, the Company estimates that the full year impact of foreign currency translation will negatively impact sales by approximately 6% and have a negative impact on gross profit.
Selling and administrative expenses increased 2% for the quarter and decreased 4% year-to-date. Foreign currency translation decreased selling and
administrative expenses in the quarter and year-to-date by 9% and 8%, respectively. These reductions in expenses were somewhat offset by $2 million of severance-related costs in the current quarter in connection with a reduction in workforce in
Europe. Selling and administrative expenses in the prior year quarter included a $2 million award received from an arbitration settlement. In addition, year-to-date selling and administrative expenses in the prior year included $6 million of severance-related costs in connection with a reduction in workforce, primarily in the U.S., and a $4 million impairment charge related to a write-down in the fair value of a building held for sale in the U.K.
This building was sold in the current quarter for $5 million in cash.
The increase in research and development expenses in both the quarter and
year-to-date was primarily a result of increased spending on new products and the development of new technology initiatives, which was somewhat offset by a 5% decrease in expenses due to the favorable effects of foreign currency translation.
Net income per diluted share for both the quarter and year-to-date benefited from an increase in sales and fewer shares outstanding due to additional share
repurchases. Foreign currency translation decreased net income per diluted share by approximately $0.20 in the quarter and approximately $0.44 year-to-date.
Year-to-date, net cash provided by operating activities was $407 million and $350 million in 2015 and 2014, respectively. The $57 million increase was
primarily a result of higher sales volumes and the timing of payments to vendors and collection of receivables from customers, as well as the effect of additional days in the first quarter of 2015. Within cash flows used in investing activities,
capital expenditures related to property, plant, equipment and software capitalization were $72 million and $70 million for 2015 and 2014, respectively.
21
On May 22, 2015, the Company acquired the net assets of the ElectroForce® business of the Bose Corporation (ElectroForce), for approximately $9 million in cash. ElectroForce is a manufacturer of dynamic mechanical testing systems used to characterize
medical devices, biologic and engineered materials. This acquisition is not expected to have a significant impact on the Companys sales and profits over the next twelve months.
Within cash flows used in financing activities, the Company received $29 million and $43 million of proceeds from stock plans in 2015 and 2014, respectively.
Fluctuations in these amounts were primarily attributable to changes in the Companys stock price. In May 2014, the Companys Board of Directors authorized the Company to repurchase up to $750 million of its outstanding common stock over a
three-year period and authorized the extension of the May 2012 program until May 2015. The Company repurchased $249 million and $255 million of the Companys outstanding common stock in 2015 and 2014, respectively, under the May 2012 and May
2014 authorizations.
In April 2015, Waters entered into an amendment to the credit agreement dated June 2013. The amended credit agreement provides for
an increase of the revolving commitments from $1.1 billion to $1.3 billion and extends the maturity of the original credit agreement from June 25, 2018 until April 23, 2020. The Company plans to use future proceeds from the revolving
facility for general corporate purposes.
