NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Description of Business and Organization
Waters Corporation (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 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.
2 Basis of Presentation and Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles (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. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, product returns and allowances, bad debts, inventory valuation, goodwill and intangible assets, income
taxes, warranty and installation provisions, litigation, retirement plan obligations, stock-based compensation, equity investments and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these
estimates under different assumptions or conditions.
Risks and Uncertainties
The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency
exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel,
protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. The Company consolidates entities
in which it owns or controls fifty percent or more of the voting shares. All inter-company balances and transactions have been eliminated.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Translation of Foreign Currencies
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.
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. Any resulting translation gains or losses
are included in accumulated other comprehensive income in the consolidated balance sheets. The Companys net sales derived from operations outside the United States were 69%, 68% and 70% in 2016, 2015 and 2014, respectively. Gains and losses
from foreign currency transactions are included in net income in the consolidated statements of operations. In 2016 and 2015, foreign currency transactions resulted in a net gain of $4 million and a net loss of $3 million, respectively.
Gains and losses from foreign currency transactions were not material for 2014.
Seasonality of Business
The Company typically experiences an increase in sales in the fourth quarter, as a result of purchasing habits for capital goods of customers that tend to
exhaust their spending budgets by calendar year end.
Cash, Cash Equivalents and Investments
Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, primarily in bank deposits, U.S. treasury bill
money market funds and commercial paper. Investments with longer maturities are classified as investments, and are held primarily in U.S. treasury bills, U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt
securities.
Investments are classified as
available-for-sale
in accordance with the accounting standards for investments in debt and equity securities. All
available-for-sale
securities are recorded at fair market value and any unrealized holding gains and losses, to the extent deemed temporary, are included in accumulated other comprehensive income in
stockholders equity, net of the related tax effects. If any adjustment to fair value reflects a decline in the value of the investment, the Company considers all available evidence to evaluate the extent to which the decline is other
than temporary and marks the investment to market through a charge to the statement of operations. The Company classifies its investments exclusive of those categorized as cash equivalents.
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 December 31, 2016 and 2015, $2,766 million out of $2,813 million and $2,346 million out 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, $261 million out of $2,813 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 December 31, 2016 and 2015, respectively.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are
recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is based on a number of factors, including
historical experience and the customers credit-
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
worthiness. The allowance for doubtful accounts is reviewed on at least a quarterly basis. Past due balances over 90 days and over a specified amount are reviewed individually for
collectibility. Account balances are charged against the allowance when the Company determines it is probable that the receivable will not be recovered. The Company does not have any
off-balance
sheet credit
exposure related to its customers. The allowance for sales returns is the best estimate of the amount of future product returns related to current period revenue and is based on historical experience.
The following is a summary of the activity of the Companys allowance for doubtful accounts and sales returns for the years ended
December 31, 2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning of Period
|
|
|
Additions
|
|
|
Deductions
|
|
|
Balance at
End
of Period
|
|
Allowance for Doubtful Accounts and Sales Returns:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
$
|
7,496
|
|
|
$
|
6,912
|
|
|
$
|
(5,751
|
)
|
|
$
|
8,657
|
|
2015
|
|
$
|
7,179
|
|
|
$
|
6,739
|
|
|
$
|
(6,422
|
)
|
|
$
|
7,496
|
|
2014
|
|
$
|
7,057
|
|
|
$
|
7,551
|
|
|
$
|
(7,429
|
)
|
|
$
|
7,179
|
|
Concentration of Credit Risk
The Company sells its products and services to a significant number of large and small customers throughout the world, with net sales to the pharmaceutical industry of approximately 56% in 2016, 54% in
2015 and 53% in 2014. None of the Companys individual customers accounted for more than 2% of annual Company sales in 2016, 2015 or 2014. The Company performs continuing credit evaluations of its customers and generally does not require
collateral, but in certain circumstances may require letters of credit or deposits. Historically, the Company has not experienced significant bad debt losses.
Inventory
The Company values all of its inventories at the lower of cost or market on a
first-in,
first-out
basis (FIFO).
Income Taxes
Deferred income taxes are recognized for temporary differences between the financial statement and income tax basis of assets and
liabilities using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized. Appropriate long-term liabilities have also been recorded to recognize uncertain tax return reporting positions.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost.
Expenditures for maintenance and repairs are charged to expense, while the costs of significant improvements are capitalized. Depreciation is provided using the straight-line method over the following estimated useful lives:
buildings fifteen to thirty years; building improvements five to ten years; leasehold improvements the shorter of the economic useful life or life of lease; and production and other
equipment three to ten years. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the consolidated balance sheets and related gains or losses are reflected in the
consolidated statements of operations.
Asset Impairments
The Company reviews its long-lived assets for impairment in accordance with the accounting standards for property, plant and equipment. Whenever events or circumstances indicate that the carrying amount
of an asset
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
may not be recoverable, the Company evaluates the fair value of the asset, relying on a number of factors, including, but not limited to, operating results, business plans, economic projections
and anticipated future cash flows. Any change in the carrying amount of an asset as a result of the Companys evaluation is recorded in the consolidated statements of operations.
Business Combinations and Asset Acquisitions
The Company accounts for business
acquisitions under the accounting standards for business combinations. The results of each acquisition are 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. Acquired
in-process
research and development (IPR&D) included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as
incurred and acquired IPR&D is tested for impairment annually until completion of the acquired programs. Upon commercialization, this indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a
straight-line basis over its estimated useful life, subject to periodic impairment reviews. If the research and development project is abandoned, the indefinite-lived asset is charged to expense. Legal costs, due diligence costs, business valuation
costs and all other business acquisition costs are expensed when incurred.
The Company also acquires intellectual property
through licensing arrangements. These arrangements often require upfront payments and may include additional milestone or royalty payments, contingent upon certain future events. IPR&D acquired in an asset acquisition (as opposed to a business
combination) is expensed immediately unless there is an alternative future use. Subsequent payments made for the achievement of milestones are evaluated to determine whether they have an alternative future use or should be expensed. Payments made to
third parties subsequent to commercialization are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.
Goodwill and Other Intangible Assets
The Company tests for goodwill
impairment using a fair-value approach at the reporting unit level annually, or earlier, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Additionally,
the Company performs an annual goodwill impairment assessment for its reporting units as of January 1 each year. The goodwill and other intangible assets accounting standards define a reporting unit as an operating segment, or one level below
an operating segment, if discrete financial information is prepared and reviewed by management. For goodwill impairment review purposes, the Company has two reporting units, Waters
®
and TA. Goodwill is allocated to the reporting units at the time of acquisition. Under the impairment test, if a reporting units carrying amount exceeds its
estimated fair value, goodwill impairment is recognized to the extent that the carrying amount of goodwill exceeds the implied fair value of the goodwill. The fair value of reporting units was estimated using a discounted cash flows technique, which
includes certain management assumptions, such as estimated future cash flows, estimated growth rates and discount rates.
The
Companys intangible assets include purchased technology; capitalized software development costs; costs associated with acquiring Company patents, trademarks and intellectual properties, such as licenses; debt issuance costs and acquired
IPR&D. Purchased intangibles are recorded at their fair market values as of the acquisition date and amortized over their estimated useful lives, ranging from one to fifteen years. Other intangibles are amortized over a period ranging from one
to ten years. Debt issuance costs are amortized over the life of the related debt. Acquired IPR&D is amortized from the date of completion of the acquired program over its estimated useful life. IPR&D and indefinite-lived intangibles are
tested annually for impairment.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Software Development Costs
The Company capitalizes internal and external software development costs for products offered for sale in accordance with the accounting standards for the costs of software to be sold, leased, or
otherwise marketed. Capitalized costs are amortized to cost of sales over the period of economic benefit, which approximates a straight-line basis over the estimated useful lives of the related software products, generally three to ten years. The
Company capitalized $33 million and $35 million of direct expenses that were related to the development of software in 2016 and 2015, respectively. Net capitalized software included in intangible assets totaled $132 million at both
December 31, 2016 and 2015. See Note 7, Goodwill and Other Intangibles.
The Company capitalizes internal
software development costs for internal use in accordance with the accounting standards for goodwill and other intangible assets. Capitalized internal software development costs are amortized over the period of economic benefit, which approximates a
straight-line basis over ten years. Net capitalized internal software included in property, plant and equipment totaled $3 million at both December 31, 2016 and 2015.
Other Investments
The Company accounts for its investments that represent less than twenty
percent ownership, and for which the Company does not have significant influence, using the accounting standards for investments in debt and equity securities. Investments for which the Company does not have the ability to exercise significant
influence, and for which there is not a readily determinable market value, are accounted for under the cost method of accounting. The Company periodically evaluates the carrying value of its investments accounted for under the cost method of
accounting and carries them at the lower of cost or estimated net realizable value. For investments in which the Company owns or controls between twenty and forty-nine percent of the voting shares, or over which it exerts significant influence over
operating and financial policies, the equity method of accounting is used. The Companys share of net income or losses of equity investments is included in the consolidated statements of operations and was not material in any period presented.
During the year ended December 31, 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. This investment had
a balance of $2 million as of December 31, 2015 and the Company has no long-term investments remaining as of December 31, 2016.
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 December 31, 2016 and 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.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table represents the Companys assets and liabilities measured at
fair value on a recurring basis at December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at
December 31,
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
|
|
$
|
570,313
|
|
|
$
|
|
|
|
$
|
570,313
|
|
|
$
|
|
|
Foreign government securities
|
|
|
17,991
|
|
|
|
|
|
|
|
17,991
|
|
|
|
|
|
Corporate debt securities
|
|
|
1,643,838
|
|
|
|
|
|
|
|
1,643,838
|
|
|
|
|
|
Time deposits
|
|
|
199,906
|
|
|
|
|
|
|
|
199,906
|
|
|
|
|
|
Equity securities
|
|
|
147
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
Waters 401(k) Restoration Plan assets
|
|
|
30,954
|
|
|
|
30,954
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
|
60
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,463,209
|
|
|
$
|
30,954
|
|
|
$
|
2,432,255
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
3,007
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,007
|
|
Foreign currency exchange contracts
|
|
|
730
|
|
|
|
|
|
|
|
730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,737
|
|
|
$
|
|
|
|
$
|
730
|
|
|
$
|
3,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
35,823
|
|
|
$
|
2,069,383
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
4,215
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,215
|
|
Foreign currency exchange contracts
|
|
|
402
|
|
|
|
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,617
|
|
|
$
|
|
|
|
$
|
402
|
|
|
$
|
4,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of 401(k) Restoration Plan Assets
The 401(k) Restoration Plan is a nonqualified defined contribution plan and, in 2016 and 2015, the assets were held in registered mutual funds. The Company has revised the classification of the 401(k)
Restoration Plan assets
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
from Level 2 to Level 1 at December 31, 2015 to correct the classification. The Company concluded that the error was not material to the prior period financial statements.
