SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
01-14010
Waters Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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13-3668640 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
34 Maple Street
Milford, Massachusetts 01757
(Address, including zip code, of principal executive
offices)
Registrant’s telephone number, including area code:
(508) 478-2000
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Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $0.01 per share
New York Stock Exchange, Inc. |
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Securities registered pursuant to Section 12(g) of the Act:
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None |
Indicate by check mark whether the
registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark whether the
registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for
the past
90 days. Yes þ No o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is
not contained herein and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2 of the
Act). Yes o No þ
State the aggregate market value
of the registrant’s common stock held by non-affiliates of
the registrant as of July 2, 2005: $5,295,924,857.
Indicate the number of shares
outstanding of the registrant’s common stock as of
February 28, 2006: 104,519,617.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2006 Annual Meeting of
Stockholders are incorporated by reference in Part III.
WATERS CORPORATION AND SUBSIDIARIES
ANNUAL REPORT ON
FORM 10-K
INDEX
2
PART I
Item 1: Business
General
Waters Corporation, (“Waters” or the
“Company”) an analytical instrument manufacturer,
designs, manufactures, sells and services, through its Waters
Division, high performance liquid chromatography
(“HPLC”), ultra performance liquid chromatography
(“UPLC”) (together with HPLC, herein referred to as
(“LC”)) and mass spectrometry (“MS”)
instrument systems and support products, including
chromatography columns and other consumable products. These
instruments are complimentary products that can be integrated
together and used along with other analytical instruments.
Through its TA Instruments Division (“TA”), the
Company designs, manufactures, sells and services thermal
analysis and rheometry instruments which are used in predicting
the suitability of polymers and viscous liquids for various
industrial, consumer goods and health care products. The Company
is also a developer and supplier of software based products that
interface with the Company’s as well as other instrument
manufacturers’ instruments. The Company is also a developer
and supplier of
laboratory-to-enterprise
scale software systems for managing and storing scientific
information collected from a wide variety of testing methods.
The Company’s products are used by pharmaceutical, life
science, biochemical, industrial, academic and government
customers working in research and development, quality assurance
and other laboratory applications. The Company’s LC
instruments are a technology utilized in this broad range of
industries to detect, identify, monitor and measure the
chemical, physical and biological composition of materials as
well as 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”), food safety analyses and environmental
testing. The Company’s thermal analysis and rheometry
instruments are used in predicting the suitability of fine
chemicals and polymers for uses in various industrial, consumer
goods and health care products.
The Company typically experiences a seasonal increase in sales
in its fourth quarter, as a result of purchasing habits for
capital goods by customers who tend to exhaust their spending
budgets by calendar year-end.
Waters is a holding company that owns all of the outstanding
common stock of Waters Technologies Corporation, its operating
subsidiary. Waters became a publicly traded company with its
initial public offering (“IPO”) in November 1995.
Since the IPO, the Company has added two significant and
complementary technologies to its range of products with the
acquisitions of TA Instruments in May 1996 and Micromass Limited
(“Micromass”) in September 1997.
Business Segments
The Company’s business activities, for which discrete
financial information is available, are regularly reviewed and
evaluated by the Chief Executive Officer. As a result of this
evaluation, the Company determined that it has two operating
segments: Waters Division and TA Division. As indicated above,
the Company operates in the analytical instruments industry,
manufacturing, distributing and servicing products in three
complementary technologies: LC instruments, columns and other
consumables, MS, and thermal analysis and rheometry instruments.
The Company’s two operating segments, Waters Division and
TA, 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.
Information concerning revenues and long-lived assets
attributable to each of the Company’s geographic areas is
set forth in Note 20 of Notes to the Consolidated Financial
Statements, which is incorporated herein by reference.
3
WATERS DIVISION
High Performance and Ultra Performance Liquid
Chromatography
Developed in the 1950’s, HPLC is the standard technique
used to identify and analyze the constituent components of a
variety of chemicals and other materials. The Company believes
that HPLC’s performance capabilities enable it to separate
and identify approximately 80% of all known chemicals and
materials. As a result, HPLC is used to analyze substances in a
wide variety of industries for research and development
purposes, quality control and process engineering applications.
The most significant end-use markets for HPLC are those served
by the pharmaceutical and life science industries. In these
markets, HPLC is used extensively to identify new drugs, to
develop manufacturing methods, and to assure the potency and
purity of new pharmaceuticals. HPLC is also used in a variety of
other applications such as analyses of foods and beverages for
nutritional labeling and compliance with safety regulations, the
testing of water and air purity within the environmental testing
industry, as well as applications in other industries, such as
chemical and consumer products. HPLC is also used by
universities, research institutions and government agencies, and
in many instances, the United States Food and Drug
Administration (“FDA”) and the United States
Environmental Protection Agency (“EPA”), and their
international counterparts, mandate testing that requires HPLC
instrumentation.
Traditionally, a typical HPLC system has consisted of five basic
components: solvent delivery system, sample injector, separation
column, detector and data acquisition unit. The solvent delivery
system pumps the solvent through the HPLC system, while the
sample injector introduces the sample into the solvent flow. The
chromatography column then separates the sample into its
components for analysis by the detector, which measures the
presence and amount of the constituents. The data acquisition
unit, usually referred to as the instrument’s software or
data system, then records and stores the information from the
detector.
In March 2004, Waters introduced a novel technology that the
Company described as Ultra-Performance Liquid Chromatography
that utilizes a packing material with small, uniform diameter
particles and a specialized instrument, the ACQUITY
UPLCtm,
to accommodate the increased pressure and narrow chromatographic
bands that are generated by these small particles. By using the
ACQUITY UPLC, researchers and analysts are able to achieve more
comprehensive chemical separations and faster analysis times in
comparison with many analyses performed by HPLC. In addition, in
using ACQUITY UPLC, researchers have the potential to extend the
range of application beyond that of HPLC, enabling the
uncovering of new levels of scientific information. Though it
offers significant performance advantages, ACQUITY UPLC is
compatible with the Company’s software products and the
general operating protocols of HPLC. For these reasons, the
Company’s customers and field sales and support
organizations are well positioned to utilize this new technology
and instrument. The Company began shipping the ACQUITY UPLC in
the third quarter of 2004. During 2005, the Company experienced
growth in the instrument systems product line primarily from the
sales of the ACQUITY UPLC.
The primary consumable products for LC are chromatography
columns. These columns are packed with separation media used in
the LC testing process and are replaced at regular intervals.
The chromatography column contains one of several types of
packing, typically stationary phase particles made from silica.
As the sample flows through the column, it is separated into its
constituent components.
Waters HPLC columns can be used on Waters branded as well as
competitors’ LC systems. The Company believes that it is
one of the few suppliers in the world that processes silica,
packs columns and distributes its own products. In doing so, the
Company believes it can better ensure product consistency, a key
attribute for its customers in quality control laboratories, and
react quickly to new customer requirements. At this time, the
Company believes that its ACQUITY UPLC lines of columns are used
nearly exclusively on its ACQUITY UPLC instrument and
furthermore, that its ACQUITY UPLC instrument will primarily use
ACQUITY UPLC columns.
In 2005, the Company experienced growth in its LC chromatography
column and sample preparation businesses, especially in the
XBridgetm,
SunFiretm
and ACQUITY UPLC columns as well as in
Oasis®
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sample preparation cartridges. During 2004, the Company
experienced growth in these businesses mainly due to
Xterra®
and
Atlantis®
columns, which were newly introduced in 2003.
Based upon reports from independent marketing research firms and
publicly disclosed sales figures from competitors, the Company
believes that it is the world’s largest manufacturer and
distributor of LC instruments, chromatography columns and
other consumables and related services. The Company also
believes that it has the leading LC market share in the United
States, Europe and non-Japan/ Asia and believes it has a leading
market share position in Japan.
Waters manufactures LC instruments that are offered in
configurations that allow for varying degrees of automation,
from component configured systems for academic research
applications to fully automated
Alliance®
2795 systems for high speed screening, and with a variety of
detection technologies, from ultra-violet (“UV”)
absorbance to MS, optimized for certain analyses. The Company
also manufactures tailored LC systems for the analysis of
biologics as well as an LC detector utilizing evaporative light
scattering technology to expand the usage of LC to compounds
that are not amenable to UV absorbance detection.
The servicing and support of LC and MS instruments and
accessories is an important source of revenue for the Waters
Division. These revenues are derived primarily through the sale
of support plans, demand service, customer training and
performance validation services. Support plans most typically
involve scheduled instrument maintenance, a commitment to supply
software and firmware upgrades and an agreement to promptly
repair a non-functioning instrument in return for a fee
described in a multi-year contract that is priced according to
the configuration of the instrument.
In 2004, the Company introduced a new product, the Electronic
Laboratory Notebook, (“eLab
Notebooktm”),
designed to replace and augment the paper-based safekeeping and
archiving of laboratory procedures and results. In combination
with the Company’s Scientific Data Management System
(“SDMS”) product, eLab Notebook functions as a portal
to laboratory scale information storage and retrieval systems as
well as a flexible and personally manageable notation and
display device. The pricing of eLab Notebook is based upon the
number of users or seats that the customer decides to purchase.
The Company began shipping eLab Notebook in the fourth quarter
of 2004. The Company’s existing server based software
products,
Millenium®
and
Empowertm,
are now augmented by the addition of the eLab Notebook’s
internet or “web” based software that enables the
reporting of scientific data sourced from a broader array of
instruments.
Mass Spectrometry
Mass spectrometry is a powerful analytical technique that is
used to identify unknown compounds, to quantify known materials,
and to elucidate the structural and chemical properties of
molecules by measuring the masses of individual molecules that
have been converted into ions.
The Company believes it is a market leader in the development,
manufacture, sale and distribution of MS instruments. These
instruments can be integrated and used along with other
complementary analytical instruments and systems such as LC,
chemical electrophoresis, chemical electrophoresis
chromatography and gas chromatography. A wide variety of
instrumental designs fall within the overall category of
MS instrumentation including devices that incorporate
quadrupole, ion trap, time of flight (“Tof”) and
classical magnetic sector technologies. Furthermore, these
technologies are often used in tandem to maximize the efficacy
of certain experiments.
Currently, the Company offers and provides service, support and
training for a wide range of MS instruments utilizing
various combinations of quadrupole, Tof and magnetic sector
designs. These instruments are used in drug discovery and
development as well as for environmental testing. The majority
of mass spectrometers sold by the Company are designed to
utilize an LC system as the sample introduction device. These
products supply a diverse market with a strong emphasis on the
life science, pharmaceutical, biomedical, clinical and
environmental market segments worldwide. Service sales, included
in Waters Division total service sales, are primarily related to
the sale of parts and labor associated with instrument repair
and routine maintenance.
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The mass spectrometer is an increasingly important detection
device for LC. The Company’s smaller sized mass
spectrometers (such as the single quadrupole
ZQtm
and Waters EMD) are often referred to as
LC “detectors” and are either sold as part of an
LC system or as an LC upgrade. Tandem quadrupole systems, such
as the Waters Quattro
microtm
and Quattro
Premiertm
XE instruments, are used primarily for experiments performed for
late stage drug development, including clinical trial testing,
and Q-Tof Instruments such as the Company’s Q-Tof
microtm
and Q-Tof
Premiertm
instruments, are often used to analyze the role of proteins in
disease processes, an application sometimes referred to as
“proteomics”. In 2005, the Company introduced a new
enhanced tandem quadrupole instrument, the Quattro Premier XE.
The introduction of the Quattro Premier XE helped to grow the
overall MS business in 2005. The LCT
Premiertm
is an LC, electrospray-Tof instrument designed to deliver a
higher level of mass accuracy and the ability for more precise
quantitative analysis. In 2004, the Company introduced a new
Q-Tof configuration mass spectrometry system, the Q-Tof Premier
to replace its Q-Tof Ultima line of systems and offer a higher
level of instrument performance to its customers. The Q-Tof
Premier is a tandem mass spectrometry system developed to
provide increased levels of sensitivity and specificity to
customers involved in challenging analyses such as those often
encountered in proteomics and metabolite profiling experiments.
The Company began shipping the Q-Tof Premier in the fourth
quarter of 2004. The Q-Tof Premier is compatible and often
purchased with a specialized ACQUITY UPLC as an inlet, a device
to efficiently introduce a separated sample into the mass
spectrometer.
LC-MS
LC and MS are instrumental technologies often embodied within an
analytical system tailored for either a dedicated class of
analyses or as a general purpose analytical device. An
increasing percentage of the Company’s customers are
purchasing LC and MS components simultaneously and it is
becoming common for LC and MS instrumentation to be used within
the same laboratory and be operated by the same user. The
descriptions of LC and MS above reflect the historical
segmentation of these analytical technologies and the historical
categorization of their respective practitioners. Increasingly
in today’s instrument market, this segmentation and
categorization is becoming obsolete as a high percentage of
instruments used in the laboratory embody both LC and MS
technologies as part of a single device. In response to this
development and to further promote the high utilization of these
hybrid instruments, the Company has organized its Waters
Division to develop, manufacture, sell, service and support
integrated LC-MS systems.
TA DIVISION
Thermal Analysis
Thermal analysis measures the physical characteristics of
materials as a function of temperature. Changes in temperature
affect several characteristics of materials such as their
physical state, weight, dimension and mechanical and electrical
properties, which may be measured by one or more thermal
analysis techniques. Consequently, thermal analysis techniques
are widely used in the development, production and
characterization of materials in various industries such as
plastics, chemicals, automobiles, pharmaceuticals and
electronics.
Rheometry instruments complement thermal analyzers in
characterizing materials. Rheometry characterizes the flow
properties of materials and measures their viscosity, elasticity
and deformation under different types of “loading” or
conditions. The information obtained under such conditions
provides insight to a material’s behavior during
manufacturing, transport, usage and storage.
Thermal analysis and rheometry instruments are heavily used in
material testing laboratories and in many cases provide
information useful in predicting the suitability of polymers and
viscous liquids for various industrial, consumer goods and
health care products. As with systems offered through the Waters
Division, a range of instrumental configurations are available
with increasing levels of sample handling and information
processing automation. In addition, systems and accompanying
software packages can be tailored for specific applications. For
example, the Q-Series family of differential scanning
calorimeters includes a range of instruments from basic
dedicated analyzers to more expensive systems that can
accommodate robotic sample
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handlers and a variety of sample cells and temperature control
features for analyzing a broad range of materials. In 2005, TA
introduced a new thermogravimetric analyzer (“TGA”),
the Q5000IR TGA and a new
AR-G2 rheometer. The
introduction of these new products significantly helped grow the
TA business in 2005. In the first quarter of 2003, TA expanded
its rheometry product line through the acquisition of
Rheometrics Scientific, Inc. (“Rheometrics”). During
2003, the Rheometrics product line was successfully integrated
within the TA Instruments Division.
The Company sells, supports and services these product offerings
through TA, headquartered in New Castle, Delaware. The TA
division operates independently from the Waters Division though
several of its overseas offices are situated in Waters
facilities. TA has dedicated field sales and service operations.
Service sales primarily derived from the sale of replacement
parts and from billed labor fees associated with the repair,
maintenance and upgrade of installed systems.
Customers
The Company has a broad and diversified customer base that
includes pharmaceutical accounts, other industrial accounts,
universities and government agencies. The pharmaceutical segment
represents the Company’s largest sector and includes
multinational pharmaceutical companies, generic drug
manufacturers and biotechnology companies. The Company’s
other industrial customers include chemical manufacturers,
polymer manufacturers, food and beverage companies and
environmental testing laboratories. The Company also sells to
various universities and government agencies worldwide. The
Company’s technical support staff works closely with its
customers in developing and implementing applications that meet
their full range of analytical requirements.
The Company does not rely on any single customer or one group of
customers for a material portion of its sales. During fiscal
years 2005 and 2004, no single customer accounted for more than
3% of the Company’s net sales.
Sales and Service
The Company has one of the largest sales and service
organizations in the industry focused exclusively on its LC, MS
and thermal analysis installed base. Across these product
technologies, using respective specialized sales and service
forces, the Company serves its customer base with approximately
2,400 field representatives in 87 sales offices throughout the
world as of December 31, 2005 compared to approximately
2,100 field representatives in 89 sales offices as of
December 31, 2004. The Company’s sales representatives
have direct responsibility for account relationships, while
service representatives work in the field to install instruments
and minimize instrument downtime for customers. Technical
support representatives work directly with customers, helping
them to develop applications and procedures. The Company
provides customers with comprehensive product literature and
also makes consumable products available through a dedicated
catalog.
Manufacturing
The Company provides high quality LC products by controlling
each stage of production of its instruments, columns and
chemical reagents. The Company currently assembles a substantial
portion of its LC instruments at its facility in Milford,
Massachusetts, where it performs machining, assembly and
testing. The Milford facility employs manufacturing techniques
that are expected to meet the strict ISO 9002 quality
manufacturing standards and FDA mandated Good Manufacturing
Practices. The Company outsources manufacturing of certain
electronic components such as computers, monitors and circuit
boards to outside vendors that can meet the Company’s
quality requirements. In 2006, the Company will begin
outsourcing some of the manufacturing of the Alliance HPLC
instrument system to a company in Singapore. The Company expects
to continue to increase the number of units outsourced as
quality requirements are achieved.
The Company manufactures its LC columns at its facilities in
Taunton, Massachusetts and Wexford, Ireland, where it processes,
sizes and treats silica and polymeric media that are packed into
columns, solid phase extraction cartridges and bulk shipping
containers. The Wexford facility also manufactures and
distributes certain data, instruments and software components
for the Company’s LC, MS and thermal
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analysis product lines. These facilities meet the same ISO and
FDA standards met by the Milford, Massachusetts facility and are
approved by the FDA.
The Company manufactures most of its MS products at its
facilities in Manchester, England, Cheshire, England and
Wexford, Ireland. Certain components or modules of the
Company’s MS instruments are manufactured by long-standing
outside contractors. Each stage of this supply chain is closely
monitored by the Company to maintain its high quality and
performance standards. The instruments, components or modules
are then returned to the Company’s facilities where its
engineers perform final assembly, calibrations to customer
specifications and quality control procedures. The
Company’s MS facilities meet similar ISO and FDA
standards met by the Milford, Massachusetts facility and are
approved by the FDA.
Thermal analysis products are manufactured at the Company’s
New Castle, Delaware facility and rheometry products are
manufactured at the Company’s New Castle, Delaware and
Crawley, England facilities. Similar to MS, certain elements of
TA’s products are manufactured by outside contractors and
are then returned to the Company’s facilities for final
assembly, calibration and quality control. The Company’s
thermal analysis facilities meet similar ISO standards met by
the Milford, Massachusetts facility.
Research and Development
The Company maintains an active research and development program
focused on the development and commercialization of products
that both complement and update the existing product offering.
The Company’s research and development expenditures for
2005, 2004 and 2003 were $66.9 million, $65.2 million
and $59.2 million, respectively. Nearly all of the current
LC products of the Company have been developed at the
Company’s main research and development center located in
Milford, Massachusetts, with input and feedback from the
Company’s extensive field organizations. The majority of
the MS products have been developed at facilities in England and
nearly all of the current thermal analysis products have been
developed at the Company’s research and development center
in New Castle, Delaware. At December 31, 2005, there were
approximately 555 employees involved in the Company’s
research and development efforts, compared to 525 employees in
2004. The Company has increased research and development
expenses relating to acquisitions and the Company’s
continued commitment to invest significantly in new product
development and existing product enhancements. Despite the
Company’s active research and development programs, there
can be no assurances that the Company’s product development
and commercialization efforts will be successful or that the
products developed by the Company will be accepted by the
marketplace.
Employees
The Company employed approximately 4,500 employees, with 47%
located in the United States, and approximately 4,300 employees,
with 48% located in the United States at December 31, 2005
and 2004, respectively. The increase of 5% over 2004 is
primarily due to increases in service personnel in support of
the Company’s growing installed base of instrument systems.
The Company considers its employee relations, in general, to be
good. The Company’s employees are not unionized or
affiliated with any internal or external labor organizations.
The Company believes that its future success depends, in a large
part, upon its continued ability to attract and retain highly
skilled employees. In February 2006, the Company implemented a
cost reduction and expense reallocation plan, primarily in the
U.S. and Europe, resulting in the employment of approximately 70
employees being terminated with effective dates through the
third quarter of 2006. During 2004, the Company had similarly
announced and commenced a small restructuring effort to realign
its personnel between various support functions and field sales
and service organizations around the world. The employment of
approximately 70 people was terminated as a result of this
restructuring, all of whom had left the Company as of
December 31, 2004.
Competition
The analytical instrument and systems market is highly
competitive. The Company encounters competition from several
worldwide instrument manufacturers in both domestic and foreign
markets for each of its three technologies. The Company competes
in its markets primarily on the basis of instrument performance,
8
reliability and service and, to a lesser extent, price. Some
competitors have instrument businesses that are more diversified
than the Company’s business, but are typically less focused
on the Company’s chosen markets. Some competitors have
greater financial and other resources than the Company.
In the markets served by LC, MS and LC-MS, the Company’s
principal competitors include: Applied BioSystems, Inc., Agilent
Technologies, Inc., Thermo Electron Corporation, Varian, Inc.,
Shimadzu Corporation and Bruker BioSciences Corporation. In the
markets served by TA, the Company’s principal competitors
include: PerkinElmer Inc., Mettler-Toledo International Inc.,
Shimadzu Corporation, Thermo Electron Corporation, Malvern
Instruments Ltd. and Anton-Paar. The Company is not currently
aware of a competitor that it believes offers an instrument
system comparable to its ACQUITY UPLC.
The market for consumable HPLC products, including separation
columns, is also highly competitive but is more fragmented than
the analytical instruments market. The Company encounters
competition in the consumable columns market from chemical
companies that produce column chemicals and small, specialized
companies that pack and distribute columns. The Company believes
that it is one of the few suppliers that process silica, packs
columns, and distributes its own product. The Company competes
in this market on the basis of reproducibility, reputation and
performance, and, to a lesser extent, price. The Company’s
principal competitors for consumable products include
Phenomenex, Supelco Inc., Agilent Technologies, Inc., Alltech
International Holdings, Inc. and Merck and Co., Inc. The ACQUITY
UPLC instrument is designed to offer a predictable level of
performance when used with ACQUITY UPLC columns to effect the
chemical separation. UPLC columns are both fluidically and
electronically connected to the ACQUITY UPLC instrument to allow
users to simultaneously employ and track the performance status
of the UPLC column. The Company believes that the expansion of
ACQUITY UPLC technology will enhance its chromatographic column
business because of the high level of synergy between ACQUITY
UPLC columns and the ACQUITY UPLC instrument.
Patents, Trademarks and Licenses
The Company owns a number of United States and foreign patents
and has patent applications pending in the United States and
abroad. Certain technology and software is licensed from third
parties. The Company also owns a number of trademarks. The
Company’s patents, trademarks and licenses are viewed as
valuable assets to its operations. However, the Company believes
that no one patent or group of patents, or trademark or license
is, in and of itself, essential to the Company such that its
loss would materially affect the Company’s business as a
whole.
Environmental Matters
The Company is subject to federal, state and local laws,
regulations and ordinances that (i) govern activities or
operations that may have adverse environmental effects, such as
discharges to air and water, as well as handling and disposal
practices for solid and hazardous wastes, and (ii) impose
liability for the costs of cleaning up, and certain damages
resulting from sites of past spills, disposals or other releases
of hazardous substances. The Company believes that it currently
conducts its operations, and in the past has operated its
business, in substantial compliance with applicable
environmental laws. From time to time, operations of the Company
have resulted or may result in noncompliance with or liability
for cleanup pursuant to environmental laws. In July 2003, the
Company entered into a settlement agreement (the
“Environmental Settlement Agreement”) with the
Commonwealth of Massachusetts, acting by and through the
Attorney General and the Department of Environmental
Protection (“DEP”), with respect to alleged
non-compliance with state environmental laws at its Taunton,
Massachusetts facility. Pursuant to the terms of a final
judgment entered in the Superior Court of the Commonwealth on
July 10, 2003, the Company paid a civil penalty of
$5.9 million. In addition, the Company agreed to conduct a
Supplemental Environmental Project in the amount of
$0.6 million, comprised of investments in capital
infrastructure, to study the effects of bio-filtration on
certain air emissions from the Taunton facility and for the
purchase of equipment in connection therewith. Pursuant to the
terms of the Environmental Settlement Agreement, the Company
also agreed to undertake a variety of actions to ensure that air
emissions from the facility do not exceed certain limits and
that the facility is brought into full compliance with all
applicable environmental regulations. As of December 31,
2005, the
9
Company had fulfilled its obligations with respect to the
Supplemental Environment Project. The Company does not currently
anticipate any material adverse effect on its operations,
financial condition or competitive position as a result of its
efforts to comply with environmental laws.
Available Information
The Company files all required reports with the Securities and
Exchange Commission (“SEC”). The public may read and
copy any materials the Company files with the SEC at the
SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The Company is an electronic filer and the SEC maintains an
Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file
electronically with the SEC. The address of the SEC electronic
filing web-site is http://www.sec.gov. The Company also
makes available free of charge on its web-site its annual report
on Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K, and
amendments to those reports as soon as reasonably practicable
after such material is electronically filed with or furnished to
the SEC. The Internet address for Waters Corporation is
http://www.waters.com and SEC filings can be found under
the caption About Waters > Investor Information.
Forward-Looking Statements
Certain of the statements in this
Form 10-K and the
documents incorporated in this form are forward-looking
statements, including statements regarding, among other items,
(i) the impact of the Company’s new products,
(ii) the Company’s growth strategies, including its
intention to make acquisitions and introduce new products,
(iii) anticipated trends in the Company’s business and
(iv) the Company’s ability to continue to control
costs and maintain quality. You can identify these
forward-looking statements by the use of the words
“believes”, “anticipates”,
“plans”, “expects”, “may”,
“will”, “would”, “intends”,
“estimates” and similar expressions, whether in the
negative or affirmative. These statements are subject to various
risks and uncertainties, many of which are outside the control
of the Company, including and without limitation, fluctuations
in capital expenditures by our customers, in particular large
pharmaceutical companies, regulatory and/or administrative
obstacles to the timely completion of purchase order
documentation, introduction of competing products, such as
improved research-grade mass spectrometers, higher speed and/or
more sensitive liquid chromatographs, by other companies,
pressures on prices from competitors and/or customers,
regulatory obstacles to new product introductions, lack of
acceptance of new products, other changes in the demands of the
Company’s healthcare and pharmaceutical company customers,
changes in distribution of the Company’s products, changes
in the healthcare market and the pharmaceutical industry, loss
of market share through competition, potential product liability
or other claims against the Company as a result of the use of
its products, risk associated with lawsuits and other legal
actions particularly involving claims for infringement of
patents and other intellectual property rights, the short-term
impact on 2006 operating results from cost savings initiatives
the Company has implemented in February 2006, the effect in 2006
of implementing the new Statement of Financial Accounting
Standard 123(R), Share-Based Payments adversely impacting the
Company’s fiscal year 2006 operating results and foreign
exchange rate fluctuations potentially adversely affecting
translation of the Company’s future
non-U.S. operating
results as well as additional risk factors set forth below.
Actual results or events could differ materially from the plans,
intentions and expectations disclosed in the forward-looking
statements, whether because of these factors or for other
reasons. The Company does not assume any obligation to update
any forward-looking statements.
Item 1A: Risk
Factors
Competition and the Analytical Instrument Market:
The analytical instrument market and, in particular, the portion
related to the Company’s HPLC, UPLC, MS, LC-MS, thermal
analysis and rheometry product lines, is highly competitive, and
the Company encounters competition from several international
instrument manufacturers and other companies in both domestic
and foreign markets. Some competitors have instrument businesses
that are more diversified than the Company’s
10
business, but are typically less focused on the Company’s
chosen markets. There can be no assurances that the
Company’s competitors will not introduce more effective and
less costly products than those of the Company, or that the
Company will be able to increase its sales and profitability
from new product introductions. There can be no assurances that
the Company’s sales and marketing forces will compete
successfully against its competitors in the future.
Additionally, the analytical instrument market may, from time to
time, experience low sales growth. Approximately 51% and 53% of
the Company’s net sales in 2005 and 2004, respectively,
were to the worldwide pharmaceutical and biotechnology
industries, which may be periodically subject to unfavorable
market conditions and consolidations. Unfavorable industry
conditions could have a material adverse effect on the
Company’s results of operations.
Risk of Disruption:
The Company manufactures LC instruments at its facility in
Milford, Massachusetts, separation columns at its facilities in
Taunton, Massachusetts and Wexford, Ireland, MS products at its
facilities in Manchester, England, Cheshire, England and
Wexford, Ireland, thermal analysis products at its facility in
New Castle, Delaware and rheometry products at its facilities in
New Castle, Delaware and Crawley, England. Any prolonged
disruption to the operations at any of these facilities, whether
due to labor difficulties, destruction of or damage to either
facility or other reasons, could have a material adverse effect
on the Company’s results of operations and financial
condition.
Foreign Operations and Exchange Rates:
Approximately 65% of the Company’s 2005 net sales were
outside of the United States and were primarily denominated in
foreign currencies. As a result, a significant portion of the
Company’s sales and operations are subject to certain
risks, including adverse developments in the foreign political
and economic environment, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations and
potentially adverse tax consequences.
Additionally, the U.S. dollar value of the Company’s
net sales varies with currency exchange rate fluctuations.
Significant increases in the value of the U.S. dollar
relative to certain foreign currencies could have a material
adverse effect on the Company’s results of operations.
Reliance on Key Management:
The operation of the Company requires managerial and operational
expertise. None of the key management employees has an
employment contract with the Company, and there can be no
assurance that such individuals will remain with the Company.
If, for any reason, such key personnel do not continue to be
active in management, the Company’s operations could be
adversely affected.
Protection of Intellectual Property:
The Company vigorously protects its intellectual property rights
and seeks patent coverage on all developments that it regards as
material and patentable. However, there can be no assurances
that any patents held by the Company will not be challenged,
invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company.
Conversely, there could be successful claims against the Company
where its intellectual property does not cover competitor
products or is invalidated. The Company’s patents,
including those licensed from others, expire on various dates.
If the Company is unable to protect its intellectual property
rights, it could have an adverse and material effect on the
Company’s results of operations and financial conditions.
Reliance on Customer Demand:
The demand for the Company’s products is dependent upon the
size of the markets for its LC, MS, thermal analysis and
rheometry products, the level of capital expenditures of the
Company’s customers, the rate of economic growth in the
Company’s major markets and competitive considerations.
There can be no assurances that the Company’s results of
operations will not be adversely impacted by a change in any of
the factors listed above.
11
Reliance on Suppliers:
Most of the raw materials, components and supplies purchased by
the Company are available from a number of different suppliers;
however, a number of items are purchased from limited or single
sources of supply, and disruption of these sources could have a
temporary adverse effect on shipments and the financial results
of the Company. The Company believes alternative sources could
ordinarily be obtained to supply these materials, but a
prolonged inability to obtain certain materials or components
could have an adverse effect on the Company’s financial
condition or results of operations and could result in damage to
its relationships with its customers and, accordingly, adversely
affect the Company’s business.
Reliance on Outside Manufacturers:
Certain components or modules of the Company’s MS
instruments are manufactured by long-standing outside
contractors. Additionally, in 2006, the Company will begin
outsourcing some of the manufacturing of the Alliance HPLC
instrument system to an outside manufacturer. Disruptions of
service by these outside contractors could have an adverse
effect on the supply chain and the financial results of the
Company. The Company believes that it could obtain alternative
sources for these components or modules, but a prolonged
inability to obtain these components or modules could have an
adverse effect on the Company’s financial condition or
results of operations.
Item 1B: Unresolved
Staff Comments
None.