Results of Operations
Sales by Geography
Geographic sales information is
presented below for the three and nine months ended October 3, 2015 and September 27, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
|
% change |
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
|
% change |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
169,783 |
|
|
$ |
150,835 |
|
|
|
13 |
% |
|
$ |
475,854 |
|
|
$ |
422,206 |
|
|
|
13 |
% |
Europe |
|
|
132,104 |
|
|
|
144,076 |
|
|
|
(8 |
%) |
|
|
383,919 |
|
|
|
420,717 |
|
|
|
(9 |
%) |
Asia: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
|
64,356 |
|
|
|
56,010 |
|
|
|
15 |
% |
|
|
193,472 |
|
|
|
162,357 |
|
|
|
19 |
% |
Japan |
|
|
36,369 |
|
|
|
41,595 |
|
|
|
(13 |
%) |
|
|
109,048 |
|
|
|
125,570 |
|
|
|
(13 |
%) |
Asia Other |
|
|
67,174 |
|
|
|
63,024 |
|
|
|
7 |
% |
|
|
198,476 |
|
|
|
171,277 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia |
|
|
167,899 |
|
|
|
160,629 |
|
|
|
5 |
% |
|
|
500,996 |
|
|
|
459,204 |
|
|
|
9 |
% |
Other |
|
|
30,792 |
|
|
|
37,625 |
|
|
|
(18 |
%) |
|
|
94,953 |
|
|
|
103,347 |
|
|
|
(8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
500,578 |
|
|
$ |
493,165 |
|
|
|
2 |
% |
|
$ |
1,455,722 |
|
|
$ |
1,405,474 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in sales in the U.S. for the quarter and year-to-date was broad-based across major product lines and customer
classes. Europes sales in local currency grew on increased demand from the Companys life science, governmental and academic customers; however, Europes sales declined as a result of the negative effects of foreign currency
translation, which reduced sales growth by 15% and 16% in the quarter and year-to-date, respectively. Chinas sales growth was broad-based across all product lines and customer classes. Japans sales were negatively impacted by foreign
currency translation, which decreased sales by 14% and 15% for the quarter and year-to-date, respectively. The increase in sales in both the quarter and year-to-date in the rest of Asia was driven by LC and LC-MS instrument systems and recurring
revenues from life science, industrial chemical and nutritional safety customers. The decline in sales in the rest of the world was significantly attributed to a reduction in customer demand in Latin America caused by the strengthening of the U.S.
dollar and the weak Brazilian economy for both the quarter and year-to-date.
22
Waters Division Net Sales
Net sales for the Waters Divisions products and services are as follows for the three and nine months ended October 3, 2015 and September 27,
2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 3, 2015 |
|
|
% of Total |
|
|
September 27, 2014 |
|
|
% of Total |
|
|
% change |
|
Waters instrument systems |
|
$ |
219,196 |
|
|
|
49 |
% |
|
$ |
213,122 |
|
|
|
49 |
% |
|
|
3 |
% |
Chemistry |
|
|
78,173 |
|
|
|
18 |
% |
|
|
77,853 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Waters Division product sales |
|
|
297,369 |
|
|
|
67 |
% |
|
|
290,975 |
|
|
|
67 |
% |
|
|
2 |
% |
Waters service |
|
|
148,206 |
|
|
|
33 |
% |
|
|
146,038 |
|
|
|
33 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Waters Division net sales |
|
$ |
445,575 |
|
|
|
100 |
% |
|
$ |
437,013 |
|
|
|
100 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
October 3, 2015 |
|
|
% of Total |
|
|
September 27, 2014 |
|
|
% of Total |
|
|
% change |
|
Waters instrument systems |
|
$ |
625,276 |
|
|
|
48 |
% |
|
$ |
595,670 |
|
|
|
48 |
% |
|
|
5 |
% |
Chemistry |
|
|
234,095 |
|
|
|
18 |
% |
|
|
229,633 |
|
|
|
18 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Waters Division product sales |
|
|
859,371 |
|
|
|
66 |
% |
|
|
825,303 |
|
|
|
66 |
% |
|
|
4 |
% |
Waters service |
|
|
438,104 |
|
|
|
34 |
% |
|
|
423,155 |
|
|
|
34 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Waters Division net sales |
|
$ |
1,297,475 |
|
|
|
100 |
% |
|
$ |
1,248,458 |
|
|
|
100 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waters instrument system sales (LC and LC-MS) increased in the quarter and year-to-date, primarily due to stronger demand for
instrument systems from life science, industrial chemical and nutritional safety customers. The increase in recurring revenues for both the quarter and year-to-date primarily resulted from a combination of a higher utilization rate of installed
instrument systems and a higher base of installed instruments. In addition, the first nine months of 2015 had additional calendar days as compared with the first nine months of 2014. The effect of foreign currency translation decreased sales for the
Waters Division by 7% and 8% for the quarter and year-to-date, respectively.
