e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 28, 2008
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 01-14010
Waters Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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13-3668640 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
34 Maple Street
Milford, Massachusetts 01757
(Address, including zip code, of principal executive offices)
Registrants telephone number, including area code: (508) 478-2000
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 whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer þ Accelerated filer o |
Non-accelerated filer (Do not check if a smaller reporting company) o Smaller reporting company 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
Indicate the number of shares outstanding of the registrants common stock as of July 25,
2008: 98,984,944
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
2
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
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June 28, 2008 |
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December 31, 2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
830,681 |
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$ |
597,333 |
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Short-term investments |
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95,681 |
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Accounts receivable, less allowances for doubtful accounts and sales returns
of $8,565 and $9,634 at June 28, 2008 and December 31, 2007, respectively |
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304,790 |
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317,792 |
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Inventories |
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206,873 |
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175,888 |
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Other current assets |
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47,957 |
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50,368 |
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Total current assets |
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1,390,301 |
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1,237,062 |
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Property, plant and equipment, net |
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165,929 |
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160,856 |
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Intangible assets, net |
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153,891 |
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141,759 |
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Goodwill |
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273,814 |
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272,626 |
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Other assets |
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80,423 |
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68,752 |
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Total assets |
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$ |
2,064,358 |
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$ |
1,881,055 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Notes payable and debt |
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$ |
334,020 |
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$ |
384,176 |
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Accounts payable |
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58,330 |
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47,451 |
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Accrued employee compensation |
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34,356 |
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58,771 |
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Deferred revenue and customer advances |
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109,865 |
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87,348 |
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Accrued income taxes |
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10,419 |
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994 |
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Accrued warranty |
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13,560 |
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13,119 |
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Other current liabilities |
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60,319 |
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66,575 |
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Total current liabilities |
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620,869 |
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658,434 |
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Long-term liabilities: |
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Long-term debt |
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650,000 |
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500,000 |
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Long-term portion of retirement benefits |
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52,596 |
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52,353 |
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Long-term income tax liability |
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72,799 |
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70,079 |
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Other long-term liabilities |
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17,477 |
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14,113 |
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Total long-term liabilities |
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792,872 |
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636,545 |
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Total liabilities |
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1,413,741 |
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1,294,979 |
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Commitments and contingencies (Notes 5, 6 and 10) |
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Stockholders equity: |
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Preferred stock, par value $0.01 per share, 5,000 shares authorized, none
issued at June 28, 2008 and December 31, 2007 |
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Common stock, par value $0.01 per share, 400,000 shares authorized,
147,601 and 147,061 shares issued, 98,934 and 100,975 shares
outstanding at June 28, 2008 and December 31, 2007, respectively |
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1,476 |
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1,471 |
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Additional paid-in capital |
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729,827 |
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691,746 |
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Retained earnings |
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1,742,547 |
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1,590,924 |
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Treasury stock, at cost, 48,667 and 46,086 shares at June 28, 2008
and December 31, 2007, respectively |
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(1,918,633 |
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(1,764,297 |
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Accumulated other comprehensive income |
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95,400 |
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66,232 |
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Total stockholders equity |
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650,617 |
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586,076 |
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Total liabilities and stockholders equity |
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$ |
2,064,358 |
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$ |
1,881,055 |
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The accompanying notes are an integral part of the interim consolidated financial statements.
3
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
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Three Months Ended |
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June 28, 2008 |
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June 30, 2007 |
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Product sales |
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$ |
287,121 |
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$ |
258,641 |
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Service sales |
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111,650 |
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93,989 |
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Total net sales |
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398,771 |
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352,630 |
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Cost of product sales |
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121,256 |
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104,326 |
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Cost of service sales |
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53,976 |
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47,893 |
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Total cost of sales |
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175,232 |
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152,219 |
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Gross profit |
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223,539 |
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200,411 |
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Selling and administrative expenses |
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111,935 |
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102,223 |
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Research and development expenses |
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22,228 |
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19,115 |
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Purchased intangibles amortization |
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2,352 |
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2,133 |
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Operating income |
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87,024 |
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76,940 |
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Interest expense |
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(9,807 |
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(13,335 |
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Interest income |
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4,952 |
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6,939 |
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Income from operations before income taxes |
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82,169 |
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70,544 |
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Provision for income tax (benefit) expense |
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(979 |
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10,635 |
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Net income |
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$ |
83,148 |
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$ |
59,909 |
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Net income per basic common share |
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$ |
0.83 |
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$ |
0.60 |
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Weighted-average number of basic common shares |
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99,586 |
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100,327 |
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Net income per diluted common share |
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$ |
0.82 |
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$ |
0.59 |
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Weighted-average number of diluted common shares and equivalents |
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101,035 |
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102,130 |
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The accompanying notes are an integral part of the consolidated interim financial statements.
4
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
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Six Months Ended |
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June 28, 2008 |
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June 30, 2007 |
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Product sales |
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$ |
557,586 |
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$ |
500,704 |
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Service sales |
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212,897 |
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182,703 |
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Total net sales |
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770,483 |
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683,407 |
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Cost of product sales |
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227,596 |
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203,237 |
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Cost of service sales |
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103,087 |
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92,214 |
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Total cost of sales |
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330,683 |
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295,451 |
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Gross profit |
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439,800 |
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387,956 |
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Selling and administrative expenses |
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217,772 |
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196,130 |
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Research and development expenses |
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42,014 |
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37,837 |
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Purchased intangibles amortization |
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4,624 |
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4,258 |
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Operating income |
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175,390 |
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149,731 |
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Interest expense |
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(20,964 |
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(26,523 |
) |
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Interest income |
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11,865 |
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13,292 |
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Income from operations before income taxes |
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166,291 |
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136,500 |
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Provision for income taxes |
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14,668 |
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20,654 |
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Net income |
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$ |
151,623 |
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$ |
115,846 |
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Net income per basic common share |
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$ |
1.52 |
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$ |
1.15 |
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Weighted-average number of basic common shares |
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99,981 |
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100,880 |
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Net income per diluted common share |
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$ |
1.49 |
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$ |
1.13 |
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Weighted-average number of diluted common shares and equivalents |
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101,531 |
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102,702 |
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The accompanying notes are an integral part of the consolidated interim financial statements.
5
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
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Six Months Ended |
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June 28, 2008 |
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June 30, 2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
151,623 |
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$ |
115,846 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Provisions for doubtful accounts on accounts receivable |
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890 |
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|
806 |
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Provisions on inventory |
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5,466 |
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3,351 |
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Stock-based compensation |
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15,509 |
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13,796 |
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Deferred income taxes |
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(13,373 |
) |
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(1,312 |
) |
Depreciation |
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15,611 |
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13,227 |
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Amortization of intangibles |
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23,176 |
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12,774 |
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Change in operating assets and liabilities, net of acquisitions: |
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Decrease in accounts receivable |
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22,164 |
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5,136 |
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Increase in inventories |
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(33,684 |
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(11,257 |
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Decrease in other current assets |
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2,909 |
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1,387 |
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Increase in other assets |
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(3,085 |
) |
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(5,494 |
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(Decrease) increase in accounts payable and other current liabilities |
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(10,275 |
) |
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8,825 |
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Increase in deferred revenue and customer advances |
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19,761 |
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20,965 |
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Increase in other liabilities |
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6,596 |
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|
8,659 |
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Net cash provided by operating activities |
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203,288 |
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|
186,709 |
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Cash flows from investing activities: |
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Additions to property, plant, equipment and software capitalization |
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(32,574 |
) |
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(27,307 |
) |
Investment in unaffiliated company |
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(3,500 |
) |
Purchase of short-term investments |
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(19,738 |
) |
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(244,063 |
) |
Maturity of short-term investments |
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115,419 |
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|
69,854 |
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Cash received from escrow related to business acquisition |
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|
724 |
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Net cash provided by (used in) investing activities |
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63,107 |
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(204,292 |
) |
Cash flows from financing activities: |
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Proceeds from debt issuances |
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389,904 |
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|
1,045,040 |
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Payments on debt |
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(290,060 |
) |
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(1,059,083 |
) |
Payments of debt issuance costs |
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(501 |
) |
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|
(1,081 |
) |
Proceeds from stock plans |
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|
16,247 |
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|
32,225 |
|
Purchase of treasury shares |
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(154,336 |
) |
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|
(156,499 |
) |
Excess tax benefit related to stock option plans |
|
|
6,168 |
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|
9,559 |
|
(Payments)
proceeds of debt swaps and other derivatives contracts |
|
|
(483 |
) |
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|
401 |
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|
Net cash used in financing activities |
|
|
(33,061 |
) |
|
|
(129,438 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
14 |
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|
2,950 |
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|
|
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|
Increase (decrease) in cash and cash equivalents |
|
|
233,348 |
|
|
|
(144,071 |
) |
Cash and cash equivalents at beginning of period |
|
|
597,333 |
|
|
|
514,166 |
|
|
|
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|
Cash and cash equivalents at end of period |
|
$ |
830,681 |
|
|
$ |
370,095 |
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|
The accompanying notes are an integral part of the interim consolidated financial statements.
