The accompanying notes are an integral part of the interim consolidated financial statements.
The accompanying notes are an integral part of the interim consolidated financial statements.
The accompanying notes are an integral part of the interim consolidated financial statements.
The accompanying notes are an integral part of the interim consolidated financial statements.
The accompanying notes are an integral part of the interim consolidated financial statements.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1 Basis of Presentation
and Summary of Significant Accounting Policies
Waters Corporation (the Company) is a specialty measurement company that has pioneered
chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for nearly 60 years. The Company 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.
The Companys interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Companys fiscal year end is
December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Companys third fiscal quarters for 2017 and 2016 ended on September 30, 2017 and October 1, 2016, respectively.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form
10-Q
and do not include all of the information and footnote disclosures required by generally accepted accounting principles (GAAP) in the United States of America. The consolidated financial statements
include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated.
The
preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions.
It is
managements opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim
consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Companys Annual Report on Form
10-K
for the year ended December 31, 2016,
as filed with the U.S. Securities and Exchange Commission on February 24, 2017.
Translation of Foreign Currencies
For most of the Companys foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet
date, while revenues and expenses are translated at average exchange rates prevailing during the period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets. 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.
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
Cash, Cash Equivalents and Investments
Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified
as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of September 30, 2017 and December 31,
2016, $3,212 million out of $3,255 million and $2,766 million out of $2,813 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, $337 million out of $3,255 million and $261 million out of $2,813 million of cash, cash equivalents and investments were held in currencies other than the
U.S. dollar at September 30, 2017 and December 31, 2016, respectively.
Other Investments
During the nine months ended September 30, 2017, the Company made a $7 million investment in a developer of analytical system solutions used to make
measurements, predict stability and accelerate product discovery in the routine analytic, process monitoring and quality control release processes for life science and biopharmaceutical markets. This investment was accounted for under the cost
method of accounting.
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 September 30, 2017 and December 31, 2016. Fair
values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either
directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions.
The following table represents the Companys assets and liabilities that are measured at fair value on a recurring basis at September 30, 2017 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at
September 30,
2017
|
|
|
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
|
|
$
|
548,010
|
|
|
$
|
|
|
|
$
|
548,010
|
|
|
$
|
|
|
Foreign government securities
|
|
|
6,970
|
|
|
|
|
|
|
|
6,970
|
|
|
|
|
|
Corporate debt securities
|
|
|
1,884,101
|
|
|
|
|
|
|
|
1,884,101
|
|
|
|
|
|
Time deposits
|
|
|
403,112
|
|
|
|
|
|
|
|
403,112
|
|
|
|
|
|
Equity securities
|
|
|
147
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
Waters 401(k) Restoration Plan assets
|
|
|
33,845
|
|
|
|
33,845
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
|
213
|
|
|
|
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,876,398
|
|
|
$
|
33,845
|
|
|
$
|
2,842,553
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
3,017
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,017
|
|
Foreign currency exchange contracts
|
|
|
63
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,080
|
|
|
$
|
|
|
|
$
|
63
|
|
|
$
|
3,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
The following table represents the Companys assets and liabilities that are 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of 401(k) Restoration Plan Assets
The 401(k) Restoration Plan is a nonqualified defined contribution plan and the assets were held in registered mutual funds and have been classified as
Level 1. The fair values of the assets in this plan are determined through market and observable sources from daily quoted prices on nationally recognized securities exchanges.
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
September 30, 2017 and December 31, 2016. There were no transfers between the levels of the fair value hierarchy during the nine months ended September 30, 2017.
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 at both September 30, 2017 and December 31, 2016, 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. There have
been no changes in significant assumptions since December 31, 2016 and the change in fair value since then is primarily due to change in time value of money.
8
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
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 at both September 30, 2017 and December 31, 2016. 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 $611 million and
$603 million at September 30, 2017 and December 31, 2016, 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.
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 September 30, 2017 and December 31, 2016, the Company held foreign currency exchange contracts with notional amounts totaling $127 million and $120 million,
respectively.
