SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 2, 2005

OR

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from            to            .

Commission File Number: 01-14010

WATERS CORPORATION

(Exact name of registrant as specified in the charter)

Delaware		13-3668640
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

34 Maple Street
Milford, Massachusetts 01757
(Address of principal executive offices)

Registrant’s telephone number, including area code: (508) 478-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days

Yes       þ            No      o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes       þ            No      o

Number of shares outstanding of the Registrant’s common stock as of August 1, 2005: 115,005,472.

 

 

WATERS CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

INDEX

				Page
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets (unaudited) as of July 2, 2005 and December 31, 2004			3
		Consolidated Statements of Operations (unaudited) for the three months ended July 2, 2005 and July 3, 2004			4
		Consolidated Statements of Operations (unaudited) for the six months ended July 2, 2005 and July 3, 2004			5
		Consolidated Statements of Cash Flows (unaudited) for the six months ended July 2, 2005 and July 3, 2004			6
		Condensed Notes to Consolidated Financial Statements (unaudited)			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			23
Item 4.		Controls and Procedures			24
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			24
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 3.		Defaults Upon Senior Securities			24
Item 4.		Submission of Matters to a Vote of Security Holders			25
Item 5.		Other Information			25
Item 6.		Exhibits			25
		SIGNATURE			26
		EXHIBITS			27
EX-10.38 2nd Amendment to the Waters Corporation 2003 Equity Plan
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

The accompanying notes are an integral part of the interim consolidated financial statements.

The accompanying notes are an integral part of the interim consolidated financial statements.

The accompanying notes are an integral part of the interim consolidated financial statements.

WATERS CORPORATION AND SUBSIDIARIES

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R (revised 2004), “Share-Based Payment”, which requires the expensing of unvested stock options. SFAS 123R was to be effective as of the third fiscal quarter of 2005; however, in April 2005, the SEC amended the compliance date for public companies to the first annual period beginning after June 15, 2005.

     On December 31, 2004, the Company approved an amendment to accelerate the vesting of approximately 238 thousand unvested stock options granted between December 2000 and February 2001 to certain employees of the Company. These options had an exercise price significantly greater than the market value of the Company’s stock at that time; hence, in accordance with APB 25 and FIN 44, no compensation expense was recorded in the consolidated statements of operations. Each stock option was scheduled to vest primarily in 2005, but became fully vested and exercisable on December 31, 2004. The exercise price and number of shares underlying each affected stock option were unchanged. The acceleration of these options was primarily done as a result of the issuance of SFAS 123R which, under the modified prospective method, requires the expensing of unvested stock options in the first annual reporting period that begins after June 15, 2005. As a result of this acceleration, the Company recognized share-based compensation, net of related tax effects, of $9.1 million in the fourth quarter of 2004 in the pro forma net income disclosure for SFAS 123.

     On May 4, 2005, the Company approved an amendment to accelerate the vesting of approximately 12 thousand unvested stock options and to extend the expiration date of approximately 36 thousand stock options granted to a retiring non-employee director of the Company. The Company also approved an amendment to accelerate the vesting of 2 thousand shares of the Company’s restricted common stock granted to the same director. Under APB 25 and FIN 44 these modifications resulted in a charge which was recorded in selling and administrative expense in the consolidated statements of operations of approximately $0.5 million for the three months ended July 2, 2005.

Product Warranty Costs:

The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component supplies, the 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.

Stockholders’ Equity:

On October 25, 2004, the Company’s Board of Directors authorized the Company to repurchase up to an additional $500.0 million of its outstanding common shares over a two-year period. During the three months ended July 2, 2005, the Company purchased 2.5 million shares of its common stock for an aggregate of $100.1 million. As of July 2, 2005, the Company repurchased an aggregate of 6.8 million shares of its common stock under this program for an aggregate of $304.9 million.

     On May 6, 2003, the Company’s Board of Directors authorized the Company to repurchase up to $400.0 million of its outstanding common shares over a two-year period. During the three months ended July 3, 2004, the Company purchased 2.1 million shares of its common stock for $94.4 million, thus completing its $400.0 million stock buyback program. The total shares purchased under this program were 11.8 million.