6
WATERS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Basis of Presentation and Significant Accounting Policies
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, rheometry and calorimetry
instruments which are used in predicting the suitability of polymers and viscous liquids for
various industrial, consumer goods and healthcare products. The Company is also a developer and
supplier of software-based products that interface with the Companys instruments and are typically
purchased by customers as part of the instrument system.
The Companys interim fiscal quarter typically ends on the thirteenth Saturday of each
quarter. Since the Companys fiscal year end is December 31, the first and fourth fiscal quarters
may not consist of thirteen complete weeks. The Companys second fiscal quarters for 2008 and 2007
ended on June 28, 2008 and June 30, 2007, respectively.
The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the information and note
disclosures required by generally accepted accounting principles (GAAP) in the United States of
America. The consolidated financial statements include the accounts of the Company and its
subsidiaries, most of which are wholly owned. All material inter-company balances and transactions
have been eliminated.
The preparation of consolidated financial statements in conformity with GAAP requires the
Company to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent liabilities at the dates of the
financial statements. Actual amounts may differ from these estimates under different assumptions or
conditions.
It is managements opinion that the accompanying interim consolidated financial statements
reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of
the results for the interim periods. The interim consolidated financial statements should be read
in conjunction with the consolidated financial statements included in the Companys annual report
on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange
Commission (SEC) on February 29, 2008.
Reclassifications
Certain amounts from the prior year have been reclassified in the accompanying financial statements
in order to be consistent with the current years classifications.
Short-term Investments
Short-term investments primarily represent highly liquid investments, with original maturities
generally greater than 90 days, in commercial paper rated A1 or A1+ by Standard & Poors and P1 by
Moodys Investors Service; bank deposits; repurchase agreements; U.S. Government Agency Debt and
AAA rated money market funds which are convertible to a known amount of cash and carry an
insignificant risk of change in market value. The cost of the
short-term investments approximates
fair value.
7
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value Measurements
Fair values of cash, accounts receivable, accounts payable and debt approximate cost.
Effective January 1, 2008, the Company adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standard (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 GAAP. The adoption of this standard
did not have a material effect on the Companys financial position, results of operations or cash
flows. Relative to SFAS No. 157, the FASB issued Financial Statement of Position (FSP) Nos. 157-1
and 157-2. FSP No. 157-1 amends SFAS No. 157 to exclude SFAS No. 13, Accounting for Leases, and
its related interpretive accounting pronouncements that address leasing transactions, while FSP No.
157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial
liabilities, except for those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. As is permitted by FSP No. 157-2, the Company has elected to defer
implementation of this standard as it relates to the Companys non-financial assets and
non-financial liabilities that are recognized and disclosed at fair value in the financial
statements on a non-recurring basis until January 1, 2009. The Company is in the process of
evaluating whether the adoption of FSP No. 157-2 will have a material effect on its financial
position, results of operations or cash flows.
SFAS No. 157 establishes a three-level value hierarchy for disclosure of fair-value
measurements. The valuation hierarchy is based on the transparency of the inputs to the valuation
of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
Level 2 Inputs to the valuation methodology are quoted prices for similar assets and
liabilities in active markets, quoted prices in markets that are not active or inputs that
are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the financial instrument.
Level 3 Unobservable inputs (e.g. a reporting entitys own data).
In accordance with methodology prescribed by SFAS No. 157, the Company has measured and
disclosed the fair value of the following financial instrument assets and liabilities as of June
28, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Market for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
Total |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
June 28, 2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
680,997 |
|
|
$ |
|
|
|
$ |
680,997 |
|
|
$ |
|
|
Waters Retirement Restoration Plan assets |
|
|
18,336 |
|
|
|
|
|
|
|
18,336 |
|
|
|
|
|
Foreign currency exchange contract agreements |
|
|
436 |
|
|
|
|
|
|
|
436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
699,769 |
|
|
$ |
|
|
|
$ |
699,769 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
|
2,338 |
|
|
|
|
|
|
|
2,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,338 |
|
|
$ |
|
|
|
$ |
2,338 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values of the Companys cash equivalents, plan assets and derivative instruments are
determined through market, observable and corroborated sources.
Stockholders Equity
In February 2007, the Companys Board of Directors authorized the Company to repurchase up to
$500.0 million of its outstanding common stock over a two-year period. During the six months ended
June 28, 2008 and June 30, 2007, the Company repurchased 2.5 million and 2.1 million shares at a
cost of $152.4 million and $122.0 million,
8
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
respectively, under this program. As of June 28, 2008, the Company repurchased an aggregate of 5.3
million shares for an aggregate of $318.5 million under this program.
In October 2005, the Companys Board of Directors authorized the Company to repurchase up to
$500.0 million of its outstanding common stock over a two-year period. During the three months
ended March 31, 2007, the Company repurchased 0.6 million shares at a cost of $34.5 million under
this program. As of March 31, 2007, the Company repurchased an aggregate of 11.9 million shares of
its common stock under the October 2005 program for an aggregate of $499.8 million, effectively
completing this program.
Hedge Transactions
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 August
2007, the Company entered into two floating-to-fixed-rate interest rate swaps, each with a notional
amount of $50.0 million and maturity dates of April 2009 and October 2009, to hedge floating rate
debt related to the term loan facility of its outstanding debt.
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 June 28, 2008
and December 31, 2007, the Company held forward foreign exchange contracts with notional amounts
totaling approximately $112.7 million and $101.4 million, respectively.
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
six months ended June 28, 2008 and June 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Accruals for |
|
Settlements |
|
Balance at |
|
|
Beginning of Period |
|
Warranties |
|
Made |
|
End of Period |
Accrued warranty liability: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
$ |
13,119 |
|
|
$ |
6,460 |
|
|
$ |
(6,019 |
) |
|
$ |
13,560 |
|
June 30, 2007 |
|
$ |
12,619 |
|
|
$ |
5,514 |
|
|
$ |
(5,814 |
) |
|
$ |
12,319 |
|
2 Out-of-Period Adjustments
During the second quarter of 2008, the Company identified errors originating in periods prior to
the three months ended June 28, 2008. The errors primarily relate to (i) an overstatement of the
Companys income tax expense of $16.3 million as a result of errors in recording its income tax
provision during the period from 2000 to March 29, 2008 and (ii) an understatement of amortization
expense of $8.7 million for certain capitalized software. The Company incorrectly calculated its
provision for income taxes by tax-effecting its tax liability utilizing a U.S. tax rate of 35%
instead of an Irish tax rate of 10%. In addition, the Company incorrectly accounted for Irish-based
capitalized software and the related amortization expense as U.S. Dollar-denominated instead of
Euro-denominated, resulting in an understatement of amortization expense and cumulative translation
adjustment.
9
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company identified and corrected the errors in the three months ended June 28, 2008, which
had the effect of increasing cost of sales by $8.7 million; reducing gross profit and income from
operations before income tax by $8.7 million; reducing the provision for income taxes by $16.3
million and increasing net income by $7.6 million. For the three months ended June 28, 2008, the
errors had the effect of reducing the Companys effective tax rate by 18.1 percentage points,
resulting in an income tax benefit of 1.2%. For the six months ended June 28, 2008, the errors had
the effect of reducing the Companys effective tax rate by 8.9 percentage points, resulting in an
income tax rate of 8.8%. In addition, the out-of-period adjustments increased the gross carrying
value of capitalized software by $45.9 million; increased accumulated amortization for capitalized
software by $35.5 million; reduced deferred tax liabilities by $14.4 million and increased
accumulated other comprehensive income by $17.2 million.
The Company does not believe that the prior period errors, individually or in the aggregate,
are material to any previously issued annual or quarterly financial statements. In addition, the
Company does not believe that the adjustments described above to correct the cumulative effect of
the errors in the three months ended June 28, 2008 are material to the three months ended June 28,
2008 or to the estimate of the full year results for 2008. As a result, the Company has not
restated its previously issued annual financial statements or interim financial data.
3 Inventories
Inventories are classified as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
|
December 31, 2007 |
|
Raw materials |
|
$ |
62,938 |
|
|
$ |
51,426 |
|
Work in progress |
|
|
16,450 |
|
|
|
16,970 |
|
Finished goods |
|
|
127,485 |
|
|
|
107,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
206,873 |
|
|
$ |
175,888 |
|
|
|
|
|
|
|
|
4 Goodwill and Other Intangibles
The carrying amount of goodwill was $273.8 million and $272.6 million at June 28, 2008 and December
31, 2007, respectively. Currency translation adjustments increased goodwill approximately
$1.2 million.
The Companys intangible assets included in the consolidated balance sheets are detailed as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Amortization |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Amortization |
|
|
|
Amount |
|
|
Amortization |
|
|
Period |
|
|
Amount |
|
|
Amortization |
|
|
Period |
|
Purchased intangibles |
|
$ |
113,006 |
|
|
$ |
48,754 |
|
|
10 years |
|
$ |
111,207 |
|
|
$ |
43,180 |
|
|
10 years |
Capitalized software |
|
|
190,216 |
|
|
|
116,029 |
|
|
4 years |
|
|
133,215 |
|
|
|
74,298 |
|
|
4 years |
Licenses |
|
|
10,635 |
|
|
|
7,516 |
|
|
9 years |
|
|
10,522 |
|
|
|
7,011 |
|
|
9 years |
Patents and other
intangibles |
|
|
21,414 |
|
|
|
9,081 |
|
|
8 years |
|
|
19,182 |
|
|
|
7,878 |
|
|
8 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
335,271 |
|
|
$ |
181,380 |
|
|
7 years |
|
$ |
274,126 |
|
|
$ |
132,367 |
|
|
7 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross carrying value of capitalized software and related accumulated amortization
increased by $45.9 million and $35.5 million, respectively, during the six months ended June 28,
2008 primarily as a result of an out-of-period adjustment (Note 2). The gross carrying value of
intangible assets and accumulated amortization for intangible assets increased by approximately
$1.8 million and $0.7 million, respectively, in the six months ended June 28, 2008 due to the
effect of foreign currency translation.
