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Basis of Presentation and Summary of Significant Accounting Policies | 6 Months Ended
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Jul. 02, 2016
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 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 process es (known as “proteomics”), nutritional safety analysis and environmental testing. LC-MS instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA® product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for pharmaceutical research. The Company is also a developer and supplier of software-based products that interface with the 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 second fiscal quarters for 2016 and 2015 ended on July 2, 2016 and July 4, 2015, respectively. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles (“GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All material inter-company balances and tra nsactions 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 statem ents included in the Company's A nnual R eport on Form 10-K for the year ended December 31, 2015, as filed with the U.S. Securities and Exchange Commission on February 26, 2016. Translation of Foreign Currencies For most of the 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. The functional currency of each of the Company's foreign operating subsidiaries is the local currency of that particular country, except for the Company's subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity's cash flows. Cash, Cash Equivalents and Investments Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of July 2, 2016 and December 31, 2015, $2,559 million out of $2,600 million and $2,346 million out of $2,399 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. In addition, $252 million out of $2,600 million and $248 million out of $2,399 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at July 2, 2016 and December 31, 2015, respectively. 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 July 2, 2016 and December 31, 2015. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions. The following table represents the Company's assets and liabilities measured at fair value on a recurring basis at July 2, 2016 (in thousands):
|  |  |  |  |  |  | Quoted Prices |  |  |  |  |  |
|  |  |  |  |  |  | in Active |  | Significant |  |  |
|  |  |  |  |  |  | Markets |  | Other |  | Significant
|  |  |  |  |  |  | for Identical |  | Observable |  | Unobservable
|  |  |  | Total at |  | Assets |  | Inputs |  | Inputs
|  |  |  | July 2, 2016 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |  |  |  |  |  |  |  |
| U.S. Treasury securities |  | $ | 585,448 |  | $ | - |  | $ | 585,448 |  | $ | -
| Foreign government securities |  |  | 18,024 |  |  | - |  |  | 18,024 |  |  | -
| Corporate debt securities |  |  | 1,454,719 |  |  | - |  |  | 1,454,719 |  |  | -
| Time deposits |  |  | 166,152 |  |  | - |  |  | 166,152 |  |  | -
| Equity securities |  |  | 147 |  |  | - |  |  | 147 |  |  | -
| Other cash equivalents |  |  | 11,000 |  |  | - |  |  | 11,000 |  |  | -
| Waters 401(k) Restoration Plan assets |  |  | 30,031 |  |  | - |  |  | 30,031 |  |  | -
| Foreign currency exchange contracts |  |  | 174 |  |  | - |  |  | 174 |  |  | -
|  | Total |  | $ | 2,265,695 |  | $ | - |  | $ | 2,265,695 |  | $ | -
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
| Contingent consideration |  | $ | 4,608 |  | $ | - |  | $ | - |  | $ | 4,608
| Foreign currency exchange contracts |  |  | 952 |  |  | - |  |  | 952 |  |  | -
|  | Total |  | $ | 5,560 |  | $ | - |  | $ | 952 |  | $ | 4,608
The following table represents the Company's assets and liabilities measured at fair value on a recu rring basis at December 31, 2015 (in thousands):
|  |  |  |  |  |  | Quoted Prices |  |  |  |  |  |
|  |  |  |  |  |  | in Active |  | Significant |  |  |
|  |  |  |  |  |  | Markets |  | Other |  | Significant
|  |  |  | Total at |  | for Identical |  | Observable |  | Unobservable
|  |  |  | December 31, |  | Assets |  | Inputs |  | Inputs
|  |  |  | 2015 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |  |  |  |  |  |  |  |
| U.S. Treasury securities |  | $ | 627,156 |  | $ | - |  | $ | 627,156 |  | $ | -
| Foreign government securities |  |  | 15,199 |  |  | - |  |  | 15,199 |  |  | -
| Corporate debt securities |  |  | 1,324,318 |  |  | - |  |  | 1,324,318 |  |  | -
| Time deposits |  |  | 74,947 |  |  | - |  |  | 74,947 |  |  | -
| Equity securities |  |  | 147 |  |  | - |  |  | 147 |  |  | -
| Other cash equivalents |  |  | 27,000 |  |  | - |  |  | 27,000 |  |  | -
| Waters 401(k) Restoration Plan assets |  |  | 35,823 |  |  | - |  |  | 35,823 |  |  | -
| Foreign currency exchange contracts |  |  | 616 |  |  | - |  |  | 616 |  |  | -
|  | Total |  | $ | 2,105,206 |  | $ | - |  | $ | 2,105,206 |  | $ | -
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
| Contingent consideration |  | $ | 4,215 |  | $ | - |  | $ | - |  | $ | 4,215