Fair Value of Cash Equivalents, Investment and Foreign Currency Exchange Contracts
The fair values of the Companys cash equivalents, investments 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
December 31, 2016 and 2015.
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 $3 million and $4 million at December 31, 2016 and December 31, 2015, respectively, based on the Companys best estimate, as the earnout is based on future sales of
certain products, some of which are currently in development, through 2034. The change in fair value since December 31, 2015 is primarily due to a reduction in the future revenue projections, offset by the 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 December 31, 2016 and 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 $603 million and $454 million at December 31,
2016 and 2015, respectively, using Level 2 inputs.
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.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, Mexican peso and Brazilian real. At December 31, 2016,
2015 and 2014, the Company held foreign currency exchange contracts with notional amounts totaling $120 million, $116 million and $110 million, respectively.
The Companys foreign currency exchange contracts included in the consolidated balance sheets are classified as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Other current assets
|
|
$
|
60
|
|
|
$
|
616
|
|
Other current liabilities
|
|
$
|
730
|
|
|
$
|
402
|
|
The following is a summary of the activity included in cost of sales in the statements of operations
related to the foreign currency exchange contracts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Realized (losses) gains on closed contracts
|
|
$
|
(10,401
|
)
|
|
$
|
(2,601
|
)
|
|
$
|
174
|
|
Unrealized (losses) gains on open contracts
|
|
|
(883
|
)
|
|
|
742
|
|
|
|
(1,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative net
pre-tax
losses
|
|
$
|
(11,284
|
)
|
|
$
|
(1,859
|
)
|
|
$
|
(1,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2016, 2015 and 2014, the
Company repurchased 2.3 million, 2.6 million and 3.1 million shares of the Companys outstanding common stock at a cost of $318 million, $327 million and $329 million, respectively, under the May 2014 authorization
and other previously announced programs. As of December 31, 2016, the Company repurchased an aggregate of 4.8 million shares at a cost of $627 million under the May 2014 repurchase program and has a total of $123 million
authorized for future repurchases. In addition, the Company repurchased $8 million, $7 million and $8 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2016, 2015 and
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.
Revenue Recognition
Sales of products and services are generally recorded based on product shipment and performance of service, respectively. The Companys deferred revenue on the consolidated balance sheets consists of
the obligation on
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
instrument service contracts and customer payments received in advance, prior to shipment of the instrument. Revenue is recognized when all of the following revenue recognition criteria are met:
persuasive evidence of an arrangement exists; delivery or performance has occurred; the vendors fee is fixed or determinable; collectibility is reasonably assured and, if applicable, upon acceptance when acceptance criteria with contractual
cash holdback are specified. Shipping and handling costs invoiced to the customer are included in net sales, while the costs associated with shipping and handling are included in cost of sales.
Product shipments and service contracts are not recorded as revenue until a valid purchase order or master agreement is received,
specifying fixed terms and prices. The Company generally recognizes product revenue when legal title has transferred and risk of loss passes to the customer. The Company generally structures its sales arrangements as shipping point or international
equivalent and, accordingly, recognizes revenue upon shipment. In some cases, destination-based shipping terms are included in sales arrangements, in which cases revenue is generally recognized when the products arrive at the customer site.
The Companys method of revenue recognition for certain products requiring installation is accounted for in accordance
with multiple-element revenue recognition accounting standards. With respect to the installation obligations, the larger of the contractual cash holdback or the best estimate of selling price of the installation service is deferred when the product
is shipped and revenue is recognized as a multiple-element arrangement when installation is complete. The Company determines the best estimate of selling price of installation based upon a number of factors, including hourly service billing rates
and estimated installation hours.
Instrument service contracts are typically billed at the beginning of the maintenance
period. The amount of the service contract is amortized ratably to revenue over the instrument maintenance period. There are no deferred costs associated with the service contract, as the cost of the service is recorded when the service is
performed. No revenue is recognized until all revenue recognition criteria have been met.
Sales of standalone software are
accounted for in accordance with the accounting standards for software revenue recognition. The Companys software arrangements typically include software licenses and maintenance contracts. Software license revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collection is probable, and there are no significant post-delivery obligations remaining. The revenue associated with the software maintenance
contract is recognized ratably over the maintenance term. Unspecified rights to software upgrades are typically sold as part of the maintenance contract on a
when-and-if-available
basis. The Company uses the residual method to allocate software revenue when a transaction includes multiple elements and vendor specific objective evidence of fair value of
undelivered elements exists. Under the residual method, the fair value of the undelivered element (maintenance) is deferred and the remaining portion of the arrangement fee is allocated to the delivered element (software license) and recognized as
revenue.
Returns and customer credits are infrequent and are recorded as a reduction to sales. Rights of return are not
included in sales arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. Discounts from list prices are recorded as a reduction to
sales.
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
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 years ended
December 31, 2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning of Period
|
|
|
Accruals for
Warranties
|
|
|
Settlements
Made
|
|
|
Balance at
End of Period
|
|
Accrued warranty liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
$
|
13,349
|
|
|
$
|
9,755
|
|
|
$
|
(9,713
|
)
|
|
$
|
13,391
|
|
2015
|
|
$
|
13,266
|
|
|
$
|
8,390
|
|
|
$
|
(8,307
|
)
|
|
$
|
13,349
|
|
2014
|
|
$
|
12,962
|
|
|
$
|
8,148
|
|
|
$
|
(7,844
|
)
|
|
$
|
13,266
|
|
Advertising Costs
All advertising costs are expensed as incurred and are included in selling and administrative expenses in the consolidated statements of operations. Advertising expenses were $11 million for both
2016 and 2015 and were $12 million for 2014.
Research and Development Expenses
Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits,
facilities costs, overhead costs, contract services and other outside costs. Research and development expenses are expensed as incurred. During 2015 and 2014, the Company incurred $4 million and $15 million charges, respectively, for
acquired
in-process
research and development related to the licensing of certain intellectual property relating to mass spectrometry technologies yet to be commercialized and for which there was no future
alternative use as of the acquisition date. These licensing arrangements are significantly related to new, biologically-focused applications, as well as other applications, and require the Company to make additional future payments of up to
$12 million if certain milestones are achieved, as well as royalties on future net sales.
Stock-Based Compensation
The Company has two stock-based compensation plans, which are described in Note 12, Stock-Based Compensation.
Earnings Per Share
In accordance with
the earnings per share accounting standards, the Company presents two earnings per share (EPS) amounts. Income per basic common share is based on income available to common shareholders and the weighted-average number of common shares
outstanding during the periods presented. Income per diluted common share includes additional dilution from potential common stock, such as stock issuable pursuant to the exercise of stock options outstanding.
Retirement Plans
The Company sponsors
various retirement plans, which are described in Note 15, Retirement Plans.
Comprehensive Income
The Company accounts for comprehensive income in accordance with the accounting standards for comprehensive income, which establish the accounting rules
for reporting and displaying comprehensive income.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
These standards require that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
Recently Adopted Accounting Standards
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 was effective in the three month period ended December 31, 2016, and for annual and interim periods thereafter. The
adoption of this standard did not have an impact on the Companys financial position, results of operations or cash flows.
In May 2015, accounting guidance was issued which allows a practical expedient for the measurement of certain investments using the net
asset value per share of the investment. The guidance also exempts investments using this practical expedient from categorization within the fair value hierarchy. This guidance requires retrospective application and is effective for annual and
interim reporting periods beginning after December 15, 2015. The adoption of this guidance removed certain retirement plan assets from the fair value hierarchy and the prior period presentation has been updated to conform with the current
period presentation, see Note 15, Retirement Plans, for further details.
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 (FASB) 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 does not intend to early adopt this accounting standard and will apply the modified-retrospective
method. 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 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 currently does not expect that the adoption of this standard will have a material effect 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
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reporting periods beginning after December 15, 2017 and early adoption of certain provisions of this guidance is permitted. The Company currently does not expect that the adoption of this
standard will have a material effect 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 expects
that the adoption of this standard will have a material effect on the Companys balance sheet classifications; however, it is not expected to have an overall material impact 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 expects that the adoption of this standard may have a material impact on the Companys financial position, results of operations and cash flows as the tax benefits in excess of
compensation costs that are currently recorded in equity will be included in the Companys results of operations after adoption of this standard. In addition, the tax benefits in excess of compensation costs, which are currently included as an
inflow from financing activities, will be included as operating activities after adoption of this standard. Furthermore, the impact of this standard after adoption is dependent on employee stock option exercise activity, which is not within the
Companys control.
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 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 currently does not
expect that the adoption of this standard will have a material effect 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.
In October 2016, accounting guidance was issued
regarding intra-entity transfers of assets other than inventory. The new guidance eliminates the deferral of tax effects on intra-entity transfers other than inventory and requires an entity to recognize the income tax consequences when the transfer
occurs. This guidance is effective for annual and interim periods beginning after December 15, 2017 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.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 2017, accounting guidance was issued that clarifies the definition of a
business. The new guidance provides a more robust framework to use in determining when a set of assets and activities is a business, thus narrowing the definition and the amount of transactions accounted for as business combinations. This guidance
is effective for annual and interim periods beginning after December 15, 2017 and early application is permitted under certain circumstances. 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 2017, accounting guidance was
issued that simplifies the accounting for goodwill impairment. The guidance eliminates step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This guidance is effective for annual and interim periods
beginning after December 15, 2019 and early adoption is permitted. The Company currently does not expect that the adoption of this standard will have a material effect on the Companys financial position, results of operations and cash
flows.