The Companys foreign currency exchange contracts included in the consolidated balance sheets are classified as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Other current assets
|
|
$
|
213
|
|
|
$
|
60
|
|
Other current liabilities
|
|
$
|
63
|
|
|
$
|
730
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
Realized gains (losses) on closed contracts
|
|
$
|
2,871
|
|
|
$
|
(1,994
|
)
|
|
$
|
3,301
|
|
|
$
|
(9,525
|
)
|
Unrealized (losses) gains on open contracts
|
|
|
(1,258
|
)
|
|
|
1,003
|
|
|
|
819
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative net
pre-tax
gains (losses)
|
|
$
|
1,613
|
|
|
$
|
(991
|
)
|
|
$
|
4,120
|
|
|
$
|
(9,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
In May 2017, the Companys Board of Directors authorized the Company to repurchase up to $1 billion of its outstanding common stock over a three-year
period. During the nine months ended September 30, 2017 and October 1, 2016, the Company repurchased 1.4 million and 1.8 million shares of the Companys outstanding common stock at a cost of $238 million and
$236 million, respectively, under the May 2017 and other previously announced programs. As of September 30, 2017, the Company had purchased an aggregate of 5.5 million shares at a cost of
9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
$750 million under the May 2014 authorization, which is now completed. The Company has a total of $885 million in remaining authorized capacity for future repurchases under the May 2017
authorization. In addition, the Company repurchased $8 million and $6 million of common stock related to the vesting of restricted stock units during the nine months ended September 30, 2017 and October 1, 2016, respectively. The
Company believes that it has the financial flexibility to fund these share repurchases given current cash levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Companys
sales and profits.
Product Warranty Costs
The
Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively
monitoring and evaluating the quality of its component suppliers, the Companys warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the
accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.
The following is a summary of the activity of the Companys accrued warranty liability for the nine months ended September 30, 2017 and
October 1, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Period
|
|
|
Accruals for
Warranties
|
|
|
Settlements
Made
|
|
|
Balance at
End of
Period
|
|
Accrued warranty liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
$
|
13,391
|
|
|
$
|
6,287
|
|
|
$
|
(6,823
|
)
|
|
$
|
12,855
|
|
October 1, 2016
|
|
$
|
13,349
|
|
|
$
|
7,101
|
|
|
$
|
(6,915
|
)
|
|
$
|
13,535
|
|
Restructuring and Other Charges
During the nine months ended September 30, 2017, the Company incurred $12 million of severance costs associated with the closure of a facility in
Germany and costs associated with providing U.S. employees with an early retirement transition incentive. During the nine months ended October 1, 2016, the Company incurred $3 million of severance costs associated with an organizational
restructuring. At September 30, 2017 and December 31, 2016, the Company had $3 million and $2 million of severance costs accrued in other current liabilities.
Acquired
In-process
Research and Development
During the nine months ended September 30, 2017, the Company incurred a $5 million charge for acquired
in-process
research and development related to a milestone payment for 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. This licensing arrangement is significantly related to new, biologically-focused applications, as well as other applications, and requires the Company to make additional future payments of up to
$7 million if certain milestones are achieved, as well as royalties on future net sales.
10
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
2 Marketable Securities
The Companys marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
U.S. Treasury securities
|
|
$
|
548,736
|
|
|
$
|
91
|
|
|
$
|
(817
|
)
|
|
$
|
548,010
|
|
Foreign government securities
|
|
|
6,976
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
6,970
|
|
Corporate debt securities
|
|
|
1,883,688
|
|
|
|
1,474
|
|
|
|
(1,061
|
)
|
|
|
1,884,101
|
|
Time deposits
|
|
|
403,113
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
403,112
|
|
Equity securities
|
|
|
77
|
|
|
|
70
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,842,590
|
|
|
$
|
1,635
|
|
|
$
|
(1,885
|
)
|
|
$
|
2,842,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
191,190
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
191,190
|
|
Investments
|
|
|
2,651,400
|
|
|
|
1,635
|
|
|
|
(1,885
|
)
|
|
|
2,651,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,842,590
|
|
|
$
|
1,635
|
|
|
$
|
(1,885
|
)
|
|
$
|
2,842,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Due in one year or less
|
|
$
|
1,574,317
|
|
|
$
|
1,388,537
|
|
Due after one year through three years
|
|
|
864,764
|
|
|
|
843,605
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,439,081
|
|
|
$
|
2,232,142
|
|
|
|
|
|
|
|
|
|
|
3 Inventories
Inventories are classified as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Raw materials
|
|
$
|
99,832
|
|
|
$
|
95,430
|
|
Work in progress
|
|
|
20,205
|
|
|
|
16,585
|
|
Finished goods
|
|
|
177,817
|
|
|
|
150,667
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
297,854
|
|
|
$
|
262,682
|
|
|
|
|
|
|
|
|
|
|
11
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
4 Goodwill and Other Intangibles
The carrying amount of goodwill was $359 million and $352 million at September 30, 2017 and December 31, 2016, respectively. During the
nine months ended September 30, 2017, the effect of foreign currency translation increased goodwill by $7 million.