     The Company believes that the share repurchase program benefits shareholders by increasing earnings per share through reducing the number of shares outstanding and that the Company is likely to have adequate financial flexibility to fund additional share repurchases given current cash and debt levels.

2.

Inventories and Property, Plant and Equipment

Property, Plant and Equipment

During the six months ended July 2, 2005, the Company retired and disposed of approximately $8.4 million of property, plant and equipment, most of which was fully depreciated and no longer in use. Gains or losses on disposal were immaterial for the six months ended July 2, 2005.

3.

Acquisitions

NuGenesis:

In February 2004, the Company acquired all of the capital stock of NuGenesis Technologies Corporation (“NuGenesis”), a company headquartered in Westborough, Massachusetts, for approximately $42.9 million in cash. NuGenesis develops and markets the NuGenesis ^® Scientific Data Management System (“SDMS”).

     The acquisition of NuGenesis was accounted for under the purchase method of accounting and the results of operations of NuGenesis have been included in the consolidated results of the Company from the acquisition date. The purchase price of the acquisition was allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values. The Company has allocated $13.1 million of the purchase price to intangible assets comprised of customer lists, trademarks and other purchased intangibles. The excess purchase price of $34.7 million after this allocation has been accounted for as goodwill.

     In connection with the NuGenesis purchase price allocation, deferred tax liabilities were established for the amortization of intangible assets for book purposes that were not deductible for tax purposes in the U.S. In the third quarter of 2004, the Company transferred the NuGenesis intangible assets to a foreign wholly-owned subsidiary where the Company expects to deduct the amortization of the intangible assets for book and tax purposes. As a result, deferred tax liabilities and goodwill were adjusted by $4.6 million during the year ended December 31, 2004.

     The Company recorded approximately $1.1 million in purchase accounting liabilities relating to the NuGenesis acquisition. Approximately $0.3 million had been utilized and $0.7 million had been reversed as of December 31, 2004. The reversal was due to a change in management’s plan to continue use of a facility lease assumed as part of the acquisition until the end of its term in June 2005. The remaining $0.1 million was utilized during the second quarter of 2005.

Rheometrics:

On January 15, 2003, the Company acquired the worldwide rheometry business of Rheometric Scientific, Inc. (“Rheometrics”) for approximately $16.5 million in cash. This transaction was accounted for under the purchase method of accounting and the results of operations of Rheometrics have been included in the consolidated results of the Company from the acquisition date. This business was integrated into the existing worldwide TA operations. The purchase price of the acquisition was allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values.

     The Company recorded approximately $4.1 million in purchase accounting liabilities relating to the Rheometrics acquisition. The purchase accounting liabilities included $1.2 million for severance costs for approximately 65 employees, all of whom were terminated as of December 31, 2004, and $0.9 million in facilities related costs for three facilities, all of which have been closed as of December 31, 2004. Amounts accrued under purchase accounting related to the Rheometrics acquisition were $0.3 million at July 2, 2005 and December 31, 2004.

Other

During the first quarter of 2004, the Company acquired various tangible and intangible assets of certain Asian distributors totaling approximately $0.5 million.

     The following represents the pro forma results of the ongoing operations for Waters and NuGenesis as though the acquisition of NuGenesis had occurred at the beginning of the period shown (in thousands, except per share data). The pro forma information, however, is not necessarily indicative of the results that would have resulted had the acquisition occurred at the beginning of the period presented, nor is it necessarily indicative of future results.

4. Goodwill and Other Intangibles

The carrying amount of goodwill was $225.3 million and $228.5 million at July 2, 2005 and December 31, 2004, respectively. The decrease is attributable to currency translation adjustments of approximately $3.2 million.

     The Company’s intangible assets in the consolidated balance sheets are detailed as follows (in thousands):

     For the three months ended July 2, 2005 and July 3, 2004, amortization expense for intangible assets was $5.1 million and $4.5 million, respectively. For the six months ended July 2, 2005 and July 3, 2004, amortization expense for intangible assets was $10.4 million and $8.9 million, respectively. Amortization expense for intangible assets is estimated to be approximately $20.7 million for each of the next five years. Foreign currency translation decreased gross carrying amount and accumulated amortization for intangible assets by approximately $2.7 million and $0.7 million, respectively, during the six months ended July 2, 2005.