3 Marketable Securities
The Companys marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
U.S. Treasury securities
|
|
$
|
570,695
|
|
|
$
|
253
|
|
|
$
|
(635
|
)
|
|
$
|
570,313
|
|
Foreign government securities
|
|
|
17,999
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
17,991
|
|
Corporate debt securities
|
|
|
1,645,468
|
|
|
|
496
|
|
|
|
(2,126
|
)
|
|
|
1,643,838
|
|
Time deposits
|
|
|
199,906
|
|
|
|
|
|
|
|
|
|
|
|
199,906
|
|
Equity securities
|
|
|
77
|
|
|
|
70
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,434,145
|
|
|
$
|
819
|
|
|
$
|
(2,769
|
)
|
|
$
|
2,432,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
124,793
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
124,794
|
|
Investments
|
|
|
2,309,352
|
|
|
|
818
|
|
|
|
(2,769
|
)
|
|
|
2,307,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,434,145
|
|
|
$
|
819
|
|
|
$
|
(2,769
|
)
|
|
$
|
2,432,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated fair value of marketable debt securities by maturity date is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Due in one year or less
|
|
$
|
1,388,537
|
|
|
$
|
1,137,825
|
|
Due after one year through three years
|
|
|
843,605
|
|
|
|
828,848
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,232,142
|
|
|
$
|
1,966,673
|
|
|
|
|
|
|
|
|
|
|
Realized gains and losses on sales of investments were not material in 2016, 2015 and 2014.
4 Inventories
Inventories are classified as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
95,430
|
|
|
$
|
88,625
|
|
Work in progress
|
|
|
16,585
|
|
|
|
20,901
|
|
Finished goods
|
|
|
150,667
|
|
|
|
153,889
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
262,682
|
|
|
$
|
263,415
|
|
|
|
|
|
|
|
|
|
|
During 2016, 2015 and 2014, the Company recorded inventory-related excess and obsolescence provisions of
$9 million, $5 million and $5 million, respectively.
5 Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land and land improvements
|
|
$
|
35,720
|
|
|
$
|
38,735
|
|
Buildings and leasehold improvements
|
|
|
274,021
|
|
|
|
265,300
|
|
Production and other equipment
|
|
|
438,604
|
|
|
|
380,016
|
|
Construction in progress
|
|
|
20,204
|
|
|
|
20,477
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
768,549
|
|
|
|
704,528
|
|
Less: accumulated depreciation and amortization
|
|
|
(431,431
|
)
|
|
|
(371,173
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
337,118
|
|
|
$
|
333,355
|
|
|
|
|
|
|
|
|
|
|
During 2016, 2015 and 2014, the Company retired and disposed of approximately $15 million,
$29 million and $10 million of property, plant and equipment, respectively, most of which was fully depreciated and no longer in use. Gains on disposal were immaterial for the years ended December 31, 2016 and 2014. During 2014, the
Company recorded a $5 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. During 2015, the Company sold the building for $5 million in cash, which resulted
in a gain on the sale of $1 million.
6 Acquisitions
In September 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
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 completed 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 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 current other 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 liabilities
|
|
|
2,849
|
|
Deferred tax liability
|
|
|
782
|
|
|
|
|
|
|
Cash consideration paid
|
|
$
|
5,186
|
|
|
|
|
|
|
In November 2015, the Company acquired all of the outstanding stock of MPE Orbur Group Limited and its
sole operating subsidiary, Midland Precision Equipment Company, Ltd. (MPE), a manufacturer of MS instrumentation components, for $12 million, net of cash acquired. MPE is a highly skilled manufacturer and former Waters supplier that
produces critical components that support the Companys MS instrument systems. MPE was acquired to bring this key supplier in house to reduce manufacturing costs in the future and to reduce risk to our supply chain.
In the fourth quarter of 2015, the Company acquired certain assets of its Malaysian sales and service distributor for $2 million in
cash.
In May 2015, the Company acquired the net assets of the ElectroForce
®
business of the Bose Corporation (ElectroForce), a manufacturer of testing systems, for $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 precise performance over a wide range of force and frequency. ElectroForce was acquired to expand TAs product offering into new markets, while leveraging the technology, infrastructure and
customer bases of the combined organizations.
In July 2014, the Company acquired the net assets of Medimass Research,
Development and Service Kft. (Medimass), a developer of mass spectrometry-related technologies with the potential to be used for a variety of applications, for $23 million in cash. In addition, the Company potentially has to pay
additional contingent consideration, which had an estimated fair value of $3 million as of the closing date. The net assets acquired consist primarily of the Rapid Evaporative Ionization Mass Spectrometry (REIMS) technology,
including patent applications, software, databases and REIMS expertise. REIMS is an ambient pressure surface ionization technique that, when used with mass spectrometry, can characterize the molecular topography of complex surfaces, such as cell
membranes. The contingent consideration payments are calculated based on a royalty due
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
on future sales of products containing the REIMS technology. The fair value of the contingent consideration recognized was estimated using a probability-weighted discounted cash flow model, using
Level 3 inputs.
In January 2014, the Company acquired all of the outstanding stock of ULSP B.V. (ULSP), a
manufacturer of instrumentation components that enable ultra low temperature generation, for $4 million in cash. ULSPs core business is the manufacturing and servicing of high quality low temperature coolers for thermal analysis and
rheology applications, and these products are important accessories for many TA core instrument offerings. ULSP was acquired to bring the manufacturing of these devices in house and to expand the Companys product offering.
The principal factor that resulted in recognition of goodwill in these acquisitions 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 each of the acquired companies technology,
customer access or products on a standalone basis. The goodwill also includes value assigned to assembled workforce, which cannot be recognized as an intangible asset. Specifically, the goodwill acquired with MPE and Medimass consists of the values
assigned to the respective workforces and the future incremental sales synergies anticipated.
In each 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 pro forma effect of the
ongoing operations for Waters Corporation, Rubotherm, MPE, the Malaysian sales and service distributor, ElectroForce, Medimass and ULSP, either individually or in the aggregate, as though these acquisitions had occurred at the beginning of the
periods covered by this report was immaterial.
7 Goodwill and Other Intangibles
The carrying amount of goodwill was $352 million and $357 million at December 31, 2016 and 2015, respectively. During the year ended
December 31, 2016, the Companys acquisitions increased goodwill by $4 million (see Note 6) and the effect of foreign currency translation decreased goodwill by $9 million.
The Companys intangible assets included in the consolidated balance sheets are detailed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Weighted-
Average
Amortization
Period
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Weighted-
Average
Amortization
Period
|
|
Capitalized software
|
|
$
|
355,973
|
|
|
$
|
223,572
|
|
|
|
5 years
|
|
|
$
|
335,949
|
|
|
$
|
204,267
|
|
|
|
7 years
|
|
Purchased intangibles
|
|
|
162,180
|
|
|
|
127,045
|
|
|
|
11 years
|
|
|
|
163,500
|
|
|
|
119,505
|
|
|
|
11 years
|
|
Trademarks and IPR&D
|
|
|
13,544
|
|
|
|
|
|
|
|
|
|
|
|
14,364
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
4,632
|
|
|
|
3,851
|
|
|
|
6 years
|
|
|
|
5,396
|
|
|
|
4,046
|
|
|
|
6 years
|
|
Patents and other intangibles
|
|
|
61,646
|
|
|
|
36,452
|
|
|
|
8 years
|
|
|
|
58,519
|
|
|
|
31,888
|
|
|
|
8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
597,975
|
|
|
$
|
390,920
|
|
|
|
7 years
|
|
|
$
|
577,728
|
|
|
$
|
359,706
|
|
|
|
8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2016, the Company acquired $3 million of purchased
intangibles as a result of the acquisition of Rubotherm (see Note 6). In addition, the gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $21 million and $13 million, respectively, in
the year ended December 31, 2016 due to the effects of foreign currency translation. Amortization expense for
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
intangible assets was $45 million, $45 million and $48 million for the years ended December 31, 2016, 2015 and 2014, respectively. Amortization expense for intangible assets
is estimated to be $45 million per year for each of the next five years.
8 Debt
In May 2016, the Company issued the following senior unsecured notes:
|
|
|
|
|
|
|
|
|
|
|
Senior Unsecured Notes
|
|
Term
|
|
Interest Rate
|
|
Face Value
(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%.
|
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 Corporation 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 December 31, 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 $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.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 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.
The Company had the following outstanding debt at December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Foreign subsidiary lines of credit
|
|
$
|
297
|
|
|
$
|
322
|
|
Senior unsecured notes - Series C - 2.50%, due March 2016
|
|
|
|
|
|
|
50,000
|
|
Credit agreement
|
|
|
125,000
|
|
|
|
125,000
|
|
Unamortized debt issuance costs
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Total notes payable and debt, current
|
|
|
125,297
|
|
|
|
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 agreement
|
|
|
1,005,000
|
|
|
|
1,045,000
|
|
Unamortized debt issuance costs
|
|
|
(3,034
|
)
|
|
|
(1,973
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,701,966
|
|
|
|
1,493,027
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
1,827,263
|
|
|
$
|
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 December 31, 2016 and 2015, the Company had a total amount available to borrow under existing credit
agreements of $468 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 2.55% and 2.11%
at December 31, 2016 and 2015, respectively. As of December 31, 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 $79 million and $97 million at December 31, 2016 and 2015, respectively, for the purpose of
short-term borrowing and
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
issuance of commercial guarantees. At December 31, 2016 and 2015, the weighted-average interest rates applicable to these short-term borrowings were 1.49% and 1.24%, respectively.
