| Basis of Presentation and Summary of Significant Accounting Policies | 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 at the dates of the financial statements . On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, product returns and allowances, bad debts, inventory valuation, goodwill and intangible assets, income taxes, warranty and installation provisions, litigation, retirement plan obligations, stock-based compensation , equity investments and contingencies . 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, which are wholly owned. The Company consolidates entities in which it owns or controls fifty percent or more of the voting shares. All inter-company balances and transactions have been eliminated. Translation of Foreign Currencies The functional currency of each of the Company's foreign operating subsidiaries is the local currency of that particular country, except for the Company's subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity's cash flows. 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 69% , 68% and 70% in 2016, 2015 and 2014 , respectively . Gains and losses from foreign currency transactions are included in net income in the consolidated statements of operations . In 2016 and 2015, foreign currency transactions resulted in a net gain of $4 million and a net loss of $3 million, respectively. Gains and losses from foreign currency transactions were not material for 2014 . 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. treasury bill money market funds and commercial paper. Investments with longer maturities are classified as i nvestments, and are held primarily in U.S. treasury bills, U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities . I nvestments 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 Compan y 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 the U.S. dollar. As of December 31, 2016 and 2015, $2,766 million out of $2,813 million and $2,346 million out of $2,399 million, respectively, of the Company's total cash, cash equivalents and investments were held by foreign subsidiaries and may be subject to material tax effects on distribution to U.S. legal entities . In addition, $261 million out of $2,813 million and $248 million out of $2,399 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at December 31, 2016 and 2015 , respectively . 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 s ales returns is the best estimate of the amount of future product returns related to current period revenue and is based on historical experience . 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, 2016, 2015 and 2014 (in thousands): Balance at Balance at Beginning End of of Period Additions Deductions Period Allowance for Doubtful Accounts and Sales Returns: 2016 $ 7,496 $ 6,912 $ (5,751) $ 8,657 2015 $ 7,179 $ 6,739 $ (6,422) $ 7,496 2014 $ 7,057 $ 7,551 $ (7,429) $ 7,179 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 56% in 2016, 54% in 2015 and 53% in 2014. None of the Company's individual customers accounted for more than 2% of annual Company sales in 2016, 2015 or 2014. 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 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. Business Combinations and Asset Acquisitions The Company accounts for business acquisitions under the accounting standard s for business combinations . T he 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 acqui sition are expensed as incurred and acquired IPR&D is tested for impairment annually 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 periodi c 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. I PR&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, Waters ® and TA. 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. 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 p roducts, 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 2016 and 2015, respectively. Net capitalized software included in intangible assets totaled $132 million at both December 31, 2016 and 2015 . S ee 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, 2016 and 2015. 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 ma terial in any period presented . During the year ended December 31, 2016 , the Company sold an equity investment that was accounted for using the equity method of accounting and was included in other assets in the consolidated balance sheet for $4 million in cash. The investment had a carrying value of $2 million, which resulted in a gain on the sale of $2 million. This investment had a balance of $2 million as of December 31, 2015 and the Company has no long-term investments remaining as of December 31, 2016 . 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, 2016 and 2015 . Fair values determined by Level 1 inputs utilize observable data , such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions. The following table represents the Company's assets and liabilities measured at fair value on a recurring basis at December 31, 2016 (in thousands) : Quoted Prices in Active Significant Markets Other Significant Total at for Identical Observable Unobservable December 31, Assets Inputs Inputs 2016 (Level 1) (Level 2) (Level 3) Assets: U.S. Treasury securities $ 570,313 $ - $ 570,313 $ - Foreign government securities 17,991 - 17,991 - Corporate debt securities 1,643,838 - 1,643,838 - Time deposits 199,906 - 199,906 - Equity securities 147 - 147 - Waters 401(k) Restoration Plan assets 30,954 30,954 - - Foreign currency exchange contracts 60 - 60 - Total $ 2,463,209 $ 30,954 $ 2,432,255 $ - Liabilities: Contingent consideration $ 3,007 $ - $ - $ 3,007 Foreign currency exchange contracts 730 - 730 - Total $ 3,737 $ - $ 730 $ 3,007 The following table represents the Company's assets and liabilities measured at fair value on a recu rring basis at December 31, 2015 (in thousands): Quoted Prices in Active Significant Markets Other Significant Total at for Identical Observable Unobservable December 31, Assets Inputs Inputs 2015 (Level 1) (Level 2) (Level 3) Assets: U.S. Treasury securities $ 627,156 $ - $ 627,156 $ - Foreign government securities 15,199 - 15,199 - Corporate debt securities 1,324,318 - 1,324,318 - Time deposits 74,947 - 74,947 - Equity securities 147 - 147 - Other cash equivalents 27,000 - 27,000 - Waters 401(k) Restoration Plan assets 35,823 35,823 - - Foreign currency exchange contracts 616 - 616 - Total $ 2,105,206 $ 35,823 $ 2,069,383 $ - Liabilities: Contingent consideration $ 4,215 $ - $ - $ 4,215 Foreign currency exchange contracts 402 - 402 - Total $ 4,617 $ - $ 402 $ 4,215 Fair Value of 401(k) Restoration Plan Assets The 401(k) R estoration P lan is a nonqualified defined contribution plan and , in 