For the three months ended June 28, 2008 and June 30, 2007, amortization expense for
intangible assets was $16.6 million and $6.5 million, respectively. For the six months ended June
28, 2008 and June 30, 2007, amortization expense for intangible assets was $23.2 million and
$12.8 million, respectively. Included in
amortization expense for both the three and six months ended June 28, 2008 is an $8.7 million
out-of-period
10
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
adjustment related to capitalized software. Amortization expense for intangible
assets is estimated to be approximately $31.0 million for each of the next five years.
5 Debt
In March 2008, the Company entered into a new credit agreement (the 2008 Credit Agreement) that
provides for a $150 million term loan facility. In January 2007, the Company entered into a credit
agreement (the 2007 Credit Agreement) that provides for a $500 million term loan facility and
$600 million in revolving facilities, which include both a letter of credit and a swingline
subfacility. Both credit agreements mature on January 11, 2012 and require no scheduled
prepayments before that date. The outstanding portions of the revolving facilities have been
classified as short-term liabilities in the consolidated balance sheets due to the fact that the
Company utilizes the revolving line of credit to fund its working capital needs. It is the
Companys intention to pay the outstanding revolving line of credit balance during the subsequent
twelve months following the respective period end date.
The interest rates applicable to the 2008 and 2007 Credit Agreements 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 137.5 basis points for LIBOR rate loans and range between zero basis points and 37.5
basis points for base rate loans. The 2008 and 2007 Credit Agreements require 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 2008 and 2007 Credit Agreements include negative covenants that are customary for
investment grade credit facilities. The 2008 and 2007 Credit Agreements also contain certain
customary representations and warranties, affirmative covenants and events of default.
As of June 28, 2008 and December 31, 2007, the Company had a total of $950.0 million and
$865.0 million borrowed under the 2008 and 2007 Credit Agreements and a total amount available to
borrow of $298.5 million and $233.2 million, respectively, after outstanding letters of credit. At
June 28, 2008, $650.0 million of the total debt was classified as long-term debt and $300.0 million
classified as short-term debt in the consolidated balance sheet. At December 31, 2007, $500.0
million of the total debt was classified as long-term debt and $365.0 million classified as
short-term debt in the consolidated balance sheet. The weighted-average interest rates applicable
to these borrowings were 3.20% and 5.67% at June 28, 2008 and December 31, 2007, respectively.
The Company, and its foreign subsidiaries, also had available short-term lines of credit,
totaling $100.1 million and $98.5 million at June 28, 2008 and December 31, 2007, respectively. At
June 28, 2008 and December 31, 2007, the related short-term borrowings were $34.0 million at a
weighted-average interest rate of 4.47% and $19.2 million at a weighted average interest rate of
3.30%, respectively.
6 Income Taxes
The Company accounts for its uncertain tax return reporting positions in accordance with FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 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 those tax reporting positions, as well as all of the
pertinent facts and circumstances, but it prohibits any discounting of any of the related tax
effects for the time value of money.
The following is a summary of the activity of the Companys unrecognized tax benefits for the
six months ended June 28, 2008 (in thousands):
|
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
68,463 |
|
Additions for tax positions of the current year |
|
|
2,111 |
|
|
|
|
|
Balance as of June 28, 2008 |
|
$ |
70,574 |
|
|
|
|
|
For the three months ended June 28, 2008 and June 30, 2007, the Company recorded increases of
$1.0 million and $1.2 million, respectively, in unrecognized tax benefits via the income tax
provision. For the six months ended June
11
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
28, 2008 and June 30, 2007, the Company recorded increases
of $2.1 million and $2.5 million, respectively, in unrecognized tax benefits via the income tax
provision. If all of the Companys unrecognized tax benefits accrued as of June 28, 2008 were to
become recognizable in the future, the Company would record a total reduction of $69.1 million in
the income tax provision. As of June 28, 2008, however, the Company is not able to estimate the
portion of that total potential reduction that may occur within the next twelve months.
The Companys accounting policy is to record estimated interest and penalties related to the
potential underpayment of income taxes, net of related tax effects, as a component of the income
tax provision. For the three months ended June 28, 2008 and June 30, 2007, the Company included
$0.3 million and $0.2 million, respectively, of interest expense, net of related tax benefits in
the income tax provision. For the six months ended June 28, 2008 and June 30, 2007, the Company
included $0.6 million and $0.5 million, respectively, of interest expense, net of related tax
benefits in the income tax provision. The Company has recorded no tax penalty expense in the income
tax provision for the three and six months ended June 28, 2008 and three and six months ended June
30, 2007. As of June 28, 2008 and December 31, 2007, the Company had accrued $4.6 million and $4.0
million of such estimated interest expense, net of related tax benefits, respectively. As of both
June 28, 2008 and December 31, 2007, the Company had no accrued income tax penalties.
The Companys uncertain tax positions are taken with respect to income tax return reporting
periods beginning after December 31, 1999, which are the periods that remain generally open to
income tax audit examination by the various income tax authorities that have jurisdiction over the
Companys income tax reporting for that period of time. The Company has monitored and will continue
to monitor the lapsing of statutes of limitations on potential tax assessments for related changes
in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred
tax assets and liabilities. As of June 28, 2008, however, the Company does not expect to record any
material changes in the measurement of unrecognized tax benefits, related net interest and
penalties or deferred tax assets and liabilities due to the lapsing of statutes of limitations on
potential tax assessments within the next twelve months.
The Companys effective tax rates for the three months ended June 28, 2008 and June 30, 2007
were an income tax benefit of 1.2%, or $1.0 million, and an income tax provision of 15.1%, or $10.6
million, respectively. Included in the $1.0 million income tax benefit for the three months ended
June 28, 2008 is a $16.3 million benefit resulting from the out-of-period adjustments as described
in Note 2. The out-of-period adjustments had the effect of reducing the Companys effective tax
rate by 18.1 percentage points for the three months ended June 28, 2008. The remaining increase in
the effective tax rate for the three months ended June 28, 2008 is primarily attributable to
proportionately greater growth in income in jurisdictions with comparatively high effective tax
rates.
The Companys effective tax rates for the six months ended June 28, 2008 and June 30, 2007
were 8.8%, or $14.7 million, and 15.1%, or $20.7 million, respectively. Included in the $14.7
million income tax provision for the six months ended June 28, 2008 is a $16.3 million benefit
resulting from the out-of-period adjustments as described in Note 2. The out-of-period adjustments
had the effect of reducing the Companys effective tax rate by 8.9 percentage points for the six
months ended June 28, 2008. The remaining increase in the effective tax rate for the six months
ended June 28, 2008 is primarily attributable to proportionately greater growth in income in
jurisdictions with comparatively high effective tax rates.
7 Stock-Based Compensation
The Company maintains various shareholder-approved stock-based compensation plans which allow for
the issuance of incentive or non-qualified stock options, stock appreciation rights, restricted
stock or other types of awards (e.g. restricted stock units).
The Company accounts for stock-based compensation costs in accordance with SFAS No. 123(R),
Share-Based Payment, and SEC Staff Accounting Bulletin (SAB) No. 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 stock-based compensation expense recognized in the
consolidated statements of operations is based on awards that ultimately are expected to vest;
therefore, the amount of expense has been reduced for estimated forfeitures.
