filings.toolsItem 8. Financial Statements and Supplementary Data
165K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control — Integrated Framework 2013, our management, including our chief executive officer and chief financial officer, concluded that our internal control over financial reporting was effective as of December 31, 2014.
The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Waters Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of Waters Corporation and its subsidiaries at December 31, 2014 and December 31, 2013 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 27, 2015
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WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| (In thousands, except per share data) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 422,177 | $ | 440,796 | ||||
| Investments | 1,633,211 | 1,362,874 | ||||||
| Accounts receivable, net | 433,616 | 430,985 | ||||||
| Inventories | 246,430 | 242,800 | ||||||
| Other current assets | 118,302 | 78,800 | ||||||
| Total current assets | 2,853,736 | 2,556,255 | ||||||
| Property, plant and equipment, net | 321,583 | 324,932 | ||||||
| Intangible assets, net | 232,371 | 239,112 | ||||||
| Goodwill | 354,838 | 350,350 | ||||||
| Other assets | 115,406 | 111,980 | ||||||
| Total assets | $ | 3,877,934 | $ | 3,582,629 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Notes payable and debt | $ | 225,243 | $ | 133,346 | ||||
| Accounts payable | 65,704 | 64,961 | ||||||
| Accrued employee compensation | 47,198 | 43,305 | ||||||
| Deferred revenue and customer advances | 129,706 | 128,056 | ||||||
| Accrued income taxes | 15,143 | 19,770 | ||||||
| Accrued warranty | 13,266 | 12,962 | ||||||
| Other current liabilities | 85,335 | 85,132 | ||||||
| Total current liabilities | 581,595 | 487,532 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt | 1,240,000 | 1,190,000 | ||||||
| Long-term portion of retirement benefits | 85,230 | 74,723 | ||||||
| Long-term income tax liabilities | 20,397 | 25,436 | ||||||
| Other long-term liabilities | 56,046 | 41,765 | ||||||
| Total long-term liabilities | 1,401,673 | 1,331,924 | ||||||
| Total liabilities | 1,983,268 | 1,819,456 | ||||||
| Commitments and contingencies (Notes 8, 9, 10, 11 and 14) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at December 31, 2014 and December 31, 2013 | — | — | ||||||
| Common stock, par value $0.01 per share, 400,000 shares authorized, 156,716 and 155,246 shares issued, 83,147 and 84,819 shares outstanding at December 31, 2014 and December 31, 2013, respectively | 1,567 | 1,552 | ||||||
| Additional paid-in capital | 1,392,494 | 1,270,608 | ||||||
| Retained earnings | 4,394,513 | 3,962,893 | ||||||
| Treasury stock, at cost, 73,569 and 70,427 shares at December 31, 2014 and December 31, 2013, respectively | (3,815,203 | ) | (3,477,759 | ) | ||||
| Accumulated other comprehensive (loss) income | (78,705 | ) | 5,879 | |||||
| Total stockholders’ equity | 1,894,666 | 1,763,173 | ||||||
| Total liabilities and stockholders’ equity | $ | 3,877,934 | $ | 3,582,629 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
| Product sales | $ | 1,346,729 | $ | 1,312,503 | $ | 1,280,507 | ||||||
| Service sales | 642,615 | 591,715 | 563,134 | |||||||||
| Total net sales | 1,989,344 | 1,904,218 | 1,843,641 | |||||||||
| Cost of product sales | 549,121 | 526,721 | 501,660 | |||||||||
| Cost of service sales | 275,792 | 256,735 | 235,954 | |||||||||
| Total cost of sales | 824,913 | 783,456 | 737,614 | |||||||||
| Gross profit | 1,164,431 | 1,120,762 | 1,106,027 | |||||||||
| Selling and administrative expenses | 512,707 | 492,965 | 477,270 | |||||||||
| Research and development expenses | 107,726 | 100,536 | 96,004 | |||||||||
| Acquired in-process research and development (Note 2) | 15,456 | — | — | |||||||||
| Purchased intangibles amortization | 10,634 | 9,918 | 13,829 | |||||||||
| Litigation provisions (Note 10) | — | — | 7,434 | |||||||||
| Operating income | 517,908 | 517,343 | 511,490 | |||||||||
| Other expense (Note 3) | — | (1,575 | ) | — | ||||||||
| Interest expense | (34,191 | ) | (30,050 | ) | (28,073 | ) | ||||||
| Interest income | 7,023 | 4,387 | 4,208 | |||||||||
| Income from operations before income taxes | 490,740 | 490,105 | 487,625 | |||||||||
| Provision for income taxes | 59,120 | 40,102 | 26,182 | |||||||||
| Net income | $ | 431,620 | $ | 450,003 | $ | 461,443 | ||||||
| Net income per basic common share | $ | 5.12 | $ | 5.27 | $ | 5.25 | ||||||
| Weighted-average number of basic common shares | 84,358 | 85,426 | 87,841 | |||||||||
| Net income per diluted common share | $ | 5.07 | $ | 5.20 | $ | 5.19 | ||||||
| Weighted-average number of diluted commonshares and equivalents | 85,151 | 86,546 | 88,979 |
The accompanying notes are an integral part of the consolidated financial statements.
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WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| Net income | $ | 431,620 | $ | 450,003 | $ | 461,443 | ||||||
| Other comprehensive (loss) income: | ||||||||||||
| Foreign currency translation | (61,728 | ) | 11,843 | 17,279 | ||||||||
| Unrealized (losses) gains on investments before reclassifications | (532 | ) | 134 | (27 | ) | |||||||
| Amounts reclassified to other expense | — | 1,575 | — | |||||||||
| Amounts reclassified to selling and administrative expenses | — | — | (968 | ) | ||||||||
| Unrealized (losses) gains on investments before income taxes | (532 | ) | 1,709 | (995 | ) | |||||||
| Income tax benefit (expense) | 43 | (639 | ) | 348 | ||||||||
| Unrealized (losses) gains on investments, net of tax | (489 | ) | 1,070 | (647 | ) | |||||||
| Retirement liability adjustment before reclassifications | (34,797 | ) | 27,888 | (14,147 | ) | |||||||
| Amounts reclassified to selling and administrative expenses | 2,886 | 3,678 | 3,055 | |||||||||
| Retirement liability adjustment | (31,911 | ) | 31,566 | (11,092 | ) | |||||||
| Income tax benefit (expense) | 9,544 | (12,205 | ) | 4,120 | ||||||||
| Retirement liability adjustment, net of tax | (22,367 | ) | 19,361 | (6,972 | ) | |||||||
| Other comprehensive (loss) income | (84,584 | ) | 32,274 | 9,660 | ||||||||
| Comprehensive income | $ | 347,036 | $ | 482,277 | $ | 471,103 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
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WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In thousands) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 431,620 | $ | 450,003 | $ | 461,443 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Provisions for doubtful accounts on accounts receivable | 2,037 | 3,656 | 2,256 | |||||||||
| Stock-based compensation | 32,998 | 31,708 | 29,183 | |||||||||
| Deferred income taxes | 1,583 | 169 | (52,219 | ) | ||||||||
| Depreciation | 46,393 | 38,165 | 37,422 | |||||||||
| Amortization of intangibles | 47,838 | 41,530 | 31,409 | |||||||||
| Building impairment | 4,718 | — | — | |||||||||
| In-process research and development and other non-cash charges | 16,481 | — | — | |||||||||
| Change in operating assets and liabilities, net of acquisitions: | ||||||||||||
| Increase in accounts receivable | (29,435 | ) | (35,233 | ) | (39,836 | ) | ||||||
| Increase in inventories | (15,984 | ) | (11,389 | ) | (10,930 | ) | ||||||
| (Increase) decrease in other current assets | (5,784 | ) | 5,033 | (7,136 | ) | |||||||
| (Increase) decrease in other assets | (14,409 | ) | (11,467 | ) | 1,473 | |||||||
| (Decrease) increase in accounts payable and other current liabilities | (13,687 | ) | (28,127 | ) | 563 | |||||||
| Increase in deferred revenue and customer advances | 9,566 | 8,512 | 11,005 | |||||||||
| Decrease in other liabilities | (2,287 | ) | (7,684 | ) | (15,353 | ) | ||||||
| Net cash provided by operating activities | 511,648 | 484,876 | 449,280 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Additions to property, plant, equipment and software capitalization | (91,122 | ) | (118,450 | ) | (104,749 | ) | ||||||
| Business acquisitions, net of cash acquired | (27,008 | ) | (41,395 | ) | (31,016 | ) | ||||||
| Payments for intellectual property licenses | (15,126 | ) | — | — | ||||||||
| Purchase of investments | (2,196,153 | ) | (2,972,116 | ) | (1,815,988 | ) | ||||||
| Maturities and sales of investments | 1,925,816 | 2,667,232 | 1,655,359 | |||||||||
| Proceeds from sale of property | 1,563 | — | — | |||||||||
| Net cash used in investing activities | (402,030 | ) | (464,729 | ) | (296,394 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from debt issuances | 381,673 | 1,032,209 | 218,324 | |||||||||
| Payments on debt | (239,776 | ) | (886,644 | ) | (32,107 | ) | ||||||
| Payments of debt issuance costs | (1,400 | ) | (2,039 | ) | (497 | ) | ||||||
| Proceeds from stock plans | 73,849 | 68,958 | 28,869 | |||||||||
| Purchase of treasury shares | (337,444 | ) | (301,580 | ) | (295,878 | ) | ||||||
| Excess tax benefit related to stock option plans | 15,703 | 15,842 | 10,568 | |||||||||
| Proceeds from derivative contracts | 174 | 8,666 | 4,186 | |||||||||
| Net cash used in financing activities | (107,221 | ) | (64,588 | ) | (66,535 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (21,016 | ) | 4,202 | 10,694 | ||||||||
| (Decrease) increase in cash and cash equivalents | (18,619 | ) | (40,239 | ) | 97,045 | |||||||
| Cash and cash equivalents at beginning of period | 440,796 | 481,035 | 383,990 | |||||||||
| Cash and cash equivalents at end of period | $ | 422,177 | $ | 440,796 | $ | 481,035 | ||||||
| Supplemental cash flow information: | ||||||||||||
| Income taxes paid | $ | 60,971 | $ | 55,928 | $ | 59,446 | ||||||
| Interest paid | $ | 34,332 | $ | 29,563 | $ | 28,305 |
The accompanying notes are an integral part of the consolidated financial statements.