Waters operates 18 United States facilities and 75 international
facilities, including field offices. The Company believes its
facilities are suitable and adequate for its current production
level and for reasonable growth over the next several years. The
Company’s primary facilities are summarized in the table
below.
|
|
|
Primary Facility Locations |
| |
|
|
|
|
| Location |
|
Function (1) |
|
Owned/Leased |
| |
|
|
|
|
|
Franklin, MA
|
|
D |
|
Leased |
|
Milford, MA
|
|
M, R, S, A |
|
Owned |
|
Taunton, MA
|
|
M |
|
Owned |
|
Etten-Leur, Netherlands
|
|
S, D, A |
|
Leased |
|
St. Quentin, France
|
|
S, A |
|
Leased |
|
Singapore
|
|
S, A |
|
Leased |
|
Tokyo, Japan
|
|
S, A |
|
Leased |
|
Wexford, Ireland
|
|
M |
|
Owned/Leased |
|
New Castle, DE
|
|
M, R, S, D, A |
|
Leased |
|
Crawley, England
|
|
M, R, S, D, A |
|
Leased |
|
Cheshire, England
|
|
M, R, D, A |
|
Leased |
|
Manchester, England
|
|
M, R, S, A |
|
Leased |
|
Romania
|
|
R, A |
|
Leased |
|
|
| (1) |
M = Manufacturing; R = Research; S = Sales and service; D =
Distribution; A = Administration |
12
The Company operates and maintains 12 field offices in the
United States and 64 field offices abroad in addition to sales
offices in the primary facilities listed above. The
Company’s field office locations are listed below.
|
|
|
Field Office Locations (2) |
| |
|
|
|
|
|
|
| United States |
|
International |
| |
|
|
|
Dublin, CA
|
|
Australia |
|
India |
|
Switzerland |
|
Irvine, CA
|
|
Austria |
|
Ireland |
|
Taiwan |
|
Schaumburg, IL
|
|
Belgium |
|
Italy |
|
United Kingdom |
|
Wood Dale, IL
|
|
Brazil |
|
Japan |
|
|
|
Beverly, MA
|
|
Canada |
|
Korea |
|
|
|
Columbia, MD
|
|
Czech Republic |
|
Mexico |
|
|
|
Ann Arbor, MI
|
|
Denmark |
|
Netherlands |
|
|
|
Cary, NC
|
|
Finland |
|
People’s Republic of China |
|
|
|
Parsippany, NJ
|
|
France |
|
Poland |
|
|
|
Huntingdon, PA
|
|
Germany |
|
Puerto Rico |
|
|
|
Bellaire, TX
|
|
Hong Kong |
|
Spain |
|
|
|
Spring, TX
|
|
Hungary |
|
Sweden |
|
|
|
|
| (2) |
The Company operates more than one office within certain states
and foreign countries. |
|
|
| Item 3: |
Legal Proceedings |
Hewlett-Packard Company:
The Company filed suit in the United States against
Hewlett-Packard Company and Hewlett-Packard GmbH (collectively,
“HP”), seeking a declaration that certain products
sold under the mark “Alliance” do not constitute an
infringement of one or more patents owned by HP or its foreign
subsidiaries (the “HP patents”). The action in the
United States was dismissed for lack of controversy. Actions
seeking revocation or nullification of foreign HP patents were
filed by the Company in Germany, France and England. A German
patent tribunal found the HP German patent to be valid. In
Germany, France and England, HP and its successor, Agilent
Technologies Deutschland GmbH (“Agilent”), have
brought an action alleging that certain features of the Alliance
pump may infringe the HP patents. In England, the Court of
Appeal found the HP patent valid and infringed. The
Company’s petitions for leave to appeal to the House of
Lords were denied. A trial on damages was scheduled for November
2004. In March 2004, Agilent Technologies GmbH brought a new
action against the Company alleging that certain features of the
Alliance pump continue to infringe the HP patents. At a hearing
held in the UK in June, 2004, the UK court postponed the
previously scheduled November 2004 damages trial until March
2005. Instead, the court scheduled the trial in the new action
for November 2004. In December 2004, following a trial in the
new action, the UK court ruled that the Company did not infringe
the HP patents. Agilent filed an appeal in that action, which
was heard in July 2005, and the UK Appellate Court upheld the
lower court’s ruling of non-infringement. The damages trial
scheduled for March 2005 was postponed pending this appeal and
rescheduled for December, 2005. In December, 2005, a trial on
damages commenced in the first action and continued for six days
prior to a holiday recess. In February, 2006, the Company, HP
and Agilent entered into a settlement agreement (the
“Agilent Settlement Agreement”) with respect to the
first action and a Consent Order dismissing the case was
entered. The Agilent Settlement Agreement provides for the
release of the Company and its UK affiliate from each and every
claim under Agilent’s European patent
(UK) number 309,596 arising out of the prior sale by
either of them of Alliance Separations Modules incorporating the
patented technology. In consideration of entering into the
Agilent Settlement Agreement and the Consent Order, the Company
made a payment to Agilent of 3.5 million British Pounds, in
full and final settlement of Agilent’s claim for damages
and in relation to all claims for costs and interest in the
case. In France, the Paris District Court has found the HP
patent valid and infringed by the Alliance pump. The Company
appealed the French decision and in April, 2004, the French
13
appeals court affirmed the Paris District Court’s finding
of infringement. The Company has filed a further appeal in the
case. In the German case, a German court has found the patent
infringed. The Company appealed the German decision, and in
December 2004, the German appeals court reversed the trial court
and issued a finding of non-infringement in favor of the
Company. Agilent is seeking an appeal in that action and in July
2005 brought a new action against the Company alleging that
certain features of the Alliance pump continue to infringe the
HP patents. This case is currently pending. The Company recorded
provisions in the quarters ended June 30, 2002,
April 3, 2004, and December 31, 2005 for estimated
damages, legal fees, and court costs incurred with respect to
this ongoing litigation. The provision represents
management’s best estimate of the probable and reasonably
estimable loss related to the litigation.
Other:
Cohesive Technologies, Inc. (“Cohesive”) has brought
three suits against the Company in the U.S. District Court
of Massachusetts. Cohesive alleges that several products of the
Company, which are part of a much larger product line, are an
infringement of two Cohesive U.S. Patents. The Company has
denied infringement of such patents and has asserted several
defenses. Two of the products alleged to be an infringement are
now obsolete and are no longer sold in the United States. During
the fourth quarter of 2001, a jury returned a verdict in one of
the suits finding the Company liable for infringement of one of
the two patents. The Company intends to continue to vigorously
defend its position. Judgment has not been entered on the
jury’s verdict and further proceedings may preclude such
entry. The Company believes it has meritorious positions and
should prevail either through judgment or on appeal, although
the outcome is not certain. The Company believes that any
outcome of the proceedings will not be material to the Company.
Viscotek Corporation (“Viscotek”) filed a civil action
against the Company in the Federal District Court for the
Southern District of Texas, Houston Division, alleging that one
option offered by the Company with a high temperature gel
permeation chromatography instrument is an infringement of two
of its patents. These patents are owned by E.I. DuPont de
Nemours and Company (“DuPont”) and claimed to be
exclusively licensed to Viscotek. DuPont is not a party to the
suit. On January 16, 2004, a jury returned a verdict
finding that the Company had not infringed Viscotek’s
patents. Judgment has been entered on the jury’s verdict in
favor of the Company. Viscotek appealed the judgment. In
November, 2005, the United States Court of Appeals for the
Federal Circuit affirmed the judgment of the trial court and the
finding of non-infringement.
|
|
| Item 4: |
Submission of Matters to a Vote of Security Holders |
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers of the Company are elected annually by the Board of
Directors and hold office at the discretion of the Board of
Directors. The following persons serve as executive officers of
the Company:
Douglas A. Berthiaume, 57, has served as Chairman of the Board
of Directors of the Company since February 1996 and has served
as Chief Executive Officer and a Director of the Company since
August 1994. Mr. Berthiaume also served as President of the
Company from August 1994 to January 2002. In March 2003,
Mr. Berthiaume once again became President of the Company.
From 1990 to 1994, Mr. Berthiaume served as President of
the Waters Chromatography Division of Millipore.
Mr. Berthiaume is the Chairman of the Children’s
Hospital Trust Board, and a Director of the Children’s
Hospital Medical Center, Genzyme Corporation, and University of
Massachusetts Amherst Foundation.
Arthur G. Caputo, 54, became an Executive Vice President in
March 2003 and has served as President of the Waters Division
since January 2002. Previously, he was the Senior Vice
President, Worldwide Sales and Marketing of the Company since
August 1994. He joined Millipore in October 1977 and held a
number of positions in sales. Previous roles include Senior Vice
President and General Manager of Millipore’s
North American Business Operations responsible for
establishing the Millipore North American Sales Subsidiary and
General Manager of Waters’ North American field sales,
support and marketing functions.
14
Elizabeth B. Rae, 48, became Vice President of Human Resources
in October, 2005 and has served as Vice President of Worldwide
Compensation and Benefits since January 2002. She joined Waters
Corporation in January 1996 as Director of Worldwide
Compensation. Prior to joining Waters she has held senior human
resources positions in retail, healthcare and financial services
companies.
John Ornell, 48, became Vice President, Finance and
Administration and Chief Financial Officer in June 2001. He
joined Millipore in 1990 and previously served as Vice
President, Operations. During his years at Waters, he has also
been Vice President of Manufacturing and Engineering, had
responsibility for Operations Finance and Distribution and had a
senior role in the successful implementation of the
Company’s worldwide business systems.
Mark T. Beaudouin, 51, became Vice President, General Counsel
and Secretary of the Company in April, 2003. Prior to joining
Waters, he served as Senior Vice President, General Counsel and
Secretary of PAREXEL International Corporation, a
bio/pharmaceutical services company from January 2000 to
April 2003. Previously, from May 1985 to January 2000,
Mr. Beaudouin served in several senior legal management
positions including Vice President, General Counsel and
Secretary of BC International, Inc., a development stage
biotechnology company, First Senior Vice President, General
Counsel and Secretary of J. Baker, Inc., a diversified
retail company, and General Counsel and Secretary of GenRad,
Inc., a high technology test equipment manufacturer.
PART II
|
|
| Item 5: |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Equity compensation plan information is incorporated by
reference from Part III, Item 12, Security Ownership
of Certain Beneficial Owners and Management, of this document,
and should be considered an integral part of this Item 5.
The Company’s Common Stock is registered under the
Securities Exchange Act of 1934, as amended the (“Exchange
Act”), and is listed on the New York Stock Exchange under
the symbol WAT. As of February 28, 2006, the Company had
approximately 273 common stockholders of record. The Company has
not declared or paid any dividends on its Common Stock in its
past three fiscal years and does not plan to pay dividends in
the foreseeable future.
The Company has not made any sales of unregistered securities in
the years ended December 31, 2005, 2004 or 2003.
The quarterly range of high and low sales prices for the Common
Stock as reported by the New York Stock Exchange is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Price Range | |
| |
|
| |
| For the Quarter Ended |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
April 3, 2004
|
|
$ |
41.50 |
|
|
$ |
33.10 |
|
|
July 3, 2004
|
|
|
48.34 |
|
|
|
39.16 |
|
|
October 2, 2004
|
|
|
49.80 |
|
|
|
37.75 |
|
|
December 31, 2004
|
|
|
48.10 |
|
|
|
38.66 |
|
|
April 2, 2005
|
|
|
51.57 |
|
|
|
35.51 |
|
|
July 2, 2005
|
|
|
40.85 |
|
|
|
33.99 |
|
|
October 1, 2005
|
|
|
46.43 |
|
|
|
37.42 |
|
|
December 31, 2005
|
|
|
43.79 |
|
|
|
35.11 |
|
15
The following table provides information about purchases by the
Company during the three months ended December 31, 2005 of
equity securities registered by the Company pursuant to the
Exchange Act (in thousands, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(c) Total Number | |
|
|
| |
|
|
|
|
|
of Shares | |
|
(d) Maximum | |
| |
|
(a) Total | |
|
|
|
Purchased as Part | |
|
Dollar Value of | |
| |
|
Number of | |
|
(b) Average | |
|
of Publicly | |
|
Shares that May Yet | |
| |
|
Shares | |
|
Price Paid | |
|
Announced | |
|
Be Purchased Under | |
| Period |
|
Purchased (1) | |
|
per Share | |
|
Programs (2) | |
|
the Programs (3) | |
| |
|
| |
|
| |
|
| |
|
| |
|
October 2 to 29, 2005
|
|
|
400 |
|
|
$ |
35.62 |
|
|
|
400 |
|
|
$ |
485,753 |
|
|
October 30 to November 26, 2005
|
|
|
2,680 |
|
|
|
39.09 |
|
|
|
2,680 |
|
|
|
381,020 |
|
|
November 27 to December 31, 2005
|
|
|
2,478 |
|
|
|
39.19 |
|
|
|
2,478 |
|
|
|
283,912 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,558 |
|
|
|
38.88 |
|
|
|
5,558 |
|
|
|
283,912 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The Company purchased an aggregate of 5,558 shares of its
common stock in open market transactions pursuant to a
repurchase program (the “Program”) that was announced
on October 25, 2005. |
| |
| (2) |
The Company’s Board of Directors approved the repurchase by
the Company of up to $500.0 million of its outstanding
common stock pursuant to the Program. The expiration date of the
Program is October 25, 2007. |
| |
| (3) |
The approximate dollar value of shares that may yet be purchased
under the Program was $283.9 million at December 31,
2005. |
|
|
| Item 6: |
Selected Financial Data |
Reference is made to information contained in the section
entitled “Selected Financial Data” on page 80 of
this Form 10-K,
included in Item 8, Financial Statements and Supplementary
Data.
|
|
| Item 7: |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Beginning in 2005, the Waters Division has included single
quadrupole instruments within its reported mass spectrometry
(“MS”) instrument system revenues. These had
previously been categorized as high performance liquid
chromatography (“HPLC”) instrument systems. In
addition, service sales for HPLC and ultra performance liquid
chromatography (“UPLC” and together with HPLC,
“LC”) and MS have been consolidated into a single
service sales classification. These changes were made to reflect
current business reporting processes subsequent to the
consolidation of the Waters Division’s LC and MS
organizations. All product line and service sales, as well as
sales growth percentages reported for the periods herein for
Waters Division, reflect the new classifications as described
above.
Business and Financial Overview:
The Company’s sales grew 5% in 2005 over 2004 and 15% in
2004 over 2003. Sales, in constant currency, grew 5% in 2005 and
11% in 2004. In 2005, the Company’s business was impacted
by a weakness in demand from the Company’s large
pharmaceutical customers while sales to all other customers
increased 7% in 2005 over 2004. This increase in sales was
driven primarily by the Company’s food and environmental
testing, government and university and fine chemical customers.
Demand for the Company’s products from
U.S. pharmaceutical customers was constrained due to new
drug pipeline issues and the effects of merger and litigation
issues affecting those customers in 2005 which led to a
reduction in capital spending in comparison to the 2004 levels.
Despite this weakness in the U.S., sales to
non-U.S. based
pharmaceutical customers increased 8% in 2005. This sales growth
was driven primarily by the Company’s new products, the
ACQUITY
UPLCtm,
the Q-Tof
Premiertm
and Quattro
Premiertm
XE systems.
Geographically, sales growth in 2005, before the effects of
currency translation, was strongest in Japan (10%) and Asia
(12%), particularly India and China, while sales in the
U.S. (2%) and Europe (4%) grew more modestly. In order to
capitalize on the strong sales growth anticipated in Asia and
Japan in 2006,
16
the Company expects to accelerate its investment in these
operations and fund this investment, in part, by managing
expense growth in other geographies. These realignment efforts
will result in one-time expenses in 2006.
From a product line perspective and excluding the impact of
currency translation, Waters Division LC sales grew
approximately 6% in 2005 and benefited from the shipment of
ACQUITY UPLC systems, growth in service sales of 9% and growth
in LC chemical product sales of 9%. In MS, sales grew
approximately 2% in 2005, as full-year growth in the shipments
of the new Q-Tof Premier and Quattro Premier systems was offset
by softer sales of single quadrupole and magnetic sector
devices. The Thermal Analysis Division (“TA”) sales
grew approximately 9% in 2005, benefiting from overall stronger
industrial chemical customer demand, recent new product
introductions and from the expansion of its business into Asian
markets.
In February 2006, the Company began implementing a cost
reduction plan, primarily affecting operations in the U.S. and
Europe that resulted in the employment of approximately 70
employees being terminated with effective dates through the
third quarter of 2006. In addition, the Company plans to close a
sales and demonstration office in the Netherlands in the third
quarter of 2006. The Company expects to incur a one-time
estimated restructuring charge in 2006 in the range of
$5.0 million to $7.0 million. The Company expects the
entire restructuring plan to be completed by the third quarter
of 2006. Cash expenditures associated with this restructuring
are estimated to be similar to the timing of recording the
expense. The Company is implementing this cost reduction plan
primarily to realign its operating costs with business
opportunities around the world.
Operating income was $283.2 million and $284.9 million
in 2005 and 2004, respectively, a decrease of $1.7 million.
Operating income in 2005 was impacted by a litigation provision
of $3.1 million related to a patent litigation settlement
with Hewlett-Packard Company in February 2006. In 2004,
operating income included the benefit of a litigation judgment
in the amount of $17.1 million from Perkin-Elmer
Corporation partially offset by the sum of litigation provisions
of $7.8 million and a technology license asset impairment
of $4.0 million. The remaining increase in operating income
of $6.7 million was primarily a result of sales growth.
Operating cash flow increased to $298.1 million in 2005
compared to $259.4 million in 2004. The increase of
$38.7 million in 2005 is primarily attributable to
improvements in days-sales-outstanding (“DSO”) and
improving inventory turns. DSO improved to 70 days in 2005
from 76 days in 2004 while inventory turns improved to 3.6
turns in 2005 from 3.3 turns in 2004. Capital expenditures
related to property, plant, equipment, software capitalization
and other intangibles were $51.0 million in 2005 compared
to $66.2 million in 2004. In 2004, capital expenditures
included the purchase of a building adjacent to the
Company’s headquarters, in Milford, Massachusetts, costing
$18.1 million.
In 2005, the Board of Directors of the Company approved the
repatriation of $500.0 million as a qualified distribution
in accordance with the American Jobs Creation Act of 2004
(“AJCA”). The AJCA created a temporary incentive for
U.S. multi-national corporations to repatriate accumulated
income abroad by providing an 85% dividends received deduction
for certain dividends from controlled foreign corporations. The
Company will use the repatriated cash to fund current and future
operating expenses and investments in the U.S. In
connection with this distribution, all repatriated in the second
half of 2005, the Company recorded $24.0 million of
federal, state and foreign income taxes. Excluding the impact of
this one-time income tax expense, the Company’s effective
rate was 17.7% compared to 21.6% in 2004 as a result of the
relative increase in income in international jurisdictions with
lower tax rates, primarily Ireland.
In October of 2005, the Company’s Board of Directors
authorized the Company to repurchase up to an additional
$500.0 million of its outstanding common shares over a
two-year period. The Company has repurchased 5.6 million
shares at a cost of $216.1 million under this new program
through December 31, 2005. During 2005, the Company
repurchased a total of 15.4 million shares of its common
stock at a cost of $659.3 million. This total includes
share repurchases associated with the October 2005 program as
well as previously authorized share repurchase programs. The
Company believes that the share repurchase programs are
beneficial to shareholders by increasing earnings per share
through reducing the number of outstanding shares. The Company
also believes that it has the financial flexibility to fund
these share repurchases given
17
current cash and debt levels, and invest in research, technology
acquisitions and business acquisitions to further grow the
Company’s sales and profits.
In October 2005, the Company fully exercised the
$100.0 million expansion feature in the credit agreement
dated December 2004, increasing the amount from
$700.0 million to $800.0 million. In
November 2005, the Company entered into a new Credit
Agreement that provides for a $250.0 million term loan
facility. As of December 31, 2005, the Company had
$500.0 million of long-term debt and $310.0 million of
short-term debt under these credit agreements for a total of
$810.0 million outstanding as compared to
$440.0 million outstanding at December 31, 2004,
$250.0 million of which was classified as long-term debt.
The Company plans to use the proceeds of the term loan to
finance the repurchase of common stock under its stock
repurchase program previously approved by its Board of Directors
and for general corporate purposes. The Company also believes
that this additional borrowing capacity will provide the Company
the flexibility to fund working capital needs and potential
acquisitions.
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Net Sales:
Net sales in 2005 were $1,158.2 million, an increase of 5%
compared to sales of $1,104.5 million in 2004. Foreign
currency translation had no effect overall on sales growth in
2005. In 2005, product sales increased $27.9 million or 3%
and service sales increased $25.8 million or 9% over sales
in 2004. The increase in product sales is primarily due to the
continued strength of LC, MS and TA instrument sales growth,
increases in sales of chromatography columns and consumables
and, particularly, the full-year sales in 2005 of the ACQUITY
UPLC system. The increase in service sales is primarily due to
growth in the Company’s instrument installed base and sales
of service contracts. The Company expects sales to grow in 2006
from higher sales of new products and service sales growth in
both of its operating divisions.
The following commentary discusses the Company’s sales
performance by product line in constant currencies.
Waters Division Net Sales:
With respect to the Waters Division’s performance by
product line, overall LC sales in 2005 grew approximately 6%.
The growth in LC instrument sales in 2005 was 3%. This growth
was due principally to the full-year impact of products
introduced in 2004, such as the ACQUITY UPLC instrument, in
combination with demand for existing LC instruments. In 2005,
the sales of LC consumables (sample preparation devices and
chromatography columns) grew 9% primarily as a result of
continued strength in demand from the introduction of the new
XBridgetm,
SunFiretm
and ACQUITY UPLC chromatography columns and
Oasis®
sample preparation cartridges. Service sales in 2005 grew 9%
over 2004 due to increased sales of service plans to the
Company’s growing installed base of customers. For the LC
business, service sales were approximately 33% of total LC
revenue in 2005 as compared to 32% in 2004. Service sales growth
was geographically broad-based and was driven by increased
demand, primarily from large multi-national customers, for
service plans to maintain a higher percentage of their installed
Waters instruments and their newly purchased Waters instruments.
LC consumables accounted for approximately 18% of overall LC
sales in 2005 and 2004.
MS sales grew approximately 2% in 2005. The increase in sales
over 2004 is primarily the result of an increase in Q-Tof
Premier and Quattro Premier XE system sales substantially offset
by weak single quadrupole and magnetic sector instrument sales.
The Company plans to introduce new MS instruments in 2006 that
it believes should refresh a substantial portion of its
quadrupole-based MS instrument sales.
Geographically, Waters LC sales grew 11% in Asia and 9% in Japan
while the U.S. and European sales grew 3% and 5%, respectively.
MS sales were strongest in Japan growing at 8% while MS sales in
the U.S. declined 6%. The Company believes that the MS
sales in the U.S. were significantly and negatively
impacted by the weak demand from the Company’s large
pharmaceutical customers. Sales growth rates in Asia and Japan
were driven by business associated with pharmaceutical industry
demand in India and more broad-based growth in China. Increased
regulations for food and drinking water testing also contributed
to sales growth in Japan and in Asia.
18
TA Instruments Division Net Sales:
Sales for thermal analysis instruments, rheometry instruments
and related service sales grew 9% in 2005. Strong demand for TA
products from customers outside of the U.S. contributed to
the division’s overall sales growth. Sales growth for TA
outside of the U.S. was 15% in 2005 compared to 2004.
Strong demand for the division’s products in Japan and in
Asia overall, associated with expanded sales and marketing
efforts, were especially important factors in effecting the
division’s positive sales growth performance. Sales in the
U.S. grew 3%. In 2005 and 2004, service sales were
approximately 27% and 26%, respectively, of overall revenue and
grew approximately 16% in 2005, primarily as a result of
providing service to a larger installed base of instruments.
Gross Profit:
Gross profit for 2005 was $679.9 million compared to
$649.7 million for 2004, an increase of $30.2 million
or 5% and generally consistent with the increase in net sales.
Gross profit as a percentage of sales decreased to 58.7% in 2005
from 58.8% in 2004. The slight decline in gross profit
percentage is primarily attributable to a higher mix of more
costly new products, in particular the ACQUITY UPLC instrument,
as well as lower sales of higher margin MS instruments. These
factors negatively affecting gross profit percentage were
partially offset by an increased mix of higher margin
chromatography consumables and service sales. The Company
expects that gross margin percent will decline slightly in 2006
as a result of the continued higher sales of new products with
higher manufacturing costs, transitional expenses associated
with the movement of Alliance instrument system production to
Singapore as well as due to the expensing of stock options under
Statement of Financial Accounting Standard (“SFAS”)
No. 123(R) “Share-Based Payment”.
Selling and Administrative Expenses:
Selling and administrative expenses for 2005 and 2004 were
$321.7 million and $300.2 million, respectively. As a
percentage of net sales, selling and administrative expenses
increased to 27.8% for 2005 compared to 27.2% for 2004. The
$21.5 million or 7% increase in total selling and
administrative expenses for 2005 is primarily attributable to
the following: an increase of approximately $4.1 million as
a result of foreign currency effects that included a reduction
of $2.2 million in realized and unrealized foreign currency
transaction gains; annual merit increases effective in April in
both years and other headcount additions and related fringe
benefits and indirect costs of approximately $15.4 million;
an increase in travel expenses of approximately
$6.4 million; and an increase in expenses associated with a
new building in Milford, Massachusetts acquired in 2004. The
impact of these increases was primarily offset by lower
management incentive compensation expense derived from 2005
financial results. The Company expects that selling and
administrative expenses will grow in 2006 at a percentage rate
that is slightly lower than the expected sales growth rate. This
slower growth in expenses will be effected through cost
reduction efforts that will result in a one-time charge in 2006.
This outlook does not include the effect of expensing of stock
options under SFAS No. 123(R).
Research and Development Expenses:
Research and development expenses were $66.9 million for
2005 and $65.2 million for 2004, an increase of
$1.7 million or 3%. The increase is primarily attributable
to an increase in headcount as the Company continues to invest
in the development of new and improved LC, MS, thermal analysis
and rheometry products. The Company expects research and
development expenses to grow in 2006 at a similar rate to sales
growth. This anticipated growth rate does not include the effect
of expensing of stock options under SFAS No. 123(R).
Litigation Settlement and Provisions:
Net litigation settlements and provisions for 2005 were a
$3.1 million charge compared to a $9.3 million net
benefit for 2004. In 2005, the Company recorded a provision of
$3.1 million relating to patent litigation with
Hewlett-Packard Company (“Hewlett-Packard”). This
patent litigation was settled in February 2006. The Company
recorded the benefit of a litigation judgment in the second
quarter of 2004 in the amount of $17.1 million and a
provision expense of $7.8 million in the first quarter of
2004. The benefit in 2004 is related to the conclusion of the
Company’s litigation with Perkin-Elmer. The provision in
2004 was related to the on-
19
going patent infringement suit with Hewlett-Packard. In 2005,
the Company made payments for legal fees regarding the
Hewlett-Packard litigation in the amount of approximately
$2.3 million.
Impairment of Long-Lived Asset:
In 2004, the Company recorded a $4.0 million charge for an
other-than-temporary impairment of its technology license with
Sandia National Laboratories, as a significant portion of the
technology collaboration program was suspended. There was no
such charge in 2005. The remaining value of the license was
approximately $0.8 million and $1.0 million as of
December 31, 2005 and 2004, respectively.
Other Income (Expense), Net:
In the fourth quarter of 2005, the Company sold all of its
equity investment in Nuvello, Inc. and recorded a gain of
$1.7 million. In the fourth quarter of 2005, the Company
also recorded a $4.8 million charge for an
other-than-temporary impairment for the full value of the
Company’s investment in Beyond Genomics, Inc. This charge
was recorded based on the Company’s assessment of Beyond
Genomics, Inc.’s financial condition. In 2004, the Company
recorded a $1.0 million pre-tax charge for an
other-than-temporary impairment to the Company’s remaining
investment carrying value of
GeneProttm.
This charge was recorded based on the Company’s assessment
of GeneProt’s financial condition.
Interest Expense:
Interest expense was $24.7 million and $10.1 million
for 2005 and 2004, respectively. The increase in 2005 interest
expense is primarily attributable to a combination of additional
borrowings in the U.S. to fund the stock repurchase
programs and higher interest rates on the Company’s
outstanding debt.
Interest Income:
Interest income for 2005 and 2004 was $19.3 million and
$11.9 million, respectively. The increase in interest
income is primarily due to higher cash balances and higher
interest rate yields.
Provision for Income Taxes:
In October 2004, the AJCA was signed into law. The AJCA creates
a temporary incentive for U.S. multi-national corporations
to repatriate accumulated income abroad by providing an 85%
dividends received deduction for certain dividends from
controlled foreign corporations. It previously had been the
Company’s practice to permanently reinvest all foreign
earnings into foreign operations. On July 12, 2005, the
Board of Directors of the Company approved the repatriation of
$500.0 million as a qualified distribution in accordance
with the AJCA. The Company will use the repatriated cash to fund
current and future operating expenses within the parameters of
Internal Revenue Service guidance. During the third quarter of
2005, the Company recorded a tax liability of $24.0 million
for the federal, state and foreign taxes related to the
qualified and base period distribution in accordance with
SFAS No. 109, “Accounting for Income Taxes”.
The Company’s effective tax rates for 2005 and 2004 were
26.4% and 21.6%, respectively. Included in the 2005 effective
tax rate is the $24.0 million of income tax expense related
to the repatriation of funds from the Company’s foreign
subsidiaries under the AJCA. Excluding the income tax expense
pertaining to the repatriation, the Company’s effective tax
rate was 17.7% for 2005. The effective tax rate of 21.6% in 2004
was impacted by the net tax effect of the Perkin-Elmer
litigation judgment received and the litigation provisions for
the on-going patent infringement suit with Hewlett-Packard. The
effective tax rate excluding these items was 21.0% in 2004. The
decrease in effective tax rates to 17.7% in 2005 from 21.0% in
2004, excluding the previously described items, is primarily
attributable to the relative increase in income in international
jurisdictions with lower effective tax rates, primarily Ireland.
Impact of New Accounting Pronouncements:
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 123(R) which amends
SFAS No. 123 “Accounting for Stock-Based
Compensation”. This standard requires that all share-based
payments to employees, including grants of employee stock
options, be recognized in the statement of
20
operations based on their fair values. This charge will be
allocated to line items within the consolidated statements of
operations based on underlying employee service. The Company
will begin recognizing these charges in the three months ending
April 1, 2006, under the modified prospective method. The
final standard allows alternative methods for determining fair
value. The Company will use the Black-Scholes model to determine
the fair value of its stock-based compensation awards. The
Company has made changes to its equity compensation structure
and will begin granting a combination of restricted stock units
and non-qualified stock options. The Company estimates that the
adoption of SFAS No. 123(R) will result in a negative
impact to earnings per diluted share, net of tax, of
approximately $0.21 to $0.24 in 2006.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003
Net Sales:
Net sales for 2004 were $1,104.5 million, an increase of
15% compared to $958.2 million for 2003. Excluding currency
effects, net sales grew 11% over 2003. Currency translation
effect increased sales growth in 2004 by 4% primarily due to the
strengthening of the Euro, British Pound, Japanese Yen and
Canadian dollar against the U.S. dollar. In 2004, product
sales increased $83.7 million or 12% and service sales
increased $62.7 million or 27% over sales in 2003. The
increase in product sales, aside from the effects of foreign
currency translation, is primarily due to the continued strength
of LC, MS and TA sales growth, the mid-year launch of the
ACQUITY UPLC system and the impact of acquired businesses. The
increase in service sales, aside from the effects of foreign
currency translation, is primarily due to growth in the
Company’s instrument installed base and sales of service
contracts, including the effect of the Company’s recent
acquisitions.
Waters Division Net Sales:
With respect to the Waters Division’s performance by
product line (excluding the effects of currency translation), LC
sales (Liquid Chromatography — including HPLC and UPLC
product lines) grew approximately 12%. The growth in LC
instrument and data sales in 2004 was 13%. This growth was due
principally to the introduction of new products, such as the
ACQUITY UPLC instrument, the impact of businesses acquired and
steady demand for existing instrument systems. In 2004, the
sales of LC consumables (sample preparation devices) in the
Company’s chemistry operations grew 10% primarily as a
result of continued strength in demand related to pharmaceutical
production and the introduction of new chromatography columns,
most notably the
SunFiretm
product line. Service sales grew 13% over 2003 due to increased
sales of service plans to the Company’s growing installed
base of customers. Service sales were approximately 32% of total
LC revenue in 2004. The growth of LC service sales was
geographically broad-based and was driven by increased demand
primarily from large multi-national customers for service plans
to maintain a higher percentage of their installed base and
newly purchased Waters instruments. LC consumables account for
approximately 18% of overall LC sales.
MS sales grew approximately 4% in 2004 (excluding the effects of
currency translation). The increase in sales over 2003 is
primarily a result of strong growth of tandem quadrupole
instruments throughout the year and the positive impact of new
product shipments, especially the Q-Tof Premier, late in the
year. The growth in 2004 is also a result of weak 2003 MS
performance, during which MS sales declined over the prior year,
due primarily to the effects of a patent litigation loss
sustained in 2002. During 2004, the Company re-entered all
instrument categories impacted by the patent litigation loss.
Geographically, Waters LC and MS sales in Asia had the highest
growth in 2004. Growth in Asia was highlighted by business
associated with growth of the pharmaceutical industry in India
and more broad-based growth in China. More regulations for food
and drinking water testing contributed to sales growth in Japan
and in Southeast Asia. In Asia and in Japan, the Company’s
growth rates in sales (excluding the effects of currency
translation) were 16% and 12%, respectively. Sales in the
U.S. grew 13% while Europe experienced an 8% increase in
sales due to slower sales volume in the first half of the year.
TA Instruments Division Net Sales:
Sales for thermal analysis instruments, rheometry instruments
and related service sales grew 11% in 2004 (excluding the
effects of currency translation). The growth of this business
was influenced by strong sales
21
growth of 16% outside of the U.S., primarily from Europe, Japan
and Asia, as a result of expanded sales and marketing efforts in
the regions. Sales in the U.S. grew 5%. In 2004 and 2003,
service sales were approximately 26% of overall revenue and grew
approximately 10% in 2004 primarily as a result of providing
service to a larger installed base of instruments.