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
12
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
actual results differ significantly from these
estimates, stock-based compensation expense and the Companys results of operations could be
materially impacted. In addition, if the Company employs different assumptions in the application
of 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 consolidated statements of operations for the three and six months ended June 28, 2008 and
June 30, 2007 include the following stock-based compensation expense related to stock option
awards, restricted stock, restricted stock unit awards and the employee stock purchase plan (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Cost of sales |
|
$ |
631 |
|
|
$ |
775 |
|
|
$ |
1,538 |
|
|
$ |
1,690 |
|
Selling and administrative |
|
|
6,100 |
|
|
|
5,140 |
|
|
|
11,639 |
|
|
|
10,163 |
|
Research and development |
|
|
1,325 |
|
|
|
943 |
|
|
|
2,332 |
|
|
|
1,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
8,056 |
|
|
$ |
6,858 |
|
|
$ |
15,509 |
|
|
$ |
13,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
In determining the fair value of the stock options, the Company makes a variety of assumptions and
estimates, including volatility measures, expected yields and expected stock option lives. The fair
value of each option grant was estimated on the date of grant using the Black-Scholes option
pricing model. The Company uses implied volatility on its publicly traded options as the basis for
its estimate of expected volatility. The Company believes that implied volatility is the most
appropriate indicator of expected volatility because it is generally reflective of historical
volatility and expectations of how future volatility will differ from historical volatility. The
expected life assumption for grants is based on historical experience for the population of
non-qualified stock 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 stock
options granted during the six months ended June 28, 2008 and June 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
June 30, |
Options
Issued and Significant Assumptions Used to Estimate Option Fair
Values |
|
2008 |
|
2007 |
Options issued in thousands
|
|
|
28 |
|
|
|
47 |
|
Risk-free interest rate
|
|
|
3.8 |
% |
|
|
4.5 |
% |
Expected life in years
|
|
|
6.0 |
|
|
|
6.0 |
|
Expected volatility
|
|
|
.291 |
|
|
|
.280 |
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
June 30, |
Weighted-average
Exercise Price and Fair Values of Options on the Date of Grant |
|
2008 |
|
2007 |
Exercise price
|
|
$ 76.75 |
|
$ 48.88 |
Fair value
|
|
$ 28.25 |
|
$ 18.19 |
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, 2007 |
|
|
7,097 |
|
|
$19.50 to $80.97 |
|
$43.93 |
|
Granted |
|
|
28 |
|
|
$76.75 |
|
$76.75 |
|
Exercised |
|
|
(391 |
) |
|
$19.69 to $72.06 |
|
$37.17 |
|
Canceled |
|
|
(15 |
) |
|
$32.12 to $47.12 |
|
$48.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 28, 2008 |
|
|
6,719 |
|
|
$19.50 to $80.97 |
|
$44.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
During the six months ended June 28, 2008, the Company granted eight thousand shares of restricted
stock. The fair value of these awards on the grant date was $76.75. The restrictions on these
shares lapse at the end of a three-year period.
13
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the six months
ended June 28, 2008 (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Shares |
|
|
Average Price |
|
Unvested at December 31, 2007 |
|
|
489 |
|
|
$ |
48.44 |
|
Granted |
|
|
241 |
|
|
$ |
60.37 |
|
Vested |
|
|
(117 |
) |
|
$ |
47.22 |
|
Forfeited |
|
|
(10 |
) |
|
$ |
49.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at June 28, 2008 |
|
|
603 |
|
|
$ |
53.43 |
|
|
|
|
|
|
|
|
Restricted stock units are generally issued annually in February and vest in equal annual
installments over a five year period.
8 Earnings Per Share
Basic and diluted earnings per share (EPS) calculations are detailed as follows (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 28, 2008 |
|
|
|
Weighted-Average |
|
|
|
Net Income |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
Net income per basic common share |
|
$ |
83,148 |
|
|
|
99,586 |
|
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock option, restricted stock and restricted
stock unit securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
1,424 |
|
|
|
|
|
Exercised and cancellations |
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share |
|
$ |
83,148 |
|
|
|
101,035 |
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2007 |
|
|
|
Weighted-Average |
|
|
|
Net Income |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
Net income per basic common share |
|
$ |
59,909 |
|
|
|
100,327 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock option, restricted stock and restricted
stock unit securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
1,765 |
|
|
|
|
|
Exercised and cancellations |
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share |
|
$ |
59,909 |
|
|
|
102,130 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 28, 2008 |
|
|
|
Weighted-Average |
|
|
|
Net Income |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
Net income per basic common share |
|
$ |
151,623 |
|
|
|
99,981 |
|
|
$ |
1.52 |
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock option, restricted stock and restricted
stock unit securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
1,463 |
|
|
|
|
|
Exercised and cancellations |
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share |
|
$ |
151,623 |
|
|
|
101,531 |
|
|
$ |
1.49 |
|
|
|
|
|
|
|
|
|
|
|
14
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2007 |
|
|
|
Weighted-Average |
|
|
|
Net Income |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
Net income per basic common share |
|
$ |
115,846 |
|
|
|
100,880 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock option, restricted stock and restricted
stock unit securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
1,694 |
|
|
|
|
|
Exercised and cancellations |
|
|
|
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share |
|
$ |
115,846 |
|
|
|
102,702 |
|
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
For both the three and six months ended June 28, 2008, the Company had 1.3 million stock
option securities that were antidilutive due to having higher exercise prices than the average
price during the period. For both the three and six months ended June 30, 2007, the Company had
1.1 million stock option securities that were antidilutive 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.
9 Comprehensive Income
Comprehensive income is detailed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
83,148 |
|
|
$ |
59,909 |
|
|
$ |
151,623 |
|
|
$ |
115,846 |
|
Foreign currency translation |
|
|
14,560 |
|
|
|
5,241 |
|
|
|
29,621 |
|
|
|
8,364 |
|
Net appreciation (depreciation) and realized
gains (losses) on derivative instruments |
|
|
1,913 |
|
|
|
(2,928 |
) |
|
|
(612 |
) |
|
|
(4,758 |
) |
Income tax (expense) benefit |
|
|
(670 |
) |
|
|
1,025 |
|
|
|
214 |
|
|
|
1,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net appreciation (depreciation) and realized gains
(losses) on derivative instruments, net of tax |
|
|
1,243 |
|
|
|
(1,903 |
) |
|
|
(398 |
) |
|
|
(3,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency adjustments |
|
|
15,803 |
|
|
|
3,338 |
|
|
|
29,223 |
|
|
|
5,271 |
|
Unrealized losses on investments before income taxes |
|
|
(110 |
) |
|
|
(482 |
) |
|
|
(84 |
) |
|
|
(325 |
) |
Income tax benefit |
|
|
38 |
|
|
|
169 |
|
|
|
29 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on investments, net of tax |
|
|
(72 |
) |
|
|
(313 |
) |
|
|
(55 |
) |
|
|
(211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
15,731 |
|
|
|
3,025 |
|
|
|
29,168 |
|
|
|
5,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
98,879 |
|
|
$ |
62,934 |
|
|
$ |
180,791 |
|
|
$ |
120,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 Retirement Plans
The Company sponsors various retirement plans. In September 2007, the Companys Board of Directors
approved various amendments to freeze the pay credit accrual under the Waters Retirement Plan and
the Waters Retirement Restoration Plan (the U.S. Pension Plans) effective December 31, 2007. In
accordance with SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, the Company recorded a curtailment gain of
$0.5 million in the third quarter of 2007. In addition, the Company re-measured the U.S. Pension
Plans liabilities in September 2007 and the Company reduced the projected benefit obligation
liability by $6.7 million with a corresponding adjustment, net of tax, to accumulated other
comprehensive income as a result of the curtailment reducing the accrual for future service. The
Companys Board of Directors also approved a $12.6 million payment that was contributed to the
Waters Employee Investment Plan, a 401(k) defined contribution plan for U.S. employees, in the
first quarter of 2008. In addition, effective January 1, 2008, the Companys Board of Directors
increased the employer matching contribution in the Waters Employee Investment Plan to 100% for
contributions up to 6% of eligible pay, an increase of 3%, and eliminated the one-year service
requirement to be eligible for matching contributions. For the six months ended June 28, 2008 and
June 30, 2007, the Companys matching contribution into the Waters Employee Investment Plan
amounted to $5.3 million and $2.1 million, respectively.
15
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The summary of the components of net periodic pension costs for the plans for the three and
six months ended June 28, 2008 and June 30, 2007 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
|
|
|
|
|
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 |
|
Service cost |
|
$ |
31 |
|
|
$ |
53 |
|
|
$ |
374 |
|
|
$ |
1,941 |
|
|
$ |
64 |
|
|
$ |
290 |
|
Interest cost |
|
|
1,481 |
|
|
|
83 |
|
|
|
227 |
|
|
|
1,301 |
|
|
|
69 |
|
|
|
196 |
|
Expected return on plan assets |
|
|
(1,528 |
) |
|
|
(39 |
) |
|
|
(114 |
) |
|
|
(1,333 |
) |
|
|
(30 |
) |
|
|
(97 |
) |
Net amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service costs |
|
|
38 |
|
|
|
(14 |
) |
|
|
|
|
|
|
(22 |
) |
|
|
(14 |
) |
|
|
|
|
Net actuarial loss |
|
|
33 |
|
|
|
|
|
|
|
(7 |
) |
|
|
202 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
55 |
|
|
$ |
83 |
|
|
$ |
480 |
|
|
$ |
2,089 |
|
|
$ |
89 |
|
|
$ |
394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
|
|
|
|
|
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 |
|
Service cost |
|
$ |
62 |
|
|
$ |
106 |
|
|
$ |
748 |
|
|
$ |
3,882 |
|
|
$ |
128 |
|
|
$ |
580 |
|
Interest cost |
|
|
2,962 |
|
|
|
166 |
|
|
|
454 |
|
|
|
2,602 |
|
|
|
138 |
|
|
|
392 |
|
Expected return on plan assets |
|
|
(3,056 |
) |
|
|
(78 |
) |
|
|
(228 |
) |
|
|
(2,666 |
) |
|
|
(60 |
) |
|
|
(194 |
) |
Net amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service costs |
|
|
76 |
|
|
|
(28 |
) |
|
|
|
|
|
|
(44 |
) |
|
|
(28 |
) |
|
|
|
|
Net actuarial loss |
|
|
66 |
|
|
|
|
|
|
|
(14 |
) |
|
|
404 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
110 |
|
|
$ |
166 |
|
|
$ |
960 |
|
|
$ |
4,178 |
|
|
$ |
178 |
|
|
$ |
788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 28, 2008, the Company contributed approximately $0.7
million to the U.S. Pension Plans. For the three and six months ended June 30, 2007, the Company
made no contributions to the U.S. Pension Plans. During fiscal year 2008, the Company expects to
contribute approximately $3.5 million to $7.0 million to the defined benefit plans.
