e10vk
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, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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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
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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34 Maple Street
Milford, Massachusetts 01757
(Address, including zip code, of
principal executive offices)
Registrants 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
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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 registrants 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. þ
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 registrants common
stock held by non-affiliates of the registrant as of
July 1, 2006: $4,545,672,000.
Indicate the number of shares outstanding of the
registrants common stock as of February 23, 2007:
101,531,747
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2007 Annual Meeting of
Stockholders are incorporated by reference in Part III,
including, specifically, the Compensation Committee Report to be
included in that proxy statement.
WATERS
CORPORATION AND SUBSIDIARIES
ANNUAL
REPORT ON
FORM 10-K
INDEX
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Item
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No.
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Page
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Business
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3
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Risk
Factors
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10
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Unresolved Staff
Comments
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11
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Properties
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12
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Legal
Proceedings
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13
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Submission of
Matters to a Vote of Security Holders
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13
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Market for
Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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14
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Selected Financial
Data
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16
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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16
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Quantitative and
Qualitative Disclosures About Market Risk
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32
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Financial
Statements and Supplementary Data
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35
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Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
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78
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Controls and
Procedures
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78
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Other
Information
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78
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Directors,
Executive Officers and Corporate Governance
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78
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Executive
Compensation
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79
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Security Ownership
of Certain Beneficial Owners and Management and Related
Stockholder Matters
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79
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Certain
Relationships and Related Transactions and Director
Independence
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79
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Principal
Accounting Fees and Services
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79
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Exhibits and
Financial Statement Schedules
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80
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Signatures
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83
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EX-3.21 Amended and Restated Bylaws of Waters Corporation dated as of December 13, 2006. |
EX-10.46 Second Amendment to the Waters Corporation Second Amended and Restated 1996 Long-Term Performance Incentive Plan. |
EX-10.47 Five Year Credit Agreement, dated January 11, 2007 among Waters Corporation, Waters Technologies Ireland Limited. JP Morgan Chase Bank, N.A., JP Morgan Europe and other Lenders party thereto. |
EX-10.48 Third Amendment to the Waters Corporation 2003 Equity Incentive Plan. |
EX-21.1 Subsidiaries of Waters Corporation. |
EX-23.1 Consent of PricewaterhouseCoopers LLP, and independent registered public accounting firm. |
EX-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. |
EX-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. |
EX-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. |
EX-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. |
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 and together with HPLC, herein referred to as
LC) and mass spectrometry (MS)
instrument systems and support products, including
chromatography columns, other consumable products and
comprehensive post-warranty service plans. These systems are
complementary products that can be integrated together and used
along with other analytical instruments. Through its TA Division
(TA), the Company designs, manufactures, sells and
services thermal analysis and rheometry instruments which are
used primarily 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
Companys instruments as well as other instrument
manufacturers instruments.
The Companys 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 Companys LC and MS
instruments are 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. These 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 Companys 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 Companys 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 and MS instruments, columns and
other consumables, and thermal analysis and rheometry
instruments. The Companys 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 Companys geographic areas is
set forth in Note 17 of Notes to the Consolidated Financial
Statements, which is incorporated herein by reference.
WATERS
DIVISION
High
Performance and Ultra Performance Liquid
Chromatography
Developed in the 1950s, 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 HPLCs performance capabilities enable it to separate
and identify approximately 80% of all known chemicals and
materials. As a result, HPLC is used to
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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 who 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 instruments 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
UPLC®,
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 Companys software products and the
general operating protocols of HPLC. For these reasons, the
Companys 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 2006 and 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 2006 and 2005, excluding the small
impact from acquisitions mentioned below, 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®
sample preparation cartridges.
In February 2006, the Company acquired the net assets of the
food safety business of VICAM Limited Partnership
(VICAM) for $13.8 million in cash. VICAM is a
leading provider of tests to identify and quantify toxins in
various agricultural commodities. The Companys test kits
provide reliable, quantitative detection of particular toxins
through the choice of flurometer or HPLC. In December 2006, the
Company acquired all of the outstanding capital stock of
Environmental Resources Associates, Inc. (ERA), a
provider of environmental testing products for quality control,
proficiency testing and specialty calibration chemicals used in
environmental laboratories, for $62.5 million in cash and
the assumption of $3.8 million of debt. ERA also provides
product
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support services required to help laboratories with their
federal and state mandated accreditation requirements or with
quality control over critical pharmaceutical analysis.
Based upon reports from independent marketing research firms and
publicly disclosed sales figures from competitors, the Company
believes that it is one of the worlds largest
manufacturers and distributors 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 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.
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.
The mass spectrometer is an increasingly important detection
device for LC. The Companys smaller sized mass
spectrometers (such as the SQD and the TQD) are often referred
to as LC detectors and are either sold as part of an
LC system or as an LC upgrade. Large 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 Companys 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 late 2006, the Company also
introduced a new Tandem Quadrupole device, the TQD, and a new
hybrid quadrupole time of flight technology system,
the
Synapttm
HDMS. The Synapt HDMS system integrates ion mobility technology
within a Q-Tof geometry instrument configuration and uniquely
allows researchers to glean molecular shape information, a novel
capability for a mass spectrometry instrument. The introduction
of these new products has augmented the recent growth of the MS
instrument systems. In 2005, the Company introduced a new
enhanced tandem quadrupole instrument, the Quattro Premier XE
and the LCT
Premiertm.
The LCT Premier is
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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 Companys 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 todays 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 materials 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-Seriestm
family of differential scanning calorimeters includes a range of
instruments from basic dedicated analyzers to more expensive
systems that can accommodate robotic sample handlers and a
variety of sample cells and temperature control features for
analyzing a broad range of materials. In 2006, TA introduced
four new differential scanning calorimeters. During 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
2006 and 2005.
In August 2006, the Company acquired all of the outstanding
capital stock of Thermometric AB (Thermometrics), a
manufacturer of high performance microcalorimeters, for
$2.5 million in cash and the assumption of
$1.2 million in debt. Thermometrics flagship product,
the TAM III, is a modular calorimeter that employs
proprietary technology to deliver unparalleled calorimetric
sensitivity and temperature stability. It is routinely used to
characterize materials, and their interactions, in the fields of
pharmaceuticals, life and materials sciences. The TAM III
systems complement TAs industry leading Q-Series
differential scanning calorimeter product line and enhances
TAs position as the worlds leading supplier of
thermal analysis instrumentation.
6
The Company sells, supports and services these product offerings
through TA, headquartered in New Castle, Delaware. TA 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 are
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 Companys largest sector and includes
multi-national pharmaceutical companies, generic drug
manufacturers and biotechnology companies. The Companys
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
Companys 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 2006 and 2005, no single customer accounted for more than
3% of the Companys 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 82 sales offices throughout the
world as of December 31, 2006, compared to approximately
2,400 field representatives in 87 sales offices as of
December 31, 2005. The Companys 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 maintains a Quality Management
System in accordance with the requirements of ISO 9001:2000, ISO
13485:2003 and applicable regulatory requirements (including FDA
QSR and the European IVD Directives). The Company outsources
manufacturing of certain electronic components such as
computers, monitors and circuit boards to outside vendors that
can meet the Companys quality requirements. In 2006, the
Company transitioned the manufacturing of the Alliance HPLC
instrument system to a company in Singapore. The Company expects
to continue to pursue other outsourcing opportunities in the
future. During 2006, the Company added four manufacturing
locations in connection with the ERA, VICAM and Thermometrics
acquisitions. ERA manufactures environmental proficiency kits in
Arvada, Colorado. VICAM manufactures antibody resin and magnetic
beads that are packed into columns and kits in Watertown,
Massachusetts and Nixa, Missouri. Thermometrics manufactures
high performance microcalorimeters in Sweden.
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 Companys LC, MS and thermal analysis product
lines. These facilities meet the same ISO and FDA standards met
by the Milford, Massachusetts facility and are registered with
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
Companys MS instruments are
7
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
Companys facilities where its engineers perform final
assembly, calibrations to customer specifications and quality
control procedures. The Companys MS facilities meet
similar ISO and FDA standards met by the Milford, Massachusetts
facility and are registered with the FDA.
Thermal analysis and rheology products are manufactured at TA.
Thermal analysis products are manufactured at the Companys
New Castle, Delaware facility. Rheometry products are
manufactured at the Companys New Castle, Delaware and
Crawley, England facilities. Similar to MS, certain elements of
TAs products are manufactured by outside contractors and
are then returned to the Companys facilities for final
assembly, calibration and quality control. The Companys
thermal analysis facilities are certified to ISO 9001:2000
standards.
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 Companys research and development expenditures for
2006, 2005 and 2004 were $77.3 million, $66.9 million
and $65.2 million, respectively. Included in the 2006
expense is $5.1 million associated with the adoption of
Statement of Financial Accounting Standard (SFAS)
No. 123(R), Share-based Payment. Nearly all of
the current LC products of the Company have been developed at
the Companys main research and development center located
in Milford, Massachusetts, with input and feedback from the
Companys 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 Companys research and
development center in New Castle, Delaware. At December 31,
2006, there were approximately 571 employees involved in the
Companys research and development efforts, compared to 555
employees in 2005. The Company has increased research and
development expenses relating to acquisitions and the
Companys continued commitment to invest significantly in
new product development and existing product enhancements.
Despite the Companys active research and development
programs, there can be no assurances that the Companys
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 4,700 employees, with 45%
located in the United States, and approximately 4,500 employees,
with 47% located in the United States, at December 31, 2006
and 2005, respectively. The increase of 4% over 2005 is
primarily due to increases in manufacturing operations, research
and development and from acquisitions. The Company considers its
employee relations, in general, to be good. The Companys
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 74 employees being
terminated, all of which had left the Company as of
December 31, 2006.
Competition
The analytical instrument and systems market is 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, reliability
and service and, to a lesser extent, price. Some
competitors businesses are generally more diversified and
less focused on the Companys primary instrument markets.
Some competitors have greater financial and other resources than
the Company.
In the markets served by LC, MS and LC-MS, the Companys
principal competitors include: Applied BioSystems, Inc., Agilent
Technologies, Inc., Thermo Fisher Scientific Inc., Varian, Inc.,
Shimadzu Corporation and Bruker BioSciences Corporation. In the
markets served by TA, the Companys principal competitors
include: PerkinElmer Inc., Mettler-Toledo International Inc.,
NETZSCH-Geraetebau GmbH, Thermo Fisher Scientific Inc.,
8
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 highly competitive and 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 Companys
principal competitors for consumable products include:
Phenomenex, Supelco Inc., Agilent Technologies, Inc., Alltech
International Holdings, Inc., Thermo Fisher Scientific 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
Companys patents, trademarks and licenses are viewed as
valuable assets to its operations. However, the Company believes
that no one patent or group of patents, trademark or license is,
in and of itself, essential to the Company such that its loss
would materially affect the Companys 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. 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
SECs 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 may contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E
9
of the Securities Exchange Act of 1934, as amended (the
Exchange Act), regarding future results and events,
including statements regarding, among other items, (i) the
impact of the Companys new products, (ii) the
Companys growth strategies, including its intention to
make acquisitions and introduce new products,
(iii) anticipated trends in the Companys business and
(iv) the Companys 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, projects, 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 by other
companies, such as improved research-grade mass spectrometers,
higher speed
and/or more
sensitive liquid chromatographs, 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 Companys healthcare and pharmaceutical company
customers, risks associated with lawsuits and other legal
actions particularly involving claims for infringement of
patents and other intellectual property rights, and foreign
exchange rate fluctuations potentially adversely affecting
translation of the Companys 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 Companys 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
businesses are generally more diversified and less focused on
the Companys primary instrument markets. There can be no
assurances that the Companys 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 Companys 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 52% and 54% of
the Companys net sales in 2006 and 2005, 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
Companys results of operations or financial condition.
Risk of
Disruption:
The Company manufactures LC instruments at facilities in
Milford, Massachusetts and Singapore, 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 Companys results of
operations or financial condition.
Foreign
Operations and Exchange Rates:
Approximately 68% and 66% of the Companys 2006 and
2005 net sales, respectively, were outside of the United
States and were primarily denominated in foreign currencies. As
a result, a significant portion of the Companys 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.
10
Additionally, the U.S. dollar value of the Companys
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 Companys results of operations or
financial condition.
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 Companys results of operations
or financial condition 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
by third party patent holders with respect to certain Company
products that may infringe the intellectual property rights of
such third parties. The Companys 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 Companys
results of operations or financial condition.
Reliance
on Customer Demand:
The demand for the Companys 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
Companys customers, the rate of economic growth in the
Companys major markets and competitive considerations.
There can be no assurances that the Companys results of
operations or financial condition will not be adversely impacted
by a change in any of the factors listed above.
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 Companys financial
condition or results of operations and could result in damage to
its relationships with its customers and, accordingly, adversely
affect the Companys business.
Reliance
on Outside Manufacturers:
Certain components or modules of the Companys MS
instruments are manufactured by long-standing outside
contractors. In 2006, the Company transitioned the manufacturing
of the Alliance HPLC instrument system to a company in
Singapore. 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 Companys
financial condition or results of operations.
Item 1B: Unresolved
Staff Comments
None.
11
Item 2: Properties
Waters operates 21 United States facilities and 71 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
Companys 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
|
Watertown, MA
|
|
M, R, S, A
|
|
Leased
|
Nixa, MO
|
|
M, S, D, A
|
|
Leased
|
Arvada, CO
|
|
M, R, S, D, A
|
|
Leased
|
Etten-Leur, Netherlands
|
|
S, D, A
|
|
Owned
|
St. Quentin, France
|
|
S, A
|
|
Leased
|
Singapore
|
|
S, D, A
|
|
Leased
|
Tokyo, Japan
|
|
S, A
|
|
Leased
|
Wexford, Ireland
|
|
M, D, A
|
|
Owned
|
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
|
Sweden
|
|
M, R, D, S, A
|
|
Leased
|
|
|
|
(1) |
|
M = Manufacturing; R = Research; S = Sales and service; D =
Distribution; A = Administration |
The Company operates and maintains 12 field offices in the
United States and 59 field offices abroad in addition to sales
offices in the primary facilities listed above. The
Companys 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
|
|
Peoples 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. |
12
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 did 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), brought
actions 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 Companys 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 brought a new action against the Company
alleging that certain features of the Alliance pump continued 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 courts 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 Agilents
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 Agilents
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 Courts finding of
infringement. The Company has filed a further appeal in the
case. The Company has sought a declaration from the French court
that, as was found in both the UK and Germany, certain modified
features of the Alliance pump do not infringe the HP patents. A
hearing on this matter is currently scheduled for June 2007. 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. In August
2006, following a trial in this new action the German court
ruled that the Company did not infringe the HP patents. Agilent
has filed an appeal in this action.
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 provisions
represent managements best estimate of the probable and
reasonably estimable loss related to the litigations.
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, 58, 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
13
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 Childrens Hospital Trust Board, and a
Trustee of the Childrens Hospital Medical Center, The
University of Massachusetts Amherst Foundation and a Director of
Genzyme Corporation.
Arthur G. Caputo, 55, 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 Millipores 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.
Elizabeth B. Rae, 49, 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, 49, 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
Companys worldwide business systems.
Mark T. Beaudouin, 52, 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 Registrants 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 and Related
Stockholder Matters, of this document, and should be considered
an integral part of this Item 5. The Companys 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 23, 2007, the Company had approximately 247 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, 2006, 2005 or 2004.
14
STOCK
PRICE PERFORMANCE GRAPH
The following graph compares the cumulative total return on $100
invested as of December 31, 2001 (the last day of public
trading of the Companys Common Stock in fiscal year
2001) through December 29, 2006 (the last day of
public trading of the Common Stock in fiscal year 2006) in
the Companys Common Stock, the NYSE Market Index and the
SIC Code 3826 Index. The return of the indices is calculated
assuming reinvestment of dividends during the period presented.
The Company has not paid any dividends since its initial public
offering. The stock price performance shown on the graph below
is not necessarily indicative of future price performance.
COMPARISON
OF CUMULATIVE TOTAL RETURN SINCE
DECEMBER 31, 2001 AMONG WATERS CORPORATION,
NYSE MARKET INDEX AND SIC CODE 3826 LABORATORY
ANALYTICAL INSTRUMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
WATER CORPORATION
|
|
|
|
100.00
|
|
|
|
|
56.21
|
|
|
|
|
85.57
|
|
|
|
|
120.75
|
|
|
|
|
97.55
|
|
|
|
|
126.37
|
|
SIC CODE INDEX
|
|
|
|
100.00
|
|
|
|
|
51.13
|
|
|
|
|
74.59
|
|
|
|
|
91.53
|
|
|
|
|
94.40
|
|
|
|
|
107.64
|
|
NYSE MARKET INDEX
|
|
|
|
100.00
|
|
|
|
|
81.69
|
|
|
|
|
105.82
|
|
|
|
|
119.50
|
|
|
|
|
129.37
|
|
|
|
|
151.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
|
|
April 1, 2006
|
|
$
|
44.88
|
|
|
$
|
37.06
|
|
July 1, 2006
|
|
$
|
46.98
|
|
|
$
|
40.40
|
|
September 30, 2006
|
|
$
|
45.41
|
|
|
$
|
38.38
|
|
December 31, 2006
|
|
$
|
51.64
|
|
|
$
|
44.43
|
|
15
The following table provides information about purchases by the
Company during the three months ended December 31, 2006 of
equity securities registered by the Company under to the
Exchange Act (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Maximum
|
|
|
|
Total
|
|
|
|
|
|
Purchased as Part
|
|
|
Dollar Value of
|
|
|
|
Number of
|
|
|
Average
|
|
|
of Publicly
|
|
|
Shares that May Yet
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Announced
|
|
|
Be Purchased Under
|
|
Period
|
|
Purchased (1)
|
|
|
per Share
|
|
|
Programs (2)
|
|
|
the Programs
|
|
|
October 1 to 28, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
56,144
|
|
October 29 to November 25,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,144
|
|
November 26 to December 31,
2006
|
|
|
430
|
|
|
|
49.85
|
|
|
|
430
|
|
|
|
34,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
430
|
|
|
|
49.85
|
|
|
|
430
|
|
|
|
34,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company purchased an aggregate of 11.3 million 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 Companys 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. |
|
|
Item 6:
|
Selected
Financial Data
|
Reference is made to information contained in the section
entitled Selected Financial Data on page 77 of
this
Form 10-K,
included in Item 8, Financial Statements and Supplementary
Data.
|
|
Item 7:
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Business
and Financial Overview:
The Companys sales were $1,280.2 million,
$1,158.2 million and $1,104.5 million in 2006, 2005
and 2004, respectively. Sales grew 11% in 2006 over 2005 and 5%
in 2005 over 2004. Overall, the sales growth achieved in these
years can be primarily attributed to the Companys
introduction of new products and sustained growth in Asia. The
2006 and 2005 sales growth benefited from the introduction of
the ACQUITY
UPLC®
and the Quattro
Premiertm
XE based systems and an increase in chemistry consumable sales.
In addition, the 2006 sales growth also benefited from the
introduction of the new SQD, TQD and
Synapttm
HDMS mass spectrometry systems which were introduced in the
second-half of 2006.
The effect of currency translation benefited the 2006 sales
growth rate by less than 1%, principally in Europe, and was
neutral to the 2005 sales growth rates. U.S. sales
increased 4% and 2%; European sales grew 12% and 3%; and Asian
sales (including Japan) grew 19% and 10% during 2006 and 2005,
respectively. Asian sales growth was strongest in India and
China.
In 2006, global sales to pharmaceutical customers rebounded from
2005 levels and industry-wide sales grew 8%, as these customers
increased their capital spending on the Companys new
products. Global sales to pharmaceutical customers were weak in
2005 as the Companys large pharmaceutical customers
decreased capital spending as these customers dealt with various
new drug pipeline, merger and acquisition and litigation issues.
Global sales to industrial and food safety customers continued
its positive trend as sales grew 13% in 2006 over 2005. The TA
Division (TA) sales, a business with a heavy
industrial focus, grew 9% and 8% for 2006 and 2005,
respectively, and the sales growth can be attributed to new
product introductions and expansion of its Asian businesses.