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WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Number of Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| Balance December 31, 2011 | 152,757 | $ | 1,528 | $ | 1,089,959 | $ | 3,051,447 | $ | (2,880,301 | ) | $ | (36,055 | ) | $ | 1,226,578 | |||||||||||||
| Net income | — | — | — | 461,443 | — | — | 461,443 | |||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 9,660 | 9,660 | |||||||||||||||||||||
| Issuance of common stock for employees: | ||||||||||||||||||||||||||||
| Employee Stock Purchase Plan | 66 | 1 | 4,660 | — | — | — | 4,661 | |||||||||||||||||||||
| Stock options exercised | 630 | 6 | 24,202 | — | — | — | 24,208 | |||||||||||||||||||||
| Tax benefit related to stock option plans | — | — | 10,568 | — | — | — | 10,568 | |||||||||||||||||||||
| Increase in valuation allowance | — | — | (2,354 | ) | — | — | — | (2,354 | ) | |||||||||||||||||||
| Treasury stock | — | — | — | — | (295,878 | ) | — | (295,878 | ) | |||||||||||||||||||
| Stock-based compensation | 243 | 2 | 28,469 | — | — | — | 28,471 | |||||||||||||||||||||
| Balance December 31, 2012 | 153,696 | $ | 1,537 | $ | 1,155,504 | $ | 3,512,890 | $ | (3,176,179 | ) | $ | (26,395 | ) | $ | 1,467,357 | |||||||||||||
| Net income | — | — | — | 450,003 | — | — | 450,003 | |||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 32,274 | 32,274 | |||||||||||||||||||||
| Issuance of common stock for employees: | ||||||||||||||||||||||||||||
| Employee Stock Purchase Plan | 58 | 1 | 4,816 | — | — | — | 4,817 | |||||||||||||||||||||
| Stock options exercised | 1,281 | 13 | 64,128 | — | — | — | 64,141 | |||||||||||||||||||||
| Tax benefit related to stock option plans | — | — | 15,842 | — | — | — | 15,842 | |||||||||||||||||||||
| Increase in valuation allowance | — | — | (892 | ) | — | — | — | (892 | ) | |||||||||||||||||||
| Treasury stock | — | — | — | — | (301,580 | ) | — | (301,580 | ) | |||||||||||||||||||
| Stock-based compensation | 211 | 1 | 31,210 | — | — | — | 31,211 | |||||||||||||||||||||
| Balance December 31, 2013 | 155,246 | $ | 1,552 | $ | 1,270,608 | $ | 3,962,893 | $ | (3,477,759 | ) | $ | 5,879 | $ | 1,763,173 | ||||||||||||||
| Net income | — | — | — | 431,620 | — | — | 431,620 | |||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (84,584 | ) | (84,584 | ) | |||||||||||||||||||
| Issuance of common stock for employees: | ||||||||||||||||||||||||||||
| Employee Stock Purchase Plan | 54 | 1 | 5,027 | — | — | — | 5,028 | |||||||||||||||||||||
| Stock options exercised | 1,185 | 12 | 68,809 | — | — | — | 68,821 | |||||||||||||||||||||
| Tax benefit related to stock option plans | — | — | 15,703 | — | — | — | 15,703 | |||||||||||||||||||||
| Treasury stock | — | — | — | — | (337,444 | ) | — | (337,444 | ) | |||||||||||||||||||
| Stock-based compensation | 231 | 2 | 32,347 | — | — | — | 32,349 | |||||||||||||||||||||
| Balance December 31, 2014 | 156,716 | $ | 1,567 | $ | 1,392,494 | $ | 4,394,513 | $ | (3,815,203 | ) | $ | (78,705 | ) | $ | 1,894,666 | |||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Description of Business and Organization
Waters Corporation (“Waters®” or the “Company”) is an analytical instrument manufacturer that primarily designs, manufactures, sells and services, through its Waters Division, high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC®” and together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together (“LC-MS”) and sold as integrated instrument systems using a common software platform. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS instruments are used in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing. LC-MS instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. Through its TA Division (“TA®”), the Company primarily designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments, which are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of software-based products that interface with the Company’s instruments, as well as other suppliers’ instruments, and are typically purchased by customers as part of the instrument system.
2 Basis of Presentation and Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, product returns and allowances, bad debts, inventory valuation, equity investments, goodwill and intangible assets, warranty and installation provisions, income taxes, contingencies, litigation, retirement plan obligations and stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions or conditions.
Risks and Uncertainties
The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, most of which are wholly owned. The Company consolidates entities in which it owns or controls fifty percent or more of the voting shares. All material inter-company balances and transactions have been eliminated.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Translation of Foreign Currencies
For most of the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets. The Company’s net sales derived from operations outside the United States were 70% in 2014 and 71% in both 2013 and 2012. Gains and losses from foreign currency transactions are included in net income in the consolidated statements of operations and were not material for the years presented.
Seasonality of Business
The Company typically experiences an increase in sales in the fourth quarter, as a result of purchasing habits for capital goods of customers that tend to exhaust their spending budgets by calendar year end.
Cash, Cash Equivalents and Investments
Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, primarily in bank deposits, U.S. and U.K. treasury bill money market funds and commercial paper. Investments with longer maturities are classified as investments, and are held primarily in U.S. treasury bills, U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities.
Investments are classified as available-for-sale in accordance with the accounting standards for investments in debt and equity securities. All available-for-sale securities are recorded at fair market value and any unrealized holding gains and losses, to the extent deemed temporary, are included in accumulated other comprehensive income in stockholders’ equity, net of the related tax effects. If any adjustment to fair value reflects a decline in the value of the investment, the Company considers all available evidence to evaluate the extent to which the decline is “other than temporary” and marks the investment to market through a charge to the statement of operations. The Company classifies its investments exclusive of those categorized as cash equivalents.
The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than U.S. dollars. As of December 31, 2014 and 2013, $1,971 million out of $2,055 million and $1,738 million out of $1,804 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries and may be subject to material tax effects on distribution to U.S. legal entities.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is based on a number of factors, including historical experience and the customer’s credit-worthiness. The allowance for doubtful accounts is reviewed on at least a quarterly basis. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged against the allowance when the Company determines it is probable that the receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its customers. The allowance for sales returns is the best estimate of the amount of future product returns related to current period revenue and is based on historical experience.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of the activity of the Company’s allowance for doubtful accounts and sales returns for the years ended December 31, 2014, 2013 and 2012 (in thousands):
| Balance at Beginning of Period | Additions | Deductions | Balance at End of Period | |||||||||||||
| Allowance for Doubtful Accounts and Sales Returns: | ||||||||||||||||
| 2014 | $ | 7,057 | $ | 7,551 | $ | (7,429 | ) | $ | 7,179 | |||||||
| 2013 | $ | 8,240 | $ | 4,386 | $ | (5,569 | ) | $ | 7,057 | |||||||
| 2012 | $ | 8,584 | $ | 7,298 | $ | (7,642 | ) | $ | 8,240 |
Concentration of Credit Risk
The Company sells its products and services to a significant number of large and small customers throughout the world, with net sales to the pharmaceutical industry of approximately 53% in 2014, 52% in 2013 and 53% in 2012. None of the Company’s individual customers accounted for more than 2% of annual Company sales in 2014, 2013 or 2012. The Company performs continuing credit evaluations of its customers and generally does not require collateral, but in certain circumstances may require letters of credit or deposits. Historically, the Company has not experienced significant bad debt losses.
Inventory
The Company values all of its inventories at the lower of cost or market on a first-in, first-out basis (“FIFO”).
Income Taxes
Deferred income taxes are recognized for temporary differences between the financial statement and income tax basis of assets and liabilities using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Appropriate short-term and long-term liabilities have also been recorded to recognize uncertain tax return reporting positions.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to expense, while the costs of significant improvements are capitalized. Depreciation is provided using the straight-line method over the following estimated useful lives: buildings — fifteen to thirty years; building improvements — five to ten years; leasehold improvements — the shorter of the economic useful life or life of lease; and production and other equipment — three to ten years. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the consolidated balance sheets and related gains or losses are reflected in the consolidated statements of operations.
Asset Impairments
The Company reviews its long-lived assets for impairment in accordance with the accounting standards for property, plant and equipment. Whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable, the Company evaluates the fair value of the asset, relying on a number of factors, including, but not limited to, operating results, business plans, economic projections and anticipated future cash flows. Any change in the carrying amount of an asset as a result of the Company’s evaluation is recorded in the consolidated statements of operations.
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Business Combinations and Asset Acquisitions
The Company accounts for business acquisitions under the accounting standards for business combinations. The results of each acquisition are included in the Company’s consolidated results as of the acquisition date and the purchase price of an acquisition is allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values. Any excess of the fair value consideration transferred over the estimated fair values of the net assets acquired is recognized as goodwill. Acquired in-process research and development (“IPR&D”) included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred and acquired IPR&D is tested for impairment until completion of the acquired programs. Upon commercialization, this indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life, subject to periodic impairment reviews. If the research and development project is abandoned, the indefinite-lived asset is charged to expense. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.
The Company also acquires intellectual property through licensing arrangements. These arrangements often require upfront payments and may include additional milestone or royalty payments, contingent upon certain future events. IPR&D acquired in an asset acquisition (as opposed to a business combination) is expensed immediately unless there is an alternative future use. Subsequent payments made for the achievement of milestones are evaluated to determine whether they have an alternative future use or should be expensed. Payments made to third parties subsequent to commercialization are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.
Goodwill and Other Intangible Assets
The Company tests for goodwill impairment using a fair-value approach at the reporting unit level annually, or earlier, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Additionally, the Company performs an annual goodwill impairment assessment for its reporting units as of January 1 each year. The goodwill and other intangible assets accounting standards define a reporting unit as an operating segment, or one level below an operating segment, if discrete financial information is prepared and reviewed by management. For goodwill impairment review purposes, the Company has two reporting units, the Waters Division and TA Division. Goodwill is allocated to the reporting units at the time of acquisition. Under the impairment test, if a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the extent that the carrying amount of goodwill exceeds the implied fair value of the goodwill. The fair value of reporting units was estimated using a discounted cash flows technique, which includes certain management assumptions, such as estimated future cash flows, estimated growth rates and discount rates.
The Company’s intangible assets include purchased technology; capitalized software development costs; costs associated with acquiring Company patents, trademarks and intellectual properties, such as licenses; debt issuance costs and acquired IPR&D. Purchased intangibles are recorded at their fair market values as of the acquisition date and amortized over their estimated useful lives, ranging from one to fifteen years. Other intangibles are amortized over a period ranging from one to ten years. Debt issuance costs are amortized over the life of the related debt. Acquired IPR&D is amortized from the date of completion of the acquired program over its estimated useful life. IPR&D and indefinite-lived intangibles are tested annually for impairment.
Software Development Costs
The Company capitalizes internal and external software development costs for products offered for sale in accordance with the accounting standards for the costs of software to be sold, leased, or otherwise marketed.
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Capitalized costs are amortized to cost of sales over the period of economic benefit, which approximates a straight-line basis over the estimated useful lives of the related software products, generally three to ten years. The Company capitalized $33 million and $35 million of direct expenses that were related to the development of software in 2014 and 2013, respectively. Net capitalized software included in intangible assets totaled $138 million and $151 million at December 31, 2014 and 2013, respectively. See Note 7, “Goodwill and Other Intangibles”.
The Company capitalizes internal software development costs for internal use in accordance with the accounting standards for goodwill and other intangible assets. Capitalized internal software development costs are amortized over the period of economic benefit, which approximates a straight-line basis over ten years. Net capitalized internal software included in property, plant and equipment totaled $3 million at both December 31, 2014 and 2013.
Other Investments
The Company accounts for its investments that represent less than twenty percent ownership, and for which the Company does not have significant influence, using the accounting standards for investments in debt and equity securities. Investments for which the Company does not have the ability to exercise significant influence, and for which there is not a readily determinable market value, are accounted for under the cost method of accounting. The Company periodically evaluates the carrying value of its investments accounted for under the cost method of accounting and carries them at the lower of cost or estimated net realizable value. For investments in which the Company owns or controls between twenty and forty-nine percent of the voting shares, or over which it exerts significant influence over operating and financial policies, the equity method of accounting is used. The Company’s share of net income or losses of equity investments is included in the consolidated statements of operations and was not material in any period presented. All long-term investments at December 31, 2014 and 2013 are included in other assets and amounted to $2 million and $3 million, respectively.
Fair Value Measurements
In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of December 31, 2014 and 2013. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions.
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The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2014 (in thousands):
| Total at December 31, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| U.S. Treasury securities | $ | 626,772 | $ | — | $ | 626,772 | $ | — | ||||||||
| Foreign government securities | 24,998 | — | 24,998 | — | ||||||||||||
| Corporate debt securities | 984,105 | — | 984,105 | — | ||||||||||||
| Time deposits | 64,240 | — | 64,240 | — | ||||||||||||
| Equity securities | 147 | — | 147 | — | ||||||||||||
| Other cash equivalents | 29,000 | — | 29,000 | — | ||||||||||||
| Waters 401(k) Restoration Plan assets | 33,935 | — | 33,935 | — | ||||||||||||
| Foreign currency exchange contract agreements | 123 | — | 123 | — | ||||||||||||
| Total | $ | 1,763,320 | $ | — | $ | 1,763,320 | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration | $ | 3,612 | $ | — | $ | — | $ | 3,612 | ||||||||
| Foreign currency exchange contract agreements | 651 | — | 651 | — | ||||||||||||
| Total | $ | 4,263 | $ | — | $ | 651 | $ | 3,612 | ||||||||
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2013 (in thousands):
| Total at December 31, 2013 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| U.S. Treasury securities | $ | 556,539 | $ | — | $ | 556,539 | $ | — | ||||||||
| Foreign government securities | 139,670 | — | 139,670 | — | ||||||||||||
| Corporate debt securities | 629,434 | — | 629,434 | — | ||||||||||||
| Time deposits | 74,050 | — | 74,050 | — | ||||||||||||
| Equity securities | 147 | — | 147 | — | ||||||||||||
| Other cash equivalents | 62,851 | — | 62,851 | — | ||||||||||||
| Waters 401(k) Restoration Plan assets | 31,203 | — | 31,203 | — | ||||||||||||
| Foreign currency exchange contract agreements | 929 | — | 929 | — | ||||||||||||
| Total | $ | 1,494,823 | $ | — | $ | 1,494,823 | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Foreign currency exchange contract agreements | $ | 88 | $ | — | $ | 88 | $ | — | ||||||||
| Total | $ | 88 | $ | — | $ | 88 | $ | — | ||||||||
The fair values of the Company’s cash equivalents, investments, 401(k) restoration plan assets and foreign currency exchange contracts are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued,
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typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources. After completing these validation procedures, the Company did not adjust or override any fair value measurements provided by third-party pricing services as of December 31, 2014 and 2013.