Annual maturities of debt outstanding at December 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
Total
|
|
2017
|
|
$
|
125,297
|
|
2018
|
|
|
100,000
|
|
2019
|
|
|
|
|
2020
|
|
|
1,105,000
|
|
2021
|
|
|
150,000
|
|
Thereafter
|
|
|
350,000
|
|
|
|
|
|
|
Total
|
|
$
|
1,830,297
|
|
|
|
|
|
|
9 Income Taxes
Income tax data for the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
The components of income from operations before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
35,154
|
|
|
$
|
66,716
|
|
|
$
|
70,136
|
|
Foreign
|
|
|
564,960
|
|
|
|
475,203
|
|
|
|
420,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
600,114
|
|
|
$
|
541,919
|
|
|
$
|
490,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
The current and deferred components of the provision for income taxes on operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
77,407
|
|
|
$
|
66,285
|
|
|
$
|
57,537
|
|
Deferred
|
|
|
1,204
|
|
|
|
6,581
|
|
|
|
1,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78,611
|
|
|
$
|
72,866
|
|
|
$
|
59,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The jurisdictional components of the provision for income taxes on operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
19,693
|
|
|
$
|
20,882
|
|
|
$
|
23,071
|
|
State
|
|
|
3,090
|
|
|
|
3,389
|
|
|
|
3,791
|
|
Foreign
|
|
|
55,828
|
|
|
|
48,595
|
|
|
|
32,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78,611
|
|
|
$
|
72,866
|
|
|
$
|
59,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
The differences between income taxes computed at the United States statutory rate and the provision for income taxes are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax computed at U.S. statutory income tax rate
|
|
$
|
210,040
|
|
|
$
|
189,672
|
|
|
$
|
171,759
|
|
Settlement of tax audits
|
|
|
345
|
|
|
|
(3,258
|
)
|
|
|
|
|
State income tax, net of federal income tax benefit
|
|
|
2,008
|
|
|
|
2,601
|
|
|
|
2,464
|
|
Net effect of foreign operations
|
|
|
(133,518
|
)
|
|
|
(112,426
|
)
|
|
|
(109,240
|
)
|
Other, net
|
|
|
(264
|
)
|
|
|
(3,723
|
)
|
|
|
(5,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
78,611
|
|
|
$
|
72,866
|
|
|
$
|
59,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2016. The Company has a contractual tax rate of 0% on qualifying activities in Singapore 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%. The effect of applying the contractual tax rate rather than the statutory tax rate to income
from qualifying activities in Singapore increased the Companys net income in 2016, 2015 and 2014 by $23 million, $20 million and $20 million, respectively and increased the Companys net income per diluted share by $0.29,
$0.25 and $0.24, respectively.
The Companys effective tax rates for the years ended December 31, 2016, 2015 and
2014 were 13.1%, 13.4% and 12.0%, respectively. The change in the effective tax rates can be primarily attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with
different effective tax rates. In addition, the income tax provision for 2016 included a $3 million tax benefit related to a release of a valuation allowance on certain net operating loss carryforwards. In 2015, the income tax provision
included a $3 million tax benefit related to the completion of tax audit examinations.
The tax effects of temporary
differences and carryforwards which give rise to deferred tax assets and deferred tax liabilities are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses and credits
|
|
$
|
76,027
|
|
|
$
|
83,428
|
|
Depreciation
|
|
|
8,310
|
|
|
|
8,223
|
|
Stock-based compensation
|
|
|
19,609
|
|
|
|
18,160
|
|
Deferred compensation
|
|
|
24,813
|
|
|
|
28,907
|
|
Revaluation of equity investments and licenses
|
|
|
4,707
|
|
|
|
5,396
|
|
Inventory
|
|
|
5,235
|
|
|
|
4,470
|
|
Accrued liabilities and reserves
|
|
|
8,814
|
|
|
|
10,129
|
|
Other
|
|
|
15,948
|
|
|
|
15,871
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
163,463
|
|
|
|
174,584
|
|
Valuation allowance
|
|
|
(61,225
|
)
|
|
|
(68,595
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
|
102,238
|
|
|
|
105,989
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Capitalized software
|
|
|
(15,323
|
)
|
|
|
(15,336
|
)
|
Amortization
|
|
|
(5,115
|
)
|
|
|
(5,799
|
)
|
Indefinite-lived intangibles
|
|
|
(19,680
|
)
|
|
|
(18,924
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(40,118
|
)
|
|
|
(40,059
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
62,120
|
|
|
$
|
65,930
|
|
|
|
|
|
|
|
|
|
|
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2016, the Company has provided a deferred tax valuation
allowance of $61 million, of which $57 million relates to certain foreign net operating losses. The Companys net deferred tax assets associated with net operating losses and tax credit carryforwards are approximately $19 million
as of December 31, 2016, which represent the future tax benefit of foreign net operating loss carryforwards that do not expire under current law.
The income tax benefits associated with
non-qualified
stock option compensation expense recognized for tax purposes and credited to additional
paid-in
capital were $14 million, $13 million and $16 million for the years ended December 31, 2016, 2015 and 2014, respectively.
At December 31, 2016, there were unremitted earnings of foreign subsidiaries of approximately $3 billion. The Company has not
provided for U.S. income taxes or foreign withholding taxes on these earnings as it is the Companys current intention to permanently reinvest these earnings outside the U.S. Because of the complexity of U.S. and foreign tax rules
applicable to the distribution of earnings from foreign subsidiaries to U.S. legal entities, the determination of the unrecognized deferred tax liability on these earnings is not practicable. Events that could trigger a tax might include U.S.
acquisitions or other investments funded by cash distributions or loans from a foreign subsidiary.
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 Company classified interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
The following is a summary of the activity of the Companys unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance at the beginning of the period
|
|
$
|
14,450
|
|
|
$
|
19,596
|
|
|
$
|
24,716
|
|
Changes resulting from completion of tax examinations
|
|
|
(828
|
)
|
|
|
(2,405
|
)
|
|
|
|
|
Other changes in uncertain tax benefits
|
|
|
(3,658
|
)
|
|
|
(2,741
|
)
|
|
|
(5,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
9,964
|
|
|
$
|
14,450
|
|
|
$
|
19,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
During the year ended December 31, 2016, the Company concluded tax audit disputes outside the
U.S. that, in part, related to matters for which the Company had recorded net uncertain tax benefits. The resolution of these tax disputes resulted in a $1 million reduction in the measurement of its unrecognized tax benefits for the year ended
December 31, 2016.
During the year ended December 31, 2015, the Company concluded U.S. tax audit disputes that, in
part, related to matters for which the Company had recorded net uncertain tax benefits. The resolution of these tax disputes resulted in a $2 million reduction in the measurement of its unrecognized tax benefits and a $2 million decrease
in its provision for income taxes for the year ended December 31, 2015.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 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.
10 Litigation
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 it has meritorious arguments in its current litigation matters and believes any outcome, either individually or in the aggregate, will not be
material to the Companys financial position, results of operations or cash flows. In both 2016 and 2015, the Company recorded $4 million of litigation settlement provisions and related costs. The accrued patent litigation expense is in
other current liabilities in the consolidated balance sheets at December 31, 2016 and 2015.
11 Other
Commitments and Contingencies
Lease agreements, expiring at various dates through 2031, cover buildings, office equipment and automobiles.
Rental expense was $28 million for the year ended December 31, 2016 and $27 million for each of the years ended December 31, 2015 and 2014. Future minimum rents payable as of December 31, 2016 under
non-cancelable
leases with initial terms exceeding one year are as follows (in thousands):
|
|
|
|
|
2017
|
|
$
|
21,864
|
|
2018
|
|
|
16,877
|
|
2019
|
|
|
13,361
|
|
2020
|
|
|
10,855
|
|
2021 and thereafter
|
|
|
27,152
|
|
The Company licenses certain technology and software from third parties. Future minimum license fees
payable under existing license agreements as of December 31, 2016 are immaterial for the years ended December 31, 2017 and thereafter. The Company enters into licensing arrangements with third parties that require future milestone or
royalty payments contingent upon future events. Upon the achievement of certain milestones in existing agreements, the Company could make additional future payments of up to $12 million, as well as royalties on future net sales.
The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company
indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Companys business partners or customers, in connection with patent, copyright or other
intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The
maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Companys costs to defend lawsuits or settle claims relating to such indemnity agreements
have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.
12 Stock-Based Compensation
In May 2012, the Companys shareholders approved the Companys 2012 Equity Incentive Plan (2012 Plan). As of December 31, 2016, the 2012 Plan has 3.1 million shares
available for grant in the form of incentive or
non-qualified
stock options, stock appreciation rights (SARs), restricted stock, restricted stock units,
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
performance stock units or other types of awards. The Company issues new shares of common stock upon exercise of stock options, restricted stock unit conversion or performance stock unit
conversion. Under the 2012 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 2012 Plan is scheduled to terminate on May 9, 2022. Options generally will expire
no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may
be granted alone or in conjunction with an option or other award. Shares of restricted stock, and restricted stock units and performance stock units may be issued under the 2012 Plan for such consideration as is determined by the Compensation
Committee of the Board of Directors. As of December 31, 2016, the Company had stock options, restricted stock and restricted and performance stock unit awards outstanding.
In May 2009, the Companys shareholders approved the 2009 Employee Stock Purchase Plan under which eligible employees may
contribute up to 15% of their earnings toward the quarterly purchase of the Companys common stock. The plan makes available 0.9 million shares of the Companys common stock, which includes the remaining shares available under the
1996 Employee Stock Purchase Plan. As of December 31, 2016, 1.4 million shares have been issued under both the 2009 and 1996 Employee Stock Purchase Plans. Each plan period lasts three months beginning on January 1, April 1,
July 1 and October 1 of each year. The purchase price for each share of stock is the lesser of 90% of the market price on the first day of the plan period or 100% of the market price on the last day of the plan period. Stock-based
compensation expense related to this plan was $1 million for each of the years ended December 31, 2016, 2015 and 2014, respectively.
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.