The Waters Division sales grew by 11% in 2006 and 4% in 2005.
The Waters Divisions products and services consist of
LC & MS instrument systems which include high
performance liquid chromatography (HPLC), ultra
performance liquid chromatography (UPLC and together
with HPLC, herein referred to as LC), mass
16
spectrometry (MS) products, chemistry consumable
products, and LC and MS services. The sales growth is strongly
influenced by ACQUITY UPLC sales and sales growth in the
chemistry consumables business.
In 2006, the Company continued to enhance its operations in Asia
by expanding an existing partnership to manufacture
instrumentation in Singapore. The Company transitioned the
manufacturing of the
Alliance®
instrument system and, while the Company expects to achieve cost
savings efficiencies in the future, the overall impact during
the ramp-up
in 2006 was slightly negative on gross profit margin percentages
in 2006 compared to 2005.
Operating income was $295.2 million, $283.2 million
and $284.9 million in 2006, 2005 and 2004, respectively.
Operating income was primarily impacted by the following:
|
|
|
|
|
The $12.0 million net increase in 2006 operating income
from 2005 is primarily a result of the increased sales volume
being partially offset by the $28.0 million of the
additional stock-based compensation costs incurred as a result
of the adoption of Statement of Financial Accounting Standard
(SFAS) No. 123(R) Share-Based
Payment and $8.5 million of restructuring costs
incurred relating to the February 2006 cost reduction
initiative. The Company does not expect to incur any significant
additional restructuring costs for this initiative in the future.
|
|
|
|
The $1.7 million net decrease in operating income in 2005
from 2004 is primarily attributable to a litigation provision of
$3.1 million related to a patent litigation settlement with
Hewlett-Packard Company in February 2006 that was recorded in
the fourth quarter of 2005. The remaining increase in 2005
operating income was primarily a result of sales growth. The
2004 operating income included the benefit of a litigation
judgment in the amount of $17.1 million from Perkin-Elmer
Corporation partially offset by litigation provisions of
$7.8 million and a technology license asset impairment of
$4.0 million.
|
The Company continuously evaluates its equity investments for
impairment and, as a result, the Company recorded, in net other
expense, a net write-down of certain equity investments in the
amount of $5.8 million, $3.1 million and
$1.0 million in 2006, 2005 and 2004, respectively. Included
in the 2005 net write-down is a gain on the sale of an
equity investment of $1.7 million.
Operating cash flow was $263.6 million, $298.1 million
and $259.4 million in 2006, 2005 and 2004, respectively.
Included in the 2006 operating cash flow was a $9.0 million
tax payment associated with the American Jobs Creation Act
(AJCA), a $3.5 million litigation payment and
$7.0 million of severance and other facility related
payments made in connection with the cost reduction initiative.
The 2005 operating cash flow included an AJCA payment of
approximately $10.0 million. The decline in the 2006
operating cash flow can also be attributed to an increase in
inventories of $29.9 million over 2005. The inventory
increase is attributable to the
ramp-up of
new product introductions and an increase in the safety stock
levels resulting from the outsourcing of the Alliance instrument
system manufacturing. Operating cash flows continue to benefit
from the improvement in accounts receivable collection measured
in days-sales-outstanding (DSO). DSOs were
64 days, 70 days and 76 days at December 31,
2006, 2005 and 2004, respectively.
In cash flows used in investing activities, capital expenditures
related to property, plant, equipment, software capitalization
and other intangibles were $51.4 million,
$51.0 million and $66.2 million, in 2006, 2005 and
2004, respectively. Capital expenditures have remained
substantially unchanged over the last three years. Capital
expenditures in 2004 included $18.1 million for the
purchase of a building adjacent to the Companys
headquarters.
The Company continues to evaluate the acquisition of businesses,
product lines and technologies to augment the Waters and TA
operating divisions. On December 15, 2006, the Company
acquired all of the outstanding capital stock of Environmental
Resources Associates, Inc., (ERA), a provider of
environmental testing products for quality control, proficiency
testing and specialty calibration chemicals used by
environmental laboratories, for approximately $62.5 million
in cash and the assumption of $3.8 million of debt. The
Company expects that ERA will add approximately
$17.0 million of product sales and be about neutral to
earnings in 2007 after debt service costs. In February 2006, the
Company acquired the net assets of the food safety business of
VICAM Limited Partnership (VICAM) for approximately
$13.8 million. VICAM products added approximately
$8.0 million to sales and were about neutral to earnings
for the year ended December 31, 2006 after debt service
costs. VICAM product sales in 2007 are expected to be
approximately $10.0 million. In August 2006, the Company
acquired all of
17
the outstanding capital stock of Thermometric AB
(Thermometrics), a manufacturer of high performance
microcalorimeters, for a total of $2.5 million in cash and
the assumption of $1.2 million of debt. Thermometrics
products added approximately $1.5 million to sales and were
neutral to earnings for the year ended December 31, 2006.
Thermometrics sales are expected to be approximately
$4.0 million in 2007.
During 2006, management continued to apply the Companys
net cash flow to repurchase shares of Company stock through the
$500.0 million program authorized by the Companys
Board of Directors in October 2005. During 2006, the Company
purchased 5.8 million shares of its common stock at a cost
of $249.2 million. The Company has repurchased an aggregate
of 11.3 million shares of its common stock under this
program at a cost of $465.3 million, leaving
$34.7 million authorized for future repurchases. 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 current cash and debt levels, and
invest in research, technology and business acquisitions to
further grow the Companys sales and profits.
In January 2007, the Company terminated multiple term loan and
revolving credit agreements entered into 2005 and 2004. The
Company refinanced the credit agreement facilities to expand its
debt capacity to $1.1 billion, reduce its borrowing rates
and extend the maturity by two years.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Net
Sales:
Net sales for 2006 and 2005 were $1,280.2 million and
$1,158.2 million, respectively, an increase of 11%. Foreign
currency translation benefited the 2006 sales growth rate by
less than 1%. Product sales were $922.5 million and
$834.7 million for 2006 and 2005, respectively, an increase
of 11% over 2005. The increase in product sales was primarily
due to the overall positive growth in LC, MS and TA instrument
systems sales, an increase in chemistry consumables sales and
the effect of acquisitions. Service sales were
$357.7 million and $323.6 million in the 2006 and
2005, respectively, an increase of 11%. The increase was
primarily attributable to growth in the Companys installed
base of instruments and higher sales of service contracts.
The following commentary discusses the Companys sales
performance by product line.
Waters
Division Net Sales:
The Waters Division sales grew approximately 11% in 2006. The
effect of foreign currency translation benefited the 2006 Waters
Division sales growth by less than 1%. Chemistry consumables
sales grew approximately 18% in 2006. This growth was driven by
increased column sales of ACQUITY UPLC proprietary column
technology, new
XBridgetm
columns,
Oasis®
sample preparation products and the sales associated with the
acquired VICAM product line. LC and MS service sales grew 9% in
2006 due to increased sales of service plans to the higher
installed base of customers. LC and MS instrument systems sales
grew 9% in 2006. The increase in LC and MS instrument sales
during 2006 is primarily attributable to higher sales of ACQUITY
UPLC systems and higher MS triple quadrupole system sales,
offset by a decline in lower-end MS systems sales. Waters
Division sales by product mix was substantially unchanged in
2006 and 2005 with instruments, chemistry and service
representing approximately 57%, 16% and 27% respectively.
Geographically, Waters Division sales in the U.S., Europe and
Asia (including Japan) strengthened approximately 4%, 12% and
19%, respectively, in 2006. The effects of foreign currency
translation increased sales growth by 2% in Europe and decreased
sales growth in Asia by 3% in 2006. The growth in Europe was
broad-based across most major countries, particularly in Eastern
Europe, while Asias growth was primarily driven by
increased sales in India and China. U.S. sales growth in
2006 was primarily due to higher demand from the Companys
pharmaceutical and industrial customers.
TA
Division Net Sales:
TA Divisions sales grew 9% in 2006 as a result of
TAs new product introductions and expansion of its Asian
businesses. Foreign currency translation had no impact to this
overall sales growth rate. Instrument sales grew 4% as TA
introduced four new differential scanning calorimeters during
2006 and, in late August 2006, the Company entered the field of
microcalorimetry through the acquisition of Thermometrics.
Instrument system sales represented approximately 70% and 73% of
sales in 2006 and 2005, respectively. TA service sales grew 22%
in 2006 and
18
can be attributed to the increased sales of service plans to the
higher installed base of customers. Geographically, sales growth
for 2006 was predominantly in Europe and Asia.
Gross
Profit:
Gross profit for 2006 was $744.0 million compared to
$679.9 million for 2005, an increase of $64.1 million
or 9% and is generally consistent with the increase in net
sales. Gross profit as a percentage of sales decreased to 58.1%
in 2006 from 58.7% in 2005. The 2006 gross profit was negatively
impacted by $4.3 million of stock-based compensation costs
relating to the adoption of SFAS No. 123(R). The
remaining slight decrease in gross profit percentage in 2006 as
compared to 2005 is primarily due to product transition costs to
Singapore and product introduction costs on new MS instruments.
Selling
and Administrative Expenses:
Selling and administrative expenses for 2006 and 2005 were
$357.7 million and $321.7 million, respectively. As a
percentage of net sales, selling and administrative expenses
were 27.9% for 2006 compared to 27.8% for 2005. The
$36.0 million or 11% increase in total selling and
administrative expenses for 2006 is primarily due to additional
stock-based compensation costs of $18.6 million, annual
merit increases across most divisions, other headcount additions
and related fringe benefits and indirect costs of
$11.6 million. Other increases in selling and
administration expenses were offset by decreases related to the
February 2006 cost saving initiative. The Company has made
investments in Asia, largely in the second half of 2006, in
support of growing business opportunities and management expects
expenses to continue to grow at a modest rate in the future as
compared to 2006.
Research
and Development Expenses:
Research and development expenses were $77.3 million for
2006 and $66.9 million for 2005, an increase of
$10.4 million or 16% primarily due to stock-based
compensation costs of $5.1 million relating to the adoption
of SFAS No. 123(R)and the merit increases across most
divisions, other headcount additions and related fringe benefits
and indirect costs. The remaining increases in research and
development expenses in 2006 as compared to 2005 reflects the
costs of introducing multiple new MS instruments in the second
half of 2006.
2006
Restructuring:
In February 2006, the Company implemented a cost reduction plan
primarily affecting operations in the U.S. and Europe that
resulted in the employment of 74 employees being terminated, all
of which had left the Company as of December 31, 2006. In
addition, the Company closed a sales and demonstration office in
the Netherlands in the second quarter of 2006. The Company
implemented this cost reduction plan primarily to realign its
operating costs with business opportunities around the world.
The following is a summary of activity of the Companys
2006 restructuring liability (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Charges
|
|
|
Utilization
|
|
|
2006
|
|
|
Severance
|
|
$
|
|
|
|
$
|
6,443
|
|
|
$
|
(5,010
|
)
|
|
$
|
1,433
|
|
Other
|
|
|
|
|
|
|
2,041
|
|
|
|
(1,993
|
)
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
8,484
|
|
|
$
|
(7,003
|
)
|
|
$
|
1,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not expect to incur any additional charges
connection with the February 2006 restructuring initiative. The
Company achieved approximately $4.4 million of cost savings
in 2006 from this initiative, mostly in the second half of 2006,
and expects to achieve approximately $7.4 million in cost
savings annually as a result of this restructuring. Other
charges include approximately $0.7 million of leasehold
improvement assets, net of accumulated amortization, written-off
as a result of the closure of the facility in the Netherlands.
Litigation
Provisions:
Litigation provisions in 2005 were $3.1 million relating to
patent litigation with Agilent Corporation and Hewlett-Packard
Company (Hewlett-Packard). This patent litigation
was settled in February 2006 and recorded in the
2005 statement of operations. No additional provisions were
made in 2006.
19
Other
(Expense) Income, Net:
In the fourth quarter of 2006, the Company recorded a
$5.8 million charge for an
other-than-temporary
impairment to an equity investment in Caprion Pharmaceuticals
Inc. (Caprion). The charge was recorded in 2006 when
the Company learned that Caprions financial condition had
deteriorated and a merger was in process that, in the
Companys assessment, would result in the Companys
investment being substantially diminished. The remaining value
of the Caprion investment was approximately $1.7 million as
of December 31, 2006.
In the fourth quarter of 2005, the Company sold all of its
equity investment in Nuvelo, 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 Companys investment
in Beyond Genomics, Inc. This charge was recorded based on the
Companys assessment of Beyond Genomics, Inc.s
financial condition.
Interest
Expense:
Interest expense was $51.7 million and $24.7 million
for 2006 and 2005, respectively. The increase in 2006 interest
expense is primarily attributable to increases in interest rates
on the Companys outstanding debt and an increase in
average borrowings in the U.S. to fund the stock repurchase
programs.
Interest
Income:
Interest income for 2006 and 2005 was $25.3 million and
$19.3 million, respectively. The increase in interest
income is primarily due to higher interest rate yields.
Provision
for Income Taxes:
The Companys effective tax rates for 2006 and 2005 were
15.5% and 26.4%, respectively. Included in the
2005 effective tax rate is the effect of $24.0 million
of income tax expense related to the repatriation of funds from
the Companys foreign subsidiaries under the ACJA. The
remaining decrease in the effective tax rates for
2006 compared to 2005 is primarily attributable to the
proportionate increase in income in international jurisdictions
with lower effective tax rates, primarily Ireland and Singapore.
In addition, the adoption of SFAS No. 123(R) resulted
in the recognition of a tax benefit at a higher effective tax
rate in 2006.
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 significant 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
chemistry 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 Companys instrument
installed base and sales of service contracts.
Waters
Division Net Sales:
Waters Divisions sales in 2005 grew approximately 4%. The
effect of foreign currency translation decreased overall sales
by 1%. The growth in LC and MS instrument system sales in 2005
was 2%. 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, and an increase in Q-Tof Premier and Quattro
Premier XE system sales substantially offset by weak single
quadrupole and magnetic sector instrument sales. In 2005, the
sales of chemistry consumables (sample preparation devices and
chromatography columns) grew 8% primarily as a result of
continued strength in demand from the introduction of the new
XBridge,
SunFiretm
and ACQUITY UPLC chromatography columns and Oasis sample
preparation cartridges. Service sales in 2005 grew 8% over 2004
due to increased sales of service plans to the Companys
growing installed base of customers. 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. The
2005 Waters Division sales product mix for instruments,
chemistry and service was approximately 57%, 16% and 27%,
respectively. The 2004 Waters Division sales product mix for
instruments, chemistry and service was approximately 59%, 14%
and 27%, respectively.
20
Geographically, Waters Division sales grew 10% in Asia and 7% in
Japan while the U.S. and European sales grew 1% and 3%,
respectively. Foreign currency translation had no significant
impact on sales growth in 2005; except in Japan where sales were
negatively impacted by 3%. 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.
TA
Division Net Sales:
Sales for thermal analysis instruments, rheometry instruments
and related service sales grew 8% in 2005. Instrument system
sales grew 6% as strong demand for TA products from customers
outside of the U.S. contributed to the divisions
overall sales growth. Instrument system sales represented
approximately 73% of sales in 2005 and 2004. Sales growth for TA
outside of the U.S. was 13% in 2005 compared to 2004.
TAs positive sales growth performance can be attributed to
the strong demand for TAs products in Japan and Asia and
TAs worldwide expanded sales and marketing efforts. Sales
in the U.S. and Europe grew 3% while sales in Japan and Asia
grew 20% and 39% in 2005, respectively. In 2005, service sales
grew approximately 15% 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 chemistry
consumables and service sales.
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 from 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; annual merit increases 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 sales commissions and management
incentive compensation expense derived from 2005 financial
results.
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.
Litigation
Provisions and Settlement:
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. This patent litigation was settled in February
2006. In 2004, the Company recorded the benefit of a litigation
judgment in the amount of $17.1 million and a provision
expense of $7.8 million. The benefit in 2004 is related to
the conclusion of the Companys litigation with
Perkin-Elmer. The provision in 2004 was related to the on-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.
21
Other
(Expense) Income, Net:
In 2005, the Company sold all of its equity investment in
Nuvelo, Inc. and recorded a gain of $1.7 million. In 2005,
the Company also recorded a $4.8 million charge for an
other-than-temporary
impairment for the full value of the Companys investment
in Beyond Genomics, Inc. This charge was recorded based on the
Companys 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 Companys remaining investment carrying
value of
GeneProttm. This
charge was recorded based on the Companys assessment of
GeneProts 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 Companys
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
Companys 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 has used and will continue to 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 Companys effective tax rates for 2005 and 2004 were
26.4% and 21.6%, respectively. Included in the 2005 effective
tax rate is the effect of $24.0 million of income tax
expense related to the repatriation of funds from the
Companys foreign subsidiaries under the AJCA. The 2004
effective tax rate 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 remaining change in effective tax rates is
primarily attributable to the relative increase in income in
international jurisdictions with lower effective tax rates,
primarily Ireland.
22
Liquidity
and Capital Resources
Condensed
Consolidated Statements of Cash Flows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
222,200
|
|
|
$
|
201,975
|
|
|
$
|
224,053
|
|
Depreciation and amortization
|
|
|
46,159
|
|
|
|
43,685
|
|
|
|
41,926
|
|
Stock-based compensation
|
|
|
28,813
|
|
|
|
765
|
|
|
|
75
|
|
Deferred income taxes
|
|
|
506
|
|
|
|
10,235
|
|
|
|
1,468
|
|
Tax benefit related to stock
option plans
|
|
|
|
|
|
|
4,872
|
|
|
|
32,012
|
|
Change in accounts receivable
|
|
|
(9,803
|
)
|
|
|
(6,515
|
)
|
|
|
(36,453
|
)
|
Change in inventories
|
|
|
(29,853
|
)
|
|
|
(6,973
|
)
|
|
|
(11,575
|
)
|
Change in accounts payable and
other current liabilities
|
|
|
1,670
|
|
|
|
26,802
|
|
|
|
12,203
|
|
Change in accrued litigation
|
|
|
(4,420
|
)
|
|
|
688
|
|
|
|
(16,095
|
)
|
Change in deferred revenue and
customer advances
|
|
|
1,230
|
|
|
|
7,551
|
|
|
|
1,526
|
|
Other changes
|
|
|
7,092
|
|
|
|
14,982
|
|
|
|
10,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
263,594
|
|
|
|
298,067
|
|
|
|
259,449
|
|
Net cash used in investing
activities
|
|
|
(130,374
|
)
|
|
|
(51,045
|
)
|
|
|
(108,605
|
)
|
Net cash (used in) provided by
financing activities
|
|
|
(125,906
|
)
|
|
|
(272,015
|
)
|
|
|
21,507
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
13,264
|
|
|
|
(20,496
|
)
|
|
|
9,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
$
|
20,578
|
|
|
$
|
(45,489
|
)
|
|
$
|
182,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
from Operating Activities
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Net cash provided by operating activities was
$263.6 million and $298.1 million in 2006 and 2005,
respectively. The $34.5 million decline in net cash
provided from operating activities in 2006 compared to 2005 is
attributed primarily to the following significant changes in the
sources and uses of net cash provided from operating activities,
aside from the increase in net income and the impact of stock
compensation under SFAS 123(R):
|
|
|
|
|
The change in accounts receivable in 2006 compared to 2005 is
primarily attributable to the timing of payments made by
customers and the higher sales volume in 2006 as compared to
2005. The days-sales-outstanding (DSO) decreased to
64 days at December 31, 2006 from 70 days at
December 31, 2005.
|
|
|
|
The change in inventory in 2006 compared to 2005 results from
the increase in inventory due to the
ramp-up of
new MS products, an increase in LC instrument inventory
associated with the transition to higher production levels of
ACQUITY systems from Alliance systems and a planned increase in
the Alliance inventory levels during the outsourcing transition.
|
|
|
|
The 2006 change in accounts payable and other current
liabilities was impacted by cash payments made on increased
inventory levels, severance and other facility related payments
of $7.0 million in connection with the cost reduction
initiative and a litigation payment of $3.5 million to
settle the Hewlett-Packard litigation.
|
|
|
|
Also included in the change in accounts payable and other
current liabilities in 2006 was a tax payment in the amount of
$9.0 million related to the distribution and repatriation
of cash under the AJCA. During 2005, the income tax accrual was
increased by $24.0 million resulting from the repatriation
of funds under the AJCA.
|
|
|
|
Net cash provided from deferred revenue and customer advances in
both 2006 and 2005 was a result of the installed base of
customers renewing annual service contracts.
|
|
|
|
2006 net cash provided by operating activities as compared
to 2005 was impacted by the adoption of
SFAS No. 123(R). Under SFAS No. 123(R),
$16.5 million of benefits of tax deductions in excess of
recognized compensation costs were reported as cash from
financing activities in 2006; prior to the adoption
|
23
|
|
|
|
|
of SFAS No. 123(R), this benefit of $4.9 million
in 2005 was reported as part of cash from operating activities.
|
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Net cash provided by operating activities was
$298.1 million and $259.4 million in 2005 and 2004,
respectively. The $38.7 million increase in the net cash
provided from operating activities in 2005 compared to 2004 can
be attributed primarily to the following significant changes in
the sources and uses of the net cash provided from operating
activities, aside from the increase in net income:
|
|
|
|
|
Depreciation and amortization have increased as a result of
higher capital spending on equipment and facilities, and the
full-year impact of acquisitions, particularly in 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 accounts receivable is primarily related to the
timing of the Companys sales within the quarter, the
timing of cash receipts from customers and foreign currency
translation. DSO at December 31, 2005 and 2004 were
70 days and 76 days, respectively.
|
|
|
|
The growth in inventory over the two years is primarily related
to the Companys sales growth and the introduction of new
products. Although inventory levels have grown, they have not
increased at the same rate as sales growth, thus resulting in
improved inventory turns of 3.6 and 3.3 in 2005 and 2004,
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.
|
|
|
|
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, 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.
|
|
|
|
Net cash provided from deferred revenue and customer advances in
both 2005 and 2004 was a result of the installed base of
customers renewing annual service contracts.
|
Cash Used
in Investing Activities
Net cash used in investing activities totaled
$130.4 million in 2006 compared to $51.0 million in
2005 and $108.6 million in 2004. Additions to fixed assets
and intangible assets were $51.4 million in 2006,
$51.0 million in 2005 and $66.2 million in 2004.
