The accompanying notes are an integral part of the interim consolidated financial statements.
The accompanying notes are an integral part of the interim consolidated financial statements.
The accompanying notes are an integral part of the interim consolidated financial statements.
The accompanying notes are an integral part of the interim consolidated financial statements.
The accompanying notes are an integral part of the interim consolidated financial statements.
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 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. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and
calorimetry instruments through its TA
®
product line. These instruments 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 pharmaceutical 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 2016 and 2015 ended on October 1, 2016 and October 3, 2015, 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, 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, 2015, as filed with the U.S. Securities and Exchange Commission on February 26, 2016.
Translation of Foreign
Currencies
For most of the Companys foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on
the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the period. The functional currency of each of the Companys foreign operating subsidiaries is the local currency of that particular
country, except for the Companys subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional
currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entitys cash flows.
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 the U.S. dollar. As of October
1, 2016 and December 31, 2015, $2,664 million out of $2,713 million and $2,346 million out
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
of $2,399 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. In addition, $263 million out of $2,713 million and $248 million out of $2,399 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at October 1, 2016 and December 31, 2015,
respectively.
Other Investments
During the three
and nine months ended October 1, 2016, the Company sold an equity investment that was accounted for using the equity method of accounting and was included in other assets in the consolidated balance sheet for $4 million in cash. The investment had a
carrying value of $2 million, which resulted in a gain on the sale of $2 million.
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 1, 2016 and December 31, 2015. 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 1, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at
October 1, 2016
|
|
|
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
|
|
$
|
556,148
|
|
|
$
|
|
|
|
$
|
556,148
|
|
|
$
|
|
|
Foreign government securities
|
|
|
18,002
|
|
|
|
|
|
|
|
18,002
|
|
|
|
|
|
Corporate debt securities
|
|
|
1,572,848
|
|
|
|
|
|
|
|
1,572,848
|
|
|
|
|
|
Time deposits
|
|
|
221,034
|
|
|
|
|
|
|
|
221,034
|
|
|
|
|
|
Equity securities
|
|
|
147
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
Other cash equivalents
|
|
|
3,000
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
Waters 401(k) Restoration Plan assets
|
|
|
30,373
|
|
|
|
|
|
|
|
30,373
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
|
376
|
|
|
|
|
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,401,928
|
|
|
$
|
|
|
|
$
|
2,401,928
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
4,805
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,805
|
|
Foreign currency exchange contracts
|
|
|
151
|
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,956
|
|
|
$
|
|
|
|
$
|
151
|
|
|
$
|
4,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at
December 31,
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
|
|
$
|
627,156
|
|
|
$
|
|
|
|
$
|
627,156
|
|
|
$
|
|
|
Foreign government securities
|
|
|
15,199
|
|
|
|
|
|
|
|
15,199
|
|
|
|
|
|
Corporate debt securities
|
|
|
1,324,318
|
|
|
|
|
|
|
|
1,324,318
|
|
|
|
|
|
Time deposits
|
|
|
74,947
|
|
|
|
|
|
|
|
74,947
|
|
|
|
|
|
Equity securities
|
|
|
147
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
Other cash equivalents
|
|
|
27,000
|
|
|
|
|
|
|
|
27,000
|
|
|
|
|
|
Waters 401(k) Restoration Plan assets
|
|
|
35,823
|
|
|
|
|
|
|
|
35,823
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
|
616
|
|
|
|
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,105,206
|
|
|
$
|
|
|
|
$
|
2,105,206
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
4,215
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,215
|
|
Foreign currency exchange contracts
|
|
|
402
|
|
|
|
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,617
|
|
|
$
|
|
|
|
$
|
402
|
|
|
$
|
4,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 1, 2016 and December 31, 2015. There were no transfers between the levels of the fair value hierarchy during the nine months ended October 1, 2016.