Fair Value of Contingent Consideration
The fair value of the Company’s liability for contingent consideration related to the acquisition of Medimass Research, Development and Service Kft. (see Note 6) is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including estimated future results and a discount rate reflective of the Company’s creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Although there is no contractual limit, total future contingent consideration payments were estimated to be $3 million as of the acquisition date and $4 million as of December 31, 2014, based on the Company’s best estimate, as the earnout is based on future sales of certain products through 2034. The increase in the liability for contingent consideration since the acquisition date is primarily due to change in fair value as the earnout period lapses.
Fair Value of Other Financial Instruments
The Company’s cash, accounts receivable, accounts payable and variable interest rate debt are recorded at cost, which approximates fair value. The carrying value of the Company’s fixed interest rate debt was $600 million and $400 million at December 31, 2014 and 2013, respectively. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $608 million and $398 million at December 31, 2014 and 2013, respectively, using Level 2 inputs.
Derivative Transactions
The Company operates on a global basis and is exposed to the risk that its earnings, cash flows and stockholders’ equity could be adversely impacted by fluctuations in currency exchange rates.
The Company records its derivative transactions in accordance with the accounting standards for derivative instruments and hedging activities, which establish the accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the consolidated balance sheets at fair value as either assets or liabilities, and gains and losses are recorded in cost of sales in the consolidated statements of operations. The Company enters into forward foreign exchange contracts to manage exposures to foreign currency by hedging the impact of currency fluctuations on certain inter-company balances and short-term assets and liabilities. Principal hedged currencies include the Euro, Japanese yen, British pound and Brazilian real. 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 the underlying exposures. At December 31, 2014, 2013 and 2012, the Company held forward foreign exchange contracts with notional amounts totaling $110 million, $104 million and $134 million, respectively.
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The Company’s foreign currency exchange contracts included in the consolidated balance sheets are classified as follows (in thousands):
| December 31, 2014 | December 31, 2013 | |||||||
| Other current assets | $ | 123 | $ | 929 | ||||
| Other current liabilities | $ | 651 | $ | 88 |
The following is a summary of the activity in the statements of operations related to the forward foreign exchange contracts (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Realized gains on closed contracts | $ | 174 | $ | 8,666 | $ | 4,186 | ||||||
| Unrealized (losses) gains on open contracts | (1,369 | ) | 361 | 1,716 | ||||||||
| Cumulative net pre-tax (losses) gains | $ | (1,195 | ) | $ | 9,027 | $ | 5,902 | |||||
Stockholders’ Equity
In May 2014, the Company’s Board of Directors authorized the Company to repurchase up to $750 million of its outstanding common stock over a three-year period and authorized the extension of the May 2012 program until May 2015. During 2014, 2013 and 2012, the Company repurchased 3.1 million, 3.1 million and 3.5 million shares at a cost of $329 million, $295 million and $290 million, respectively, under the May 2012 authorization and other previously announced programs. As of December 31, 2014, the Company repurchased an aggregate of 7.4 million shares at a cost of $731 million under the May 2012 repurchase program, leaving a total of $769 million authorized for future repurchases. In addition, the Company repurchased $8 million, $6 million and $6 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2014, 2013 and 2012, respectively. The Company believes that it has the financial flexibility to fund these share repurchases given current cash and debt levels, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits.
Revenue Recognition
Sales of products and services are generally recorded based on product shipment and performance of service, respectively. The Company’s deferred revenue on the consolidated balance sheets consists of the obligation on instrument service contracts and customer payments received in advance, prior to shipment of the instrument. Revenue is recognized when all of the following revenue recognition criteria are met: persuasive evidence of an arrangement exists; delivery or performance has occurred; the vendor’s fee is fixed or determinable; collectibility is reasonably assured and, if applicable, upon acceptance when acceptance criteria with contractual cash holdback are specified. Shipping and handling costs are included in cost of sales, net of amounts invoiced to the customer per the order.
Product shipments, including those for demonstration or evaluation, and service contracts are not recorded as revenue until a valid purchase order or master agreement is received, specifying fixed terms and prices. The Company generally recognizes product revenue when legal title has transferred and risk of loss passes to the customer. The Company structures its sales arrangements as shipping point or international equivalent and, accordingly, recognizes revenue upon shipment. In some cases, destination-based shipping terms are included in sales arrangements, in which cases revenue is generally recognized when the products arrive at the customer site.
The Company’s method of revenue recognition for certain products requiring installation is accounted for in accordance with the multiple-element revenue recognition accounting standards. With respect to the installation obligations, the larger of the contractual cash holdback or the best estimate of selling price of the installation
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service is deferred when the product is shipped and revenue is recognized as a multiple-element arrangement when installation is complete. The Company determines the best estimate of selling price of installation based upon a number of factors, including hourly service billing rates and estimated installation hours.
Instrument service contracts are typically billed at the beginning of the maintenance period. The amount of the service contract is amortized ratably to revenue over the instrument maintenance period. There are no deferred costs associated with the service contract, as the cost of the service is recorded when the service is performed. No revenue is recognized until all revenue recognition criteria have been met.
Sales of software are accounted for in accordance with the accounting standards for software revenue recognition. The Company’s software arrangements typically include software licenses and maintenance contracts. Software license revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collection is probable, and there are no significant post-delivery obligations remaining. The revenue associated with the software maintenance contract is recognized ratably over the maintenance term. Unspecified rights to software upgrades are typically sold as part of the maintenance contract on a when-and-if-available basis. The Company uses the residual method to allocate software revenue when a transaction includes multiple elements and vendor specific objective evidence of fair value of undelivered elements exists. Under the residual method, the fair value of the undelivered element (maintenance) is deferred and the remaining portion of the arrangement fee is allocated to the delivered element (software license) and recognized as revenue.
Returns and customer credits are infrequent and are recorded as a reduction to sales. Rights of return are not included in sales arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. Discounts from list prices are recorded as a reduction to sales.
Product Warranty Costs
The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.
The following is a summary of the activity of the Company’s accrued warranty liability for the years ended December 31, 2014, 2013 and 2012 (in thousands):
| Balance at Beginning of Period | Accruals for Warranties | Settlements Made | Balance at End of Period | |||||||||||||
| Accrued warranty liability: | ||||||||||||||||
| 2014 | $ | 12,962 | $ | 8,148 | $ | (7,844 | ) | $ | 13,266 | |||||||
| 2013 | $ | 12,353 | $ | 8,466 | $ | (7,857 | ) | $ | 12,962 | |||||||
| 2012 | $ | 13,258 | $ | 7,212 | $ | (8,117 | ) | $ | 12,353 |
Advertising Costs
All advertising costs are expensed as incurred and are included in selling and administrative expenses in the consolidated statements of operations. Advertising expenses for 2014, 2013 and 2012 were $12 million, $11 million and $13 million, respectively.
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Research and Development Expenses
Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, facilities costs, overhead costs, contract services and other outside costs. Research and development expenses are expensed as incurred. During 2014, the Company incurred a $15 million charge for acquired in-process research and development related to the licensing of certain intellectual property relating to mass spectrometry technologies yet to be commercialized and for which there was no future alternative use as of the acquisition date. These licensing arrangements are significantly related to new, medically-focused applications, as well as other applications, and require the Company to make additional payments of up to $15 million if certain milestones are achieved, as well as royalties on future net sales.
Stock-Based Compensation
The Company has two stock-based compensation plans, which are described in Note 12, “Stock-Based Compensation”.
Earnings Per Share
In accordance with the earnings per share accounting standards, the Company presents two earnings per share (“EPS”) amounts. Income per basic common share is based on income available to common shareholders and the weighted-average number of common shares outstanding during the periods presented. Income per diluted common share includes additional dilution from potential common stock, such as stock issuable pursuant to the exercise of stock options outstanding.
Retirement Plans
The Company sponsors various retirement plans, which are described in Note 14, “Retirement Plans”.
Comprehensive Income
The Company accounts for comprehensive income in accordance with the accounting standards for comprehensive income, which establish the accounting rules for reporting and displaying comprehensive income. These standards require that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
Subsequent Events
The Company did not have any material subsequent events, except for the repayment of senior unsecured notes discussed in Note 8, “Debt”.
Recently Adopted Accounting Standards
In July 2013, amended accounting guidance was issued regarding the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The adoption of this standard on January 1, 2014 did not have a material effect on the Company’s financial position, results of operations or cash flows.
Recently Issued Accounting Standards
In May 2014, amended accounting guidance was issued regarding the recognition of revenue from contracts with customers. The objective of this guidance is to significantly enhance comparability and clarify principles of revenue recognition practices across entities, industries, jurisdictions and capital markets. This guidance is effective for annual
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and interim reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the potential impact that the adoption of this standard will have on the Company’s financial position, results of operations or cash flows.
3 Marketable Securities
The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):
| December 31, 2014 | ||||||||||||||||
| Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | |||||||||||||
| U.S. Treasury securities | $ | 626,683 | $ | 246 | $ | (157 | ) | $ | 626,772 | |||||||
| Foreign government securities | 24,998 | — | — | 24,998 | ||||||||||||
| Corporate debt securities | 984,668 | 125 | (688 | ) | 984,105 | |||||||||||
| Time deposits | 64,240 | — | — | 64,240 | ||||||||||||
| Equity securities | 77 | 70 | — | 147 | ||||||||||||
| Total | $ | 1,700,666 | $ | 441 | $ | (845 | ) | $ | 1,700,262 | |||||||
| Amounts included in: | ||||||||||||||||
| Cash equivalents | $ | 67,051 | $ | — | $ | — | $ | 67,051 | ||||||||
| Investments | 1,633,615 | 441 | (845 | ) | 1,633,211 | |||||||||||
| Total | $ | 1,700,666 | $ | 441 | $ | (845 | ) | $ | 1,700,262 | |||||||
| December 31, 2013 | ||||||||||||||||
| Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | |||||||||||||
| U.S. Treasury securities | $ | 556,438 | $ | 111 | $ | (10 | ) | $ | 556,539 | |||||||
| Foreign government securities | 139,670 | — | — | 139,670 | ||||||||||||
| Corporate debt securities | 629,477 | 190 | (233 | ) | 629,434 | |||||||||||
| Time deposits | 74,050 | — | — | 74,050 | ||||||||||||
| Equity securities | 77 | 70 | — | 147 | ||||||||||||
| Total | $ | 1,399,712 | $ | 371 | $ | (243 | ) | $ | 1,399,840 | |||||||
| Amounts included in: | ||||||||||||||||
| Cash equivalents | $ | 36,966 | $ | — | $ | — | $ | 36,966 | ||||||||
| Investments | 1,362,746 | 371 | (243 | ) | 1,362,874 | |||||||||||
| Total | $ | 1,399,712 | $ | 371 | $ | (243 | ) | $ | 1,399,840 | |||||||
The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):
| December 31, 2014 | December 31, 2013 | |||||||
| Due in one year or less | $ | 872,872 | $ | 1,011,459 | ||||
| Due after one year through three years | 763,003 | 314,184 | ||||||
| Total | $ | 1,635,875 | $ | 1,325,643 | ||||
In the year ended December 31, 2013, the Company recorded a $2 million charge for an other-than-temporary impairment to an investment. Realized gains and losses on sales of investments were not material in 2014, 2013 and 2012.