Gross Profit:
Gross profit for 2004 was $649.7 million compared to
$560.4 million for 2003, an increase of $89.3 million
or 16% and is generally consistent with the increase in net
sales. Gross profit as a percentage of sales increased to 58.8%
in 2004 from 58.5% in 2003. The increase in gross profit
percentage is a net result of favorable foreign currency
translation along with the continuing success of the
Company’s manufacturing cost reduction programs, offset by
costs associated with additional service resources added to the
Waters Division in support of the service product line growth.
Within MS, there was a decrease in gross profit as a percentage
of net sales as a result of a product mix shift away from the
higher margin Q-Tof product line.
Selling and Administrative Expenses:
Selling and administrative expenses for 2004 and 2003 were
$300.2 million and $264.3 million, respectively. As a
percentage of net sales, selling and administrative expenses
declined slightly to 27.2% for 2004 compared to 27.6% for 2003.
The $35.9 million, or 14%, increase in total selling and
administrative expenses for 2004 included an increase of
approximately $11.9 million as a result of currency
translation; an incremental $10.4 million attributed to
acquisitions; an increase of $18.6 million in personnel
costs attributed to higher headcount, selling related expenses
related to the higher sales volume, annual merit increases and
increased employee incentive plans costs as a result of the
Company’s 2004 performance. An increase in costs related to
Sarbanes — Oxley compliance of $3.2 million was
offset by a decrease in litigation costs of $3.8 million.
The increase in selling and administrative expenses was
partially offset by $6.6 million of realized and unrealized
foreign currency transaction gains compared to the
$2.2 million of realized and unrealized foreign currency
transaction gains in 2003.
Research and Development Expenses:
Research and development expenses were $65.2 million for
2004 and $59.2 million for 2003, an increase of
$6.0 million or 10%. The increase is primarily attributable
to an increase in headcount due to acquisitions, the effects of
foreign currency translation, and to the Company’s
continued commitment to invest significantly in the development
of new and improved LC, MS, thermal analysis and rheometry
products.
Purchased Intangibles Amortization:
Purchased intangibles amortization for 2004 was
$4.8 million compared to $4.2 million for 2003, an
increase of $0.6 million or 14%. The increase primarily
relates to the amortization of purchased intangibles resulting
from acquisitions.
Litigation Settlement and Provisions:
Net litigation settlements and provisions for 2004 were a
$9.3 million net benefit compared to a litigation provision
of $1.5 million for 2003. The Company recorded the benefit
of a litigation judgment in the second quarter of 2004 in the
amount of $17.1 million and a provision expense of
$7.8 million in the first quarter of 2004. The benefit in
2004 is related to the conclusion of the Company’s
litigation with Perkin-Elmer. The provision in 2004 is related
to the on-going patent infringement suit with Hewlett-Packard.
In 2004, the Company made payments for legal fees and potential
award deposits regarding the Hewlett-Packard litigation in the
amount of approximately $4.1 million. The Company recorded
a $1.5 million expense in 2003 for an environmental matter
concerning the Company’s Taunton facility.
Loss on Sale of Business:
The Company recorded a $5.0 million charge relating to the
loss on the sale of the inorganic MS product line in 2003. There
was no such charge in 2004.
22
Impairment of Long-Lived Asset:
In 2004, the Company recorded a $4.0 million charge for an
other-than-temporary impairment of its technology license with
Sandia National Laboratories, as a significant portion of the
technology collaboration program was suspended. The remaining
value of the license is approximately $1.0 million at
December 31, 2004. There was no such charge in 2003.
Restructuring and Other Unusual Charges, net:
2004 Restructuring:
In January 2004, the Company initiated a restructuring effort to
realign its personnel between various support functions and
field sales and service organizations around the world. As a
result, 70 employees were terminated, all of which had left the
Company as of December 31, 2004. The provision of
$2.1 million represents costs incurred, including severance
costs, for the 70 people and other directly related incremental
costs of this realignment effort.
The following is a summary of the activity of the Company’s
2004 restructuring liability (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance | |
|
|
|
|
|
|
|
Balance | |
| |
|
December 31, | |
|
|
|
|
|
Reserve | |
|
December 31, | |
| |
|
2003 | |
|
Charges | |
|
Utilization | |
|
Reversals | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Severance
|
|
$ |
— |
|
|
$ |
1,968 |
|
|
$ |
(1,968 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
Other
|
|
|
— |
|
|
|
115 |
|
|
|
(115 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
— |
|
|
$ |
2,083 |
|
|
$ |
(2,083 |
) |
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 Restructuring:
In July 2002, the Company took action to restructure and combine
its field sales, service and distribution of its Micromass and
LC operations. The objective of this integration was to leverage
the strengths of both divisions and align and reduce operating
expenses. The integration efforts impacted the U.S., Canada,
continental Europe and the United Kingdom. Approximately 55
employees were terminated, all of which had left the Company as
of December 31, 2003. In addition, the Company originally
committed to closing four sales and distribution facilities, two
of which were closed by December 31, 2004.
The Company recorded $2.6 million of charges for the year
ended December 31, 2003 and $7.4 million for the year
ended December 31, 2002, for restructuring and other
directly related incremental charges relating to its integration
of the worldwide LC and MS sales, service and support
organizations. The charge for the year ended December 31,
2003 includes severance costs for 13 people, distributor
termination costs and other directly related incremental costs
of this integration effort. The charge for the year ended
December 31, 2002 includes severance costs for 42 people,
contract cancellation fees, non-cancelable lease obligations and
other directly related incremental costs.
During the year ended December 31, 2004, the Company
reversed approximately $2.2 million in restructuring
reserves, primarily attributable to a change in plans with
respect to two facilities previously selected for closure and
distributor contract settlements being less than previously
estimated. During the year ended December 31, 2003, the
Company reversed approximately $1.9 million in
restructuring reserves, primarily attributable to facility
closure and distributor termination costs being less than
previously estimated and the retention of certain employees
previously selected for termination.
23
The following is a summary of the activity of the Company’s
LC and MS integration restructuring liability (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance | |
|
|
|
|
|
|
|
Balance | |
| |
|
December 31, | |
|
|
|
|
|
Reserve | |
|
December 31, | |
| |
|
2003 | |
|
Charges | |
|
Utilization | |
|
Reversals | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Severance
|
|
$ |
31 |
|
|
$ |
23 |
|
|
$ |
(54 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
Facilities
|
|
|
1,937 |
|
|
|
— |
|
|
|
(338 |
) |
|
|
(1,599 |
) |
|
|
— |
|
|
Distributor terminations
|
|
|
475 |
|
|
|
— |
|
|
|
(75 |
) |
|
|
(400 |
) |
|
|
— |
|
|
Other
|
|
|
163 |
|
|
|
5 |
|
|
|
(10 |
) |
|
|
(158 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
2,606 |
|
|
$ |
28 |
|
|
$ |
(477 |
) |
|
$ |
(2,157 |
) |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also recorded an unrelated restructuring provision
of $0.1 million at its TA subsidiary for severance and
other related costs in the year ended December 31, 2003.
There were no such charges for the year ended December 31,
2004.
Expensed In-Process Research and Development:
In 2003, in connection with the acquisition of Creon, the
Company wrote off the fair value of purchased in-process
research and development (“IPR&D”) of various
projects for the development of new products and technologies in
the amount of $6.0 million. The amount was determined by
identifying research projects for which technological
feasibility had not been established and which had no
alternative future uses. As of the Creon acquisition date (the
“Acquisition Date”), there were four projects that met
the above criteria. The significant IPR&D projects
identified consist of the eLab Notebook and the automatic LC-MS
dereplication system. The IPR&D charges associated with
these projects were $4.5 million and $0.8 million,
respectively.
Management determined the valuation of the IPR&D using a
number of factors, including engaging a third party valuation
firm to provide an independent appraisal. The value was based
primarily on the discounted cash flow method. This valuation
included consideration of (i) the stage of completion of
each of the projects, (ii) the technological feasibility of
each of the projects, (iii) whether the projects had an
alternative future use, and (iv) the estimated future
residual cash flows that could be generated from the various
projects and technologies over their respective projected
economic lives.
The primary basis for determining the technological feasibility
of these projects was whether the product met predetermined
design specifications and complex functionality. As of the
Acquisition Date, none of the IPR&D projects had reached
predetermined design specifications and complex functionality.
In assessing the technological feasibility of a project,
consideration was also given to the level of complexity in
future technological hurdles that each project had to overcome.
Future residual cash flows that could be generated from each of
the projects were determined based upon management’s
estimate of future revenue and expected profitability of the
various products and technologies involved. These projected cash
flows were then discounted to their present values taking into
account management’s estimate of future expenses that would
be necessary to bring the projects to completion. The discount
rates include a rate of return, which accounts for the time
value of money, as well as risk factors that reflect the
economic risk that the cash flows projected may not be realized.
The cash flows were discounted at discount rates ranging from
55% to 60% per annum, depending on the project’s stage
of completion and the type of complex functionality needed. This
discounted cash flow methodology for the various projects
included in the purchased IPR&D resulted in a total
valuation of $6.0 million. Although work on the projects
related to the IPR&D continued after the acquisition, the
amount of the purchase price allocated to IPR&D was written
off because the projects underlying the IPR&D that was being
developed were not considered technologically feasible as of the
Acquisition Date.
Other Income (Expense), Net:
In 2004 and 2003, the Company recorded $1.0 million and
$0.3 million, respectively, of pre-tax charges for
other-than-temporary impairments to the carrying amounts of
certain equity investments. The 2004 pre-tax
24
charge of $1.0 million is for the Company’s remaining
investment carrying value of GeneProt. This charge was recorded
based on the Company’s current assessment of
GeneProt’s financial condition.
Interest Expense:
Interest expense was $10.1 million and $2.4 million
for 2004 and 2003, respectively. The increase in 2004 interest
expense is primarily attributed to the additional borrowings in
the U.S. to fund the stock repurchase programs.
Interest Income:
Interest income for 2004 and 2003 was $11.9 million and
$7.1 million, respectively. The increase in interest income
is primarily due to higher cash balances and higher interest
rate yields.
Provision for Income Taxes:
The Company’s effective tax rate was 21.6% in 2004 and
23.6% in 2003. The change in effective tax rates for the period
was impacted by the net tax effect of the Perkin-Elmer
litigation judgment received and litigation provisions and
restructuring charges made during 2004, compared to the tax
effect of certain litigation provisions, restructuring charges,
expensed in-process research and development and loss on sale of
a business incurred during 2003. The effective tax rates,
excluding these items and corresponding tax effects, were 21.0%
and 23.0% for the years ended December 31, 2004 and 2003,
respectively. This decrease is primarily attributable to the
increase in income in international jurisdictions with lower
effective tax rates, primarily Ireland.
Liquidity and Capital Resources
|
|
|
Condensed Consolidated Statements of Cash Flows (in
thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31 | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Net income
|
|
$ |
201,975 |
|
|
$ |
224,053 |
|
|
$ |
170,891 |
|
|
Depreciation and amortization
|
|
|
43,685 |
|
|
|
41,926 |
|
|
|
33,848 |
|
|
Tax benefit related to stock option plans
|
|
|
4,872 |
|
|
|
32,012 |
|
|
|
17,582 |
|
|
Deferred Taxes
|
|
|
10,235 |
|
|
|
1,468 |
|
|
|
(5,926 |
) |
|
Change in accounts receivable
|
|
|
(6,515 |
) |
|
|
(36,453 |
) |
|
|
10,938 |
|
|
Change in inventories
|
|
|
(6,973 |
) |
|
|
(11,575 |
) |
|
|
(4,302 |
) |
|
Change in accounts payable and other current liabilities
|
|
|
26,802 |
|
|
|
12,203 |
|
|
|
(30,005 |
) |
|
Change in accrued litigation
|
|
|
688 |
|
|
|
(16,095 |
) |
|
|
(60,120 |
) |
|
Change in deferred revenue and customer advances
|
|
|
7,551 |
|
|
|
1,526 |
|
|
|
3,277 |
|
|
Other changes
|
|
|
15,747 |
|
|
|
10,384 |
|
|
|
20,822 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
298,067 |
|
|
|
259,449 |
|
|
|
157,005 |
|
|
Net cash used in investing activities
|
|
|
(51,045 |
) |
|
|
(108,605 |
) |
|
|
(18,663 |
) |
|
Net cash provided by (used in) financing activities
|
|
|
(272,015 |
) |
|
|
21,507 |
|
|
|
(63,640 |
) |
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(20,496 |
) |
|
|
9,945 |
|
|
|
18,767 |
|
| |
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
$ |
(45,489 |
) |
|
$ |
182,296 |
|
|
$ |
93,469 |
|
| |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities was
$298.1 million, $259.4 million, and $157.0 in 2005,
2004, and 2003 respectively. The primary sources and uses of net
cash provided from operating activities aside from net income,
and reasons for their change, are as follows. Depreciation and
amortization have increased over the three years presented as a
result of higher capital spending on equipment and facilities,
and the full-year impact of acquisitions, particularly in 2005
and 2004. Deferred income taxes decreased in 2005 primarily as a
result of the utilization of a portion of the net operating loss
carryforwards. The change in the tax benefit related to stock
option plans is primarily attributable to the significant
exercises of stock options in 2003 and
25
2004 related to previously granted options about to expire which
had low exercise prices. The change in accounts receivable is
primarily related to the timing of the Company’s sales
within the quarter, the timing of cash receipts from customers
and foreign currency translation. DSO at December 31, 2005,
2004 and 2003 were 70 days, 76 days and 71 days,
respectively. The growth in inventory over the three years is
primarily related to the Company’s sales growth and the
introduction of new products, most recently the ACQUITY UPLC
system. Although inventory levels have grown they have not
increased at the same rate of sales growth thus resulting in
improved inventory turns of 3.6, 3.3 and 3.1 in 2005, 2004 and
2003, respectively.
The changes in accounts payable and other current liabilities
are primarily related to the increase in income tax accruals
resulting from the repatriation of funds in 2005 and timing of
payments of income tax, compensation, and retirement accruals
during the three years presented. The 2005 change in accrued
litigation is attributed to payment of legal fees directly
associated with existing litigation accruals and a provision of
$3.1 million relating to patent litigation with
Hewlett-Packard Company, which was settled in February 2006. The
2004 change in accrued litigation of $16.1 million is
primarily due to the $18.1 million payment to Applied
Biosystems/ MDS Sciex Instruments for the settlement of a patent
litigation matter and a $7.8 million provision offset by
approximately $4.1 million of payments in connection with
the Hewlett-Packard patent litigation matter. The 2003 change in
accrued litigation of $60.1 million is primarily attributed
to the Company paying $59.6 million in connection with both
the Applera patent litigation and the DEP settlement. Changes in
deferred revenue and customer advances are primarily
attributable to the Company’s growth in service sales
contracts and the timing of contract billings.
Net cash used in investing activities totaled $51.0 million
in 2005 compared to $108.6 million in 2004 and
$18.7 million in 2003. Additions to fixed assets and
intangible assets were $51.0 million in 2005,
$66.2 million in 2004 and $34.6 million in 2003.
Included in 2004 was a 250,000 square foot building
purchase adjacent to the Company’s headquarters in Milford,
Massachusetts for $18.1 million as well as approximately
$3.2 million of costs in construction in-progress related
to improvements made to the building. Aside from the purchase of
this building, fixed asset and intangible asset additions were
consistent with capital spending trends and expectations
throughout the respective years to accommodate the
Company’s growth. Business acquisitions were
$42.4 million and $35.2 million in 2004 and 2003,
respectively. There were no business acquisitions in 2005. In
addition, net cash used by investing activities in 2003
benefited from the release of the restricted cash related to a
payment made to Applera for an unfavorable judgment in patent
litigation.
Regarding cash provided by (used in) financing activities, the
Company repurchased 15.4 million, 5.5 million and
11.9 million common stock shares at a cost of
$659.3 million, $231.3 million and
$324.6 million, respectively, during 2005, 2004 and 2003,
respectively, under previously announced programs. On
October 24, 2005, the Company’s Board of Directors
authorized the Company to repurchase up to an additional
$500.0 million of its outstanding common shares over a
two-year period. The Company repurchased 5.6 million shares
at a cost of $216.1 million under this new program through
December 31, 2005 leaving $283.9 million authorized
for repurchases in the future. The Company believes that these
share repurchase programs benefit shareholders by increasing
earnings per share through reducing the outstanding shares while
maintaining adequate financial flexibility given current cash
and debt levels to fund future share repurchases and pursue
acquisition opportunities. The Company received
$16.8 million, $45.0 million and $27.8 million of
proceeds from the exercise of stock options and the purchase of
shares pursuant to employee stock purchase plans in 2005, 2004
and 2003, respectively. Proceeds from stock options exercised in
2004 and 2003 were unusually high due to significant exercises
of stock options related to previously granted options about to
expire.
In November 2005, the Company entered into a new Credit
Agreement (the “November 2005 Credit Agreement”) that
provides for a $250.0 million term loan facility due in
November 2010. The Company may, on a single occasion, request of
the lender group that the facility be increased up to an
additional $100.0 million. The Company plans to use the
proceeds of the term loan to finance the repurchase of common
stock under its stock repurchase program previously approved by
its Board of Directors and for general corporate purposes. The
interest rates applicable to any U.S. borrowings under the
November 2005 Credit Agreement are, at the Company’s
option, equal to either the base rate (which is the higher of
the prime rate or the federal funds rate plus 1/2%) or, on any
Euro borrowings, the applicable 1, 2, 3, 6, 9 or
12 month LIBOR
26
rate, in each case plus an interest rate margin based upon the
Company’s leverage ratio, which can range between
37.5 basis points and 112.5 basis points. The November
2005 Credit Agreement requires that the Company comply with an
interest coverage ratio test of not less than 3.50:1, and a
leverage ratio test of not more than 3.25:1, for any period of
four consecutive fiscal quarters, respectively. In addition, the
November 2005 Credit Agreement includes negative covenants that
are customary for investment grade credit facilities and are
similar in nature to ones contained in the Company’s
existing credit facility. The November 2005 Credit Agreement
also contains certain customary representations and warranties,
affirmative covenants and events of default, similar in nature
to those in the Company’s existing credit facility.
In December 2004, the Company had entered into a syndicated
committed Credit Agreement (the “Credit Agreement”)
that provides for a $250.0 million term loan facility due
in December 2009 and, subsequent to the amendment discussed
below, a $450.0 million revolving facility, which includes
both a letter of credit and a swingline subfacility. In October
2005, the Company fully exercised the $100.0 million
expansion feature in the credit agreement dated December 2004,
increasing the amount from $700.0 million to
$800.0 million. The Company used the proceeds of the
additional borrowings to finance the repurchase of common stock
and for general corporate purposes as provided for under the
Credit Agreement. In October 2005, the Company amended the
Credit Agreement (the “Amended Credit Agreement”) to
increase the leverage ratio test from not more than 3.0:1 for
any period of four consecutive fiscal quarters, to 3.25:1 and to
amend the definition of Consolidated EBITDA (earnings before
interest, taxes, depreciation and amortization) to exclude
stock-based compensation to the extent deducted from
consolidated net income pursuant to Statement
SFAS No. 123(R). All other terms and conditions under
the original Credit Agreement with respect to interest rates,
interest coverage ratio test, maturity dates and affirmative and
negative covenants remained substantially the same in the
Amended Credit Agreement.
As of December 31, 2005, the Company had
$250.0 million borrowed under the November 2005 Credit
Agreement and $560.0 million under the Amended Credit
Agreement for a total of $810.0 million borrowed under the
two credit agreements and an amount available to borrow of
$238.4 million after outstanding letters of credit. In
total, $500.0 million of the total debt was classified as
long-term debt and $310.0 million classified as short-term
debt at December 31, 2005 in the consolidated balance
sheets. At December 31, 2004, the Company had aggregate
borrowings under the Amended Credit Agreement of
$440.0 million of which $250.0 million was classified
as long-term debt. The remaining amounts of short-term debt of
$16.3 million and $16.7 million at December 31,
2005 and 2004, respectively, represent various local lines of
credit throughout the Company’s worldwide subsidiaries.
The Company believes that the cash and cash equivalent balance
of $493.6 million at the end of 2005 and expected cash flow
from operating activities together with borrowing capacity from
committed credit facilities will be sufficient to fund working
capital, capital spending requirements, authorized share
repurchase amounts, potential acquisitions and any adverse final
determination of ongoing litigation for at least the next twelve
months. Management believes, as of the date of this report, that
its financial position along with expected future cash flows
from earnings based on historical trends and the ability to
raise funds from a number of financing alternatives and external
sources, will be sufficient to meet future operating and
investing needs for the foreseeable future.
In July 2005, the Board of Directors of the Company approved the
repatriation of $500.0 million as a qualified distribution
in accordance with the AJCA all of which was repatriated as a
cash dividend by December 31, 2005 in accordance with the
Board approved plan. The Company will use the repatriated cash
to fund current and future operating expenses within the
parameters of Internal Revenue Service guidance. During the
third quarter of 2005, the Company recorded a tax liability of
$24.0 million for the federal, state and foreign taxes
related to the qualified and base period distribution in
accordance with SFAS No. 109. The Company made
$10.0 million in tax payments during 2005 and the Company
expects to make tax payments of approximately $9.0 million
during the first quarter of 2006. The remaining
$5.0 million of this tax liability was offset by the tax
benefit of a net operating loss carryforward (“NOL”),
which was credited to additional paid-in capital in the third
quarter of 2005. The tax benefit of the NOL was previously
reserved for as a valuation allowance in additional paid-in
capital since the NOL was originally associated with
non-qualified stock option compensation expense recognized for
tax purposes. The tax benefit became realizable as a result of
the
27
repatriation in the third quarter of 2005, and accordingly,
income taxes payable was reduced and additional paid-in capital
was credited for $5.0 million.
Commitments:
The Company licenses certain technology and software from third
parties, which expire at various dates through 2008. Fees paid
for licenses were approximately $0.8 million in 2005,
$1.1 million in 2004 and $2.9 million in 2003. Future
minimum licenses payable under existing license agreements as of
December 31, 2005 are immaterial.
Contractual Obligations and Commercial Commitments
The following is a summary of the Company’s commitments as
of December 31, 2005 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Year | |
| |
|
| |
| Contractual Obligations |
|
Total | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 | |
|
After 2011 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Long-term debt(1)
|
|
$ |
500,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
250,000 |
|
|
$ |
250,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Operating leases
|
|
|
92,897 |
|
|
|
19,497 |
|
|
|
15,859 |
|
|
|
13,349 |
|
|
|
10,275 |
|
|
|
9,135 |
|
|
|
7,534 |
|
|
|
17,248 |
|
|
Other long-term liabilities(2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
592,897 |
|
|
$ |
19,497 |
|
|
$ |
15,859 |
|
|
$ |
13,349 |
|
|
$ |
260,275 |
|
|
$ |
259,135 |
|
|
$ |
7,534 |
|
|
$ |
17,248 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount of Commitments Expiration Per Period |
| |
|
|
| Other Commercial Commitments |
|
Total | |
|
2006 | |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
After 2011 |
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit
|
|
$ |
1,633 |
|
|
$ |
1,633 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
| (1) |
The interest rates applicable to any U.S. borrowings under
the New Credit Agreement and term loan and revolving loans under
the existing credit agreement are, at the Company’s option,
equal to either the base rate (which is the higher of the prime
rate or the federal funds rate plus
1/2%)
or, on any Euro borrowings, the applicable 1, 2, 3, 6,
9 or 12 month LIBOR rate, in each case plus an interest
rate margin based upon the Company’s leverage ratio, which
can range between 37.5 basis points and 112.5 basis
points. At current and long-term debt and interest rate levels
consistent with those at December 31, 2005, the
Company’s interest expense would be approximately
$44.0 million, annually. |
| |
| (2) |
Does not include normal purchases made in the ordinary course of
business. |
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 any outcome, either
individually or in the aggregate, with the exception of the
current litigation described in Item 3, Legal Proceedings,
will not be material to the financial position or results of
operations.
The Company paid approximately $13.5 million in the first
quarter of 2006 for the net assets of the food safety business
of VICAM Limited Partnership. This is described in more detail
in Note 6, Acquisitions, in the Notes to the Consolidated
Financial Statements.
The Company has long-term liabilities for deferred employee
compensation, including pension and supplemental executive
retirement plans. The payments related to the supplemental
retirement plan are not included above since they are dependent
upon when the employee retires or leaves the Company, and
whether the employee elects lump-sum or annuity payments. During
fiscal year 2006, the Company expects to contribute
approximately $10.0 million to $12.0 million to the
Company’s pension plans. Capital expenditures in 2006 are
expected to be at similar levels expended in 2005 to support the
growth in the business.
The Company is not aware of any undisclosed risks and
uncertainties, including but not limited to product technical
obsolescence, regulatory compliance, protection of intellectual
property rights, changes in pharmaceutical industry spending,
competitive advantages, current and pending litigation, and
changes in foreign exchanges rates, that are reasonably likely
to occur and could materially and negatively affect the
Company’s existing cash balance or its ability to borrow
funds from its credit facility. The Company also believes there
are no provisions in its credit facilities, its real estate
leases, or supplier and collaborative agreements that would
28
accelerate payments, require additional collateral or impair its
ability to continue to enter into critical transactions. The
Company has not paid any dividends and does not plan to pay any
dividends in the foreseeable future.
Off-Balance Sheet Arrangements
The Company has not created, and is not party to, any
special-purpose or off-balance sheet entities for the purpose of
raising capital, incurring debt or operating parts of its
business that are not consolidated (to the extent of the
Company’s ownership interest therein) into the consolidated
financial statements. The Company has not entered into any
transactions with unconsolidated entities whereby it has
subordinated retained interests, derivative instruments or other
contingent arrangements that expose the Company to material
continuing risks, contingent liabilities, or any other
obligation under a variable interest in an unconsolidated entity
that provides financing, liquidity, market risk or credit risk
support to the Company.
Critical Accounting Policies and Estimates
Summary:
The preparation of consolidated financial statements 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. Critical
accounting policies are those that are central to the
presentation of the Company’s financial condition and
results of operations that require management to make estimates
about matters that are highly uncertain and that would have a
material impact on the Company’s results of operations
given changes in the estimate that are reasonably likely to
occur from period to period or use of different estimates that
reasonably could have been used in the current period. On an
on-going basis, the Company evaluates its policies and
estimates. 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 results may differ from these estimates under
different assumptions or conditions. There are other items
within the Company’s consolidated financial statements that
require estimation, but are not deemed critical as defined
above. Changes in estimates used in these and other items could
potentially have a material impact on the Company’s
consolidated financial statements.
Revenue Recognition:
Sales of products and services are generally recorded based on
product shipment and performance of service, respectively.
Partial proceeds received in advance of product shipment or
performance of service are recorded as deferred revenue in the
consolidated balance sheets. Once the product is shipped, all
advance payments received associated with that particular order
are reclassified to accounts receivable to offset against the
customer invoice. Shipping and handling costs are included in
cost of sales net of amounts invoiced to the customer per the
order. The Company’s products generally carry one year of
warranty. These costs are accrued at the point of shipment. Once
the warranty period has expired, the customer may purchase a
service contract. Service contract billings are generally
invoiced to the customer at the beginning of the contract term,
and revenue is amortized on a straight-line basis over the
contract term. At December 31, 2005, the Company had
current and long-term deferred revenue liabilities of
approximately $71.7 million and $8.0 million,
respectively.
Product shipments, including those for demonstration or
evaluation, and service contracts are not recorded as revenues
until a valid purchase order or master agreement is received
specifying fixed terms and prices. Revenues are adjusted
accordingly for changes in contract terms or if collectibility
is not reasonably assured. The Company’s method of revenue
recognition for certain products requiring installation is in
accordance with Staff Accounting Bulletin (“SAB”) 104,
“Revenue Recognition in Financial Statements.”
Accordingly, revenue is recognized when all of the following
criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred, the vendor’s fee is fixed or
determinable, and collectibility is reasonably assured and, if
applicable, upon acceptance when acceptance criteria are
specified or upon expiration of the acceptance period. With
respect to installation obligations, the larger of the
contractual cash
29
holdback or the fair value 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 fair value of installation based upon
a number of factors, including hourly service billing rates,
estimated installation hours and comparisons of amounts charged
by third parties. The Company believes that this amount
approximates the amount that a third party would charge for the
installation effort.
Sales of software are accounted for in accordance with Statement
of Position (“SOP”) No. 97-2, “Software
Revenue Recognition” as amended by SOP 98-9,
“Modification of
SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions”.
Nearly all of the Company’s instruments contain embedded
operating system and data management software, which is included
in the purchase price. Software is also sold separately and
revenue is recognized upon shipment as typically no significant
post-delivery obligations remain. Software upgrades are
typically sold as part of a service contract with revenue
recognized ratably over the term of the service contract.
Loss Provisions on Accounts Receivable and Inventory:
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers
to make required payments. If the financial condition of the
Company’s customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required. The Company does not request
collateral from its customers but collectibility is enhanced
through the use of credit card payments and letters of credit.
The Company assesses collectibility based on a number of factors
including, but not limited to, past transaction history with the
customer, the credit-worthiness of the customer, industry trends
and the macro-economic environment. Sales returns and allowances
are estimates of future product returns related to current
period revenue. Material differences may result in the amount
and timing of revenue for any period if management made
different judgments or utilized different estimates for sales
returns and allowances for doubtful accounts. The Company’s
accounts receivable balance at December 31, 2005 was
$256.8 million, net of allowances for doubtful accounts and
sales returns of $6.6 million. Historically, the Company
has not experienced significant bad debt losses.
The Company values all of its inventories at the lower of cost
or market on a
first-in, first-out
basis (“FIFO”). The Company estimates revisions to its
inventory valuations based on technical obsolescence, historical
demand, projections of future demand including that in the
Company’s current backlog of orders, and industry and
market conditions. If actual future demand or market conditions
are less favorable than those projected by management,
additional write-downs may be required. The Company’s
inventory balance at December 31, 2005 was
$131.6 million, net of write-downs to net realizable value
of $13.4 million.
Long-Lived Assets, Intangible Assets and Goodwill:
The Company assesses the impairment of identifiable intangibles,
long-lived assets and goodwill whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers important which could
trigger an impairment review include but are not limited to the
following:
|
|
|
| |
• |
significant underperformance relative to expected historical or
projected future operating results; |
| |
| |
• |
significant negative industry or economic trends; and |
| |
| |
• |
significant changes or developments in strategic technological
collaborations or legal matters which affect the Company’s
capitalized patent, trademark and intellectual properties such
as licenses. |
When the Company determines that the carrying value of
intangibles, long-lived assets and goodwill may not be
recoverable based upon the existence of one or more of the above
indicators, it measures any impairment based on a projected
discounted cash flow method using a discount rate determined by
management to be commensurate with the risk inherent in the
Company’s current business model. In 2004, the Company
recorded a $4.0 million charge for an other-than-temporary
impairment of its technology licenses with Sandia National
Laboratories as a significant portion of the technology
collaboration program was suspended. Net intangible assets,
long-lived assets, and goodwill amounted to $84.4 million,
$141.0 million, and $210.6 million, respectively, as
of December 31, 2005. The Company performs annual impairment
30
reviews of its goodwill. The Company performed its annual review
during 2005 and currently does not expect to record an
impairment charge in the foreseeable future. However, there can
be no assurance that at the time future reviews are completed, a
material impairment charge will not be recorded.
Warranty:
Product warranties are recorded at the time revenue is
recognized for certain product shipments. While the Company
engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its
component suppliers, the Company’s warranty obligation is
affected by product failure rates, material usage and service
delivery costs incurred in correcting a product failure. Should
actual product failure rates, material usage or service delivery
costs differ from the Company’s previous estimates,
revisions to the estimated warranty liability would be required.
At December 31, 2005, the Company’s warranty liability
was $11.7 million.
Income Taxes:
As part of the process of preparing the consolidated financial
statements, the Company is required to estimate its income taxes
in each of the jurisdictions in which it operates. This process
involves the Company estimating its actual current tax exposure
together with assessing temporary differences resulting from
differing treatment of items, such as depreciation,
amortization, and inventory reserves, for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included within the consolidated balance
sheets. The Company must then assess the likelihood that its
deferred tax assets will be recovered from future taxable income
and, to the extent it believes that recovery is not likely, the
Company must establish a valuation allowance. In the event that
actual results differ from these estimates, or the Company
adjusts these estimates in future periods, the Company may need
to establish an additional valuation allowance which could
materially impact its financial position and results of
operations.
The Company has a significant income tax benefit associated with
the exercise of its nonqualified stock options recorded to
additional
paid-in-capital.