Included in 2004 was a building purchase adjacent to the
Companys 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
Companys growth. Business acquisitions were
$79.0 million and $42.4 million in 2006 and 2004,
respectively. There were no business acquisitions in 2005.
Cash Used
in Financing Activities
During 2006, the Companys net change in debt borrowings
was a $72.2 million increase compared to a
$369.6 million increase in 2005 and a $210.4 million
increase in 2004. As of December 31, 2006, the Company had
$885.0 million borrowed under two existing credit
agreements and an amount available to borrow of
$163.4 million after outstanding letters of credit. In
total, $500.0 million of the total debt was classified as
long-term debt and $385.0 million classified as short-term
debt at December 31, 2006 in the consolidated balance
sheets. The remaining amount of short-term debt of
$18.5 million at December 31, 2006 consists of various
local lines of credit throughout the Companys worldwide
subsidiaries.
24
The Company repurchased 5.8 million, 15.4 million and
5.5 million common stock shares at a cost of
$249.2 million, $659.3 million and $231.3 million
during 2006, 2005 and 2004, respectively, under previously
announced stock repurchase programs. On October 24, 2005,
the Companys 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 11.3 million shares at a cost of
$465.3 million under this new program through
December 31, 2006, leaving $34.7 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. The Company received $39.9 million,
$16.8 million and $45.0 million of proceeds from the
exercise of stock options and the purchase of shares pursuant to
employee stock purchase plans in 2006, 2005 and 2004,
respectively. Proceeds from stock options exercised in 2004 were
unusually high due to significant exercises of stock options
related to previously granted options about to expire.
The Company believes that the cash and cash equivalent balance
of $514.2 million at the end of 2006 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.
On January 11, 2007, Waters Corporation and Waters
Technologies Ireland Ltd. entered into a new credit agreement
(the 2007 Credit Agreement). The 2007 Credit
Agreement provides for a $500 million term loan facility, a
$350 million revolving facility
(U.S. Tranche), which includes both a letter of
credit and a swingline subfacility, and a $250 million
revolving facility (European Tranche) that is
available to Waters Corporation in U.S. dollars and Waters
Technologies Ireland Ltd. in either U.S. dollars or Euro.
Waters Corporation may on one or more occasions request of the
lender group that commitments for the U.S. Tranche or
European Tranche be increased by an amount of not less than
$25 million, up to an aggregate additional amount of
$250 million. Existing lenders are not obligated to
increase commitments and the Company can seek to bring in
additional lenders. The term loan facility and the revolving
facilities both mature on January 11, 2012 and require no
scheduled prepayments before that date.
On January 11, 2007, the Company borrowed $500 million
under the new term loan facility, $115 million under the
new European Tranche, and $270 million under the new
U.S. Tranche revolving facility. The Company used the
proceeds of the term loan and the revolving borrowings to repay
the outstanding amounts under the Companys existing
multi-borrower credit agreement dated as of December 15,
2004 and amended as of October 12, 2005 and the
Companys existing term loan agreement dated as of
November 28, 2005. Waters Corporation terminated such
agreements early without penalty.
The interest rates applicable to term loan and revolving loans
under the 2007 Credit Agreement are, at the Companys
option, equal to either the base rate (which is the higher of
the prime rate or the federal funds rate plus
1/2%) or the
applicable 1, 2, 3, 6, 9 or 12 month LIBOR rate,
in each case, plus an interest rate margin based upon the
Companys leverage ratio, which can range between
33 basis points and 72.5 basis points. The facility
fee on the 2007 Credit Agreement ranges between 7 basis
points and 15 basis points. The 2007 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, the same as the terminated credit
agreements. In addition, the 2007 Credit Agreement includes
negative covenants that are customary for investment grade
credit facilities and are similar in nature to ones contained in
the terminated credit agreements. The 2007 Credit Agreement also
contains certain customary representations and warranties,
affirmative covenants and events of default which are similar in
nature to those in the terminated credit agreements.
Commitments:
The Company licenses certain technology and software from third
parties which expire at various dates through 2008. Fees paid
for licenses were approximately $0.6 million in 2006,
$0.8 million in 2005 and $1.1 million in 2004. Future
minimum licenses fees payable under existing license agreements
as of December 31, 2006 are immaterial.
25
Contractual
Obligations and Commercial Commitments
The following is a summary of the Companys commitments as
of December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
Contractual Obligations
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
After 2012
|
|
|
Long-term debt(1)
|
|
$
|
500,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
84,228
|
|
|
|
18,894
|
|
|
|
15,679
|
|
|
|
12,260
|
|
|
|
9,404
|
|
|
|
8,195
|
|
|
|
7,605
|
|
|
|
12,191
|
|
Other long-term liabilities(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
584,228
|
|
|
$
|
18,894
|
|
|
$
|
15,679
|
|
|
$
|
262,260
|
|
|
$
|
259,404
|
|
|
$
|
8,195
|
|
|
$
|
7,605
|
|
|
$
|
12,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitments Expiration Per Period
|
|
Other Commercial Commitments
|
|
Total
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
After 2011
|
|
|
Letters of credit
|
|
$
|
1,608
|
|
|
$
|
1,608
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1) |
|
The interest rates applicable to any U.S. borrowings under
the existing credit agreement and term loan and revolving loans
under the existing credit agreement are, at the Companys
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 Companys 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, 2006, the
Companys interest expense would be approximately
$52.0 million annually. This amount considers the credit
margins under the 2007 Credit Agreement mentioned above. |
|
(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 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 2007, the Company expects to contribute approximately
$4.0 million to $8.0 million to the Companys
pension plans. Capital expenditures in 2007 are expected to be
at similar levels expended in 2006 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
Companys 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
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
Companys 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.
26
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 Companys 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 Companys 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
ongoing 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
Companys 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 Companys
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 is 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 Companys 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, 2006, the Company had
current and long-term deferred revenue liabilities of
approximately $76.1 million and $10.5 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 Companys method of revenue
recognition for certain products requiring installation is in
accordance with Securities and Exchange Commission
(SEC) 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 vendors fee is fixed or
determinable, and collectibility is reasonably assured and, if
applicable, upon acceptance when acceptance criteria with
contractual cash holdback are specified. 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 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 Companys 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.
27
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
Companys 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 Companys
accounts receivable balance at December 31, 2006 was
$272.2 million, net of allowances for doubtful accounts and
sales returns of $8.4 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 Companys 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
Companys inventory balance at December 31, 2006 was
$168.4 million, net of write-downs to net realizable value
of $14.3 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:
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significant underperformance relative to expected historical or
projected future operating results;
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significant negative industry or economic trends; and
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significant changes or developments in strategic technological
collaborations or legal matters which affect the Companys
capitalized patent, trademark and intellectual properties such
as licenses.
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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
Companys 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 $131.7 million,
$149.3 million, and $265.2 million, respectively, as
of December 31, 2006. The Company performs annual
impairment reviews of its goodwill. The Company performed its
annual review during 2006 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 Companys 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 Companys previous estimates,
revisions to the estimated warranty liability would be required.
At December 31, 2006, the Companys warranty liability
was $12.6 million.
28
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. 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.
SFAS No. 109, Accounting for Income Taxes,
requires that a Company continually evaluate the necessity of
establishing or changing a valuation allowance for deferred tax
assets, depending on whether it is more likely than not that
actual benefit of those assets will be realized in future
periods.
As of December 31, 2004, the Company had determined that it
was more likely than not that the actual tax benefit of
$167.5 million of its deferred tax assets would not be
realized. The Company had therefore recorded a cumulative
$167.5 million valuation allowance to reduce the net
carrying value of these assets to zero for financial reporting
purposes as of December 31, 2004. The valuation allowance
was determined based on the Companys review of its future
estimated U.S. taxable income levels and the estimated
future stock option exercises. Included in this
$167.5 million valuation allowance was $154.9 million
related to the future tax benefit of U.S. net operating
losses generated by the exercise of non-qualified stock options.
As required by SFAS No. 109 and APB Opinion
No. 25, Accounting for Stock Issued to
Employees, the Company had originally recorded all
$154.9 million of these future tax benefits as increased
additional paid-in capital. Accordingly, when the Company
recorded a valuation allowance against these future tax
benefits, the Company also reduced additional paid-in capital by
$154.9 million.
As required by SFAS No. 109, the Company maintained
this deferred tax asset valuation allowance until it determined,
during 2005, that it was more likely than not that it would
realize the actual tax benefit of $92.5 million of deferred
tax assets for which a full valuation allowance had been
previously provided. The Company made this determination based
on the level of the Companys actual 2005 U.S. taxable
income, the Companys projected future U.S. taxable
income levels, the Companys actual 2005 tax deduction from
the exercise of non-qualified stock options and the fact that
the Companys future tax deduction from the exercise of
non-qualified stock options would most likely be less than in
the past as those options, which were significantly
in-the-money,
were expiring and exercised by December 31, 2005. The
Company therefore recorded, in 2005, a $92.5 million
reduction in its deferred tax asset valuation allowance. Because
this reduction in the valuation allowance included
$78.8 million related to the future tax benefit of
U.S. net operating losses generated by the exercise of
non-qualified stock options, the Company also restored
$78.8 million to the Companys additional paid-in
capital in 2005, in accordance with SFAS No. 109 and
APB No. 25. The remaining balance was credited to goodwill
related to an acquisition the Company made in 2004. The Company
made the 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 Companys results of operation
or financial position.
29
Pension
and Other Retirement Benefits:
Assumptions used in determining projected benefit obligations
and the fair values of plan assets for the Companys
pension plans and other 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 Companys 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 Moodys Aa interest rate as of December 31,
2006 that best matched the timing of the plans future cash
flows for the period to maturity of the pension benefits. Once
the interest rates were determined, the plans cash flow
was discounted at the spot interest rate back to the measurement
date. At December 31, 2006, the Company determined this
rate to be 5.82% for the Companys U.S. defined
benefit pension plan, which is the majority of the
Companys 2006 benefit obligation and 2007 expense.
Retirement benefit plan discount rates are the same as those
used by the Companys defined benefit pension plan in
accordance with the provisions of SFAS No. 106,
Employers Accounting for Postretirement Benefits
other than Pensions.
A one-quarter percentage point increase in the discount rate
would decrease the Companys 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 Companys net periodic
benefit cost for the U.S. pension plan by approximately
$0.2 million.
Stock-based
Compensation:
The Company adopted SFAS No. 123(R), Share-Based
Payment, on January 1, 2006. This standard requires
that all share-based payments to employees be recognized in the
statements of operations based on their fair values. The Company
has used the Black-Scholes model to determine the fair value of
its stock option awards. Under the fair value recognition
provisions of this statement, share-based compensation cost is
measured at the grant date based on the value of the award and
is recognized as expense over the vesting period. Determining
the fair value of share-based awards at the grant date requires
judgment, including estimating stock price volatility and
employee stock option exercise behaviors. If actual results
differ significantly from these estimates, stock-based
compensation expense and the Companys results of
operations could be materially impacted. As stock-based
compensation expense recognized in the consolidated statements
of operations is based on awards that ultimately are expected to
vest, the amount of expense has been reduced for estimated
forfeitures. SFAS No. 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated based on historical
experience. If factors change and the Company employs different
assumptions in the application of SFAS No. 123(R), the
compensation expense that the Company records in the future
periods may differ significantly from what the Company has
recorded in the current period.
The Company adopted the modified prospective transition method
permitted under SFAS No. 123(R) and consequently has
not adjusted results from prior years. Under the modified
transition method, compensation costs associated with awards for
2006 now include expense relating to the remaining unvested
awards granted prior to December 31, 2005 and the expense
related to any awards issued subsequent to December 31,
2005. The Company recognizes the expense using the straight-line
attribution method.
The after-tax stock-based compensation and the impact to diluted
earnings per share of adopting SFAS No. 123(R) for the
year ended December 31, 2006 were $20.6 million with a
$0.20 per share reduction to diluted earnings per share,
respectively. As of December 31, 2006, the Company has
capitalized stock-based compensation costs of $0.6 million
and $1.0 million to inventory and capitalized software,
respectively, in the consolidated balance sheets. Prior to the
adoption of SFAS No. 123(R), the Company used the
intrinsic value method of accounting prescribed by APB
No. 25 and related interpretations, including Financial
Interpretation (FIN) 44, Accounting for
Certain Transactions Involving Stock Compensation, for its
plans. Under this accounting method, stock-option compensation
awards that are granted with the exercise price at the current
fair
30
value of the Companys common stock as of the date of the
award generally did not require compensation expense to be
recognized in the consolidated statements of operations.
Stock-based compensation expense recognized for the
Companys fixed employee stock option plans, restricted
stock and employee stock purchase plan was $0.8 million in
2005. The 2005 stock-based compensation expense amounts were all
recorded in selling and administrative expenses.
As of December 31, 2006, unrecognized compensation costs
and related weighted-average lives over which the costs will be
amortized were as follows (in millions):
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Unrecognized
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Compensation
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Weighted-Average
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Costs
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Life in Years
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Stock options
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$
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61.1
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3.1
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Restricted stock units
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$
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11.8
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2.8
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Restricted stock
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$
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0.3
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1.1
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Total
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$
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73.2
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3.0
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Recent
Accounting Standards Changes
In January 2006, the Company adopted SFAS No. 123(R),
Share-Based Payment, and SAB 107,
Share-Based Payment. These standards require 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 adoption of these
standards did have a material effect on the Companys
financial position and results of operations. See Note 13,
Stock-Based Compensation, in the Notes to Consolidated Financial
Statements for additional information.
In January 2006, the Company adopted SFAS No. 154,
Accounting Changes and Error Corrections, which
replaces APB Opinion No. 20, Accounting
Changes, and SFAS 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. The adoption of
SFAS No. 154 did not have a material effect on the
Companys financial position, results of operations or cash
flows.
In January 2006, the Company adopted 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. The adoption
of this standard did not have a material effect on the
Companys financial position, results of operations or cash
flows.
In February 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements
No. 133 and 140. This standard permits fair value
remeasurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation;
clarifies which interest-only strips and principal-only strips
are not subject to the requirements of SFAS No. 133;
requires evaluation of interests in securitized financial
assets; clarifies that concentrations of credit risk in the form
of subordination are not embedded derivatives; and eliminates
the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial
instrument. This standard is effective for all financial
instruments acquired or issued for fiscal years beginning after
September 15, 2006. The Company does not believe that
adoption of SFAS No. 155 will have a material effect
on its financial position, results of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109. This
interpretation prescribes new methodology by which a company
must measure, report, present, and disclose in its financial
statements the effects of any uncertain tax return reporting
positions that a company has taken or expects to take. The
interpretation requires financial
31
statement reporting of the expected future tax consequences of
uncertain tax return reporting positions on the presumption that
all relevant tax authorities possess full knowledge of the tax
reporting positions as well as all of the pertinent facts and
circumstances, but it prohibits any discounting of these effects
for the time value of money. In addition, the interpretation
also mandates expanded financial statement disclosure about
uncertainty in tax reporting positions. The interpretation will
become effective in the first quarter of 2007. The Company is
still evaluating the impact of this interpretation on its
financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This standard addresses how
companies should measure fair value when they are required to
use a fair value measure for recognition or disclosure purposes
under generally accepted accounting principles
(GAAP). This standard is effective for all financial
statements issued for fiscal years beginning after
November 15, 2007. The Company is in the process of
evaluating whether this standard will have a material effect on
its financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, which amends SFAS No. 87,
Employers Accounting for Pensions,
SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits, SFAS No. 106,
Employers Accounting for Postretirement Benefits Other
Than Pensions, and SFAS No. 132(R),
Employers Disclosures about Pensions and Other
Postretirement Benefits. This standard requires an
employer to recognize the overfunded or underfunded status of
defined benefit pension and other postretirement defined benefit
plans, previously disclosed in the footnotes to the financial
statements, as an asset or liability in its statement of
financial position and to recognize changes in that funded
status in the year in which the changes occur through
comprehensive income. This standard also requires an employer to
measure the funded status of a plan as of the date of its year
end statement of financial position. In addition, this statement
will require disclosure of the effects of the unrecognized gains
or losses, prior service costs and transition asset or
obligation on the next fiscal years net periodic benefit
cost. This standard is effective for all financial statements
issued for fiscal years ending after December 15, 2006 and
retrospective application of this standard is not permitted. The
adoption of this standard did have a material effect on the
Companys financial position. See Note 16, Retirement
Plans, in the Notes to Consolidated Financial Statements for
additional information as to the impact of adopting this
pronouncement.
In September 2006, the SEC issued SAB 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements. This standard addresses quantifying the
financial statement effect of misstatements, specifically, how
the effects of prior year uncorrected errors must be considered
in quantifying misstatements in the current year financial
statements. This standard is effective for fiscal years ending
after November 15, 2006. The adoption of this standard did
not have a material effect on the Companys financial
position, results of operations or cash flows.
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Item 7a:
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Quantitative
and Qualitative Disclosures About Market Risk
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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 Companys
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 Companys 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
32
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, 2006, the
Company recorded a cumulative net pre-tax realized gain of
$0.5 million and, in December 2006, the Company closed out
the swap, resulting in a pre-tax gain of $0.4 million. The
gain was deferred and will be recognized in earnings in 2007
over the original term of the interest rate swap. For the year
ended December 31, 2005, the Company recorded a cumulative
net pre-tax unrealized loss 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.