| Foreign currency exchange contracts |  |  | 402 |  |  | - |  |  | 402 |  |  | -
|  | Total |  | $ | 4,617 |  | $ | - |  | $ | 402 |  | $ | 4,215
The fair values of the 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 July 2, 2016 and December 31, 2015. Fair Value of Contingent Consideration The fair value of the Company's liability for contingent consideration relates to the July 2014 acquisition of Medimass Research, Development and Service Kft. and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the estimated futu re results and a discount rate that reflects both the likelihood of achieving the estimated future results and 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 $5 million and $4 million at July 2, 2016 and December 31, 2015, respectively, 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, 2015 and the change in fair value since then is primarily due to change in time value of money. Fair Value of Other Financial Instruments The 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 $610 million and $450 million at July 2, 2016 and December 31, 2015, 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 $623 million and $454 million at July 2, 2016 and December 31, 2015, respectively, using Level 2 inputs. Derivative Transactions The Company is a global company that operates in over 35 countries and, as a result, the Company's net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its non-U.S. dollar foreign subsidiaries' financial statements into U.S. dollars, and when any of the Company's subsidiaries purchase or sell products or services in a currency other than its own currency. The Company's principal strategy in managing exposure to changes in foreign currency exchange rates is to naturally hedge the foreign-currency-denominated liabilities on the Company's balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign exchange rates are typically offset by corresponding changes in assets. The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company's net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company's currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currenc ies include the Euro, Japanese y en, Britis h pound and Brazilian real. At July 2, 2016 and December 31, 2015, the Company held foreign exchange contracts with notional amounts totaling $128 million and $116 million, respectively. T he Company's foreign currency exchange contracts included in the consolid ated balance sheets are classified as follows (in thousands):
|  |  | July 2, 2016 |  | December 31, 2015
Other current assets |  | $ | 174 |  | $ | 616
Other current liabilities |  | $ | 952 |  | $ | 402
The following is a summary of the activity in the statements of operations related to the foreign exchange contracts (in thousands):
|  | Three Months Ended |  | Six Months Ended
|  | July 2, 2016 |  | July 4, 2015 |  | July 2, 2016 |  | July 4, 2015
Realized (losses) gains on closed contracts |  | $ | (5,637) |  | $ | 2,542 |  | $ | (7,531) |  | $ | (805)
Unrealized (losses) gains on open contracts |  |  | (963) |  |  | (280) |  |  | (992) |  |  | 62
Cumulative net pre-tax (losses) gains |  | $ | (6,600) |  | $ | 2,262 |  | $ | (8,523) |  | $ | (743)
Stockholders' Equity In Ma y 20 1 4, the Company's Board of Directors authorized the Company to repurchase up to $75 0 million of its out standing common stock over a three-year period. The Company repurchased 1.3 million shares of the Company's outstanding common stock during both the six months ended July 2, 2016 and July 4, 2015 at a cost of $166 million and $165 million, respectively, under the May 201 4 authorization and other previously announced programs. The Company has a total of $275 million authorized for future repurchases under the May 2014 p lan. In addition, the Company repurchased $6 million of common stock related to the vesting of restricted stock units during both the six months ended July 2, 2016 and July 4, 2015. The Company believes that it has the financial flexibility to fund these share repurchases given current cash levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the 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 supplie r s, 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 inform ation, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for re asonableness at least quarterly. The following is a summary of the activity of the Company's accrued warranty liability for the six months ended July 2, 2016 and July 4, 2015 (in thousands):
|  | Balance at |  |  |  |  |  | Balance at
|  | Beginning |  | Accruals for |  | Settlements |  | End of
|  | of Period |  | Warranties |  | Made |  | Period
Accrued warranty liability: |  |  |  |  |  |  |  |  |  |  |  |
July 2, 2016 |  | $ | 13,349 |  | $ | 4,297 |  | $ | (4,719) |  | $ | 12,927
July 4, 2015 |  | $ | 13,266 |  | $ | 3,744 |  | $ | (3,971) |  | $ | 13,039

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