Fair Value of Contingent Consideration
The fair value of
the Companys liability for contingent consideration relates to the July 2014 acquisition of Medimass Research, Development and Service Kft. and 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 estimated future results and a discount rate that reflects both the likelihood of achieving the estimated future results and 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 $5 million and $4 million at
October 1, 2016 and December 31, 2015, respectively, 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, 2015
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 due to their
short-term nature. The carrying value of the Companys fixed interest rate debt was $610 million and $450 million at October 1, 2016 and December 31, 2015, 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 $618 million
and $454 million at October 1, 2016 and December 31, 2015, respectively, using Level 2 inputs.
8
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
Derivative Transactions
The Company is a global company that operates in over 35 countries and, as a result, the Companys net sales, cost of sales, operating expenses and
balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its non-U.S. dollar foreign
subsidiaries financial statements into U.S. dollars, and when any of the Companys subsidiaries purchase or sell products or services in a currency other than its own currency.
The Companys principal strategy in managing exposure to changes in foreign currency exchange rates is to naturally hedge the
foreign-currency-denominated liabilities on the Companys balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by
corresponding changes in assets.
The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated assets, liabilities
or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Companys net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company
periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Companys currency price risk
exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment.
Principal hedged currencies include the Euro,
Japanese yen, British pound and Brazilian real. At October 1, 2016 and December 31, 2015, the Company held foreign currency exchange contracts with notional amounts totaling $124 million and $116 million, respectively.
The Companys foreign currency exchange contracts included in the consolidated balance sheets are classified as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
December 31, 2015
|
|
Other current assets
|
|
$
|
376
|
|
|
$
|
616
|
|
Other current liabilities
|
|
$
|
151
|
|
|
$
|
402
|
|
The following is a summary of the activity in the statements of operations related to the foreign currency exchange contracts
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
Realized (losses) gains on closed contracts
|
|
$
|
(1,994
|
)
|
|
$
|
810
|
|
|
$
|
(9,525
|
)
|
|
$
|
5
|
|
Unrealized gains (losses) on open contracts
|
|
|
1,003
|
|
|
|
(71
|
)
|
|
|
11
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative net pre-tax (losses) gains
|
|
$
|
(991
|
)
|
|
$
|
739
|
|
|
$
|
(9,514
|
)
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. During the nine months ended October 1, 2016 and October 3, 2015, the Company repurchased 1.8 million and 1.3 million shares of the Companys outstanding common stock at a cost of $236 million and $249 million, respectively, under the
May 2014 authorization and other previously announced programs. The Company has a total of $206 million authorized for future repurchases under the May 2014 plan. In addition, the Company repurchased $6 million of common stock related to the vesting
of restricted stock units during both the nine months ended October 1, 2016 and October 3, 2015. 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.
9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
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.
The following is a summary of the activity of the Companys
accrued warranty liability for the nine months ended October 1, 2016 and October 3, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Period
|
|
|
Accruals for
Warranties
|
|
|
Settlements
Made
|
|
|
Balance at
End of
Period
|
|
Accrued warranty liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
$
|
13,349
|
|
|
$
|
7,101
|
|
|
$
|
(6,915
|
)
|
|
$
|
13,535
|
|
October 3, 2015
|
|
$
|
13,266
|
|
|
$
|
5,834
|
|
|
$
|
(5,993
|
)
|
|
$
|
13,107
|
|
The Companys marketable securities within cash equivalents and investments
included in the consolidated balance sheets are detailed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