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4 Inventories
Inventories are classified as follows (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Raw materials | $ | 84,952 | $ | 76,930 | ||||
| Work in progress | 16,749 | 19,656 | ||||||
| Finished goods | 144,729 | 146,214 | ||||||
| Total inventories | $ | 246,430 | $ | 242,800 | ||||
5 Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Land and land improvements | $ | 39,688 | $ | 37,156 | ||||
| Buildings and leasehold improvements | 256,603 | 205,638 | ||||||
| Production and other equipment | 367,716 | 336,135 | ||||||
| Construction in progress | 20,606 | 80,420 | ||||||
| Total property, plant and equipment | 684,613 | 659,349 | ||||||
| Less: accumulated depreciation and amortization | (363,030 | ) | (334,417 | ) | ||||
| Property, plant and equipment, net | $ | 321,583 | $ | 324,932 | ||||
During 2014, the Company recorded a $5 million impairment charge related to a write-down in the fair value of a building in the U.K. The building is currently classified as held-for-sale and recorded in other current assets in the consolidated balance sheet as of December 31, 2014 at a fair value of $4 million, which was determined based on a real estate market analysis. During 2014, 2013 and 2012, the Company retired and disposed of approximately $10 million, $19 million and $6 million of property, plant and equipment, respectively, most of which was fully depreciated and no longer in use. Gains on disposal were $1 million during the year ended December 31, 2014 and were immaterial for both 2013 and 2012.
6 Acquisitions
In July 2014, the Company acquired the net assets of Medimass Research, Development and Service Kft. (“Medimass”), a developer of mass spectrometry-related technologies with the potential to be used for a variety of applications, for $23 million in cash. In addition, the Company potentially has to pay additional contingent consideration, which had an estimated fair value of $3 million as of the closing date. The net assets acquired consist primarily of the Rapid Evaporative Ionization Mass Spectrometry (“REIMS”) technology, including patent applications, software, databases and REIMS expertise. REIMS is an ambient pressure surface ionization technique that, when used with mass spectrometry, can characterize the molecular topography of complex surfaces, such as cell membranes. The Company allocated $18 million of the purchase price to intangible assets comprised of $13 million of technology and $5 million of IPR&D. The technology will be amortized over fifteen years and the amortization of IPR&D will commence once commercialized. The remaining purchase price of $8 million was accounted for as goodwill, which is deductible for tax purposes. The contingent consideration payments are calculated based on a royalty due on future sales of products containing the REIMS technology. The fair value of the contingent consideration recognized was estimated using a probability-weighted discounted cash flow model, using Level 3 inputs.
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In January 2014, the Company acquired all of the outstanding stock of ULSP B.V. (“ULSP”), a manufacturer of instrumentation components that enable ultra low temperature generation, for $4 million in cash. ULSP’s core business is the manufacturing and servicing of high quality low temperature coolers for thermal analysis and rheology applications, and these products are important accessories for many TA core instrument offerings. ULSP was acquired to bring the manufacturing of these devices in-house and to expand the Company’s product offering. The Company allocated $1 million of the purchase price to an intangible asset comprised of technology, which will be amortized over ten years. The remaining purchase price of $3 million was accounted for as goodwill. The goodwill is not deductible for tax purposes.
The fair values of the assets and liabilities acquired were determined using various income-approach valuation techniques, which use Level 3 inputs. The following table presents the fair values as of the respective acquisition dates, as determined by the Company, of 100% of the assets and liabilities owned and recorded in connection with the acquisitions of Medimass and ULSP (in thousands):
| Accounts receivable and other assets | $ | 550 | ||
| Intangible assets | 18,457 | |||
| Goodwill | 11,631 | |||
| Total assets acquired | 30,638 | |||
| Accrued expenses and other liabilities | 294 | |||
| Accrued contingent consideration | 3,336 | |||
| Cash consideration paid | $ | 27,008 | ||
In December 2013, the Company acquired the net assets of LaserComp Inc. (“LaserComp”), a manufacturer of thermal conductivity measurement instruments, for $12 million in cash. LaserComp was acquired to expand TA’s thermal analysis instrument product offering and to leverage the Company’s distribution channels.
In December 2013, the Company acquired all of the outstanding capital stock of Expert Systems Solutions S.r.l. (“ESS”), a manufacturer of advanced thermal analysis instruments, for $3 million in cash. ESS was acquired to expand TA’s thermal analysis instrument product offering and to leverage the Company’s distribution channels.
In August 2013, the Company acquired all of the outstanding capital stock of Nonlinear Dynamics Ltd. (“Nonlinear Dynamics”), a developer of proteomics and metabolomics software, for $23 million in cash. Waters and Nonlinear Dynamics collaborated on the development of the Company’s TransOmics™ Informatics, a scalable solution for proteomics, metabolomics, and lipidomics analysis, which was introduced in 2012. In 2014, the Company introduced Progenesis® QI and Progenesis® QI for Proteomics.
In July 2013, the Company acquired all of the outstanding capital stock of Scarabaeus Mess-und Prodktionstechnik GmbH (“Scarabaeus”), a manufacturer of rheometers for the rubber and elastomer markets, for $4 million in cash. Scarabaeus was acquired to expand TA’s rheology analysis instrument product offering and to leverage the Company’s distribution channels.
In July 2012, the Company acquired all of the outstanding capital stock of Blue Reference, Inc. (“Blue Reference”), a U.S.-based developer and distributor of software products used for the real-time mining and analysis of multiple-application scientific databases, for $14 million in cash. The Company has integrated the Blue Reference technology into software product platforms to further differentiate its offerings by providing customers with a more efficient scientific information assessment process, where there is an ongoing need for immediacy and interactivity of multiple scientific databases.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In February 2012, the Company acquired the net assets of its Israeli sales and service distributor for $6 million in cash.
In January 2012, the Company acquired all of the outstanding capital stock of Baehr Thermoanalyse GmbH (“Baehr”), a German manufacturer of a range of thermal analyzers, for $12 million in cash, including the assumption of $1 million of debt. Baehr was acquired to expand TA’s thermal analysis instrument product offering and to leverage the Company’s distribution channels.
The principal factor that resulted in recognition of goodwill in these acquisitions is that the purchase price was based, in part, on cash flow projections assuming the integration of any acquired technology, distribution channels and products with the Company’s products, which is of considerably greater value than utilizing each of the acquired companies’ technology, customer access or products on a stand-alone basis. The goodwill also includes value assigned to assembled workforce, which cannot be recognized as an intangible asset. Specifically, the goodwill acquired with Medimass and Nonlinear Dynamics consists of the values assigned to the respective workforces and the future incremental sales synergies anticipated when Medimass and Nonlinear Dynamics develop future products.
In each acquisition, the sellers provided the Company with customary representations, warranties and indemnification, which would be settled in the future if and when a breach of the contractual representation or warranty condition occurs. The pro forma effect of the ongoing operations for Waters, Medimass, ULSP LaserComp, ESS, Nonlinear Dynamics, Scarabaeus, Blue Reference, the Israeli sales and service distributor and Baehr, either individually or in the aggregate, as though these acquisitions had occurred at the beginning of the periods covered by this report was immaterial.
7 Goodwill and Other Intangibles
The carrying amount of goodwill was $355 million and $350 million at December 31, 2014 and 2013, respectively. The Company’s acquisitions increased goodwill by $12 million (see Note 6) and the effect of foreign currency translation decreased goodwill by $7 million in 2014.
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (in thousands):
| December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Weighted- Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Weighted- Average Amortization Period | |||||||||||||||||||
| Capitalized software | $ | 334,280 | $ | 196,477 | 7 years | $ | 340,070 | $ | 189,415 | 7 years | ||||||||||||||
| Purchased intangibles | 163,855 | 112,279 | 11 years | 158,424 | 105,347 | 10 years | ||||||||||||||||||
| Trademarks and IPR&D | 14,095 | — | — | 9,180 | — | — | ||||||||||||||||||
| Licenses | 5,371 | 3,634 | 6 years | 3,909 | 3,390 | 7 years | ||||||||||||||||||
| Patents and other intangibles | 56,513 | 29,353 | 8 years | 49,902 | 24,221 | 8 years | ||||||||||||||||||
| Total | $ | 574,114 | $ | 341,743 | 8 years | $ | 561,485 | $ | 322,373 | 8 years | ||||||||||||||
During the year ended December 31, 2014, the Company acquired $18 million of purchased intangibles as a result of the acquisitions of Medimass and ULSP (see Note 6). In addition, the gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $48 million and $28 million, respectively, in the year ended December 31, 2014 due to the effects of foreign currency translation. Amortization expense for intangible assets was $48 million, $42 million and $31 million for the years ended December 31, 2014, 2013 and
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2012, respectively. Included in amortization expense for the year ended December 31, 2012 is a one-time $4 million charge to purchased intangibles amortization expense related to the discontinuance of a product trade name intangible asset. Amortization expense for intangible assets is estimated to be $50 million per year for each of the next five years. The increase in amortization expense in 2013, 2014 and for the next five years is primarily due to amortization associated with acquisitions and capitalized software costs related to the launch of new software product platforms. The net carrying value of the new software platforms were approximately $103 million as of December 31, 2014 and are being amortized over ten years.
8 Debt
In June 2014, the Company issued and sold the following senior unsecured notes:
| Senior Unsecured Notes | Term | Interest Rate | Face Value (in millions) | Maturity Date | ||||||||||||
| Series F | 7 years | 3.40 | % | $ | 100 | June 2021 | ||||||||||
| Series G | 10 years | 3.92 | % | $ | 50 | June 2024 | ||||||||||
| Series H | 10 years | Floating Rate | * | $ | 50 | June 2024 |
| * | Series H senior unsecured notes bear interest at 3 month LIBOR for that floating rate interest period plus 1.25%. |
|---|
All of the proceeds from the issuance of the new senior unsecured notes were used to repay outstanding portions of the revolving facility under the credit agreement dated June 2013 (the “2013 Credit Agreement”). At December 31, 2014 and 2013, the Company had a total of $600 million and $400 million of outstanding senior unsecured notes, respectively. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for Series H senior unsecured notes. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default. In February 2015, the Company repaid $100 million of senior unsecured notes upon maturity with borrowings under the revolving facility.
In June 2013, the Company entered into the 2013 Credit Agreement, which provides for a $1.1 billion revolving facility and a $300 million term loan facility. The revolving facility and term loan facility both mature on June 25, 2018 and require no scheduled prepayments before that date.
The interest rates applicable to the 2013 Credit Agreement are, at the Company’s option, equal to either the alternate base rate calculated daily (which is a rate per annum equal to the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 1/2% per annum, or (c) the adjusted LIBO rate on such day (or if such day is not a business day, the immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 2, 3 or 6 month adjusted LIBO rate, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 to 12.5 basis points for alternate base rate loans and between 75 basis points and 112.5 basis points for adjusted LIBO rate loans. The facility fee on the 2013 Credit Agreement ranges between 12.5 basis points and 25 basis points. The 2013 Credit Agreement requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive
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fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the 2013 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.
At December 31, 2014, $125 million of the outstanding portion of the revolving facility were classified as short-term liabilities in the consolidated balance sheet due to the fact that the Company expects to utilize this portion of the revolving line of credit to fund its working capital needs within the next twelve months and can repay and re-borrow from the facility without penalty. The remaining $440 million of the outstanding portion of the revolving facility were classified as long-term liabilities in the consolidated balance sheet, as no repayments are required prior to the maturity date in 2018 and this portion is not expected to be repaid within the next twelve months.