Hedges of
Net Investments in Foreign Operations
The Company has operations in various countries and currencies
throughout the world, with approximately 34% of its sales
denominated in Euros, 11% in Yen and smaller sales exposures in
other currencies in 2006. As a result, the Companys
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 Companys
consolidated foreign affiliates. Therefore, these derivative
instruments are intended to serve as an effective hedge of
certain foreign net assets of the Company.
During 2006 and 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 $100.0 million. At
December 31, 2006, the notional amount of the outstanding
contracts was approximately $100.0 million. For the year
ended December 31, 2006, the Company recorded cumulative
net pre-tax losses of $11.0 million in accumulated other
comprehensive income, which consists of realized losses of
$9.7 million and unrealized losses of $1.3 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.
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
agreements, designated as hedges of net investment in foreign
operation, as of December 31, 2006, would decrease
accumulated other comprehensive income by approximately
$10.0 million.
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. 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
33
$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.
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 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.
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, 2006 and December 31,
2005, the Company held forward foreign exchange contracts with
notional amounts totaling approximately $70.9 million and
$72.9 million, respectively. For the year ended
December 31, 2006, the Company recorded cumulative net
pre-tax gains of $3.9 million, which consists of realized
gains of $2.5 million relating to the closed forward
contracts and $1.4 million of unrealized gains relating to
the open forward contracts. 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.
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, 2006, would decrease earnings by approximately
$7.1 million.
The Company is exposed to the risk of interest rate fluctuations
from the investments of cash generated from operations. The
Companys cash equivalents represent highly liquid
investments, with weighted-average original maturities of
90 days or less, in commercial paper, bank deposits,
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.
34
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Item 8:
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Financial
Statements and Supplementary Data
|
Managements
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, 2006.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
35
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Waters Corporation:
We have completed integrated audits of Waters Corporations
consolidated financial statements and of its internal control
over financial reporting as of December 31, 2006 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Companys 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.
As discussed in Note 13 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation as of January 1, 2006. As
discussed in Note 16 to the consolidated financial
statements, the Company changed the manner in which it accounts
for defined benefit pension and other postretirement plans
effective December 31, 2006.
Internal
control over financial reporting
Also, in our opinion, managements assessment, included in
Managements 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, 2006 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, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
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 managements
assessment and on the effectiveness of the Companys
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 managements 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.
36
A companys 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 companys
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
companys 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
Boston, Massachusetts
March 1, 2007
37
WATERS
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands,
|
|
|
|
expect per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
514,166
|
|
|
$
|
493,588
|
|
Accounts receivable, less
allowances for doubtful accounts and sales returns of $8,439 and
$6,550 at December 31, 2006 and 2005, respectively
|
|
|
272,157
|
|
|
|
256,809
|
|
Inventories
|
|
|
168,437
|
|
|
|
131,554
|
|
Other current assets
|
|
|
44,920
|
|
|
|
31,041
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
999,680
|
|
|
|
912,992
|
|
Property, plant and equipment, net
|
|
|
149,262
|
|
|
|
141,030
|
|
Intangible assets, net
|
|
|
131,653
|
|
|
|
84,363
|
|
Goodwill
|
|
|
265,207
|
|
|
|
210,571
|
|
Other assets
|
|
|
71,511
|
|
|
|
79,975
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,617,313
|
|
|
$
|
1,428,931
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable and debt
|
|
$
|
403,461
|
|
|
$
|
326,286
|
|
Accounts payable
|
|
|
47,073
|
|
|
|
44,243
|
|
Accrued employee compensation
|
|
|
35,824
|
|
|
|
23,044
|
|
Deferred revenue and customer
advances
|
|
|
76,131
|
|
|
|
71,733
|
|
Accrued retirement plan
contributions
|
|
|
130
|
|
|
|
12,931
|
|
Accrued income taxes
|
|
|
58,011
|
|
|
|
60,710
|
|
Accrued other taxes
|
|
|
11,883
|
|
|
|
14,024
|
|
Accrued warranty
|
|
|
12,619
|
|
|
|
11,719
|
|
Other current liabilities
|
|
|
40,702
|
|
|
|
39,201
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
685,834
|
|
|
|
603,891
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
500,000
|
|
|
|
500,000
|
|
Long-term portion of retirement
benefits
|
|
|
58,187
|
|
|
|
33,074
|
|
Other long-term liabilities
|
|
|
10,909
|
|
|
|
8,334
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
569,096
|
|
|
|
541,408
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,254,930
|
|
|
|
1,145,299
|
|
Commitments and contingencies
(Notes 8, 10, 12, and 16)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value
$0.01 per share, 5,000 shares authorized, none issued
at December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.01 per share, 400,000 shares authorized, 144,092
and 142,287 shares issued, 101,371 and 105,336 shares
outstanding at December 31, 2006 and 2005, respectively
|
|
|
1,441
|
|
|
|
1,423
|
|
Additional paid-in capital
|
|
|
554,169
|
|
|
|
467,681
|
|
Retained earnings
|
|
|
1,326,757
|
|
|
|
1,104,557
|
|
Treasury stock, at cost, 42,721 and
36,951 shares at December 31, 2006 and 2005,
respectively
|
|
|
(1,563,649
|
)
|
|
|
(1,314,446
|
)
|
Deferred compensation
|
|
|
|
|
|
|
(255
|
)
|
Accumulated other comprehensive
income
|
|
|
43,665
|
|
|
|
24,672
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
362,383
|
|
|
|
283,632
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
1,617,313
|
|
|
$
|
1,428,931
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
38
WATERS
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Product sales
|
|
$
|
922,532
|
|
|
$
|
834,673
|
|
|
$
|
806,801
|
|
Service sales
|
|
|
357,697
|
|
|
|
323,563
|
|
|
|
297,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
1,280,229
|
|
|
|
1,158,236
|
|
|
|
1,104,536
|
|
Cost of product sales
|
|
|
365,241
|
|
|
|
321,344
|
|
|
|
307,627
|
|
Cost of service sales
|
|
|
170,944
|
|
|
|
157,011
|
|
|
|
147,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
536,185
|
|
|
|
478,355
|
|
|
|
454,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
744,044
|
|
|
|
679,881
|
|
|
|
649,729
|
|
Selling and administrative expenses
|
|
|
357,664
|
|
|
|
321,694
|
|
|
|
300,150
|
|
Research and development expenses
|
|
|
77,306
|
|
|
|
66,905
|
|
|
|
65,241
|
|
Purchased intangibles amortization
|
|
|
5,439
|
|
|
|
5,005
|
|
|
|
4,814
|
|
Litigation provisions and
settlement (Note 10)
|
|
|
|
|
|
|
3,122
|
|
|
|
(9,277
|
)
|
Impairment of long-lived
intangible asset (Note 7)
|
|
|
|
|
|
|
|
|
|
|
3,997
|
|
Restructuring and other charges,
net (Note 11)
|
|
|
8,484
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
295,151
|
|
|
|
283,155
|
|
|
|
284,858
|
|
Other (expense) income, net
(Note 5)
|
|
|
(5,847
|
)
|
|
|
(3,103
|
)
|
|
|
(1,014
|
)
|
Interest expense
|
|
|
(51,657
|
)
|
|
|
(24,744
|
)
|
|
|
(10,074
|
)
|
Interest income
|
|
|
25,312
|
|
|
|
19,255
|
|
|
|
11,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before
income taxes
|
|
|
262,959
|
|
|
|
274,563
|
|
|
|
285,671
|
|
Provision for income taxes
(Note 9)
|
|
|
40,759
|
|
|
|
72,588
|
|
|
|
61,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
222,200
|
|
|
$
|
201,975
|
|
|
$
|
224,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic common share
|
|
$
|
2.16
|
|
|
$
|
1.77
|
|
|
$
|
1.87
|
|
Weighted-average number of basic
common shares
|
|
|
102,691
|
|
|
|
114,023
|
|
|
|
119,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
2.13
|
|
|
$
|
1.74
|
|
|
$
|
1.82
|
|
Weighted-average number of diluted
common shares and equivalents
|
|
|
104,240
|
|
|
|
115,945
|
|
|
|
123,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
39
WATERS
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
222,200
|
|
|
$
|
201,975
|
|
|
$
|
224,053
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for doubtful accounts on
accounts receivable
|
|
|
4,254
|
|
|
|
3,726
|
|
|
|
1,332
|
|
Provisions on inventory
|
|
|
5,903
|
|
|
|
7,093
|
|
|
|
7,349
|
|
Impairment of investments and other
assets
|
|
|
5,847
|
|
|
|
4,820
|
|
|
|
5,011
|
|
Stock-based compensation
|
|
|
28,813
|
|
|
|
765
|
|
|
|
75
|
|
Deferred income taxes
|
|
|
506
|
|
|
|
10,235
|
|
|
|
1,468
|
|
Depreciation
|
|
|
25,896
|
|
|
|
23,669
|
|
|
|
22,075
|
|
Amortization of intangibles
|
|
|
20,263
|
|
|
|
20,016
|
|
|
|
19,851
|
|
Tax benefit related to stock option
plans
|
|
|
|
|
|
|
4,872
|
|
|
|
32,012
|
|
Change in operating assets and
liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(9,803
|
)
|
|
|
(6,515
|
)
|
|
|
(36,453
|
)
|
Increase in inventories
|
|
|
(29,853
|
)
|
|
|
(6,973
|
)
|
|
|
(11,575
|
)
|
(Increase) decrease in other
current assets
|
|
|
(2,919
|
)
|
|
|
1,102
|
|
|
|
(7,344
|
)
|
(Increase) decrease in other assets
|
|
|
(13,146
|
)
|
|
|
(2,534
|
)
|
|
|
3,716
|
|
Increase in accounts payable and
other current liabilities
|
|
|
1,670
|
|
|
|
26,802
|
|
|
|
12,203
|
|
Increase in deferred revenue and
customer advances
|
|
|
1,230
|
|
|
|
7,551
|
|
|
|
1,526
|
|
(Decrease) increase in accrued
litigation
|
|
|
(4,420
|
)
|
|
|
688
|
|
|
|
(16,095
|
)
|
Increase in other liabilities
|
|
|
7,153
|
|
|
|
775
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
263,594
|
|
|
|
298,067
|
|
|
|
259,449
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant,
equipment, software capitalization and other intangibles
|
|
|
(51,421
|
)
|
|
|
(51,045
|
)
|
|
|
(66,236
|
)
|
Business acquisitions, net of cash
acquired of $0.9 million
|
|
|
(78,953
|
)
|
|
|
|
|
|
|
(42,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(130,374
|
)
|
|
|
(51,045
|
)
|
|
|
(108,605
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt issuances
|
|
|
406,844
|
|
|
|
915,512
|
|
|
|
885,053
|
|
Payments on debt
|
|
|
(334,629
|
)
|
|
|
(545,889
|
)
|
|
|
(674,699
|
)
|
Payments of debt issuance costs
|
|
|
|
|
|
|
(443
|
)
|
|
|
(1,578
|
)
|
Proceeds from stock plans
|
|
|
39,913
|
|
|
|
16,801
|
|
|
|
44,982
|
|
Purchase of treasury shares
|
|
|
(249,203
|
)
|
|
|
(659,285
|
)
|
|
|
(231,287
|
)
|
Excess tax benefit related to stock
option plans
|
|
|
16,503
|
|
|
|
|
|
|
|
|
|
(Payments) proceeds of debt swaps
and other dervatives contracts
|
|
|
(5,334
|
)
|
|
|
1,289
|
|
|
|
(964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(125,906
|
)
|
|
|
(272,015
|
)
|
|
|
21,507
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
13,264
|
|
|
|
(20,496
|
)
|
|
|
9,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
20,578
|
|
|
|
(45,489
|
)
|
|
|
182,296
|
|
Cash and cash equivalents at
beginning of period
|
|
|
493,588
|
|
|
|
539,077
|
|
|
|
356,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
514,166
|
|
|
$
|
493,588
|
|
|
$
|
539,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplmental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
38,049
|
|
|
$
|
27,743
|
|
|
$
|
28,574
|
|
Interest paid
|
|
$
|
51,853
|
|
|
$
|
23,995
|
|
|
$
|
9,676
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
40
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, 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
employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Purchase Plan
|
|
|
67
|
|
|
|
1
|
|
|
|
2,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,173
|
|
|
|
|
|
Stock options exercised
|
|
|
4,585
|
|
|
|
46
|
|
|
|
42,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,809
|
|
|
|
|
|
Restricted common stock
|
|
|
7
|
|
|
|
|
|
|
|
231
|
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
Tax benefit related to stock option
plans
|
|
|
|
|
|
|
|
|
|
|
32,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,012
|
|
|
|
|
|
Treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(231,287
|
)
|
|
|
|
|
|
|
(231,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,112
|
)
|
|
|
(39,112
|
)
|
|
|
(39,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
162,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for
employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Purchase Plan
|
|
|
76
|
|
|
|
1
|
|
|
|
2,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,672
|
|
|
|
|
|
Stock options exercised
|
|
|
824
|
|
|
|
8
|
|
|
|
14,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,129
|
|
|
|
|
|
Restricted common stock
|
|
|
7
|
|
|
|
|
|
|
|
320
|
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,200
|
|
|
|
|
|
|
|
|
|
|
|
222,200
|
|
|
$
|
222,200
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,072
|
|
|
|
27,072
|
|
|
|
27,072
|
|
Net appreciation (depreciation) and
realized gains (losses) on derivative instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,575
|
)
|
|
|
(10,575
|
)
|
|
|
(10,575
|
)
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,210
|
|
|
|
4,210
|
|
|
|
4,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,707
|
|
|
|
20,707
|
|
|
|
20,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
242,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,714
|
)
|
|
|
(1,714
|
)
|
|
|
|
|
Issuance of common stock for
employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Purchase Plan
|
|
|
70
|
|
|
|
1
|
|
|
|
2,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,637
|
|
|
|
|
|
Stock options exercised
|
|
|
1,727
|
|
|
|
17
|
|
|
|
37,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,276
|
|
|
|
|
|
Tax benefit related to stock option
plans
|
|
|
|
|
|
|
|
|
|
|
16,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,503
|
|
|
|
|
|
Treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(249,203
|
)
|
|
|
|
|
|
|
(249,203
|
)
|
|
|
|
|
Adoption of SFAS 123(R)
|
|
|
|
|
|
|
|
|
|
|
(255
|
)
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
8
|
|
|
|
|
|
|
|
30,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
144,092
|
|
|
$
|
1,441
|
|
|
$
|
554,169
|
|
|
$
|
|
|
|
$
|
1,326,757
|
|
|
$
|
(1,563,649
|
)
|
|
$
|
43,665
|
|
|
$
|
362,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
41
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
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 and together with HPLC, herein referred to as
LC) and mass spectrometry (MS)
instrument systems and support products, including
chromatography columns, other consumable products and
comprehensive post-warranty service plans. 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. Through its TA
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 of and
supplier of software based products that interface with the
Companys instruments and are typically purchased by
customers as part of the instrument system.
|
|
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, stock-based compensation,
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.
Reclassifications
Certain amounts from prior years have been reclassified in the
accompanying financial statements in order to be consistent with
the current years 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.
42
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Translation
of Foreign Currencies
For most of the Companys foreign operations, assets and
liabilities are translated into U.S. dollars at exchange
rates prevailing on the balance sheet date while revenues and
expenses are translated at average exchange rates prevailing
during the period. Any resulting translation gains or losses are
included in accumulated other comprehensive income in the
consolidated balance sheets. The Companys net sales
derived from operations outside the United States were 68% in
2006, 66% in 2005 and 65% in 2004. 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 commercial
paper, bank deposits, 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.
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 52% in
2006, 54% in 2005 and 54% in 2004. None of the Companys
individual customers accounted for more than 3% of annual
Company sales in 2006, 2005 or 2004. 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 a number
of factors, including historical experience and the
customers credit-worthiness. The allowance for doubtful
accounts is reviewed at least on a quarterly 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.
The following is a summary of activity of the Companys
allowance for doubtful accounts and sales returns for the years
ended December 31, 2006, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of Period
|
|
|
Additions
|
|
|
Deductions
|
|
|
End of Period
|
|
|
Allowance for Doubtful Accounts
and Sales Returns:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
6,550
|
|
|
$
|
4,254
|
|
|
$
|
(2,365
|
)
|
|
$
|
8,439
|
|
2005
|
|
$
|
7,100
|
|
|
$
|
3,726
|
|
|
$
|
(4,276
|
)
|
|
$
|
6,550
|
|
2004
|
|
$
|
5,638
|
|
|
$
|
1,332
|
|
|
$
|
130
|
|
|
$
|
7,100
|
|
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
43
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 fifteen to thirty
years, building improvements five to ten years,
leasehold improvements the shorter of the economic
useful life or life of lease, and production and other
equipment three to ten years. Upon retirement or
sale, the cost of the assets disposed of and the related
accumulated depreciation are eliminated from the consolidated
balance sheets and related gains or losses are reflected in the
consolidated statements of operations. There were no material
gains or losses from retirement or sale of assets in 2006, 2005
and 2004.
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 units carrying amount
exceeds its estimated fair value, goodwill impairment is
recognized to the extent that the carrying amount of goodwill
exceeds the implied fair value of the goodwill. The fair value
of reporting units 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 Companys 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 one to fifteen years. Other
intangibles are amortized over a period ranging from one to
thirteen years. Debt issuance costs are amortized over the life
of the related debt.
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 five years.
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, 2006 and 2005, capitalized internal
software included in property, plant and equipment totaled
$1.7 million and $2.2 million, net of accumulated
amortization of $3.6 million and $3.0 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
44
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Companys share of net
income or losses of equity investments is included in the
consolidated statements of operations and was not material in
any period presented. All investments at December 31, 2006
and 2005 are included in other assets and amounted to
$5.3 million and $11.0 million, respectively. There
were no significant additions in 2006 and see Note 5
Business Investments for other-than temporary
impairment charges taken in 2006, 2005, and 2004 for a certain
equity investments.
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 Companys
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 Companys 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 11.3 million shares at a cost of
$465.3 million under this new program through
December 31, 2006. The Company repurchased
5.8 million, 15.4 million and 5.5 million common
stock shares at a cost of $249.2 million,
$659.3 million and $231.3 million during 2006, 2005
and 2004, 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
$120.00 exercise price 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
$120.00 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 Companys common
stock.
On February 27, 2007, the Companys Board of Directors
authorized the Company to repurchase up to $500.0 million
of its outstanding common shares over a two-year period.
45
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 Companys
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, 2006, the
Company recorded a cumulative net pre-tax realized gain of
$0.5 million and, in December 2006, the Company closed out
the swap, resulting in a pre-tax gain of $0.4 million. The
gain was deferred and will be recognized in earnings in 2007
over the original term of the interest rate swap. For the year
ended December 31, 2005, the Company recorded a cumulative
net pre-tax unrealized loss 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.
Hedges of
Net Investments in Foreign Operations
The Company has operations in various countries and currencies
throughout the world, with approximately 34% of its sales
denominated in Euros, 11% in Yen and smaller sales exposures in
other currencies in 2006. As a result, the Companys
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 Companys
consolidated foreign
46
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
affiliates. Therefore, these derivative instruments are intended
to serve as an effective hedge of certain foreign net assets of
the Company.
During 2006 and 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 $100.0 million. At
December 31, 2006, the notional amount of the outstanding
contracts was approximately $100.0 million. For the year
ended December 31, 2006, the Company recorded cumulative
net pre-tax losses of $11.0 million in accumulated other
comprehensive income, which consists of realized losses of
$9.7 million and unrealized losses of $1.3 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. 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.
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 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.
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, 2006 and December 31,
2005, the Company held forward foreign exchange contracts with
notional amounts totaling approximately $70.9 million and
$72.9 million, respectively. For the year
47
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ended December 31, 2006, the Company recorded cumulative
net pre-tax gains of $3.9 million, which consists of
realized gains of $2.5 million relating to the closed
forward contracts and $1.4 million of unrealized gains
relating to the open forward contracts. 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.