U.S. Treasury securities
|
|
$
|
555,493
|
|
|
$
|
719
|
|
|
$
|
(64
|
)
|
|
$
|
556,148
|
|
Foreign government securities
|
|
|
17,999
|
|
|
|
3
|
|
|
|
|
|
|
|
18,002
|
|
Corporate debt securities
|
|
|
1,572,028
|
|
|
|
1,353
|
|
|
|
(533
|
)
|
|
|
1,572,848
|
|
Time deposits
|
|
|
221,034
|
|
|
|
|
|
|
|
|
|
|
|
221,034
|
|
Equity securities
|
|
|
77
|
|
|
|
70
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,366,631
|
|
|
$
|
2,145
|
|
|
$
|
(597
|
)
|
|
$
|
2,368,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
85,373
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
85,373
|
|
Investments
|
|
|
2,281,258
|
|
|
|
2,145
|
|
|
|
(597
|
)
|
|
|
2,282,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,366,631
|
|
|
$
|
2,145
|
|
|
$
|
(597
|
)
|
|
$
|
2,368,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
U.S. Treasury securities
|
|
$
|
628,358
|
|
|
$
|
16
|
|
|
$
|
(1,218
|
)
|
|
$
|
627,156
|
|
Foreign government securities
|
|
|
15,216
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
15,199
|
|
Corporate debt securities
|
|
|
1,325,398
|
|
|
|
159
|
|
|
|
(1,239
|
)
|
|
|
1,324,318
|
|
Time deposits
|
|
|
74,947
|
|
|
|
|
|
|
|
|
|
|
|
74,947
|
|
Equity securities
|
|
|
77
|
|
|
|
70
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,043,996
|
|
|
$
|
245
|
|
|
$
|
(2,474
|
)
|
|
$
|
2,041,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
130,169
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
130,169
|
|
Investments
|
|
|
1,913,827
|
|
|
|
245
|
|
|
|
(2,474
|
)
|
|
|
1,911,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,043,996
|
|
|
$
|
245
|
|
|
$
|
(2,474
|
)
|
|
$
|
2,041,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 1, 2016
|
|
|
December 31, 2015
|
|
Due in one year or less
|
|
$
|
1,284,900
|
|
|
$
|
1,137,825
|
|
Due after one year through three years
|
|
|
862,098
|
|
|
|
828,848
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,146,998
|
|
|
$
|
1,966,673
|
|
|
|
|
|
|
|
|
|
|
Inventories are classified as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
December 31, 2015
|
|
Raw materials
|
|
$
|
97,351
|
|
|
$
|
88,625
|
|
Work in progress
|
|
|
20,078
|
|
|
|
20,901
|
|
Finished goods
|
|
|
185,754
|
|
|
|
153,889
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
303,183
|
|
|
$
|
263,415
|
|
|
|
|
|
|
|
|
|
|
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 September 2, 2016, the Company acquired all of the outstanding stock of Rubotherm GmbH (Rubotherm), a manufacturer of gravimetric analysis
systems, for approximately $6 million in cash, $5 million of which was paid at closing and an additional $1 million paid after closing to settle certain liabilities. Rubotherm develops and manufactures analytical test instruments for
thermogravimetric and sorption measurements that are used in both industrial and academic research laboratories in disciplines that include chemistry, material science and engineering. The Rubotherm acquisition will help support and further expand
product offerings within TAs thermal analysis business. The Company has allocated $3 million of the purchase price to intangible assets comprised of technology, which will be amortized over ten years. The remaining purchase price of $4 million
was accounted for as goodwill, which is not deductible for tax purposes.
The principal factor that resulted in recognition of goodwill in the acquisition
of Rubotherm 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 Rubotherm on the Companys revenues and net income since the acquisition date for the nine months ended October 1, 2016 was
immaterial. The pro forma effect of the ongoing operations for Waters and Rubotherm as though this acquisition had occurred at the beginning of the periods covered by this report was also 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
Rubotherm (in thousands):
|
|
|
|
|
Accounts receivable and other current assets
|
|
$
|
1,037
|
|
Inventory
|
|
|
976
|
|
Property, plant and equipment
|
|
|
160
|
|
Intangible assets
|
|
|
2,901
|
|
Goodwill
|
|
|
3,743
|
|
|
|
|
|
|
Total assets acquired
|
|
|
8,817
|
|
Accrued expenses and other current liabilities
|
|
|
2,849
|
|
Deferred tax liability
|
|
|
782
|
|
|
|
|
|
|
Cash consideration paid
|
|
$
|
5,186
|
|
|
|
|
|
|
5
|
Goodwill and Other Intangibles
|
The carrying amount of goodwill was $356 million and $357 million
at October 1, 2016 and December 31, 2015, respectively. During the nine months ended October 1, 2016, the Companys acquisitions increased goodwill by $4 million (see Note 4) and the effect of foreign currency translation decreased goodwill by
$5 million.