The Company had the following outstanding debt at December 31, 2014 and 2013 (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Foreign subsidiary lines of credit | $ | 243 | $ | 8,346 | ||||
| Senior unsecured notes - Series A - 3.75%, due February 2015 | 100,000 | — | ||||||
| 2013 Credit Agreement | 125,000 | 125,000 | ||||||
| Total notes payable and debt | 225,243 | 133,346 | ||||||
| Senior unsecured notes - Series A - 3.75%, due February 2015 | — | 100,000 | ||||||
| Senior unsecured notes - Series B - 5.00%, due February 2020 | 100,000 | 100,000 | ||||||
| Senior unsecured notes - Series C - 2.50%, due March 2016 | 50,000 | 50,000 | ||||||
| Senior unsecured notes - Series D - 3.22%, due March 2018 | 100,000 | 100,000 | ||||||
| Senior unsecured notes - Series E - 3.97%, due March 2021 | 50,000 | 50,000 | ||||||
| Senior unsecured notes - Series F - 3.40%, due June 2021 | 100,000 | — | ||||||
| Senior unsecured notes - Series G - 3.92%, due June 2024 | 50,000 | — | ||||||
| Senior unsecured notes - Series H - floating rate, due June 2024 | 50,000 | — | ||||||
| 2013 Credit Agreement | 740,000 | 790,000 | ||||||
| Total long-term debt | 1,240,000 | 1,190,000 | ||||||
| Total debt | $ | 1,465,243 | $ | 1,323,346 | ||||
As of December 31, 2014 and 2013, the Company had a total amount available to borrow of $533 million and $483 million, respectively, after outstanding letters of credit, under the 2013 Credit Agreement. The weighted-average interest rates applicable to the senior unsecured notes and 2013 Credit Agreement borrowings collectively were 2.31% and 1.94% at December 31, 2014 and 2013, respectively. As of December 31, 2014, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $88 million and $87 million at December 31, 2014 and 2013, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. The weighted-average interest rates applicable to these short-term borrowings were 1.48% and 2.00% at December 31, 2014 and 2013, respectively.
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9 Income Taxes
Income tax data for the years ended December 31, 2014, 2013 and 2012 is as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| The components of income from operations before income taxes are as follows: | ||||||||||||
| Domestic | $ | 70,136 | $ | 116,067 | $ | 116,071 | ||||||
| Foreign | 420,604 | 374,038 | 371,554 | |||||||||
| Total | $ | 490,740 | $ | 490,105 | $ | 487,625 | ||||||
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| The current and deferred components of the provision for income taxes on operations are as follows: | ||||||||||||
| Current | $ | 57,537 | $ | 39,933 | $ | 78,401 | ||||||
| Deferred | 1,583 | 169 | (52,219 | ) | ||||||||
| Total | $ | 59,120 | $ | 40,102 | $ | 26,182 | ||||||
| The jurisdictional components of the provision for income taxes on operations are as follows: | ||||||||||||
| Federal | $ | 23,071 | $ | (702 | ) | $ | 39,840 | |||||
| State | 3,791 | 5,142 | 5,599 | |||||||||
| Foreign | 32,258 | 35,662 | (19,257 | ) | ||||||||
| Total | $ | 59,120 | $ | 40,102 | $ | 26,182 | ||||||
| The differences between income taxes computed at the United States statutory rate and the provision for income taxes are summarized as follows: | ||||||||||||
| Federal tax computed at U.S. statutory income tax rate | $ | 171,759 | $ | 171,537 | $ | 170,669 | ||||||
| Settlement of tax audits | — | (30,552 | ) | (6,035 | ) | |||||||
| State income tax, net of federal income tax benefit | 2,464 | 3,342 | 3,639 | |||||||||
| Net effect of foreign operations | (109,240 | ) | (96,461 | ) | (102,858 | ) | ||||||
| Recognition of deferred tax asset associated with a non-U.S. net operating loss | — | — | (36,410 | ) | ||||||||
| Other, net | (5,863 | ) | (7,764 | ) | (2,823 | ) | ||||||
| Provision for income taxes | $ | 59,120 | $ | 40,102 | $ | 26,182 | ||||||
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the United Kingdom and Singapore, where the marginal effective tax rates were approximately 37.5%, 12.5%, 21.5% and 0%, respectively, as of December 31, 2014. The Company has a contractual tax rate in Singapore of 0% through March 2016, based upon achievement of contractual milestones that the Company expects to continue to meet. The current statutory tax rate in Singapore is 17%.
The Company’s effective tax rates for the years ended December 31, 2014, 2013 and 2012 were 12.0%, 8.2% and 5.4%, respectively. The income tax provision for 2013 included a $31 million net tax benefit related to the completion of tax audit examinations. In addition, the research and development tax credit (“R&D Tax
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Credit”) was retroactively extended in January 2013 for the 2012 and 2013 tax years. The entire $3 million benefit related to the 2012 tax year was recorded in the first quarter of 2013, and the 2013 benefit was included in the 2013 annual effective tax rate. The net income tax benefits related to the completed tax audit examinations and the 2012 R&D Tax Credit decreased the Company’s effective tax rate by 6.9 percentage points in the year ended December 31, 2013. The income tax provision for the year ended December 31, 2012 included a $36 million tax benefit related to the Company’s refinancing of certain of its inter-company debt arrangements, which enabled the Company to recognize a deferred tax asset associated with a non-U.S. net operating loss carryforward. During the year ended December 31, 2012, the Company also recorded a $6 million tax benefit related to tax audit settlements in the U.S. These tax benefits decreased the Company’s effective tax rate by 8.6 percentage points in the year ended December 31, 2012. The remaining differences between the effective tax rates for 2014, 2013 and 2012 were primarily attributable to differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates.
The tax effects of temporary differences and carryforwards which give rise to deferred tax assets and deferred tax liabilities are summarized as follows (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Deferred tax assets: | ||||||||
| Net operating losses and credits | $ | 102,810 | $ | 116,567 | ||||
| Depreciation | 11,979 | 7,163 | ||||||
| Stock-based compensation | 18,702 | 22,684 | ||||||
| Deferred compensation | 34,301 | 25,391 | ||||||
| Revaluation of equity investments | 5,819 | 3,832 | ||||||
| Inventory | 4,104 | 3,651 | ||||||
| Accrued liabilities and reserves | 9,368 | 23,268 | ||||||
| Other | 18,097 | 15,289 | ||||||
| Total deferred tax assets | 205,180 | 217,845 | ||||||
| Valuation allowance | (82,550 | ) | (94,952 | ) | ||||
| Deferred tax assets, net of valuation allowance | 122,630 | 122,893 | ||||||
| Deferred tax liabilities: | ||||||||
| Capitalized software | (16,253 | ) | (18,012 | ) | ||||
| Amortization | (8,765 | ) | (3,798 | ) | ||||
| Indefinite-lived intangibles | (18,094 | ) | (18,840 | ) | ||||
| Total deferred tax liabilities | (43,112 | ) | (40,650 | ) | ||||
| Net deferred tax assets | $ | 79,518 | $ | 82,243 | ||||
The Company’s net deferred tax assets included in the consolidated balance sheets are classified as follows (in thousands):
| December 31, 2014 | December 31, 2013 | |||||||
| Other current assets | $ | 36,691 | $ | 31,423 | ||||
| Other assets | 61,920 | 69,466 | ||||||
| Other current liabilities | (1,096 | ) | (579 | ) | ||||
| Other long-term liabilities | (17,997 | ) | (18,067 | ) | ||||
| Net deferred tax assets | $ | 79,518 | $ | 82,243 | ||||
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During the year ended December 31, 2012, the deferred tax assets associated with net operating losses and tax credit carryforwards and the related valuation allowance increased due to the aforementioned tax benefit related to the Company’s refinancing of inter-company debt arrangements. This deferred tax asset was established for $111 million, for which a $75 million valuation allowance was established and a $36 million tax benefit was recorded in the income tax provision.
As of December 31, 2014, the Company has provided a deferred tax valuation allowance of $83 million, of which $78 million relates to foreign tax credits and certain foreign net operating losses. The Company’s net deferred tax assets associated with net operating losses and tax credit carryforwards are approximately $25 million as of December 31, 2014, which represent the future tax benefit of foreign net operating loss carryforwards that do not expire under current law.
The income tax benefits associated with non-qualified stock option compensation expense recognized for tax purposes and credited to additional paid-in capital were $16 million, $16 million and $11 million for the years ended December 31, 2014, 2013 and 2012, respectively.
At December 31, 2014, there were unremitted earnings of foreign subsidiaries of approximately $3 billion. The Company has not provided for U.S. income taxes or foreign withholding taxes on these earnings as it is the Company’s current intention to permanently reinvest these earnings outside the U.S. Because of the complexity of U.S. and foreign tax rules applicable to the distribution of earnings from foreign subsidiaries to U.S. legal entities, the determination of the unrecognized deferred tax liability on these earnings is not practicable. Events that could trigger a tax might include U.S. acquisitions or other investments funded by cash distributions or loans from a foreign subsidiary.
The Company accounts for its uncertain tax return reporting positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money.
The following is a summary of the activity of the Company’s unrecognized tax benefits for the years ended December 31, 2014, 2013 and 2012 (in thousands):
| 2014 | 2013 | 2012 | ||||||||||
| Balance at the beginning of the period | $ | 24,716 | $ | 64,390 | $ | 73,199 | ||||||
| Realization of uncertain U.S. tax benefits | — | — | (5,625 | ) | ||||||||
| Changes resulting from completion of tax examinations | — | (35,279 | ) | — | ||||||||
| Other changes in uncertain tax benefits | (5,120 | ) | (4,395 | ) | (3,184 | ) | ||||||
| Balance at the end of the period | $ | 19,596 | $ | 24,716 | $ | 64,390 | ||||||
With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2009. However, carryforward attributes that were generated in years beginning on or before January 1, 2010 may still be adjusted upon examination by tax authorities if the attributes are utilized. The Company continuously monitors 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.
During the year ended December 31, 2013, the Company concluded tax audit disputes with tax authorities in the U.S. and Japan that were related to matters for which the Company had previously recorded uncertain tax benefits of approximately $35 million. The resolution of these tax audit disputes also entailed net global
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assessments against the Company of approximately $4 million. Accordingly, the Company recorded a $35 million reduction in the measurement of its unrecognized tax benefits and a $4 million increase in its current tax liabilities in the year ended December 31, 2013, which reduced the provision for income taxes and increased net income for the year ended December 31, 2013 by $31 million. As of December 31, 2014, the Company expects to record additional reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of approximately $5 million within the next twelve months due to the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.
10 Litigation
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 believes any outcome, either individually or in the aggregate, will not be material to the Company’s financial position, results of operations or cash flows. In June 2012, a $3 million payment was made to settle a complaint that was filed against the Company alleging patent infringement.
The Company has been engaged in ongoing patent litigation with Agilent Technologies GmbH (“Agilent”) in Germany. In July 2005, Agilent brought an action against the Company alleging that certain features of the Alliance pump continued to infringe certain of its patents. In August 2006, following a trial in this action, the German court ruled that the Company did not infringe the patents. Agilent filed an appeal in this action. A hearing on this appeal was held in January 2008. The appeals court affirmed the finding of the trial court that the Company did not infringe and Agilent appealed this finding to the German Federal Court of Justice. In December 2012, Agilent won this appeal and the Company recorded a $4 million provision for damages and fees estimated to be incurred in connection with this litigation. The accrued patent litigation expense is in other current liabilities in the consolidated balance sheets at December 31, 2014 and 2013.
11 Other Commitments and Contingencies
Lease agreements, expiring at various dates through 2026, cover buildings, office equipment and automobiles. Rental expense was $30 million during each of the years ended December 31, 2014, 2013 and 2012. Future minimum rents payable as of December 31, 2014 under non-cancelable leases with initial terms exceeding one year are as follows (in thousands):
| 2015 | $ | 21,945 | ||
| 2016 | 17,464 | |||
| 2017 | 12,760 | |||
| 2018 | 6,528 | |||
| 2019 and thereafter | 17,473 |
The Company licenses certain technology and software from third parties. Future minimum license fees payable under existing license agreements as of December 31, 2014 are immaterial for the years ended December 31, 2015 and thereafter. The Company enters into licensing arrangements with third parties that require future milestone or royalty payments contingent upon future events. Upon the achievement of certain milestones in existing agreements, the Company could make additional payments of up to $15 million, as well as royalties on future net sales.
The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in
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connection with patent, copyright or other intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company’s costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.
12 Stock-Based Compensation
In May 2012, the Company’s shareholders approved the Company’s 2012 Equity Incentive Plan (“2012 Plan”). As of December 31, 2014, the 2012 Plan has 4.2 million shares available for grant in the form of incentive or non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units or other types of awards. The Company issues new shares of common stock upon exercise of stock options or restricted stock unit conversion. Under the 2012 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 2012 Plan is scheduled to terminate on May 9, 2022. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock and restricted stock units may be issued under the 2012 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of December 31, 2014, the Company had stock options, restricted stock and restricted stock unit awards outstanding.