The consolidated statements of operations for the
years ended December 31, 2016, 2015 and 2014 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock
purchase plan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of sales
|
|
$
|
2,738
|
|
|
$
|
2,590
|
|
|
$
|
2,732
|
|
Selling and administrative expenses
|
|
|
34,451
|
|
|
|
26,431
|
|
|
|
26,128
|
|
Research and development expenses
|
|
|
3,809
|
|
|
|
4,347
|
|
|
|
4,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
40,998
|
|
|
$
|
33,368
|
|
|
$
|
32,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2016, the Company recognized $7 million of stock
compensation expense related to the modification of certain stock awards upon the retirement of senior executives.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2016, 2015 and
2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Issued and Significant Assumptions Used to Estimate Option Fair Values
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Options issued in thousands
|
|
|
324
|
|
|
|
673
|
|
|
|
569
|
|
Risk-free interest rate
|
|
|
1.9
|
%
|
|
|
1.8
|
%
|
|
|
1.6
|
%
|
Expected life in years
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Expected volatility
|
|
|
0.247
|
|
|
|
0.257
|
|
|
|
0.266
|
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Exercise price
|
|
$
|
135.02
|
|
|
$
|
127.63
|
|
|
$
|
112.56
|
|
Fair value
|
|
$
|
37.44
|
|
|
$
|
35.84
|
|
|
$
|
32.61
|
|
The following table summarizes stock option activity for the plans for the year ended December 31,
2016 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Exercise Price
per Share
|
|
|
Weighted-
Average
Exercise Price
|
|
Outstanding at December 31, 2015
|
|
|
3,154
|
|
|
$
|
38.09 to $134.37
|
|
|
$
|
96.73
|
|
Granted
|
|
|
324
|
|
|
$
|
117.68 to $139.51
|
|
|
$
|
135.02
|
|
Exercised
|
|
|
(730
|
)
|
|
$
|
41.20 to $113.36
|
|
|
$
|
76.55
|
|
Canceled
|
|
|
(51
|
)
|
|
$
|
79.15 to $128.93
|
|
|
$
|
109.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
2,697
|
|
|
$
|
38.09 to $139.51
|
|
|
$
|
106.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the options outstanding at December 31, 2016 by range of exercise prices
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
Price Range
|
|
Number of Shares
Outstanding
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Remaining
Contractual Life of
Options Outstanding
|
|
|
Number of Shares
Exercisable
|
|
|
Weighted-
Average
Exercise Price
|
|
$38.09 to $79.99
|
|
|
490
|
|
|
$
|
74.22
|
|
|
|
4.1
|
|
|
|
483
|
|
|
$
|
74.20
|
|
$80.00 to $113.36
|
|
|
1,228
|
|
|
$
|
100.68
|
|
|
|
7.0
|
|
|
|
670
|
|
|
$
|
97.52
|
|
$113.37 to $139.51
|
|
|
979
|
|
|
$
|
130.09
|
|
|
|
9.3
|
|
|
|
157
|
|
|
$
|
125.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,697
|
|
|
$
|
106.55
|
|
|
|
7.3
|
|
|
|
1,310
|
|
|
$
|
92.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2016, 2015 and 2014, the total intrinsic value of the stock options exercised (i.e., the
difference between the market price at exercise and the price paid by the employee to exercise the options) was $53 million, $48 million and $63 million, respectively. The total cash received from the exercise of these stock options
was $56 million, $47 million and $69 million for the years ended December 31, 2016, 2015 and 2014, respectively.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The aggregate intrinsic value of the outstanding stock options at December 31, 2016
was $76 million. Options exercisable at December 31, 2016, 2015 and 2014 were 1.3 million, 1.5 million and 1.7 million, respectively. The weighted-average exercise prices of options exercisable at December 31, 2016,
2015 and 2014 were $92.26, $80.71 and $70.03, respectively. The weighted-average remaining contractual life of the exercisable outstanding stock options at December 31, 2016 was 6 years.
At December 31, 2016, the Company had 2.7 million stock options which are vested and expected to vest. The intrinsic value,
weighted-average price and remaining contractual life of the vested and expected to vest stock options were $76 million, $106.34 and 7.2 years, respectively, at December 31, 2016.
As of December 31, 2016, there were $44 million of total unrecognized compensation costs related to unvested stock option
awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.6 years.
Restricted
Stock
During the years ended December 31, 2016, 2015 and 2014, the Company granted 8 thousand, 10 thousand and
12 thousand shares of restricted stock, respectively. The weighted-average fair value per share on the grant date of the restricted stock granted in 2016, 2015 and 2014 was $130.35, $113.88 and $99.22, respectively. The Company has recorded
$1 million, $1 million and $2 million of compensation expense in each of the years ended December 31, 2016, 2015 and 2014, respectively, related to the restricted stock grants. As of December 31, 2016, the Company had
8 thousand unvested shares of restricted stock outstanding, which have been fully expensed.
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the year ended December 31, 2016 (in thousands, except for per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Price
|
|
Unvested at December 31, 2015
|
|
|
497
|
|
|
$
|
104.16
|
|
Granted
|
|
|
138
|
|
|
$
|
118.16
|
|
Vested
|
|
|
(169
|
)
|
|
$
|
98.67
|
|
Forfeited
|
|
|
(13
|
)
|
|
$
|
108.80
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2016
|
|
|
453
|
|
|
$
|
110.34
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units are generally granted annually in February and vest in equal annual installments
over a five-year period. The amount of compensation costs recognized for the years ended December 31, 2016, 2015 and 2014 on the restricted stock units expected to vest were $17 million, $16 million and $16 million, respectively.
As of December 31, 2016, there were $36 million of total unrecognized compensation costs related to the restricted stock unit awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of
3.0 years.
Performance Stock Units
During year ended December 31, 2016, the Company issued performance stock units, which are equity compensation awards with a market vesting condition based on the Companys Total Shareholder
Return (TSR) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the
target shares awarded.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In determining the fair value of the performance stock units, the Company makes a
variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation 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 the performance period of the underlying performance stock units. 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 Monte Carlo simulation model. The correlation
coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each other during the performance period. The relevant data used to determine the value of the performance stock units granted
during 2016 are as follows:
|
|
|
|
|
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values
|
|
2016
|
|
Performance stock units issued in thousands
|
|
|
27
|
|
Risk-free interest rate
|
|
|
1.4
|
%
|
Expected life in years
|
|
|
3
|
|
Expected volatility
|
|
|
0.233
|
|
Average volatility of peer companies
|
|
|
0.261
|
|
Correlation Coefficient
|
|
|
0.386
|
|
Expected dividends
|
|
|
|
|
The following table summarizes the unvested performance stock unit award activity for the year ended
December 31, 2016 (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Fair Value
|
|
Unvested at December 31, 2015
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
27
|
|
|
$
|
171.16
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2016
|
|
|
27
|
|
|
$
|
171.16
|
|
|
|
|
|
|
|
|
|
|
The amount of compensation cost recognized for the year ended December 31, 2016 on the performance
stock units expected to vest was less than $1 million. As of December 31, 2016, there were $4 million of total unrecognized compensation costs related to the restricted stock unit awards that are expected to vest. These costs are
expected to be recognized over a weighted-average period of 3.0 years.
13 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
Net Income
|
|
|
Weighted-Average
Shares
|
|
|
Per
Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net income per basic common share
|
|
$
|
521,503
|
|
|
|
80,786
|
|
|
$
|
6.46
|
|
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
|
|
|
|
|
|
|
631
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
521,503
|
|
|
|
81,417
|
|
|
$
|
6.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
Net Income
|
|
|
Weighted-Average
Shares
|
|
|
Per
Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net income per basic common share
|
|
$
|
469,053
|
|
|
|
82,336
|
|
|
$
|
5.70
|
|
Effect of dilutive stock option, restricted stock and restricted stock unit securities
|
|
|
|
|
|
|
751
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
469,053
|
|
|
|
83,087
|
|
|
$
|
5.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
|
|
Net Income
|
|
|
Weighted-Average
Shares
|
|
|
Per
Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net income per basic common share
|
|
$
|
431,620
|
|
|
|
84,358
|
|
|
$
|
5.12
|
|
Effect of dilutive stock option, restricted stock and restricted stock unit securities
|
|
|
|
|
|
|
793
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
431,620
|
|
|
|
85,151
|
|
|
$
|
5.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2016, 2015 and 2014, the Company had 0.9 million,
1.2 million and 1.0 million stock options that were antidilutive, respectively, due to having higher exercise prices than the Companys average stock price during the period. These securities were not included in the computation of
diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.
14 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 loss, net of tax
|
|
|
(66,996
|
)
|
|
|
(2,948
|
)
|
|
|
390
|
|
|
|
(69,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
(170,566
|
)
|
|
$
|
(43,894
|
)
|
|
$
|
(1,820
|
)
|
|
$
|
(216,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 Retirement Plans
U.S. employees are eligible to participate in the Waters Employee Investment Plan, a 401(k) defined contribution plan, immediately upon hire. Employees may contribute up to 60% of eligible pay on a
pre-tax
or
post-tax
basis and the Company makes matching contributions of 100% for contributions up to 6% of eligible pay. Employees are 100% vested in employee and Company
matching contributions. For the years ended December 31, 2016, 2015 and 2014, the Companys matching contributions amounted to $15 million, $14 million and $13 million, respectively.
The Company maintains two defined benefit plans in the U.S. for which the pay credit accruals have been frozen, the Waters Retirement
Plan and the Waters Retirement Restoration Plan (collectively, the U.S. Pension Plans). The Company also sponsors other employee benefit plans in the U.S., including a retiree healthcare plan, which provides reimbursement for medical
expenses and is contributory. There are various employee benefit plans outside the United States (both defined benefit and defined contribution plans). Certain
non-U.S.
defined benefit plans
(Non-U.S.
Pension Plans) are included in the disclosures below, which are required under the accounting standards for retirement benefits. The Company made
one-time
contributions totaling $21 million to certain of these
Non-U.S.
Pension Plans during 2014.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company contributed $12 million, $11 million and $11 million in the
years ended December 31, 2016, 2015 and 2014, respectively, to the
non-U.S.
plans (primarily defined contribution plans) which are currently outside of the scope of the required disclosures. The
eligibility and vesting of
non-U.S. plans
are consistent with local laws and regulations.
The net periodic pension cost is made up of several components that reflect different aspects of the Companys financial arrangements as well as the cost of benefits earned by employees. These
components are determined using the projected unit credit actuarial cost method and are based on certain actuarial assumptions. The Companys accounting policy is to reflect in the projected benefit obligation all benefit changes to which the
Company is committed as of the current valuation date; use a market-related value of assets to determine pension expense; amortize increases in prior service costs on a straight-line basis over the expected future service of active participants as
of the date such costs are first recognized; and amortize cumulative actuarial gains and losses in excess of 10% of the larger of the market-related value of plan assets and the projected benefit obligation over the expected future service of active
participants.
Summary data for the U.S. Pension Plans, U.S. Retiree Healthcare Plan and
Non-U.S. Pension
Plans are presented in the following tables, using the measurement dates of December 31, 2016 and 2015, respectively.
