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Basis of Presentation and Summary of Significant Accounting Policies | 9 Months Ended
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Oct. 03, 2015
Basis of Presentation and Summary of Significant Accounting Policies [Abstract] |
Basis of Presentation and Summary of Significant Accounting Policies | 1 Basis of Presentation and Summary of Significant Accounting Policies Waters Corporation (“Waters®” or the “Company”) is an analytical instrument manufacturer that primarily designs, manufactures, sells and services, through its Waters Division, high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC®” and together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together (“LC-MS”) and sold as integrated instrument systems using a common software platform. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS instruments are used in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing. LC-MS instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. Through its TA Division (“TA®”), the Company primarily designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments, which are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of software-based products that interface with the Company's instruments, as well as other suppliers' instruments, and are typically purchased by customers as part of the instrument system. The Company's interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company's fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company's third fiscal quarters for 2015 and 2014 ended on October 3, 2015 and September 27, 2014, respectively. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles (“GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, most of which are wholly owned. All material inter-company balances and transactions have been eliminated. The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions. It is management's opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission on February 27, 2015. Cash, Cash Equivalents and Investments Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than U.S. dollars. As of October 3, 2015 and December 31, 2014, $2,275 million out of $2,311 million and $1,971 million out of $2,055 million, respectively, of the Company's total cash, cash equivalents and investments were held by foreign subsidiaries and may be subject to material tax effects on distribution to U.S. legal entities. Property, Plant and Equipment During the three and nine months ended September 27, 2014, the Company recorded a $4 million impairment charge related to a write-down in the fair value of a building in the U.K., which was designated as held for sale. The carrying value of the building was $4 million and was included in other current assets in the consolidated balance sheet at December 31, 2014. During the three months ended October 3, 2015, the Company sold the building for $5 million in cash, which resulted in a gain on the sale of $1 million. Fair Value Measurements In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company's assets and liabilities are measured at fair value on a recurring basis as of October 3, 2015 and December 31, 2014. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions. The following table represents the Company's assets and liabilities measured at fair value on a recurring basis at October 3, 2015 (in thousands):
|  |  |  |  |  |  | Quoted Prices |  |  |  |  |  |
|  |  |  |  |  |  | in Active |  | Significant |  |  |
|  |  |  |  |  |  | Markets |  | Other |  | Significant
|  |  |  |  |  |  | for Identical |  | Observable |  | Unobservable
|  |  |  | Total at |  | Assets |  | Inputs |  | Inputs
|  |  |  | October 3, 2015 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |  |  |  |  |  |  |  |
| U.S. Treasury securities |  | $ | 629,048 |  | $ | - |  | $ | 629,048 |  | $ | -
| Corporate debt securities |  |  | 1,233,772 |  |  | - |  |  | 1,233,772 |  |  | -
| Time deposits |  |  | 80,931 |  |  | - |  |  | 80,931 |  |  | -
| Equity securities |  |  | 147 |  |  | - |  |  | 147 |  |  | -
| Other cash equivalents |  |  | 29,000 |  |  | - |  |  | 29,000 |  |  | -
| Waters 401(k) Restoration Plan assets |  |  | 33,842 |  |  | - |  |  | 33,842 |  |  | -
| Foreign currency exchange contracts |  |  | 38 |  |  | - |  |  | 38 |  |  | -
|  | Total |  | $ | 2,006,778 |  | $ | - |  | $ | 2,006,778 |  | $ | -
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
| Contingent consideration |  | $ | 4,116 |  | $ | - |  | $ | - |  | $ | 4,116
| Foreign currency exchange contracts |  |  | 575 |  |  | - |  |  | 575 |  |  | -
|  | Total |  | $ | 4,691 |  | $ | - |  | $ | 575 |  | $ | 4,116
The following table represents the Company's assets and liabilities measured at fair value on a recurring basis at December 31, 2014 (in thousands):
|  |  |  |  |  |  | Quoted Prices |  |  |  |  |  |
|  |  |  |  |  |  | in Active |  | Significant |  |  |
|  |  |  |  |  |  | Markets |  | Other |  | Significant
|  |  |  | Total at |  | for Identical |  | Observable |  | Unobservable
|  |  |  | December 31, |  | Assets |  | Inputs |  | Inputs
|  |  |  | 2014 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |  |  |  |  |  |  |  |
| U.S. Treasury securities |  | $ | 626,772 |  | $ | - |  | $ | 626,772 |  | $ | -
| Foreign government securities |  |  | 24,998 |  |  | - |  |  | 24,998 |  |  | -
| Corporate debt securities |  |  | 984,105 |  |  | - |  |  | 984,105 |  |  | -
| Time deposits |  |  | 64,240 |  |  | - |  |  | 64,240 |  |  | -
| Equity securities |  |  | 147 |  |  | - |  |  | 147 |  |  | -
| Other cash equivalents |  |  | 29,000 |  |  | - |  |  | 29,000 |  |  | -
| Waters 401(k) Restoration Plan assets |  |  | 33,935 |  |  | - |  |  | 33,935 |  |  | -