Waters Division sales increased 13% and 14% in the U.S. for the quarter and
year-to-date, respectively. Europe sales decreased 7% and 8% for the quarter and year-to-date, respectively, primarily due to the negative effect of foreign currency translation, which decreased sales by 16% and 17%, respectively. Total Asia sales
increased 5% and 9% for the quarter and year-to-date, respectively, with sales in China increasing 15% and 19%, respectively. Japan sales decreased 11% and 13% in the quarter and year-to-date, respectively, primarily due to the effects of foreign
currency translation, while sales in the rest of Asia increased 7% and 15%. Sales in the rest of the world decreased 17% and 8% in the quarter and year-to-date, respectively, on lower sales in Latin America and the negative effect of foreign
currency translation.
TA Division Net Sales
Net
sales for the TA Divisions products and services are as follows for the three and nine months ended October 3, 2015 and September 27, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 3, 2015 |
|
|
% of Total |
|
|
September 27, 2014 |
|
|
% of Total |
|
|
% change |
|
TA instrument systems |
|
$ |
39,564 |
|
|
|
72 |
% |
|
$ |
40,190 |
|
|
|
72 |
% |
|
|
(2 |
%) |
TA service |
|
|
15,439 |
|
|
|
28 |
% |
|
|
15,962 |
|
|
|
28 |
% |
|
|
(3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TA Division net sales |
|
$ |
55,003 |
|
|
|
100 |
% |
|
$ |
56,152 |
|
|
|
100 |
% |
|
|
(2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
October 3, 2015 |
|
|
% of Total |
|
|
September 27, 2014 |
|
|
% of Total |
|
|
% change |
|
TA instrument systems |
|
$ |
112,471 |
|
|
|
71 |
% |
|
$ |
111,922 |
|
|
|
71 |
% |
|
|
|
|
TA service |
|
|
45,776 |
|
|
|
29 |
% |
|
|
45,094 |
|
|
|
29 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TA Division net sales |
|
$ |
158,247 |
|
|
|
100 |
% |
|
$ |
157,016 |
|
|
|
100 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TA instrument system and service sales decreased in the quarter due to the negative effect of foreign currency translation. TA
service sales increased year-to-date due to sales of service plans and billings to a higher installed base of customers. In addition, the first nine months of 2015 had additional calendar days as compared with the first nine months of 2014. The
effect of foreign currency translation decreased TAs total sales by 4% and 5% for the quarter and year-to-date, respectively. TAs sales grew 9% and 4% in the U.S. for the quarter and year-to-date, respectively. TA had double-digit sales
growth in China in both the quarter and year-to-date, which was offset by declines in Japan, primarily due to the negative effects of foreign currency translation. Sales growth in the rest of Asia was 2% and 23% for the quarter and year-to-date,
respectively. Recent acquisitions added 5% and 3% to sales growth for the quarter and year-to-date, respectively.
Gross Profit
Gross profit increased 1% and 5% for the quarter and year-to-date, respectively, primarily as a result of benefits from sales mix, leverage achieved on higher
sales volumes and the favorable effect of foreign currency translation on operating costs of the Companys European manufacturing and distribution facilities. Gross profit as a percentage of sales was also impacted by the factors discussed
above.
Gross profit as a percentage of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix,
price, product costs of instrument systems and amortization of software platforms. The Company expects that the impact of foreign currency translation will negatively affect gross profit for the remainder of 2015, based on current exchange rates.
Selling and Administrative Expenses
Selling and
administrative expenses increased 2% for the quarter and decreased 4% year-to-date. Foreign currency translation decreased selling and administrative expenses in the quarter and year-to-date by 9% and 8%, respectively. These reductions in expenses
were somewhat offset by $2 million of severance-related costs in the current quarter in connection with a reduction in workforce in Europe. Selling and administrative expenses in the prior year quarter included a $2 million award received from an
arbitration settlement. In addition, year-to-date selling and administrative expenses in the prior year included $6 million of severance-related costs in connection with a reduction in workforce, primarily in
the U.S., and a $4 million impairment charge related to a write-down in the fair value of a building held for sale in the U.K. This building was sold in the current quarter for $5 million in cash. As a percentage of net sales, selling and
administrative expenses were 24.9% and 25.2% for the 2015 quarter and year-to-date, respectively, and 24.8% and 27.1% for the 2014 quarter and year-to-date, respectively.