Historically, the Company believed that it was more likely than
not that the U.S. deferred tax assets associated with this
tax benefit would not be realized and as a result, a valuation
allowance was established for all the deferred tax assets
relating to U.S. income. This valuation allowance against
U.S. assets was maintained until an appropriate level of
taxable income in the U.S. could be sustained. In 2005, the
Company believed it had reached an appropriate sustainable level
of profitability in the U.S.; therefore, $92.5 million of
the valuation allowance was reversed, of which
$78.8 million was credited to additional paid-in capital
and the balance was credited to goodwill related to an
acquisition the Company made in 2004. The Company made this
determination based on a review of the facts and circumstances
at that time.
Litigation:
As described in Item 3 of Part I of this
Form 10-K, the
Company is a party to various pending litigation matters. With
respect to each pending claim, management determines whether it
can reasonably estimate whether a loss is probable and, if so,
the probable range of that loss. If and when management has
determined, with respect to a particular claim, both that a loss
is probable and that it can reasonably estimate the range of
that loss, the Company records a charge equal to either its best
estimate of that loss or the lowest amount in that probable
range of loss. The Company will disclose additional exposures
when the range of loss is subject to considerable interpretation.
With respect to the claims referenced in Item 3, management
of the Company to date has been able to make this determination,
and thus has recorded charges, with respect to the claims
described under the heading “Hewlett-Packard Company.”
As developments occur in these matters and additional
information becomes available, management of the Company will
reassess the probability of any losses and of their range, which
may result in its recording charges or additional charges, which
could materially impact the Company’s results of operation
or financial position.
31
Pension and Other Post-retirement Benefits:
Assumptions used in determining projected benefit obligations
and the fair values of plan assets for the Company’s
pension plans and other post-retirement benefits are evaluated
periodically by management in consultation with outside
actuaries and investment advisors. Changes in assumptions are
based on relevant company data. Critical assumptions, such as
the discount rate used to measure the benefit obligations and
the expected long-term rate of return on plan assets are
evaluated and updated annually. The Company has assumed that the
expected long-term rate of return on plan assets will be 8.00%
for its U.S. defined-benefit pension plan which is the
majority of the Company’s benefit obligation and expense.
At the end of each year, the Company determines the discount
rate that reflects the current rate at which the pension
liabilities could be effectively settled. The Company determined
the discount rate based on the analysis of the Mercer and
Citigroup Pension Discount Curves for high quality investments
and the Moody’s Aa interest rate as of December 31,
2005 that best matched the timing of the plan’s future cash
flows for the period to maturity of the pension benefits. Once
the interest rates were determined, the plan’s cash flow
was discounted at the spot interest rate back to the measurement
date. At year-end 2005, the Company determined this rate to be
5.50% for its U.S. defined-benefit pension plan which is
the majority of the Company’s benefit obligation and
expense. Post-retirement benefit plan discount rates are the
same as those used by the Company’s defined benefit pension
plan in accordance with the provisions of
SFAS No. 106, “Employers’ Accounting for
Post-retirement Benefits other than Pensions.”
A one-quarter percentage point increase in the discount rate
would decrease the Company’s net periodic benefit cost for
the U.S. pension plan by approximately $0.4 million. A
one-quarter percentage point change in the assumed long-term
rate of return would impact the Company’s net periodic
benefit cost for the U.S. pension plan by approximately
$0.1 million.
Recent Accounting Standards Changes
In May 2005, the FASB issued SFAS No. 154
“Accounting Changes and Error Corrections”, which
replaces APB Opinion No. 20 “Accounting Changes”,
and FASB Statement No. 3 “Reporting Accounting Changes
in Interim Financial Statements”, and changes the
requirements for the accounting for and reporting of a change in
accounting principles. This Statement requires retrospective
application to prior periods’ financial statements of
changes in accounting principles, unless it is impracticable to
determine either the period-specific effects or the cumulative
effect of the change. This Statement is effective for accounting
changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted
for accounting changes and corrections of errors made in fiscal
years beginning after the date this Statement is issued. At the
present time, the Company does not believe that adoption of
SFAS 154 will have a material effect on its financial
position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation No. 47
“Accounting for Conditional Asset Retirement
Obligations”, which is an interpretation of FASB Statement
No. 143, “Accounting for Asset Retirement
Obligations”. The interpretation requires a liability for
the fair value of a conditional asset retirement obligation be
recognized if the fair value of the liability can be reasonably
estimated. The interpretation is effective for years ending
after December 15, 2005. The interpretation is not expected
to have a material impact on the Company’s results of
operations or financial position.
In December 2004, the FASB issued SFAS No. 123(R)
“Share-Based Payment” which amends
SFAS No. 123 “Accounting for Stock-Based
Compensation”. This standard requires that all share-based
payments to employees, including grants of employee stock
options, be recognized in the statement of operations based on
their fair values. The standard is effective for public
companies for the first annual period beginning after
June 15, 2005. The final standard allows alternative
methods for determining fair value. The Company will use the
Black-Scholes model to determine the fair value of its
stock-based compensation awards. The Company has made changes to
its equity compensation structure and will begin granting a
combination of restricted stock units and non-qualified stock
options. The Company estimates that the adoption of
SFAS No. 123(R), under the modified prospective
method, will result in a negative impact to earnings per diluted
share, net of tax, of approximately $0.21 to $0.24 in 2006.
32
In April 2005, the Securities and Exchange Commission
(“SEC”) issued Staff Accounting Bulletin
(“SAB”) 107 “Share-Based Payments” which
expresses the SEC Staff’s views regarding the application
of SFAS No. 123(R). As noted above, the adoption of
SFAS No. 123(R), as applied using standards set forth
in SAB 107, will have a material impact on the
Company’s results of operations and financial position.
In December 2004, the FASB issued SFAS No. 153
“Exchanges of Nonmonetary Assets” which amends
Accounting Principles Board Opinion No. 29. This standard
requires that exchanges of nonmonetary assets be measured based
on the fair value of the assets exchanged. This standard is
effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005 and should be applied
prospectively. The adoption of this standard did not have a
material effect on the Company’s financial position,
results of operations or cash flows.
In November 2004, the FASB issued SFAS No. 151
“Inventory Costs” which amends Accounting Research
Bulletin No. 43 Chapter 4. This standard
clarifies that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials
(spoilage) should be recognized as current period charges
and requires the allocation of fixed production overheads to
inventory based on the normal capacity of the production
facilities. This standard is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
At the present time, the Company believes the adoption of this
standard will not have a material effect on its financial
position, results of operations or cash flows.
|
|
| Item 7a: |
Quantitative and Qualitative Disclosures About Market
Risk |
The Company operates on a global basis and is exposed to the
risk that its earnings, cash flows and stockholders’ equity
could be adversely impacted by fluctuations in currency exchange
rates and interest rates. The Company attempts to minimize its
exposures by using certain financial instruments, for purposes
other than trading, in accordance with the Company’s
overall risk management guidelines.
The Company is primarily exposed to currency exchange-rate risk
with respect to certain inter-company balances, forecasted
transactions and cash flow, and net assets denominated in Euro,
Japanese Yen and British Pound. The Company manages its foreign
currency exposures on a consolidated basis, which allows the
Company to analyze exposures globally and take into account
offsetting exposures in certain balances. In addition, the
Company utilizes derivative and non-derivative financial
instruments to further reduce the net exposure to currency
fluctuations.
The Company is also exposed to the risk that its earnings and
cash flows could be adversely impacted by fluctuations in
interest rates. The Company’s policy is to manage interest
costs by using a mix of fixed and floating rate debt that
management believes is appropriate. At times, to manage this mix
in a cost efficient manner, the Company has periodically entered
into interest rate swaps, in which the Company agrees to
exchange, at specified intervals, the difference between fixed
and floating interest amounts calculated by reference to an
agreed upon notional amount.
Cash Flow Hedges
The Company uses interest rate swap agreements to hedge the risk
to earnings associated with fluctuations in interest rates
related to outstanding U.S. dollar floating rate debt. In
the fourth quarter of 2005, the Company entered into a floating
to fixed rate interest rate swap with a notional amount of
$200.0 million, to hedge floating rate debt related to the
term loan facility of its outstanding debt, with a maturity date
of June 2007. For the year ended December 31, 2005, the
Company recorded cumulative net pre-tax unrealized losses of
$0.2 million in accumulated other comprehensive income on
this interest rate swap agreement. During the first quarter of
2004, the Company entered into a floating to fixed rate interest
rate swap with a notional amount of $125.0 million, to
hedge floating rate debt related to the term loan tranche of its
outstanding debt, with a maturity date of 21 months. The
Company subsequently closed out the swap in the second quarter
of 2004, with a realized gain of $1.6 million. The total
pre-tax amount of the gain that was recognized in earnings in
2004 was $0.7 million. The remaining $0.9 million was
recognized in earnings in 2005 over the original term of the
interest rate swap.
33
Assuming a hypothetical adverse change of 100 basis points
in interest rates, the fair market value of the floating to
fixed rate interest rate swap would decrease by approximately
$2.7 million and increase interest expense by approximately
$2.0 million.
Hedges of Net Investments in Foreign Operations
The Company has operations in various countries and currencies
throughout the world, with approximately 30% of its sales
denominated in Euros, 12% in Yen and smaller sales exposures in
other currencies in 2005. As a result, the Company’s
financial position, results of operations and cash flows can be
affected by fluctuations in foreign currency exchange rates. The
Company uses cross-currency interest rate swaps, forward
contracts and range forward contracts to hedge its
stockholders’ equity balance from the effects of
fluctuations in currency exchange rates. These agreements are
designated as foreign currency hedges of a net investment in
foreign operations. Any increase or decrease in the fair value
of cross-currency interest rate swap agreements, forward
contracts or range forward contracts is offset by the change in
the value of the hedged net assets of the Company’s
consolidated foreign affiliates. Therefore, these derivative
instruments are intended to serve as an effective hedge of
certain foreign net assets of the Company.
During 2005, the Company hedged its net investment in Euro
foreign affiliates with cross-currency interest rate swaps, with
notional values ranging from approximately $30.0 million to
approximately $50.0 million. At December 31, 2005, the
notional amount of the outstanding contracts was approximately
$50.0 million. For the year ended December 31, 2005,
the Company recorded cumulative net pre-tax gains of
$0.7 million in accumulated other comprehensive income,
which consists of realized gains of $0.7 million relating
to closed Euro cross-currency interest rate swap agreements.
During 2005 and 2004, the Company hedged its net investment in
Yen foreign affiliates with Japanese Yen cross-currency interest
rate swaps, with notional values ranging from approximately
$26.0 million to approximately $37.0 million,
respectively. At December 31, 2005 and 2004, the notional
amounts of the outstanding contracts were zero and
$37.0 million, respectively. For the year ended
December 31, 2005, the Company recorded cumulative net
pre-tax realized losses of $0.2 million in accumulated
other comprehensive income on the closed Japanese Yen
cross-currency interest rate swap agreements. For the year ended
December 31, 2004, the Company recorded cumulative pre-tax
losses of $2.4 million in accumulated other comprehensive
income, which consists of realized losses of $1.6 million
related to closed Japanese Yen cross-currency interest rate swap
agreements and unrealized losses of $0.8 million relating
to the open Japanese Yen cross-currency interest rate swap
agreements. For the year ended December 31, 2003, the
Company recorded cumulative net pre-tax gains of
$1.6 million in accumulated other comprehensive income,
which consists of realized gains of $1.3 million relating
to the closed Japanese Yen cross-currency interest rate swap
agreements and unrealized gains of $0.3 million relating to
the open Japanese Yen cross-currency interest rate swap
agreements.
During 2005 and 2004, the Company hedged its net investment in
British Pound foreign affiliates with range forward agreements
in British Pounds ranging from approximately
£25.0 million to £75.0 million. Under the
terms of the agreements the Company purchases an option below
the current spot rate to sell British Pounds, and sells an
option to their counterparties above the current spot rate to
buy British Pounds, with option premiums that offset. At
December 31, 2005, the Company had range forward agreements
in British Pounds with a notional amount of
£30.0 million outstanding. For the year ended
December 31, 2005, the Company recorded a cumulative net
pre-tax gain of $6.1 million in accumulated other
comprehensive income, which consists of realized gains of
$5.8 million related to the closed range forward agreements
and unrealized gains of $0.3 million related to the open
British Pound range forward agreements. At December 31,
2004, the Company had no range forward agreements in British
Pounds outstanding. For the year ended December 31, 2004,
the Company recorded a realized cumulative net pre-tax loss of
$8.6 million to accumulated other comprehensive income,
related to the closed range forward agreements.
During 2005, the Company hedged its net investment in British
Pound foreign affiliates with forward foreign exchange contracts
in British Pounds. At December 31, 2005, the Company had no
forward exchange contracts in British Pounds used to hedge its
net investment position. For the year ended December 31,
2005, the Company recorded a realized gain of $1.6 million.
For the year ended December 31, 2004, the Company
34
recorded a cumulative net pre-tax gain of $0.7 million in
accumulated other comprehensive income, which consists of
realized gains of $0.5 million related to closed forward
agreements and unrealized gains of $0.2 million related to
the British Pound forward agreements. As of December 31,
2004, the Company had forward foreign exchange contracts in
British Pounds with a notional amount of approximately
£45.0 million outstanding. For the year ended
December 31, 2003, the Company recorded realized losses of
$3.3 million in accumulated other comprehensive income
relating to forward foreign exchange contracts in British Pounds
that were entered into and closed in 2003. As of
December 31, 2003, the Company had no open forward foreign
exchange contracts in British Pounds.
Assuming a hypothetical adverse change of 10% in year-end
exchange rates (a weakening of the U.S. dollar), the fair
market value of the cross-currency interest rate swap, range
forwards and foreign exchange contracts agreements, designated
as hedges of net investment in foreign operations, as of
December 31, 2005, would decrease accumulated other
comprehensive income by approximately $10.4 million.
Other
The Company enters into forward foreign exchange contracts,
principally to hedge the impact of currency fluctuations on
certain inter-company balances. Principal hedged currencies
include the Euro, Japanese Yen and British Pound. The periods of
these forward contracts typically range from one to three months
and have varying notional amounts which are intended to be
consistent with changes in inter-company balances. Gains and
losses on these forward contracts are recorded in selling and
administrative expenses in the consolidated statements of
operations. At December 31, 2005 and December 31,
2004, the Company held forward foreign exchange contracts with
notional amounts totaling approximately $72.9 million and
$62.9 million, respectively. For the year ended
December 31, 2005, the Company recorded cumulative net
pre-tax gains of $0.5 million, which consists of realized
gains of $1.5 million relating to the closed forward
contracts and $1.0 million of unrealized losses relating to
the open forward contracts. For the year ended December 31,
2004, the Company recorded cumulative net pre-tax gains of
$4.6 million, which consists of realized gains of
$4.5 million on closed forward contracts and a
$0.1 million of unrealized gains on the open forward
contracts. For the year ended December 31, 2003, the
Company recorded cumulative pre-tax gains of $5.4 million,
which consists of realized gains of $4.6 million on closed
forward contracts and $0.8 million of unrealized gains on
the open forward contracts.
Assuming a hypothetical adverse change of 10% in year-end
exchange rates (a strengthening of the U.S. dollar), the
fair market value of the forward contracts, as of
December 31, 2005, would decrease earnings by approximately
$7.3 million.
The Company is exposed to the risk of interest rate fluctuations
from the investments of cash generated from operations. The
Company’s cash equivalents represent highly liquid
investments, with original maturities of 90 days or less,
in repurchase agreements and money market funds. Cash
equivalents are convertible to a known amount of cash and carry
an insignificant risk of change in value. The Company
periodically maintains balances in various operating accounts in
excess of federally insured limits.
35
|
|
| Item 8: |
Financial Statements and Supplementary Data |
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rule 13a-15(f) or
15d-15(f) under the
Securities Exchange Act of 1934. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal
Control — Integrated Framework, our management
concluded that our internal control over financial reporting was
effective as of December 31, 2005.
Our management’s assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
36
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Waters Corporation:
We have completed integrated audits of Waters Corporation’s
2005 and 2004 consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2005 and an audit of 2003 consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and
related consolidated statements of operations, of
stockholders’ equity and comprehensive income, and of cash
flows present fairly, in all material respects, the financial
position of Waters Corporation and its subsidiaries at
December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in
Management’s Annual Report on Internal Control Over
Financial Reporting appearing under Item 8, that the
Company maintained effective internal control over financial
reporting as of December 31, 2005 based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material
respects, based on those criteria. Furthermore, in our opinion,
the Company maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control — Integrated Framework issued by the
COSO. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express
opinions on management’s assessment and on the
effectiveness of the Company’s internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
37
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
____________________________________________________________
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 6, 2006
38
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands, | |
| |
|
except per share data) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
493,588 |
|
|
$ |
539,077 |
|
| |
Accounts receivable, less allowances for doubtful accounts and
sales returns of $6,550 and $7,100 at December 31, 2005 and
2004, respectively
|
|
|
256,809 |
|
|
|
271,731 |
|
| |
Inventories
|
|
|
131,554 |
|
|
|
139,900 |
|
| |
Other current assets
|
|
|
31,041 |
|
|
|
23,176 |
|
| |
|
|
|
|
|
|
| |
|
|
Total current assets
|
|
|
912,992 |
|
|
|
973,884 |
|
|
Property, plant and equipment, net
|
|
|
141,030 |
|
|
|
135,908 |
|
|
Intangible assets, net
|
|
|
84,363 |
|
|
|
85,249 |
|
|
Goodwill
|
|
|
210,571 |
|
|
|
228,537 |
|
|
Other assets
|
|
|
79,975 |
|
|
|
36,848 |
|
| |
|
|
|
|
|
|
| |
|
|
Total assets
|
|
$ |
1,428,931 |
|
|
$ |
1,460,426 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Notes payable and debt
|
|
$ |
326,286 |
|
|
$ |
206,663 |
|
| |
Accounts payable
|
|
|
44,243 |
|
|
|
46,180 |
|
| |
Accrued employee compensation
|
|
|
23,044 |
|
|
|
33,709 |
|
| |
Deferred revenue and customer advances
|
|
|
71,733 |
|
|
|
66,783 |
|
| |
Accrued retirement plan contributions
|
|
|
12,931 |
|
|
|
10,655 |
|
| |
Accrued income taxes
|
|
|
60,710 |
|
|
|
49,120 |
|
| |
Accrued other taxes
|
|
|
14,024 |
|
|
|
12,547 |
|
| |
Accrued warranty
|
|
|
11,719 |
|
|
|
10,565 |
|
| |
Accrued litigation
|
|
|
5,340 |
|
|
|
4,652 |
|
| |
Other current liabilities
|
|
|
33,861 |
|
|
|
52,116 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
603,891 |
|
|
|
492,990 |
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
| |
Long-term debt
|
|
|
500,000 |
|
|
|
250,000 |
|
| |
Long-term portion of retirement benefits
|
|
|
33,074 |
|
|
|
30,980 |
|
| |
Other long-term liabilities
|
|
|
8,334 |
|
|
|
7,770 |
|
| |
|
|
|
|
|
|
| |
|
Total long-term liabilities
|
|
|
541,408 |
|
|
|
288,750 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
1,145,299 |
|
|
|
781,740 |
|
|
Commitments and contingencies (Notes 10, 12, 13, 15
and 19)
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred stock, par value $0.01 per share,
5,000 shares authorized, none issued at December 31,
2005 and 2004
|
|
|
— |
|
|
|
— |
|
| |
Common stock, par value $0.01 per share,
400,000 shares authorized, 142,287 and 141,367 shares
issued, 105,336 and 119,835 shares outstanding at
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2005 and 2004, respectively
|
|
|
1,423 |
|
|
|
1,414 |
|
| |
Additional paid-in capital
|
|
|
467,681 |
|
|
|
366,224 |
|
| |
Retained earnings
|
|
|
1,104,557 |
|
|
|
902,582 |
|
| |
Treasury stock, at cost, 36,951 and 21,532 shares at
December 31, 2005 and 2004, respectively
|
|
|
(1,314,446 |
) |
|
|
(655,161 |
) |
| |
Deferred compensation
|
|
|
(255 |
) |
|
|
(157 |
) |
| |
Accumulated other comprehensive income
|
|
|
24,672 |
|
|
|
63,784 |
|
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
283,632 |
|
|
|
678,686 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
1,428,931 |
|
|
$ |
1,460,426 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
39
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Product sales
|
|
$ |
834,673 |
|
|
$ |
806,801 |
|
|
$ |
723,151 |
|
|
Service sales
|
|
|
323,563 |
|
|
|
297,735 |
|
|
|
235,054 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total net sales
|
|
|
1,158,236 |
|
|
|
1,104,536 |
|
|
|
958,205 |
|
|
Cost of product sales
|
|
|
321,344 |
|
|
|
307,627 |
|
|
|
285,752 |
|
|
Cost of service sales
|
|
|
157,011 |
|
|
|
147,180 |
|
|
|
112,096 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total cost of sales
|
|
|
478,355 |
|
|
|
454,807 |
|
|
|
397,848 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Gross profit
|
|
|
679,881 |
|
|
|
649,729 |
|
|
|
560,357 |
|
|
Selling and administrative expenses
|
|
|
321,694 |
|
|
|
300,150 |
|
|
|
264,252 |
|
|
Research and development expenses
|
|
|
66,905 |
|
|
|
65,241 |
|
|
|
59,242 |
|
|
Purchased intangibles amortization
|
|
|
5,005 |
|
|
|
4,814 |
|
|
|
4,242 |
|
|
Litigation provisions and settlement (Notes 12 and 13)
|
|
|
3,122 |
|
|
|
(9,277 |
) |
|
|
1,500 |
|
|
Loss on sale of business (Note 8)
|
|
|
— |
|
|
|
— |
|
|
|
5,031 |
|
|
Impairment of long-lived intangible asset (Note 9)
|
|
|
— |
|
|
|
3,997 |
|
|
|
— |
|
|
Restructuring and other charges, net (Note 14)
|
|
|
— |
|
|
|
(54 |
) |
|
|
918 |
|
|
Expensed in-process research and development (Note 7)
|
|
|
— |
|
|
|
— |
|
|
|
6,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Operating income
|
|
|
283,155 |
|
|
|
284,858 |
|
|
|
219,172 |
|
|
Other income (expense), net (Note 5)
|
|
|
(3,103 |
) |
|
|
(1,014 |
) |
|
|
(250 |
) |
|
Interest expense
|
|
|
(24,744 |
) |
|
|
(10,074 |
) |
|
|
(2,367 |
) |
|
Interest income
|
|
|
19,255 |
|
|
|
11,901 |
|
|
|
7,131 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income from operations before income taxes
|
|
|
274,563 |
|
|
|
285,671 |
|
|
|
223,686 |
|
|
Provision for income taxes (Note 11)
|
|
|
72,588 |
|
|
|
61,618 |
|
|
|
52,795 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
$ |
201,975 |
|
|
$ |
224,053 |
|
|
$ |
170,891 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per basic common share
|
|
$ |
1.77 |
|
|
$ |
1.87 |
|
|
$ |
1.39 |
|
|
Weighted average number of basic common shares
|
|
|
114,023 |
|
|
|
119,640 |
|
|
|
123,189 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$ |
1.74 |
|
|
$ |
1.82 |
|
|
$ |
1.34 |
|
|
Weighted average number of diluted common shares and equivalents
|
|
|
115,945 |
|
|
|
123,069 |
|
|
|
127,579 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
40
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
201,975 |
|
|
$ |
224,053 |
|
|
$ |
170,891 |
|
| |
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Loss on sale of business
|
|
|
— |
|
|
|
— |
|
|
|
5,031 |
|
| |
|
Provisions for doubtful accounts on accounts receivable
|
|
|
3,726 |
|
|
|
1,332 |
|
|
|
847 |
|
| |
|
Expensed in process research and development
|
|
|
— |
|
|
|
— |
|
|
|
6,000 |
|
| |
|
Provisions on inventory
|
|
|
7,093 |
|
|
|
7,349 |
|
|
|
8,848 |
|
| |
|
Impairment of investments and other assets
|
|
|
4,820 |
|
|
|
5,011 |
|
|
|
250 |
|
| |
|
Stock-based compensation
|
|
|
676 |
|
|
|
74 |
|
|
|
— |
|
| |
|
Deferred income taxes
|
|
|
10,235 |
|
|
|
1,468 |
|
|
|
(5,926 |
) |
| |
|
Depreciation
|
|
|
23,669 |
|
|
|
22,075 |
|
|
|
21,983 |
|
| |
|
Amortization of intangibles
|
|
|
20,016 |
|
|
|
19,851 |
|
|
|
11,865 |
|
| |
|
Tax benefit related to stock option plans
|
|
|
4,872 |
|
|
|
32,012 |
|
|
|
17,582 |
|
| |
Change in operating assets and liabilities, net of acquisitions
and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(Increase) decrease in accounts receivable
|
|
|
(6,515 |
) |
|
|
(36,453 |
) |
|
|
10,938 |
|
| |
|
Increase in inventories
|
|
|
(6,973 |
) |
|
|
(11,575 |
) |
|
|
(4,302 |
) |
| |
|
Decrease (increase) in other current assets
|
|
|
1,102 |
|
|
|
(7,344 |
) |
|
|
(3,199 |
) |
| |
|
(Increase) decrease in other assets
|
|
|
(2,534 |
) |
|
|
3,716 |
|
|
|
501 |
|
| |
|
Increase (decrease) in accounts payable and other current
liabilities
|
|
|
26,802 |
|
|
|
12,203 |
|
|
|
(30,005 |
) |
| |
|
Increase in deferred revenue and customer advances
|
|
|
7,551 |
|
|
|
1,526 |
|
|
|
3,277 |
|
| |
|
Increase (decrease) in accrued litigation
|
|
|
688 |
|
|
|
(16,095 |
) |
|
|
(60,120 |
) |
| |
|
Increase in other liabilities
|
|
|
864 |
|
|
|
246 |
|
|
|
2,544 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by operating activities
|
|
|
298,067 |
|
|
|
259,449 |
|
|
|
157,005 |
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Additions to property, plant, equipment, software capitalization
and other intangibles
|
|
|
(51,045 |
) |
|
|
(66,236 |
) |
|
|
(34,586 |
) |
| |
Business acquisitions, net of cash acquired
|
|
|
— |
|
|
|
(42,369 |
) |
|
|
(35,204 |
) |
| |
Proceeds from sale of business
|
|
|
— |
|
|
|
— |
|
|
|
1,183 |
|
| |
Decrease in restricted cash
|
|
|
— |
|
|
|
— |
|
|
|
49,944 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(51,045 |
) |
|
|
(108,605 |
) |
|
|
(18,663 |
) |
41
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds from debt issuances
|
|
|
915,512 |
|
|
|
885,053 |
|
|
|
682,428 |
|
| |
Payments on debt
|
|
|
(545,889 |
) |
|
|
(674,699 |
) |
|
|
(443,605 |
) |
| |
Payments of debt issuance costs
|
|
|
(443 |
) |
|
|
(1,578 |
) |
|
|
(436 |
) |
| |
Proceeds from stock plans
|
|
|
16,801 |
|
|
|
44,982 |
|
|
|
27,824 |
|
| |
Purchase of treasury shares
|
|
|
(659,285 |
) |
|
|
(231,287 |
) |
|
|
(324,578 |
) |
| |
Proceeds (payments) of debt swaps and other derivatives
contracts
|
|
|
1,289 |
|
|
|
(964 |
) |
|
|
(5,273 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash (used in) provided by financing activities
|
|
|
(272,015 |
) |
|
|
21,507 |
|
|
|
(63,640 |
) |
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(20,496 |
) |
|
|
9,945 |
|
|
|
18,767 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
(Decrease) increase in cash and cash equivalents
|
|
|
(45,489 |
) |
|
|
182,296 |
|
|
|
93,469 |
|
|
Cash and cash equivalents at beginning of period
|
|
|
539,077 |
|
|
|
356,781 |
|
|
|
263,312 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Cash and cash equivalents at end of period
|
|
$ |
493,588 |
|
|
$ |
539,077 |
|
|
$ |
356,781 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income taxes paid
|
|
$ |
27,743 |
|
|
$ |
28,574 |
|
|
$ |
39,353 |
|
| |
Interest paid
|
|
$ |
23,995 |
|
|
$ |
9,676 |
|
|
$ |
3,457 |
|
The accompanying notes are an integral part of the consolidated
financial statements.
42
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
| |
|
Number of | |
|
|
|
Additional | |
|
|
|
|
|
|
|
Other | |
|
Total | |
|
Statements of | |
| |
|
Common | |
|
Common | |
|
Paid-In | |
|
Deferred | |
|
Retained | |
|
Treasury | |
|
Comprehensive | |
|
Stockholders’ | |
|
Comprehensive | |
| |
|
Shares | |
|
Stock | |
|
Capital | |
|
Compensation | |
|
Earnings | |
|
Stock | |
|
Income (Loss) | |
|
Equity | |
|
Income | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance December 31, 2002
|
|
|
132,182 |
|
|
$ |
1,322 |
|
|
$ |
251,203 |
|
|
$ |
— |
|
|
$ |
507,638 |
|
|
$ |
(99,296 |
) |
|
$ |
4,443 |
|
|
$ |
665,310 |
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
170,891 |
|
|
|
— |
|
|
|
— |
|
|
|
170,891 |
|
|
$ |
170,891 |
|
| |
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
46,010 |
|
|
|
46,010 |
|
|
|
46,010 |
|
| |
|
Net appreciation (depreciation) and realized gains (losses)
on derivative instruments, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,688 |
) |
|
|
(6,688 |
) |
|
|
(6,688 |
) |
| |
|
Minimum pension liability adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
116 |
|
|
|
116 |
|
|
|
116 |
|
| |
|
Unrealized gains (losses) on investments, net
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,528 |
|
|
|
1,528 |
|
|
|
1,528 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
40,966 |
|
|
|
40,966 |
|
|
|
40,966 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
211,857 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for Employee Stock Purchase Plan
|
|
|
95 |
|
|
|
1 |
|
|
|
2,196 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,197 |
|
|
|
|
|
|
Stock options exercised
|
|
|
4,431 |
|
|
|
44 |
|
|
|
25,583 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,627 |
|
|
|
|
|
|
Tax benefit related to stock option plans
|
|
|
— |
|
|
|
— |
|
|
|
17,582 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,582 |
|
|
|
|
|
|
Valuation allowance related to stock option deferred tax asset
|
|
|
— |
|
|
|
— |
|
|
|
(7,518 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,518 |
) |
|
|
|
|
|
Treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(324,578 |
) |
|
|
— |
|
|
|
(324,578 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
|
136,708 |
|
|
$ |
1,367 |
|
|
$ |
289,046 |
|
|
$ |
— |
|
|
$ |
678,529 |
|
|
$ |
(423,874 |
) |
|
$ |
45,409 |
|
|
$ |
590,477 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
224,053 |
|
|
|
— |
|
|
|
— |
|
|
|
224,053 |
|
|
$ |
224,053 |
|
| |
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27,413 |
|
|
|
27,413 |
|
|
|
27,413 |
|
| |
|
Net appreciation (depreciation) and realized gains (losses)
on derivative instruments, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,341 |
) |
|
|
(9,341 |
) |
|
|
(9,341 |
) |
| |
|
Minimum pension liability adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
427 |
|
|
|
427 |
|
|
|
427 |
|
| |
|
Unrealized gains (losses) on investments, net
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(124 |
) |
|
|
(124 |
) |
|
|
(124 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,375 |
|
|
|
18,375 |
|
|
|
18,375 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
242,428 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for Employee Stock Purchase Plan
|
|
|
67 |
|
|
|
1 |
|
|
|
2,172 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,173 |
|
|
|
|
|
|
Stock options exercised
|
|
|
4,585 |
|
|
|
46 |
|
|
|
42,763 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
42,809 |
|
|
|
|
|
|
Tax benefit related to stock option plans
|
|
|
— |
|
|
|
— |
|
|
|
32,012 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
32,012 |
|
|
|
|
|
|
Treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(231,287 |
) |
|
|
— |
|
|
|
(231,287 |
) |
|
|
|
|
|
Restricted common stock
|
|
|
7 |
|
|
|
— |
|
|
|
231 |
|
|
|
(157 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
74 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
141,367 |
|
|
$ |
1,414 |
|
|
$ |
366,224 |
|
|
$ |
(157 |
) |
|
$ |
902,582 |
|
|
$ |
(655,161 |
) |
|
$ |
63,784 |
|
|
$ |
678,686 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
201,975 |
|
|
|
— |
|
|
|
— |
|
|
|
201,975 |
|
|
$ |
201,975 |
|
| |
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(44,383 |
) |
|
|
(44,383 |
) |
|
|
(44,383 |
) |
| |
|
Net appreciation (depreciation) and realized gains (losses)
on derivative instruments, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,731 |
|
|
|
7,731 |
|
|
|
7,731 |
|
| |
|
Minimum pension liability adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,021 |
) |
|
|
(1,021 |
) |
|
|
(1,021 |
) |
| |
|
Unrealized gains (losses) on investments, net
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,439 |
) |
|
|
(1,439 |
) |
|
|
(1,439 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(39,112 |
) |
|
|
(39,112 |
) |
|
|
(39,112 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
162,863 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for Employee Stock Purchase Plan
|
|
|
76 |
|
|
|
1 |
|
|
|
2,671 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,672 |
|
|
|
|
|
|
Stock options exercised
|
|
|
824 |
|
|
|
8 |
|
|
|
14,121 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,129 |
|
|
|
|
|
|
Tax benefit related to stock option plans
|
|
|
— |
|
|
|
— |
|
|
|
4,872 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,872 |
|
|
|
|
|
|
Release of valuation allowance
|
|
|
— |
|
|
|
— |
|
|
|
78,753 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
78,753 |
|
|
|
|
|
|
Treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(659,285 |
) |
|
|
— |
|
|
|
(659,285 |
) |
|
|
|
|
|
Restricted common stock
|
|
|
7 |
|
|
|
— |
|
|
|
320 |
|
|
|
(320 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Amortization of restricted stock issuance
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
222 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
222 |
|
|
|
|
|
|
Other stock-based compensation
|
|
|
13 |
|
|
|
— |
|
|
|
720 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
720 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
|
142,287 |
|
|
$ |
1,423 |
|
|
$ |
467,681 |
|
|
$ |
(255 |
) |
|
$ |
1,104,557 |
|
|
$ |
(1,314,446 |
) |
|
$ |
24,672 |
|
|
$ |
283,632 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
|
|
| 1 Description of Business, Organization and Basis of Presentation |
|
Waters Corporation, (“Waters” or the
“Company”) an analytical instrument manufacturer,
designs, manufactures sells and services, through its Waters
Division, high performance liquid chromatography
(“HPLC”), ultra performance liquid chromatography
(“UPLC”) together with HPLC, herein referred to as
(“LC”) and mass spectrometry (“MS”)
instrument systems and associated service and support products
including chromatography columns and other
“consumable” products. These systems are complementary
products that can be integrated together and used along with
other analytical instruments. 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”)
and environmental testing. LC is often combined with MS to
create LC-MS
instruments that include a liquid phase sample introduction and
separation system with mass spectrometric compound
identification and quantification. As a result of the
acquisitions of Creon Lab Control AG (“Creon”) in July
2003 and NuGenesis Technologies Corporation in February 2004,
Waters Division entered the laboratory informatics market.