5.

Debt

In December 2004, the Company entered into a syndicated committed Credit Agreement (the “Credit Agreement”) that provides for a $250.0 million term loan facility and a $450.0 million revolving facility, which includes both a letter of credit and a swingline subfacility. At July 2, 2005 and December 31, 2004, the Company had aggregate borrowings under the Credit Agreement of $610.0 million and $440.0 million, respectively, and an amount available to borrow of $88.2 million and $256.8 million, respectively, after outstanding letters of credit. At July 2, 2005 and December 31, 2004, the $250.0 million term loan was fully drawn and classified as long-term debt.

     The Company, and its foreign subsidiaries, also had available short-term lines of credit, totaling $122.1 million at July 2, 2005 and $95.7 million at December 31, 2004. At July 2, 2005 and December 31, 2004, related short-term borrowings were $47.4 million at a weighted average interest rate of 3.26% and $16.7 million at a weighted average interest rate of 2.45%, respectively.

Hedging Transactions

Hedges of Net Investments in Foreign Operations

During the second quarter of 2005, the Company hedged its net investment in Yen and Euro foreign affiliates with cross-currency interest rate swaps, with notional values of $26.0 million and $30.0 million, respectively. At July 2, 2005 and December 31, 2004, the notional amounts of outstanding contracts were $30.0 million and $37.0 million, respectively.

WATERS CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

     During the second quarter of 2005, the Company hedged its net investment in British pound foreign affiliates with range forward and forward foreign exchange contracts in British pounds. Under the terms of the range forward agreements, the Company purchases an option below the current spot rate to sell British pounds, and sells an option to its counterparties above the current spot rate to buy British pounds, with option premiums that offset. As of July 2, 2005 and December 31, 2004, the Company had combined range forward and forward foreign exchange contracts outstanding in British pounds with notional amounts of 75.0 million and 45.0 million British pounds, respectively.

     The Company has designated the forward exchange agreements described above as hedges of net investments, and accordingly the changes in fair value associated with these forward exchange agreements are recorded in accumulated other comprehensive income in the consolidated balance sheets.

Other

The Company enters into forward foreign exchange contracts, principally to hedge the impact of currency fluctuations on certain inter-company balances. Principal hedged currencies include the Euro, Japanese Yen and British pound. The periods of these forward contracts typically range from one to three months and have varying notional amounts which are intended to be consistent with changes in inter-company balances. Gains and losses on these forward contracts are recorded in selling and administrative expenses in the consolidated statements of operations. At July 2, 2005 and December 31, 2004, the Company held forward foreign exchange contracts with notional amounts totaling approximately $71.9 million and $62.9 million, respectively.

6.

Income Taxes

The Company’s effective tax rates for the three months ended July 2, 2005 and July 3, 2004 were 18.7% and 25.2%, respectively. The effective tax rate for the three months ended July 3, 2004 was impacted by the net tax effect of a litigation settlement. The effective tax rate, excluding this item and corresponding tax effect, was 22.0% for the three months ended July 3, 2004. For the quarter ended July 2, 2005, the Company lowered its effective tax rate from 20.0% to 19.3% on a full year basis. This is attributable to the Company’s quarterly assessment of projected full year taxable income by jurisdiction. The decrease in effective tax rates for the three months ended July 2, 2005 from July 3, 2004, excluding the previously described items, is primarily attributable to the increase in income in international jurisdictions with lower effective tax rates.

     The Company’s effective tax rates for the six months ended July 2, 2005 and July 3, 2004 were 19.3% and 23.2%, respectively. The effective tax rate for the six months ended July 3, 2004 was impacted by the net tax effect of certain litigation charges and settlements. The effective tax rate, excluding these items and corresponding tax effects, was 22.0% for the six months ended July 3, 2004. The decrease in effective tax rates for the six months ended July 2, 2005 from July 3, 2004, excluding the previously described items, is primarily attributable to the increase in income in international jurisdictions with lower effective tax rates.