In May 2009, the Company’s shareholders approved the 2009 Employee Stock Purchase Plan under which eligible employees may contribute up to 15% of their earnings toward the quarterly purchase of the Company’s common stock. The plan makes available 0.9 million shares of the Company’s common stock, which includes the remaining shares available under the 1996 Employee Stock Purchase Plan. As of December 31, 2014, 1.2 million shares have been issued under both the 2009 and 1996 Employee Stock Purchase Plans. Each plan period lasts three months beginning on January 1, April 1, July 1 and October 1 of each year. The purchase price for each share of stock is the lesser of 90% of the market price on the first day of the plan period or 100% of the market price on the last day of the plan period. Stock-based compensation expense related to this plan was $1 million for each of the years ended December 31, 2014, 2013 and 2012, respectively.
The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations based on their fair values. The Company recognizes the expense using the straight-line attribution method. 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. The stock-based compensation accounting standards require 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 actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.
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The consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012 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):
| 2014 | 2013 | 2012 | ||||||||||
| Cost of sales | $ | 2,732 | $ | 2,523 | $ | 2,694 | ||||||
| Selling and administrative expenses | 26,128 | 25,252 | 22,679 | |||||||||
| Research and development expenses | 4,138 | 3,933 | 3,810 | |||||||||
| Total stock-based compensation | $ | 32,998 | $ | 31,708 | $ | 29,183 | ||||||
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 2014, 2013 and 2012 are as follows:
| Options Issued and Significant Assumptions Used to Estimate Option Fair Values | 2014 | 2013 | 2012 | |||||||||
| Options issued in thousands | 569 | 428 | 699 | |||||||||
| Risk-free interest rate | 1.6 | % | 1.7 | % | 1.0 | % | ||||||
| Expected life in years | 6 | 5 | 6 | |||||||||
| Expected volatility | 0.266 | 0.248 | 0.265 | |||||||||
| Expected dividends | — | — | — | |||||||||
| Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant | 2014 | 2013 | 2012 | |||||||||
| Exercise price | $ | 112.56 | $ | 97.74 | $ | 86.55 | ||||||
| Fair value | $ | 32.61 | $ | 27.37 | $ | 23.97 |
The following table summarizes stock option activity for the plans for the year ended December 31, 2014 (in thousands, except per share data):
| Number of Shares | Exercise Price per Share | Weighted-Average Exercise Price | ||||||||||
| Outstanding at December 31, 2013 | 3,917 | $ | 33.12 to $103.47 | $ | 71.08 | |||||||
| Granted | 569 | $ | 99.22 to $113.36 | $ | 112.56 | |||||||
| Exercised | (1,185 | ) | $ | 33.12 to $ 87.06 | $ | 58.12 | ||||||
| Canceled | (21 | ) | $ | 79.15 to $ 98.21 | $ | 88.02 | ||||||
| Outstanding at December 31, 2014 | 3,280 | $ | 37.84 to $113.36 | $ | 82.85 | |||||||
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The following table details the weighted-average remaining contractual life of options outstanding at December 31, 2014 by range of exercise prices (in thousands, except per share data):
| Exercise Price Range | Number of Shares Outstanding | Weighted- Average Exercise Price | Remaining Contractual Life of Options Outstanding | Number of Shares Exercisable | Weighted- Average Exercise Price | |||||||||||||||
| $37.84 to $59.99 | 593 | $ | 49.45 | 3.5 | 593 | $ | 49.45 | |||||||||||||
| $60.00 to $79.99 | 1,151 | $ | 78.34 | 5.9 | 757 | $ | 78.18 | |||||||||||||
| $80.00 to $113.36 | 1,536 | $ | 99.12 | 9.0 | 305 | $ | 89.83 | |||||||||||||
| Total | 3,280 | $ | 82.85 | 6.9 | 1,655 | $ | 70.03 | |||||||||||||
During 2014, 2013 and 2012, the total intrinsic value of the stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $63 million, $64 million and $31 million, respectively. The total cash received from the exercise of these stock options was $69 million, $64 million and $24 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The aggregate intrinsic value of the outstanding stock options at December 31, 2014 was $98 million. Options exercisable at December 31, 2014, 2013 and 2012 were 1.7 million, 2.2 million and 2.9 million, respectively. The weighted-average exercise prices of options exercisable at December 31, 2014, 2013 and 2012 were $70.03, $60.88 and $54.00, respectively. The weighted-average remaining contractual life of the exercisable outstanding stock options at December 31, 2014 was 5.3 years.
At December 31, 2014, the Company had 3.2 million stock options which are vested and expected to vest. The intrinsic value, weighted-average price and remaining contractual life of the vested and expected to vest stock options were $98 million, $82.67 and 6.8 years, respectively, at December 31, 2014.
As of December 31, 2014, 2013 and 2012, there were $43 million, $40 million and $45 million of total unrecognized compensation costs related to unvested stock option awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.7 years.
Restricted Stock
During each of the years ended December 31, 2014, 2013 and 2012, the Company granted 12 thousand shares of restricted stock. The weighted-average fair value per share on the grant date of the restricted stock granted in 2014, 2013 and 2012 was $99.22, $88.71 and $78.10, respectively. The Company has recorded $2 million, $2 million and $1 million of compensation expense in each of the years ended December 31, 2014, 2013 and 2012, respectively, related to the restricted stock grants. As of December 31, 2014, the Company had 24 thousand unvested shares of restricted stock outstanding, which have been fully expensed.
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the year ended December 31, 2014 (in thousands, except for per share amounts):
| Shares | Weighted-Average Price | |||||||
| Unvested at December 31, 2013 | 642 | $ | 82.16 | |||||
| Granted | 134 | $ | 112.59 | |||||
| Vested | (222 | ) | $ | 70.69 | ||||
| Forfeited | (21 | ) | $ | 87.43 | ||||
| Unvested at December 31, 2014 | 533 | $ | 94.38 | |||||
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted stock units are generally issued annually in February and vest in equal annual installments over a five-year period. The amount of compensation costs recognized for the years ended December 31, 2014, 2013 and 2012 on the restricted stock units expected to vest were $16 million, $12 million and $13 million, respectively. As of December 31, 2014, there were $37 million of total unrecognized compensation costs related to the restricted stock unit awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.5 years.
13 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
| Year Ended December 31, 2014 | ||||||||||||
| Net Income | Weighted-Average Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| Net income per basic common share | $ | 431,620 | 84,358 | $ | 5.12 | |||||||
| Effect of dilutive stock option, restricted stock and restricted stock unit securities | 793 | |||||||||||
| Net income per diluted common share | $ | 431,620 | 85,151 | $ | 5.07 | |||||||
| Year Ended December 31, 2013 | ||||||||||||
| Net Income | Weighted-Average Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| Net income per basic common share | $ | 450,003 | 85,426 | $ | 5.27 | |||||||
| Effect of dilutive stock option, restricted stock and restricted stock unit securities | 1,120 | |||||||||||
| Net income per diluted common share | $ | 450,003 | 86,546 | $ | 5.20 | |||||||
| Year Ended December 31, 2012 | ||||||||||||
| Net Income | Weighted-Average Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| Net income per basic common share | $ | 461,443 | 87,841 | $ | 5.25 | |||||||
| Effect of dilutive stock option, restricted stock and restricted stock unit securities | 1,138 | |||||||||||
| Net income per diluted common share | $ | 461,443 | 88,979 | $ | 5.19 | |||||||
For the years ended December 31, 2014, 2013 and 2012, the Company had 1.0 million, 1.1 million and 2.0 million stock options that were antidilutive, respectively, due to having higher exercise prices than the Company’s average stock 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.
14 Retirement Plans
U.S. employees are eligible to participate in the Waters Employee Investment Plan, a 401(k) defined contribution plan, immediately upon hire. Employees may contribute from 1% to 60% of eligible pay on a pre-tax basis and the Company makes matching contributions of 100% for contributions up to 6% of eligible pay. Employees are 100% vested in employee and Company matching contributions. For the years ended December 31, 2014, 2013 and 2012, the Company’s matching contributions amounted to $13 million, $13 million and $12 million, respectively.
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company maintains two defined benefit plans in the U.S. for which the pay credit accruals have been frozen, the Waters Retirement Plan and the Waters Retirement Restoration Plan (collectively, the “U.S. Pension Plans”). The Company also sponsors other employee benefit plans in the U.S., including a retiree healthcare plan, which provides reimbursement for medical expenses and is contributory. There are various employee benefit plans outside the United States (both defined benefit and defined contribution plans). Certain non-U.S. defined benefit plans (“Non-U.S. Pension Plans”) are included in the disclosures below, which are required under the accounting standards for retirement benefits. The Company made one-time contributions totaling $21 million to certain of these Non-U.S. Pension Plans during 2014.
The Company contributed $11 million, $12 million and $11 million in the years ended December 31, 2014, 2013 and 2012, respectively, to the non-U.S. plans (primarily defined contribution plans) which are currently outside of the scope of the required disclosures. The eligibility and vesting of non-U.S. plans are generally consistent with local laws and regulations.
The net periodic pension cost is made up of several components that reflect different aspects of the Company’s financial arrangements as well as the cost of benefits earned by employees. These components are determined using the projected unit credit actuarial cost method and are based on certain actuarial assumptions. The Company’s accounting policy is to reflect in the projected benefit obligation all benefit changes to which the Company is committed as of the current valuation date; use a market-related value of assets to determine pension expense; amortize increases in prior service costs on a straight-line basis over the expected future service of active participants as of the date such costs are first recognized; and amortize cumulative actuarial gains and losses in excess of 10% of the larger of the market-related value of plan assets and the projected benefit obligation over the expected future service of active participants.
Summary data for the U.S. Pension Plans, U.S. retiree healthcare plan and Non-U.S. Pension Plans are presented in the following tables, using the measurement dates of December 31, 2014 and 2013, respectively.