Research and Development Expenses
Research and
development expenses increased 13% and 14% for the quarter and year-to-date, respectively, primarily as a result of additional headcount, merit compensation and costs associated with new products and the development of new technology initiatives.
These increases were somewhat offset by favorable effects of foreign currency translation, which lowered the research and development expense growth rate by 5%.
Interest Expense, Net
The decrease in net interest
expense for both the quarter and year-to-date was primarily attributable to increased income earned on an increase in average cash, cash equivalents and investments.
Provision for Income Taxes
The four principal
jurisdictions in which the Company manufactures are the U.S., Ireland, the United Kingdom and Singapore, where the marginal effective tax rates were approximately 37.5%, 12.5%, 20.25% and 0%, respectively, as of October 3, 2015. In the third
quarter of 2015, the Company entered into a new agreement with Singapore tax authorities that extended a 0% contractual tax rate through March 2021. The contractual tax rate is dependent upon achievement of certain contractual milestones, which the
Company expects to meet. The current statutory tax rate in Singapore is 17%. The Companys effective tax rate is influenced by many significant factors, including, but not
24
limited to, the wide range of income tax rates in jurisdictions in which the Company operates; sales volumes and profit levels in each tax jurisdiction; changes in tax laws, tax rates and
policies; the outcome of various ongoing tax audit examinations; and the impact of foreign currency transactions and translation. As a result of variability in these factors, the Companys effective tax rates in the future may not be similar to
the effective tax rates for the current or prior year.
The Companys effective tax rate for the quarter was 10.3% and 13.6% for 2015 and 2014,
respectively. The Companys effective tax rate year-to-date was 13.3% and 14.1% for 2015 and 2014, respectively. The differences between the effective tax rates for 2015 as compared to 2014 were primarily attributable to differences in the
proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates, and the recognition of a $2 million discrete benefit for additional U.K. credits in the current quarter.
Liquidity and Capital Resources
Condensed
Consolidated Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
October 3, 2015 |
|
|
September 27, 2014 |
|
Net income |
|
$ |
317,999 |
|
|
$ |
280,328 |
|
Depreciation and amortization |
|
|
66,895 |
|
|
|
70,550 |
|
Stock-based compensation |
|
|
24,957 |
|
|
|
24,460 |
|
Deferred income taxes |
|
|
1,821 |
|
|
|
(9,151 |
) |
Change in accounts receivable |
|
|
6,121 |
|
|
|
23,588 |
|
Change in inventories |
|
|
(39,171 |
) |
|
|
(36,812 |
) |
Change in accounts payable and other current liabilities |
|
|
4,234 |
|
|
|
3,887 |
|
Change in deferred revenue and customer advances |
|
|
31,099 |
|
|
|
23,737 |
|
Other changes |
|
|
(7,313 |
) |
|
|
(30,661 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
406,642 |
|
|
|
349,926 |
|
Net cash used in investing activities |
|
|
(294,509 |
) |
|
|
(322,424 |
) |
Net cash used in financing activities |
|
|
(57,918 |
) |
|
|
(104,784 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(16,874 |
) |
|
|
(6,546 |
) |
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
37,341 |
|
|
$ |
(83,828 |
) |
|
|
|
|
|
|
|
|
|
Cash Flow from Operating Activities
Net cash provided by operating activities was $407 million and $350 million in the nine months ended October 3, 2015 and September 27, 2014,
respectively. The changes within net cash provided by operating activities in 2015 as compared to 2014 include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the increase in net
income:
|
|
|
The change in accounts receivable in 2015 compared to 2014 was primarily attributable to timing of shipments and payments made by customers. Days-sales-outstanding (DSO) increased to 76 days at
October 3, 2015 from 73 days at September 27, 2014. |
|
|
|
The change in inventory in both 2015 and 2014 is primarily attributable to the additional inventory ramp up for new products launched during the second half of this year. |
|
|
|
The 2015 and 2014 change in accounts payable and other current liabilities was a result of timing of payments to vendors. |
|
|
|
Net cash provided from deferred revenue and customer advances in both 2015 and 2014 was a result of the higher installed base of customers renewing annual service contracts. |
|
|
|
Other changes were attributable to variation in the timing of various provisions, expenditures, prepaid income taxes and accruals in other current assets, other assets and other liabilities. In addition, the Company
made one-time contributions totaling $21 million to certain Non-U.S. pension plans during 2014. |
25
Cash Used in Investing Activities
Year-to-date, net cash used in investing activities totaled $295 million and $322 million in 2015 and 2014, respectively. Additions to fixed assets and
capitalized software were $72 million and $70 million year-to-date in 2015 and 2014, respectively. During 2015 and 2014, the Company purchased $1,467 million and $1,731 million of investments year-to-date, while $1,249 million and $1,505 million of
investments matured, respectively. Business acquisitions, net of cash acquired, were $9 million and $24 million year-to-date in 2015 and 2014, respectively. In 2015, the
Company received $5 million cash from the sale of a building in the U.K.