Laboratory informatics consists of
laboratory-to-enterprise
scale software systems for managing and storing scientific
information collected from a wide variety of instrumental test
methods. Through its TA Instruments Division (“TA”),
the Company designs, manufactures, sells and services thermal
analysis and rheometry instruments which are used in predicting
the suitability of polymers and viscous liquids for various
industrial, consumer goods and health care products. In the
third quarter of fiscal year 2003, the Company completed the
integration of the LC and MS worldwide sales, service and
support organizations. Accordingly, the Micromass operating
segment has been integrated into the Waters operating segment.
As discussed in Note 20 to the consolidated financial
statements, the Company has two operating segments, Waters
Division and TA, which have been aggregated into one reporting
segment for financial statement purposes.
|
|
| 2 |
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. On an on-going basis, the Company
evaluates its estimates, including those related to revenue
recognition, product returns and allowances, bad debts,
inventory valuation, equity investments, goodwill and intangible
assets, income taxes, warranty and installation provisions,
retirement plan obligations, contingencies and litigation. 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,
development by its competitors of new technological innovations,
dependence on key personnel, protection and litigation of
proprietary technology, fluctuations in foreign currency
exchange rates, and compliance with regulations of the
U.S. Food and Drug Administration and similar foreign
regulatory authorities and agencies.
44
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Reclassifications
Certain amounts from prior years have been reclassified in the
accompanying financial statements in order to be consistent with
the current year’s classifications.
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its subsidiaries, most of which are wholly
owned. The Company consolidates entities in which it owns or
controls fifty percent or more of the voting shares. All
material inter-company balances and transactions have been
eliminated.
Translation of Foreign Currencies
For most of the Company’s 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 Company’s net sales
derived from operations outside the United States were 65% in
2005, 64% in 2004 and 63% in 2003. Gains and losses from foreign
currency transactions are included in net income in the
consolidated statements of operations and were not material for
the years presented.
Cash and Cash Equivalents
Cash equivalents primarily represent highly liquid investments,
with original maturities of 90 days or less, in repurchase
agreements and money market funds which are convertible to a
known amount of cash and carry an insignificant risk of change
in value. The Company has periodically maintained balances in
various operating accounts in excess of federally insured limits.
Restricted Cash
At December 31, 2002, restricted cash was
$49.9 million, which represented credit support for a
standby letter of credit issued securing damages awarded plus
interest with respect to the Applera patent litigation
(Note 12). In April 2003, the Company made a payment of
$53.7 million for damages and interest relating to this
patent litigation and, as a result, the Company is no longer
required to maintain a restricted cash balance.
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 51% in
2005, 53% in 2004 and 53% in 2003. None of the Company’s
individual customers accounted for more than 3% of annual
Company sales in 2005, 2004 or 2003. 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.
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
historical write-off experience. The allowance for doubtful
accounts is reviewed on a monthly basis. Past due balances over
90 days and over a specified amount are reviewed
individually for collectibility. Account balances are charged
off against the allowance when the Company feels it is probable
the receivable will not be recovered. The Company does not have
any off-balance-sheet credit exposure related to its customers.
45
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a summary of activity of the Company’s
allowance for doubtful accounts and sales returns for the year
ended December 31, 2005 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
|
|
|
|
Balance at | |
| |
|
Beginning of Period | |
|
Additions | |
|
Deductions | |
|
End of Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
Allowance for Doubtful Accounts and Sales Returns:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
2005
|
|
$ |
7,100 |
|
|
$ |
3,726 |
|
|
$ |
(4,276 |
) |
|
$ |
6,550 |
|
| |
2004
|
|
$ |
5,638 |
|
|
$ |
1,332 |
|
|
$ |
130 |
|
|
$ |
7,100 |
|
| |
2003
|
|
$ |
5,826 |
|
|
$ |
847 |
|
|
$ |
(1,035 |
) |
|
$ |
5,638 |
|
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 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.
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 — thirty years,
building improvements — five to thirty years,
leasehold improvements — the shorter of the economic
useful life or life of lease, and production and other
equipment — two 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. There were no material gains or losses
from retirement or sale of assets in 2005, 2004 and 2003.
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 has elected to make January 1
the annual impairment assessment date for its reporting units.
Statement of Financial Accounting Standard (“SFAS”)
No. 142, “Goodwill and Other Intangible Assets”,
defines a reporting unit as an operating segment, or one level
below an operating segment, if discrete financial information is
prepared and reviewed by management. Goodwill is allocated to
the reporting units at the time of acquisition. Under the
impairment test, if a reporting unit’s 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 were 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 Company’s intangible assets include purchased
technology, capitalized software development costs, costs
associated with acquiring Company patents, trademarks and
intellectual properties, such as licenses, and debt issuance
costs. Purchased intangibles are recorded at their fair market
values as of the acquisition date and amortized over their
estimated useful lives ranging from two to fifteen years. Other
intangibles are amortized over a period ranging from three to
thirteen years. Debt issuance costs are amortized over the life
of the related debt.
46
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Software Development Costs
The Company capitalizes software development costs for products
offered for sale in accordance with SFAS No. 86,
“Accounting for the Costs of Computer 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 four years (Note 9).
The Company capitalizes internal software development costs in
accordance with Statement of Position (“SOP”) 98-1,
“Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use”. Capitalized internal software
development costs are amortized over the period of economic
benefit which approximates a straight-line basis over ten years.
At December 31, 2005 and 2004, capitalized internal
software included in property, plant and equipment totaled
$2.2 million and $2.7 million net of accumulated
amortization of $3.0 million and $2.5 million,
respectively.
Investments
The Company accounts for its investments that represent less
than twenty percent ownership using SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities.” This standard requires that certain debt and
equity securities be adjusted to market value at the end of each
accounting period. Unrealized market gains and losses are
charged to earnings if the securities are traded for short-term
profit. Otherwise, these securities are considered
available-for-sale investments and unrealized gains and losses
are charged or credited to other comprehensive income (loss) in
stockholders’ equity. Realized gains and losses on sales of
investments are included in the consolidated statements of
operations.
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 Company’s 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. All investments at December 31, 2005
and 2004 are included in other assets and amounted to
$11.0 million and $17.9 million, respectively.
Asset Impairments
The Company reviews its long-lived assets for impairment in
accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.” Whenever
events or circumstances indicate that the carrying amount of an
asset 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 Company’s
evaluation is separately identified in the consolidated
statements of operations.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable,
accounts payable and debt approximate cost.
Stockholders’ Equity
On October 24, 2005, the Company’s Board of Directors
authorized the Company to repurchase up to $500.0 million
of its outstanding common shares over a two-year period. The
Company has repurchased 5.6 million shares at a cost of
$216.1 million under this new program through
December 31, 2005. The Company repurchased
15.4 million, 5.5 million, and 11.9 million
common stock shares at a cost of
47
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$659.3 million, $231.3 million, and
$324.5 million, respectively, during 2005, 2004 and 2003,
respectively, under the October 2005 and previously announced
programs. The Company believes it has the resources to fund the
common stock repurchases as well as to pursue acquisition
opportunities in the future.
On August 9, 2002, the Board of Directors approved the
adoption of a stock purchase rights plan where a dividend of one
fractional preferred share purchase right (a “Right”)
was declared for each outstanding share of common stock, par
value $0.01 per share, of the Company. The dividend was
paid on August 27, 2002 to the stockholders of record on
that date. The Rights, which expire on August 27, 2012,
become exercisable only under certain conditions. When they
first become exercisable, each Right will entitle its holder to
buy from Waters one one-hundredth of a share of new
Series A Junior Participating Preferred Stock (authorized
limit of 4,000) for $120.00. When a person or group actually has
acquired 15% or more of Waters’ common stock, the Rights
will then become exercisable for a number of shares of
Waters’ common stock with a market value of twice the
exercise price ($120.00) of each Right. In addition, the Rights
will then become exercisable for a number of shares of common
stock of the acquiring company with a market value of twice the
exercise price per Right. The Board of Directors may redeem the
Rights at a price of $0.001 per Right up until 10 days
following a public announcement that any person or group has
acquired 15% or more of the Company’s common stock.
Hedge Transactions
The Company records its hedge transactions in accordance with
SFAS 133, “Accounting for Derivative Instruments and
Hedging Activities”, as amended, which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be
recorded on the consolidated balance sheets at fair value as
either assets or liabilities. If the derivative is designated as
a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the
fair value of the derivative are recorded in other comprehensive
income (“OCI”) and are recognized in earnings when the
hedged item affects earnings; ineffective portions of changes in
fair value are recognized in earnings.
The Company currently uses derivative instruments to manage
exposures to foreign currency risks. The Company’s
objectives for holding derivatives are to minimize foreign
currency risk using the most effective methods to eliminate or
reduce the impact of foreign currency exposure. The Company
documents all relationships between hedging instruments and
hedged items, and links all derivatives designated as fair
value, cash flow or net investment hedges to specific assets and
liabilities on the consolidated balance sheets or to specific
forecasted transactions. The Company also assesses and
documents, both at the hedges’ inception and on an ongoing
basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair
values or cash flows associated with the hedged items.
The Company operates on a global basis and is exposed to the
risk that its earnings, cash flows and stockholders’ equity
could be adversely impacted by fluctuations in currency exchange
rates and interest rates.
Cash Flow Hedges
The Company uses interest rate swap agreements to hedge the risk
to earnings associated with fluctuations in interest rates
related to outstanding U.S. dollar floating rate debt. In
the fourth quarter of 2005, the Company entered into a floating
to fixed rate interest rate swap with a notional amount of
$200.0 million, to hedge floating rate debt related to the
term loan facility of its outstanding debt, with a maturity date
of June 2007. For the year ended December 31, 2005, the
Company recorded cumulative net pre-tax unrealized losses of
$0.2 million in accumulated other comprehensive income on
this interest rate swap agreement. During the first quarter of
2004, the Company entered into a floating to fixed rate interest
rate swap with a notional amount of $125.0 million, to
hedge floating rate debt related to the term loan tranche of its
outstanding debt, with a
48
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
maturity date of 21 months. The Company subsequently closed
out the swap in the second quarter of 2004, with a realized gain
of $1.6 million. The total pre-tax amount of the gain that
was recognized in earnings in 2004 was $0.7 million. The
remaining $0.9 million was recognized in earnings in 2005
over the original term of the interest rate swap.
Hedges of Net Investments in Foreign Operations
The Company has operations in various countries and currencies
throughout the world, with approximately 30% of its sales
denominated in Euros, 12% in Yen and smaller sales exposures in
other currencies in 2005. As a result, the Company’s
financial position, results of operations and cash flows can be
affected by fluctuations in foreign currency exchange rates. The
Company uses cross-currency interest rate swaps, forward
contracts and range forward contracts to hedge its
stockholders’ equity balance from the effects of
fluctuations in currency exchange rates. These agreements are
designated as foreign currency hedges of a net investment in
foreign operations. Any increase or decrease in the fair value
of cross-currency interest rate swap agreements, forward
contracts or range forward contracts is offset by the change in
the value of the hedged net assets of the Company’s
consolidated foreign affiliates. Therefore, these derivative
instruments are intended to serve as an effective hedge of
certain foreign net assets of the Company.
During 2005, the Company hedged its net investment in Euro
foreign affiliates with cross-currency interest rate swaps, with
notional values ranging from approximately $30.0 million to
approximately $50.0 million. At December 31, 2005, the
notional amount of the outstanding contracts was approximately
$50.0 million. For the year ended December 31, 2005,
the Company recorded cumulative net pre-tax gains of
$0.7 million in accumulated other comprehensive income,
which consists of realized gains of $0.7 million relating
to closed Euro cross-currency interest rate swap agreements.
During 2005 and 2004, the Company hedged its net investment in
Yen foreign affiliates with Japanese Yen cross-currency interest
rate swaps, with notional values ranging from approximately
$26.0 million to approximately $37.0 million,
respectively. At December 31, 2005 and 2004, the notional
amounts of the outstanding contracts were zero and
$37.0 million, respectively. For the year ended
December 31, 2005, the Company recorded cumulative net
pre-tax realized losses of $0.2 million in accumulated
other comprehensive income on the closed Japanese Yen
cross-currency interest rate swap agreements. For the year ended
December 31, 2004, the Company recorded cumulative pre-tax
losses of $2.4 million in accumulated other comprehensive
income, which consists of realized losses of $1.6 million
related to closed Japanese Yen cross-currency interest rate swap
agreements and unrealized losses of $0.8 million relating
to the open Japanese Yen cross-currency interest rate swap
agreements. For the year ended December 31, 2003, the
Company recorded cumulative net pre-tax gains of
$1.6 million in accumulated other comprehensive income,
which consists of realized gains of $1.3 million relating
to the closed Japanese Yen cross-currency interest rate swap
agreements and unrealized gains of $0.3 million relating to
the open Japanese Yen cross-currency interest rate swap
agreements.
During 2005 and 2004, the Company hedged its net investment in
British Pound foreign affiliates with range forward agreements
in British Pounds ranging from approximately
£25.0 million to £75.0 million. Under the
terms of the agreements the Company purchases an option below
the current spot rate to sell British Pounds, and sells an
option to their counterparties above the current spot rate to
buy British Pounds, with option premiums that offset. At
December 31, 2005, the Company had range forward agreements
in British Pounds with a notional amount of
£30.0 million outstanding. For the year ended
December 31, 2005, the Company recorded a cumulative net
pre-tax gain of $6.1 million in accumulated other
comprehensive income, which consists of realized gains of
$5.8 million related to the closed range forward agreements
and unrealized gains of $0.3 million related to the open
British Pound range forward agreements. At December 31,
2004, the Company had no range forward agreements in British
Pounds outstanding. For the year ended December 31, 2004,
the Company recorded a realized cumulative net pre-tax loss of
$8.6 million to accumulated other comprehensive income,
related to the closed range forward agreements.
49
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During 2005, the Company hedged its net investment in British
Pound foreign affiliates with forward foreign exchange contracts
in British Pounds. At December 31, 2005, the Company had no
forward exchange contracts in British Pounds used to hedge its
net investment position. For the year ended December 31,
2005, the Company recorded a realized gain of $1.6 million.
For the year ended December 31, 2004, the Company recorded
a cumulative net pre-tax gain of $0.7 million in
accumulated other comprehensive income, which consists of
realized gains of $0.5 million related to closed forward
agreements and unrealized gains of $0.2 million related to
the British Pound forward agreements. As of December 31,
2004, the Company had forward foreign exchange contracts in
British Pounds with a notional amount of approximately
£45.0 million outstanding. For the year ended
December 31, 2003, the Company recorded realized losses of
$3.3 million in accumulated other comprehensive income
relating to forward foreign exchange contracts in British Pounds
that were entered into and closed in 2003. As of
December 31, 2003, the Company had no open forward foreign
exchange contracts in British Pounds.
Other
The Company enters into forward foreign exchange contracts,
principally to hedge the impact of currency fluctuations on
certain inter-company balances. Principal hedged currencies
include the Euro, Japanese Yen and British Pound. The periods of
these forward contracts typically range from one to three months
and have varying notional amounts which are intended to be
consistent with changes in inter-company balances. Gains and
losses on these forward contracts are recorded in selling and
administrative expenses in the consolidated statements of
operations. At December 31, 2005 and December 31,
2004, the Company held forward foreign exchange contracts with
notional amounts totaling approximately $72.9 million and
$62.9 million, respectively. For the year ended
December 31, 2005, the Company recorded cumulative net
pre-tax gains of $0.5 million, which consists of realized
gains of $1.5 million relating to the closed forward
contracts and $1.0 million of unrealized losses relating to
the open forward contracts. For the year ended December 31,
2004, the Company recorded cumulative net pre-tax gains of
$4.6 million, which consists of realized gains of
$4.5 million on closed forward contracts and a
$0.1 million of unrealized gains on the open forward
contracts. For the year ended December 31, 2003, the
Company recorded cumulative pre-tax gains of $5.4 million,
which consists of realized gains of $4.6 million on closed
forward contracts and $0.8 million of unrealized gains on
the open forward contracts.
Revenue Recognition
Sales of products and services are generally recorded based on
product shipment and performance of service, respectively.
Product shipments, including those for demonstration or
evaluation, and service contracts are not recorded as revenues
until a valid purchase order or master agreement is received
specifying fixed terms and prices. Proceeds received in advance
of product shipment or performance of service are recorded as
deferred revenue in the consolidated balance sheets. Shipping
and handling costs are included in cost of sales net of amounts
invoiced to the customer per the order.
The Company’s method of revenue recognition for certain
products requiring installation is in accordance with Staff
Accounting Bulletin (“SAB”) 104, “Revenue
Recognition in Financial Statements.” Accordingly, revenue
is recognized when all of the following criteria are met:
persuasive evidence of an arrangement exists, delivery has
occurred, the vendor’s fee is fixed or determinable, and
collectibility is reasonably assured and, if applicable, upon
acceptance when acceptance criteria are specified or upon
expiration of the acceptance period. With respect to
installation obligations, the larger of the contractual cash
holdback or the fair value 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 fair value of installation based on
several factors, including hourly service billing rates,
estimated installation hours and comparisons of amounts charged
by third parties.
The Company recognizes product revenue when legal title has
transferred and risk of loss passes to the customer. The Company
generally structures its sales arrangements as FOB shipping
point or international
50
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
equivalent and accordingly, recognizes revenue upon shipment. In
some cases, FOB destination based shipping terms are included in
sales arrangements in which cases revenue is recognized when the
products arrive at the customer site.
Returns and customer credits are infrequent and recorded as a
reduction to sales. Rights of return are generally not included
in sales arrangements. Revenue associated with products that
contain specific customer acceptance criteria is not recognized
before the customer acceptance criterion is satisfied. Discounts
from list prices are recorded as a reduction to sales.
Sales of software are accounted for in accordance with Statement
of Position (“SOP”) No. 97-2, “Software
Revenue Recognition” as amended by SOP 98-9,
“Modification of
SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions”.
Nearly all of the Company’s instruments contain embedded
operating system and data management software, which is included
in the purchase price. Software is also sold separately and
revenue is recognized upon shipment as typically no significant
post-delivery obligations remain. Software upgrades are
typically sold as part of a service contract with revenue
recognized ratably over the term of the service contract.
The Company assists customers in obtaining financing with an
independent third-party leasing company with respect to certain
product sales. Revenue is generally recognized upon product
shipment under these arrangements. The Company receives payment
from the leasing company shortly after shipment, provided
delivery and credit documentation meets contractual criteria.
The customer is obligated to pay the leasing company but the
Company retains some credit risk if the customer is unable to
pay. Accordingly, the Company reduces revenue equal to
pre-established loss-pool criteria, including contracts with
recourse. The Company’s credit risk is significantly
reduced through loss-pool limitations and re-marketing rights in
the event of a default.
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 supplies,
the Company’s 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 cost of material and labor. The liability
is reviewed for reasonableness at least quarterly.
The following is a summary of the activity of the Company’s
accrued warranty liability for the year ended December 31,
2005 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Accruals for | |
|
Settlements | |
|
Balance at | |
| |
|
Beginning of Period | |
|
Warranties | |
|
Made | |
|
End of Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
Accrued warranty liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
2005
|
|
$ |
10,565 |
|
|
$ |
19,679 |
|
|
$ |
(18,525 |
) |
|
$ |
11,719 |
|
| |
2004
|
|
$ |
11,051 |
|
|
$ |
19,915 |
|
|
$ |
(20,401 |
) |
|
$ |
10,565 |
|
| |
2003
|
|
$ |
9,562 |
|
|
$ |
15,611 |
|
|
$ |
(14,122 |
) |
|
$ |
11,051 |
|
Advertising Costs
All advertising costs are expensed as incurred and included in
selling and administrative expenses in the consolidated
statements of operations. Advertising expenses for 2005, 2004
and 2003 were $8.5 million, $6.4 million and
$7.5 million, respectively.
51
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
Expensed In-Process Research and Development Expenses
Costs to acquire in-process research and development
(“IPR&D”) projects and technologies, which have
not reached technological feasibility at the date of acquisition
and have no alternative future use, are expensed as incurred
(Note 7).
Stock-Based Compensation
The Company has five stock-based compensation plans, which are
described in Note 16. The Company uses the intrinsic value
method of accounting prescribed by Accounting Principles Board
Opinion (“APB”) 25, “Accounting for Stock
Issued to Employees”, and related interpretations,
including Financial Interpretation (“FIN”) 44,
“Accounting for Certain Transactions Involving Stock
Compensation”, for its plans. No compensation expense has
been recognized at the grant date for its fixed employee stock
option plans, except as noted below, or its employee stock
purchase plan since all stock based compensation awards are
granted with the exercise price at the current fair value of the
Company’s common stock as of the date of the award. The
cost of time-based restricted stock awards is initially recorded
as deferred compensation and expensed over the respective
vesting period. Stock-based compensation expense recorded,
related to restricted stock awards, except as noted below, was
immaterial for 2005 and 2004.
In 2005, the Company approved an amendment to accelerate the
vesting of approximately 12 thousand unvested stock options and
to extend the expiration date of approximately 36 thousand stock
options granted to a retiring non-employee director of the
Company. The Company also approved an amendment to accelerate
the vesting of 2 thousand shares of the Company’s
restricted common stock granted to the same director. Under
APB 25 and FIN 44 these modifications resulted in a
charge which was recorded in selling and administrative expense
in the 2005 consolidated statements of operations of
approximately $0.5 million.
On December 31, 2004, the Company approved an amendment to
accelerate the vesting of approximately 238 thousand unvested
stock options granted between December 2000 and February 2001 to
certain employees of the Company. These options had an exercise
price significantly greater than the market value of the
Company’s stock at that time; hence, in accordance with
APB 25 and FIN 44, no compensation expense was
recorded in the consolidated statements of operations. Each
stock option was scheduled to vest primarily in 2005, but became
fully vested and exercisable on December 31, 2004. The
exercise price and number of shares underlying each affected
stock option were unchanged. The acceleration of these options
was primarily done as a result of the issuance of
SFAS No. 123(R), “Share-Based Payment”,
which, under the modified prospective method, requires the
expensing of unvested stock options in the first annual
reporting period that begins after June 15, 2005. As a
result of this acceleration, the Company recognized share-based
compensation, net of related tax effects, of $9.1 million
in the fourth quarter of 2004 in the pro forma net income
disclosure for SFAS No. 123, “Accounting for
Stock-Based Compensation”.
52
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table illustrates the effect on net income and
earnings per share had the Company applied the fair value
recognition provisions of SFAS No. 123 for the
Company’s five stock-based compensation plans for all of
the periods shown.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Compensation Expense — Fair Value Method |
|
|
|
|
|
|
| (in thousands, except per share data) |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Net income, as reported December 31
|
|
$ |
201,975 |
|
|
$ |
224,053 |
|
|
$ |
170,891 |
|
|
Deduct: total stock-based employee compensation expense, net of
related tax effects
|
|
|
(22,729 |
) |
|
|
(39,496 |
) |
|
|
(25,999 |
) |
|
Add: stock-based compensation recognized in the consolidated
statements of operations, net of related tax effects
|
|
|
556 |
|
|
|
59 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
179,802 |
|
|
$ |
184,616 |
|
|
$ |
144,892 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic — as reported
|
|
$ |
1.77 |
|
|
$ |
1.87 |
|
|
$ |
1.39 |
|
| |
Basic — pro forma
|
|
$ |
1.58 |
|
|
$ |
1.54 |
|
|
$ |
1.18 |
|
| |
Diluted — as reported
|
|
$ |
1.74 |
|
|
$ |
1.82 |
|
|
$ |
1.34 |
|
| |
Diluted — pro forma
|
|
$ |
1.55 |
|
|
$ |
1.50 |
|
|
$ |
1.14 |
|
The fair value of each option grant under SFAS No. 123
was estimated on the date of grant using the Black-Scholes
option-pricing model. Beginning in 2005, the Company used
implied volatility on its publicly traded options as the basis
for its estimate of expected volatility. The expected volatility
assumption of all grants issued prior to 2005 was derived from
the Company’s historical volatility. In 2005, the Company
changed its stock-based compensation structure and plans to
begin granting a combination of restricted stock units and
non-qualified stock options. The expected life assumption for
2005 grants is based on historical experience for the new
population of non-qualified stock optionees. Relevant data are
described below (options issued are in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Options Issued and Significant Assumptions Used to Estimate Option Fair Values |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Options issued
|
|
|
551 |
|
|
|
1,975 |
|
|
|
2,104 |
|
|
Risk-free interest rate
|
|
|
4.3 |
|
|
|
3.8 |
|
|
|
4.1 |
|
|
Expected life in years
|
|
|
6.0 |
|
|
|
5.5 |
|
|
|
7.5 |
|
|
Expected volatility
|
|
|
.270 |
|
|
|
.552 |
|
|
|
.541 |
|
|
Expected dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Exercise Price and Fair Values of Options on the Date of Grant |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Exercise price
|
|
$ |
39.51 |
|
|
$ |
46.79 |
|
|
$ |
31.60 |
|
|
Fair value
|
|
$ |
14.22 |
|
|
$ |
25.10 |
|
|
$ |
20.13 |
|
Income Per Share
In accordance with SFAS No. 128, “Earnings Per
Share,” 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.
Comprehensive Income
The Company accounts for comprehensive income in accordance with
SFAS No. 130, “Reporting Comprehensive
Income.” The statement establishes standards for reporting
and displaying comprehensive income and its components in a full
set of general-purpose financial statements. The statement
requires that all
53
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements.
Recent Accounting Standards Changes
In May 2005, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 154
“Accounting Changes and Error Corrections”, which
replaces APB Opinion No. 20 “Accounting Changes”,
and FASB Statement No. 3 “Reporting Accounting Changes
in Interim Financial Statements”, and changes the
requirements for the accounting for and reporting of a change in
accounting principles. This Statement requires retrospective
application to prior periods’ financial statements of
changes in accounting principles, unless it is impracticable to
determine either the period-specific effects or the cumulative
effect of the change. This Statement shall be effective for
accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. Early adoption is
permitted for accounting changes and corrections of errors made
in fiscal years beginning after the date this Statement is
issued. At the present time, the Company does not believe that
adoption of SFAS 154 will have a material effect on its
financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation No. 47
“Accounting for Conditional Asset Retirement
Obligations”, which is an interpretation of FASB Statement
No. 143, “Accounting for Asset Retirement
Obligations”. The interpretation requires a liability for
the fair value of a conditional asset retirement obligation be
recognized if the fair value of the liability can be reasonably
estimated. The interpretation is effective for years ending
after December 15, 2005. The interpretation is not expected
to have a material impact on the Company’s results of
operations or financial position.
In December 2004, the FASB issued SFAS No. 123(R)
“Share-Based Payment” which amends
SFAS No. 123 “Accounting for Stock-Based
Compensation”. This standard requires that all share-based
payments to employees, including grants of employee stock
options, be recognized in the statement of operations based on
their fair values. The standard is effective for public
companies for the first annual period beginning after
June 15, 2005. The final standard allows alternative
methods for determining fair value. The Company will use the
Black-Scholes model to determine the fair value of its
stock-based compensation awards. The Company has made changes to
its equity compensation structure and plans to begin granting a
combination of restricted stock units and non-qualified stock
options. The Company estimates that the adoption of
SFAS No. 123(R), under the modified prospective
method, will result in a negative impact to earnings per diluted
share, net of tax, of approximately $0.21 to $0.24 in 2006.
In April 2005, the Securities and Exchange Commission
(“SEC”) issued Staff Accounting Bulletin
(“SAB”) 107 “Share-Based Payments” which
expresses the SEC Staff’s views regarding the application
of SFAS No. 123(R). As noted above, the adoption of
SFAS No. 123(R), as applied using standards set forth
in SAB 107, will have a material impact on the
Company’s results of operations and financial position.
In December 2004, the FASB issued SFAS No. 153
“Exchanges of Nonmonetary Assets” which amends
Accounting Principles Board Opinion No. 29. This standard
requires that exchanges of nonmonetary assets be measured based
on the fair value of the assets exchanged. This standard is
effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005 and should be applied
prospectively. The adoption of this standard did not have a
material effect on the Company’s financial position,
results of operations or cash flows.
In November 2004, the FASB issued SFAS No. 151
“Inventory Costs” which amends Accounting Research
Bulletin No. 43 Chapter 4. This standard
clarifies that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials
(spoilage) should be recognized as current period charges
and requires the allocation of fixed production overheads to
inventory based on the normal capacity of the production
facilities. This standard is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
At the present time, the Company believes the adoption of this
standard will not have a material effect on its financial
position, results of operations or cash flows.
54
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Inventories are classified as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31 | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Raw materials
|
|
$ |
45,257 |
|
|
$ |
51,777 |
|
|
Work in progress
|
|
|
12,908 |
|
|
|
14,125 |
|
|
Finished goods
|
|
|
73,389 |
|
|
|
73,998 |
|
| |
|
|
|
|
|
|
| |
Total inventories
|
|
$ |
131,554 |
|
|
$ |
139,900 |
|
| |
|
|
|
|
|
|
|
|
| 4 |
Property, Plant and Equipment |
Property, plant and equipment consists of the following (in
thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31 | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Land and land improvements
|
|
$ |
8,199 |
|
|
$ |
7,877 |
|
|
Buildings and leasehold improvements
|
|
|
96,036 |
|
|
|
88,834 |
|
|
Production and other equipment
|
|
|
188,534 |
|
|
|
181,800 |
|
|
Construction in progress
|
|
|
10,407 |
|
|
|
8,859 |
|
| |
|
|
|
|
|
|
| |
Total property, plant and equipment
|
|
|
303,176 |
|
|
|
287,370 |
|
|
Less: accumulated depreciation and amortization
|
|
|
(162,146 |
) |
|
|
(151,462 |
) |
| |
|
|
|
|
|
|
| |
Property, plant and equipment, net
|
|
$ |
141,030 |
|
|
$ |
135,908 |
|
| |
|
|
|
|
|
|
During 2005, the Company retired and disposed of approximately
$9.6 million of property, plant and equipment, most of
which was fully depreciated and no longer in use. Gains and
losses on disposal were immaterial.
In the fourth quarter of 2005, the Company recorded a
$4.8 million pre-tax charge for an other-than-temporary
impairment for the full value of the Company’s investment
in Beyond Genomics, Inc. This charge was recorded based on the
Company’s assessment of Beyond Genomics, Inc.’s
current financial condition and uncertainty surrounding their
ability to raise necessary funding.
In November 2000 and February 2002, the Company made minority
equity investments in
GeneProttm, Inc.
(“GeneProt”), a privately held company. The investment
in GeneProt was accounted for under the cost method of
accounting. To the Company’s knowledge, due to changes in
GeneProt’s ability to generate enough commercial interest
to expand its business in the U.S. market, the Company
recorded pre-tax charges of $1.0 million to other income
(expense) in the consolidated statements of operations
during the year ended December, 31, 2004, for an
other-than-temporary impairment of its investment in GeneProt.