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 Companys method of revenue recognition for certain
products requiring installation is in accordance with the
Securities and Exchange Commission (SEC) 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 vendors fee is fixed or determinable, and
collectibility is reasonably assured and, if applicable, upon
acceptance when acceptance criteria with contractual cash
holdback are specified. 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 upon a number of
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 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 criteria is satisfied. Discounts
from list prices are recorded as a reduction to sales.
Sales of software are accounted for in accordance with
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 Companys 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 Companys credit risk is significantly
reduced through loss-pool limitations and re-marketing rights in
the event of a default.
48
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Companys warranty obligation is affected by product
failure rates, material usage and service delivery costs
incurred in correcting a product failure. The amount of the
accrued warranty liability is based on historical information
such as past experience, product failure rates, number of units
repaired and estimated costs of material and labor. The
liability is reviewed for reasonableness at least quarterly.
The following is a summary of the activity of the Companys
accrued warranty liability for the years ended December 31,
2006, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Accruals for
|
|
|
Settlements
|
|
|
Balance at
|
|
|
|
Beginning of Period
|
|
|
Warranties
|
|
|
Made
|
|
|
End of Period
|
|
|
Accrued warranty liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
11,719
|
|
|
$
|
17,940
|
|
|
$
|
(17,040
|
)
|
|
$
|
12,619
|
|
2005
|
|
$
|
10,565
|
|
|
$
|
19,679
|
|
|
$
|
(18,525
|
)
|
|
$
|
11,719
|
|
2004
|
|
$
|
11,051
|
|
|
$
|
19,915
|
|
|
$
|
(20,401
|
)
|
|
$
|
10,565
|
|
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 2006, 2005
and 2004 were $7.9 million, $8.5 million and
$6.4 million, respectively.
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.
Stock-Based
Compensation
The Company has two stock-based compensation plans, which are
described in Note 13 Stock-Based Compensation.
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 components of comprehensive income be reported
in a financial statement that is displayed with the same
prominence as other financial statements.
49
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Standards Changes
In January 2006, the Company adopted SFAS No. 123(R),
Share-Based Payment and SAB 107,
Share-Based Payment. These standards require 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 adoption of these
standards did have a material effect on the Companys
financial position and results of operations. See Note 13,
Stock-Based Compensation for additional information.
In January 2006, the Company adopted SFAS No. 154,
Accounting Changes and Error Corrections, which
replaces Accounting Principle Board (APB) Opinion
No. 20, Accounting Changes, and
SFAS 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. The adoption of SFAS No. 154 did not have
a material effect on the Companys financial position,
results of operations or cash flows.
In January 2006, the Company adopted 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. The adoption
of this standard did not have a material effect on the
Companys financial position, results of operations or cash
flows.
In February 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 155
(SFAS No. 155), Accounting for
Certain Hybrid Financial Instruments an amendment of
FASB Statements No. 133 and 140. This standard
permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation; clarifies which interest-only strips
and principal-only strips are not subject to the requirements of
SFAS No. 133; requires evaluation of interests in
securitized financial assets; clarifies that concentrations of
credit risk in the form of subordination are not embedded
derivatives; and eliminates the prohibition on a qualifying
special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than
another derivative financial instrument. This standard is
effective for all financial instruments acquired or issued for
fiscal years beginning after September 15, 2006. The
Company does not believe that adoption of SFAS No. 155
will have a material effect on its financial position, results
of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109. This
interpretation prescribes new methodology by which a company
must measure, report, present, and disclose in its financial
statements the effects of any uncertain tax return reporting
positions that a company has taken or expects to take. The
interpretation requires financial statement reporting of the
expected future tax consequences of uncertain tax return
reporting positions on the presumption that all relevant tax
authorities possess full knowledge of the tax reporting
positions as well as all of the pertinent facts and
circumstances, but it prohibits any discounting of these effects
for the time value of money. In addition, the interpretation
also mandates expanded financial statement disclosure about
uncertainty in tax reporting positions. The interpretation will
become effective in the first quarter of 2007. The Company is
still evaluating the impact of this interpretation on its
financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This standard addresses how
companies should measure fair value when they are required to
use a fair value measure for recognition or disclosure purposes
under generally accepted accounting principles
(GAAP). This standard is effective for all financial
statements issued for fiscal years beginning after
November 15, 2007. The Company is in the process of
evaluating whether this standard will have a material effect on
its financial position, results of operations or cash flows.
50
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, which amends SFAS No. 87,
Employers Accounting for Pensions,
SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits, SFAS No. 106,
Employers Accounting for Postretirement Benefits Other
Than Pensions, and SFAS No. 132(R),
Employers Disclosures about Pensions and Other
Postretirement Benefits. This standard requires an
employer to recognize the overfunded or underfunded status of
defined benefit pension and other postretirement defined benefit
plans, previously disclosed in the footnotes to the financial
statements, as an asset or liability in its statement of
financial position and to recognize changes in that funded
status in the year in which the changes occur through
comprehensive income. This standard also requires an employer to
measure the funded status of a plan as of the date of its year
end statement of financial position. In addition, this statement
will require disclosure of the effects of the unrecognized gains
or losses, prior service costs and transition asset or
obligation on the next fiscal years net periodic benefit
cost. This standard is effective for all financial statements
issued for fiscal years ending after December 15, 2006 and
retrospective application of this standard is not permitted. The
adoption of this standard did have a material effect on the
Companys financial position. See Note 16, Retirement
Plans, for additional information as to the impact of adopting
this pronouncement.
In September 2006, the SEC issued SAB 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements. This standard addresses quantifying the
financial statement effect of misstatements, specifically, how
the effects of prior year uncorrected errors must be considered
in quantifying misstatements in the current year financial
statements. This standard is effective for fiscal years ending
after November 15, 2006. The adoption of this standard did
not have a material effect on the Companys financial
position, results of operations or cash flows.
Inventories are classified as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
Raw materials
|
|
$
|
51,568
|
|
|
$
|
45,257
|
|
Work in progress
|
|
|
17,400
|
|
|
|
12,908
|
|
Finished goods
|
|
|
99,469
|
|
|
|
73,389
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
168,437
|
|
|
$
|
131,554
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
Property,
Plant and Equipment
|
Property, plant and equipment consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
Land and land improvements
|
|
$
|
8,261
|
|
|
$
|
8,199
|
|
Buildings and leasehold
improvements
|
|
|
109,504
|
|
|
|
96,036
|
|
Production and other equipment
|
|
|
185,807
|
|
|
|
188,534
|
|
Construction in progress
|
|
|
6,506
|
|
|
|
10,407
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
310,078
|
|
|
|
303,176
|
|
Less: accumulated depreciation and
amortization
|
|
|
(160,816
|
)
|
|
|
(162,146
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
149,262
|
|
|
$
|
141,030
|
|
|
|
|
|
|
|
|
|
|
During 2006 and 2005, the Company retired and disposed of
approximately $30.0 million and $9.6 million of
property, plant and equipment, respectively, most of which was
fully depreciated and no longer in use. Gains and losses on
disposal were immaterial.
51
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the fourth quarter of 2006, the Company recorded a
$5.8 million charge for an
other-than-temporary
impairment to an equity investment in Caprion Pharmaceuticals
Inc (Caprion). The charge was recorded in 2006 when
the Company was notified that Caprions financial condition
had deteriorated and that a merger was occurring that, in the
Companys assessment, would result in the Companys
investment being substantially diminished. The remaining value
of the Caprion investment is approximately $1.7 million at
December 31, 2006. In 2005, the Company recorded a
$4.8 million pre-tax charge for an
other-than-temporary
impairment for the full value of the Companys investment
in Beyond Genomics, Inc (Beyond Genomics). This
charge was recorded based on the Companys assessment of
Beyond Genomics 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 Companys knowledge, due to changes
in GeneProts 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, 2006 and 2005.
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 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.
Environmental
Resources Associates:
In December 2006, the Company acquired all of the outstanding
capital stock of Environmental Resources Associates, Inc.
(ERA), a provider of environmental testing products
for quality control, proficiency testing and specialty
calibration chemicals used in environmental laboratories, for
approximately $62.5 million, including $0.4 million of
acquisition-related transaction costs and the assumption of
$3.8 million of debt. This acquisition was accounted for
under the purchase method of accounting and the results of
operations of ERA 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 initially allocated $29.9 million of the
purchase price to intangible assets comprised of customer
relationships, non-compete agreements, acquired technology and
other purchased intangibles. The Company is amortizing the
customer relationships, acquired technology and other purchased
intangibles over ten years. The non-compete agreements are being
amortized over five years. These intangible assets are being
amortized over a weighted-average period of approximately
10 years. Included in intangible assets is a trademark in
the amount of $3.7 million that has been assigned an
indefinite life. The excess purchase price of $45.3 million
after this allocation has been accounted for as goodwill. The
goodwill is not deductible for tax purposes.
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 Company is still in the process of
making a final determination of the purchase price allocation
based upon obtaining the third party
52
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
independent appraisal report of the fair value of certain assets
acquired. The following table presents the fair values of assets
and liabilities recorded in connection with the ERA acquisition
(in thousands):
|
|
|
|
|
Accounts receivable
|
|
$
|
368
|
|
Inventory
|
|
|
4,408
|
|
Other current assets
|
|
|
68
|
|
Goodwill
|
|
|
45,332
|
|
Intangible assets
|
|
|
29,866
|
|
Fixed assets
|
|
|
1,417
|
|
|
|
|
|
|
|
|
|
81,459
|
|
|
|
|
|
|
Accrued expenses and other current
liabilities
|
|
|
3,636
|
|
Debt
|
|
|
3,774
|
|
Deferred tax liability
|
|
|
11,574
|
|
|
|
|
|
|
Cash consideration paid, net of
cash acquired
|
|
$
|
62,475
|
|
|
|
|
|
|
VICAM:
In February 2006, the Company acquired the net assets of the
food safety business of VICAM Limited Partnership
(VICAM) for approximately $13.8 million,
including $0.3 million of acquisition-related transaction
costs. The Company anticipates continuous increases in
laboratory testing to ensure food safety. This acquisition was
accounted for under the purchase method of accounting and the
results of operations of VICAM 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
$7.7 million of the purchase price to intangible assets
comprised of customer relationships, non-compete agreements,
acquired technology and other purchased intangibles. The Company
is amortizing acquired technology and other purchased
intangibles over twelve years and customer relationships over
fifteen years. The non-compete agreements are being amortized
over five years. These intangible assets are being amortized
over a weighted-average period of 13 years. Included in
intangible assets is a trademark in the amount of
$2.1 million that has been assigned an indefinite life. The
excess purchase price of $3.7 million after this allocation
has been accounted for as goodwill. The goodwill is deductible
for tax purposes.
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
VICAM acquisition (in thousands):
|
|
|
|
|
Accounts receivable
|
|
$
|
950
|
|
Inventory
|
|
|
1,837
|
|
Other current assets
|
|
|
142
|
|
Goodwill
|
|
|
3,716
|
|
Intangible assets
|
|
|
7,707
|
|
Fixed assets
|
|
|
285
|
|
|
|
|
|
|
|
|
|
14,637
|
|
|
|
|
|
|
Accrued expenses and other current
liabilities
|
|
|
812
|
|
|
|
|
|
|
Cash consideration paid
|
|
$
|
13,825
|
|
|
|
|
|
|
53
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other:
In August 2006, the Company acquired all of the outstanding
capital stock of Thermometric AB (Thermometrics), a
manufacturer of high performance microcalorimeters, and certain
net assets and customer lists from an Asian distributor of
thermal analysis products, for a total of $3.2 million in
cash. As part of the Thermometrics acquisition, the Company
assumed $1.2 million of debt. These acquisitions were
accounted for under the purchase method of accounting and the
results of operations of these acquisitions have been included
in the consolidated results of the Company from the acquisition
dates. The combined purchase price of the acquisitions was
allocated to tangible and intangible assets and assumed
liabilities based on their estimated fair values. The Company
has allocated $2.2 million of the combined purchase price
to intangible assets comprised of customer relationships,
non-compete agreements and acquired technology. The combined
excess purchase price of $1.5 million after this allocation
has been accounted for as goodwill. The goodwill is not
deductible for tax purposes.
During the year ended December 31, 2004, the Company
acquired various tangible and intangible assets of certain Asian
distributors totaling approximately $1.4 million.
NuGenesis:
In February 2004, the Company acquired all of the outstanding
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
$16.1 million after this allocation has been accounted for
as goodwill.
The following represents the unaudited pro forma results of the
ongoing operations for Waters, ERA, VICAM, Thermometrics and
NuGenesis as though the acquisitions of ERA, VICAM,
Thermometrics and NuGenesis had occurred at the beginning of
each period shown (in thousands, except per share data). 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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues
|
|
$
|
1,300,050
|
|
|
$
|
1,184,252
|
|
|
$
|
1,130,054
|
|
Net income
|
|
$
|
225,464
|
|
|
$
|
204,990
|
|
|
$
|
224,166
|
|
Net income per basic common share
|
|
$
|
2.20
|
|
|
$
|
1.80
|
|
|
$
|
1.87
|
|
Net income per diluted common share
|
|
$
|
2.16
|
|
|
$
|
1.77
|
|
|
$
|
1.82
|
|
The pro forma effects of other acquisitions are immaterial.
|
|
7
|
Goodwill
and Other Intangibles
|
The carrying amount of goodwill was $265.2 million and
$210.6 million at December 31, 2006 and 2005,
respectively. The increase is primarily attributable to the
Companys acquisitions of VICAM, Thermometrics and ERA
(Note 6) of approximately $3.7 million,
$1.5 million and $45.3 million, respectively. Currency
translation adjustments increased goodwill approximately
$4.1 million.
54
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys intangible assets included in the
consolidated balance sheets are detailed as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Amortization
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Amortization
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Period
|
|
|
Amount
|
|
|
Amortization
|
|
|
Period
|
|
|
Purchased intangibles
|
|
$
|
103,930
|
|
|
$
|
33,294
|
|
|
|
10 years
|
|
|
$
|
61,827
|
|
|
$
|
27,250
|
|
|
|
11 years
|
|
Capitalized software
|
|
|
108,072
|
|
|
|
60,223
|
|
|
|
4 years
|
|
|
|
85,089
|
|
|
|
47,846
|
|
|
|
3 years
|
|
Licenses
|
|
|
10,352
|
|
|
|
6,166
|
|
|
|
9 years
|
|
|
|
9,548
|
|
|
|
5,052
|
|
|
|
9 years
|
|
Patents and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
intangibles
|
|
|
14,813
|
|
|
|
5,831
|
|
|
|
8 years
|
|
|
|
12,137
|
|
|
|
4,090
|
|
|
|
8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
237,167
|
|
|
$
|
105,514
|
|
|
|
8 years
|
|
|
$
|
168,601
|
|
|
$
|
84,238
|
|
|
|
7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2006, the Company
acquired approximately $39.8 million of purchased
intangibles as a result of the acquisitions of VICAM,
Thermometrics, ERA and the distributor rights from an Asian
distributor of thermal analysis products. In addition, the gross
carrying value of intangible assets increased by approximately
$2.9 million and decreased approximately $3.3 million
in 2006 and 2005, respectively, due to the effect of foreign
currency translation.
For the years ended December 31, 2006, 2005 and 2004,
amortization expense for intangible assets was
$20.3 million, $20.0 million and $19.9 million,
respectively. Amortization expense for intangible assets is
estimated to be approximately $23.3 million for each of the
next five years. Accumulated amortization for intangible assets
increased approximately $1.0 million and decreased
approximately $0.9 million in 2006 and 2005, respectively,
due to the effect of foreign currency translation.
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 credit agreement
(the November 2005 Credit Agreement) that provides
for a $250.0 million term loan facility due in November
2010. The Company used 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 Companys 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 Companys 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 Companys 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 Companys
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. In
October 2005,
55
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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). 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, 2006, the Company had
$250.0 million borrowed under the November 2005 Credit
Agreement and $635.0 million under the Amended Credit
Agreement for a total of $885.0 million borrowed under the
two credit agreements and an amount available to borrow of
$163.4 million after outstanding letters of credit. In
total, $500.0 million of the total debt was classified as
long-term debt and $385.0 million classified as short-term
debt at December 31, 2006 in the consolidated balance
sheets. 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. The Company, and its foreign subsidiaries, also had
available short-term lines of credit, totaling
$96.8 million at December 31, 2006 and
$76.9 million at December 31, 2005. At
December 31, 2006 and 2005, related short-term borrowings
were $18.5 million at a weighted-average interest rate of
3.21% and $16.3 million at a weighted-average interest rate
of 3.11%, respectively.
On January 11, 2007, Waters Corporation and Waters
Technologies Ireland Ltd. entered into a new credit agreement
(the 2007 Credit Agreement). The 2007 Credit
Agreement provides for a $500 million term loan facility, a
$350 million revolving facility
(U.S. Tranche), which includes both a letter of
credit and a swingline subfacility, and a $250 million
revolving facility (European Tranche) that is
available to Waters Corporation in U.S. dollars and Waters
Technologies Ireland Ltd. in either U.S. dollars or Euro.
Waters Corporation may on one or more occasions request of the
lender group that commitments for the U.S. Tranche or
European Tranche be increased by an amount of not less than
$25 million, up to an aggregate additional amount of
$250 million. Existing lenders are not obligated to
increase commitments and the Company can seek to bring in
additional lenders. The term loan facility and the revolving
facilities both mature on January 11, 2012 and require no
scheduled prepayments before that date.
On January 11, 2007, the Company borrowed $500 million
under the new term loan facility, $115 million under the
new European Tranche, and $270 million under the new
U.S. Tranche revolving facility. The Company used the
proceeds of the term loan and the revolving borrowings to repay
the outstanding amounts under the Companys existing
multi-borrower credit agreement dated as of December 15,
2004 and amended as of October 12, 2005 and the
Companys existing term loan agreement dated as of
November 28, 2005. Waters Corporation terminated such
agreements early without penalty.
The interest rates applicable to term loan and revolving loans
under the 2007 Credit Agreement are, at the Companys
option, equal to either the base rate (which is the higher of
the prime rate or the federal funds rate plus 1/2%) or the
applicable 1, 2, 3, 6, 9 or 12 month LIBOR rate,
in each case, plus an interest rate margin based upon the
Companys leverage ratio, which can range between
33 basis points and 72.5 basis points. The facility
fee on the 2007 Credit Agreement ranges between 7 basis
points and 15 basis points. The 2007 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, the same as the terminated credit
agreements. In addition, the 2007 Credit Agreement includes
negative covenants that are customary for investment grade
credit facilities and are similar in nature to ones contained in
the terminated credit agreements. The 2007 Credit Agreement also
contains certain customary representations and warranties,
affirmative covenants and events of default which are similar in
nature to those in the terminated credit agreements.