Cash Used in Financing Activities
In April 2015, Waters entered into an amendment to the credit agreement dated June 2013. The amended credit agreement provides for an increase of the revolving
commitments from $1.1 billion to $1.3 billion and extends the maturity of the original credit agreement from June 25, 2018 until April 23, 2020. The Company plans to use future proceeds from the revolving facility for general corporate
purposes.
Year-to-date, the Companys total debt borrowings increased by $165 million and $107 million in 2015 and 2014, respectively. As of
October 3, 2015, the Company had a total of $1,630 million in outstanding debt, which consisted of $500 million in outstanding senior unsecured notes, $300 million borrowed under the term loan facility under the 2015 Credit Agreement and $830
million borrowed under revolving credit facility under the 2015 Credit Agreement. At October 3, 2015, $125 million of the outstanding portion of the revolving facility was classified as short-term liabilities in the consolidated balance sheet
due to the fact that the Company expects to repay this portion of the borrowing under the revolving line of credit within the next twelve months. The remaining $705 million of the outstanding portion of the revolving facility was classified as
long-term liabilities in the consolidated balance sheet, as this portion is not expected to be repaid within the next twelve months. As of October 3, 2015, the Company had a total amount available to borrow under the 2015 Credit Agreement of
$468 million after outstanding letters of credit.
In May 2014, the Companys Board of Directors authorized the Company to repurchase up to $750
million of its outstanding common stock over a three-year period and authorized the extension of the May 2012 program until May 2015. During the first nine months of 2015 and 2014, the Company repurchased 2.0 million and 2.4 million shares
of the Companys outstanding common stock at a cost of $249 million and $255 million, respectively, under the May 2012 and May 2014 authorizations. As of October 3, 2015, the Company had a total of $520 million authorized for future
repurchases under the May 2014 plan. In addition, the Company repurchased $6 million and $7 million of common stock related to the vesting of restricted stock units during 2015 and 2014, respectively.
The Company received $29 million and $43 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Companys
employee stock purchase plan in 2015 and 2014, respectively.
The Company had cash, cash equivalents and investments of $2,311 million as of
October 3, 2015. The majority of the Companys cash, cash equivalents and investments are generated from foreign operations, with $2,275 million held by foreign subsidiaries at October 3, 2015. Due to the fact that most of the
Companys cash, cash equivalents and investments are held outside of the U.S., the Company must manage and maintain sufficient levels of cash flow in the U.S. to fund operations and capital expenditures, service debt interest, finance potential
U.S. acquisitions and continue the authorized stock repurchase program in the U.S. These U.S. cash requirements are managed by the Companys cash flow from U.S. operations and the use of the Companys revolving credit facility.