The investment in GeneProt is zero at December 31, 2005 and
December 31, 2004.
In June 2000, the Company formed a strategic alliance with
Variagenics, Inc. (“Variagenics”), a publicly traded
company, to develop and commercialize genetic variance reagent
kits for use in the clinical development of pharmaceutical
products. Variagenics was considered a leader in applying
genetic variance information to the drug development process. In
July 2000, the Company paid Variagenics $7.5 million for a
minority common stock equity ownership. The investment in
Variagenics was included in other assets and carried at fair
value with unrealized gains and losses reported as a separate
component of other comprehensive income (loss). On
January 31, 2003, Variagenics was merged with Hyseq
Pharmaceuticals and is now named
55
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Nuvelo, Inc. (“Nuvelo”). In 2005, the Company sold its
Nuvelo, Inc. common stock for $2.5 million resulting in a
gain of $1.7 million which was recorded in other income in
the consolidated statements of operations. The carrying amount,
which approximated market value, of this investment was zero and
$3.0 million at December 31, 2005 and 2004,
respectively.
NuGenesis:
In February 2004, the Company acquired all of the capital stock
of NuGenesis Technologies Corporation (“NuGenesis”), a
company headquartered in Westborough, Massachusetts, for
approximately $42.9 million in cash. NuGenesis developed
and marketed the NuGenesis Scientific Data Management System
(“SDMS”).
The acquisition of NuGenesis was accounted for under the
purchase method of accounting and the results of operations of
NuGenesis have been included in the consolidated results of the
Company from the acquisition date. The purchase price of the
acquisition was allocated to tangible and intangible assets and
assumed liabilities based on their estimated fair values. The
Company has allocated $13.1 million of the purchase price
to intangible assets comprised of customer lists, trademarks and
other purchased intangibles. The excess purchase price of
$34.7 million after this allocation has been accounted for
as goodwill.
The Company considered a number of factors to determine the
purchase price allocation, including engaging a third party
valuation firm to independently appraise the fair value of
certain assets acquired. The following table presents the fair
values of assets and liabilities recorded in connection with the
NuGenesis acquisition (in thousands):
| |
|
|
|
|
|
|
Cash
|
|
$ |
1,983 |
|
|
Accounts receivable
|
|
|
3,079 |
|
|
Inventory
|
|
|
121 |
|
|
Other current assets
|
|
|
194 |
|
|
Goodwill
|
|
|
34,741 |
|
|
Intangible assets
|
|
|
13,100 |
|
|
Fixed assets
|
|
|
722 |
|
|
Other assets
|
|
|
162 |
|
| |
|
|
|
| |
Total assets acquired
|
|
|
54,102 |
|
| |
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
6,817 |
|
|
Deferred tax liability
|
|
|
4,348 |
|
| |
|
|
|
| |
Total liabilities acquired
|
|
|
11,165 |
|
| |
|
|
|
|
Cash consideration paid
|
|
$ |
42,937 |
|
| |
|
|
|
In connection with the NuGenesis purchase price allocation,
deferred tax liabilities were established for the amortization
of intangible assets for book purposes that were not deductible
for tax purposes in the U.S. In the third quarter of 2004,
the Company transferred the NuGenesis intangible assets to a
foreign wholly-owned subsidiary, where the Company expects to
deduct the amortization of the intangible assets for book and
tax purposes. As a result, deferred tax liabilities and goodwill
were reduced by $4.6 million during the year ended
December 31, 2004. In 2005, as a result of the releasing of
the deferred tax valuation allowance related to deferred tax
assets acquired in the NuGenesis acquisition, the Company
reduced goodwill by approximately $13.4 million.
The Company recorded approximately $1.1 million in purchase
accounting liabilities relating to the NuGenesis acquisition.
Approximately $0.4 million had been utilized and
$0.7 million has been reversed as of
56
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
December 31, 2004. The reversal was due to a change in
management’s plan to continue use of a facility lease
assumed as part of the acquisition until the end of its term in
June 2005.
Creon:
Effective July 1, 2003, the Company acquired all of the
capital stock of Creon, a Company headquartered in Cologne,
Germany, for approximately $16.3 million in cash. Creon
specialized in Laboratory Information Management Software
(“LIMS”) solutions.
The acquisition of Creon was accounted for under the purchase
method of accounting and the results of operations of Creon have
been included in the consolidated results of the Company from
the acquisition date. The purchase price of the acquisition was
allocated to tangible and intangible assets and assumed
liabilities based on their estimated fair values. In conjunction
with the acquisition in 2003, the Company recorded a charge of
$6.0 million for the write-off of acquired in-process
research and development. The technological feasibility of
in-process research and development projects had not been
established at the date of acquisition and they had no
alternative future use.
Rheometrics:
On January 15, 2003, the Company acquired the worldwide
rheometry business of Rheometrics for approximately
$16.5 million in cash. This transaction was accounted for
under the purchase method of accounting and the results of
operations of Rheometrics have been included in the consolidated
results of the Company from the acquisition date. This business
has been integrated into existing worldwide TA operations. The
purchase price of the acquisition was allocated to tangible and
intangible assets and assumed liabilities based on their
estimated fair values.
The Company recorded approximately $4.1 million in purchase
accounting liabilities relating to the Rheometrics acquisition.
The purchase accounting liabilities included $1.2 million
for severance costs for approximately 65 employees, all of whom
were terminated as of December 31, 2004, and
$0.9 million in facilities related costs for three
facilities, all of which have been closed as of
December 31, 2004. During 2005, the Company reversed
$0.1 million of accruals established during purchase
accounting against goodwill since it was no longer required.
The following is a summary of activity of the Rheometrics
acquisition schedule of amounts accrued under purchase
accounting and related utilization (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance | |
|
|
|
|
|
Balance | |
| |
|
December 31, | |
|
|
|
Utilization and | |
|
December 31, | |
| |
|
2004 | |
|
Amounts |
|
Reversals | |
|
2005 | |
| |
|
| |
|
|
|
| |
|
| |
|
Relocation
|
|
$ |
73 |
|
|
$ |
— |
|
|
$ |
(3 |
) |
|
$ |
70 |
|
|
Supplier and contract terminations
|
|
|
35 |
|
|
|
— |
|
|
|
(35 |
) |
|
|
— |
|
|
Facility related costs
|
|
|
153 |
|
|
|
— |
|
|
|
(153 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
261 |
|
|
$ |
— |
|
|
$ |
(191 |
) |
|
$ |
70 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Other:
During the year ended December 31, 2004, the Company
acquired various tangible and intangible assets of certain Asian
distributors totaling approximately $1.4 million. In 2003,
the Company made similar acquisitions in Asia and Ireland
totaling approximately $5.4 million.
The following represents the pro forma results of the ongoing
operations for Waters, NuGenesis and Creon as though the
acquisitions of NuGenesis and Creon had occurred at the
beginning of each period shown (in thousands, except per share
data). The pro forma results exclude expensed in-process
research and
57
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
development. The pro forma information, however, is not
necessarily indicative of the results that would have resulted
had the acquisition occurred at the beginning of the periods
presented, nor is it necessarily indicative of future results.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
December 31, | |
|
December 31, | |
|
December 31, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Net revenues
|
|
$ |
1,158,236 |
|
|
$ |
1,105,852 |
|
|
$ |
984,080 |
|
|
Net income
|
|
$ |
201,975 |
|
|
$ |
221,188 |
|
|
$ |
173,918 |
|
|
Income per basic common share (excluding expensed in-process
research and development charge):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
1.77 |
|
|
$ |
1.85 |
|
|
$ |
1.41 |
|
|
Income per diluted common share (excluding expensed in-process
research and development charge):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
1.74 |
|
|
$ |
1.80 |
|
|
$ |
1.36 |
|
The pro forma effects of the Rheometrics and Other acquisitions
are immaterial.
In the first quarter of 2006, the Company acquired the net
assets of the food safety business of VICAM Limited
Partnership for approximately $13.5 million. This
transaction will be accounted for under the purchase method of
accounting. During the first quarter of 2006, the Company will
record each acquired asset and liability assumed at its fair
value, which is subject to future adjustment when appraisals or
other valuation data have been obtained.
|
|
| 7 |
Expensed In-Process Research and Development |
In connection with the acquisition of Creon, the Company wrote
off the fair value of purchased IPR&D of various projects
for the development of new products and technologies in the
amount of $6.0 million. The amount was determined by
identifying research projects for which technological
feasibility had not been established and had no alternative
future uses. As of the acquisition date, there were four
projects that met the above criteria. The significant IPR&D
projects identified consist of the eLab
Notebooktm
and the automatic LC-MS dereplication system. The IPR&D
charges associated with these projects were $4.5 million
and $0.8 million, respectively.
Management determined the valuation of the IPR&D using a
number of factors, including engaging a third party valuation
firm to provide an independent appraisal. The value was based
primarily on the discounted cash flow method. This valuation
included consideration of (i) the stage of completion of
each of the projects, (ii) the technological feasibility of
each of the projects, (iii) whether the projects had an
alternative future use, and (iv) the estimated future
residual cash flows that could be generated from the various
projects and technologies over their respective projected
economic lives.
The primary basis for determining the technological feasibility
of these projects was whether the product has met predetermined
design specifications and complex functionality. As of the
acquisition date, the IPR&D projects had not reached
predetermined design specifications and complex functionality.
In assessing the technological feasibility of a project,
consideration was also given to the level of complexity in
future technological hurdles that each project had to overcome.
Future residual cash flows that could be generated from each of
the projects were determined based upon management’s
estimate of future revenue and expected profitability of the
various products and technologies involved. These projected cash
flows were then discounted to their present values taking into
account management’s estimate of future expenses that would
be necessary to bring the projects to completion. The discount
rates include a rate of return, which accounts for the time
value of money, as well as risk factors that reflect the
economic risk that the cash flows projected may not be realized.
The cash flows were discounted at discount rates ranging from
55% to 60% per annum, depending on the project’s stage
of completion and the
58
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
type of complex functionality needed. This discounted cash flow
methodology for the various projects included in the purchased
IPR&D resulted in a total valuation of $6.0 million.
Although work on the projects related to the IPR&D continued
after the acquisition, the amount of the purchase price
allocated to IPR&D was written off because the projects
underlying the IPR&D that was being developed were not
considered technologically feasible as of the acquisition date.
|
|
| 8 |
Divestiture of Business |
On March 26, 2003, the Company sold the net assets of its
mass spectrometry inorganic product line for approximately
$1.2 million in cash and the balance in notes receivable.
Assets sold included inventory and certain accounts receivable,
and liabilities assumed by the acquirer consisted of deferred
service sales and advance payment obligations, and warranty and
installation obligations. The Company recorded a loss on
disposal of approximately $5.0 million, including severance
costs of approximately $0.3 million. This business
generated sales of approximately $14.0 million per year
with no significant effects to earnings per share results.
|
|
| 9 |
Goodwill and Other Intangibles |
The carrying amount of goodwill was $210.6 million and
$228.5 million at December 31, 2005 and 2004,
respectively. The decrease is primarily attributable to the
release of a deferred tax asset valuation allowance of
approximately $13.4 million associated with the NuGenesis
acquisition, resulting in a credit to goodwill. The additional
change in goodwill is attributable to a $4.4 million
decrease relating to currency translation and the reversal of
$0.1 million of goodwill relating to an accrual established
as part of the Rheometrics purchase, since it was no longer
required.
The Company’s intangible assets included in the
consolidated balance sheets are detailed as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2005 | |
|
December 31, 2004 | |
| |
|
| |
|
| |
| |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
| |
|
|
|
Average | |
|
|
|
Average | |
| |
|
Gross Carrying | |
|
Accumulated | |
|
Amortization | |
|
Gross Carrying | |
|
Accumulated | |
|
Amortization | |
| |
|
Amount | |
|
Amortization | |
|
Period | |
|
Amount | |
|
Amortization | |
|
Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Purchased intangibles
|
|
$ |
61,827 |
|
|
$ |
27,250 |
|
|
|
11 years |
|
|
$ |
64,814 |
|
|
$ |
22,812 |
|
|
|
11 years |
|
|
Capitalized software
|
|
|
85,089 |
|
|
|
47,846 |
|
|
|
3 years |
|
|
|
66,186 |
|
|
|
35,384 |
|
|
|
3 years |
|
|
Licenses
|
|
|
9,548 |
|
|
|
5,052 |
|
|
|
9 years |
|
|
|
9,500 |
|
|
|
4,122 |
|
|
|
10 years |
|
|
Patents and other intangibles
|
|
|
12,137 |
|
|
|
4,090 |
|
|
|
8 years |
|
|
|
9,829 |
|
|
|
2,762 |
|
|
|
8 years |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
168,601 |
|
|
$ |
84,238 |
|
|
|
7 years |
|
|
$ |
150,329 |
|
|
$ |
65,080 |
|
|
|
7 years |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation decreased the gross carrying value
of intangible assets by approximately $3.3 million in 2005.
For the years ended December 31, 2005, 2004 and 2003,
amortization expense for intangible assets was
$20.0 million, $19.9 million and $11.9 million,
respectively. Amortization expense for intangible assets is
estimated to be approximately $20.1 million for each of the
next five years. Accumulated amortization for intangible assets
decreased approximately $0.9 million in 2005 due to the
effect of foreign currency translation.
During the year ended December 31, 2004, the Company
acquired approximately $16.1 million of purchased
intangibles as a result of the NuGenesis acquisition
(Note 6) and other various customer lists and distributor
rights, mostly in Asia. In addition, foreign currency
translation increased intangible assets by approximately
$1.9 million in 2004.
During the year ended December 31, 2004, the Company
retired approximately $7.9 million in fully amortized
purchased intangibles and $2.8 million in fully amortized
capitalized software related to thermal
59
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
analysis technology no longer in use. During 2004, the Company
recorded a pre-tax charge of $4.0 million in the
consolidated statements of operations for the impairment of a
license with Sandia National Laboratories.
In November 2005, the Company entered into a new Credit
Agreement (the “November 2005 Credit Agreement”) that
provides for a $250.0 million term loan facility due in
November 2010. The Company may, on a single occasion, request of
the lender group that the facility be increased up to an
additional $100.0 million. The Company plans to use the
proceeds of the term loan to finance the repurchase of common
stock under its stock repurchase program previously approved by
its Board of Directors and for general corporate purposes. The
interest rates applicable to any U.S. borrowings under the
November 2005 Credit Agreement are, at the Company’s
option, equal to either the base rate (which is the higher of
the prime rate or the federal funds rate plus 1/2%) or, on any
Euro borrowings, the applicable 1, 2, 3, 6, 9 or
12 month LIBOR rate, in each case plus an interest rate
margin based upon the Company’s leverage ratio, which can
range between 37.5 basis points and 112.5 basis
points. The November 2005 Credit Agreement requires that the
Company comply with an interest coverage ratio test of not less
than 3.50:1, and a leverage ratio test of not more than 3.25:1,
for any period of four consecutive fiscal quarters,
respectively. In addition, the November 2005 Credit Agreement
includes negative covenants that are customary for investment
grade credit facilities and are similar in nature to ones
contained in the Company’s existing credit facility. The
November 2005 Credit Agreement also contains certain customary
representations and warranties, affirmative covenants and events
of default, similar in nature to those in the Company’s
existing credit facility.
In December 2004, the Company entered into a syndicated
committed Credit Agreement (the “Credit Agreement”)
that provides for a $250.0 million term loan facility due
in December 2009 and, subsequent to the amendment discussed
below, a $550.0 million revolving facility, which includes
both a letter of credit and a swingline subfacility. In October
2005, the Company exercised the $100.0 million expansion
feature in the credit agreement dated December 2004, increasing
the amount from $700.0 million to $800.0 million. The
Company plans to use the proceeds of the additional borrowings,
if and when utilized, for general corporate purposes as provided
for under the Credit Agreement. In October 2005, the Company
amended the Credit Agreement (the “Amended Credit
Agreement”) to increase the leverage ratio test from not
more than 3.0:1 for any period of four consecutive fiscal
quarters, to 3.25:1 and to amend the definition of Consolidated
EBITDA (earnings before interest, taxes, depreciation and
amortization) to exclude stock-based compensation to the extent
deducted from consolidated net income pursuant to
SFAS 123(R), “Share-Based Payment”. All other
terms and conditions under the original Credit Agreement with
respect to interest rates, interest coverage ratio test,
maturity dates and affirmative and negative covenants remained
substantially the same in the Amended Credit Agreement.
As of December 31, 2005, the Company had
$250.0 million borrowed under the November 2005 Credit
Agreement and $560.0 million under the Amended Credit
Agreement for a total of $810.0 million borrowed under the
two credit agreements and an amount available to borrow of
$238.4 million after outstanding letters of credit. In
total, $500.0 million of the total debt was classified as
long-term debt and $310.0 million classified as short-term
debt at December 31, 2005 in the consolidated balance
sheets. At December 31, 2004, the Company had aggregate
borrowings under the Amended Credit Agreement of
$440.0 million. The Company, and its foreign subsidiaries,
also had available short-term lines of credit, totaling
$76.9 million at December 31, 2005 and
$95.7 million at December 31, 2004. At
December 31, 2005 and 2004, related short-term borrowings
were $16.3 million at a weighted average interest rate of
3.11% and $16.7 million at a weighted average interest rate
of 2.45%, respectively.
60
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income tax data for the years ended December 31, 2005, 2004
and 2003 follow in the tables below (in thousands).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31 | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
The components of income from operations before income taxes
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Domestic
|
|
$ |
53,757 |
|
|
$ |
83,573 |
|
|
$ |
55,580 |
|
| |
Foreign
|
|
|
220,806 |
|
|
|
202,098 |
|
|
|
168,106 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
274,563 |
|
|
$ |
285,671 |
|
|
$ |
223,686 |
|
| |
|
|
|
|
|
|
|
|
|
|
The components of the current and deferred income tax
provision
from operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
63,437 |
|
|
$ |
58,674 |
|
|
$ |
46,008 |
|
| |
Deferred
|
|
|
9,151 |
|
|
|
2,944 |
|
|
|
6,787 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
72,588 |
|
|
$ |
61,618 |
|
|
$ |
52,795 |
|
| |
|
|
|
|
|
|
|
|
|
|
The components of the provision for income taxes from
operations
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
39,852 |
|
|
$ |
28,262 |
|
|
$ |
20,077 |
|
| |
State
|
|
|
4,488 |
|
|
|
4,061 |
|
|
|
2,066 |
|
| |
Foreign
|
|
|
28,248 |
|
|
|
29,295 |
|
|
|
30,652 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
72,588 |
|
|
$ |
61,618 |
|
|
$ |
52,795 |
|
| |
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
96,097 |
|
|
$ |
99,985 |
|
|
$ |
78,290 |
|
| |
Extraterritorial income exclusion
|
|
|
(3,384 |
) |
|
|
(3,061 |
) |
|
|
(2,665 |
) |
| |
State income tax, net of federal income tax benefit
|
|
|
1,286 |
|
|
|
2,640 |
|
|
|
1,343 |
|
| |
Net effect of foreign operations
|
|
|
(44,658 |
) |
|
|
(37,875 |
) |
|
|
(23,811 |
) |
| |
AJCA dividend repatriation
|
|
|
24,000 |
|
|
|
— |
|
|
|
— |
|
| |
Other, net
|
|
|
(753 |
) |
|
|
(71 |
) |
|
|
(362 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Provision for income taxes
|
|
$ |
72,588 |
|
|
$ |
61,618 |
|
|
$ |
52,795 |
|
| |
|
|
|
|
|
|
|
|
|
61
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31 | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
The tax effects of temporary differences and carryforwards which
gave rise to deferred tax assets and deferred tax
(liabilities) were as follows:
|
|
|
|
|
|
|
|
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
|
Net operating losses and credits
|
|
$ |
125,632 |
|
|
$ |
136,313 |
|
| |
|
Depreciation and capitalized software
|
|
|
1,570 |
|
|
|
— |
|
| |
|
Amortization
|
|
|
12,644 |
|
|
|
6,357 |
|
| |
|
Deferred compensation
|
|
|
9,553 |
|
|
|
9,193 |
|
| |
|
Revaluation of equity investments
|
|
|
9,356 |
|
|
|
10,390 |
|
| |
|
Inventory
|
|
|
2,761 |
|
|
|
2,735 |
|
| |
|
Accrued liabilities and reserves
|
|
|
2,444 |
|
|
|
5,887 |
|
| |
|
Interest
|
|
|
5,161 |
|
|
|
5,161 |
|
| |
|
Other
|
|
|
7,807 |
|
|
|
7,337 |
|
| |
|
|
|
|
|
|
| |
|
|
176,928 |
|
|
|
183,373 |
|
| |
Valuation allowance
|
|
|
(87,997 |
) |
|
|
(167,501 |
) |
| |
|
|
|
|
|
|
| |
Deferred tax asset, net of valuation allowance
|
|
|
88,931 |
|
|
|
15,872 |
|
| |
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and capitalized software
|
|
|
(7,290 |
) |
|
|
(8,469 |
) |
| |
|
Amortization
|
|
|
(1,625 |
) |
|
|
(1,625 |
) |
| |
|
Deferred compensation
|
|
|
(3,590 |
) |
|
|
— |
|
| |
|
Indefinite lived intangibles
|
|
|
(13,381 |
) |
|
|
(8,766 |
) |
| |
|
Other
|
|
|
(47 |
) |
|
|
(3,283 |
) |
| |
|
|
|
|
|
|
| |
|
|
(25,933 |
) |
|
|
(22,143 |
) |
| |
|
|
|
|
|
|
| |
|
|
Net deferred tax assets (liabilities)
|
|
$ |
62,998 |
|
|
$ |
(6,271 |
) |
| |
|
|
|
|
|
|
Statement of Financial Accounting Standard
SFAS No. 109, “Accounting for Income Taxes”,
requires that a Company evaluate the necessity of establishing
or increasing a valuation allowance for deferred tax assets
depending on whether it is more likely than not that a related
benefit will be recognized in future periods. At
December 31, 2004, the Company determined that it was more
likely than not that the $167.5 million of deferred tax
benefit would not be realized, therefore, a valuation allowance
had reduced this deferred tax benefit to zero. Included in the
$167.5 million of total valuation allowance, at
December 31, 2004, was $154.9 million relating to
U.S. assets. The valuation allowance against the
U.S. deferred tax assets would be maintained until an
appropriate level of taxable income in the U.S. could be
sustained. To the extent the deferred tax assets relate to stock
option deductions, the resultant benefits, if and when realized,
will be credited to additional paid-in capital.
In 2005, the Company reversed approximately $92.5 million
of its valuation allowance on its deferred tax assets with a
credit of $78.8 million to additional paid-in capital and
the remainder to goodwill in the consolidated balance sheet. The
Company believes an appropriate level of profitability had been
established and believes that it is more likely than not that
the deferred tax assets will be realized in the future. The
Company made this determination based on a review of the facts
and circumstances at this time.
Net deferred tax assets include $13.0 million and
$4.1 million in other current assets and $50.0 million
and zero in other assets at December 31, 2005 and 2004,
respectively. Net deferred tax liabilities included in
62
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
other current liabilities totaled zero and $10.4 million at
December 31, 2005, and 2004, respectively. The deferred tax
liabilities relate primarily to the U.S.
The Company’s deferred tax benefit of net operating losses
and credits is broken out as follows: $45.5 million
($123.0 million pre-tax) in U.S. federal and state
operating loss carryforwards that begin to expire in 2020 and
2006, respectively; $63.6 million in foreign tax credits,
which begin to expire in 2009; $6.5 million in research and
development credits that begin to expire in 2009; and
$10.0 million ($36.5 million pre-tax) in foreign net
operating losses with expiration dates ranging from 2006 to
unlimited.
The Company has provided a valuation allowance of
$88.0 million principally against foreign tax credits
($63.6 million), certain foreign net operating losses,
deferred interest and other deferred tax assets. The benefit
relating to foreign tax credits and other deferred tax assets,
if and when realized, will be credited to additional paid-in
capital.
The income tax benefits associated with non-qualified stock
option compensation expense recognized for tax purposes and
credited to additional paid-in capital were $4.9 million,
$32.0 million and $17.6 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
At December 31, 2005, there were unremitted earnings of
foreign subsidiaries of approximately $304.4 million. The
Company has not provided for U.S. income taxes or foreign
withholding taxes on these earnings as it is the Company’s
current intention to permanently reinvest the earnings outside
the U.S.
In October 2004, the American Jobs Creation Act
(“AJCA”) was signed into law. The AJCA creates a
temporary incentive for U.S. multi-national corporations to
repatriate accumulated income abroad by providing an 85%
dividends received deduction for certain dividends from
controlled foreign corporations. It previously had been the
Company’s practice to permanently reinvest all foreign
earnings into foreign operations. In July 2005, the Board of
Directors of the Company approved the repatriation of
$500.0 million as a qualified distribution in accordance
with the AJCA. The Company will use the repatriated cash to fund
current and future operating expenses within the parameters of
Internal Revenue Service guidance. During the third quarter of
2005, the Company recorded a tax liability of $24.0 million
for the federal, state and foreign taxes related to the
qualified and base period distribution in accordance with
SFAS No. 109. The Company made $10.0 million in
tax payments during 2005 and the Company expects to make a tax
payment of approximately $9.0 million during the first
quarter of 2006. The remaining $5.0 million of this tax
liability was offset by the tax benefit of a net operating loss
carryforward (“NOL”), which was credited to additional
paid-in capital in the third quarter of 2005. The tax benefit of
the NOL was previously reserved for as a valuation allowance in
additional paid-in capital since the NOL was originally
associated with non-qualified stock option compensation expense
recognized for tax purposes. The tax benefit became realizable
as a result of the repatriation in the third quarter of 2005,
and accordingly, income taxes payable was reduced and additional
paid-in capital was credited for $5.0 million.
The Company’s effective tax rate for the years ended
December 31, 2005, 2004 and 2003 were 26.4%, 21.6% and
23.6%, respectively. The effective tax rate for 2005 includes
the $24.0 million provision made under the AJCA. Without
this provision, the Company’s effective tax rate for 2005
would have been 17.7%. The Company’s effective tax rate has
benefited primarily from the preferential tax rate of 10%
afforded its Irish operations. The Irish rate will increase to
12.5% in 2011. The effect of the Irish operation is a benefit of
approximately $49.4 million or $0.43 per diluted share
for the year ended December 31, 2005.
Applera Corporation:
PE Corporation (since renamed Applera Corporation), MDS, Inc.
and Applied Biosystems/ MDS Sciex (“the Plaintiffs”)
filed a civil action against Micromass UK Limited and Micromass,
Inc., wholly owned subsidiaries of the Company, in the
U.S. District Court for the District of Delaware (the
“Court”) on
63
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
February 18, 2000. The Plaintiffs alleged that the Quattro
Ultima triple quadrupole mass spectrometer infringes
U.S. Patent No. 4,963,736 (“the patent”).
The patent is owned by MDS, Inc. and licensed to a joint venture
with Applied Biosystems/ MDS Sciex Instruments.
In March 2002, the Company was informed of a jury’s finding
that the Quattro Ultima with Mass Transit ion tunnel technology
infringes the patent. The same jury found that the infringement
was not willful and determined damages in the amount of
$47.5 million. The Court entered an injunction in which the
Company is enjoined from making, using and selling in the
U.S. the Quattro Ultima triple quadrupole mass spectrometer
incorporating features of the patent.
In March 2003, the Court’s decision was affirmed on appeal.
In April 2003, the Company paid total damages and interest of
approximately $53.7 million to the Plaintiffs. These
instruments are manufactured in the United Kingdom and shipments
to the rest of the world outside the United States were not
subject to this litigation. Similar claims were asserted against
the Company by the Plaintiffs in Japan and Canada. Also, in
2003, the Company reversed approximately $0.9 million of
interest as a one-time credit to interest expense.
Previously, in July 2002, the Company filed a civil action
against Applera Corporation alleging patent infringement of
U.S. Patent No. 5,304,798 owned by the Company. In
November 2002, the University of Manitoba (the
“University”) and Applera Corporation, its licensee,
filed a civil action against the Company alleging patent
infringement of U.S. Patent No. 6,331,702 owned by the
University.
On October 31, 2003, MDS, Inc. and Applied Biosystems/ MDS
Sciex Instruments filed a civil action against Micromass UK
Limited, Waters Limited, wholly-owned subsidiaries of the
Company, and the Company, in the High Court of Justice, Chancery
Division, Patents Courts, UK. The case alleged that certain of
the Company’s MS products infringe European Patent
(UK) No. 0 373 835 (the “European Patent”).
To the Company’s knowledge, the European Patent is owned by
MDS, Inc. and licensed to a joint venture with Applied
Biosystems/ MDS Sciex Instruments. The Plaintiffs in this action
were seeking an injunction against the Company to restrain it
from infringing the European Patent and an unspecified award of
damages.
On March 2, 2004, the Company and MDS, Inc., through its
Applied Biosystems/ MDS Sciex Instruments partnership, and
Applied Biosystems entered into a settlement agreement (the
“Applera Settlement Agreement”) with respect to the
various civil actions pending against each of them, both in the
United States and internationally. Stipulations of Dismissal or
their foreign equivalents (the “Stipulations”) with
respect to the disposal of all such actions have been entered in
the applicable courts and tribunals in each of the United
States, the United Kingdom, Canada and Japan.
The Applera Settlement Agreement provides for the resolution of
all patent infringement claims in the United States made by
certain of the parties against the other and of international
cases brought by MDS, Inc. and Applied Biosystems/ MDS Sciex
Instruments against the Company with respect to alleged
infringements of those parties’ patents at issue in the
United Kingdom, Canada and Japan.
In consideration of entering into the Applera Settlement
Agreement and the Stipulations, the Company and MDS, Inc. and
Applied Biosystems/ MDS Sciex Instruments have entered into
royalty paying license agreements, cross licensing the use of
the technology described in the parties’ respective patents
at issue. In addition, the Company made a one-time payment to
Applied Biosystems/ MDS Sciex Instruments of $18.1 million
on March 11, 2004.
The accrued patent litigation expenses in the consolidated
balance sheets as of December 31, 2005 and
December 31, 2004 were zero and $0.1 million,
respectively. The change in the liability from December 31,
2004 is attributed to the payment of legal fees directly
associated with these cases. There were no charges in the
statements of operations for the years ended December 31,
2005, 2004 and 2003 related to these cases.
64
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Hewlett-Packard Company:
The Company filed suit in the United States against
Hewlett-Packard Company and Hewlett-Packard GmbH (collectively,
“HP”), seeking a declaration that certain products
sold under the mark “Alliance” do not constitute an
infringement of one or more patents owned by HP or its foreign
subsidiaries (the “HP patents”). The action in the
United States was dismissed for lack of controversy. Actions
seeking revocation or nullification of foreign HP patents were
filed by the Company in Germany, France and England. A German
patent tribunal found the HP German patent to be valid. In
Germany, France and England, HP and its successor, Agilent
Technologies Deutschland GmbH (“Agilent”), have
brought an action alleging that certain features of the Alliance
pump may infringe the HP patents. In England, the Court of
Appeal found the HP patent valid and infringed. The
Company’s petitions for leave to appeal to the House of
Lords were denied. A trial on damages was scheduled for November
2004. In March 2004, Agilent Technologies GmbH brought a new
action against the Company alleging that certain features of the
Alliance pump continue to infringe the HP patents. At a hearing
held in the UK in June, 2004, the UK court postponed the
previously scheduled November 2004 damages trial until March
2005. Instead, the court scheduled the trial in the new action
for November 2004. In December 2004, following a trial in the
new action, the UK court ruled that the Company did not infringe
the HP patents. Agilent filed an appeal in that action, which
was heard in July 2005, and the UK Appellate Court upheld the
lower court’s ruling of non-infringement. The damages trial
scheduled for March 2005 was postponed pending this appeal and
rescheduled for December, 2005. In December, 2005, a trial on
damages commenced in the first action and continued for six days
prior to a holiday recess. In February, 2006, the Company, HP
and Agilent entered into a settlement agreement (the
“Agilent Settlement Agreement”) with respect to the
first action and a Consent Order dismissing the case was
entered. The Agilent Settlement Agreement provides for the
release of the Company and its UK affiliate from each and every
claim under Agilent’s European patent
(UK) number 309,596 arising out of the prior sale by
either of them of Alliance Separations Modules incorporating the
patented technology. In consideration of entering into the
Agilent Settlement Agreement and the Consent Order, the Company
made a payment to Agilent of 3.5 million British Pounds, in
full and final settlement of Agilent’s claim for damages
and in relation to all claims for costs and interest in the
case. In France, the Paris District Court has found the HP
patent valid and infringed by the Alliance pump. The Company
appealed the French decision and in April, 2004, the French
appeals court affirmed the Paris District Court’s finding
of infringement. The Company has filed a further appeal in the
case. In the German case, a German court has found the patent
infringed. The Company appealed the German decision, and in
December 2004, the German appeals court reversed the trial court
and issued a finding of non-infringement in favor of the
Company. Agilent is seeking an appeal in that action and in July
2005 brought a new action against the Company alleging that
certain features of the Alliance pump continue to infringe the
HP patents. This case is currently pending.