The Companys intangible assets included in the consolidated balance sheets are detailed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Gross
|
|
|
|
|
|
Average
|
|
Gross
|
|
|
|
|
|
Average
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Amortization
|
|
Carrying
|
|
|
Accumulated
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Period
|
|
Amount
|
|
|
Amortization
|
|
|
Period
|
Capitalized software
|
|
$
|
372,588
|
|
|
$
|
231,237
|
|
|
6 years
|
|
$
|
335,949
|
|
|
$
|
204,267
|
|
|
7 years
|
Purchased intangibles
|
|
|
166,216
|
|
|
|
127,026
|
|
|
11 years
|
|
|
163,500
|
|
|
|
119,505
|
|
|
11 years
|
Trademarks and IPR&D
|
|
|
13,788
|
|
|
|
|
|
|
|
|
|
14,364
|
|
|
|
|
|
|
|
Licenses
|
|
|
4,876
|
|
|
|
3,960
|
|
|
6 years
|
|
|
5,396
|
|
|
|
4,046
|
|
|
6 years
|
Patents and other intangibles
|
|
|
61,986
|
|
|
|
35,612
|
|
|
8 years
|
|
|
58,519
|
|
|
|
31,888
|
|
|
8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
619,454
|
|
|
$
|
397,835
|
|
|
7 years
|
|
$
|
577,728
|
|
|
$
|
359,706
|
|
|
8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended October 1, 2016, the effect of foreign currency translation increased the gross carrying value of
intangible assets and accumulated amortization for intangible assets by $8 million and $5 million, respectively. Amortization expense for intangible assets was $12 million for both the three months ended October 1, 2016 and October 3, 2015.
Amortization expense for intangible assets was $34 million for both the nine months ended October 1, 2016 and October 3, 2015. Amortization expense for intangible assets is estimated to be approximately $45 million per year for each of the next
five years.
On May 12, 2016, the Company issued and sold the following senior unsecured notes:
|
|
|
|
|
|
|
|
|
|
|
Senior Unsecured Notes
|
|
|
|
|
|
Face Value
|
|
|
|
|
Term
|
|
Interest Rate
|
|
(in millions)
|
|
|
Maturity Date
|
Series I
|
|
7 years
|
|
3.13%
|
|
$
|
50
|
|
|
May 2023
|
Series J
|
|
8 years
|
|
Floating Rate*
|
|
$
|
40
|
|
|
May 2024
|
Series K
|
|
10 years
|
|
3.44%
|
|
$
|
160
|
|
|
May 2026
|
*
|
Series J senior unsecured notes bear interest at 3 month LIBOR for that floating rate interest period plus 1.45%.
|
12
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
Of the $250 million of proceeds received from the issuance of the new senior unsecured notes, $225 million
were used to repay outstanding portions of the revolving facilities. Interest on the Series I and K senior unsecured notes is payable semi-annually each year. Interest on Series J 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 J senior unsecured notes. Other provisions for
these senior unsecured notes are similar to the existing senior unsecured notes, as described below.
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 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 1, 2016, $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 $660 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 1, 2016 and December 31, 2015, the Company had a total of $700 million and $500 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 and J 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.