56
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax data for the years ended December 31, 2006, 2005
and 2004 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
The components of income from
operations before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
11,812
|
|
|
$
|
53,757
|
|
|
$
|
83,573
|
|
Foreign
|
|
|
251,147
|
|
|
|
220,806
|
|
|
|
202,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
262,959
|
|
|
$
|
274,563
|
|
|
$
|
285,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The current and deferred
components of the provision for income taxes on operations are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
46,883
|
|
|
$
|
63,437
|
|
|
$
|
58,674
|
|
Deferred
|
|
|
(6,124
|
)
|
|
|
9,151
|
|
|
|
2,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,759
|
|
|
$
|
72,588
|
|
|
$
|
61,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The jurisdictional components of
the provision for income taxes on operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,121
|
|
|
$
|
39,852
|
|
|
$
|
28,262
|
|
State
|
|
|
2,603
|
|
|
|
4,488
|
|
|
|
4,061
|
|
Foreign
|
|
|
32,035
|
|
|
|
28,248
|
|
|
|
29,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,759
|
|
|
$
|
72,588
|
|
|
$
|
61,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
92,036
|
|
|
$
|
96,097
|
|
|
$
|
99,985
|
|
Extraterritorial income exclusion
|
|
|
(2,676
|
)
|
|
|
(3,384
|
)
|
|
|
(3,061
|
)
|
State income tax, net of federal
income tax benefit
|
|
|
1,692
|
|
|
|
1,286
|
|
|
|
2,640
|
|
Net effect of foreign operations
|
|
|
(49,568
|
)
|
|
|
(44,658
|
)
|
|
|
(37,875
|
)
|
AJCA dividend repatriation
|
|
|
|
|
|
|
24,000
|
|
|
|
|
|
Other, net
|
|
|
(725
|
)
|
|
|
(753
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
40,759
|
|
|
$
|
72,588
|
|
|
$
|
61,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
The tax effects of temporary
differences and carryforwards which give rise to deferred tax
assets and deferred tax (liabilities) are summarized as follows:
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses and credits
|
|
$
|
115,325
|
|
|
$
|
125,632
|
|
Depreciation and capitalized
software
|
|
|
2,411
|
|
|
|
1,570
|
|
Amortization
|
|
|
3,436
|
|
|
|
12,644
|
|
Stock-based compensation
|
|
|
8,807
|
|
|
|
|
|
Deferred compensation
|
|
|
20,731
|
|
|
|
9,553
|
|
Revaluation of equity investments
|
|
|
11,240
|
|
|
|
9,356
|
|
Inventory
|
|
|
1,902
|
|
|
|
2,761
|
|
Accrued liabilities and reserves
|
|
|
11,383
|
|
|
|
2,444
|
|
Interest
|
|
|
|
|
|
|
5,161
|
|
Other
|
|
|
6,907
|
|
|
|
7,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,142
|
|
|
|
176,928
|
|
Valuation allowance
|
|
|
(86,826
|
)
|
|
|
(87,997
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net of
valuation allowance
|
|
|
95,316
|
|
|
|
88,931
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and capitalized
software
|
|
|
(11,155
|
)
|
|
|
(7,290
|
)
|
Amortization
|
|
|
(5,937
|
)
|
|
|
(1,625
|
)
|
Deferred compensation
|
|
|
|
|
|
|
(3,590
|
)
|
Indefinite lived intangibles
|
|
|
(15,652
|
)
|
|
|
(13,381
|
)
|
Other
|
|
|
(80
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,824
|
)
|
|
|
(25,933
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
62,492
|
|
|
$
|
62,998
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets of $22.1 million and
$13.0 million are included in other current assets and
$40.4 million and $50.0 million are included in other
assets at December 31, 2006 and 2005, respectively.
The Companys deferred tax assets associated with net
operating loss, tax credit carryforwards and alternative minimum
tax credits are comprised of the following at December 31,
2006: $33.7 million ($87.5 million pre-tax) benefit of
U.S. federal and state net operating loss carryforwards
that begin to expire in 2020 and 2007, respectively;
$64.1 million in foreign tax credits, which begin to expire
in 2009; $7.0 million in research and development credits
that begin to expire in 2010; and $10.5 million
($39.6 million pre-tax) in foreign net operating losses,
$9.0 million ($31.8 million pre-tax) of which do not
expire under current law, the remainder of which begin to expire
in 2008.
The Company has provided a deferred tax valuation allowance of
$86.8 million, principally against foreign tax credits
($64.1 million), certain foreign net operating losses and
other deferred tax assets. The benefit relating to foreign tax
credits and these other deferred tax assets, if 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 $16.5 million,
$4.9 million and $32.0 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
At December 31, 2006, there were unremitted earnings of
foreign subsidiaries of approximately $556.5 million. The
Company has not provided for U.S. income taxes or foreign
withholding taxes on these earnings as it is the Companys
current intention to permanently reinvest these earnings outside
the U.S.
58
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 109, Accounting for Income Taxes,
requires that a Company continually evaluate the necessity of
establishing or changing a valuation allowance for deferred tax
assets, depending on whether it is more likely than not that
actual benefit of those assets will be realized in future
periods.
As of December 31, 2004, the Company had determined that it
was more likely than not that the actual tax benefit of
$167.5 million of its deferred tax assets would not be
realized. The Company had therefore recorded a cumulative
$167.5 million valuation allowance to reduce the net
carrying value of these assets to zero for financial reporting
purposes as of December 31, 2004. The valuation allowance
was determined based on the Companys review of its future
estimated U.S. taxable income levels and the estimated
future stock option exercises. Included in this
$167.5 million valuation allowance was $154.9 million
related to the future tax benefit of U.S. net operating
losses generated by the exercise of non-qualified stock options.
As required by SFAS No. 109 and APB Opinion
No. 25 Accounting for Stock Issued to
Employees, the Company had originally recorded all
$154.9 million of these future tax benefits as increased
additional paid-in capital. Accordingly, when the Company
recorded a valuation allowance against these future tax
benefits, the Company also reduced additional paid-in capital by
$154.9 million.
As required by SFAS No. 109, the Company maintained
this deferred tax asset valuation allowance until it determined,
during 2005, that it was more likely than not that it would
realize the actual tax benefit of $92.5 million of deferred
tax assets for which a full valuation allowance had been
previously provided. The Company made this determination based
on the level of the Companys actual 2005 U.S. taxable
income, the Companys projected future U.S. taxable
income levels, the Companys actual 2005 tax deduction from
the exercise of non-qualified stock options and the fact that
the Companys future tax deduction from the exercise of
non-qualified stock options would most likely be less than in
the past as those options, which were significantly
in-the-money,
were expiring and exercised by December 31, 2005. The
Company therefore recorded, in 2005, a $92.5 million
reduction in its deferred tax asset valuation allowance. Because
this reduction in the valuation allowance included
$78.8 million related to the future tax benefit of
U.S. net operating losses generated by the exercise of
non-qualified stock options, the Company also restored
$78.8 million to the Companys additional paid-in
capital in 2005, in accordance with SFAS No. 109 and
APB No. 25. The remaining balance was credited 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 the deferred tax assets
will be realized in the future. The Company made this
determination based on a review of facts and circumstances at
that time.
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 income accumulated abroad by providing an 85%
dividends received deduction for certain dividends from
controlled foreign corporations. It previously had been the
Companys 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 has used and will continue to 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 paid $10.0 million of this tax during 2005 and
approximately $9.0 million during the first quarter of
2006. The remainder of this tax liability was offset by the tax
benefit of carryforwards.
The Companys effective tax rates for the years ended
December 31, 2006, 2005 and 2004 were 15.5%, 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 Companys foreign
subsidiaries under the AJCA. The remaining decrease in the
effective tax rates for 2006 compared to 2005 is primarily
attributable to the proportionate increase in income in
international jurisdictions with lower effective tax rates,
primarily Ireland and Singapore. In addition, the adoption of
SFAS No. 123(R) resulted in the recognition of a tax
benefit at a higher effective tax rate in 2006. The 2004
effective tax rate 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.
59
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Applera
Corporation:
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 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.
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 did 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), brought
actions 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 Companys 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 brought a new action against the Company
alleging that certain features of the Alliance pump continued 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 courts 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 Agilents
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 Agilents
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 Courts finding of
infringement. The Company has filed a further appeal in the
case. The Company has sought a declaration from the French court
that, as was found in both the UK and Germany, certain modified
features of the Alliance pump do not infringe the HP patents. A
hearing on this matter is currently scheduled for June 2007. In
the
60
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. In August
2006, following a trial in this new action the German court
ruled that the Company did not infringe the HP patents. Agilent
has filed an appeal in this action.
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 Companys
financial position. The accrued patent litigation expense in
other current liabilities in the consolidated balance sheets at
December 31, 2006 and December 31, 2005, was
$0.9 million and $5.3 million, respectively, for the
England and France suits. The change in the liability through
December 31, 2005 is attributable to payment of remaining
settlement costs in the U.K. case 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. PE appealed the District Court judgment in favor of TA
to the federal appellate court. The District Courts
judgment, with respect to PEs infringement of the TAI
patents, was affirmed. The District Courts judgment, with
respect to TAs 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 jurys verdict in favor of the
Company. PE has appealed the judgment with respect to TAs
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. Approximately $0.1 million in legal fees were
incurred and were offset against the recording of settlement
proceeds.
|
|
11
|
Restructuring
and Other Charges
|
2006
Restructuring:
In February 2006, the Company implemented a cost reduction plan,
primarily affecting operations in the U.S. and Europe, that
resulted in the employment of 74 employees being terminated, all
of which had left the Company as of December 31, 2006. In
addition, the Company closed a sales and demonstration office in
the Netherlands in the second quarter of 2006. The Company
implemented this cost reduction plan primarily to realign its
operating costs with business opportunities around the world.
The following is a summary of activity of the Companys
2006 restructuring liability included in other current
liabilities on the consolidated balance sheet (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Charges
|
|
|
Utilization
|
|
|
2006
|
|
|
Severance
|
|
$
|
|
|
|
$
|
6,443
|
|
|
$
|
(5,010
|
)
|
|
$
|
1,433
|
|
Other
|
|
|
|
|
|
|
2,041
|
|
|
|
(1,993
|
)
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
8,484
|
|
|
$
|
(7,003
|
)
|
|
$
|
1,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company does not expect to incur any additional charges in
connection with this restructuring. Other charges include
approximately $0.7 million of leasehold improvement assets,
net of accumulated amortization, written-off as a result of the
closure of the facility in the Netherlands.
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 terminated, all of which
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
Companys 2004 restructuring liability was zero at
December 31, 2006 and 2005. Also during 2004, the Company
reversed approximately $2.2 million in restructuring
accruals related to a 2002 restructuring initiative.
|
|
12
|
Other
Commitments and Contingencies
|
Lease agreements, expiring at various dates through 2022, cover
buildings, office equipment and automobiles. Rental expense was
$23.3 million, $23.2 million and $19.7 million
during the years ended December 31, 2006, 2005 and 2004,
respectively. Future minimum rents payable as of
December 31, 2006 under non-cancelable leases with initial
terms exceeding one year are as follows (in thousands):
|
|
|
|
|
2007
|
|
$
|
18,894
|
|
2008
|
|
|
15,679
|
|
2009
|
|
|
12,260
|
|
2010
|
|
|
9,404
|
|
2011 and thereafter
|
|
|
27,991
|
|
The Company licenses certain technology and software from third
parties, which expire at various dates through 2008. Fees paid
for licenses were approximately $0.6 million,
$0.8 million and $1.1 million during the years ended
December 31, 2006, 2005 and 2004, respectively. Future
minimum licenses payable under existing license agreements as of
December 31, 2006 will be immaterial for the years ended
December 31, 2007 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 10, 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 Companys business
partners or customers, in connection with patent, copyright or
other intellectual property infringement claims by any third
party with respect to its current products, as well as claims
relating to property damage or personal injury resulting from
the performance of services by the Company or its
subcontractors. The maximum potential amount of future payments
the Company could be required to make under these
indemnification agreements is unlimited. Historically, the
Companys costs to defend lawsuits or settle claims
relating to such indemnity agreements have been minimal and
management accordingly believes the estimated fair value of
these agreements is immaterial.
13 Stock-Based
Compensation
On May 6, 2003, the Companys shareholders approved
the Companys 2003 Equity Incentive Plan (2003
Plan). As of December 31, 2006, the 2003 Plan has
5.4 million shares available for granting in the form of
incentive or non-qualified stock options, stock appreciation
rights (SARs), restricted stock or other types of
awards (e.g. restricted stock units). The Company issues new
shares of common stock upon exercise of stock options or
restricted stock
62
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unit conversion. 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 and generally
vest ratably over a five year period. A SAR may be granted alone
or in conjunction with an option or other award. Shares of
restricted stock and restricted stock units may 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 may 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. As of December 31,
2006, the Company had stock options, restricted stock and
restricted stock unit awards outstanding.
On February 26, 1996, the Company adopted its 1996 Employee
Stock Purchase Plan under which eligible employees may
contribute up to 15% of their earnings toward the quarterly
purchase of the Companys common stock. The plan makes
available 1.0 million shares of the Companys common
stock commencing October 1, 1996. As of December 31,
2006, 0.7 million 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. Stock-based
compensation expense related to this plan was $0.4 million
for the year ended December 31, 2006.
On January 1, 2006, the Company adopted
SFAS No. 123(R), which amends SFAS No. 123,
Accounting for Stock-Based Compensation, and
SAB 107, Share-Based Payment. These standards
require that all share-based payments to employees be recognized
in the statements of operations based on their fair values. The
Company has used the Black-Scholes model to determine the fair
value of its stock option awards at the time of grant.
The Company adopted the modified prospective transition method
permitted under SFAS No. 123(R) and consequently has
not adjusted results from prior years. Under the modified
prospective transition method, compensation costs associated
with awards for the year ended December 31, 2006 now
include the expense relating to the remaining unvested awards
granted prior to December 31, 2005 and the expense related
to any awards issued subsequent to December 31, 2005. The
Company recognizes the expense using the straight-line
attribution method. The amount of stock-based compensation
recognized during the period is based on the value of the
portion of the award that ultimately is expected to vest.
SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The
cumulative effect of the change in accounting for forfeitures is
immaterial.
The consolidated statements of operations for the three years
ended December 31, 2006, 2005 and 2004 include the
following stock-based compensation expense related to stock
option awards, restricted stock, and restricted stock unit
awards and the employee stock purchase plan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cost of sales
|
|
$
|
4,345
|
|
|
$
|
|
|
|
$
|
|
|
Selling and administrative
|
|
|
19,357
|
|
|
|
765
|
|
|
|
75
|
|
Research and development
|
|
|
5,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
28,813
|
|
|
$
|
765
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The after-tax stock-based compensation and the impact to diluted
earnings per share of adopting
SFAS No. 123(R)
for the year ended December 31, 2006 were
$20.6 million with a $0.20 per share reduction to
diluted earnings per share. As of December 31, 2006, the
Company has capitalized stock-based compensation costs of
$0.6 million and $1.0 million to inventory and
capitalized software, respectively, in the consolidated balance
sheets. Prior to the adoption of SFAS No. 123(R), the
Company used the intrinsic value method of accounting prescribed
by APB No. 25 and related interpretations, including
Financial Interpretation (FIN) No. 44,
Accounting for Certain Transactions Involving Stock
Compensation, for its plans. Under this accounting method,
63
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock-option compensation awards that are granted with the
exercise price at the current fair value of the Companys
common stock as of the date of the award generally did not
require compensation expense to be recognized in the
consolidated statements of operations. Stock-based compensation
expense recognized for the Companys fixed employee stock
option plans, restricted stock and employee stock purchase plan
was $0.8 million and $0.1 million in the years ended
December 31, 2005 and 2004, respectively. The 2005 and 2004
stock-based compensation expense amounts were all recorded in
selling and administrative expenses.
Prior to the adoption of SFAS No. 123(R), benefits of
tax deductions in excess of recognized compensation costs were
reported as part of cash from operating activities. Under
SFAS No. 123(R), approximately $16.5 million of
windfall benefits of tax deductions in excess of recognized
compensation costs were reported as cash from financing
activities for the year ended December 31, 2006.
During 2006 the total intrinsic value of the stock options
exercised (i.e., the difference between the market price at
exercise and the price paid by the employee to exercise the
options) was $40.1 million and the total cash received from
the exercise of these stock options was $39.9 million.
As of December 31, 2006, there was $61.1 million of
total unrecognized compensation cost related to unvested stock
option awards. This cost is expected to be recognized over a
weighted-average period of 3.1 years.
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
Companys stock-based compensation plans for all of the
periods shown.
|
|
|
|
|
|
|
|
|
Compensation Expense Fair Value Method (in
thousands, except per share data)
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
December 31
|
|
$
|
201,975
|
|
|
$
|
224,053
|
|
Deduct: total stock-based employee
compensation expense, net of related tax effects
|
|
|
(22,729
|
)
|
|
|
(39,496
|
)
|
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
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
1.77
|
|
|
$
|
1.87
|
|
Basic pro forma
|
|
$
|
1.58
|
|
|
$
|
1.54
|
|
Diluted as reported
|
|
$
|
1.74
|
|
|
$
|
1.82
|
|
Diluted pro forma
|
|
$
|
1.55
|
|
|
$
|
1.50
|
|
The fair value of each option grant 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 Companys historical volatility.
The expected life assumption for 2006 grants is based on
historical experience for the population of non-qualified stock
optionees. The risk-free interest rate is the yield currently
available on U.S. Treasury zero-coupon issues with a
remaining term approximating the expected term used as the input
to the Black-Scholes model. The relevant data used to determine
the value of the 2006 stock option grants is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Issued and Significant Assumptions Used to Estimate
Option Fair Values
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Options issued
|
|
|
572
|
|
|
|
551
|
|
|
|
1,975
|
|
Risk-free interest rate
|
|
|
4.5
|
|
|
|
4.3
|
|
|
|
3.8
|
|
Expected life in years
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
5.5
|
|
Expected volatility
|
|
|
.280
|
|
|
|
.270
|
|
|
|
.552
|
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
64
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average Exercise Price and Fair Values of Options on
the Date of Grant
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Exercise price
|
|
$
|
48.64
|
|
|
$
|
39.51
|
|
|
$
|
46.79
|
|
Fair value
|
|
$
|
18.08
|
|
|
$
|
14.22
|
|
|
$
|
25.10
|
|
Stock
Option Plans
The following table details the weighted-average remaining
contractual life of options outstanding at December 31,
2006 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
|
|
|
$ 9.39 to $20.00
|
|
|
827
|
|
|
$
|
16.61
|
|
|
|
1.6
|
|
|
|
827
|
|
|
$
|
16.61
|
|
$20.01 to $30.00
|
|
|
1,755
|
|
|
$
|
22.17
|
|
|
|
4.8
|
|
|
|
1,472
|
|
|
$
|
22.28
|
|
$30.01 to $40.00
|
|
|
3,399
|
|
|
$
|
34.75
|
|
|
|
6.5
|
|
|
|
2,188
|
|
|
$
|
34.80
|
|
$40.01 to $50.00
|
|
|
2,433
|
|
|
$
|
47.59
|
|
|
|
8.3
|
|
|
|
751
|
|
|
$
|
47.13
|
|
$50.01 to $80.97
|
|
|
1,093
|
|
|
$
|
72.21
|
|
|
|
3.9
|
|
|
|
1,093
|
|
|
$
|
72.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,507
|
|
|
$
|
38.44
|
|
|
|
5.9
|
|
|
|
6,331
|
|
|
$
|
37.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2005
|
|
|
10,939
|
|
|
$8.55 to $80.97
|
|
$
|
35.47
|
|
Granted
|
|
|
572
|
|
|
$38.10 to $49.31
|
|
$
|
48.64
|
|
Exercised
|
|
|
(1,727
|
)
|
|
$8.55 to $47.25
|
|
$
|
21.59
|
|
Canceled
|
|
|
(277
|
)
|
|
$21.39 to $80.97
|
|
$
|
47.07
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
9,507
|
|
|
$9.39 to $80.97
|
|
$
|
38.44
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2006, 2005 and 2004
were 6.3 million, 6.7 million and 6.1 million,
respectively. The weighted-average exercise prices of options
exercisable at December 31, 2006, 2005 and 2004 were
$37.43, $34.34 and $31.98, respectively. The weighted-average
remaining contractual life of the exercisable outstanding stock
options at December 31, 2006 was 4.9 years. The
aggregate intrinsic value of the outstanding stock options at
December 31, 2006 was $125.6 million.
At December 31, 2006, the Company had 9.3 million
stock options which are vested and expected to vest. The
intrinsic value, the weighted-average price and the remaining
contractual life of the vested and expected to vest stock
options were $124.0 million, $38.40 and 5.9 years,
respectively, at December 31, 2006.
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 Companys
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
Companys stock at that time; hence, in accordance with APB
No. 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
65
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock option were unchanged. The acceleration of these options
was primarily done as a result of the issuance of
SFAS No. 123(R), 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.