11 Business Segment Information
The 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, rheometry and calorimetry 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.
16
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net sales for the Companys products and services are as follows for the three and six months
ended June 28, 2008 and June 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
Product net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waters instrument systems |
|
$ |
195,422 |
|
|
$ |
180,181 |
|
|
$ |
376,773 |
|
|
$ |
342,490 |
|
Chemistry |
|
|
63,275 |
|
|
|
53,607 |
|
|
|
122,539 |
|
|
|
107,822 |
|
TA instrument systems |
|
|
28,424 |
|
|
|
24,853 |
|
|
|
58,274 |
|
|
|
50,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product net sales |
|
|
287,121 |
|
|
|
258,641 |
|
|
|
557,586 |
|
|
|
500,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waters service |
|
|
102,032 |
|
|
|
87,026 |
|
|
|
196,065 |
|
|
|
169,498 |
|
TA service |
|
|
9,618 |
|
|
|
6,963 |
|
|
|
16,832 |
|
|
|
13,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service net sales |
|
|
111,650 |
|
|
|
93,989 |
|
|
|
212,897 |
|
|
|
182,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
398,771 |
|
|
$ |
352,630 |
|
|
$ |
770,483 |
|
|
$ |
683,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Recent Accounting Standards Changes and Developments
The FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
- Including an Amendment of FASB Statement No. 115, which is effective for fiscal years beginning
after November 15, 2007. This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value at specified election dates. Subsequent
unrealized gains and losses on items for which the fair value option has been elected will be
reported in earnings. The Company did not elect to re-measure any of its existing financial assets
or liabilities under the provisions of this standard.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which replaces
SFAS No. 141. This revised standard requires assets, liabilities and non-controlling interests
acquired to be measured at fair value and requires that costs incurred to effect the acquisition be
recognized separately from the business combination. In addition, this statement expands the scope
to include all transactions and other events in which one entity obtains control over one or more
businesses. This statement is effective for all business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company is in the process of evaluating whether the adoption of this
standard will have a material effect on its financial position, results of operations or cash
flows.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 51. This statement establishes accounting and
reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of
a subsidiary. This statement is effective for fiscal years beginning on or after December 15, 2008.
The Company is in the process of evaluating whether the adoption of this standard will have a
material effect on its financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. This statement is intended to help investors better understand how derivative
instruments and hedging activities affect an entitys financial position, financial performance and
cash flows through enhanced disclosure requirements. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. The
Company is in the process of evaluating whether the adoption of this standard will have a material
effect on its financial position, results of operations or cash flows.
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets. This FSP amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other Intangible Assets. The objective of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R),
and other U.S. GAAP. This FSP applies to all intangible assets, whether acquired in a business
combination or otherwise, and shall be effective for financial statements issued for fiscal years
beginning after
17
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 15, 2008, and interim periods within those fiscal years and applied prospectively to
intangible assets acquired after the effective date. Early adoption is prohibited. The Company is
in the process of evaluating whether the adoption of this standard will have a material effect on
its financial position, results of operations or cash flows.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. This statement identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of non-governmental
entities that are presented in accordance with GAAP. With the issuance of this statement, the FASB
concluded that the GAAP hierarchy should be directed toward the entity and not its auditor, and
reside in the accounting literature established by the FASB as opposed to the American Institute of
Certified Public Accountants Statement on Auditing Standards No. 69, The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles. This statement is effective 60 days
following the SECs approval of the Public Company Accounting Oversight Board amendments to U.S.
Auditing Standards Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Company is in the process of evaluating whether the adoption
of this standard will have a material effect on its financial position, results of operations or
cash flows.
18
Item 2:
Managements Discussion and Analysis of Financial Condition and Results of Operations
Business and Financial Overview
The Companys sales were $398.8 million and $352.6 million for the three months ended June 28, 2008
(the 2008 Quarter) and June 30, 2007 (the 2007 Quarter), respectively. The Companys sales were
$770.5 million and $683.4 million for the six months ended June 28, 2008 (the 2008 Period) and
June 30, 2007 (the 2007 Period), respectively. Sales grew 13% in both the 2008 Quarter and the
2008 Period. Overall, the sales growth achieved in the 2008 Quarter and 2008 Period were impacted
by the increase in demand for the Companys products in Asia (including Japan), continued expansion
of the Companys industrial businesses and the effect of foreign currency translation which
benefited both the 2008 Quarter and 2008 Period sales growth rates by 6%.
During the 2008 Quarter, U.S. sales increased 6%, European sales increased 17%, Asian sales
increased 18% and sales in the rest of the world increased 9%. During the 2008 Period, U.S. sales
increased 8%, European sales increased 13%, Asian sales increased 18% and sales in the rest of the
world increased 14%. The effect of foreign currency translation benefited sales growth rates in the
2008 Quarter by 14% in Europe, 6% in Asia and 1% in the rest of the world. The effect of foreign
currency translation benefited sales growth rates in the 2008 Period by 13% in Europe, 6% in Asia
and 6% in the rest of the world.
In the 2008 Quarter and 2008 Period, global sales to pharmaceutical customers grew 4% and 7%,
respectively. Global sales to government and academic customers were up 21% in the 2008 Quarter and
14% in the 2008 Period. Global sales to industrial and food safety customers grew 28% in the 2008
Quarter and 23% in the 2008 Period. Sales growth for the TA Division (TA) grew 20% for the 2008
Quarter and 18% in the 2008 Period. TAs sales growth in the 2008 Quarter and 2008 Period can be
primarily attributed to new product introductions, the effect of foreign currency translation which
benefited sales by 5% in the 2008 Quarter and 4% in the 2008 Period and, to a lesser extent, the
August 2007 acquisition of Calorimetry Sciences Corporation (CSC) which added 3% to TAs sales
growth during the 2008 Quarter and 2% to TAs sales growth during the 2008 Period.
The Waters Division sales grew 12% in both the 2008 Quarter and in the 2008 Period. The Waters
Divisions products and services consist of high performance liquid chromatography (HPLC), ultra
performance liquid chromatography® (UPLC and together with HPLC, herein referred to as LC),
mass spectrometry (MS) and chemistry consumable products and related services. The Waters
Division sales growth was strongly influenced by ACQUITY UPLC® sales, Tandem Quadrupole MS system
sales, shipments of new SynaptTM HDMSTM systems and recurring sales growth
from the service and chemistry consumables businesses.
During the 2008 Quarter, the Company identified errors originating in periods prior to the
three months ended June 28, 2008. The errors primarily relate to (i) an overstatement of the
Companys income tax expense of $16.3 million as a result of errors in recording its income tax
provision during the period from 2000 to March 29, 2008 and (ii) an understatement of amortization
expense of $8.7 million for certain capitalized software. The Company incorrectly calculated its
provision for income taxes by tax-effecting its tax liability utilizing a U.S. tax rate of 35%
instead of an Irish tax rate of 10%. In addition, the Company incorrectly accounted for Irish-based
capitalized software and the related amortization expense as U.S. Dollar-denominated instead of
Euro-denominated, resulting in an understatement of amortization expense and cumulative translation
adjustment.
The Company identified and corrected the errors in the three months ended June 28, 2008, which
had the effect of increasing cost of sales by $8.7 million; reducing gross profit and income from
operations before income tax by $8.7 million; reducing the provision for income taxes by $16.3
million and increasing net income by $7.6 million. For the three months ended June 28, 2008, the
errors had the effect of reducing the Companys effective tax rate by 18.1 percentage points,
resulting in an income tax benefit of 1.2%. For the six months ended June 28, 2008, the errors had
the effect of reducing the Companys effective tax rate by 8.9 percentage points, resulting in an
income tax rate of 8.8%. In addition, the out-of-period adjustments increased the gross carrying
value of capitalized software by $45.9 million; increased accumulated amortization for capitalized
software by $35.5 million; reduced deferred tax liabilities by $14.4 million and increased
accumulated other comprehensive income by $17.2 million.
The Company does not believe that the prior period errors, individually or in the aggregate,
are material to any previously issued annual or quarterly financial statements. In addition, the
Company does not believe that the adjustments described above to correct the cumulative effect of
the errors in the three months ended June 28, 2008
19
are material to the three months ended
June 28, 2008 or to the estimate of the full year
results for 2008. As a result, the Company has not restated its previously issued annual financial
statements or interim financial data.
Operating income was $87.0 million and $76.9 million in the 2008 Quarter and 2007 Quarter,
respectively. The $10.1 million net increase in operating income in the 2008 Quarter is primarily a
result of the benefit from the increase in sales volume and the effect of favorable foreign
currency translation, offset by the $8.7 million impact of the out-of-period adjustment related to
capitalized software amortization. Operating income was $175.4 million and $149.7 million in the
2008 Period and 2007 Period, respectively. The $25.7 million net increase in operating income in
the 2008 Period is primarily a result of the benefit from the increase in sales volume and the
effect of favorable foreign currency translation, offset to a lesser extent by the $8.7 million
impact of the out-of-period adjustment related to capitalized software amortization.