The reconciliation of the projected benefit obligations at December 31, 2014 and 2013 is as follows (in thousands):
| 2014 | 2013 | |||||||||||||||||||||||
| U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
| Projected benefit obligation, January 1 | $ | 134,593 | $ | 11,020 | $ | 69,116 | $ | 145,047 | $ | 10,788 | $ | 64,857 | ||||||||||||
| Service cost | — | 1,623 | 5,171 | — | 1,733 | 5,079 | ||||||||||||||||||
| Interest cost | 6,417 | 463 | 2,195 | 5,505 | 333 | 1,966 | ||||||||||||||||||
| Actuarial losses (gains) | 18,270 | 1,253 | 17,967 | (13,328 | ) | (1,292 | ) | (925 | ) | |||||||||||||||
| Benefits paid | (3,587 | ) | (847 | ) | (1,195 | ) | (2,631 | ) | (542 | ) | (1,743 | ) | ||||||||||||
| Plan amendments | — | — | 796 | — | — | 232 | ||||||||||||||||||
| Plan settlements | — | — | (2,766 | ) | — | — | — | |||||||||||||||||
| Other plans | — | — | — | — | — | 227 | ||||||||||||||||||
| Currency impact | — | — | (9,278 | ) | — | — | (577 | ) | ||||||||||||||||
| Projected benefit obligation, December 31 | $ | 155,693 | $ | 13,512 | $ | 82,006 | $ | 134,593 | $ | 11,020 | $ | 69,116 | ||||||||||||
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accumulated benefit obligations at December 31, 2014 and 2013 are as follows (in thousands):
| 2014 | 2013 | |||||||||||||||||||||||
| U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
| Accumulated benefit obligation | $ | 155,693 | * | * | $ | 69,664 | $ | 134,592 | * | * | $ | 58,471 |
| ** | Not applicable. |
|---|
The reconciliation of the fair value of the plan assets at December 31, 2014 and 2013 is as follows (in thousands):
| 2014 | 2013 | |||||||||||||||||||||||
| U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
| Fair value of plan assets, January 1 | $ | 128,516 | $ | 6,616 | $ | 40,820 | $ | 106,572 | $ | 5,357 | $ | 35,859 | ||||||||||||
| Actual return on plan assets | 7,366 | 533 | 4,170 | 19,755 | 693 | 1,948 | ||||||||||||||||||
| Company contributions | 3,592 | 392 | 24,216 | 4,820 | 290 | 4,104 | ||||||||||||||||||
| Employee contributions | — | 832 | 592 | — | 818 | 612 | ||||||||||||||||||
| Plan settlements | — | — | (2,766 | ) | — | — | — | |||||||||||||||||
| Benefits paid | (3,587 | ) | (847 | ) | (1,195 | ) | (2,631 | ) | (542 | ) | (1,743 | ) | ||||||||||||
| Currency impact | — | — | (6,269 | ) | — | — | 40 | |||||||||||||||||
| Fair value of plan assets, December 31 | $ | 135,887 | $ | 7,526 | $ | 59,568 | $ | 128,516 | $ | 6,616 | $ | 40,820 | ||||||||||||
The summary of the funded status of the plans at December 31, 2014 and 2013 is as follows (in thousands):
| 2014 | 2013 | |||||||||||||||||||||||
| U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
| Projected benefit obligation | $ | (155,693 | ) | $ | (13,512 | ) | $ | (82,006 | ) | $ | (134,593 | ) | $ | (11,020 | ) | $ | (69,116 | ) | ||||||
| Fair value of plan assets | 135,887 | 7,526 | 59,568 | 128,516 | 6,616 | 40,820 | ||||||||||||||||||
| Projected benefit obligation in excess of fair value of plan assets | $ | (19,806 | ) | $ | (5,986 | ) | $ | (22,438 | ) | $ | (6,077 | ) | $ | (4,404 | ) | $ | (28,296 | ) | ||||||
The summary of the amounts recognized in the consolidated balance sheets for the plans at December 31, 2014 and 2013 is as follows (in thousands):
| 2014 | 2013 | |||||||||||||||||||||||
| U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
| Long-term assets | $ | — | $ | — | $ | 838 | $ | — | $ | — | $ | 1,370 | ||||||||||||
| Current liabilities | (193 | ) | (351 | ) | — | — | (262 | ) | (193 | ) | ||||||||||||||
| Long-term liabilities | (19,613 | ) | (5,635 | ) | (23,276 | ) | (6,077 | ) | (4,142 | ) | (29,473 | ) | ||||||||||||
| Net amount recognized at December 31 | $ | (19,806 | ) | $ | (5,986 | ) | $ | (22,438 | ) | $ | (6,077 | ) | $ | (4,404 | ) | $ | (28,296 | ) | ||||||
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The summary of the components of net periodic pension costs for the plans for the years ended December 31, 2014, 2013 and 2012 is as follows (in thousands):
| 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||
| U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | ||||||||||||||||||||||||||||
| Service cost | $ | — | $ | 791 | $ | 4,579 | $ | — | $ | 915 | $ | 4,467 | $ | 9 | $ | 720 | $ | 3,752 | ||||||||||||||||||
| Interest cost | 6,417 | 463 | 2,195 | 5,505 | 333 | 1,966 | 5,806 | 350 | 1,988 | |||||||||||||||||||||||||||
| Expected return on plan assets | (9,060 | ) | (435 | ) | (1,520 | ) | (8,034 | ) | (355 | ) | (901 | ) | (7,619 | ) | (287 | ) | (838 | ) | ||||||||||||||||||
| Settlement loss | — | — | 557 | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Net amortization: | ||||||||||||||||||||||||||||||||||||
| Prior service credit | — | (51 | ) | (176 | ) | — | (54 | ) | (216 | ) | — | (54 | ) | (267 | ) | |||||||||||||||||||||
| Net actuarial loss (gain) | 2,216 | (35 | ) | 375 | 3,432 | — | 516 | 3,009 | — | 367 | ||||||||||||||||||||||||||
| Net periodic pension (benefit) cost | $ | (427 | ) | $ | 733 | $ | 6,010 | $ | 903 | $ | 839 | $ | 5,832 | $ | 1,205 | $ | 729 | $ | 5,002 | |||||||||||||||||
The summary of the changes in plan assets and benefit obligations recognized in other comprehensive (loss) income for the years ended December 31, 2014, 2013 and 2012 is as follows (in thousands):
| 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||
| U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | ||||||||||||||||||||||||||||
| Prior service cost | $ | — | $ | — | $ | (796 | ) | $ | — | $ | — | $ | (232 | ) | $ | — | $ | — | $ | — | ||||||||||||||||
| Net (loss) gain arising during the year | (19,965 | ) | (1,155 | ) | (15,168 | ) | 25,048 | 1,629 | 1,940 | (2,042 | ) | (96 | ) | (5,622 | ) | |||||||||||||||||||||
| Amortization: | ||||||||||||||||||||||||||||||||||||
| Prior service credit | — | (51 | ) | (176 | ) | — | (54 | ) | (216 | ) | — | (54 | ) | (267 | ) | |||||||||||||||||||||
| Net loss (gain) | 2,216 | (35 | ) | 932 | 3,432 | — | 516 | 3,009 | — | 367 | ||||||||||||||||||||||||||
| Other Plans | — | — | — | — | — | — | — | — | (5,970 | ) | ||||||||||||||||||||||||||
| Currency impact | — | — | 2,287 | — | — | (497 | ) | — | — | (424 | ) | |||||||||||||||||||||||||
| Total recognized in other comprehensive (loss) income | $ | (17,749 | ) | $ | (1,241 | ) | $ | (12,921 | ) | $ | 28,480 | $ | 1,575 | $ | 1,511 | $ | 967 | $ | (150 | ) | $ | (11,916 | ) | |||||||||||||
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The summary of the amounts included in accumulated other comprehensive (loss) income in stockholders’ equity for the plans at December 31, 2014 and 2013 is as follows (in thousands):
| 2014 | 2013 | |||||||||||||||||||||||
| U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
| Net actuarial (loss) gain | $ | (45,749 | ) | $ | 44 | $ | (23,327 | ) | $ | (27,999 | ) | $ | 1,233 | $ | (11,190 | ) | ||||||||
| Prior service credit | — | — | 719 | — | 52 | 1,933 | ||||||||||||||||||
| Total | $ | (45,749 | ) | $ | 44 | $ | (22,608 | ) | $ | (27,999 | ) | $ | 1,285 | $ | (9,257 | ) | ||||||||
The summary of the amounts included in accumulated other comprehensive (loss) income expected to be included in next year’s net periodic benefit cost for the plans at December 31, 2014 is as follows (in thousands):
| 2014 | ||||||||||||
| U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | ||||||||||
| Net actuarial loss | $ | (2,717 | ) | $ | — | $ | (1,091 | ) | ||||
| Prior service credit | — | — | 121 | |||||||||
| Total | $ | (2,717 | ) | $ | — | $ | (970 | ) | ||||
The plans’ investment asset mix is as follows at December 31, 2014 and 2013:
| 2014 | 2013 | |||||||||||||||||||||||
| U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
| Equity securities | 75 | % | 68 | % | 4 | % | 75 | % | 59 | % | 0 | % | ||||||||||||
| Debt securities | 24 | % | 30 | % | 12 | % | 24 | % | 25 | % | 0 | % | ||||||||||||
| Cash and cash equivalents | 1 | % | 2 | % | 19 | % | 1 | % | 16 | % | 16 | % | ||||||||||||
| Insurance contracts and other | 0 | % | 0 | % | 65 | % | 0 | % | 0 | % | 84 | % | ||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
The plans’ investment policies include the following asset allocation guidelines:
| U.S. Pension and U.S. Retiree | Non-U.S. Pension Plans Policy Target | |||||||||||
| Healthcare Plans | ||||||||||||
| Policy Target | Range | |||||||||||
| Equity securities | 60 | % | 40% - 80% | 5 | % | |||||||
| Debt securities | 25 | % | 20% - 60% | 10 | % | |||||||
| Cash and cash equivalents | 5 | % | 0% - 20% | 20 | % | |||||||
| Insurance contracts and other | 10 | % | 0% - 20% | 65 | % |
The asset allocation policy for the U.S. Pension Plans and U.S. retiree healthcare plan was developed in consideration of the following long-term investment objectives: achieving a return on assets consistent with the investment policy, achieving portfolio returns which exceed the average return for similarly invested funds and maximizing portfolio returns with at least a return of 2.5% above the one-year constant maturity Treasury bond yield over reasonable measurement periods and based on reasonable market cycles.
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Within the equity portfolio of the U.S. retirement plans, investments are diversified among market capitalization and investment strategy. The Company targets a 20% allocation of its U.S. retirement plans’ equity portfolio to be invested in financial markets outside of the United States. The Company does not invest in its own stock within the U.S. retirement plans’ assets.
The fair value of the Company’s retirement plan assets are as follows at December 31, 2014 (in thousands):
| Total at December 31, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| U.S. Pension Plans: | ||||||||||||||||
| Mutual funds(a) | $ | 124,405 | $ | 124,405 | $ | — | $ | — | ||||||||
| Common stocks(b) | 3,438 | 3,438 | — | — | ||||||||||||
| Cash equivalents(c) | 710 | — | 710 | — | ||||||||||||
| Hedge funds(d) | 7,334 | — | — | 7,334 | ||||||||||||
| Total U.S. Pension Plans | 135,887 | 127,843 | 710 | 7,334 | ||||||||||||
| U.S. Retiree Healthcare Plan: | ||||||||||||||||
| Mutual funds(e) | 7,371 | 7,371 | — | — | ||||||||||||
| Cash equivalents(c) | 155 | — | 155 | — | ||||||||||||
| Total U.S. Retiree Healthcare Plan | 7,526 | 7,371 | 155 | — | ||||||||||||
| Non-U.S. Pension Plans: | ||||||||||||||||
| Cash equivalents(c) | 11,367 | 11,367 | — | — | ||||||||||||
| Mutual funds(f) | 9,528 | 9,258 | — | — | ||||||||||||
| Bank and insurance investment contracts(g) | 38,943 | — | — | 38,943 | ||||||||||||
| Total Non-U.S. Pension Plans | 59,568 | 20,625 | — | 38,943 | ||||||||||||
| Total fair value of retirement plan assets | $ | 202,981 | $ | 155,839 | $ | 865 | $ | 46,277 | ||||||||
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of the Company’s retirement plan assets are as follows at December 31, 2013 (in thousands):
| Total at December 31, 2013 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| U.S. Pension Plans: | ||||||||||||||||
| Mutual funds(h) | $ | 117,718 | $ | 117,718 | $ | — | $ | — | ||||||||
| Common stocks(b) | 3,123 | 3,123 | — | — | ||||||||||||
| Cash equivalents(c) | 650 | — | 650 | — | ||||||||||||
| Hedge funds(d) | 7,025 | — | — | 7,025 | ||||||||||||
| Total U.S. Pension Plans | 128,516 | 120,841 | 650 | 7,025 | ||||||||||||
| U.S. Retiree Healthcare Plan: | ||||||||||||||||
| Mutual funds(i) | 5,589 | 5,589 | — | — | ||||||||||||
| Cash equivalents(c) | 1,027 | — | 1,027 | — | ||||||||||||
| Total U.S. Retiree Healthcare Plan | 6,616 | 5,589 | 1,027 | — | ||||||||||||
| Non-U.S. Pension Plans: | ||||||||||||||||
| Cash equivalents(c) | 6,400 | 6,400 | — | — | ||||||||||||
| Bank and insurance investment contracts(g) | 34,420 | — | — | 34,420 | ||||||||||||
| Total Non-U.S. Pension Plans | 40,820 | 6,400 | — | 34,420 | ||||||||||||
| Total fair value of retirement plan assets | $ | 175,952 | $ | 132,830 | $ | 1,677 | $ | 41,445 | ||||||||
| (a) | The mutual fund balance in the U.S. Pension Plans are invested in the following categories: 43% in the common stock of large-cap U.S. companies, 31% in the common stock of international growth companies, and 26% in fixed income bonds issued by U.S. companies and by the U.S. government and its agencies. |
|---|
| (b) | Represents primarily amounts invested in common stock of technology, healthcare, financial, energy and consumer staples and discretionary U.S. companies. |