     In October 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. The AJCA contains a series of provisions, several of which are pertinent to the Company. The AJCA creates a temporary incentive for U.S. multi-national corporations to repatriate accumulated income abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. It has been the Company’s practice to permanently reinvest all foreign earnings into foreign operations. On July 12, 2005, the Board of Directors of the Company approved the repatriation of $500.0 million as a qualified distribution in accordance with the AJCA. The Company will use the repatriated cash to fund current and future operating expenses within the parameters of IRS guidance. During the third quarter of 2005, the Company will record a tax liability of approximately $22.0 million to $28.0 million for the federal, state and foreign taxes related to such repatriation.

7.

Patent Litigation

Applera Corporation:

On March 2, 2004, the Company and MDS, Inc., through its Applied Biosystems/MDS Sciex Instruments partnership, and Applera Corporation — Applied Biosystems entered into a settlement agreement (the “Applera Settlement Agreement”) with respect to the various civil actions pending against each of them, both in the United States and internationally. Stipulations of Dismissal or their foreign equivalents (the “Stipulations”) with respect to the disposal of all such actions have been entered in the applicable courts and tribunals in each of the United States, the United Kingdom, Canada and Japan.

WATERS CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

     The Applera Settlement Agreement provides for the resolution of all patent infringement claims in the United States made by certain of the parties against the other and of international cases brought by MDS, Inc. and Applied Biosystems/MDS Sciex Instruments against the Company with respect to alleged infringements of those parties’ patents at issue in the United Kingdom, Canada and Japan.

     In consideration of entering into the Applera Settlement Agreement and the Stipulations, the Company and MDS, Inc. and Applied Biosystems/MDS Sciex Instruments have entered into royalty paying license agreements, cross licensing the use of the technology described in the parties’ respective patents at issue. In addition, the Company made a one-time payment to Applied Biosystems/MDS Sciex Instruments of $18.1 million on March 11, 2004.

     The accrued patent litigation expenses in the consolidated balance sheets as of July 2, 2005 and December 31, 2004 were zero and $0.1 million, respectively. There were no charges in the consolidated statements of operations for the six months ended July 2, 2005 and July 3, 2004 related to this case.

Hewlett-Packard Company:

The Company filed suit in the United States against Hewlett-Packard Company and Hewlett-Packard GmbH (collectively, “HP”), seeking a declaration that certain Company products sold under the mark “Alliance” do not constitute an infringement of one or more patents owned by HP or its foreign subsidiaries (the “HP patents”). The action in the United States was dismissed for lack of controversy. Actions seeking revocation or nullification of foreign HP patents were filed by the Company in Germany, France and England. A German patent tribunal found the HP German patent to be valid. In Germany, France and England, HP and its successor, Agilent Technologies Deutschland GmbH (“Agilent”), have brought an action alleging that certain features of the Alliance pump may infringe the HP patents. In England, the Court of Appeal has found the HP patent valid and infringed. The Company’s petitions for leave to appeal to the House of Lords were denied. A trial on damages was scheduled for November 2004. In March 2004, Agilent brought a new action against the Company alleging that certain features of the Alliance pump continue to infringe the HP patents. At a hearing held in the UK on June 8, 2004, the UK court postponed the previously scheduled November 2004 damages trial until March 2005. Instead, the court scheduled the trial in the new action for December 2004. In December 2004, following a trial in the new action, the UK court ruled that the Company did not infringe the HP patents. Agilent filed an appeal in that action, which was heard in July 2005, and the UK Appellate Court upheld the lower Court’s ruling of non-infringement. The damages trial scheduled for March 2005 has been postponed pending this appeal and rescheduled for December 2005. In France, the Paris District Court has found the HP patent valid and infringed by the Alliance pump. The Company appealed the French decision and on April 12, 2004 the French appeals court affirmed the Paris District Court’s finding of infringement. The Company has filed a further appeal in the case. In the German case, a German court has found the patent infringed. The Company appealed the German decision, and in December 2004 the German appeals court reversed the trial court and issued a finding of non-infringement in favor of the Company. Agilent is seeking an appeal in that action and in July 2005 brought a new action against the Company alleging that certain features of the Alliance pump continue to infringe the HP patents. The Company is currently assessing the impact of this new action.