The Companys
intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Weighted-
Average
Amortization
Period
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Weighted-
Average
Amortization
Period
|
|
Capitalized software
|
|
$
|
424,155
|
|
|
$
|
273,430
|
|
|
|
5 years
|
|
|
$
|
355,973
|
|
|
$
|
223,572
|
|
|
|
5 years
|
|
Purchased intangibles
|
|
|
169,023
|
|
|
|
136,491
|
|
|
|
11 years
|
|
|
|
162,180
|
|
|
|
127,045
|
|
|
|
11 years
|
|
Trademarks and IPR&D
|
|
|
13,924
|
|
|
|
|
|
|
|
|
|
|
|
13,544
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
5,837
|
|
|
|
4,502
|
|
|
|
6 years
|
|
|
|
4,632
|
|
|
|
3,851
|
|
|
|
6 years
|
|
Patents and other intangibles
|
|
|
67,971
|
|
|
|
42,431
|
|
|
|
8 years
|
|
|
|
61,646
|
|
|
|
36,452
|
|
|
|
8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
680,910
|
|
|
$
|
456,854
|
|
|
|
7 years
|
|
|
$
|
597,975
|
|
|
$
|
390,920
|
|
|
|
7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2017, the effect of foreign currency translation increased the gross carrying
value of intangible assets and accumulated amortization for intangible assets by $52 million and $33 million, respectively. Amortization expense for intangible assets was $11 million and $12 million for the three months ended
September 30, 2017 and October 1, 2016, respectively. Amortization expense for intangible assets was $33 million and $34 million for the nine months ended September 30, 2017 and October 1, 2016, respectively.
Amortization expense for intangible assets is estimated to be approximately $44 million per year for each of the next five years.
5 Debt
In June 2013, the Company entered into a credit agreement that provides for a $1.1 billion revolving facility and a $300 million term loan facility.
In April 2015, Waters 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 basis points 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 September 30, 2017,
$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 $835 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.
12
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
The Company had a total of $700 million of outstanding senior unsecured notes as of September 30,
2017 and December 31, 2016. 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 September 30, 2017 and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Foreign subsidiary lines of credit
|
|
$
|
423
|
|
|
$
|
297
|
|
Senior unsecured notesSeries D3.22%, due March 2018
|
|
|
100,000
|
|
|
|
|
|
Credit agreements
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and debt
|
|
|
225,423
|
|
|
|
125,297
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured notesSeries B5.00%, due February 2020
|
|
|
100,000
|
|
|
|
100,000
|
|
Senior unsecured notesSeries D3.22%, due March 2018
|
|
|
|
|
|
|
100,000
|
|
Senior unsecured notesSeries E3.97%, due March 2021
|
|
|
50,000
|
|
|
|
50,000
|
|
Senior unsecured notesSeries F3.40%, due June 2021
|
|
|
100,000
|
|
|
|
100,000
|
|
Senior unsecured notesSeries G3.92%, due June 2024
|
|
|
50,000
|
|
|
|
50,000
|
|
Senior unsecured notesSeries Hfloating rate*, due June 2024
|
|
|
50,000
|
|
|
|
50,000
|
|
Senior unsecured notesSeries I3.13%, due May 2023
|
|
|
50,000
|
|
|
|
50,000
|
|
Senior unsecured notesSeries Jfloating rate**, due May 2024
|
|
|
40,000
|
|
|
|
40,000
|
|
Senior unsecured notesSeries K3.44%, due May 2026
|
|
|
160,000
|
|
|
|
160,000
|
|
Credit agreements
|
|
|
1,135,000
|
|
|
|
1,005,000
|
|
Unamortized debt issuance costs
|
|
|
(2,633
|
)
|
|
|
(3,034
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,732,367
|
|
|
|
1,701,966
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
1,957,790
|
|
|
$
|
1,827,263
|
|
|
|
|
|
|
|
|
|
|
*
|
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 September 30, 2017 and December 31, 2016, the Company had a total amount available to borrow under existing credit agreements of
$338 million and $468 million, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.82% and 2.55% at
September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $90 million and $79 million at September 30,
2017 and December 31, 2016, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. At September 30, 2017 and December 31, 2016, the weighted-average interest rates applicable to these short-term
borrowings were 1.48% and 1.49%, respectively.