| Foreign currency exchange contracts |  |  | 123 |  |  | - |  |  | 123 |  |  | -
|  | Total |  | $ | 1,763,320 |  | $ | - |  | $ | 1,763,320 |  | $ | -
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
| Contingent consideration |  | $ | 3,612 |  | $ | - |  | $ | - |  | $ | 3,612
| Foreign currency exchange contracts |  |  | 651 |  |  | - |  |  | 651 |  |  | -
|  | Total |  | $ | 4,263 |  | $ | - |  | $ | 651 |  | $ | 3,612
The fair values of the Company's cash equivalents, investments, 401(k) restoration plan assets and foreign currency exchange contracts are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources. After completing these validation procedures, the Company did not adjust or override any fair value measurements provided by third-party pricing services as of October 3, 2015 and December 31, 2014. Fair Value of Contingent Consideration The fair value of the Company's liability for contingent consideration related to the July 2014 acquisition of Medimass Research, Development and Service Kft. is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the development of future products, estimated sales of those products and a discount rate reflective of the Company's creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Although there is no contractual limit, the fair value of future contingent consideration payments was estimated to be approximately $4 million at both October 3, 2015 and December 31, 2014, based on the Company's best estimate, as the earnout is based on future sales of certain products through 2034. There have been no changes in significant assumptions since December 31, 2014 and the change in fair value since then is primarily due to change in time value of money. Fair Value of Other Financial Instruments The Company's cash, accounts receivable, accounts payable and variable interest rate debt are recorded at cost, which approximates fair value. The carrying value of the Company's fixed interest rate debt was $450 million and $550 million at October 3, 2015 and December 31, 2014, respectively. The fair value of the Company's fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company's fixed interest rate debt was estimated to be $456 million and $558 million at October 3, 2015 and December 31, 2014, respectively, using Level 2 inputs. Derivative Transactions The Company enters into foreign currency exchange contracts to manage exposures to changes in foreign currency exchange rates on certain inter-company balances and short-term assets and liabilities. Principal hedged currencies include the Euro, Japanese yen, British pound and Brazilian real. At October 3, 2015 and December 31, 2014, the Company held forward foreign exchange contracts with notional amounts totaling $107 million and $110 million, respectively. The Company's foreign currency exchange contracts included in the consolidated balance sheets are classified as follows (in thousands):
|  |  | October 3, 2015 |  | December 31, 2014
Other current assets |  | $ | 38 |  | $ | 123
Other current liabilities |  | $ | 575 |  | $ | 651
The following is a summary of the activity in cost of sales in the statements of operations related to the forward foreign exchange contracts (in thousands):
|  | Three Months Ended |  | Nine Months Ended
|  | October 3, 2015 |  | September 27, 2014 |  | October 3, 2015 |  | September 27, 2014
Realized gains (losses) on closed contracts |  | $ | 810 |  | $ | (266) |  | $ | 5 |  | $ | (366)
Unrealized losses on open contracts |  |  | (71) |  |  | (43) |  |  | (9) |  |  | (1,000)
Cumulative net pre-tax gains (losses) |  | $ | 739 |  | $ | (309) |  | $ | (4) |  | $ | (1,366)
Stockholders' Equity In May 2014, the Company's Board of Directors authorized the Company to repurchase up to $750 million of its outstanding common stock over a three-year period and authorized the extension of the May 2012 program until May 2015. During the nine months ended October 3, 2015 and September 27, 2014, the Company repurchased 2.0 million and 2.4 million shares of the Company's outstanding common stock at a cost of $249 million and $255 million, respectively, under the May 2012 and May 2014 authorizations. As of October 3, 2015, the Company repurchased an aggregate of 7.6 million shares at a cost of $750 million under the May 2012 repurchase program, which is now completed. The Company has a total of $520 million authorized for future repurchases under the May 2014 plan. In addition, the Company repurchased $6 million and $7 million of common stock related to the vesting of restricted stock units during the nine months ended October 3, 2015 and September 27, 2014, respectively. The Company believes that it has the financial flexibility to fund these share repurchases given current cash levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company's sales and profits. Product Warranty Costs The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the 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 costs 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 nine months ended October 3, 2015 and September 27, 2014 (in thousands):
|  | Balance at |  |  |  |  |  | Balance at
|  | Beginning |  | Accruals for |  | Settlements |  | End of
|  | of Period |  | Warranties |  | Made |  | Period
Accrued warranty liability: |  |  |  |  |  |  |  |  |  |  |  |
October 3, 2015 |  | $ | 13,266 |  | $ | 5,834 |  | $ | (5,993) |  | $ | 13,107
September 27, 2014 |  | $ | 12,962 |  | $ | 5,292 |  | $ | (5,773) |  | $ | 12,481
Subsequent Events The Company did not have any material subsequent events.

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- Definition The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity. + References No definition available. + Details
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