The reconciliation of the projected benefit obligations for the plans at December 31, 2016 and 2015 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
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
|
|
Projected benefit obligation, January 1
|
|
$
|
155,003
|
|
|
$
|
12,963
|
|
|
$
|
75,677
|
|
|
$
|
155,693
|
|
|
$
|
13,512
|
|
|
$
|
82,006
|
|
Service cost
|
|
|
377
|
|
|
|
473
|
|
|
|
4,954
|
|
|
|
|
|
|
|
577
|
|
|
|
5,087
|
|
Employee contributions
|
|
|
|
|
|
|
987
|
|
|
|
584
|
|
|
|
|
|
|
|
864
|
|
|
|
573
|
|
Interest cost
|
|
|
6,931
|
|
|
|
557
|
|
|
|
1,699
|
|
|
|
6,128
|
|
|
|
470
|
|
|
|
1,503
|
|
Actuarial losses (gains)
|
|
|
2,338
|
|
|
|
586
|
|
|
|
6,510
|
|
|
|
(3,266
|
)
|
|
|
(1,552
|
)
|
|
|
(3,956
|
)
|
Benefits paid
|
|
|
(5,233
|
)
|
|
|
(645
|
)
|
|
|
(2,141
|
)
|
|
|
(3,552
|
)
|
|
|
(908
|
)
|
|
|
(2,503
|
)
|
Plan amendments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(645
|
)
|
Plan settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(577
|
)
|
Other plans
|
|
|
|
|
|
|
|
|
|
|
1,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency impact
|
|
|
|
|
|
|
|
|
|
|
(3,277
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, December 31
|
|
$
|
159,416
|
|
|
$
|
14,921
|
|
|
$
|
85,311
|
|
|
$
|
155,003
|
|
|
$
|
12,963
|
|
|
$
|
75,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligations for the plans at December 31, 2016 and 2015 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
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
|
|
Accumulated benefit obligation
|
|
$
|
159,416
|
|
|
|
*
|
*
|
|
$
|
72,618
|
|
|
$
|
155,003
|
|
|
|
*
|
*
|
|
$
|
63,883
|
|
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The reconciliation of the fair value of the plan assets at December 31, 2016 and
2015 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
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
|
|
Fair value of plan assets, January 1
|
|
$
|
136,128
|
|
|
$
|
8,001
|
|
|
$
|
60,441
|
|
|
$
|
135,887
|
|
|
$
|
7,526
|
|
|
$
|
59,568
|
|
Actual return on plan assets
|
|
|
8,621
|
|
|
|
510
|
|
|
|
4,741
|
|
|
|
(486
|
)
|
|
|
71
|
|
|
|
611
|
|
Company contributions
|
|
|
5,149
|
|
|
|
289
|
|
|
|
4,579
|
|
|
|
4,279
|
|
|
|
448
|
|
|
|
7,082
|
|
Employee contributions
|
|
|
|
|
|
|
987
|
|
|
|
584
|
|
|
|
|
|
|
|
864
|
|
|
|
573
|
|
Plan settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(577
|
)
|
Benefits paid
|
|
|
(5,233
|
)
|
|
|
(645
|
)
|
|
|
(2,141
|
)
|
|
|
(3,552
|
)
|
|
|
(908
|
)
|
|
|
(2,503
|
)
|
Other plans
|
|
|
|
|
|
|
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency impact
|
|
|
|
|
|
|
|
|
|
|
(2,918
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, December 31
|
|
$
|
144,665
|
|
|
$
|
9,142
|
|
|
$
|
65,548
|
|
|
$
|
136,128
|
|
|
$
|
8,001
|
|
|
$
|
60,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary of the funded status for the plans at December 31, 2016 and 2015 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
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
|
|
Projected benefit obligation
|
|
$
|
(159,416
|
)
|
|
$
|
(14,921
|
)
|
|
$
|
(85,311
|
)
|
|
$
|
(155,003
|
)
|
|
$
|
(12,963
|
)
|
|
$
|
(75,677
|
)
|
Fair value of plan assets
|
|
|
144,665
|
|
|
|
9,142
|
|
|
|
65,548
|
|
|
|
136,128
|
|
|
|
8,001
|
|
|
|
60,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation in excess of fair value of plan assets
|
|
$
|
(14,751
|
)
|
|
$
|
(5,779
|
)
|
|
$
|
(19,763
|
)
|
|
$
|
(18,875
|
)
|
|
$
|
(4,962
|
)
|
|
$
|
(15,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary of the amounts recognized in the consolidated balance sheets for the plans at
December 31, 2016 and 2015 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
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
|
|
Long-term assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,084
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,402
|
|
Current liabilities
|
|
|
(1,343
|
)
|
|
|
(289
|
)
|
|
|
|
|
|
|
(1,324
|
)
|
|
|
(447
|
)
|
|
|
|
|
Long-term liabilities
|
|
|
(13,408
|
)
|
|
|
(5,490
|
)
|
|
|
(20,847
|
)
|
|
|
(17,551
|
)
|
|
|
(4,515
|
)
|
|
|
(16,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized at December 31
|
|
$
|
(14,751
|
)
|
|
$
|
(5,779
|
)
|
|
$
|
(19,763
|
)
|
|
$
|
(18,875
|
)
|
|
$
|
(4,962
|
)
|
|
$
|
(15,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The summary of the components of net periodic pension costs for the plans for the years
ended December 31, 2016, 2015 and 2014 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
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
|
|
|
U.S.
Pension
Plans
|
|
|
U.S.
Retiree
Healthcare
Plan
|
|
|
Non-U.S.
Pension
Plans
|
|
Service cost
|
|
$
|
377
|
|
|
$
|
473
|
|
|
$
|
4,954
|
|
|
$
|
|
|
|
$
|
577
|
|
|
$
|
5,087
|
|
|
$
|
|
|
|
$
|
791
|
|
|
$
|
4,579
|
|
Interest cost
|
|
|
6,931
|
|
|
|
557
|
|
|
|
1,699
|
|
|
|
6,128
|
|
|
|
470
|
|
|
|
1,503
|
|
|
|
6,417
|
|
|
|
463
|
|
|
|
2,195
|
|
Expected return on plan assets
|
|
|
(9,635
|
)
|
|
|
(519
|
)
|
|
|
(1,596
|
)
|
|
|
(9,145
|
)
|
|
|
(497
|
)
|
|
|
(1,542
|
)
|
|
|
(9,060
|
)
|
|
|
(435
|
)
|
|
|
(1,520
|
)
|
Settlement loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
557
|
|
Net amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (credit) cost
|
|
|
|
|
|
|
|
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
(176
|
)
|
Net actuarial loss (gain)
|
|
|
2,702
|
|
|
|
|
|
|
|
753
|
|
|
|
3,278
|
|
|
|
|
|
|
|
1,031
|
|
|
|
2,216
|
|
|
|
(35
|
)
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
375
|
|
|
$
|
511
|
|
|
$
|
5,618
|
|
|
$
|
261
|
|
|
$
|
550
|
|
|
$
|
6,213
|
|
|
$
|
(427
|
)
|
|
$
|
733
|
|
|
$
|
6,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary of the changes in amounts recognized in other comprehensive loss for the plans for the years
ended December 31, 2016, 2015 and 2014 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
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
|
|
|
U.S.
Pension
Plans
|
|
|
U.S.
Retiree
Healthcare
Plan
|
|
|
Non-U.S.
Pension
Plans
|
|
Prior service cost (credit)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
645
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(796
|
)
|
Net (loss) gain arising during the year
|
|
|
(3,352
|
)
|
|
|
(594
|
)
|
|
|
(3,361
|
)
|
|
|
(6,365
|
)
|
|
|
1,126
|
|
|
|
3,025
|
|
|
|
(19,965
|
)
|
|
|
(1,155
|
)
|
|
|
(15,168
|
)
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (credit) cost
|
|
|
|
|
|
|
|
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
(176
|
)
|
Net loss (gain)
|
|
|
2,702
|
|
|
|
|
|
|
|
753
|
|
|
|
3,278
|
|
|
|
|
|
|
|
1,126
|
|
|
|
2,216
|
|
|
|
(35
|
)
|
|
|
932
|
|
Other Plans
|
|
|
|
|
|
|
|
|
|
|
(360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency impact
|
|
|
|
|
|
|
|
|
|
|
884
|
|
|
|
|
|
|
|
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
2,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive loss
|
|
$
|
(650
|
)
|
|
$
|
(594
|
)
|
|
$
|
(2,276
|
)
|
|
$
|
(3,087
|
)
|
|
$
|
1,126
|
|
|
$
|
6,595
|
|
|
$
|
(17,749
|
)
|
|
$
|
(1,241
|
)
|
|
$
|
(12,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The summary of the amounts included in accumulated other comprehensive loss in
stockholders equity for the plans at December 31, 2016 and 2015 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
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
|
|
Net actuarial (loss) gain
|
|
$
|
(49,486
|
)
|
|
$
|
575
|
|
|
$
|
(19,638
|
)
|
|
$
|
(48,835
|
)
|
|
$
|
1,170
|
|
|
$
|
(17,478
|
)
|
Prior service credit
|
|
|
|
|
|
|
|
|
|
|
1,348
|
|
|
|
|
|
|
|
|
|
|
|
1,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(49,486
|
)
|
|
$
|
575
|
|
|
$
|
(18,290
|
)
|
|
$
|
(48,835
|
)
|
|
$
|
1,170
|
|
|
$
|
(16,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary of the amounts included in accumulated other comprehensive loss expected to be included in
next years net periodic benefit cost for the plans at December 31, 2016 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
U.S.
Pension
Plans
|
|
|
U.S.
Retiree
Healthcare
Plan
|
|
|
Non-U.S.
Pension
Plans
|
|
Net actuarial loss
|
|
$
|
(2,733
|
)
|
|
$
|
|
|
|
$
|
(909
|
)
|
Prior service credit
|
|
|
|
|
|
|
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,733
|
)
|
|
$
|
|
|
|
$
|
(729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The plans investment asset mix is as follows at December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
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
|
|
Equity securities
|
|
|
74
|
%
|
|
|
58
|
%
|
|
|
7
|
%
|
|
|
76
|
%
|
|
|
61
|
%
|
|
|
6
|
%
|
Debt securities
|
|
|
25
|
%
|
|
|
42
|
%
|
|
|
18
|
%
|
|
|
23
|
%
|
|
|
32
|
%
|
|
|
19
|
%
|
Cash and cash equivalents
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
6
|
%
|
|
|
1
|
%
|
|
|
7
|
%
|
|
|
8
|
%
|
Insurance contracts and other
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
69
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The plans investment policies include the following asset allocation guidelines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension and U.S. Retiree
|
|
|
Non-U.S.