13
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
6 Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the Companys marginal effective
tax rates were approximately 37.5%, 12.5%, 19.25% and 0%, respectively, as of September 30, 2017. 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%. For the first nine months of 2017 and 2016, 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 by $18 million and $16 million, respectively, and increased the Companys net income per diluted share by $0.23 and $0.20, respectively.
The Companys effective tax rate for the quarter was 11.5% and 14.2% for 2017 and 2016, respectively.
Year-to-date,
the Companys effective tax rate was 10.1% and 12.7% for 2017 and 2016, respectively. The decrease in the effective tax rate in 2017 as compared to 2016 can be primarily attributed to the
adoption of new accounting guidance related to stock-based compensation, which decreased income tax expense by $3 million and $14 million for the three and nine months ended September 30, 2017, respectively, and decreased the
Companys effective tax rate by 1.7 percentage points and 3.4 percentage points, respectively. See Note 13 for further information regarding the adoption of this standard. In addition, the provision for income tax for the first quarter of 2016
included a quarter-specific tax benefit associated with modifications to certain stock-based compensation awards. The remaining differences between the effective tax rate in 2017 and 2016 can be primarily attributed to differences in the
proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
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 classifies 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 nine months ended September 30, 2017 and
October 1, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Balance at the beginning of the period
|
|
$
|
9,964
|
|
|
$
|
14,450
|
|
Net changes in uncertain tax benefits
|
|
|
(2,953
|
)
|
|
|
(3,559
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
7,011
|
|
|
$
|
10,891
|
|
|
|
|
|
|
|
|
|
|
With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years
ended on or before December 31, 2012. However, carryforward tax attributes that were generated in years beginning on or before January 1, 2013 may still be adjusted upon examination by tax authorities if the attributes are utilized. The
Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities. As of
September 30, 2017, the Company expects to record additional reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of approximately $2 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.
7 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.
14
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
The Company has been engaged in patent litigation in Germany since 2005. In June 2017, the court issued a
verdict against the Company and awarded the plaintiff damages, fees and interest. As a result of the courts judgment, the Company recorded a $10 million provision for damages and fees estimated to be incurred in connection with this
litigation. The accrued patent litigation expense of $17 million and $7 million is in other current liabilities in the consolidated balance sheets at September 30, 2017 and December 31, 2016, respectively.
8 Stock-Based Compensation
The Company maintains various
shareholder-approved, stock-based compensation plans which allow for the issuance of incentive or
non-qualified
stock options, stock appreciation rights, restricted stock or other types of awards (e.g.
restricted stock units and performance stock units). In the first quarter of 2017, the Company adopted new accounting guidance related to stock-based compensation, see Note 13 for further information regarding the adoption of this standard.
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 new stock-based compensation accounting guidance offers the option of
recognizing forfeitures as they occur or estimating forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has elected to remain consistent with prior periods
and estimate forfeitures at the time of grant and, if necessary, revise in subsequent periods in which actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If actual results differ significantly
from these estimates, stock-based compensation expense and the Companys results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation
expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.
The
consolidated statements of operations for the three and nine months ended September 30, 2017 and October 1, 2016 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Cost of sales
|
|
$
|
726
|
|
|
$
|
731
|
|
|
$
|
2,251
|
|
|
$
|
2,058
|
|
Selling and administrative expenses
|
|
|
10,768
|
|
|
|
6,944
|
|
|
|
25,558
|
|
|
|
27,526
|
|
Research and development expenses
|
|
|
780
|
|
|
|
692
|
|
|
|
2,259
|
|
|
|
3,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
12,274
|
|
|
$
|
8,367
|
|
|
$
|
30,068
|
|
|
$
|
32,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2017 and October 1, 2016, the Company recognized $4 million and
$7 million, respectively, of stock-based compensation expense related to the modification of certain stock awards upon the retirement of senior executives.