The Company recorded a provision of $3.1 million during
2005 for damages and fees to be incurred with respect to the
litigation, which was settled in February 2006. The Company
recorded a provision of $7.8 million in the first quarter
of 2004 for estimated damages and fees to be incurred with
respect to the ongoing litigation for the England and France
suits. No provision has been made for the Germany suit and the
Company believes the outcome, if the plaintiff ultimately
prevails, will not have a material impact on the Company’s
financial position. The accrued patent litigation expense in the
consolidated balance sheets at December 31, 2005 and
December 31, 2004 was $5.3 million and
$4.5 million, respectively, for the England and France
suits. The change in the liability through December 31,
2005 is attributable to the provision discussed above and
payments of legal fees directly associated with the cases.
Perkin-Elmer Corporation:
The Company, through its subsidiary TA, asserted a claim against
The Perkin-Elmer Corporation (“PE”) alleging patent
infringement of three patents owned by TA (the “TAI
patents”). PE counterclaimed for infringement of a patent
owned by PE (the “PE patent”). The U.S. District
Court for the District of Delaware granted judgment as a matter
of law in favor of TA and enjoined PE from infringing the TAI
patents.
65
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
PE appealed the District Court judgment in favor of TA to
the federal appellate court. The District Court’s judgment,
with respect to PE’s infringement of the TAI patents, was
affirmed. The District Court’s judgment with respect to
TA’s non-infringement of the PE patent was reversed and
remanded to the District Court for further proceedings.
On remand to the District Court in October 2002, a jury found PE
liable to TA for damages of $13.3 million and found TA did
not infringe the PE patent. In May 2003, the District Court
entered judgment on the jury’s verdict in favor of the
Company. PE has appealed the judgment with respect to TA’s
non-infringement of the PE patent. A hearing on the matter was
held on May 4, 2004. On May 5, 2004, the United States
Court of Appeals for the Federal Circuit affirmed the judgment
of non-infringement of the PE Patent. On May 11, 2004, PE,
now known as Applera Corporation, paid the Company
$17.4 million, including $0.2 million in post-judgment
interest which has been classified as interest income in the
consolidated statements of operations. Approximately
$0.1 million in legal fees were incurred and were offset
against the recording of settlement proceeds.
|
|
| 13 |
Environmental Contingency |
In July 2003, the Company entered into a settlement agreement
(the “Environmental Settlement Agreement”) with the
Commonwealth of Massachusetts, acting by and through the
Attorney General and the Department of Environmental Protection,
with respect to alleged non-compliance with state environmental
laws at its Taunton, Massachusetts facility. Pursuant to the
terms of a final judgment entered in the Superior Court of the
Commonwealth on July 10, 2003, the Company paid a civil
penalty of $5.9 million. In addition, the Company agreed to
conduct a Supplemental Environmental Project in the amount of
$0.6 million, comprised of investments in capital
infrastructure, to study the effects of bio-filtration on
certain air emissions from the Taunton facility and for the
purchase of equipment in connection therewith. As of
December 31, 2005, the Company had fulfilled its
obligations with respect to the Supplemental Environmental
Project. Pursuant to the terms of the Environmental Settlement
Agreement, the Company also agreed to undertake a variety of
actions to ensure that air emissions from the facility do not
exceed certain limits and that the facility is brought into full
compliance with all applicable environmental regulations.
|
|
| 14 |
Restructuring and Other Charges |
2006 Restructuring:
In early February 2006, the Company began implementing a cost
reduction plan, primarily affecting operations in the U.S. and
Europe that resulted in the employment of approximately 70
employees being terminated with effective dates through third
quarter of 2006. In addition, the Company plans to close a sales
and demonstration office in the Netherlands in the third quarter
of 2006. The Company is implementing this cost reduction plan
primarily to realign its operating costs with business
opportunities around the world. The Company expects to incur a
one-time estimated restructuring charge in 2006 in the range of
$5.0 million to $7.0 million. The Company expects the
entire restructuring plan to be completed by the third quarter
of 2006.
2004 Restructuring:
In January 2004, the Company initiated a small restructuring
effort to realign its personnel between various support
functions and field sales and service organizations around the
world. As a result, 70 employees were to be terminated, all of
whom had left the Company as of December 31, 2004. The
provision of $2.1 million, recorded during the year ended
December 31, 2004, represents costs incurred, including
severance costs, for the 70 people and other directly related
incremental costs of this realignment effort. The Company’s
2004 restructuring liability was zero at December 31, 2005
and 2004.
66
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2002 Restructuring:
In July 2002, the Company took action to restructure and combine
its field sales, service and distribution of its Micromass and
LC operations. The objective of this integration is to leverage
the strengths of both divisions and align and reduce operating
expenses. The integration efforts impacted the U.S., Canada,
continental Europe and the United Kingdom. Approximately 55
employees were terminated, of whom all had left the Company as
of December 31, 2004. In addition, the Company originally
committed to closing four sales and distribution facilities, two
of which were closed by December 31, 2004.
The Company recorded $2.6 million and $7.4 million of
charges for the year ended December 31, 2003 and 2002,
respectively, for restructuring and other directly related
incremental charges relating to its integration of the worldwide
LC and MS sales, service and support organizations. The charge
for the year ended December 31, 2003 includes severance
costs for 13 people, distributor termination costs and other
directly related incremental costs of this integration effort.
During the year ended December 31, 2004, the Company
reversed approximately $2.2 million in restructuring
reserves, primarily attributable to a change in plans with
respect to two facilities previously selected for closure and
distributor contract settlements being less than previously
estimated. During the year ended December 31, 2003, the
Company reversed approximately $1.9 million in
restructuring reserves, primarily attributable to facility
closure and distributor termination costs being less than
previously estimated and the retention of certain employees
previously selected for termination.
The Company’s 2002 integration restructuring liability was
zero at December 31, 2005 and 2004.
The Company also recorded an unrelated restructuring provision
of $0.1 million at its TA subsidiary for severance and
other related costs in the year ended December 31, 2003.
There were no such charges for the years ended December 31,
2005 and 2004.
|
|
| 15 |
Other Commitments and Contingencies |
Lease agreements, expiring at various dates through 2022, cover
buildings, office equipment and automobiles. Rental expense was
$23.2 million, $19.7 million and $19.6 million
during the years ended December 31, 2005, 2004 and 2003,
respectively. Future minimum rents payable as of
December 31, 2005 under non-cancelable leases with initial
terms exceeding one year are as follows (in thousands):
| |
|
|
|
|
|
2006
|
|
$ |
19,497 |
|
|
2007
|
|
|
15,859 |
|
|
2008
|
|
|
13,349 |
|
|
2009
|
|
|
10,275 |
|
|
2010 and thereafter
|
|
|
33,917 |
|
The Company licenses certain technology and software from third
parties, which expire at various dates through 2008. Fees paid
for licenses were approximately $0.8 million,
$1.1 million and $2.9 million during the years ended
December 31, 2005, 2004 and 2003, respectively. Future
minimum licenses payable under existing license agreements as of
December 31, 2005 will be immaterial for the years ended
December 31, 2006 and thereafter.
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 any outcome, either
individually or in the aggregate, with the exception of the
current litigation described in Note 12, will not be
material to the financial position or results of operations.
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 Company’s business
67
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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
Company’s 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.
|
|
| 16 |
Stock Option and Purchase Plans |
Stock Option Plans
On November 20, 2003, the Company’s shareholders
approved the 2003 Equity Incentive Plan
(“2003 Plan”). The 2003 Plan replaced the
Company’s three preceding plans, under all of which
5,697 shares remained available for granting in the form of
incentive or non-qualified stock options, SARs, restricted stock
or other types of awards. Under the 2003 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 2003
Plan is scheduled to terminate on March 4, 2013. Options
generally will expire no later than 10 years after the date
on which they are granted and will become exercisable as
directed by the Compensation Committee of the Board of
Directors. A SAR may be granted alone or in conjunction with an
option or other award. Shares of restricted stock shall be
issued under the 2003 Plan for such consideration as is
determined by the Compensation Committee of the Board of
Directors. No award of restricted stock shall have a restriction
period of less than three years except as may be recommended by
the Compensation Committee of the Board of Directors, or with
respect to any award of restricted stock which provides solely
for a performance-based risk of forfeiture so long as such award
has a restriction period of at least one year. Except for stock
options and restricted stock, no SARs or other types of awards
were outstanding as of December 31, 2005.
The following table details the weighted average remaining
contractual life of options outstanding at December 31,
2005 by range of exercise prices (in thousands, except per share
data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted | |
|
Remaining | |
|
|
|
Weighted | |
| Exercise | |
|
Number of Shares | |
|
Average | |
|
Contractual Life of | |
|
Number of Shares | |
|
Average | |
| Price Range | |
|
Outstanding | |
|
Exercise Price | |
|
Options Outstanding | |
|
Exercisable | |
|
Exercise Price | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
$ 5.01 to $10.00 |
|
|
|
257 |
|
|
$ |
8.57 |
|
|
|
0.4 |
|
|
|
257 |
|
|
$ |
8.57 |
|
| |
$10.01 to $15.00 |
|
|
|
575 |
|
|
$ |
10.69 |
|
|
|
1.9 |
|
|
|
575 |
|
|
$ |
10.69 |
|
| |
$15.01 to $20.00 |
|
|
|
803 |
|
|
$ |
19.68 |
|
|
|
2.9 |
|
|
|
803 |
|
|
$ |
19.68 |
|
| |
$20.01 to $30.00 |
|
|
|
2,239 |
|
|
$ |
22.25 |
|
|
|
5.7 |
|
|
|
1,584 |
|
|
$ |
22.49 |
|
| |
$30.01 to $40.00 |
|
|
|
3,906 |
|
|
$ |
34.71 |
|
|
|
7.4 |
|
|
|
1,894 |
|
|
$ |
34.85 |
|
| |
$40.01 to $80.97 |
|
|
|
3,159 |
|
|
$ |
56.46 |
|
|
|
7.3 |
|
|
|
1,597 |
|
|
$ |
65.51 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
10,939 |
|
|
$ |
35.47 |
|
|
|
6.2 |
|
|
|
6,710 |
|
|
$ |
34.34 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes stock option activity for the
plans (in thousands, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average | |
| |
|
Number of Shares | |
|
Price per Share | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
| |
Outstanding at December 31, 2002
|
|
|
17,327 |
|
|
|
$1.02 to $80.97 |
|
|
$ |
19.68 |
|
|
Granted
|
|
|
2,104 |
|
|
|
$21.05 to $32.12 |
|
|
$ |
31.60 |
|
|
Exercised
|
|
|
(4,431 |
) |
|
|
$1.02 to $23.06 |
|
|
$ |
5.78 |
|
|
Canceled
|
|
|
(462 |
) |
|
|
$19.69 to $72.06 |
|
|
$ |
41.69 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Outstanding at December 31, 2003
|
|
|
14,538 |
|
|
|
$1.02 to $80.97 |
|
|
$ |
24.93 |
|
|
Granted
|
|
|
1,975 |
|
|
|
$33.12 to $47.12 |
|
|
$ |
46.79 |
|
|
Exercised
|
|
|
(4,585 |
) |
|
|
$2.38 to $36.25 |
|
|
$ |
9.34 |
|
|
Canceled
|
|
|
(606 |
) |
|
|
$21.39 to $72.06 |
|
|
$ |
43.39 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Outstanding at December 31, 2004
|
|
|
11,322 |
|
|
|
$1.02 to $80.97 |
|
|
$ |
34.07 |
|
|
Granted
|
|
|
551 |
|
|
|
$37.84 to $48.85 |
|
|
$ |
39.51 |
|
|
Exercised
|
|
|
(824 |
) |
|
|
$1.02 to $36.25 |
|
|
$ |
17.14 |
|
|
Canceled
|
|
|
(110 |
) |
|
|
$21.39 to $72.06 |
|
|
$ |
48.90 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Outstanding at December 31, 2005
|
|
|
10,939 |
|
|
|
$8.55 to $80.97 |
|
|
$ |
35.47 |
|
| |
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2005, 2004 and 2003
were 6.7 million, 6.1 million and 9.1 million,
respectively. The weighted average exercise prices of options
exercisable at December 31, 2005, 2004 and 2003 were
$34.34, $31.98 and $19.48, respectively.
During both 2005 and 2004, the Company granted seven thousand
shares of restricted stock. The restrictions on these shares
lapse January 30, 2008 and 2007, respectively. The Company
has recorded $0.2 million and $0.1 million of
compensation expense during 2005 and 2004, respectively, related
to the restricted stock grants. The weighted-average fair value
on the grant date of the restricted stock for 2005 and 2004 was
$45.77 and $33.12, respectively.
Shares available for grant under the 2003 Plan at
December 31, 2005 were 6.0 million.
Employee Stock Purchase Plan
On February 26, 1996, the Company adopted the 1996 Employee
Stock Purchase Plan under which eligible employees may
contribute up to 15% of their earnings toward the quarterly
purchase of the Company’s Common Stock. The plan makes
available 1.0 million shares of the Company’s
Common Stock commencing October 1, 1996. As of
December 31, 2005, 686 thousand shares have been
issued under the plan. 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.
69
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Basic and diluted EPS calculations are detailed as follows (in
thousands, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2005 | |
| |
|
| |
| |
|
Net Income | |
|
Shares | |
|
Per Share | |
| |
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
| |
|
| |
|
| |
|
| |
|
Net income per basic common share
|
|
$ |
201,975 |
|
|
|
114,023 |
|
|
$ |
1.77 |
|
| |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Options outstanding
|
|
|
|
|
|
|
1,831 |
|
|
|
|
|
| |
Options exercised and cancellations
|
|
|
|
|
|
|
91 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$ |
201,975 |
|
|
|
115,945 |
|
|
$ |
1.74 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2004 | |
| |
|
| |
| |
|
Net Income | |
|
Shares | |
|
Per Share | |
| |
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
| |
|
| |
|
| |
|
| |
|
Net income per basic common share
|
|
$ |
224,053 |
|
|
|
119,640 |
|
|
$ |
1.87 |
|
| |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Options outstanding
|
|
|
|
|
|
|
2,192 |
|
|
|
|
|
| |
Options exercised and cancellations
|
|
|
|
|
|
|
1,237 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$ |
224,053 |
|
|
|
123,069 |
|
|
$ |
1.82 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2003 | |
| |
|
| |
| |
|
Net Income | |
|
Shares | |
|
Per Share | |
| |
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
| |
|
| |
|
| |
|
| |
|
Net income per basic common share
|
|
$ |
170,891 |
|
|
|
123,189 |
|
|
$ |
1.39 |
|
| |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Options outstanding
|
|
|
|
|
|
|
2,993 |
|
|
|
|
|
| |
Options exercised and cancellations
|
|
|
|
|
|
|
1,397 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$ |
170,891 |
|
|
|
127,579 |
|
|
$ |
1.34 |
|
| |
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2005, 2004 and 2003, the
Company had 3.2 million, 3.2 million and
5.5 million stock option securities that were antidilutive,
respectively, due to having higher exercise prices than the
average 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.
70
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Comprehensive income details follow (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31 | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Net income
|
|
$ |
201,975 |
|
|
$ |
224,053 |
|
|
$ |
170,891 |
|
| |
Foreign currency translation
|
|
|
(44,383 |
) |
|
|
27,413 |
|
|
|
46,010 |
|
| |
Net appreciation (depreciation) and realized gains (losses)
on derivative instruments
|
|
|
11,894 |
|
|
|
(14,371 |
) |
|
|
(10,289 |
) |
| |
Income tax (benefit)
|
|
|
4,163 |
|
|
|
(5,030 |
) |
|
|
(3,601 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net appreciation (depreciation) and realized gains (losses)
on derivative instruments, net of tax
|
|
|
7,731 |
|
|
|
(9,341 |
) |
|
|
(6,688 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net foreign currency adjustments
|
|
|
(36,652 |
) |
|
|
18,072 |
|
|
|
39,322 |
|
|
Minimum pension liability adjustment
|
|
|
(1,021 |
) |
|
|
427 |
|
|
|
116 |
|
|
Unrealized gains (losses) on investments before income taxes
|
|
|
(2,214 |
) |
|
|
(191 |
) |
|
|
2,351 |
|
|
Income tax (benefit)
|
|
|
(775 |
) |
|
|
(67 |
) |
|
|
823 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Unrealized gains (losses) on investments, net of tax
|
|
|
(1,439 |
) |
|
|
(124 |
) |
|
|
1,528 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income
|
|
|
(39,112 |
) |
|
|
18,375 |
|
|
|
40,966 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Comprehensive income
|
|
$ |
162,863 |
|
|
$ |
242,428 |
|
|
$ |
211,857 |
|
| |
|
|
|
|
|
|
|
|
|
U.S. Retirement Plans
The Company has two retirement plans for U.S. employees:
the Waters Employee Investment Plan, a defined contribution
plan, and the Waters Retirement Plan, a defined benefit cash
balance plan.
U.S. employees are eligible to participate in the Waters
Employee Investment Plan after one month of service. Employees
may contribute from 1% to 30% of eligible pay on a pre-tax
basis. After one year of service, the Company makes a matching
contribution of 50% for contributions up to 6% of eligible pay.
Employees are 100% vested in employee and Company matching
contributions. For the years ended December 31, 2005, 2004
and 2003, the Company’s matching contributions amount to
$3.4 million, $3.1 million and $2.9 million,
respectively.
U.S. employees are eligible to participate in the Waters
Retirement Plan after one year of service. Annually, the Company
credits each employee’s account as a percentage of eligible
pay based on years of service. In addition, each employee’s
account is credited for investment returns at the beginning of
each year for the prior year at the average 12 month
Treasury Bill rate plus 0.5%, limited to a minimum rate of 5%
and a maximum rate of 10%. An employee does not vest until the
completion of five years of service at which time the employee
becomes 100% vested.
The net periodic pension cost under SFAS 87,
“Employers” Accounting for Pensions”, is made up
of several components that reflect different aspects of the
Company’s 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 Company’s
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
71
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the market-related value of plan assets and the projected
benefit obligation over the expected future service of active
participants.
Summary data for the Waters Retirement Plan are presented in the
following tables, using the measurement date of
December 31, 2005 (in thousands):
| |
|
|
|
|
|
|
|
|
|
| Reconciliation of Projected Benefit Obligation |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Benefit obligation, January 1
|
|
$ |
68,017 |
|
|
$ |
55,974 |
|
| |
Service cost
|
|
|
6,673 |
|
|
|
5,800 |
|
| |
Interest cost
|
|
|
3,810 |
|
|
|
3,406 |
|
| |
Employee rollovers
|
|
|
466 |
|
|
|
517 |
|
| |
Actuarial loss
|
|
|
2,014 |
|
|
|
3,251 |
|
| |
Disbursements
|
|
|
(2,356 |
) |
|
|
(931 |
) |
| |
|
|
|
|
|
|
|
Benefit obligation, December 31
|
|
$ |
78,624 |
|
|
$ |
68,017 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Reconciliation of Fair Value of Assets |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Fair value of assets, January 1
|
|
$ |
51,715 |
|
|
$ |
37,295 |
|
| |
Actual return (loss) on plan assets
|
|
|
4,670 |
|
|
|
4,834 |
|
| |
Company contributions
|
|
|
6,308 |
|
|
|
10,000 |
|
| |
Disbursements
|
|
|
(2,356 |
) |
|
|
(931 |
) |
| |
Employee rollovers
|
|
|
466 |
|
|
|
517 |
|
| |
|
|
|
|
|
|
|
Fair value of assets, December 31
|
|
$ |
60,803 |
|
|
$ |
51,715 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Reconciliation of Funded Status, December 31 |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
Projected benefit obligation
|
|
$ |
(78,624 |
) |
|
$ |
(68,017 |
) |
| |
Fair value of plan assets
|
|
|
60,803 |
|
|
|
51,715 |
|
| |
|
|
|
|
|
|
| |
Projected benefit obligation in excess of fair value of plan
assets
|
|
|
(17,821 |
) |
|
|
(16,302 |
) |
| |
Unrecognized prior service cost
|
|
|
(632 |
) |
|
|
(731 |
) |
| |
Unrecognized net actuarial loss
|
|
|
21,784 |
|
|
|
21,232 |
|
| |
|
|
|
|
|
|
|
Net amount recognized at December 31
|
|
$ |
3,331 |
|
|
$ |
4,199 |
|
| |
|
|
|
|
|
|
| |
Accrued liability
|
|
$ |
(11,015 |
) |
|
$ |
(9,126 |
) |
| |
Other comprehensive income (Note 18)
|
|
|
14,346 |
|
|
|
13,325 |
|
| |
|
|
|
|
|
|
|
Net amount recognized at December 31
|
|
$ |
3,331 |
|
|
$ |
4,199 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Components of Net Periodic Pension Cost, Year Ended December 31 |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Service cost
|
|
$ |
6,673 |
|
|
$ |
5,800 |
|
|
$ |
4,339 |
|
|
Interest cost
|
|
|
3,810 |
|
|
|
3,406 |
|
|
|
3,231 |
|
|
Return on plan assets
|
|
|
(4,142 |
) |
|
|
(3,389 |
) |
|
|
(2,829 |
) |
|
Net amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Prior service cost
|
|
|
(99 |
) |
|
|
(99 |
) |
|
|
(99 |
) |
| |
Net actuarial loss
|
|
|
934 |
|
|
|
903 |
|
|
|
394 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$ |
7,176 |
|
|
$ |
6,621 |
|
|
$ |
5,036 |
|
| |
|
|
|
|
|
|
|
|
|
72
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reconciliation of Accrued Pension Cost |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Accrued pension cost, January 1
|
|
$ |
(9,126 |
) |
|
$ |
(12,932 |
) |
|
$ |
(15,090 |
) |
| |
FAS 87 cost
|
|
|
(7,176 |
) |
|
|
(6,621 |
) |
|
|
(5,036 |
) |
| |
Company contributions made during the year
|
|
|
6,308 |
|
|
|
10,000 |
|
|
|
7,078 |
|
| |
Other comprehensive income (Note 18)
|
|
|
(1,021 |
) |
|
|
427 |
|
|
|
116 |
|
| |
|
|
|
|
|
|
|
|
|
|
Accrued pension cost, December 31
|
|
$ |
(11,015 |
) |
|
$ |
(9,126 |
) |
|
$ |
(12,932 |
) |
| |
|
|
|
|
|
|
|
|
|
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the Waters
Retirement Plan were approximately $78.6 million,
$71.8 million and $60.8 million, respectively, at
December 31, 2005 and $68.0 million,
$60.8 million and $51.7 million, respectively, at
December 31, 2004.
The Company also sponsors other unfunded employee benefit plans
in the U.S., including a post-retirement health care plan, which
provides reimbursement for medical expenses and is contributory.
The Company’s accrued post-retirement benefit obligation
for this plan was $3.3 million and $3.1 million at
December 31, 2005 and 2004 respectively, and is included in
long-term portion of retirement benefits in the consolidated
balance sheets.
The Company also maintains an unfunded Supplemental Executive
Retirement Plan (“SERP”), which is nonqualified and
restores the benefits under the Waters Retirement Plan that are
limited by IRS benefit and compensation maximums. The
Company’s accrued post-retirement benefit obligation for
this plan was $2.7 million and $2.4 million at
December 31, 2005 and 2004, respectively, and is included
in long-term portion of retirement benefits in the consolidated
balance sheets. Also included in the long-term portion of
retirement benefits is $15.1 million and $12.8 million
at December 31, 2005 and 2004, respectively, relating to
the liability associated with the SERP plan.
| |
|
|
|
|
|
|
|
|
| Asset Disclosure, December 31 |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Equity securities
|
|
|
65 |
% |
|
|
67 |
% |
|
Debt securities
|
|
|
29 |
% |
|
|
32 |
% |
|
Cash and cash equivalents
|
|
|
2 |
% |
|
|
1 |
% |
|
Other
|
|
|
4 |
% |
|
|
0 |
% |
| |
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
The retirement plan’s investment policy includes the
following asset allocation guidelines:
| |
|
|
|
|
|
|
|
|
| Asset Class, December 31, 2005 |
|
Policy Target | |
|
Range | |
| |
|
| |
|
| |
|
Equity securities
|
|
|
60 |
% |
|
|
40% — 80 |
% |
|
Debt securities
|
|
|
40 |
% |
|
|
20% — 60 |
% |
|
Cash and cash equivalents
|
|
|
0 |
% |
|
|
0% — 20 |
% |
The asset allocation policy was developed in consideration of
the following long-term investment objectives: achieving a
return on assets consistent with the investment policy,
maximizing portfolio returns with at least a return of 2.5%
above the one-year Treasury Bill rate, and achieving portfolio
returns which exceeds the average return for similarly invested
funds.
The Company increased its allocation to debt securities during
2003 from 26% to 32% based on the new target allocation. The
increase in fixed income securities will help better match the
interest rate sensitivity of the pension liabilities and limit
the risk associated with equity funds. Within the equity
portfolio, investments are diversified among capitalization and
style. Up to 20% of the equity portfolio may be invested in
financial markets outside of the United States. The Company does
not invest in its own stock within the pension assets.
73
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company prohibits the following types of assets or
transactions: short selling, margin transactions, commodities
and future contracts, private placements, options and letter
stock.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average Assumptions for Benefit Obligations, December 31 |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Discount rate
|
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
|
Increases in compensation levels
|
|
|
4.75 |
% |
|
|
4.75 |
% |
|
|
4.75 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average Assumptions for Expense Calculation, December 31 |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Discount rate
|
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
6.75 |
% |
|
Return on assets
|
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
Increases in compensation levels
|
|
|
4.75 |
% |
|
|
4.75 |
% |
|
|
4.75 |
% |
To develop the expected long-term rate of return on assets
assumption, the Company considered the historical returns and
the 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. This resulted in the
selection of the 8.00% long-term rate of return on assets
assumption, net of expenses paid by the plan. A one-quarter
percentage point increase in the discount rate would decrease
the Company’s net periodic benefit cost for the
U.S. pension plan by approximately $0.4 million. A
one-quarter percentage point change in the assumed long-term
rate of return would impact the Company’s net periodic
benefit cost for the U.S. pension plan by approximately
$0.1 million.
During fiscal year 2006, the Company expects to contribute
approximately $9.0 million to $11.0 million to the
Plan.
Estimated future benefit payments as of December 31, 2005
are as follows (in thousands):
| |
|
|
|
|
|
2006
|
|
$ |
3,068 |
|
|
2007
|
|
|
3,229 |
|
|
2008
|
|
|
3,632 |
|
|
2009
|
|
|
3,930 |
|
|
2010
|
|
|
5,155 |
|
|
2011 - 2015
|
|
|
31,516 |
|
Non-U.S. Retirement
Plans
The Company sponsors various
non-U.S. retirement
plans. Summary data for these plans are presented in the
following tables, using the measurement date of
December 31, 2005 (in thousands):
| |
|
|
|
|
|
|
|
|
|
| Reconciliation of Projected Benefit Obligation |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Benefit obligation, January 1
|
|
$ |
20,463 |
|
|
$ |
17,102 |
|
| |
Service cost
|
|
|
1,177 |
|
|
|
1,046 |
|
| |
Interest cost
|
|
|
722 |
|
|
|
651 |
|
| |
Actuarial loss
|
|
|
598 |
|
|
|
1,269 |
|
| |
Disbursements
|
|
|
(598 |
) |
|
|
(814 |
) |
| |
Currency impact
|
|
|
(2,587 |
) |
|
|
1,209 |
|
| |
|
|
|
|
|
|
|
Benefit obligation, December 31
|
|
$ |
19,775 |
|
|
$ |
20,463 |
|
| |
|
|
|
|
|
|
74
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
| Reconciliation of Fair Value of Assets |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Fair value of assets, January 1
|
|
$ |
8,740 |
|
|
$ |
7,014 |
|
| |
Actual return (loss) on plan assets
|
|
|
837 |
|
|
|
754 |
|
| |
Company contributions
|
|
|
920 |
|
|
|
1,257 |
|
| |
Disbursements
|
|
|
(598 |
) |
|
|
(814 |
) |
| |
Currency impact
|
|
|
(1,021 |
) |
|
|
529 |
|
| |
|
|
|
|
|
|
|
Fair value of assets, December 31
|
|
$ |
8,878 |
|
|
$ |
8,740 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Reconciliation of Funded Status, December 31 |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
Projected benefit obligation
|
|
$ |
(19,775 |
) |
|
$ |
(20,463 |
) |
| |
Fair value of plan assets
|
|
|
8,878 |
|
|
|
8,740 |
|
| |
|
|
|
|
|
|
| |
Projected benefit obligation in excess of fair value of plan
assets
|
|
|
(10,897 |
) |
|
|
(11,723 |
) |
| |
Unrecognized net actuarial loss
|
|
|
2,682 |
|
|
|
2,840 |
|
| |
|
|
|
|
|
|
|
Net amount recognized at December 31
|
|
$ |
(8,215 |
) |
|
$ |
(8,883 |
) |
| |
|
|
|
|
|
|
| |
Prepaid cost
|
|
$ |
1,998 |
|
|
$ |
2,033 |
|
| |
Accrued liability
|
|
|
(10,213 |
) |
|
|
(10,916 |
) |
| |
|
|
|
|
|
|
|
Net amount recognized at December 31
|
|
$ |
(8,215 |
) |
|
$ |
(8,883 |
) |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Components of Net Periodic Pension Cost, Year Ended December 31 |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Service cost
|
|
$ |
1,177 |
|
|
$ |
1,046 |
|
|
$ |
920 |
|
|
Interest cost
|
|
|
722 |
|
|
|
651 |
|
|
|
538 |
|
|
Return on plan assets
|
|
|
(490 |
) |
|
|
(432 |
) |
|
|
(339 |
) |
|
Net actuarial loss
|
|
|
53 |
|
|
|
13 |
|
|
|
16 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$ |
1,462 |
|
|
$ |
1,278 |
|
|
$ |
1,135 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reconciliation of Accrued Pension Cost |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Accrued pension cost, January 1
|
|
$ |
(8,883 |
) |
|
$ |
(8,394 |
) |
|
$ |
(6,894 |
) |
| |
FAS 87 cost
|
|
|
(1,462 |
) |
|
|
(1,278 |
) |
|
|
(1,135 |
) |
| |
Company contributions and direct payments to beneficiaries
|
|
|
920 |
|
|
|
1,257 |
|
|
|
829 |
|
| |
Currency impact
|
|
|
1,210 |
|
|
|
(468 |
) |
|
|
(1,194 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Accrued pension cost, December 31
|
|
$ |
(8,215 |
) |
|
$ |
(8,883 |
) |
|
$ |
(8,394 |
) |
| |
|
|
|
|
|
|
|
|
|
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the
non-U.S. retirement
plans were approximately $19.8 million, $15.4 million
and $8.9 million, respectively, at December 31, 2005
and $20.5 million, $15.9 million and
$8.7 million, respectively, at December 31, 2004.
| |
|
|
|
|
|
|
|
|
| Asset Disclosure, December 31 |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Equity securities
|
|
|
0 |
% |
|
|
57 |
% |
|
Debt securities
|
|
|
2 |
% |
|
|
6 |
% |
|
Real estate
|
|
|
0 |
% |
|
|
1 |
% |
|
Cash and other
|
|
|
98 |
% |
|
|
36 |
% |
| |
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
75
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The retirement plans’ investment policies include the
following asset allocation guidelines:
| |
|
|
|
|
| Asset Class, December 31 |
|
Policy Target | |
| |
|
| |
|
Equity securities
|
|
|
0 |
% |
|
Debt securities
|
|
|
2 |
% |
|
Real estate
|
|
|
0 |
% |
|
Cash and other
|
|
|
98 |
% |
| |
|
|
|
|
Total
|
|
|
100 |
% |
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average Assumptions for Benefit Obligations, December 31 |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Discount rate
|
|
|
2.25% - 4.75 |
% |
|
|
2.25% - 5.25 |
% |
|
|
2.00% - 5.50 |
% |
|
Increases in compensation levels
|
|
|
2.75% - 3.25 |
% |
|
|
2.75% - 3.00 |
% |
|
|
2.50% - 3.00 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average Assumptions for Expense Calculation, December 31 |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Discount rate
|
|
|
2.25% - 5.25 |
% |
|
|
2.00% - 5.50 |
% |
|
|
2.25% - 5.75 |
% |
|
Return on assets
|
|
|
2.50% - 7.50 |
% |
|
|
2.50% - 7.50 |
% |
|
|
2.50% - 7.50 |
% |
|
Increases in compensation levels
|
|
|
2.75% - 3.00 |
% |
|
|
2.50% - 3.00 |
% |
|
|
2.50% - 3.00 |
% |
To develop the expected long-term rate of return on assets
assumption, the Company considered the historical returns and
the 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 plans.