Pension Plans
Policy Target
|
|
|
|
Healthcare Plans
|
|
|
|
|
Policy Target
|
|
|
Range
|
|
|
Equity securities
|
|
|
70
|
%
|
|
|
50% - 90%
|
|
|
|
5
|
%
|
Debt securities
|
|
|
25
|
%
|
|
|
20% - 60%
|
|
|
|
20
|
%
|
Cash and cash equivalents
|
|
|
5
|
%
|
|
|
0% - 20%
|
|
|
|
10
|
%
|
Insurance contracts and other
|
|
|
0
|
%
|
|
|
0% - 20%
|
|
|
|
65
|
%
|
The asset allocation policy for the U.S. Pension Plans and U.S. Retiree Healthcare Plan was
developed in consideration of the following long-term investment objectives: achieving a return on assets consistent with the investment policy, achieving portfolio returns which exceed the average return for similarly invested funds and
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
maximizing portfolio returns with at least a return of 2.5% above the
one-year
constant maturity Treasury bond yield over reasonable measurement periods
and based on reasonable market cycles.
Within the equity portfolio of the U.S. retirement plans, investments are
diversified among market capitalization and investment strategy. The Company targets a 30% allocation of its U.S. retirement plans equity portfolio to be invested in financial markets outside of the United States. The Company does not
invest in its own stock within the U.S. retirement plans assets.
Plan assets are measured at fair value using the
following valuation techniques and inputs:
|
|
|
Level 1:
|
|
The fair value of these types of investments is based on market and observable sources from daily quoted prices on nationally recognized securities exchanges.
|
|
|
Level 2:
|
|
The fair value of the money market funds held with financial institutions is based on the net asset value of the underlying treasury bill and commercial paper, which are valued
using third-party pricing services that utilize inputs such as benchmark yields, credit spreads and broker/dealer quotes to determine the value.
|
|
|
Level 3:
|
|
These bank and insurance investment contracts are issued by well-known, highly-rated companies. The fair value disclosed represents the present value of future cash flows under the
terms of the respective contracts. Significant assumptions used to determine the fair value of these contracts include the amount and timing of future cash flows and counterparty credit risk.
|
There have been no changes in the above valuation techniques associated with determining the value
of the plans assets during the years ended December 31, 2016 and 2015.
In 2016, the Company adopted new accounting
guidance related to the presentation of certain investments using the net asset value per share (NAV) practical expedient. The accounting guidance exempts investments using this practical expedient from categorization within the fair
value hierarchy. The Company applied the adoption of this standard retrospectively and removed certain investments from the fair value hierarchy in both periods. Other than this change in presentation, the adoption of this standard did not have an
impact on the Companys consolidated financial statements.
Investments valued at NAV consist of hedge funds in the U.S.
Pension Plans, which are valued based on underlying investments in equity securities of U.S. companies where the hedge fund manager is targeting a particular net long or net short position on the underlying stock. The fair value of these funds is
initially based on market and observable sources from daily quoted prices on nationally recognized securities exchanges and then adjustments are made to the net asset value of the hedge fund to account for the effects of any liquidation or
redemption restrictions. The redemption terms for the hedge funds are generally quarterly with a 90 day notification period and there are no redemption restrictions.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of the Companys retirement plan assets are as follows at
December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at
December 31,
2016
|
|
|
Quoted Prices
in Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
U.S. Pension Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
(a)
|
|
$
|
136,548
|
|
|
$
|
136,548
|
|
|
$
|
|
|
|
$
|
|
|
Cash equivalents
(b)
|
|
|
728
|
|
|
|
|
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Pension Plans
|
|
|
137,276
|
|
|
|
136,548
|
|
|
|
728
|
|
|
|
|
|
U.S. Retiree Healthcare Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
(c)
|
|
|
9,142
|
|
|
|
9,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Retiree Healthcare Plan
|
|
|
9,142
|
|
|
|
9,142
|
|
|
|
|
|
|
|
|
|
Non-U.S.
Pension Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
(d)
|
|
|
3,718
|
|
|
|
3,718
|
|
|
|
|
|
|
|
|
|
Mutual funds
(e)
|
|
|
16,737
|
|
|
|
16,737
|
|
|
|
|
|
|
|
|
|
Bank and insurance investment contracts
(f)
|
|
|
45,093
|
|
|
|
|
|
|
|
|
|
|
|
45,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-U.S.
Pension Plans
|
|
|
65,548
|
|
|
|
20,455
|
|
|
|
|
|
|
|
45,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of retirement plan assets
|
|
|
211,966
|
|
|
$
|
166,145
|
|
|
$
|
728
|
|
|
$
|
45,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments valued at NAV
|
|
|
7,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retirement plan assets
|
|
$
|
219,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of the Companys retirement plan assets are as follows 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)
|
|
U.S. Pension Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
(g)
|
|
$
|
124,961
|
|
|
$
|
124,961
|
|
|
$
|
|
|
|
$
|
|
|
Common stocks
(h)
|
|
|
3,138
|
|
|
|
3,138
|
|
|
|
|
|
|
|
|
|
Cash equivalents
(b)
|
|
|
634
|
|
|
|
|
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Pension Plans
|
|
|
128,733
|
|
|
|
128,099
|
|
|
|
634
|
|
|
|
|
|
U.S. Retiree Healthcare Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
(i)
|
|
|
7,476
|
|
|
|
7,476
|
|
|
|
|
|
|
|
|
|
Cash equivalents
(b)
|
|
|
525
|
|
|
|
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Retiree Healthcare Plan
|
|
|
8,001
|
|
|
|
7,476
|
|
|
|
525
|
|
|
|
|
|
Non-U.S.
Pension Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
(d)
|
|
|
5,061
|
|
|
|
5,061
|
|
|
|
|
|
|
|
|
|
Mutual funds
(j)
|
|
|
14,809
|
|
|
|
14,809
|
|
|
|
|
|
|
|
|
|
Bank and insurance investment contracts
(f)
|
|
|
40,571
|
|
|
|
|
|
|
|
|
|
|
|
40,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-U.S.
Pension Plans
|
|
|
60,441
|
|
|
|
19,870
|
|
|
|
|
|
|
|
40,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of retirement plan assets
|
|
|
197,175
|
|
|
$
|
155,445
|
|
|
$
|
1,159
|
|
|
$
|
40,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments valued at NAV
|
|
|
7,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retirement plan assets
|
|
$
|
204,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The mutual fund balance in the U.S. Pension Plans are invested in the following categories: 35% in the common stock of
large-cap
U.S. companies, 38% in the common stock of international growth companies, and 27% in fixed income bonds issued by U.S. companies and by the U.S. government and its agencies.
|
(b)
|
Primarily represents money market funds held with various financial institutions.
|
(c)
|
The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: 38% in the common stock of
large-cap
U.S. companies, 19% in the common stock of international growth companies and 43% in fixed income bonds of U.S. companies and U.S. government.
|
(d)
|
Primarily represents deposit account funds held with various financial institutions.
|
(e)
|
The mutual fund balance in the
Non-U.S.
Pension Plans is primarily invested in the following categories: 56% in international
bonds, 30% in the common stock of international companies, 8% in mortgages and real estate, and 6% in various other global investments.
|
(f)
|
Amount represents bank and insurance guaranteed investment contracts.
|
(g)
|
The mutual fund balance in the U.S. Pension Plans are invested in the following categories: 42% in the common stock of
large-cap
U.S. companies, 33% in the common stock of international growth companies, and 25% in fixed income bonds issued by U.S. companies and by the U.S. government and its agencies.
|
(h)
|
Represents primarily amounts invested in common stock of technology, healthcare, financial, energy and consumer staples and discretionary U.S. companies.
|
(i)
|
The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: 48% in the common stock of
large-cap
U.S. companies, 19% in the common stock of international growth companies and 33% in fixed income bonds of U.S. companies and U.S. government.
|
(j)
|
The mutual fund balance in the
Non-U.S.
Pension Plans is invested in the following categories: 60% in international bonds and
23% in the common stock of international companies, 10% in mortgages and real estate, and 7% in various other global investments.
|
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the changes in fair value of the Level 3 retirement
plan assets for the years ended December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
Insurance
Guaranteed
Investment
Contracts
|
|
Fair value of assets, December 31, 2014
|
|
$
|
38,943
|
|
Net purchases (sales) and appreciation (depreciation)
|
|
|
1,628
|
|
|
|
|
|
|
Fair value of assets, December 31, 2015
|
|
|
40,571
|
|
Net purchases (sales) and appreciation (depreciation)
|
|
|
4,522
|
|
|
|
|
|
|
Fair value of assets, December 31, 2016
|
|
$
|
45,093
|
|
|
|
|
|
|
The weighted-average assumptions used to determine the benefit obligation in the consolidated balance
sheets at December 31, 2016, 2015 and 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
Discount rate
|
|
|
4.41
|
%
|
|
|
1.71
|
%
|
|
|
4.59
|
%
|
|
|
2.23
|
%
|
|
|
3.92
|
%
|
|
|
1.98
|
%
|
Increases in compensation levels
|
|
|
**
|
|
|
|
2.47
|
%
|
|
|
**
|
|
|
|
2.45
|
%
|
|
|
**
|
|
|
|
2.58
|
%
|
The
weighted-average assumptions used to determine the net periodic pension cost at December 31, 2016, 2015 and 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
Discount rate
|
|
|
4.42
|
%
|
|
|
2.20
|
%
|
|
|
3.71
|
%
|
|
|
1.98
|
%
|
|
|
4.64
|
%
|
|
|
3.25
|
%
|
Return on plan assets
|
|
|
6.47
|
%
|
|
|
2.74
|
%
|
|
|
6.35
|
%
|
|
|
2.58
|
%
|
|
|
6.95
|
%
|
|
|
2.84
|
%
|
Increases in compensation levels
|
|
|
**
|
|
|
|
2.50
|
%
|
|
|
**
|
|
|
|
2.57
|
%
|
|
|
**
|
|
|
|
2.58
|
%
|
To develop the
expected long-term rate of return on assets assumption, the Company considered historical returns and future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio and historical expenses paid
by the plan. A
one-quarter
percentage point increase in the assumed long-term rate of return on assets would decrease the Companys net periodic benefit cost for the Waters Retirement Plan by less than
$1 million. A
one-quarter
percentage point increase in the discount rate would decrease the Companys net periodic benefit cost for the Waters Retirement Plan by less than $1 million.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal year 2017, the Company expects to contribute a total of approximately
$6 million to $11 million to the Companys defined benefit plans. Estimated future benefit payments from the plans as of December 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension and
Retiree Healthcare
Plans
|
|
|
Non-U.S.