Stock Options
In determining the fair value of the stock
options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option
pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it
is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of
non-qualified
stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury
zero-coupon
issues with a remaining term approximating
the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the nine months ended September 30, 2017 and October 1, 2016 is as follows:
15
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Options Issued and Significant Assumptions Used to Estimate Option Fair
Values
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Options issued (in thousands)
|
|
|
217
|
|
|
|
86
|
|
Risk-free interest rate
|
|
|
2.2
|
%
|
|
|
1.5
|
%
|
Expected life in years
|
|
|
6
|
|
|
|
5
|
|
Expected volatility
|
|
|
0.230
|
|
|
|
0.286
|
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Weighted-Average Exercise Price and Fair Value of Options on the Date of
Grant
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Exercise price
|
|
$
|
151.24
|
|
|
$
|
122.65
|
|
Fair value
|
|
$
|
40.49
|
|
|
$
|
34.63
|
|
The following table summarizes stock option activity for the plans for the nine months ended September 30, 2017 (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Price per Share
|
|
|
Weighted-Average
Exercise Price per
Share
|
|
Outstanding at December 31, 2016
|
|
|
2,697
|
|
|
$
|
38.09 to $139.51
|
|
|
$
|
106.55
|
|
Granted
|
|
|
217
|
|
|
$
|
136.43 to $184.89
|
|
|
$
|
151.24
|
|
Exercised
|
|
|
(751
|
)
|
|
$
|
41.20 to $134.37
|
|
|
$
|
90.28
|
|
Canceled
|
|
|
(43
|
)
|
|
$
|
87.06 to $136.43
|
|
|
$
|
115.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
2,120
|
|
|
$
|
38.09 to $184.89
|
|
|
$
|
116.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
During
the nine months ended September 30, 2017, the Company granted eight thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $140.52 per share.
Restricted Stock Units
The following table summarizes
the unvested restricted stock unit award activity for the nine months ended September 30, 2017 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Price per Share
|
|
Unvested at December 31, 2016
|
|
|
453
|
|
|
$
|
110.34
|
|
Granted
|
|
|
106
|
|
|
$
|
154.31
|
|
Vested
|
|
|
(140
|
)
|
|
$
|
106.06
|
|
Forfeited
|
|
|
(17
|
)
|
|
$
|
116.83
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2017
|
|
|
402
|
|
|
$
|
123.15
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year
period.
Performance Stock Units
The Companys
performance stock units 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.
16
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (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 2017 is as follows:
|
|
|
|
|
Performance Stock Units Issued and Significant Assumptions Used to Estimate
Fair Values
|
|
2017
|
|
Performance stock units issued in thousands
|
|
|
20
|
|
Risk-free interest rate
|
|
|
1.5
|
%
|
Expected life in years
|
|
|
3
|
|
Expected volatility
|
|
|
0.232
|
|
Average volatility of peer companies
|
|
|
0.261
|
|
Correlation coefficient
|
|
|
0.385
|
|
Expected dividends
|
|
|
|
|
The following table summarizes the unvested performance stock unit award activity for the nine months ended September 30,
2017 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Fair Value per
Share
|
|
Unvested at December 31, 2016
|
|
|
27
|
|
|
$
|
171.16
|
|
Granted
|
|
|
20
|
|
|
$
|
198.78
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2017
|
|
|
47
|
|
|
$
|
184.40
|
|
|
|
|
|
|
|
|
|
|
9 Earnings Per Share
Basic and diluted earnings per share (EPS) calculations are detailed as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
Net Income
(Numerator)
|
|
|
Weighted-
Average Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
Net income per basic common share
|
|
$
|
136,104
|
|
|
|
79,712
|
|
|
$
|
1.71
|
|
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock
unit securities
|
|
|
|
|
|
|
809
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
136,104
|
|
|
|
80,521
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 1, 2016
|
|
|
|
Net Income
(Numerator)
|
|
|
Weighted-
Average Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
Net income per basic common share
|
|
$
|
124,856
|
|
|
|
80,677
|
|
|
$
|
1.55
|
|
Effect of dilutive stock option, restricted stock and restricted stock unit securities
|
|
|
|
|
|
|
711
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
124,856
|
|
|
|
81,388
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
Net Income
(Numerator)
|
|
|
Weighted-
Average Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
Net income per basic common share
|
|
$
|
373,483
|
|
|
|
79,908
|
|
|
$
|
4.67
|
|
Effect of dilutive stock option, restricted stock, performance stock unit and and restricted stock
unit securities
|
|
|
|
|
|
|
752
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
373,483
|
|
|
|
80,660
|
|
|
$
|
4.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 1, 2016
|
|
|
|
Net Income
(Numerator)
|
|
|
Weighted-
Average Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
Net income per basic common share
|
|
$
|
347,125
|
|
|
|
80,923
|
|
|
$
|
4.29
|
|
Effect of dilutive stock option, restricted stock and restricted stock unit securities
|
|
|
|
|
|
|
650
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
347,125
|
|
|
|
81,573
|
|
|
$
|
4.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2017, the Company had 0.2 million and 0.4 million stock
options that were antidilutive, respectively, due to having higher exercise prices than the Companys average stock price during the period. For the three and nine months ended October 1, 2016, the Company had 0.5 million and
0.8 million stock options that were antidilutive, respectively. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.