13
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
The Company had the following outstanding debt at October 1, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
December 31, 2015
|
|
Foreign subsidiary lines of credit
|
|
$
|
176
|
|
|
$
|
322
|
|
Senior unsecured notes - Series C - 2.50%, due March 2016
|
|
|
|
|
|
|
50,000
|
|
Credit agreements
|
|
|
125,000
|
|
|
|
125,000
|
|
Unamortized debt issuance costs
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Total notes payable and debt
|
|
|
125,176
|
|
|
|
175,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes - Series B - 5.00%, due February 2020
|
|
|
100,000
|
|
|
|
100,000
|
|
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
|
|
Senior unsecured notes - Series I - 3.13%, due May 2023
|
|
|
50,000
|
|
|
|
|
|
Senior unsecured notes - Series J - floating rate**, due May 2024
|
|
|
40,000
|
|
|
|
|
|
Senior unsecured notes - Series K - 3.44%, due May 2026
|
|
|
160,000
|
|
|
|
|
|
Credit agreements
|
|
|
960,000
|
|
|
|
1,045,000
|
|
Unamortized debt issuance costs
|
|
|
(3,168
|
)
|
|
|
(1,973
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,656,832
|
|
|
|
1,493,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
1,782,008
|
|
|
$
|
1,668,336
|
|
|
|
|
|
|
|
|
|
|
*
|
Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.25%.
|
**
|
Series J senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.45%.
|
As of October 1, 2016 and December 31, 2015, the Company had a total amount available to borrow under the existing credit agreements of $513 million and $428
million, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.45% and 2.11% at October 1, 2016 and December 31, 2015,
respectively. As of October 1, 2016, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available
short-term lines of credit totaling $84 million and $97 million at October 1, 2016 and December 31, 2015, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. At October 1, 2016 and December 31, 2015, the
weighted-average interest rates applicable to these short-term borrowings were 1.48% and 1.24%, respectively.
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland,
the U.K. and Singapore, where the marginal effective tax rates were approximately 37.5%, 12.5%, 20% and 0%, respectively, as of October 1, 2016. The Company has a contractual tax rate in Singapore of 0% through March 2021, based upon the achievement
of certain contractual milestones, which the Company expects to continue to meet. The current statutory tax rate in Singapore is 17%. For the first nine months of 2016, the effect of applying the contractual tax rate in Singapore, as compared with
applying the statutory tax rate, increased net income and net income per diluted share by $16 million and $0.20, respectively.
The Companys
effective tax rate was 14.2% and 10.3% for the three months ended October 1, 2016 and October 3, 2015, respectively. The increase in the effective tax rate for the 2016 quarter as compared to the 2015 quarter can be attributed to the recognition of
a $2 million discrete benefit in the 2015 quarter for additional U.K. tax credits and the differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates. The Companys effective tax
rate was 12.7% and 13.3% for the nine months ended October 1, 2016 and October 3, 2015, respectively. The decrease in the effective tax rate year-to-date for 2016 as compared to 2015 can be attributed to the following: a release of a valuation
allowance on certain net operating loss carryforwards in the second quarter of 2016; the impact of a tax benefit recorded in the first quarter of 2016 associated with modifications to certain stock compensation awards; and the impact of the U.S.
research and development tax credit benefit which was not enacted by the government or recognized by the Company until the fourth quarter of 2015.
14
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
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 tax 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 1, 2016 and October 3, 2015 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
Balance at the beginning of the period
|
|
$
|
14,450
|
|
|
$
|
19,596
|
|
Net changes in uncertain tax benefits
|
|
|
(3,559
|
)
|
|
|
(861
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
10,891
|
|
|
$
|
18,735
|
|
|
|
|
|
|
|
|
|
|
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, 2012. However, carryforward tax attributes that were generated in years beginning on or before January 1, 2013 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
1, 2016, 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 potential tax audit settlements
and 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 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.