During fiscal year 2006, the Company expects to contribute
approximately $1.0 million to the
non-U.S. retirement
plans.
Estimated future benefit payments as of December 31, 2005
are as follows (in thousands):
| |
|
|
|
|
|
2006
|
|
$ |
897 |
|
|
2007
|
|
|
1,018 |
|
|
2008
|
|
|
333 |
|
|
2009
|
|
|
650 |
|
|
2010
|
|
|
716 |
|
|
2011 - 2015
|
|
|
4,040 |
|
|
|
| 20 |
Business Segment Information |
SFAS 131, “Disclosures about Segments of an Enterprise
and Related Information,” establishes standards for
reporting information about operating segments in annual
financial statements and requires selected information for those
segments to be presented in interim financial reports of public
business enterprises. It also establishes standards for related
disclosures about products and service, geographic areas and
major customers. The Company’s business activities, for
which discrete financial information is available, are regularly
reviewed and evaluated by the chief operating decision-makers.
In the third quarter of fiscal year 2003, the Company completed
the integration of the LC and MS worldwide sales, service
and support organizations. Accordingly, the Micromass operating
segment has been integrated into the Waters operating segment.
Waters Division is in the business of manufacturing and
distributing LC instruments, columns, other consumables and mass
spectrometry instruments that can be integrated and used along
with other analytical instruments. TA Division is in the
business of manufacturing and distributing thermal analysis and
rheometry instruments. The Company’s two divisions are its
operating segments, which have similar economic characteristics,
product processes, products and services, types and classes of
customers, methods of
76
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
Geographic information is presented below (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31 |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States
|
|
$ |
404,750 |
|
|
$ |
398,077 |
|
|
$ |
359,450 |
|
| |
Europe
|
|
|
349,433 |
|
|
|
340,635 |
|
|
|
298,869 |
|
| |
Japan
|
|
|
133,521 |
|
|
|
123,493 |
|
|
|
102,503 |
|
| |
Asia
|
|
|
152,906 |
|
|
|
141,007 |
|
|
|
109,516 |
|
| |
Other International
|
|
|
117,626 |
|
|
|
101,324 |
|
|
|
87,867 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total consolidated sales
|
|
$ |
1,158,236 |
|
|
$ |
1,104,536 |
|
|
$ |
958,205 |
|
| |
|
|
|
|
|
|
|
|
|
The United States category includes Puerto Rico. The Other
category includes Canada, Latin America, and Eastern Europe. Net
revenues are attributable to geographic areas based on the
region of destination. None of the Company’s individual
customers account for more than 3% of annual Company sales.
Long-lived assets information is presented below (in thousands):
| |
|
|
|
|
|
|
|
|
|
| December 31 |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
| |
United States
|
|
$ |
107,639 |
|
|
$ |
105,231 |
|
| |
Europe
|
|
|
29,149 |
|
|
|
26,943 |
|
| |
Japan
|
|
|
527 |
|
|
|
798 |
|
| |
Asia
|
|
|
2,196 |
|
|
|
1,473 |
|
| |
Other International
|
|
|
1,519 |
|
|
|
1,463 |
|
| |
|
|
|
|
|
|
|
Total long-lived assets
|
|
$ |
141,030 |
|
|
$ |
135,908 |
|
| |
|
|
|
|
|
|
The United States category includes Puerto Rico. The Other
category includes Canada, Latin America, and Eastern Europe.
Long-lived assets exclude goodwill and other intangible assets.
77
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| 21 |
Unaudited Quarterly Results |
The Company’s unaudited quarterly results are summarized
below (in thousands, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
| 2005 |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
268,305 |
|
|
$ |
284,630 |
|
|
$ |
273,031 |
|
|
$ |
332,270 |
|
|
$ |
1,158,236 |
|
|
Cost of sales
|
|
|
111,801 |
|
|
|
117,066 |
|
|
|
115,508 |
|
|
|
133,980 |
|
|
|
478,355 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross Profit
|
|
|
156,504 |
|
|
|
167,564 |
|
|
|
157,523 |
|
|
|
198,290 |
|
|
|
679,881 |
|
|
Selling and administrative expenses
|
|
|
80,595 |
|
|
|
82,861 |
|
|
|
76,645 |
|
|
|
81,593 |
|
|
|
321,694 |
|
|
Research and development expenses
|
|
|
16,747 |
|
|
|
16,485 |
|
|
|
16,982 |
|
|
|
16,691 |
|
|
|
66,905 |
|
|
Purchased intangibles amortization
|
|
|
1,282 |
|
|
|
1,266 |
|
|
|
1,241 |
|
|
|
1,216 |
|
|
|
5,005 |
|
|
Litigation provisions (Note 12)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,122 |
|
|
|
3,122 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating Income
|
|
|
57,880 |
|
|
|
66,952 |
|
|
|
62,655 |
|
|
|
95,668 |
|
|
|
283,155 |
|
|
Other income (expense), net (Note 5)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,103 |
) |
|
|
(3,103 |
) |
|
Interest expense
|
|
|
(4,159 |
) |
|
|
(5,753 |
) |
|
|
(6,599 |
) |
|
|
(8,233 |
) |
|
|
(24,744 |
) |
|
Interest income
|
|
|
4,523 |
|
|
|
5,290 |
|
|
|
4,630 |
|
|
|
4,812 |
|
|
|
19,255 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income from operations before income taxes
|
|
|
58,244 |
|
|
|
66,489 |
|
|
|
60,686 |
|
|
|
89,144 |
|
|
|
274,563 |
|
|
Provision for income taxes (Note 11)
|
|
|
11,649 |
|
|
|
12,424 |
|
|
|
34,969 |
|
|
|
13,546 |
|
|
|
72,588 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net Income
|
|
$ |
46,595 |
|
|
$ |
54,065 |
|
|
$ |
25,717 |
|
|
$ |
75,598 |
|
|
$ |
201,975 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic common share
|
|
$ |
0.39 |
|
|
$ |
0.47 |
|
|
$ |
0.23 |
|
|
$ |
0.70 |
|
|
$ |
1.77 |
|
|
Weighted average number of basic common shares
|
|
|
118,719 |
|
|
|
116,092 |
|
|
|
112,981 |
|
|
|
108,364 |
|
|
|
114,023 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$ |
0.38 |
|
|
$ |
0.46 |
|
|
$ |
0.22 |
|
|
$ |
0.69 |
|
|
$ |
1.74 |
|
|
Weighted average number of diluted common shares and equivalents
|
|
|
121,156 |
|
|
|
117,722 |
|
|
|
114,942 |
|
|
|
109,962 |
|
|
|
115,945 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
| 2004 |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
255,086 |
|
|
$ |
260,488 |
|
|
$ |
264,808 |
|
|
$ |
324,154 |
|
|
$ |
1,104,536 |
|
|
Cost of sales
|
|
|
107,474 |
|
|
|
106,180 |
|
|
|
111,009 |
|
|
|
130,144 |
|
|
|
454,807 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross Profit
|
|
|
147,612 |
|
|
|
154,308 |
|
|
|
153,799 |
|
|
|
194,010 |
|
|
|
649,729 |
|
|
Selling and administrative expenses
|
|
|
71,427 |
|
|
|
75,840 |
|
|
|
71,967 |
|
|
|
80,916 |
|
|
|
300,150 |
|
|
Research and development expenses
|
|
|
16,071 |
|
|
|
15,694 |
|
|
|
17,001 |
|
|
|
16,475 |
|
|
|
65,241 |
|
|
Purchased intangibles amortization
|
|
|
1,354 |
|
|
|
996 |
|
|
|
1,228 |
|
|
|
1,236 |
|
|
|
4,814 |
|
|
Litigation settlement and provisions (Note 12)
|
|
|
7,847 |
|
|
|
(17,124 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9,277 |
) |
|
Impairment of long-lived intangible asset (Note 9)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,997 |
|
|
|
3,997 |
|
|
Restructuring and other charges, net (Note 14)
|
|
|
104 |
|
|
|
— |
|
|
|
(158 |
) |
|
|
— |
|
|
|
(54 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating Income
|
|
|
50,809 |
|
|
|
78,902 |
|
|
|
63,761 |
|
|
|
91,386 |
|
|
|
284,858 |
|
|
Other expense, net (Note 5)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,014 |
) |
|
|
(1,014 |
) |
|
Interest expense
|
|
|
(1,873 |
) |
|
|
(1,891 |
) |
|
|
(2,564 |
) |
|
|
(3,746 |
) |
|
|
(10,074 |
) |
|
Interest income
|
|
|
2,104 |
|
|
|
2,886 |
|
|
|
3,009 |
|
|
|
3,902 |
|
|
|
11,901 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income from operations before income taxes
|
|
|
51,040 |
|
|
|
79,897 |
|
|
|
64,206 |
|
|
|
90,528 |
|
|
|
285,671 |
|
|
Provision for income taxes
|
|
|
10,195 |
|
|
|
20,146 |
|
|
|
12,266 |
|
|
|
19,011 |
|
|
|
61,618 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net Income
|
|
$ |
40,845 |
|
|
$ |
59,751 |
|
|
$ |
51,940 |
|
|
$ |
71,517 |
|
|
$ |
224,053 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic common share
|
|
$ |
0.34 |
|
|
$ |
0.50 |
|
|
$ |
0.43 |
|
|
$ |
0.59 |
|
|
$ |
1.87 |
|
|
Weighted average number of basic common shares
|
|
|
120,180 |
|
|
|
118,691 |
|
|
|
119,519 |
|
|
|
120,266 |
|
|
|
119,640 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$ |
0.33 |
|
|
$ |
0.49 |
|
|
$ |
0.42 |
|
|
$ |
0.58 |
|
|
$ |
1.82 |
|
|
Weighted average number of diluted common shares and equivalents
|
|
|
123,987 |
|
|
|
122,820 |
|
|
|
122,597 |
|
|
|
122,679 |
|
|
|
123,069 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company experiences a seasonal increase in sales in the
fourth quarter, as a result of purchasing habits on capital
goods of customers that tend to exhaust their spending budgets
by calendar year-end. Selling and administrative expenses were
relatively constant in 2005 as the Company instituted expense
controls due to first half sales performance being less than
expected. Selling and administrative expenses are typically
higher in the second quarter over the first quarter in each year
as the Company’s annual payroll merit increases take
effect. Expenses traditionally are lower in the third quarter
due to lower travel and promotional expenses as this is a
typical vacation period. Quarterly comparative selling and
administrative expenses declined throughout 2005 over 2004 due
to the impact of foreign currency translation, expense controls
implemented in the second half of 2005 and lower costs related
to compensation incentive plans based on 2005 performance.
79
SELECTED FINANCIAL DATA
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005(3) | |
|
2004 | |
|
2003 | |
|
2002* | |
|
2001 | |
| In thousands, except per share and employees data |
|
| |
|
| |
|
| |
|
| |
|
| |
|
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
1,158,236 |
|
|
$ |
1,104,536 |
|
|
$ |
958,205 |
|
|
$ |
889,967 |
|
|
$ |
859,208 |
|
|
Income from operations before income taxes
|
|
$ |
274,563 |
|
|
$ |
285,671 |
|
|
$ |
223,686 |
|
|
$ |
195,411 |
|
|
$ |
147,426 |
|
|
Income before cumulative effect of changes in accounting
principles
|
|
$ |
201,975 |
|
|
$ |
224,053 |
|
|
$ |
170,891 |
|
|
$ |
152,218 |
|
|
$ |
114,543 |
|
|
Cumulative effect of changes in accounting principles
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,506 |
) (1) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
201,975 |
|
|
$ |
224,053 |
|
|
$ |
170,891 |
|
|
$ |
147,712 |
|
|
$ |
114,543 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per basic common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of changes in accounting
principles per basic common share
|
|
$ |
1.77 |
|
|
$ |
1.87 |
|
|
$ |
1.39 |
|
|
$ |
1.17 |
|
|
$ |
0.88 |
|
|
Cumulative effect of changes in accounting principles
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.03 |
) |
|
|
— |
|
|
Net income per basic common share
|
|
$ |
1.77 |
|
|
$ |
1.87 |
|
|
$ |
1.39 |
|
|
$ |
1.13 |
|
|
$ |
0.88 |
|
|
Weighted average number of basic common shares
|
|
|
114,023 |
|
|
|
119,640 |
|
|
|
123,189 |
|
|
|
130,489 |
|
|
|
130,559 |
|
|
Income per diluted common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of changes in accounting
principles per diluted common share
|
|
$ |
1.74 |
|
|
$ |
1.82 |
|
|
$ |
1.34 |
|
|
$ |
1.12 |
|
|
$ |
0.83 |
|
|
Cumulative effect of changes in accounting principles
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.03 |
) |
|
|
— |
|
|
Net income per diluted common share
|
|
$ |
1.74 |
|
|
$ |
1.82 |
|
|
$ |
1.34 |
|
|
$ |
1.09 |
|
|
$ |
0.83 |
|
|
Weighted average number of diluted common shares and equivalents
|
|
|
115,945 |
|
|
|
123,069 |
|
|
|
127,579 |
|
|
|
135,762 |
|
|
|
137,509 |
|
|
BALANCE SHEET AND OTHER DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
493,588 |
|
|
$ |
539,077 |
|
|
$ |
356,781 |
|
|
$ |
263,312 |
|
|
$ |
226,798 |
|
|
Working capital
|
|
$ |
309,101 |
|
|
$ |
480,894 |
|
|
$ |
339,835 |
|
|
$ |
338,233 |
|
|
$ |
241,738 |
|
|
Total assets
|
|
$ |
1,428,931 |
|
|
$ |
1,460,426 |
|
|
$ |
1,130,861 |
|
|
$ |
1,015,240 |
|
|
$ |
886,911 |
|
|
Long-term debt, including current maturities
|
|
$ |
500,000 |
|
|
$ |
250,000 |
|
|
$ |
225,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Stockholders’ equity
|
|
$ |
283,632 |
|
|
$ |
678,686 |
|
|
$ |
590,477 |
|
|
$ |
665,310 |
|
|
$ |
581,745 |
|
|
Employees
|
|
|
4,503 |
|
|
|
4,271 |
|
|
|
3,963 |
|
|
|
3,677 |
|
|
|
3,561 |
|
|
|
| * |
As a result of the adoption of Statement of Financial Accounting
Standards 142, “Goodwill and Other Intangible Assets”,
goodwill is no longer amortized commencing January 1, 2002.
Goodwill amortization expense was approximately
$3.6 million for the year ended December 31, 2001. |
| |
| (1) |
In the second quarter of 2002, the Company changed its method of
accounting for legal costs associated with litigating patents
effective January 1, 2002. As a result, the Company
recorded a cumulative effect of changes in accounting principles
of $4.5 million, net of tax. |
| |
| (2) |
The Company has not declared or paid any dividends on its Common
Stock in its past three fiscal years and does not plan to pay
dividends in the foreseeable future. |
| |
| (3) |
As a result of the anticipated adoption in 2006 of Statement of
Financial Accounting Standards No. 123R, “Share Based
Payment”, compensation expense related to unvested stock
options will be recognized beginning in fiscal year 2006 and
will adversely effect the Company’s results of operations. |
80
|
|
| Item 9: |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9a: |
Controls and Procedures |
|
|
| (a) |
Evaluation of Disclosure Controls and Procedures |
The Company’s management, with the participation of the
Company’s chief executive officer and chief financial
officer, evaluated the effectiveness of the Company’s
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this annual
report on
Form 10-K. Based
on this evaluation, the Company’s chief executive officer
and chief financial officer concluded that the Company’s
disclosure controls and procedures were (1) designed to
ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to the
Company’s chief executive officer and chief financial
officer by others within those entities, particularly during the
period in which this report was being prepared and
(2) effective, in that they provide reasonable assurance
that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms.
|
|
| (b) |
Management’s Annual Report on Internal Control Over
Financial Reporting |
See Management’s Report on Internal Control Over Financial
Reporting in Item 8 on page 36.
|
|
| (c) |
Report of the Independent Registered Public Accounting
Firm |
See report of PricewaterhouseCoopers LLP on pages 37 and 38.
|
|
| (d) |
Changes in Internal Controls Over Financial
Reporting |
No change in the Company’s internal control over financial
reporting (as defined in
Rules 13a-15(f)
and 15d-15(f) under the
Exchange Act) occurred during the quarter ended
December 31, 2005 that has materially affected, or is
reasonably likely to materially affect, the Company’s
internal control over financial reporting.
|
|
| Item 9b: |
Other Information |
None.
PART III
|
|
| Item 10: |
Directors and Executive Officers of the Registrant |
a. Information concerning the Registrant’s directors
(including with respect to the audit committee of the
Company’s Board of Directors) is set forth in the Proxy
Statement under the headings “Election of Directors,”
“Directors Meetings and Compensation” and “Report
of the Audit Committee of the Board of Directors.” Such
information is incorporated herein by reference.
b. Information required by Item 405 of
Regulation S-K is
set forth in the Proxy Statement under the heading
“Section 16(A) Beneficial Ownership Reporting
Compliance.” Such information is incorporated herein by
reference.
c. The Company has adopted a Code of Business Conduct and
Ethics (“the Code”) that applies to all of the
Company’s employees (including its executive officers) and
directors. The Code has been distributed to all employees of the
Company. In addition, the Code is available on the
Company’s website, www.waters.com, under the caption About
Waters > Corporate Information > Corporate Governance.
The Company intends to satisfy the disclosure requirement
regarding any amendment to, or waiver of a provision of, the Code
81
applicable to any executive officer or director by posting such
information on such website. The Company shall provide to any
person without charge, upon request, a copy of the Code. Any
such request must be made in writing to the Secretary of the
Company, c/o Waters Corporation, 34 Maple Street, Milford,
MA 01757.
d. The Company’s corporate governance guidelines and
the charters of the audit committee, compensation committee, and
nominating and corporate governance committee of the Board of
Directors are available on the Company’s website,
www.waters.com, under the caption About Waters >
Corporate Information > Corporate Governance. The Company
shall provide to any person without charge, upon request, a copy
of any of the foregoing materials. Any such request must be made
in writing to the Secretary of the Company, c/o Waters
Corporation, 34 Maple Street, Milford, MA 01757.
e. The Company’s Chief Executive Officer has certified
that he is not aware of any violation by the Company of the
New York Stock Exchange corporate governance listing
standards.
|
|
| Item 11: |
Executive Compensation |
The information called for by this Item is incorporated by
reference to the information under the caption “Management
Compensation” appearing in the Proxy Statement.
|
|
| Item 12: |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Except for the Equity Compensation Plan information set forth
below, information concerning security ownership of certain
beneficial owners and management is set forth in the Proxy
Statement under the heading “Security Ownership of Certain
Beneficial Owners.” Such information is incorporated herein
by reference.
Equity Compensation Plan Information
The following table provides information as of December 31,
2005 about the Company’s common stock that may be issued
upon the exercise of options, warrants, and rights under its
existing equity compensation plans (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
A | |
|
B | |
|
C | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
Number of Securities | |
| |
|
Number of Securities | |
|
|
|
Remaining Available for | |
| |
|
to be Issued Upon | |
|
Weighted-Average | |
|
Future Issuance Under | |
| |
|
Exercise of | |
|
Exercise Price of | |
|
Equity Compensation | |
| |
|
Outstanding Options, | |
|
Outstanding Options, | |
|
Plans (excluding securities | |
| |
|
Warrants and Rights | |
|
Warrants and Rights | |
|
reflected in column (A) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by security holders
|
|
|
10,940 |
|
|
$ |
35.47 |
|
|
|
6,032 |
|
|
Equity compensation plans not approved by security holders
|
|
|
— |
|
|
|
— |
|
|
|
310 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,940 |
|
|
$ |
35.47 |
|
|
|
6,342 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Item 13: |
Certain Relationships and Related Transactions |
Information concerning certain relationships and related
transactions is set forth in the Proxy Statement under the
heading “Certain Relationships and Related
Transactions.” Such information is incorporated herein by
reference.
|
|
| Item 14: |
Principal Accountant Fees and Services |
Information concerning certain relationships and related
transactions is set forth in the Proxy Statement under the
heading “Report of the Audit Committee of the Board of
Directors.” Such information is incorporated herein by
reference.
82
PART IV
|
|
| Item 15: |
Exhibits And financial Statement Schedules |
(a) Documents filed as part of this report:
|
|
| |
(1) Financial Statements: |
|
|
| |
The consolidated financial statements of the Company and its
subsidiaries are filed as part of this
Form 10-K and are
set forth on pages 39 to 80. The report of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, dated March 6, 2006, is set forth on
pages 37 and 38 of this
Form 10-K.
|
|
|
| |
(2) Financial Statement Schedule: |
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description of Document |
| |
|
|
| |
2 |
.1 |
|
Agreement for the Sale and Purchase of Micromass Limited dated
as of September 12, 1997, between Micromass Limited,
Schroder UK Buy-Out Fund III Trust I and Others,
Waters Corporation and Waters Technologies Corporation.(18) |
| |
| |
3 |
.1 |
|
Second Amended and Restated Certificate of Incorporation of
Waters Corporation.(1) |
| |
| |
3 |
.11 |
|
Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation of Waters Corporation, as
amended May 12, 1999.(3) |
| |
| |
3 |
.12 |
|
Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation of Waters Corporation, as amended
July 27, 2000.(6) |
| |
| |
3 |
.13 |
|
Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation of Waters Corporation, as amended
May 25, 2001.(8) |
| |
| |
3 |
.2 |
|
Amended and Restated Bylaws of Waters Corporation, as amended to
date.(1) |
| |
| |
10 |
.3 |
|
Waters Corporation Second Amended and Restated 1996 Long-Term
Performance Incentive Plan.(5)(*) |
| |
| |
10 |
.31 |
|
First Amendment to the Waters Corporation Second Amended and
Restated 1996 Long-Term Performance Incentive Plan. (10)(*) |
| |
| |
10 |
.4 |
|
Waters Corporation 1996 Employee Stock Purchase Plan.(9)(*) |
| |
| |
10 |
.41 |
|
December 1999 Amendment to the Waters Corporation 1996
Employee Stock Purchase Plan.(4)(*) |
| |
| |
10 |
.42 |
|
March 2000 Amendment to the Waters Corporation 1996
Employee Stock Purchase Plan.(4)(*) |
| |
| |
10 |
.43 |
|
June 1999 Amendment to the Waters Corporation 1996 Employee
Stock Purchase Plan.(7)(*) |
| |
| |
10 |
.44 |
|
July 2000 Amendment to the Waters Corporation 1996 Employee
Stock Purchase Plan.(7)(*) |
| |
| |
10 |
.5 |
|
Waters Corporation 1996 Non-Employee Director Deferred
Compensation Plan. (13)(*) |
| |
| |
10 |
.51 |
|
First Amendment to the Waters Corporation 1996 Non-Employee
Director Deferred Compensation Plan.(5)(*) |
| |
| |
10 |
.6 |
|
Waters Corporation Amended and Restated 1996 Non-Employee
Director Stock Option Plan.(5)(*) |
| |
| |
10 |
.7 |
|
Agreement and Plan of Merger among Waters Corporation, TA Merger
Sub, Inc. and TA Instruments, Inc. dated as of
March 28, 1996.(19) |
| |
| |
10 |
.8 |
|
Offer to Purchase and Consent Solicitation Statement, dated
March 7, 1996, of Waters Technologies Corporation. (20) |
| |
| |
10 |
.9 |
|
WCD Investors, Inc. Amended and Restated 1994 Stock Option Plan
(including Form of Amended and Restated Stock Option
Agreement).(2)(*) |
| |
| |
10 |
.91 |
|
Amendment to the WCD Investors, Inc. Amended and Restated 1994
Stock Option Plan.(5)(*) |
| |
| |
10 |
.10 |
|
Waters Corporation Retirement Plan.(2)(*) |
83
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description of Document |
| |
|
|
| |
| |
10 |
.11 |
|
Registration Rights Agreement made as of August 18, 1994,
by and among WCD Investors, Inc., AEA Investors, Inc., certain
investment funds controlled by Bain Capital, Inc. and other
stockholders of Waters Corporation.(2) |
| |
| |
10 |
.12 |
|
Form of Indemnification Agreement, dated as of August 18,
1994, between WCD Investors, Inc. and its directors and
executive officers.(2) |
| |
| |
10 |
.13 |
|
Form of Management Subscription Agreement, dated as of
August 18, 1994, between WCD Investors, Inc. and
certain members of management.(2)(*) |
| |
| |
10 |
.14 |
|
1999 Management Incentive Plan.(3)(*) |
| |
| |
10 |
.15 |
|
Rights Agreement, dated as of August 9, 2002 between Waters
Corporation and EquiServe Trust Company, N.A. as Rights
Agent.(11) |
| |
| |
10 |
.17 |
|
First Amendment to the Waters Corporation 2003 Equity Incentive
Plan. (14)(*) |
| |
| |
10 |
.19 |
|
Change of Control/ Severance Agreement, dated as of
February 24, 2004 between Waters Corporation and Mark T.
Beaudouin. (15)(*) |
| |
| |
10 |
.20 |
|
Change of Control/ Severance Agreement, dated as of
February 24, 2004 between Waters Corporation and Douglas A.
Berthiaume. (15)(*) |
| |
| |
10 |
.21 |
|
Change of Control/ Severance Agreement, dated as of
February 24, 2004 between Waters Corporation and Arthur G.
Caputo. (15)(*) |
| |
| |
10 |
.22 |
|
Change of Control/ Severance Agreement, dated as of
February 24, 2004 between Waters Corporation and William J.
Curry. (15)(*) |
| |
| |
10 |
.23 |
|
Change of Control/ Severance Agreement, dated as of
February 24, 2004 between Waters Corporation and Brian K.
Mazar. (15)(*) |
| |
| |
10 |
.25 |
|
Change of Control/ Severance Agreement, dated as of
February 24, 2004 between Waters Corporation and John
Ornell. (15)(*) |
| |
| |
10 |
.26 |
|
Credit Agreement, dated as of May 28, 2004 among Waters
Corporation and Citizens Bank of Massachusetts.(16) |
| |
| |
10 |
.27 |
|
Form of Director Stock Option Agreement under the Waters
Corporation Amended 2003 Equity Incentive Plan. (17)(*) |
| |
| |
10 |
.28 |
|
Form of Director Restricted Stock Agreement under the Waters
Corporation Amended 2003 Equity Incentive Plan. (17)(*) |
| |
| |
10 |
.29 |
|
Form of Executive Officer Stock Option Agreement under the
Waters Corporation Amended 2003 Equity Incentive Plan. (17)(*) |
| |
| |
10 |
.30 |
|
Five Year Credit Agreement, dated as of December 15, 2004
among Waters Corporation, Waters Technologies Ireland Ltd.,
Waters Chromatography Ireland Ltd., JP Morgan Chase Bank, N.A.
and other Lenders party thereto. (21) |
| |
| |
10 |
.32 |
|
Form of Amendment to Stock Option Agreement under the Waters
Corporation Second Amended and Restated 1996 Long Term
Performance Incentive Plan (21).(*) |
| |
| |
10 |
.33 |
|
Stock Option Agreement, dated as of December 8, 2004
between Waters Corporation and Brian K. Mazar. (21)(*) |
| |
| |
10 |
.34 |
|
Waters Corporation 2003 Equity Incentive Plan. (12)(*) |
| |
| |
10 |
.35 |
|
Form of Executive Officer Stock Option Agreement under the
Waters Corporation Second Amended and Restated 1996 Long-Term
Performance Incentive Plan. (21)(*) |
| |
| |
10 |
.36 |
|
2005 Waters Corporation Amended and Restated Management
Incentive Plan(21)(*) |
| |
| |
10 |
.37 |
|
Amendment to Rights Agreement, dated as of March 4, 2005,
between Waters Corporation and The Bank of New York as Rights
Agent. (22) |
| |
| |
10 |
.38 |
|
Second Amendment to the Waters Corporation 2003 Equity Incentive
Plan.(23)(*) |
| |
| |
10 |
.39 |
|
Five Year Credit Agreement, dated as of November 28, 2005
among Waters Corporation, JP Morgan Chase Bank, N.A. and other
Lenders party thereto. |
| |
| |
10 |
.40 |
|
First Amendment dated as of October 12, 2005, to the Five
Year Credit Agreement, dated as of December 15, 2004. |
84
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description of Document |
| |
|
|
| |
| |
10 |
.45 |
|
Change of Control/ Severance Agreement, dated as of
February 24, 2004 between Waters Corporation and Elizabeth
B. Rae.(*) |
| |
| |
21 |
.1 |
|
Subsidiaries of Waters Corporation. |
| |
| |
23 |
.1 |
|
Consent of PricewaterhouseCoopers LLP, an independent registered
public accounting firm. |
| |
| |
31 |
.1 |
|
Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
| |
| |
31 |
.2 |
|
Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
| |
| |
32 |
.1 |
|
Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
| |
| |
32 |
.2 |
|
Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
|
| (1) |
Incorporated by reference to the Registrant’s Report on
Form 10-K dated
March 29, 1996. |
| |
| (2) |
Incorporated by reference to the Registrant’s Registration
Statement on
Form S-1 (File
No. 333-3810).
|
| |
| (3) |
Incorporated by reference to the Registrant’s Report on
Form 10-Q dated
August 11, 1999. |
| |
| (4) |
Incorporated by reference to the Registrant’s Report on
Form 10-K dated
March 30, 2000. |
| |
| (5) |
Incorporated by reference to the Registrant’s Report on
Form 10-Q dated
May 8, 2000. |
| |
| (6) |
Incorporated by reference to the Registrant’s Report on
Form 10-Q dated
August 8, 2000. |
| |
| (7) |
Incorporated by reference to the Registrant’s Report on
Form 10-K dated
March 27, 2001. |
| |
| (8) |
Incorporated by reference to the Registrant’s Report on
Form 10-K dated
March 28, 2002. |
| |
| (9) |
Incorporated by reference to Exhibit B of the
Registrant’s 1996 Proxy Statement. |
|
|
| (10) |
Incorporated by reference to the Registrant’s Report on
Form 10-Q dated
August 12, 2002. |
| |
| (11) |
Incorporated by reference to the Registrant’s Report on
Form 8-A dated
August 27, 2002. |
| |
| (12) |
Incorporated by reference to the Registrant’s Report on
Form S-8 dated
November 20, 2003. |
| |
| (13) |
Incorporated by reference to Exhibit C of the
Registrant’s 1996 Proxy Statement. |
| |
| (14) |
Incorporated by reference to the Registrant’s Report on
Form 10-K dated
March 12, 2004. |
| |
| (15) |
Incorporated by reference to the Registrant’s Report on
Form 10-Q dated
May 10, 2004. |
| |
| (16) |
Incorporated by reference to the Registrant’s Report on
Form 10-Q dated
August 11, 2004. |
| |
| (17) |
Incorporated by reference to the Registrant’s Report on
Form 10-Q dated
November 10, 2004. |
| |
| (18) |
Incorporated by reference to the Registrant’s Report on
Form 8-K, filed on
October 8, 1997 and amended on December 5, 1997. |
| |
| (19) |
Incorporated by reference to the Registrant’s Report on
Form 8-K dated
March 29, 1996. |
| |
| (20) |
Incorporated by reference to the Registrant’s Report on
Form 8-K dated
March 11, 1996 |
| |
| (21) |
Incorporated by reference to the Registrant’s Report on
Form 10-K dated
March 15, 2005. |
| |
| (22) |
Incorporated by reference to the Registrant’s Report on
Form 10-Q dated
May 6, 2005. |
| |
| (23) |
Incorporated by reference to the Registrant’s Report on
Form 10-Q dated
August 5, 2005. |
(*) Management contract or compensatory plan required to be
filed as an Exhibit to this
Form 10-K.
|
|
|
|
(b) |
|
See Item 15 (a) (3) above. |
| |
|
(c) |
|
Not Applicable. |
85
SIGNATURES AND CERTIFICATIONS
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
|
| |
Waters Corporation
|
| |
| |
/s/ John Ornell
|
| |
|
| |
John Ornell |
| |
Vice President, Finance |
| |
and Administration and Chief Financial Officer |
Date: March 6, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities indicated on
March 6, 2006.
| |
|
|
|
|
| |
/s/ Douglas A.
Berthiaume
Douglas A. Berthiaume |
|
Chairman of the Board of Directors, President and Chief
Executive Officer (principal executive officer) |
| |
/s/ John Ornell
John Ornell |
|
Vice President, Finance and
Administration and Chief Financial Officer
(principal financial officer and principal
accounting officer) |
| |
/s/ Joshua Bekenstein
Joshua Bekenstein |
|
Director |
| |
/s/ Dr. Michael J.
Berendt
Dr. Michael J. Berendt |
|
Director |
| |
/s/ Edward Conard
Edward Conard |
|
Director |
| |
/s/ Dr. Laurie H.
Glimcher
Dr. Laurie H. Glimcher |
|
Director |
| |
/s/ William J. Miller
William J. Miller |
|
Director |
| |
/s/ Thomas P. Salice
Thomas P. Salice |
|
Director |
86