Restricted
Stock:
During the year ended December 31, 2006, the Company
granted eight thousand shares of restricted stock. During each
of the years ended December 31, 2005 and 2004, the Company
granted seven thousand shares of restricted stock. The
restrictions on these shares lapse January 30, 2009, 2008
and 2007, respectively. The Company has recorded
$0.2 million, $0.2 million and $0.1 million of
compensation expense during 2006, 2005 and 2004, respectively,
related to the restricted stock grants. The weighted-average
fair value on the grant date of the restricted stock for 2006,
2005 and 2004 was $39.64, $45.77 and $33.12, respectively. As of
December 31, 2006, the Company has twenty thousand unvested
shares of restricted stock outstanding with a total of
$0.3 million of unrecognized compensation cost. This cost
is expected to be recognized over a weighted-average period of
1.1 years. As of January 1, 2006, the Company had
twelve thousand unvested shares of restricted stock outstanding.
Restricted
Stock Units:
During 2006, the Company granted three hundred and eighteen
thousand restricted stock units which vest ratably over a five
year period. The weighted-average fair value of these awards was
based on the fair value of the stock on the date of grant which
was $43.02 per unit. The amount of compensation cost
recognized for the year ended December 31, 2006 on the
restricted stock units expected to vest was $1.9 million.
As of December 31, 2006, none of these shares were vested
and there was $10.2 million of total unrecognized
compensation cost related to the restricted stock unit awards
that are expected to vest. This cost is expected to be
recognized over a weighted-average period of 2.8 years.
Basic and diluted EPS calculations are detailed as follows (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Net Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
Net income per basic common share
|
|
$
|
222,200
|
|
|
|
102,691
|
|
|
$
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock option,
restricted stock and restricted stock unit securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
1,217
|
|
|
|
|
|
Exercised and cancellations
|
|
|
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
222,200
|
|
|
|
104,240
|
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Net Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
Net income per basic common share
|
|
$
|
201,975
|
|
|
|
114,023
|
|
|
$
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock option
and restricted stock securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
1,831
|
|
|
|
|
|
Exercised and cancellations
|
|
|
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
201,975
|
|
|
|
115,945
|
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Net Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
Net income per basic common share
|
|
$
|
224,053
|
|
|
|
119,640
|
|
|
$
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock option
and restricted stock securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
2,192
|
|
|
|
|
|
Exercised and cancellations
|
|
|
|
|
|
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
224,053
|
|
|
|
123,069
|
|
|
$
|
1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2006, 2005 and 2004, the
Company had 3.5 million, 3.2 million and
3.2 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.
Comprehensive income details follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
222,200
|
|
|
$
|
201,975
|
|
|
$
|
224,053
|
|
Foreign currency translation
|
|
|
27,072
|
|
|
|
(44,383
|
)
|
|
|
27,413
|
|
Net appreciation (depreciation)
and realized gains (losses) on derivative instruments
|
|
|
(16,269
|
)
|
|
|
11,894
|
|
|
|
(14,371
|
)
|
Income tax expense (benefit)
|
|
|
(5,694
|
)
|
|
|
4,163
|
|
|
|
(5,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net appreciation (depreciation)
and realized gains (losses) on derivative instruments, net of tax
|
|
|
(10,575
|
)
|
|
|
7,731
|
|
|
|
(9,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency adjustments
|
|
|
16,497
|
|
|
|
(36,652
|
)
|
|
|
18,072
|
|
Retirement liability adjustment,
net of tax
|
|
|
4,210
|
|
|
|
(1,021
|
)
|
|
|
427
|
|
Unrealized losses on investments
before income taxes
|
|
|
|
|
|
|
(2,214
|
)
|
|
|
(191
|
)
|
Income tax (benefit)
|
|
|
|
|
|
|
(775
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on
investments, net of tax
|
|
|
|
|
|
|
(1,439
|
)
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
20,707
|
|
|
|
(39,112
|
)
|
|
|
18,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
242,907
|
|
|
$
|
162,863
|
|
|
$
|
242,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
U.S. employees are eligible to participate in the Waters
Employee Investment Plan, a defined contribution 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, 2006, 2005 and 2004, the Companys
matching contributions amounted to $3.6 million,
$3.4 million and $3.1 million, respectively.
U.S. employees are eligible to participate in the Waters
Retirement Plan, a defined benefit, cash balance plan, after one
year of service. Annually, the Company credits each
employees account as a percentage of eligible pay based on
years of service. In addition, each employees 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 Company maintains an unfunded Supplemental Executive
Retirement Plan (SERP), which is non-qualified and
restores the benefits under the Waters Retirement Plan that are
limited by IRS benefit and compensation maximums. The Company
also sponsors other unfunded employee benefit plans in the U.S.,
including a retirement health care plan, which provides
reimbursement for medical expenses and is contributory. There
are various
non-U.S. retirement
plans sponsored by the Company. The eligibility and vesting of
the
non-U.S. plans
are generally consistent with the local laws and regulations.
On December 31, 2006, the Company adopted
SFAS No. 158 which amends SFAS No. 87,
SFAS No. 88, SFAS No. 106 and
SFAS No. 132(R). This standard requires an employer to
recognize the overfunded or underfunded status of defined
benefit pension and other postretirement defined benefit plans,
previously disclosed in the footnotes to the financial
statements, as an asset or liability in its statement of
financial position and to recognize changes in that funded
status in the year in which the changes occur through
comprehensive income. The effect of adopting
SFAS No. 158 on the statements of financial position
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
After
|
|
|
|
Before
|
|
|
Liability
|
|
|
SFAS No.
|
|
|
Adoption of
|
|
|
|
Adoption of
|
|
|
Adjustment
|
|
|
158 Adoption
|
|
|
SFAS No.
|
|
|
|
SFAS No. 158
|
|
|
(MPLA)
|
|
|
Adjustments
|
|
|
158 & MPLA
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension asset
|
|
$
|
2,268
|
|
|
$
|
|
|
|
$
|
(535
|
)
|
|
$
|
1,733
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
6,959
|
|
|
|
6,959
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current pension and retirement
benefit liability
|
|
|
|
|
|
|
|
|
|
|
(130
|
)
|
|
|
(130
|
)
|
Long-term pension and retirement
benefit liability
|
|
|
(33,360
|
)
|
|
|
4,210
|
|
|
|
(8,008
|
)
|
|
|
(37,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(31,092
|
)
|
|
$
|
4,210
|
|
|
$
|
(1,714
|
)
|
|
$
|
(28,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated after-tax other
comprehensive loss
|
|
$
|
14,346
|
|
|
$
|
(4,210
|
)
|
|
$
|
1,714
|
|
|
$
|
11,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net periodic pension cost under SFAS 87 is made up of
several components that reflect different aspects of the
Companys financial arrangements as well as the cost of
benefits earned by employees. These components are determined
using the projected unit credit actuarial cost method and are
based on certain actuarial assumptions. The Companys
accounting policy is to reflect in the projected benefit
obligation all benefit changes to which the Company is committed
as of the current valuation date; use a market-related value of
assets to determine pension expense; amortize increases in prior
service costs on a straight-line basis over the expected future
service of active participants as of the date such costs are
first recognized; and amortize cumulative actuarial gains and
losses in excess of 10% of the larger of the market-related
value of plan assets and the projected benefit obligation over
the expected future service of active participants.
68
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summary data for the Waters Retirement Plan and SERP plan,
together herein referred to as U.S. Pension
Plans, the U.S. postretirement healthcare plan and
the Companys
non-U.S. retirement
plans are presented in the following tables, using the
measurement date of December 31, 2006 and 2005,
respectively (in thousands):
The summary of the projected benefit obligations at
December 31, 2006 and 2005, respectively, is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Benefit obligation, January 1,
|
|
$
|
81,689
|
|
|
$
|
4,530
|
|
|
$
|
19,775
|
|
|
$
|
70,460
|
|
|
$
|
3,800
|
|
|
$
|
20,463
|
|
Service cost
|
|
|
7,916
|
|
|
|
629
|
|
|
|
1,137
|
|
|
|
6,931
|
|
|
|
606
|
|
|
|
1,177
|
|
Interest cost
|
|
|
4,529
|
|
|
|
241
|
|
|
|
687
|
|
|
|
3,898
|
|
|
|
214
|
|
|
|
722
|
|
Plan amendments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230
|
|
|
|
|
|
Employee rollovers
|
|
|
987
|
|
|
|
|
|
|
|
|
|
|
|
466
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) or loss
|
|
|
(1,404
|
)
|
|
|
(166
|
)
|
|
|
(1,073
|
)
|
|
|
2,319
|
|
|
|
(109
|
)
|
|
|
598
|
|
Disbursements
|
|
|
(2,304
|
)
|
|
|
(293
|
)
|
|
|
(800
|
)
|
|
|
(2,385
|
)
|
|
|
(211
|
)
|
|
|
(598
|
)
|
Currency Impact
|
|
|
|
|
|
|
|
|
|
|
1,358
|
|
|
|
|
|
|
|
|
|
|
|
(2,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation,
December 31,
|
|
$
|
91,413
|
|
|
$
|
4,941
|
|
|
$
|
21,084
|
|
|
$
|
81,689
|
|
|
$
|
4,530
|
|
|
$
|
19,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary of the fair value of the plan assets at
December 31, 2006 and 2005, respectively, is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Fair value of assets, January 1
|
|
$
|
60,803
|
|
|
$
|
1,277
|
|
|
$
|
8,878
|
|
|
$
|
51,716
|
|
|
$
|
975
|
|
|
$
|
8,740
|
|
Actual return on plan assets
|
|
|
6,017
|
|
|
|
223
|
|
|
|
543
|
|
|
|
4,670
|
|
|
|
49
|
|
|
|
837
|
|
Company contributions
|
|
|
3,877
|
|
|
|
190
|
|
|
|
1,217
|
|
|
|
6,336
|
|
|
|
132
|
|
|
|
920
|
|
Employee contributions
|
|
|
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
332
|
|
|
|
|
|
Disbursements
|
|
|
(2,304
|
)
|
|
|
(293
|
)
|
|
|
(800
|
)
|
|
|
(2,385
|
)
|
|
|
(211
|
)
|
|
|
(598
|
)
|
Employee rollovers
|
|
|
987
|
|
|
|
|
|
|
|
|
|
|
|
466
|
|
|
|
|
|
|
|
|
|
Currency Impact
|
|
|
|
|
|
|
|
|
|
|
912
|
|
|
|
|
|
|
|
|
|
|
|
(1,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets,
December 31
|
|
$
|
69,380
|
|
|
$
|
1,753
|
|
|
$
|
10,750
|
|
|
$
|
60,803
|
|
|
$
|
1,277
|
|
|
$
|
8,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The summary of the funded status of the plans at
December 31, 2006 and 2005, respectively, is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Projected benefit obligation,
January 1
|
|
$
|
(91,413
|
)
|
|
$
|
(4,941
|
)
|
|
$
|
(21,084
|
)
|
|
$
|
(81,689
|
)
|
|
$
|
(4,530
|
)
|
|
$
|
(19,775
|
)
|
Fair value of plan assets
|
|
|
69,380
|
|
|
|
1,753
|
|
|
|
10,750
|
|
|
|
60,803
|
|
|
|
1,277
|
|
|
|
8,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation in
excess of fair value of plan assets
|
|
$
|
(22,033
|
)
|
|
$
|
(3,188
|
)
|
|
$
|
(10,334
|
)
|
|
|
(20,886
|
)
|
|
|
(3,253
|
)
|
|
|
(10,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(603
|
)
|
|
|
(482
|
)
|
|
|
|
|
Unrecognized net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,076
|
|
|
|
407
|
|
|
|
2,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized at
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
587
|
|
|
$
|
(3,328
|
)
|
|
$
|
(8,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary of the amounts recognized in the consolidated
balance sheet for the plans at December 31, 2006 under
SFAS No. 158 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Long-term assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,733
|
|
Current liabilities
|
|
|
(40
|
)
|
|
|
|
|
|
|
(90
|
)
|
Long-term liabilities
|
|
|
(21,993
|
)
|
|
|
(3,188
|
)
|
|
|
(11,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized at
December 31, 2006
|
|
$
|
(22,033
|
)
|
|
$
|
(3,188
|
)
|
|
$
|
(10,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary of the amounts recognized in the consolidated
balance sheet for the plans at December 31, 2005 prior to
the adoption of SFAS No. 158 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Accrued liability
|
|
$
|
(13,759
|
)
|
|
$
|
(3,328
|
)
|
|
$
|
(10,213
|
)
|
Other comprehensive income
|
|
|
14,346
|
|
|
|
|
|
|
|
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
|
|
1,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized at
December 31, 2005
|
|
$
|
587
|
|
|
$
|
(3,328
|
)
|
|
$
|
(8,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The summary of the components of net periodic pension costs for
the plans for the years ended December 31, 2006, 2005 and
2004, respectively, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Service cost
|
|
$
|
7,916
|
|
|
$
|
273
|
|
|
$
|
1,137
|
|
|
$
|
6,931
|
|
|
$
|
274
|
|
|
$
|
1,177
|
|
|
$
|
6,192
|
|
|
$
|
156
|
|
|
$
|
1,046
|
|
Interest cost
|
|
|
4,529
|
|
|
|
241
|
|
|
|
687
|
|
|
|
3,898
|
|
|
|
214
|
|
|
|
722
|
|
|
|
3,499
|
|
|
|
183
|
|
|
|
651
|
|
Return on plan assets
|
|
|
(4,695
|
)
|
|
|
(95
|
)
|
|
|
(328
|
)
|
|
|
(4,142
|
)
|
|
|
(75
|
)
|
|
|
(490
|
)
|
|
|
(3,389
|
)
|
|
|
(45
|
)
|
|
|
(432
|
)
|
Net amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service costs
|
|
|
(82
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
(82
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
(82
|
)
|
|
|
(78
|
)
|
|
|
|
|
Net actuarial loss
|
|
|
1,234
|
|
|
|
|
|
|
|
13
|
|
|
|
933
|
|
|
|
|
|
|
|
53
|
|
|
|
879
|
|
|
|
5
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
8,902
|
|
|
$
|
365
|
|
|
$
|
1,509
|
|
|
$
|
7,538
|
|
|
$
|
359
|
|
|
$
|
1,462
|
|
|
$
|
7,099
|
|
|
$
|
221
|
|
|
$
|
1,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary of the amounts included in accumulated other
comprehensive income (loss) in stockholders equity for the
plans at December 31, 2006 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Net loss
|
|
$
|
(18,116
|
)
|
|
$
|
(114
|
)
|
|
$
|
(1,527
|
)
|
Prior service credit
|
|
|
520
|
|
|
|
428
|
|
|
|
|
|
Transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(17,596
|
)
|
|
$
|
314
|
|
|
$
|
(1,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary of the amounts included in accumulated other
comprehensive income expected to be included in next years
net periodic benefit cost for the plans at December 31,
2006 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Net loss
|
|
$
|
(979
|
)
|
|
$
|
|
|
|
$
|
(19
|
)
|
Prior service credit
|
|
|
87
|
|
|
|
(53
|
)
|
|
|
|
|
Transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(892
|
)
|
|
$
|
(53
|
)
|
|
$
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The summary of the accrued pension cost included in the
consolidated balance sheet for the plans at December 31,
2005 and 2004, respectively, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Accrued pension cost, January 1
|
|
$
|
(11,536
|
)
|
|
$
|
(3,101
|
)
|
|
$
|
(8,883
|
)
|
|
$
|
(15,194
|
)
|
|
$
|
(3,013
|
)
|
|
$
|
(8,394
|
)
|
SFAS 87 cost
|
|
|
(7,538
|
)
|
|
|
(359
|
)
|
|
|
(1,462
|
)
|
|
|
(7,099
|
)
|
|
|
(221
|
)
|
|
|
(1,278
|
)
|
Company contributions and direct
payments to beneficiaries made during the year
|
|
|
6,336
|
|
|
|
132
|
|
|
|
920
|
|
|
|
10,330
|
|
|
|
133
|
|
|
|
1,257
|
|
Other comprehensive income
|
|
|
(1,021
|
)
|
|
|
|
|
|
|
|
|
|
|
427
|
|
|
|
|
|
|
|
|
|
Currency impact
|
|
|
|
|
|
|
|
|
|
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
(468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension cost,
December 31
|
|
$
|
(13,759
|
)
|
|
$
|
(3,328
|
)
|
|
$
|
(8,215
|
)
|
|
$
|
(11,536
|
)
|
|
$
|
(3,101
|
)
|
|
$
|
(8,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the plans at
December 31, 2006 and 2005, respectively, are detailed as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Projected benefit obligation
|
|
$
|
91,413
|
|
|
$
|
4,941
|
|
|
$
|
21,084
|
|
|
$
|
81,689
|
|
|
$
|
4,530
|
|
|
$
|
19,775
|
|
Accumulated benefit obligation
|
|
$
|
83,966
|
|
|
$
|
*
|
|
|
$
|
17,016
|
|
|
$
|
74,437
|
|
|
$
|
*
|
|
|
$
|
15,391
|
|
Fair value of plan assets
|
|
$
|
69,380
|
|
|
$
|
1,753
|
|
|
$
|
10,750
|
|
|
$
|
60,803
|
|
|
$
|
1,277
|
|
|
$
|
8,878
|
|
The plans investment asset mix is as follow at
December 31, 2006, 2005 and 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
U.S.
|
|
|
Retirement
|
|
|
Non-U.S.
|
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
Pension
|
|
|
Healthcare
|
|
|
Pension
|
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Plans
|
|
|
Plan
|
|
|
Plans
|
|
|
Equity securities
|
|
|
70
|
%
|
|
|
50
|
%
|
|
|
0
|
%
|
|
|
65
|
%
|
|
|
50
|
%
|
|
|
0
|
%
|
Debt securities
|
|
|
27
|
%
|
|
|
50
|
%
|
|
|
2
|
%
|
|
|
29
|
%
|
|
|
50
|
%
|
|
|
2
|
%
|
Cash and cash equivalents
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
2
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Other
|
|
|
2
|
%
|
|
|
0
|
%
|
|
|
98
|
%
|
|
|
4
|
%
|
|
|
0
|
%
|
|
|
98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The plans investment policies include the following asset
allocation guidelines:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension and U.S.
|
|
Non-U.S.
|
|
|
|
Retirement Healthcare Plans
|
|
Pension Plans
|
|
|
|
Policy Target
|
|
|
Range
|
|
Policy Target
|
|
|
Equity securities
|
|
|
60
|
%
|
|
40% - 80%
|
|
|
0
|
%
|
Debt securities
|
|
|
40
|
%
|
|
20% - 60%
|
|
|
2
|
%
|
Cash and cash equivalents
|
|
|
0
|
%
|
|
0% - 20%
|
|
|
98
|
%
|
The asset allocation policy for the U.S. pension and
retirement plans was developed in consideration of the following
long-term investment objectives: achieving a return on assets
consistent with the investment policy,
72
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Within the equity portfolio of the U.S. retirement plan,
investments are diversified among capitalization and style. Up
to 20% of the U.S. retirement plans equity portfolio
may be invested in financial markets outside of the United
States. The Company does not invest in its own stock within the
U.S. retirement plan assets.
The Company prohibits the following types of assets or
transactions in the U.S. retirement plan: short selling,
margin transactions, commodities and future contracts, private
placements, options and letter stock.
The weighted-average assumptions used to determine the benefit
obligation in the consolidated balance sheets at
December 31, 2006, 2005 and 2004, respectively, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
U.S.
|
|
Non-U.S.
|
|
U.S.
|
|
Non-U.S.
|
|
U.S.
|
|
Non-U.S.
|
|
Discount rate
|
|
|
5.82
|
%
|
|
2.25% - 5.00%
|
|
|
5.50
|
%
|
|
2.25% - 4.75%
|
|
|
5.75
|
%
|
|
2.25% - 5.25%
|
Increases in compensation levels
|
|
|
4.75
|
%
|
|
2.75% - 3.25%
|
|
|
4.75
|
%
|
|
2.75% - 3.25%
|
|
|
4.75
|
%
|
|
2.75% - 3.00%
|
The weighted-average assumptions used to determine the pension
cost at December 31, 2006, 2005 and 2004, respectively, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
U.S.
|
|
Non-U.S.
|
|
U.S.
|
|
Non-U.S.
|
|
U.S.
|
|
Non-U.S.
|
|
Discount rate
|
|
5.50%
|
|
2.25% - 4.75%
|
|
5.75%
|
|
2.25% - 5.25%
|
|
6.00%
|
|
2.00% - 5.50%
|
Return on assets
|
|
6.75% - 8.00%
|
|
2.50% - 4.00%
|
|
6.75% - 8.00%
|
|
2.50% - 7.50%
|
|
6.75% - 8.00%
|
|
2.50% - 7.50%
|
Increases in compensation levels
|
|
4.75%
|
|
2.75% - 3.25%
|
|
4.75%
|
|
2.75% - 3.00%
|
|
4.75%
|
|
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 plan. A one-quarter percentage
point increase in the discount rate would decrease the
Companys 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 Companys net periodic
benefit cost for the U.S. pension plan by approximately
$0.2 million.