     The Company recorded a provision of $7.8 million in the first quarter of 2004 for estimated damages and fees to be incurred with respect to the ongoing litigation for the England and France suits, excluding the effect of the recent suit filed in March 2004. This provision represents management’s best estimate of the probable and reasonably estimable loss related to this litigation. No provision has been made for the Germany suits since the Company believes that the loss contingencies are not probable. The accrued patent litigation expense in the consolidated balance sheets at July 2, 2005 and December 31, 2004 were $3.0 million and $4.5 million, respectively, for the England and France suits. The liability includes a provision of $0.8 million made in 2002. The change in the liability since December 31, 2004 is attributable to payments of legal fees directly associated with the cases.

8.

Restructuring and Other Unusual Charges, net

2004 Restructuring:

In January 2004, the Company initiated a restructuring effort to realign its personnel between various support functions and field sales and service organizations around the world. As a result, 70 employees were terminated, all of whom have left the Company. The provision of $2.1 million represents costs incurred, including severance costs, for the 70 people and other directly related incremental costs of this realignment effort. The Company’s 2004 restructuring liability was zero at July 2, 2005 and December 31, 2004.

WATERS CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

2002 Restructuring:

In July 2002, the Company took action to restructure and combine the Company’s field sales, service and distribution organizations of its Micromass and HPLC operations. In May 2003, the Company took action to restructure and combine the Company’s Micromass and HPLC manufacturing operations. The objective of these integrations was to leverage the strengths of both divisions and align and reduce operating expenses. The integration efforts impacted the U.S., Canada, continental Europe and the United Kingdom. Approximately 55 employees were terminated, all of whom have left the Company. In addition, the Company originally committed to closing four sales and distribution facilities, two of which were closed as of December 31, 2004. During the three months ended April 3, 2004, the Company reversed approximately $2.0 million in restructuring accruals, primarily attributable to a change in plans with respect to two facilities previously selected for closure and distributor contract settlements being less than previously estimated. The Company’s 2002 integration restructuring liability was zero at July 2, 2005 and December 31, 2004.

9.

Earnings Per Share

Basic and diluted earnings per share calculations are detailed as follows (in thousands):

     For the three months and six months ended July 2, 2005, the Company made no contributions to the Waters Retirement Plan (“the Plan”). During fiscal year 2005, the Company expects to contribute approximately $6.5 million to the Plan.

     The Company sponsors various non-U.S. retirement plans. The components of net periodic pension cost related to these plans are as follows (in thousands):

12.

Business Segment Information

The Company evaluated its business activities that are regularly reviewed by the Chief Executive Officer for which discrete financial information is available. As a result of this evaluation, the Company determined that it has two operating segments: Waters Division and TA Division.

     Waters Division is in the business of designing, manufacturing, distributing and servicing LC instruments, columns, other consumables and mass spectrometry instruments that can be integrated and used along with other analytical instruments. Additionally, as a result of the acquisitions of Creon Lab Control AG in July 2003 and NuGenesis Technologies Corporation in February 2004, Waters Division entered the laboratory informatics market (“Laboratory Informatics”), which consists of laboratory-to-enterprise scale software systems for managing and storing scientific information collected from a wide variety of instrument test methods. TA Division is in the business of designing, manufacturing, distributing and servicing thermal analysis and rheometry instruments. The Company’s two divisions are its operating segments, which have similar economic characteristics, product processes, products and services, types and classes of customers, methods of distribution, and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the one reportable segment of the Company.

WATERS CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

13.

Recent Accounting Standards Changes and Developments

In May 2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections”, which replaces APB Opinion No. 20 “Accounting Changes”, and FASB Statement No. 3 “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. At the present time, the Company does not believe that adoption of SFAS 154 will have a material effect on its financial position, results of operations or cash flows.