10 Accumulated Other Comprehensive Income
The components
of accumulated other comprehensive income are detailed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Translation
|
|
|
Unrealized Gain
(Loss) on
Retirement Plans
|
|
|
Unrealized Gain
(Loss) on
Investments
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Balance at December 31, 2016
|
|
$
|
(170,566
|
)
|
|
$
|
(43,894
|
)
|
|
$
|
(1,820
|
)
|
|
$
|
(216,280
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
94,209
|
|
|
|
52
|
|
|
|
1,592
|
|
|
|
95,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
(76,357
|
)
|
|
$
|
(43,842
|
)
|
|
$
|
(228
|
)
|
|
$
|
(120,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
11 Retirement Plans
The Company sponsors various retirement plans. The summary of the components of net periodic pension costs for the plans for the three and nine months ended
September 30, 2017 and October 1, 2016 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
|
|
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
|
|
$
|
113
|
|
|
$
|
137
|
|
|
$
|
1,311
|
|
|
$
|
94
|
|
|
$
|
116
|
|
|
$
|
1,253
|
|
Interest cost
|
|
|
1,707
|
|
|
|
155
|
|
|
|
386
|
|
|
|
1,710
|
|
|
|
135
|
|
|
|
423
|
|
Expected return on plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
|
|
(2,574
|
)
|
|
|
(146
|
)
|
|
|
(434
|
)
|
|
|
(2,392
|
)
|
|
|
(130
|
)
|
|
|
(401
|
)
|
Net amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
|
|
|
|
|
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
Net actuarial loss
|
|
|
693
|
|
|
|
|
|
|
|
248
|
|
|
|
693
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension (benefit) cost
|
|
$
|
(61
|
)
|
|
$
|
146
|
|
|
$
|
1,464
|
|
|
$
|
105
|
|
|
$
|
121
|
|
|
$
|
1,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
|
|
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
|
|
$
|
338
|
|
|
$
|
410
|
|
|
$
|
3,802
|
|
|
$
|
282
|
|
|
$
|
348
|
|
|
$
|
3,721
|
|
Interest cost
|
|
|
5,122
|
|
|
|
464
|
|
|
|
1,112
|
|
|
|
5,200
|
|
|
|
405
|
|
|
|
1,273
|
|
Expected return on plan assets
|
|
|
(7,724
|
)
|
|
|
(440
|
)
|
|
|
(1,250
|
)
|
|
|
(7,226
|
)
|
|
|
(390
|
)
|
|
|
(1,206
|
)
|
Net amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
(145
|
)
|
Net actuarial loss
|
|
|
2,078
|
|
|
|
|
|
|
|
714
|
|
|
|
2,027
|
|
|
|
|
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension (benefit) cost
|
|
$
|
(186
|
)
|
|
$
|
434
|
|
|
$
|
4,238
|
|
|
$
|
283
|
|
|
$
|
363
|
|
|
$
|
4,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2017, the Company contributed $4 million to the Companys U.S.
pension plans. During fiscal year 2017, the Company expects to contribute a total of approximately $6 million to $11 million to the Companys defined benefit plans.
12 Business Segment Information
The Companys
business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: Waters
®
and TA.
The Waters operating segment is primarily in the business of designing, manufacturing,
distributing and servicing LC and MS instruments, columns and other chemistry consumables that can be integrated and used along with other analytical instruments. The TA operating segment is primarily in the business of designing, manufacturing,
distributing and servicing thermal analysis, rheometry and calorimetry instruments. The Companys two operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of
distribution; and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial
information regarding the one reportable segment of the Company.