Pension
Plans
|
|
|
Total
|
|
2017
|
|
$
|
9,318
|
|
|
$
|
2,579
|
|
|
$
|
11,897
|
|
2018
|
|
|
8,824
|
|
|
|
1,957
|
|
|
|
10,781
|
|
2019
|
|
|
9,480
|
|
|
|
1,459
|
|
|
|
10,939
|
|
2020
|
|
|
9,820
|
|
|
|
1,923
|
|
|
|
11,743
|
|
2021
|
|
|
10,504
|
|
|
|
1,994
|
|
|
|
12,498
|
|
2022 - 2026
|
|
|
57,387
|
|
|
|
15,814
|
|
|
|
73,201
|
|
16 Business Segment Information
The accounting standards for segment reporting establish standards for reporting information about operating segments in annual financial statements and require selected information for those segments to
be presented in interim financial reports of public business enterprises. They also establish standards for related disclosures about products and services, geographic areas and major customers. 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 years ended December 31,
2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Product net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Waters instrument systems
|
|
$
|
943,218
|
|
|
$
|
895,626
|
|
|
$
|
871,048
|
|
Chemistry
|
|
|
345,413
|
|
|
|
317,941
|
|
|
|
312,890
|
|
TA instrument systems
|
|
|
171,665
|
|
|
|
171,689
|
|
|
|
162,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
|
1,460,296
|
|
|
|
1,385,256
|
|
|
|
1,346,729
|
|
Service net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Waters service
|
|
|
639,432
|
|
|
|
593,301
|
|
|
|
579,759
|
|
TA service
|
|
|
67,695
|
|
|
|
63,775
|
|
|
|
62,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service sales
|
|
|
707,127
|
|
|
|
657,076
|
|
|
|
642,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,167,423
|
|
|
$
|
2,042,332
|
|
|
$
|
1,989,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Geographic sales information is presented below for the years ended December 31,
2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
665,280
|
|
|
$
|
656,361
|
|
|
$
|
596,549
|
|
Europe
|
|
|
577,257
|
|
|
|
555,886
|
|
|
|
607,080
|
|
Asia:
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
331,354
|
|
|
|
278,600
|
|
|
|
238,892
|
|
Japan
|
|
|
167,977
|
|
|
|
145,184
|
|
|
|
163,468
|
|
Asia Other
|
|
|
283,653
|
|
|
|
272,179
|
|
|
|
237,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia
|
|
|
782,984
|
|
|
|
695,963
|
|
|
|
640,028
|
|
Other
|
|
|
141,902
|
|
|
|
134,122
|
|
|
|
145,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,167,423
|
|
|
$
|
2,042,332
|
|
|
$
|
1,989,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Other category includes Canada, Latin America and Puerto Rico. Net sales are attributable to
geographic areas based on the region of destination. None of the Companys individual customers accounts for more than 2% of annual Company sales.
Long-lived assets information at December 31, 2016 and 2015 is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
207,062
|
|
|
$
|
192,352
|
|
|
$
|
181,851
|
|
Europe
|
|
|
114,848
|
|
|
|
128,189
|
|
|
|
126,080
|
|
Asia
|
|
|
14,376
|
|
|
|
11,868
|
|
|
|
12,416
|
|
Other
|
|
|
832
|
|
|
|
946
|
|
|
|
1,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
337,118
|
|
|
$
|
333,355
|
|
|
$
|
321,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Other category includes Canada, Latin America and Puerto Rico. Long-lived assets exclude goodwill,
other intangible assets and other assets.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17 Unaudited Quarterly Results
The Companys unaudited quarterly results are summarized below (in thousands, except per share data):
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First
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Second
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Third
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|
Fourth
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|
|
|
2016
|
|
Quarter
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|
|
Quarter
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|
|
Quarter
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|
Quarter
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Total
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Net sales
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$
|
475,246
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|
|
$
|
536,560
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|
|
$
|
526,830
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|
|
$
|
628,787
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|
|
$
|
2,167,423
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|
Costs and operating expenses:
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Cost of sales
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|
201,151
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|
220,379
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|
|
|
218,344
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|
|
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251,579
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|
|
|
891,453
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|
Selling and administrative expenses
|
|
|
129,351
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|
|
|
129,581
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|
|
|
123,861
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|
|
|
130,238
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|
|
|
513,031
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|
Research and development expenses
|
|
|
29,438
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|
|
|
32,578
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|
|
|
30,418
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|
|
|
32,753
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|
|
|
125,187
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Purchased intangibles amortization
|
|
|
2,644
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|
|
|
2,411
|
|
|
|
2,476
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|
|
|
2,358
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|
|
|
9,889
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|
Litigation provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,524
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|
|
|
3,524
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
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Total costs and operating expenses
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|
362,584
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|
|
|
384,949
|
|
|
|
375,099
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|
|
|
420,452
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|
|
|
1,543,084
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating income
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|
|
112,662
|
|
|
|
151,611
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|
|
|
151,731
|
|
|
|
208,335
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|
|
|
624,339
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|
Interest expense
|
|
|
(10,119
|
)
|
|
|
(10,983
|
)
|
|
|
(11,707
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)
|
|
|
(12,102
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)
|
|
|
(44,911
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)
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Interest income
|
|
|
4,087
|
|
|
|
4,827
|
|
|
|
5,426
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|
|
|
6,346
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|
|
|
20,686
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|
|
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|
|
|
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|
|
|
|
|
|
|
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|
|
|
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Income from operations before income taxes
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106,630
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|
|
|
145,455
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|
|
145,450
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|
202,579
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|
|
|
600,114
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Provision for income tax expense
|
|
|
12,578
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|
|
|
17,238
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|
|
|
20,594
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|
|
|
28,201
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|
|
|
78,611
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Net income
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|
$
|
94,052
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|
|
$
|
128,217
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|
|
$
|
124,856
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|
|
$
|
174,378
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|
|
$
|
521,503
|
|
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|
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|
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|
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Net income per basic common share
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|
|
1.16
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|
|
|
1.59
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|
|
|
1.55
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|
|
|
2.17
|
|
|
|
6.46
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|
Weighted-average number of basic common shares
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|
81,275
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|
|
|
80,804
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|
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80,677
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|
80,366
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|
|
|
80,786
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Net income per diluted common share
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1.15
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|
|
|
1.57
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|
|
1.53
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|
|
|
2.15
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|
|
|
6.41
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|
Weighted-average number of diluted common shares and equivalents
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|
|
81,974
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|
|
|
81,455
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|
|
|
81,388
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|
|
|
80,954
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|
|
|
81,417
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
2015
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
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Total
|
|
Net sales
|
|
$
|
460,404
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|
|
$
|
494,740
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|
|
$
|
500,578
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|
|
$
|
586,610
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|
|
$
|
2,042,332
|
|
Costs and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Cost of sales
|
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|
189,246
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|
|
|
208,707
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|
|
|
206,804
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|
|
|
237,915
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|
|
|
842,672
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|
Selling and administrative expenses
|
|
|
119,751
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|
|
|
122,660
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|
|
|
124,655
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|
|
|
128,681
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|
|
|
495,747
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|
Research and development expenses
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|
|
28,951
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|
|
|
30,555
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|
|
|
30,703
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|
|
|
28,336
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|
|
|
118,545
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|
Purchased intangibles amortization
|
|
|
2,474
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|
|
|
2,500
|
|
|
|
2,573
|
|
|
|
2,576
|
|
|
|
10,123
|
|
Litigation provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,939
|
|
|
|
3,939
|
|
Acquired
in-process
research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,855
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|
|
|
3,855
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and operating expenses
|
|
|
340,422
|
|
|
|
364,422
|
|
|
|
364,735
|
|
|
|
405,302
|
|
|
|
1,474,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
119,982
|
|
|
|
130,318
|
|
|
|
135,843
|
|
|
|
181,308
|
|
|
|
567,451
|
|
Interest expense
|
|
|
(8,975
|
)
|
|
|
(9,046
|
)
|
|
|
(9,017
|
)
|
|
|
(9,205
|
)
|
|
|
(36,243
|
)
|
Interest income
|
|
|
2,340
|
|
|
|
2,500
|
|
|
|
2,736
|
|
|
|
3,135
|
|
|
|
10,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
113,347
|
|
|
|
123,772
|
|
|
|
129,562
|
|
|
|
175,238
|
|
|
|
541,919
|
|
Provision for income tax expense
|
|
|
17,286
|
|
|
|
18,115
|
|
|
|
13,281
|
|
|
|
23,961
|
|
|
|
72,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
96,061
|
|
|
$
|
105,657
|
|
|
$
|
116,281
|
|
|
$
|
151,277
|
|
|
$
|
469,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic common share
|
|
|
1.16
|
|
|
|
1.28
|
|
|
|
1.42
|
|
|
|
1.85
|
|
|
|
5.70
|
|
Weighted-average number of basic common shares
|
|
|
83,025
|
|
|
|
82,564
|
|
|
|
82,036
|
|
|
|
81,650
|
|
|
|
82,336
|
|
Net income per diluted common share
|
|
|
1.15
|
|
|
|
1.27
|
|
|
|
1.40
|
|
|
|
1.84
|
|
|
|
5.65
|
|
Weighted-average number of diluted common shares and equivalents
|
|
|
83,752
|
|
|
|
83,332
|
|
|
|
82,784
|
|
|
|
82,382
|
|
|
|
83,087
|
|
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company typically experiences an increase in sales in the fourth quarter, as a
result of purchasing habits for capital goods of customers that tend to exhaust their spending budgets by calendar year end. Selling and administrative expenses are typically higher in the second and third quarters over the first quarter in each
year as the Companys annual payroll merit increases take effect. Selling and administrative expenses will vary in the fourth quarter in relation to performance in the quarter and for the year.
In the first quarter of 2016, the Company recorded $7 million of stock compensation expense in selling and administrative expenses
related to the modification of certain stock awards upon the retirement of senior executives. In the fourth quarters of 2016 and 2015, the company recorded $4 million provisions related to litigation (see Note 10). In the fourth quarter of
2015, the Company recorded a $4 million charge related to acquired
in-process
research and development (see Note 2).
89