     In March 2005, the FASB issued FASB Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations”, which is an interpretation of FASB Statement No. 143, “Accounting for Asset Retirement Obligations”. The interpretation requires a liability for the fair value of a conditional asset retirement obligation be recognized if the fair value of the liability can be reasonably estimated. The interpretation is effective for years ending after December 15, 2005. The interpretation is not expected to have a material impact on the Company’s results of operations or financial position.

     In December 2004, the FASB issued SFAS No. 123(R) “Share-Based Payments” which amends SFAS No. 123 “Accounting for Stock-Based Compensation”. This standard requires that all share-based payments to employees, including grants of employee stock options, be recognized in the statement of operations based on their fair values. The standard was originally to be effective for public companies for interim periods beginning after June 15, 2005; however, in April 2005, the SEC amended the compliance date for public companies to the first annual period beginning after June 15, 2005. The final standard allows alternative methods for determining fair value. At the present time, the Company has not determined which valuation method it will use. The adoption of SFAS No. 123(R) will have a material impact on the Company’s results of operations. Future results will be impacted by the number and value of additional equity awards as well as the value of existing unvested equity awards.

     In April 2005, the SEC issued Staff Accounting Bulletin (“SAB”) 107 “Share-Based Payments” which expresses the SEC Staff’s views regarding the application of SFAS No. 123(R). As noted above, the adoption of SFAS No. 123(R), as applied using standards set forth in SAB 107, will have a material impact on the Company’s results of operations and financial position.

     In December 2004, the FASB issued SFAS No. 153 “Exchanges of Nonmonetary Assets” which amends Accounting Principles Board Opinion No. 29. This standard requires that exchanges of nonmonetary assets be measured based on the fair value of the assets exchanged. This standard is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and should be applied prospectively. At the present time, the Company does not believe that adoption of SFAS 153 will have a material effect on its financial position, results of operations or cash flows.

     In November 2004, the FASB issued SFAS No. 151 “Inventory Costs” which amends Accounting Research Bulletin No. 43 Chapter 4. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This standard is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. At the present time, the Company is evaluating SFAS 151 but does not believe that it will have a material effect on its financial position, results of operations or cash flows.

Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Beginning in 2005, the Waters Division has included single quadrupole instruments within its reported mass spectrometry (“MS”) instrument system revenues. These had previously been categorized as high performance liquid chromatography (“HPLC”) instrument systems. In addition, service revenues for liquid chromatography (“LC”) and MS have been consolidated into a single service revenue classification. These changes were made to reflect current business reporting subsequent to the consolidation of the Waters Division’s LC and MS organizations. All product line and service sales and sales growth percentages reported for the periods herein for Waters Division reflect the new classifications as described above. The sales amounts that were reclassified between LC and MS generally offset each other such that the relative proportions of sales classified as LC and MS remained unchanged.

Business and Financial Overview:

Sales grew 9% for the three month period ended July 2, 2005 (the “2005 Quarter”) over the three month period ended July 3, 2004 (the “2004 Quarter”). Sales grew 7% for the six month period ended July 2, 2005 (the “2005 Period”) over the six month period ended July 3, 2004 (the “2004 Period”). Currency translation effect accounted for approximately 1% of that sales growth for both the 2005 Quarter and 2005 Period.

     During the first quarter of 2005, the Company experienced weakness in its European business predominantly as a result of the delayed release of capital budgets by the Company’s large pharmaceutical customers. During the 2005 Quarter, the Company’s European business strengthened as certain delayed orders for the Company’s products were released. The Company believes that business in Europe is likely to continue to improve and that Europe is likely to finish the year with positive sales growth. Outside of Europe, the Company’s results were generally in-line with management’s expectations. Business growth was strongest in India, North America and Latin America. While pharmaceutical sales grew during the 2005 Quarter, management believes that many large pharmaceutical accounts are continuing to delay the release of capital budgets until the second half of 2005.

     Sales to industrial customers grew 4% in the 2005 Quarter and 7% in the 2005 Period. The TA Instruments Division (“TA”), a business with a heavy industrial focus, delivered sales growth of 6% for the 2005 Quarter and sales growth of 11% in the 2005 Period. Management anticipates that this positive trend in industrial spending is likely to continue throughout the year.