19
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
Net sales for the Companys products and services are as follows for the three and nine months ended
September 30, 2017 and October 1, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Product net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waters instrument systems
|
|
$
|
238,431
|
|
|
$
|
226,296
|
|
|
$
|
674,768
|
|
|
$
|
646,733
|
|
Chemistry consumables
|
|
|
92,879
|
|
|
|
84,114
|
|
|
|
271,606
|
|
|
|
255,312
|
|
TA instrument systems
|
|
|
44,240
|
|
|
|
39,524
|
|
|
|
126,310
|
|
|
|
115,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales
|
|
|
375,550
|
|
|
|
349,934
|
|
|
|
1,072,684
|
|
|
|
1,017,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waters service
|
|
|
172,594
|
|
|
|
160,503
|
|
|
|
498,736
|
|
|
|
471,792
|
|
TA service
|
|
|
17,440
|
|
|
|
16,393
|
|
|
|
50,383
|
|
|
|
49,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service sales
|
|
|
190,034
|
|
|
|
176,896
|
|
|
|
549,119
|
|
|
|
521,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
565,584
|
|
|
$
|
526,830
|
|
|
$
|
1,621,803
|
|
|
$
|
1,538,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Recent Accounting Standard Changes and Developments
Recently Adopted Accounting Standards
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 adopted this standard as of
January 1, 2017 and this standard did not have a material effect 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. The new guidance is required to be adopted on a prospective basis for the statement of operations and the Company has elected to
retrospectively apply the cash flow aspects of this new guidance. In addition, the Company has elected to continue to estimate forfeitures at the time of grant and update forfeiture estimates throughout the requisite service period. The Company
adopted this standard as of January 1, 2017 and recognized an excess tax benefit related to stock-based compensation which decreased income tax expense for the three and nine months ended September 30, 2017 by $3 million and
$14 million, respectively, and added $0.03 and $0.18 to net income per diluted share, respectively. These excess tax benefits were previously recorded in equity and there were no cumulative-effect adjustments to retained earnings as a result of
the adoption of this standard. In addition, the Company reclassified $13 million of excess tax benefits related to stock-based compensation for the first nine months of 2016 from cash flows from financing activities to cash flows from operating
activities.
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. Based on a preliminary analysis, the Company currently believes that the adoption of
this standard will not have a material impact on the Companys financial position, results of operations and cash flows.
20
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
In January 2016, accounting guidance was issued which primarily affects the classification and measurement of
certain financial instruments, principally equity investments and certain financial liabilities. Under the new guidance, there will no longer be an
available-for-sale
classification for equity securities with readily determinable fair values. Changes to the fair value of equity investments will be recognized through earnings. Equity investments carried at cost should be adjusted for changes in observable prices,
as applicable, and qualitatively assessed for impairment annually. Changes to the fair value of financial liabilities under the fair value option due to instrument specific credit risk will be recognized separately in other comprehensive income. The
new guidance also requires financial assets and financial liabilities to be presented separately and grouped by measurement category in the notes to the financial statements. This guidance is effective for annual and interim reporting periods
beginning after December 15, 2017 and early adoption of certain provisions of this guidance is permitted. The Company 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 results of operations and cash flows.
In June
2016, accounting guidance was issued that modifies the recognition of credit losses related to financial assets, such as debt securities, trade receivables, net investments in leases,
off-balance
sheet credit
exposures, and 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 has 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, 2017 and early adoption is permitted. The Company
currently does not believe that the adoption of this standard will have a material impact 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.
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 will apply this guidance prospectively to any
business combination transactions that take place after adoption of this new guidance.
21
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
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.
In March 2017, accounting guidance was issued regarding the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new
guidance requires that an employer disaggregate the service cost component from other components of net benefit cost, with service cost reported in the same line items as other compensation costs and the other components of net benefit costs
presented outside income from operations. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company currently does not believe that the adoption of this standard
will have a material impact on the Companys financial position, results of operations and cash flows.
In March 2017, accounting guidance was issued
to amend the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amortization period for certain callable debt securities will be shortened to end at the earliest call date. This guidance is
effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Companys financial
position, results of operations and cash flows.
In May 2017, accounting guidance was issued that clarifies the accounting for a change to the terms or
conditions of a share-based payment award. The standard provides more specific guidance for determining when a change to an award requires modification accounting and when it should be deemed purely administrative in nature. This guidance is
effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company currently does not believe that the adoption of this standard will have a material impact on the Companys financial
position, results of operations and cash flows.
22