|---|
| (c) | Primarily represents money market funds held with various financial institutions. |
|---|
| (d) | Hedge fund invests in both short and long term U.S. common stocks. Management of the hedge funds has the ability to shift investments from value to growth strategies, from large to small capitalization stocks and from a net long position to a net short position. |
|---|
| (e) | The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: 52% in the common stock of large-cap U.S. companies, 20% in the common stock of international growth companies and 28% in fixed income bonds of U.S. companies and U.S. government. |
|---|
| (f) | The mutual fund balance in the Non-U.S. Pension Plans is invested in the following categories: 74% in international bonds and 26% in the common stock of international companies. |
|---|
| (g) | Amount represents bank and insurance guaranteed investment contracts. |
|---|
| (h) | The mutual fund balance in the U.S. Pension Plans are invested in the following categories: 41% in the common stock of large-cap U.S. companies, 33% in the common stock of international growth companies, and 26% in fixed income bonds issued by U.S. companies and by the U.S. government and its agencies. |
|---|
| (i) | The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: 58% in the common stock of large-cap U.S. companies, 12% in the common stock of international growth companies and 30% in fixed income bonds of U.S. companies and U.S. government. |
|---|
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the changes in fair value of the Level 3 retirement plan assets for the years ended December 31, 2014 and 2013 (in thousands):
| Insurance | ||||||||||||
| Guaranteed | ||||||||||||
| Hedge | Investment | |||||||||||
| Total | Funds | Contracts | ||||||||||
| Fair value of assets, December 31, 2012 | $ | 35,963 | $ | 6,266 | $ | 29,697 | ||||||
| Net purchases (sales) and appreciation (depreciation) | 5,482 | 759 | 4,723 | |||||||||
| Fair value of assets, December 31, 2013 | 41,445 | 7,025 | 34,420 | |||||||||
| Net purchases (sales) and appreciation (depreciation) | 4,832 | 309 | 4,523 | |||||||||
| Fair value of assets, December 31, 2014 | $ | 46,277 | $ | 7,334 | $ | 38,943 | ||||||
The weighted-average assumptions used to determine the benefit obligation in the consolidated balance sheets at December 31, 2014, 2013 and 2012 are as follows:
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| U.S. | Non-U.S. | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
| Discount rate | 3.92 | % | 1.98 | % | 4.82 | % | 3.29 | % | 3.90 | % | 3.10 | % | ||||||||||||
| Increases in compensation levels | ** | 2.58 | % | ** | 2.54 | % | ** | 2.59 | % |
| ** | Not applicable |
|---|
The weighted-average assumptions used to determine the net periodic pension cost at December 31, 2014, 2013 and 2012 are as follows:
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| U.S. | Non-U.S. | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
| Discount rate | 4.64 | % | 3.25 | % | 3.61 | % | 3.10 | % | 4.26 | % | 3.29 | % | ||||||||||||
| Return on plan assets | 6.95 | % | 2.84 | % | 6.94 | % | 2.40 | % | 7.12 | % | 1.88 | % | ||||||||||||
| Increases in compensation levels | ** | 2.58 | % | ** | 2.59 | % | ** | 2.91 | % |
| ** | Not applicable |
|---|
To develop the expected long-term rate of return on assets assumption, the Company considered historical returns and future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio and historical expenses paid by the plan. A one-quarter percentage point increase in the assumed long-term rate of return on assets would decrease the Company’s net periodic benefit cost for the Waters Retirement Plan by less than $1 million. A one-quarter percentage point increase in the discount rate would decrease the Company’s net periodic benefit cost for the Waters Retirement Plan by less than $1 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During fiscal year 2015, the Company expects to contribute a total of approximately $4 million to $11 million to the Company’s defined benefit plans. Estimated future benefit payments as of December 31, 2014 are as follows (in thousands):
| U.S. Pension and Retiree Healthcare Plans | Non-U.S. Pension Plans | Total | ||||||||||
| 2015 | $ | 7,878 | $ | 1,057 | $ | 8,935 | ||||||
| 2016 | 7,833 | 1,132 | 8,965 | |||||||||
| 2017 | 8,165 | 2,334 | 10,499 | |||||||||
| 2018 | 8,810 | 2,045 | 10,855 | |||||||||
| 2019 | 9,879 | 1,763 | 11,642 | |||||||||
| 2020 - 2024 | 58,524 | 15,363 | 73,887 |
15 Business Segment Information
The accounting standards for segment reporting establish standards for reporting information about operating segments in annual financial statements and require selected information for those segments to be presented in interim financial reports of public business enterprises. They also establish standards for related disclosures about products and services, geographic areas and major customers. The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: Waters Division and TA Division.
Waters Division is primarily 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 primarily in the business of designing, manufacturing, distributing and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s two divisions are its operating segments and each has similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the one reportable segment of the Company.
Net sales for the Company’s products and services are as follows for the years ended December 31, 2014, 2013 and 2012 (in thousands):
| 2014 | 2013 | 2012 | ||||||||||
| Product net sales: | ||||||||||||
| Waters instrument systems | $ | 871,048 | $ | 840,608 | $ | 828,458 | ||||||
| Chemistry | 312,890 | 304,130 | 294,787 | |||||||||
| TA instrument systems | 162,791 | 167,765 | 157,262 | |||||||||
| Total product sales | 1,346,729 | 1,312,503 | 1,280,507 | |||||||||
| Service net sales: | ||||||||||||
| Waters service | 579,759 | 532,323 | 509,412 | |||||||||
| TA service | 62,856 | 59,392 | 53,722 | |||||||||
| Total service sales | 642,615 | 591,715 | 563,134 | |||||||||
| Total net sales | $ | 1,989,344 | $ | 1,904,218 | $ | 1,843,641 | ||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Geographic sales information is presented below for the years ended December 31, 2014, 2013 and 2012 (in thousands):
| 2014 | 2013 | 2012 | ||||||||||
| Net Sales: | ||||||||||||
| United States | $ | 596,549 | $ | 557,734 | $ | 531,912 | ||||||
| Europe | 607,080 | 573,786 | 549,341 | |||||||||
| Asia: | ||||||||||||
| China | 238,892 | 240,535 | 212,701 | |||||||||
| Japan | 163,468 | 170,115 | 207,340 | |||||||||
| Asia Other | 237,668 | 216,229 | 215,612 | |||||||||
| Total Asia | 640,028 | 626,879 | 635,653 | |||||||||
| Other | 145,687 | 145,819 | 126,735 | |||||||||
| Total net sales | $ | 1,989,344 | $ | 1,904,218 | $ | 1,843,641 | ||||||
The Other category includes Canada, Latin America and Puerto Rico. Net sales are attributable to geographic areas based on the region of destination. None of the Company’s individual customers accounts for more than 2% of annual Company sales.
Long-lived assets information at December 31, 2014 and 2013 is presented below (in thousands):
| 2014 | 2013 | |||||||
| Long-lived assets: | ||||||||
| United States | $ | 181,851 | $ | 174,143 | ||||
| Europe | 126,080 | 138,962 | ||||||
| Asia | 12,416 | 10,412 | ||||||
| Other | 1,236 | 1,415 | ||||||
| Total long-lived assets | $ | 321,583 | $ | 324,932 | ||||
The Other category includes Canada, Latin America and Puerto Rico. Long-lived assets exclude goodwill, other intangible assets and other assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16 Unaudited Quarterly Results
The Company’s unaudited quarterly results are summarized below (in thousands, except per share data):
| First | Second | Third | Fourth | |||||||||||||||||
| 2014 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
| Net sales | $ | 430,508 | $ | 481,801 | $ | 493,165 | $ | 583,870 | $ | 1,989,344 | ||||||||||
| Cost of sales | 187,719 | 201,853 | 202,222 | 233,119 | 824,913 | |||||||||||||||
| Gross profit | 242,789 | 279,948 | 290,943 | 350,751 | 1,164,431 | |||||||||||||||
| Selling and administrative expenses | 126,635 | 131,930 | 122,226 | 131,916 | 512,707 | |||||||||||||||
| Research and development expenses | 24,746 | 26,977 | 27,279 | 28,724 | 107,726 | |||||||||||||||
| Acquired in-process research and development | — | — | — | 15,456 | 15,456 | |||||||||||||||
| Purchased intangibles amortization | 2,647 | 2,646 | 2,725 | 2,616 | 10,634 | |||||||||||||||
| Operating income | 88,761 | 118,395 | 138,713 | 172,039 | 517,908 | |||||||||||||||
| Interest expense | (7,489 | ) | (7,971 | ) | (9,062 | ) | (9,669 | ) | (34,191 | ) | ||||||||||
| Interest income | 1,458 | 1,700 | 1,762 | 2,103 | 7,023 | |||||||||||||||
| Income from operations before income taxes | 82,730 | 112,124 | 131,413 | 164,473 | 490,740 | |||||||||||||||
| Provision for income tax expense | 12,428 | 15,595 | 17,916 | 13,181 | 59,120 | |||||||||||||||
| Net income | $ | 70,302 | $ | 96,529 | $ | 113,497 | $ | 151,292 | $ | 431,620 | ||||||||||
| Net income per basic common share | 0.83 | 1.14 | 1.36 | 1.82 | 5.12 | |||||||||||||||
| Weighted-average number of basic common shares | 84,977 | 84,462 | 83,663 | 83,217 | 84,358 | |||||||||||||||
| Net income per diluted common share | 0.82 | 1.13 | 1.34 | 1.80 | 5.07 | |||||||||||||||
| Weighted-average number of diluted common shares and equivalents | 85,873 | 85,177 | 84,401 | 84,015 | 85,151 |
| First | Second | Third | Fourth | |||||||||||||||||
| 2013 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
| Net sales | $ | 430,338 | $ | 451,115 | $ | 457,317 | $ | 565,448 | $ | 1,904,218 | ||||||||||
| Cost of sales | 174,568 | 188,329 | 191,568 | 228,991 | 783,456 | |||||||||||||||
| Gross profit | 255,770 | 262,786 | 265,749 | 336,457 | 1,120,762 | |||||||||||||||
| Selling and administrative expenses | 118,660 | 123,062 | 120,563 | 130,680 | 492,965 | |||||||||||||||
| Research and development expenses | 25,312 | 24,650 | 23,599 | 26,975 | 100,536 | |||||||||||||||
| Purchased intangibles amortization | 2,393 | 2,382 | 2,518 | 2,625 | 9,918 | |||||||||||||||
| Operating income | 109,405 | 112,692 | 119,069 | 176,177 | 517,343 | |||||||||||||||
| Other expense (Note 3) | — | (1,575 | ) | — | — | (1,575 | ) | |||||||||||||
| Interest expense | (7,185 | ) | (7,580 | ) | (7,358 | ) | (7,927 | ) | (30,050 | ) | ||||||||||
| Interest income | 1,187 | 1,179 | 946 | 1,075 | 4,387 | |||||||||||||||
| Income from operations before income taxes | 103,407 | 104,716 | 112,657 | 169,325 | 490,105 | |||||||||||||||
| Provision for income tax (benefit) expense | (17,652 | ) | 15,402 | 14,609 | 27,743 | 40,102 | ||||||||||||||
| Net income | $ | 121,059 | $ | 89,314 | $ | 98,048 | $ | 141,582 | $ | 450,003 | ||||||||||
| Net income per basic common share | 1.41 | 1.04 | 1.15 | 1.67 | 5.27 | |||||||||||||||
| Weighted-average number of basic common shares | 86,049 | 85,482 | 85,185 | 85,006 | 85,426 | |||||||||||||||
| Net income per diluted common share | 1.39 | 1.03 | 1.14 | 1.65 | 5.20 | |||||||||||||||
| Weighted-average number of diluted common shares and equivalents | 87,215 | 86,576 | 86,364 | 86,017 | 86,546 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company typically experiences an increase in sales in the fourth quarter, as a result of purchasing habits for capital goods of customers that tend to exhaust their spending budgets by calendar year end. Selling and administrative expenses are typically higher in the second and third quarters over the first quarter in each year as the Company’s annual payroll merit increases take effect. Selling and administrative expenses will vary in the fourth quarter in relation to performance in the quarter and for the year.
In the fourth quarter of 2014, the Company recorded a $15 million charge related to acquired in-process research and development (see Note 2). In the first quarter of 2013, the Company recorded a $31 million net tax benefit related to the completion of tax audit examinations. In addition, the R&D Tax Credit was retroactively extended in January 2013 for the 2012 and 2013 tax years. The entire $3 million benefit related to the 2012 tax year was recorded in the first quarter of 2013, and the 2013 benefit is included in the annual effective tax rate (see Note 9).
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