     With respect to the Waters Division, sales of LC, including HPLC and Ultra Performance Liquid Chromatography (“UPLC”), grew 10% in the 2005 Quarter, primarily due to higher ACQUITY UPLC™ shipments and strong service and LC consumables growth.

     The Quattro Premier™ XE was one of the new MS products that the Company introduced at the American Society of Mass Spectrometry (“ASMS”) conference in June 2005 and it began shipping in the 2005 Quarter. This new instrument is the highest performance tandem quadrupole system the Company has designed. In the Q-Tof product line, the Company began shipping its new Protein Expression system in the 2005 Quarter. Shipments of these new products were offset by declines in sales of magnetic sector and MALDI Tof devices, resulting in MS sales growth of 5% for the 2005 Quarter.

     Sales of Laboratory Informatics products, a business that is heavily influenced by pharmaceutical spending, decreased by approximately $1.1 million in the 2005 Quarter compared to the 2004 Quarter. Sales of these products continue to be below management’s expectations. However, the Company believes there is a viable market for these products and continues to pursue growth opportunities in this business.

     Operating income was $67.0 million in the 2005 Quarter, a decrease of $11.9 million from $78.9 million in the 2004 Quarter. The 2004 Quarter included a $17.1 million gain from a judgment related to patent litigation with Perkin-Elmer Corporation. The net increase in operating income of $5.2 million, excluding that gain, is primarily a result of the increase in sales and gross profit, offset somewhat by higher selling and administrative expenses.

     Operating income was $124.8 million in the 2005 Period, a decrease of $4.9 million from $129.7 million in the 2004 Period. The 2004 Period included a $17.1 million gain from a judgment related to patent litigation with Perkin-Elmer Corporation and a litigation provision of $7.8 million related to ongoing patent litigation with Hewlett-Packard Corporation. The net increase in operating income of $4.4 million, excluding the litigation gain and provision, is primarily a result of the increase in sales and gross profit, offset somewhat by higher selling and administrative expenses.

     Operating cash flows for the 2005 Period increased to $163.1 million from $128.1 million in the 2004 Period. The increase is primarily due to the decrease in accounts receivable, a reduction in the change in accrued litigation and an increase in deferred revenue. Capital expenditures related to property, plant, equipment, software capitalization and other intangibles in the 2005 Period were $26.7 million compared to $35.9 million in the 2004 Period. The decrease in capital expenditures in the 2005 Period is attributable to a purchase of a building in the 2004 Period.

     The Company continues to evaluate the acquisition of businesses, product lines and technologies to augment the Waters and TA operating divisions. Currently, however, management expects to continue to apply the Company’s strong cash generation to repurchasing shares of Company stock through the $500.0 million program authorized by the Company’s Board of Directors in October 2004. During the 2005 Quarter, the Company purchased 2.5 million shares of its common stock for an aggregate of $100.1 million. As of July 2, 2005, the Company had repurchased an aggregate of 6.8 million shares of its common stock under this program for an aggregate of $304.9 million. The Company believes that the share repurchase program benefits shareholders by increasing earnings per share through reducing the number of shares outstanding and that the Company is likely to have adequate financial flexibility to fund additional share repurchases given current cash and debt levels.

Results of Operations:

Sales:

Sales for the 2005 Quarter and the 2005 Period were $284.6 million and $552.9 million, respectively, compared to $260.5 million for the 2004 Quarter and $515.6 million for the 2004 Period, an increase of 9% for the 2005 Quarter and 7% for the 2005 Period. Currency translation accounted for approximately 1% of that sales growth in both the 2005 Quarter and 2005 Period primarily due to the strengthening of the Euro, British pound, Japanese Yen and Canadian dollar. Product sales were $204.2 million and $395.8 million in the 2005 Quarter and 2005 Period, respectively, compared to $187.7 million and $373.9 million in the 2004 Quarter and 2004 Period, respectively, an increase of 9% for the 2005 Quarter and 6% for the 2005 Period. The increase in product sales, aside from the effect of foreign currency translation, is primarily due to the continued strength of the HPLC, MS and TA sales growth in the 2005 Quarter and 2005 Period. Service sales were $80.5 million and $157.2 million in the 2005 Quarter and 2005 Period, respectively, compared to $72.8 million and $141.7 million in the 2004 Quarter and 2004 Period, respectively, an increase of 11% for both the 2005 Quarter and the 2005 Period. The increase, aside from the effect of foreign currency translation, is primarily attributable to growth in the Company’s installed base of instruments and sales of service contracts.