Net income per diluted share was $0.82 and $0.59 in the 2008 Quarter and 2007 Quarter,
respectively. Net income per diluted share was $1.49 and $1.13 in the 2008 Period and 2007 Period,
respectively. Net income per diluted share grew at a rate of 39% in the 2008 Quarter over the 2007
Quarter and 32% in the 2008 Period over the 2007 Period.
Net cash provided by operating activities was $203.3 million and $186.7 million in the 2008
Period and 2007 Period, respectively. The $16.6 million increase is primarily a result of higher
net income and the improved cash collections from customers partially offset by a higher level of
inventory on hand and the $12.6 million one-time transition pension benefit payment into the Waters
Employee Investment Plan (a 401(k) defined contribution plan for U.S. employees) associated with
the September 2007 amendment to freeze the pay credit accrual under the Waters Retirement Plan and
the Waters Retirement Restoration Plan (defined benefit plans for U.S. employees). Within cash
flows used in investing activities, capital expenditures related to property, plant, equipment and
software capitalization were $32.6 million and $27.3 million in the 2008 Period and 2007 Period,
respectively. Within cash flows used in financing activities, the Company entered into a new $150
million term loan credit agreement facility (the 2008 Credit Agreement) in March 2008. The 2008
Credit Agreement matures on January 11, 2012 and requires no scheduled prepayments before that
date. The Company used the proceeds of the term loan to repay amounts outstanding under the
revolving tranche of the Companys existing credit agreement. The Company also repurchased $152.4
million and $156.5 million of the Companys outstanding common stock in the 2008 Period and 2007
Period, respectively. In addition, the Company received $16.2 million and $32.2 million of proceeds
from stock plans in the 2008 Period and 2007 Period, respectively.
Results of Operations
Net Sales
Net sales for the 2008 Quarter and the 2007 Quarter were $398.8 million and $352.6 million,
respectively, an increase of 13%. Net sales for the 2008 Period and the 2007 Period were $770.5
million and $683.4 million, respectively, an increase of 13%. Foreign currency translation
benefited both the 2008 Quarter and 2008 Period sales growth rates by 6%. Product sales were $287.1
million and $258.6 million for the 2008 Quarter and the 2007 Quarter, respectively, an increase of
11%. Product sales were $557.6 million and $500.7 million for the 2008 Period and the 2007 Period,
respectively, an increase of 11%. The increase in product sales for both the 2008 Quarter and 2008
Period was primarily due to the overall positive growth in Waters and TA instrument systems and
chemistry consumables. Service sales were $111.7 million and $94.0 million in the 2008 Quarter and
the 2007 Quarter, respectively, an increase of 19%. Service sales were $212.9 million and $182.7
million in the 2008 Period and the 2007 Period, respectively, an increase of 17%. The increase in
service sales for both the 2008 Quarter and 2008 Period was primarily attributable to increased
sales of service plans and billings to a higher installed base of customers.
Waters Division Net Sales
The Waters Division net sales grew 12% in both the 2008 Quarter and 2008 Period. The effect of
foreign currency translation benefited the Waters Division across all product lines, resulting in a
benefit to total sales growth of 6% in both the 2008 Quarter and 2008 Period. Chemistry consumables
sales grew 18% in the 2008 Quarter and 14% in the 2008 Period. This growth was driven by increased
column sales of ACQUITY UPLC proprietary column technology and sales of HPLC columns. Waters
Division service sales grew 17% in the 2008 Quarter and 16% in the 2008 Period due primarily to
increased sales of service plans and billings to the higher installed base of customers. Waters
instrument system sales (LC and MS) grew 8% in the 2008 Quarter and 10% in the 2008 Period.
20
The increase in instrument systems sales during both the 2008 Quarter and 2008 Period is primarily
attributable to higher sales of ACQUITY UPLC systems, higher Tandem Quadruple system sales and
Synapt HDMS system sales. Waters Division sales by product mix were essentially unchanged in the
2008 Quarter and 2008 Period with instrument systems, chemistry and service representing
approximately 54%, 18% and 28%, respectively. Geographically, Waters Division sales in the U.S.,
Europe and Asia strengthened approximately 5%, 16% and 18% in the 2008 Quarter and 7%, 12% and 18%
in the 2008 Period, respectively. U.S. and Asia sales growth in the 2008 Quarter and 2008 Period
was primarily due to higher demand from the Companys industrial customers. Asias sales growth was
primarily driven by increased sales in India and China and mitigated by a weakness in Japan sales.
Sales in the rest of the world increased 8% in the 2008 Quarter and 14% in the 2008 Period and were
driven primarily by increased sales in Latin America. The effects of foreign currency translation
increased sales growth in Europe, Asia and in the rest of the world by 14%, 6% and 1% in the 2008
Quarter and 12%, 7% and 6% in the 2008 Period, respectively.
TA Division Net Sales
TAs sales grew 20% in the 2008 Quarter and 18% in the 2008 Period primarily as a result of TAs
new product introductions and the effect of foreign currency translation which benefited the TA
sales growth by approximately 5% in the 2008 Quarter and 4% in the 2008 Period. Instrument system
sales grew 14% in the 2008 Quarter and 16% in the 2008 Period. Instrument system sales represented
approximately 75% and 78% of sales in the 2008 Quarter and 2007 Quarter, respectively. Instrument
system sales represented approximately 78% and 79% of sales in the 2008 Period and 2007 Period,
respectively. TA service sales grew 38% in the 2008 Quarter and 27% in the 2008 Period and can be
primarily attributed to the higher installed base of customers and new service sales to the
customers of recently acquired companies. Geographically, sales growth for both the 2008 Quarter
and 2008 Period were predominantly in the U.S., Europe and Asia. The August 2007 acquisition of CSC
added 3% to TAs sales growth for the 2008 Quarter and 2% to TAs sales growth for the 2008 Period.
Gross Profit
Gross profit for the 2008 Quarter was $223.5 million compared to $200.4 million for the 2007
Quarter, an increase of $23.1 million, or 12%. Gross profit for the 2008 Period was $439.8 million
compared to $388.0 million for the 2007 Period, an increase of $51.8 million, or 13%. The increase
in gross profit for the 2008 Quarter and 2008 Period is generally consistent with the increase in
net sales. Gross profit as a percentage of sales decreased to 56.1% for the 2008 Quarter and
increased to 57.1% for the 2008 Period compared to 56.8% for both the 2007 Quarter and 2007 Period.
The 2008 Quarter decline and the 2008 Period increase in the gross profit percentage is primarily
due to increased comparative benefits of foreign currency translation and, to a lesser extent,
lower manufacturing costs, offset by the $8.7 million impact of the out-of-period adjustment
related to capitalized software amortization.
Selling and Administrative Expenses
Selling and administrative expenses for the 2008 Quarter and the 2007 Quarter were $111.9 million
and $102.2 million, respectively, an increase of 9%. The $9.7 million increase in total selling and
administrative expenses is primarily due to annual merit increases across most divisions, headcount
additions to support the increased sales volume and the comparative unfavorable impact of foreign
currency translation. Selling and administrative expenses for the 2008 Period and the 2007 Period
were $217.8 million and $196.1 million, respectively, an increase of 11%. The $21.7 million
increase in total selling and administrative expenses is primarily due to annual merit increases
across most divisions, headcount additions to support the increased sales volume and the
comparative unfavorable impact of foreign currency translation. As a percentage of net sales,
selling and administrative expenses were 28.1% for the 2008 Quarter and 28.3% for the 2008 Period
compared to 29.0% for the 2007 Quarter and 28.7% for the 2007 Period. Management expects selling
and administrative expenses to grow at a slightly lower rate for the remainder of 2008.
Research and Development Expenses
Research and development expenses were $22.2 million and $19.1 million for the 2008 Quarter and
2007 Quarter, respectively, an increase of $3.1 million, or 16%. Research and development expenses
were $42.0 million and $37.8 million for the 2008 Period and 2007 Period, respectively, an increase
of $4.2 million, or 11%. The increase in research and development expenses for both the 2008
Quarter and 2008 Period is primarily due to new product introduction costs, annual merit increases,
headcount additions and the comparative unfavorable impact of foreign currency translation.
21
Interest Expense
Interest expense was $9.8 million and $13.3 million for the 2008 Quarter and 2007 Quarter,
respectively. Interest expense was $21.0 million and $26.5 million for the 2008 Period and 2007
Period, respectively. The decrease in interest expense for both the 2008 Quarter and 2008 Period is
primarily attributable to a decrease in average borrowing costs during the 2008 Quarter and 2008
Period even though debt levels were $94.6 million higher at June 28, 2008 compared to June 30,
2007.
Interest Income
Interest income was $5.0 million and $6.9 million for the 2008 Quarter and 2007 Quarter,
respectively. Interest income was $11.9 million and $13.3 million for the 2008 Period and 2007
Period, respectively. The decrease in interest income is primarily due to lower yields on cash and
short-term investment balances even though cash and short-term investment levels were $286.4
million higher at June 28, 2008 compared to June 30, 2007.