Management believes, as of the date of this report, that its financial position, particularly in the U.S., along with expected future cash flows from earnings
based on historical trends and the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, will be sufficient to service debt and fund working capital and capital spending requirements,
authorized share repurchase amounts and potential acquisitions. In addition, there have been no recent significant changes to the Companys financial position, nor are there any anticipated changes, to warrant a material adjustment related to
indefinitely reinvested foreign earnings.
Contractual Obligations, Commercial Commitments, Contingent Liabilities and Dividends
A summary of the Companys contractual obligations and commercial commitments is included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission (SEC) on February 27, 2015. The Company reviewed its contractual obligations and commercial commitments as of October 3, 2015 and
determined that there were no material changes from the information set forth in the Annual Report on Form 10-K, with the exception of the amended credit agreement as described in Note 6, Debt.
26
From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the
ordinary course of business. The Company believes that it has meritorious arguments in its current litigation matters and that any outcome, either individually or in the aggregate, will not be material to the Companys financial position or
results of operations.
During the nine months ended October 3, 2015, the Company contributed $4 million to the Companys U.S. pension plans.
During fiscal year 2015, the Company expects to contribute a total of approximately $6 million to $11 million to the Companys defined benefit plans.
The Company has not paid any dividends and has no plans, at this time, to pay any dividends in the future.
Critical Accounting Policies and Estimates
In the
Companys Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on February 27, 2015, the Companys most critical accounting policies and estimates upon which its financial status depends were
identified as those relating to revenue recognition, loss provisions on accounts receivable and inventory, valuation of long-lived assets, intangible assets and goodwill, warranty, income taxes, pension and other postretirement benefit obligations,
litigation, business combinations and asset acquisitions, valuation of contingent consideration and stock-based compensation. The Company reviewed its policies and determined that those policies remain the Companys most critical accounting
policies for the nine months ended October 3, 2015. The Company did not make any changes in those policies during the nine months ended October 3, 2015.
New Accounting Pronouncements
Please refer to Note 12,
Recent Accounting Standards Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.
Special Note Regarding
Forward-Looking Statements
Certain of the statements in this Quarterly Report on Form 10-Q, including the information incorporated by reference
herein, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), with respect to
future results and events, including any statements regarding, among other items, anticipated trends or growth in the Companys business, including, but not limited to, the impact of foreign currency translation on financial results;
development of products by acquired businesses; the growth rate of sales and research and development expenses; the impact of costs associated with developing new technologies and bringing these new technologies to market; the impact of new product
launches and the associated costs, such as the amortization expense related to software platforms; geographic sales mix of business; development of products by acquired businesses and the amount of contingent payments to the sellers of an acquired
business; anticipated expenses, including interest expense, capitalized software costs and effective tax rates; the impact and outcome of the Companys various ongoing tax audit examinations; the achievement of contractual milestones to
preserve foreign tax rates; the impact and outcome of litigation matters; the impact of the loss of intellectual property protection; the impact of new accounting standards and pronouncements; the adequacy of the Companys supply chain and
manufacturing capabilities and facilities; the impact of regulatory compliance; the Companys expected cash flow, borrowing capacity, debt repayment and refinancing; the Companys ability to fund working capital, capital expenditures,
service debt, repay outstanding lines of credit, make authorized share repurchases, fund potential acquisitions and pay any adverse litigation or tax audit liabilities, particularly in the U.S.; future impairment charges; the Companys
contributions to defined benefit plans; the Companys expectations regarding changes to its financial position; compliance with applicable environmental laws; and the impact of recent acquisitions on sales and earnings.
Many of these statements appear, in particular, under the heading Managements Discussion and Analysis of Financial Condition and Results of
Operations in Part I, Item 2 of this Quarterly Report on Form 10-Q. Statements that are not statements of historical fact may be deemed forward-looking statements. You can identify these forward-looking statements by the use of the words
feels, believes, anticipates, plans, expects, may, will, would, intends, suggests, appears, estimates,
projects, should and similar expressions, whether in the negative or affirmative. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without
limitation:
|
|
The risks inherent in the transition of chief executive officer, as the Companys new chief executive officer joined the Company in September 2015 upon the retirement of the former chief executive officer.