2016 and 2015, the assets were held in registered mutual funds . T he Company has revised the classification of the 401(k) R estoration P lan assets from Level 2 to Level 1 at December 31, 2015 to correct the classification. The Company concluded that the error was not material to the pri or period financial statements. Fair Value of Cash Equivalents, Investment and Foreign Currency Exchange Contracts T he fair values of the Company' s cash equivalents, investments and foreign currency exchange contracts are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued , typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources. After completing these validation procedures, the Company did not adjust or override any fair value measurements provided by third-party pricing services as of December 31, 2016 and 2015 . Fair Value of Contingent Consideration The fair value of the Company's liability for contingent consideration relates to the July 2014 acquisition of Medimass Research, Development and Service Kft . and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the estimated future results and a discount rate that reflects both the likelihood of achieving the estimated future results and the Company's creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Although there is no contractual limit, the fair value of future contingent consideration payments was estimated to be $3 million and $ 4 million at December 31, 2016 and December 31, 2015 , respectively, based on the Company's best estimate, as the earnout is based on future sales of certain products , some of which are currently in development, through 2034. The change in fair value since December 31, 2015 is primarily due to a reduction in the future revenue projections, offset by the change in time value of money. Fair Value of Other Financial Instruments The Company's cash, accounts receivable, accounts payable and variable interest rate debt are recorded at cost, which approximates fair value due to their short-term nature . The carrying value of the Company's fixed interest rate debt was $610 million and $450 million at December 31, 2016 and 2015 , respectively . The fair value of the Company's fixed interest rate debt wa s 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 $603 million and $454 million at December 31, 2016 and 2015, respectively , using Level 2 inputs . Derivative Transactions The Company is a global company that operates in over 35 countries and, as a result, the Company's net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its non-U.S. dollar foreign subsidiaries' financial statements into U.S. dollars, and when any of the Company's subsidiaries purchase or sell products or services in a currency other than its own currency. The Company's principal strategy in managing exposure to changes in foreign currency exchange rates is to naturally hedge the foreign-currency-denominated liabilities on the Company's balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets. The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company's net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company's currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British p ound , Mexican peso and Brazilian real . At December 31, 2016 , 2015 and 2014 , the Company held foreign currency exchange contracts with notional amounts totaling $120 million , $116 million and $110 million, respectively . The Company's foreign currency exchange contracts included in the consolidated balance sheets are classi fied as follows (in thousands): December 31, 2016 December 31, 2015 Other current assets $ 60 $ 616 Other current liabilities $ 730 $ 402 The following is a summary of the activity included in cost of sales in the statements of operations related to the foreign currency exc hange contracts (in thousands): Year Ended December 31, 2016 2015 2014 Realized (losses) gains on closed contracts $ (10,401) $ (2,601) $ 174 Unrealized (losses) gains on open contracts (883) 742 (1,369) Cumulative net pre-tax losses $ (11,284) $ (1,859) $ (1,195) Stockholders' Equity In Ma y 20 1 4 , the Company's Board of Directors authorized the Company to repurchase up to $ 75 0 million of its out standing common stock over a three -year period . During 2016, 2015 and 2014 , the Company repurchased 2.3 million , 2.6 million and 3.1 million shares of the Company's ou t standing common stock at a cost of $318 million , $327 million and $ 329 million, respectively, under the Ma y 20 1 4 authorization and other previously announced programs. As of December 31, 2016 , the Company repurchased an aggregate of 4.8 million shares at a cost of $ 627 million under the May 201 4 repurchase program and has a total of $123 million authorized for future re purchases. In addition, the Company repurchased $8 million , $7 million and $8 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2016 , 2015 and 2014 , respectively . The Company believes that it has the financial flexibility to fund these share repurchases given current cash levels and debt borrowing capacity , as well as to invest in research, technology and business acquisitions to further grow the Company's sales and profits . 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 invoiced to the customer are included in net sales, while the costs associated with shipping and handling are included in cost of sales . Product shipments 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 generally 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 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 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 standalone software are accounted for in accordance with the accounting standards for software revenue recognition. T he 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 fe e 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 supplie r s, the Company's warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for re asonableness at least quarterly. The following is a summary of the activity of the Company's accrued warranty liability for the years ended December 31, 2016, 2015 and 2014 (in thousands): Balance at Balance at Beginning Accruals for Settlements End of of Period Warranties Made Period Accrued warranty liability: 2016 $ 13,349 $ 9,755 $ (9,713) $ 13,391 2015 $ 13,266 $ 8,390 $ (8,307) $ 13,349 2014 $ 12,962 $ 8,148 $ (7,844) $ 13,266 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 were $11 million for both 2016 and 2015 and were $ 12 million for 2014 . 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 2015 and 2014, the Company incurred $4 million and $15 million charge s, respectively, 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 sign |