Provision for Income Taxes
The Companys effective tax rates for the 2008 Quarter and 2007 Quarter were an income tax benefit
of 1.2% and an income tax expense of 15.1%, respectively. The Companys effective tax rates for the
2008 Period and 2007 Period were 8.8% and 15.1%, respectively. As described in the overview
section, the 2008 Quarter and 2008 Period contain out-of-period adjustments to correct errors
relating to capitalize software amortization and the income tax provision. The out-of-period
adjustments reduced the Companys effective tax rate by 18.1 percentage points and 8.9 percentage
points for the 2008 Quarter and 2008 Period, respectively. The remaining increase in the effective
tax rate for both the 2008 Quarter and 2008 Period is primarily attributable to proportionately
greater growth in net income in jurisdictions with comparatively high effective tax rates.
Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
Net income |
|
$ |
151,623 |
|
|
$ |
115,846 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
38,787 |
|
|
|
26,001 |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
15,509 |
|
|
|
13,796 |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
(13,373 |
) |
|
|
(1,312 |
) |
Change in accounts receivable |
|
|
22,164 |
|
|
|
5,136 |
|
|
|
|
|
|
|
|
|
|
Change in inventories |
|
|
(33,684 |
) |
|
|
(11,257 |
) |
|
|
|
|
|
|
|
|
|
Change in accounts payable and other current liabilities |
|
|
(10,275 |
) |
|
|
8,825 |
|
|
|
|
|
|
|
|
|
|
Change in deferred revenue and customer advances |
|
|
19,761 |
|
|
|
20,965 |
|
|
|
|
|
|
|
|
|
|
Other changes |
|
|
12,776 |
|
|
|
8,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
203,288 |
|
|
|
186,709 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
63,107 |
|
|
|
(204,292 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(33,061 |
) |
|
|
(129,438 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
14 |
|
|
|
2,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
233,348 |
|
|
$ |
(144,071 |
) |
|
|
|
|
|
|
|
Cash Flow from Operating Activities
Net cash provided by operating activities was $203.3 million and $186.7 million in the 2008 Period
and 2007 Period, respectively. The $16.6 million increase in net cash provided from operating
activities in the 2008 Period compared to the 2007 Period is 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:
|
|
|
The change in accounts receivable in the 2008 Period compared to the 2007 Period is
primarily attributable to the timing of payments made by customers and the higher sales
volume in the 2008 Period as compared |
22
|
|
|
to the 2007 Period. The days-sales-outstanding (DSO) was 70 days at both June 28, 2008 and
June 30, 2007. The effect of foreign currency added 3 days to the DSO at June 28, 2008. |
|
|
|
|
The change in inventories in the 2008 Period and the 2007 Period is attributable to
the increase in sales volume and an increase in ACQUITY and new mass spectrometry and TA
products. The Company expects these inventory levels to come down during the second half
of the year as sales of new products ramp up. |
|
|
|
|
The 2008 Period change in accounts payable and other current liabilities compared to
the 2007 Period is primarily attributed to a $12.6 million one-time transition pension
benefit payment into the Waters Employee Investment Plan during the 2008 Period associated
with the September 2007 amendment to freeze the pay credit accrual under the Waters
Retirement Plan and the Waters Retirement Restoration Plan. In addition, other current
liabilities changed as a result of the timing of payments to vendors. |
|
|
|
|
Net cash provided from deferred revenue and customer advances in both the 2008 Period
and 2007 Period was a result of the installed base of customers renewing annual service
contracts. |
Cash Used in Investing Activities
Net cash provided by investing activities totaled $63.1 million in the 2008 Period. Net cash used
in investing activities totaled $204.3 million in the 2007 Period. Additions to fixed assets and
capitalized software were $32.6 million in the 2008 Period and $27.3 million in the 2007 Period.
Capital spending and software capitalization additions during the 2008 and 2007 Periods were
consistent with historical capital spending trends. Future capital spending may increase
periodically in order to fund facility expansion to accommodate future sales growth. During the
2008 Period, the Company purchased $19.7 million of short-term investments while $115.4 million of
short-term investments matured. During the 2007 Period, the Company purchased $244.1 million of
short-term investments while $69.9 million of short-term investments matured. In the 2007 Period,
the Company made an equity investment in Thar Instruments, Inc., a privately held global leader in
the design, development and manufacture of analytical and preparative supercritical fluid
chromatography and supercritical fluid extraction systems, for $3.5 million in cash. The Company
also received $0.7 million from the former shareholders of Environmental Resources Associates, Inc.
in connection with the finalization of the purchase price in accordance with the purchase and sale
agreement.
Cash Used in Financing Activities
During the 2008 Period and 2007 Period, the Companys net debt borrowings increased by $99.8
million and decreased by $14.0 million, respectively.
In March 2008, the Company entered into the 2008 Credit Agreement that provides for a $150
million term loan facility. The Company used the proceeds of the term loan to repay amounts
outstanding under the revolving tranche of the Companys existing credit agreement. In January
2007, the Company entered into a credit agreement (the 2007 Credit Agreement) that provides for a
$500 million term loan facility and $600 million in revolving facilities, which include both a
letter of credit and a swingline subfacility. Both credit agreements mature on January 11, 2012 and
require no scheduled prepayments before that date.
The interest rates applicable to the 2008 and 2007 Credit Agreements 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 137.5 basis points for LIBOR rate loans and range between zero basis points and 37.5
basis points for base rate loans. The 2008 Credit Agreement contains provisions which are similar
in nature to those in the 2007 Credit Agreement.
As of June 28, 2008, the Company had a total of $950.0 million borrowed under the 2008 and
2007 Credit Agreements that mature in 2012. The Company has classified $300.0 million of the total
debt as short-term debt since it is the Companys intention to repay this amount within the next
twelve months. As of June 28, 2008, the total amount available to borrow under the 2007 and 2008
Credit Agreements was $298.5 million after outstanding letters of credit.
In February 2007, the Companys Board of Directors authorized the Company to repurchase up to
$500.0 million of its outstanding common stock over a two-year period. During the 2008 Period, the
Company repurchased 2.5
23
million shares at a cost of $152.4 million under this program, leaving $181.5 million authorized
for future repurchases. During the 2007 Period, the Company repurchased 2.7 million shares at a
cost of $156.5 million under the February 2007 program and a previously announced program.
The Company received $16.2 million and $32.2 million of proceeds from the exercise of stock
options and the purchase of shares pursuant to employee stock purchase plan in the 2008 Period and
2007 Period, respectively.
The Company believes that the cash and cash equivalents balance of $830.7 million at the end
of the 2008 Period 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 external sources, will
be sufficient to meet future operating and investing needs for the foreseeable future.
Contractual Obligations and Commercial Commitments
The following is a summary of the Companys contractual obligations as of June 28, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year |
|
Contractual Obligations |
|
Total |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
After 2013 |
|
Notes payable and debt(1) |
|
$ |
334,020 |
|
|
$ |
334,020 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term debt(1) |
|
|
650,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
650,000 |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
86,198 |
|
|
|
12,452 |
|
|
|
20,506 |
|
|
|
16,653 |
|
|
|
12,569 |
|
|
|
9,580 |
|
|
|
5,267 |
|
|
|
9,171 |
|
Other long-term liabilities(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,070,218 |
|
|
$ |
346,472 |
|
|
$ |
20,506 |
|
|
$ |
16,653 |
|
|
$ |
12,569 |
|
|
$ |
659,580 |
|
|
$ |
5,267 |
|
|
$ |
9,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The interest rates applicable to the 2008 & 2007 Credit Agreements 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 137.5 basis points for LIBOR rate loans
and range between zero basis points and 37.5 basis points for base rate
loans. At current and long-term debt levels and interest rates consistent
with those at June 28, 2008, the Companys interest expense would be
approximately $42.0 million annually, which is not disclosed in the above
table. |
|
(2) |
|
Does not include normal purchases made in the ordinary course of business. |
A summary of the Companys commercial commitments is included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2007. The Company reviewed its commercial commitments
as of June 28, 2008 and determined that there were no material changes from the ones set forth in
the Form 10-K.
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, will not
be material to the Companys financial position or results of operations.
During the 2008 Period, the Company contributed $0.7 million to the Companys U.S. defined
benefit plans. During fiscal year 2008, the Company expects to contribute a total of approximately
$3.5 million to $7.0 million to the Companys defined benefit plans.
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.
24
Critical Accounting Policies and Estimates
In the Companys Annual Report on Form 10-K for the year ended December 31, 2007, the Companys
most critical accounting policies and estimates upon which its financial status depends were
identified as those relating to revenue recognition; loss provisions on accounts receivable and
inventory; valuation of long-lived assets, intangible assets and goodwill; warranty; income taxes;
pension and other postretirement benefit obligations; litigation and stock-based compensation. The
Company reviewed its policies and determined that those policies remain the Companys most critical
accounting policies for the 2008 Period. The Company did not make any changes in those policies
during the 2008 Period.
New Accounting Pronouncements
Refer to Note 12, Recent Accounting Standards Changes and Developments, in the Condensed Notes to
Consolidated Financial Statements.