15
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
The consolidated statements of operations for the three and nine months ended October 1, 2016 and October 3,
2015 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 1, 2016
|
|
|
October 3, 2015
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
Cost of sales
|
|
$
|
731
|
|
|
$
|
668
|
|
|
$
|
2,058
|
|
|
$
|
1,990
|
|
Selling and administrative expenses
|
|
|
6,944
|
|
|
|
6,626
|
|
|
|
27,526
|
|
|
|
19,686
|
|
Research and development expenses
|
|
|
692
|
|
|
|
1,053
|
|
|
|
3,020
|
|
|
|
3,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
8,367
|
|
|
$
|
8,347
|
|
|
$
|
32,604
|
|
|
$
|
24,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended October 1, 2016, the Company recognized $7 million of stock compensation expense related to the
modification of certain stock awards upon the retirement of senior executives.
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 1, 2016 and
October 3, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Options Issued and Significant Assumptions Used to Estimate Option Fair
Values
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
Options issued (in thousands)
|
|
|
86
|
|
|
|
115
|
|
Risk-free interest rate
|
|
|
1.5
|
%
|
|
|
1.4
|
%
|
Expected life in years
|
|
|
5
|
|
|
|
4
|
|
Expected volatility
|
|
|
0.286
|
|
|
|
0.291
|
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Weighted-Average Exercise Price and Fair Value of Options on the Date of
Grant
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
Exercise price
|
|
$
|
122.65
|
|
|
$
|
121.33
|
|
Fair value
|
|
$
|
34.63
|
|
|
$
|
30.85
|
|
The following table summarizes stock option activity for the plans for the nine months ended October 1, 2016 (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Price per Share
|
|
Weighted-Average
Exercise Price
|
|
Outstanding at December 31, 2015
|
|
|
3,154
|
|
|
$ 38.09 to $ 134.37
|
|
$
|
96.73
|
|
Granted
|
|
|
86
|
|
|
$ 117.68 to $ 130.35
|
|
$
|
122.65
|
|
Exercised
|
|
|
(700
|
)
|
|
$ 41.20 to $ 113.36
|
|
$
|
76.98
|
|
Canceled
|
|
|
(50
|
)
|
|
$ 79.15 to $ 128.93
|
|
$
|
109.55
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 1, 2016
|
|
|
2,490
|
|
|
$ 38.09 to $ 134.37
|
|
$
|
102.92
|
|
|
|
|
|
|
|
|
|
|
|
|
16
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
Restricted Stock
During the nine months ended October 1, 2016, the Company granted eight thousand shares of restricted stock. The fair value of these awards on the grant date
was $130.35 per share.
Restricted Stock Units
The
following table summarizes the unvested restricted stock unit award activity for the nine months ended October 1, 2016 (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Price
|
|
Unvested at December 31, 2015
|
|
|
497
|
|
|
$
|
104.16
|
|
Granted
|
|
|
136
|
|
|
$
|
117.75
|
|
Vested
|
|
|
(143
|
)
|
|
$
|
98.76
|
|
Forfeited
|
|
|
(11
|
)
|
|
$
|
109.85
|
|
|
|
|
|
|
|
|
|
|
Unvested at October 1, 2016
|
|
|
479
|
|
|
$
|
109.50
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year
period.
Basic and diluted earnings per share (EPS) calculations are detailed as
follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 1, 2016
|
|
|
|
Net Income
|
|
|
Weighted-
Average Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net income per basic common share
|
|
$
|
124,856
|
|
|
|
80,677
|
|
|
$
|
1.55
|
|
Effect of dilutive stock option, restricted stock and restricted stock unit securities
|
|
|
|
|
|
|
711
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
124,856
|
|
|
|
81,388
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 3, 2015
|
|
|
|
Net Income
|
|
|
Weighted-
Average Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 1, 2016
|
|
|
|
Net Income
|
|
|
Weighted-
Average Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net income per basic common share
|
|
$
|
347,125
|
|
|
|
80,923
|
|
|
$
|
4.29
|
|
Effect of dilutive stock option, restricted stock and restricted stock unit securities
|
|
|
|
|
|
|
650
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
347,125
|
|
|
|
81,573
|
|
|
$
|
4.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 3, 2015
|
|
|
|
Net Income
|
|
|
Weighted-
Average Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended October 1, 2016, the Company had 0.5 million and 0.8 million stock options that
were antidilutive, respectively, due to having higher exercise prices than the Companys average stock price during the period. 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. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.