During fiscal year 2007, the Company expects to contribute
approximately $4.0 million to $8.0 million to the
Companys pension plans.
Estimated future benefit payments as of December 31, 2006
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
|
|
|
|
Pension
|
|
|
Pension
|
|
|
|
|
|
|
Plans
|
|
|
Plans
|
|
|
Total
|
|
|
2007
|
|
$
|
4,248
|
|
|
$
|
997
|
|
|
$
|
5,245
|
|
2008
|
|
|
4,368
|
|
|
|
268
|
|
|
|
4,636
|
|
2009
|
|
|
5,929
|
|
|
|
309
|
|
|
|
6,238
|
|
2010
|
|
|
5,352
|
|
|
|
599
|
|
|
|
5,951
|
|
2011
|
|
|
6,349
|
|
|
|
643
|
|
|
|
6,992
|
|
2012 - 2016
|
|
|
48,149
|
|
|
|
4,403
|
|
|
|
52,552
|
|
|
|
17
|
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
73
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys business activities, for which discrete financial
information is available, are regularly reviewed and evaluated
by the chief operating decision-makers. As a result of this
evaluation, the Company determined that it has two operating
segments: Waters Division and TA Division.
Waters Division is in the business of designing, manufacturing,
distributing and servicing LC and MS instruments, columns and
other chemistry consumables that can be integrated and used
along with other analytical instruments. TA Division is in the
business of designing, manufacturing, distributing and servicing
thermal analysis and rheometry instruments. The Companys
two divisions are its operating segments and each has similar
economic characteristics, product processes, products and
services, types and classes of customers, methods of
distribution, and regulatory environments. Because of these
similarities, the two segments have been aggregated into one
reporting segment for financial statement purposes. Please refer
to the consolidated financial statements for financial
information regarding the one reportable segment of the Company.
Net sales for the Companys products and services are as
follows for the three years ended December 31, 2006, 2005
and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Product net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
LC and MS instrument systems
|
|
$
|
658,457
|
|
|
$
|
601,366
|
|
|
$
|
590,145
|
|
Chemistry
|
|
|
180,519
|
|
|
|
153,157
|
|
|
|
141,234
|
|
TA instrument systems
|
|
|
83,556
|
|
|
|
80,150
|
|
|
|
75,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product net sales
|
|
|
922,532
|
|
|
|
834,673
|
|
|
|
806,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
LC and MS service
|
|
|
320,895
|
|
|
|
293,453
|
|
|
|
271,524
|
|
TA service
|
|
|
36,802
|
|
|
|
30,110
|
|
|
|
26,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service net sales
|
|
|
357,697
|
|
|
|
323,563
|
|
|
|
297,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
1,280,229
|
|
|
$
|
1,158,236
|
|
|
$
|
1,104,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic information is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
405,632
|
|
|
$
|
391,084
|
|
|
$
|
384,738
|
|
Europe
|
|
|
437,088
|
|
|
|
390,994
|
|
|
|
379,781
|
|
Japan
|
|
|
135,791
|
|
|
|
133,532
|
|
|
|
124,269
|
|
Asia
|
|
|
205,440
|
|
|
|
153,076
|
|
|
|
136,172
|
|
Other
|
|
|
96,278
|
|
|
|
89,550
|
|
|
|
79,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated sales
|
|
$
|
1,280,229
|
|
|
$
|
1,158,236
|
|
|
$
|
1,104,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The United States category includes Puerto Rico. The Other
category includes Canada and Latin America. Net revenues are
attributable to geographic areas based on the region of
destination. None of the Companys individual customers
accounts for more than 3% of annual Company sales.
74
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-lived assets information is presented below (in thousands):
|
|
|
|
|
|
|
|
|
December 31
|
|
2006
|
|
|
2005
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
109,860
|
|
|
$
|
107,639
|
|
Europe
|
|
|
34,175
|
|
|
|
29,278
|
|
Japan
|
|
|
436
|
|
|
|
526
|
|
Asia
|
|
|
3,401
|
|
|
|
2,196
|
|
Other
|
|
|
1,390
|
|
|
|
1,391
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
149,262
|
|
|
$
|
141,030
|
|
|
|
|
|
|
|
|
|
|
The United States category includes Puerto Rico. The Other
category includes Canada and Latin America. Long-lived assets
exclude goodwill and other intangible assets.
|
|
18
|
Unaudited
Quarterly Results
|
The Companys unaudited quarterly results are summarized
below (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
2006
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
|
|
|
Net sales
|
|
$
|
290,218
|
|
|
$
|
301,899
|
|
|
$
|
301,182
|
|
|
$
|
386,930
|
|
|
$
|
1,280,229
|
|
|
|
|
|
Cost of sales
|
|
|
120,628
|
|
|
|
126,004
|
|
|
|
127,167
|
|
|
|
162,386
|
|
|
|
536,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
169,590
|
|
|
|
175,895
|
|
|
|
174,015
|
|
|
|
224,544
|
|
|
|
744,044
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
85,538
|
|
|
|
88,968
|
|
|
|
87,397
|
|
|
|
95,761
|
|
|
|
357,664
|
|
|
|
|
|
Research and development expenses
|
|
|
19,043
|
|
|
|
19,655
|
|
|
|
19,138
|
|
|
|
19,470
|
|
|
|
77,306
|
|
|
|
|
|
Purchased intangibles amortization
|
|
|
1,194
|
|
|
|
1,383
|
|
|
|
1,403
|
|
|
|
1,459
|
|
|
|
5,439
|
|
|
|
|
|
Restructuring and other charges
|
|
|
4,352
|
|
|
|
2,974
|
|
|
|
344
|
|
|
|
814
|
|
|
|
8,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
59,463
|
|
|
|
62,915
|
|
|
|
65,733
|
|
|
|
107,040
|
|
|
|
295,151
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,847
|
)
|
|
|
(5,847
|
)
|
|
|
|
|
Interest expense
|
|
|
(11,428
|
)
|
|
|
(12,477
|
)
|
|
|
(13,565
|
)
|
|
|
(14,187
|
)
|
|
|
(51,657
|
)
|
|
|
|
|
Interest income
|
|
|
5,292
|
|
|
|
6,205
|
|
|
|
6,877
|
|
|
|
6,938
|
|
|
|
25,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before
income taxes
|
|
|
53,327
|
|
|
|
56,643
|
|
|
|
59,045
|
|
|
|
93,944
|
|
|
|
262,959
|
|
|
|
|
|
Provision for income taxes
|
|
|
9,172
|
|
|
|
8,863
|
|
|
|
8,669
|
|
|
|
14,055
|
|
|
|
40,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
44,155
|
|
|
$
|
47,780
|
|
|
$
|
50,376
|
|
|
$
|
79,889
|
|
|
$
|
222,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic common share
|
|
$
|
0.42
|
|
|
$
|
0.46
|
|
|
$
|
0.49
|
|
|
$
|
0.79
|
|
|
$
|
2.16
|
|
|
|
|
|
Weighted-average number of basic
common shares
|
|
|
104,585
|
|
|
|
103,010
|
|
|
|
101,845
|
|
|
|
101,431
|
|
|
|
102,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
$
|
0.42
|
|
|
$
|
0.46
|
|
|
$
|
0.49
|
|
|
$
|
0.78
|
|
|
$
|
2.13
|
|
|
|
|
|
Weighted-average number of diluted
common shares and equivalents
|
|
|
105,901
|
|
|
|
104,337
|
|
|
|
103,074
|
|
|
|
103,019
|
|
|
|
104,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,122
|
|
|
|
3,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
57,880
|
|
|
|
66,952
|
|
|
|
62,655
|
|
|
|
95,668
|
|
|
|
283,155
|
|
|
|
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 are
typically higher in the second quarter over the first quarter in
each year as the Companys 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. Selling and administrative expenses
will vary in the fourth quarter in relation to performance in
the quarter and for the year. In the third quarter of 2005, the
Company recorded a tax liability of $24.0 million related
to the repatriation of funds from the Companys foreign
subsidiaries under the American Jobs Creation Act of 2004.
76
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share and employees data
|
|
2006*
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
STATEMENT OF OPERATIONS
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,280,229
|
|
|
$
|
1,158,236
|
|
|
$
|
1,104,536
|
|
|
$
|
958,205
|
|
|
$
|
889,967
|
|
Income from operations before
income taxes
|
|
$
|
262,959
|
|
|
$
|
274,563
|
|
|
$
|
285,671
|
|
|
$
|
223,686
|
|
|
$
|
195,411
|
|
Income before cumulative effect of
changes in accounting principles
|
|
$
|
222,200
|
|
|
$
|
201,975
|
|
|
$
|
224,053
|
|
|
$
|
170,891
|
|
|
$
|
152,218
|
|
Cumulative effect of changes in
accounting principles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,506
|
)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
222,200
|
|
|
$
|
201,975
|
|
|
$
|
224,053
|
|
|
$
|
170,891
|
|
|
$
|
147,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per basic common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
changes in accounting principles per basic common share
|
|
$
|
2.16
|
|
|
$
|
1.77
|
|
|
$
|
1.87
|
|
|
$
|
1.39
|
|
|
$
|
1.17
|
|
Cumulative effect of changes in
accounting principles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
Net income per basic common share
|
|
$
|
2.16
|
|
|
$
|
1.77
|
|
|
$
|
1.87
|
|
|
$
|
1.39
|
|
|
$
|
1.13
|
|
Weighted-average number of basic
common shares
|
|
|
102,691
|
|
|
|
114,023
|
|
|
|
119,640
|
|
|
|
123,189
|
|
|
|
130,489
|
|
Income per diluted common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
changes in accounting principles per diluted common share
|
|
$
|
2.13
|
|
|
$
|
1.74
|
|
|
$
|
1.82
|
|
|
$
|
1.34
|
|
|
$
|
1.12
|
|
Cumulative effect of changes in
accounting principles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
Net income per diluted common share
|
|
$
|
2.13
|
|
|
$
|
1.74
|
|
|
$
|
1.82
|
|
|
$
|
1.34
|
|
|
$
|
1.09
|
|
Weighted- average number of
diluted common shares and equivalents
|
|
|
104,240
|
|
|
|
115,945
|
|
|
|
123,069
|
|
|
|
127,579
|
|
|
|
135,762
|
|
BALANCE SHEET AND OTHER
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
514,166
|
|
|
$
|
493,588
|
|
|
$
|
539,077
|
|
|
$
|
356,781
|
|
|
$
|
263,312
|
|
Working capital**
|
|
$
|
313,846
|
|
|
$
|
309,101
|
|
|
$
|
480,894
|
|
|
$
|
339,835
|
|
|
$
|
338,233
|
|
Total assets
|
|
$
|
1,617,313
|
|
|
$
|
1,428,931
|
|
|
$
|
1,460,426
|
|
|
$
|
1,130,861
|
|
|
$
|
1,015,240
|
|
Long-term debt, including current
maturities
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
$
|
250,000
|
|
|
$
|
225,000
|
|
|
$
|
|
|
Stockholders equity**
|
|
$
|
362,383
|
|
|
$
|
283,632
|
|
|
$
|
678,686
|
|
|
$
|
590,477
|
|
|
$
|
665,310
|
|
Employees
|
|
|
4,687
|
|
|
|
4,503
|
|
|
|
4,271
|
|
|
|
3,963
|
|
|
|
3,677
|
|
|
|
|
* |
|
As a result of the adoption of Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share Based
Payment, as of January 1, 2006, all share-based
payments to employees have been recognized in the statements of
operations based on their fair values. The Company adopted the
modified prospective transition method permitted under
SFAS No. 123(R) and, consequently, has not adjusted results
from prior years. Stock-based compensation expense related to
SFAS 123(R) was approximately $28.8 million for the
year ended December 31, 2006. |
|
** |
|
As result of the adoption of SFAS No. 158 as of
December 31, 2006, the Company was required to recognize
the underfunded status of the Companys retirement plans as
a liability in the consolidated balance sheet. Prior to 2006, a
significant portion of the Companys retirement
contribution accrual was classified in other current liabilities
and included in working capital. In 2006, in accordance with
SFAS No. 158, the majority of the retirement
contribution accrual is included in the long-term retirement
liabiliy. Also, as result of the adoption
SFAS No. 158, stockholders equity decreased by
$1.7 million after-tax. |
|
|
|
(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. |
77
|
|
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 Companys management, with the participation of the
Companys chief executive officer and chief financial
officer, evaluated the effectiveness of the Companys
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 Companys chief executive
officer and chief financial officer concluded that the
Companys 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 Companys 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 SECs rules and forms.
|
|
(b) |
Managements Annual Report on Internal Control Over
Financial Reporting
|
See Managements Report on Internal Control Over Financial
Reporting in Item 8 on page 35.
|
|
(c) |
Report of the Independent Registered Public Accounting
Firm
|
See report of PricewaterhouseCoopers LLP in Item 8 on
page 36-37.
|
|
(d) |
Changes in Internal Controls Over Financial
Reporting
|
No change in the Companys 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, 2006 that has materially affected, or is
reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
|
Item 9b:
|
Other
Information
|
None.
PART III
|
|
Item 10:
|
Directors,
Executive Officers and Corporate Goverance
|
Information regarding our directors is contained in our
definitive proxy statement for the 2007 Annual Meeting of
Stockholders under the headings Election of
Directors, Directors and Executive Officers
and Report of the Audit Committee of the Board of
Directors. Information regarding Section 16(a)
compliance is contained in our definitive proxy statement for
the 2007 Annual Meeting of Stockholders under the heading
Section 16(A) Beneficial Ownership Reporting
Compliance. Such information is incorporated herein by
reference. Information regarding our executive officers is
contained after Part I of this
Form 10-K.
The Company has adopted a Code of Business Conduct and Ethics
(the Code) that applies to all of the Companys
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 Companys website,
www.waters.com, under the caption About Waters > Corporate
Governance. The Company intends to satisfy the disclosure
requirement regarding any amendment to, or waiver of a provision
of, the Code 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.
The Companys 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
78
Companys website, www.waters.com, under the caption
About Waters > 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.
The Companys 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
|
This information is contained in our definitive proxy statement
for the 2007 Annual Meeting of Stockholders under the heading
Compensation of Directors and Executive Officers.
Such information is incorporated herein by reference.
|
|
Item 12:
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Except for the Equity Compensation Plan information set forth
below, this information is contained in our definitive proxy
statement for the 2007 Annual Meeting of Stockholders under the
heading Security Ownership of Certain Beneficial Owners
and Management. Such information is incorporated herein by
reference.
Equity
Compensation Plan Information
The following table provides information as of December 31,
2006 about the Companys 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
|
|
|
9,507
|
|
|
$
|
38.44
|
|
|
|
5,418
|
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,507
|
|
|
$
|
38.44
|
|
|
|
5,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 13:
|
Certain
Relationships and Related Transactions and Director
Independence
|
This information is contained in our definitive proxy statement
for the 2007 Annual Meeting of Stockholders under the heading
Directors and Executive Officers. Such
information is incorporated herein by reference.
|
|
Item 14:
|
Principal
Accountant Fees and Services
|
This information is contained in our definitive proxy statement
for the 2007 Annual Meeting of Stockholders under the heading
Audit Fees. Such information is incorporated herein
by reference.
79
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 38 to 76. The report of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, dated March 1, 2007, is set forth on
page 36-37
of this
Form 10-K.
|
|
|
|
(2)
|
Financial Statement Schedule:
|
None.
(3) Exhibits:
|
|
|
|
|
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
|
.21
|
|
Amended and Restated Bylaws of
Waters Corporation dated as of December 13, 2006.
|
|
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)(*)
|
80
|
|
|
|
|
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
|
.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
|
.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
|
.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.(11)
|
|
10
|
.40
|
|
First Amendment dated as of
October 12, 2005, to the Five Year Credit Agreement, dated
as of December 15, 2004.(11)
|
|
10
|
.45
|
|
Change of Control/Severance
Agreement, dated as of February 24, 2004 between Waters
Corporation and Elizabeth B. Rae.(*)(11)
|
|
10
|
.46
|
|
Second Amendment to the Waters
Corporation Second Amended and Restated 1996 Long-Term
Performance Incentive Plan.(*)
|
|
10
|
.47
|
|
Five Year Credit Agreement, dated
January 11, 2007 among Waters Corporation, Waters
Technologies Ireland Limited. JP Morgan Chase Bank, N.A., JP
Morgan Europe and other Lenders party thereto.
|
81
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.48
|
|
Third Amendment to the Waters
Corporation 2003 Equity Incentive Plan.(*)
|
|
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 Registrants Report on
Form 10-K
dated March 29, 1996. |
|
(2) |
|
Incorporated by reference to the Registrants Registration
Statement on
Form S-1
(File
No. 333-3810). |
|
(3) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
dated August 11, 1999. |
|
(4) |
|
Incorporated by reference to the Registrants Report on
Form 10-K
dated March 30, 2000. |
|
(5) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
dated May 8, 2000. |
|
(6) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
dated August 8, 2000. |
|
(7) |
|
Incorporated by reference to the Registrants Report on
Form 10-K
dated March 27, 2001. |
|
(8) |
|
Incorporated by reference to the Registrants Report on
Form 10-K
dated March 28, 2002. |
|
(9) |
|
Incorporated by reference to Exhibit B of the
Registrants 1996 Proxy Statement. |
|
(10) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
dated August 12, 2002. |
|
(11) |
|
Incorporated by reference to the Registrants Report on
Form 10-K
dated March 6, 2006. |
|
(12) |
|
Incorporated by reference to the Registrants Report on
Form S-8
dated November 20, 2003. |
|
(13) |
|
Incorporated by reference to Exhibit C of the
Registrants 1996 Proxy Statement. |
|
(14) |
|
Incorporated by reference to the Registrants Report on
Form 10-K
dated March 12, 2004. |
|
(15) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
dated May 10, 2004. |
|
(16) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
dated August 11, 2004. |
|
(17) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
dated November 10, 2004. |
|
(18) |
|
Incorporated by reference to the Registrants Report on
Form 8-K,
filed on October 8, 1997 and amended on December 5,
1997. |
|
(19) |
|
Incorporated by reference to the Registrants Report on
Form 8-K
dated March 29, 1996. |
|
(20) |
|
Incorporated by reference to the Registrants Report on
Form 8-K
dated March 11, 1996. |
|
(21) |
|
Incorporated by reference to the Registrants Report on
Form 10-K
dated March 15, 2005. |
|
(22) |
|
Incorporated by reference to the Registrants Report on
Form 10-Q
dated May 6, 2005. |
|
(23) |
|
Incorporated by reference to the Registrants 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. |
82
SIGNATURES
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
John Ornell
Vice President, Finance and
Administration and Chief Financial Officer
Date: March 1, 2007
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 1, 2007.
|
|
|
|
|
/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/ Christopher
A. Kuebler
Christopher
A. Kuebler
|
|
Director
|
|
|
|
/s/ William
J. Miller
William
J. Miller
|
|
Director
|
|
|
|
/s/ JoAnn
A. Reed
JoAnn
A. Reed
|
|
Director
|
|
|
|
/s/ Thomas
P. Salice
Thomas
P. Salice
|
|
Director
|
83