|
27
|
|
Foreign exchange rate fluctuations that could adversely affect translation of the Companys future sales, financial operating results and the condition of non-U.S. operations, especially when a currency weakens
against the U.S. dollar. |
|
|
Current global economic, sovereign and political conditions and uncertainties, particularly regarding the effect of the Chinese governments ongoing tightening of restrictions on procurement by government-funded
customers; the Companys ability to access capital and maintain liquidity in volatile market conditions of customers; changes in timing and demand by the Companys customers and various market sectors, particularly if they should reduce
capital expenditures or are unable to obtain funding, as in the cases of governmental, academic and research institutions; the effect of mergers and acquisitions on customer demand; and the Companys ability to sustain and enhance service.
|
|
|
Negative industry trends; changes in the competitive landscape as a result of changes in ownership, mergers and continued consolidation among the Companys competitors; introduction of competing products by other
companies and loss of market share; pressures on prices from customers or resulting from competition; regulatory, economic and competitive obstacles to new product introductions; lack of acceptance of new products; expansion of our business in
developing markets; spending by certain end-markets; and ability to obtain alternative sources for components and modules; and the possibility that future sales of new products, which trigger contingent purchase payments, may exceed our
expectations. |
|
|
Increased regulatory burdens as the Companys business evolves, especially with respect to the Food and Drug Administration and Environmental Protection Agency, among others, as well as regulatory, environmental
and logistical obstacles affecting the distribution of the Companys products, completion of purchase order documentation by our customers and ability of customers to obtain letters of credit or other financing alternatives. |
|
|
Risks associated with lawsuits, particularly involving claims for infringement of patents and other intellectual property rights. |
|
|
The impact and costs incurred from changes in accounting principles and practices; the impact and costs of changes in statutory or contractual tax rates; shifts in taxable income in jurisdictions with different
effective tax rates; and the outcome of and costs associated with ongoing and future tax audit examinations or changes in respective country legislation affecting the Companys effective rates. |
Certain of these and other factors are discussed under the heading Risk Factors under Part I, Item 1A of the Companys Annual Report on
Form 10-K for the year ended December 31, 2014, as filed with the SEC on February 27, 2015. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements, whether
because of these factors or for other reasons. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this report. Except
as required by applicable law, the Company does not assume any obligation to update any forward-looking statements.
Item 3: |
Quantitative and Qualitative Disclosures About Market Risk |
There have been no
material changes in the Companys market risk during the nine months ended October 3, 2015. For information regarding the Companys market risk, refer to Item 7A of Part II of the Companys Annual Report on Form 10-K for the
year ended December 31, 2014, as filed with the SEC on February 27, 2015.
Item 4: |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Companys chief executive officer and chief financial officer (principal executive and principal financial officer), with the participation
of management, evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on
Form 10-Q. Based on this evaluation, the Companys chief executive officer
28
and chief financial officer concluded that the Companys disclosure controls and procedures were effective as of October 3, 2015 (1) to ensure that information required to be
disclosed by the Company, including its consolidated subsidiaries, in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Companys management, including its chief executive officer and chief
financial officer, to allow timely decisions regarding the required disclosure and (2) to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
Changes in Internal Controls Over
Financial Reporting
No change was identified in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the quarter ended October 3, 2015 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
Part II: Other Information
Item 1: |
Legal Proceedings |
There have been no material changes in the Companys legal
proceedings during the nine months ended October 3, 2015 as described in Item 3 of Part I of the Companys Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on February 27, 2015.
Information regarding risk factors of the Company is set forth under
the heading Risk Factors under Part I, Item 1A in the Companys Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on February 27, 2015. The Company reviewed its risk factors as of
October 3, 2015 and determined that there were no material changes from the ones set forth in the Form 10-K. Note, however, the discussion under the subheading Special Note Regarding Forward-Looking Statements in Part I, Item 2
of this quarterly report on Form 10-Q. These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely
affect the Companys business, financial condition and operating results.