10
|
Accumulated Other Comprehensive Income
|
The components of accumulated other comprehensive income are
detailed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Translation
|
|
|
Unrealized Gain
(Loss) on
Retirement Plans
|
|
|
Unrealized Gain
(Loss) on
Investments
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Balance at December 31, 2015
|
|
$
|
(103,570
|
)
|
|
$
|
(40,946
|
)
|
|
$
|
(2,210
|
)
|
|
$
|
(146,726
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
(12,954
|
)
|
|
|
607
|
|
|
|
3,669
|
|
|
|
(8,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2016
|
|
$
|
(116,524
|
)
|
|
$
|
(40,339
|
)
|
|
$
|
1,459
|
|
|
$
|
(155,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 1, 2016 and October 3, 2015 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
|
U.S.
|
|
|
U.S. Retiree
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
U.S. Retiree
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
Service cost
|
|
$
|
94
|
|
|
$
|
116
|
|
|
$
|
1,253
|
|
|
$
|
|
|
|
$
|
(91
|
)
|
|
$
|
1,337
|
|
Interest cost
|
|
|
1,710
|
|
|
|
135
|
|
|
|
423
|
|
|
|
1,570
|
|
|
|
116
|
|
|
|
402
|
|
Expected return on plan assets
|
|
|
(2,392
|
)
|
|
|
(130
|
)
|
|
|
(401
|
)
|
|
|
(2,223
|
)
|
|
|
(129
|
)
|
|
|
(410
|
)
|
Net amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (credit) cost
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Net actuarial loss
|
|
|
693
|
|
|
|
|
|
|
|
190
|
|
|
|
1,101
|
|
|
|
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
105
|
|
|
$
|
121
|
|
|
$
|
1,414
|
|
|
$
|
448
|
|
|
$
|
(104
|
)
|
|
$
|
1,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
|
U.S.
|
|
|
U.S. Retiree
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
U.S. Retiree
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
Service cost
|
|
$
|
282
|
|
|
$
|
348
|
|
|
$
|
3,721
|
|
|
$
|
|
|
|
$
|
433
|
|
|
$
|
4,011
|
|
Interest cost
|
|
|
5,200
|
|
|
|
405
|
|
|
|
1,273
|
|
|
|
4,596
|
|
|
|
352
|
|
|
|
1,206
|
|
Expected return on plan assets
|
|
|
(7,226
|
)
|
|
|
(390
|
)
|
|
|
(1,206
|
)
|
|
|
(6,859
|
)
|
|
|
(373
|
)
|
|
|
(1,230
|
)
|
Net amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (credit) cost
|
|
|
|
|
|
|
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Net actuarial loss
|
|
|
2,027
|
|
|
|
|
|
|
|
570
|
|
|
|
2,459
|
|
|
|
|
|
|
|
819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
283
|
|
|
$
|
363
|
|
|
$
|
4,213
|
|
|
$
|
196
|
|
|
$
|
412
|
|
|
$
|
4,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended October 1, 2016, the Company contributed $4 million to the Companys U.S. pension plans.
During fiscal year 2016, the Company expects to contribute a total of approximately $5 million to $10 million to the Companys defined benefit plans.
12
|
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 and TA.