Special Note Regarding Forward-Looking Statements
Certain of the statements in this quarterly report on Form 10-Q, including the information
incorporated by reference herein, may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the Exchange Act), with respect to 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. Many of these statements appear, in particular,
under the heading Managements Discussion and Analysis of Financial Condition and Results of
Operations in Part I, Item 2 of this quarterly report on Form 10-Q. Statements that are not
statements of historical fact may be deemed forward-looking statements. You can identify these
forward-looking statements by the use of the words believes, anticipates, plans, expects,
may, will, would, intends, appears, 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, the impact of changes in accounting principles and practices or tax rates; the ability
to successfully integrate acquired businesses; fluctuations in capital expenditures by the
Companys 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 and loss of market share; 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; changes in distribution of the Companys products; 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. Such factors and others
are discussed in Part II, Item 1A of this quarterly report on Form 10-Q and under the heading Risk
Factors under Part I, Item 1A of the Companys Form 10-K for the year ended December 31, 2007. The
forward-looking statements included in this quarterly report on Form 10-Q represent the Companys
estimates or views as of the date of this quarterly report and should not be relied upon as
representing the Companys estimates or views as of any date subsequent to the date of this
quarterly report. 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 3: Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the Companys market risk during the six months ended June 28,
2008. For information regarding the Companys market risk, refer to Item 7a of Part II of the
Companys Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange
Commission (SEC) on February 29, 2008.
25
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Companys chief executive officer and chief financial officer (principal executive and
principal financial officer), with the participation of management, 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 quarterly report on Form 10-Q. Based
on this evaluation, the Companys chief executive officer and chief financial officer concluded
that the Companys disclosure controls and procedures were effective as of June 28, 2008 and
(1) designed to ensure that information required to be disclosed by the Company, including its
consolidated subsidiaries, in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Companys management, including its chief executive officer and
chief financial officer, to allow timely decisions regarding the required disclosure and
(2) designed to 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.
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 June 28, 2008 that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
Part II: Other Information
Item 1: Legal Proceedings
There have been no material changes in the Companys legal proceedings during the six months ended
June 28, 2008 as described in Item 3 of Part I of the Companys Form 10-K for the year ended
December 31, 2007, as filed with the SEC on February 29, 2008.
Item 1A: Risk Factors
Please read Risk Factors under Part I, Item 1A in the Companys Annual Report on Form 10-K for
the fiscal year end December 31, 2007, some of which are updated below. These risks are not the
only ones facing the Company. Please also see Special Note Regarding Forward Looking Statements
on page 25. Additional risks and uncertainties not currently known to the Company or that the
Company currently deems to be immaterial also may materially adversely affect the Companys
business, financial condition and its operating results.
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, rheometry and calorimetry product lines, is highly competitive
and subject to rapid changes in technology. The Company encounters competition from several
international instrument manufacturers and other companies in both domestic and foreign markets.
Some competitors have instrument businesses that are generally more diversified than the Companys
business, but are typically less focused on the Companys chosen 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% of the Companys net sales in 2007 were to worldwide pharmaceutical and
biotechnology industries, which may be periodically subject to unfavorable market conditions and
consolidations. There has been no material change in this percentage of net sales to these
industries in the first six months of 2008. Unfavorable industry conditions could have a material
adverse effect on the Companys results of operations or financial condition.
26
Risk of Disruption
The Company manufactures LC instruments at facilities in Milford, Massachusetts and Singapore;
chemistry 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; rheometry products at its facilities in
New Castle, Delaware and Crawley, England and other instruments and consumables at various other
locations as a result of acquisitions in 2006 and 2007. 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 70% of the Companys net sales in both the first six months of 2008 and 2007,
respectively, were outside the United States and were primarily denominated in foreign currencies.
In addition, the Company has considerable manufacturing operations in Ireland, the United Kingdom
and Singapore. 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.
Additionally, the U.S. dollar value of the Companys net sales, cost of sales and operating
expenses varies with currency exchange rate fluctuations. Significant increases or decreases in the
value of the U.S. dollar relative to certain foreign currencies could have a material adverse
effect or benefit to 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. There has been no change in key management
employees in the first six months of 2008. 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 grated there under 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. There has
been no material change in the claims against the Companys intellectual property rights or patents
in the first six months of 2008. 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 and
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, rheometry and calorimetry products; the timing and level of capital expenditures
of the Companys customers; changes in government regulations; funding available to academic and
government institutions; general economic conditions and 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.
27
Reliance on Outside Manufacturers
Certain components or modules of the Companys LC and MS instruments are manufactured by
long-standing outside contractors. In April 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.
Risk in Unexpected Shifts in Taxable Income between Tax Jurisdictions
The Company is subject to a range of income tax rates, from 0% to in excess of 35%, depending on
specific tax jurisdictions around the world. The Company typically generates a substantial portion
of its taxable income in the fourth quarter of each fiscal year. Shifts in actual taxable income
from previous quarters projections due to factors, including, but not limited to, changes in
volume and foreign currency translation rates, could have an adverse effect or benefit to the
Companys income tax expense and results of operations.
Levels of Debt and Debt Service Requirements
The Company had approximately $984.0 million in debt and $830.7 million in cash and cash
equivalents as of June 28, 2008. As of June 28, 2008, the Company also has the ability to borrow an
additional $298.5 million from its existing credit facilities. Most of the Companys debt is in the
U.S.. While there is a substantial cash requirement in the U.S. to fund operations and capital
expenditures, service debt interest obligations, finance potential acquisitions and continue
authorized stock repurchase programs, a majority of the Companys cash is maintained and generated
from foreign operations. The Companys financial condition and results of operations could be
adversely impacted if the Company is unable to maintain a sufficient level of cash flow in the U.S.
to address these requirements through cash from U.S. operations, efficient and timely repatriation
of cash from overseas and other sources obtained at an acceptable cost.
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases by the Company during the three months
ended June 28, 2008 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 |
|
per Share |
|
Programs (1) |
|
the Programs |
March 30 to April 26, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
259,113 |
|
April 27 to May 24, 2008 |
|
|
845 |
|
|
|
62.36 |
|
|
|
845 |
|
|
|
206,419 |
|
May 25 to June 28, 2008 |
|
|
405 |
|
|
|
61.44 |
|
|
|
405 |
|
|
|
181,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,250 |
|
|
|
62.06 |
|
|
|
1,250 |
|
|
|
181,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company purchased 1.3 million shares of its outstanding common
stock in the 2008 Quarter in open market transactions pursuant to a
repurchase program that was announced in February 2007 (the 2007
Program). The 2007 Program authorized the repurchase of up to $500.0
million of common stock in open market transactions over a two-year
period. |
Item 3:
Defaults Upon Senior Securities
Not Applicable
Item 4:
Submission of Matters to a Vote of Security Holders
The Companys annual meeting of stockholders was held on May 14, 2008, at which the following
matters were submitted to a vote of security holders: 1) the election of directors of the Company
and 2) ratification of the selection of PricewaterhouseCoopers LLP as the Companys independent
registered public accounting firm for the
28
fiscal year ending December 31, 2008. As of March 20, 2008, the record date for the meeting, there
were 100,075,626 shares of the Companys common stock entitled to vote at the meeting. At the
meeting, the holders of 90,589,036 shares were represented in person or by proxy, constituting a
quorum. At that meeting, the vote with respect to the matters proposed to the stockholders was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matter |
|
For |
|
|
Withheld |
|
|
Against |
|
|
Abstain |
|
Election of Directors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua Bekenstein |
|
|
74,549,946 |
|
|
|
16,039,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Berendt, Ph.D. |
|
|
74,824,883 |
|
|
|
15,764,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas A. Berthiaume |
|
|
74,188,184 |
|
|
|
16,400,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward Conard |
|
|
74,240,139 |
|
|
|
16,348,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laurie H. Glimcher, M.D. |
|
|
75,420,679 |
|
|
|
15,168,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher A. Kuebler |
|
|
75,488,488 |
|
|
|
15,100,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Miller |
|
|
74,724,090 |
|
|
|
15,864,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JoAnn A. Reed |
|
|
75,538,832 |
|
|
|
15,050,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas P. Salice |
|
|
74,224,229 |
|
|
|
16,364,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratification of the selection of PricewaterhouseCoopers LLP
as the Companys independent registered public accounting
firm for the fiscal year ending December 31, 2008 |
|
|
88,734,182 |
|
|
|
|
|
|
|
1,004,725 |
|
|
|
850,129 |
|
Proposals 1 and 2 are disclosed in detail in the Companys definitive proxy statement as filed with
the SEC on March 31, 2008.
Item 5:
Other Information
Not Applicable
Item 6:
Exhibits
|
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|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
|
|
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. |
|
|
|
* |
|
This exhibit shall not be deemed filed for purposes of Section 18 of the Exchange Act, or
otherwise subject to the liability of that section, nor shall it be deemed incorporated by
reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act,
whether made before or after the date hereof and irrespective of any general incorporation language
in any filing, except to the extent the Company specifically incorporates it by reference. |
29
SIGNATURE
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.
|
|
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|
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Waters Corporation |
|
|
|
|
|
|
|
|
|
/s/ John Ornell
John Ornell
Vice President, Finance and
Administration and Chief Financial Officer
|
|
|
Date: August 1, 2008
30