Item 2: |
Unregistered Sales of Equity Securities and Use of Proceeds |
Purchases of Common
Stock by the Issuer
The following table provides information about purchases by the Company during the three months ended October 3, 2015 of
common stock registered by the Company under the Exchange Act (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
Total Number of Shares Purchased |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(1) |
|
|
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans
or Programs (1) |
|
July 5 to August 1, 2015 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
603,611 |
|
August 2 to August 29, 2015 |
|
|
470 |
|
|
$ |
128.45 |
|
|
|
470 |
|
|
$ |
543,268 |
|
August 30 to October 3, 2015 |
|
|
195 |
|
|
$ |
121.97 |
|
|
|
195 |
|
|
$ |
519,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
665 |
|
|
$ |
126.55 |
|
|
|
665 |
|
|
$ |
519,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In May 2014, the Companys Board of Directors authorized the repurchase of up to $750 million of its outstanding common stock in open market transactions over a three-year period. |
29
|
|
|
Exhibit
Number |
|
Description of Document |
|
|
10.1 |
|
President and Chief Executive Employment Agreement.(1) |
|
|
10.2 |
|
Change of Control/Severance Agreement, dated as of September 8, 2015, between Waters Corporation and Christopher J. OConnell. (1) |
|
|
31.1 |
|
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1 * |
|
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2 * |
|
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
101 |
|
The following materials from Waters Corporations Quarterly Report on Form 10-Q for the quarter ended October 3, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets
(unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Cash Flows (unaudited), and (v) Condensed Notes to Consolidated
Financial Statements (unaudited). |
(1) |
Incorporated by reference to the Registrants Report on Form 10-Q dated August 7, 2015 (File No. 000114010). |
* |
This exhibit shall not be deemed filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any
filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filing, except to the extent the Company specifically incorporates
it by reference. |
30
SIGNATURE
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.
|
WATERS CORPORATION |
|
/s/ EUGENE G. CASSIS |
Eugene G. Cassis |
Corporate Vice President and |
Chief Financial Officer |
Date: November 6, 2015
31
Exhibit 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I,
Christopher J. OConnell certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Waters 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 registrants 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the
registrants 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 registrants 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 registrants internal control over financial reporting. |
|
|
|
|
|
|
|
Date: November 6, 2015 |
|
|
|
|
|
/s/ Christopher J. OConnell |
|
|
|
|
|
|
Christopher J. OConnell |
|
|
|
|
|
|
Chief Executive Officer |
Exhibit 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I,
Eugene G. Cassis, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Waters 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 registrants 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the
registrants 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 registrants 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 registrants internal control over financial reporting. |
|
|
|
|
|
|
|
Date: November 6, 2015 |
|
|
|
|
|
/s/ Eugene G. Cassis |
|
|
|
|
|
|
Eugene G. Cassis |
|
|
|
|
|
|
Chief Financial Officer |
Exhibit 32.1
CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The
certification set forth below is hereby made solely for the purpose of satisfying the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 and may not be relied upon or used for any other
purposes.
In connection with the Quarterly Report of Waters Corporation (the Company) on Form 10-Q for the period ended
October 3, 2015, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Christopher J. OConnell, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 or other document authenticating, acknowledging or otherwise adopting
the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
|
|
|
|
|
|
|
Date: November 6, 2015 |
|
|
|
By: |
|
/s/ Christopher J. OConnell |
|
|
|
|
|
|
Christopher J. OConnell |
|
|
|
|
|
|
Chief Executive Officer |
Exhibit 32.2
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The
certification set forth below is hereby made solely for the purpose of satisfying the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 and may not be relied upon or used for any other
purposes.
In connection with the Quarterly Report of Waters Corporation (the Company) on Form 10-Q for the period ended
October 3, 2015, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Eugene G. Cassis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A
signed original of this written statement required by Section 906 or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by
Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
|
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|
|
|
|
Date: November 6, 2015 |
|
|
|
By: |
|
/s/ Eugene G. Cassis |
|
|
|
|
|
|
Eugene G. Cassis |
|
|
|
|
|
|
Chief Financial Officer |
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