The Waters operating segment 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. The TA operating segment is primarily in the business of designing, manufacturing, distributing and servicing thermal analysis, rheometry and calorimetry
instruments. The Companys two operating segments have 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 1, 2016 and October 3, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
Product net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waters instrument systems
|
|
$
|
226,296
|
|
|
$
|
219,196
|
|
|
$
|
646,733
|
|
|
$
|
625,276
|
|
Chemistry
|
|
|
84,114
|
|
|
|
78,173
|
|
|
|
255,312
|
|
|
|
234,095
|
|
TA instrument systems
|
|
|
39,524
|
|
|
|
39,564
|
|
|
|
115,433
|
|
|
|
112,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
|
349,934
|
|
|
|
336,933
|
|
|
|
1,017,478
|
|
|
|
971,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waters service
|
|
|
160,503
|
|
|
|
148,206
|
|
|
|
471,792
|
|
|
|
438,104
|
|
TA service
|
|
|
16,393
|
|
|
|
15,439
|
|
|
|
49,366
|
|
|
|
45,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service sales
|
|
|
176,896
|
|
|
|
163,645
|
|
|
|
521,158
|
|
|
|
483,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
526,830
|
|
|
$
|
500,578
|
|
|
$
|
1,538,636
|
|
|
$
|
1,455,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
13
|
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 amended the standard in August 2015 to delay the effective period date by one year to annual and interim periods beginning after December 15, 2017. Adoption prior
to December 15, 2016 is not permitted. In March 2016, the FASB clarified the implementation guidance on principal versus agent considerations and, in April 2016, clarification was made regarding certain aspects of identifying performance
obligations and licensing implementation guidance. In May 2016, additional guidance was issued related to disclosure of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the
presentation of sales and other similar taxes collected from customers. 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 August 2014, accounting guidance was issued which defines managements responsibility to assess an entitys
ability to continue as a going concern at each annual and interim reporting period, and requires additional disclosures in certain circumstances. This guidance is effective for the annual period ending after December 15, 2016, and for annual and
interim periods thereafter. Early adoption is permitted. The adoption of this standard will not have an impact on the Companys financial position, results of operations or cash flows.
In July 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.
In January 2016, accounting guidance was issued which primarily affects the classification and measurement of certain financial instruments, principally
equity investments and certain financial liabilities. Under the new guidance, there will no longer be an available-for-sale classification for equity securities with readily determinable fair values. Changes to the fair value of equity
investments will be recognized through earnings. Equity investments carried at cost should be adjusted for changes in observable prices, as applicable, and qualitatively assessed for impairment annually. Changes to the fair value of financial
liabilities under the fair value option due to instrument specific credit risk will be recognized separately in other comprehensive income. The new guidance also requires financial assets and financial liabilities to be presented separately and
grouped by measurement category in the notes to the financial statements. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption of certain provisions of this guidance 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 February 2016, accounting guidance was issued regarding the accounting for leases. This new comprehensive lease standard amends various aspects of existing
accounting guidance for leases. The core principle of the new guidance will require lessees to present the assets and liabilities that arise from leases on their balance sheets. This guidance is effective for annual and interim reporting periods
beginning after December 15, 2018 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 March 2016, accounting guidance was issued which simplifies the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016 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 June 2016, accounting guidance was issued that modifies the recognition of credit losses related to financial assets, such as debt securities, trade
receivables, net investments in leases, off-balance sheet credit exposures, and
20
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
other financial assets that have the contractual right to receive cash. Current guidance requires the recognition of a credit loss when it is considered probable that a loss event was incurred.
The new guidance requires the measurement of expected credit losses to be based upon relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the asset. As
such, expected credit losses may be recognized sooner under the new guidance due to the broader range of information that will be required to determine credit loss estimates. The new guidance also amends the current other-than-temporary impairment
model used for debt securities classified as available-for-sale. When the fair value of an available-for-sale debt security is below its amortized cost, the new guidance requires the total unrealized loss to be bifurcated into its credit and
non-credit components. Any expected credit losses or subsequent recoveries will be recognized in earnings and any changes not considered credit related will continue to be recognized within other comprehensive income. This guidance is effective for
annual and interim periods beginning after December 15, 2019. 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 August 2016, accounting guidance was issued that clarifies the classification of certain cash flows. The new guidance addresses eight specific areas where
current accounting guidance is either unclear or does not specifically address classification issues. This guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company is
currently evaluating the potential impact that the adoption of this standard will have on the Companys cash flows.
21