     The following commentary discusses the Company’s sales performance by product line excluding the effects of currency translation.

     Within the Waters Division, LC sales grew approximately 10% in the 2005 Quarter and 6% in the 2005 Period. Chemistry grew approximately 11% in the 2005 Quarter and 8% in the 2005 Period. Service grew 11% in the 2005 Quarter and 9% in the 2005 Period due to increased sales of service plans to the higher installed base of customers. LC instrument sales grew 10% in the 2005 Quarter compared with the 2004 Quarter and 3% in the 2005 Period. The increase in instrument sales during the 2005 Quarter is primarily attributable to higher sales to pharmaceutical and life science customers and higher sales of ACQUITY UPLC. Geographically, LC sales in the U.S., Europe, Asia and Japan strengthened approximately 6%, 11%, 11% and 8%, respectively, in the 2005 Quarter and 4%, 4%, 4% and 6%, respectively, in the 2005 Period.

     Within the Waters Division, MS sales grew approximately 5% in the 2005 Quarter and the 2005 Period. Sales in the U.S. and Europe grew 29% and 4%, respectively, in the 2005 Quarter, while sales in Asia and Japan declined by 25% and 15%, respectively. Sales in the U.S. grew 21% in the 2005 Period, while sales in Europe, Asia and Japan declined by 1%, 9%, and 1%, respectively. Growth in the U.S. and Europe during the 2005 Quarter is largely due to sales growth of the tandem quadrupole and Q-Tof systems. Offsetting this growth in the quarter were declines in magnetic sector instrument revenues.

     Within the Waters Division, sales of Laboratory Informatics products were $4.3 million in the 2005 Quarter and $8.7 million in the 2005 Period, compared to $5.4 million in the 2004 Quarter and $10.3 million in the 2004 Period.

     Within the TA Instruments Division, sales continued to be strong with sales growth of 5% for the 2005 Quarter and 10% for the 2005 Period. TA product and service sales grew 3% and 12%, respectively, in the 2005 Quarter and 8% and 16%, respectively, in the 2005 Period. Geographically, growth in the TA business for the 2005 Quarter was predominantly in Asia and Europe, with increased spending by core industrial chemical and pharmaceutical companies. The Company established a direct operation in China in the third quarter of 2004 which augmented Asia’s growth in the 2005 Quarter and the 2005 Period.

Gross Profit:

Gross profit for the 2005 Quarter and 2005 Period was $167.6 million and $324.1 million, respectively, compared to $154.3 million and $301.9 million for the 2004 Quarter and 2004 Period, respectively, an increase of 9% for the quarter and 7% for the period, respectively. Gross profit as a percentage of sales decreased to 58.9% in the 2005 Quarter from 59.2% in the 2004 Quarter. The decline in gross profit margins in the 2005 Quarter is due to the change in sales mix and the impact of a planned reduction in inventory levels. Gross profit as a percentage of sales for both the 2005 and 2004 Periods was 58.6%.

Selling and Administrative Expenses:

Selling and administrative expenses for the 2005 Quarter and 2005 Period were $82.9 million and $163.5 million, respectively, compared to $75.8 million for the 2004 Quarter and $147.3 million for the 2004 Period. Selling and administrative expense as a percentage of sales for both the 2005 and 2004 Quarters was 29.1%. The $7.1 million or 9% increase in total selling and administrative expenses for the 2005 Quarter is primarily attributable to an increase of approximately $1.9 million as a result of currency translation and an increase attributable to annual merit increases effective in April of both years across most divisions, other headcount additions and related fringe benefits and indirect costs of $4.6 million. As a percentage of sales, selling and administrative expenses increased to 29.6% for the 2005 Period compared to 28.6% in the 2004 Period. The $16.2 million or 11% increase in total selling and administrative expenses for the 2005 Period is attributable primarily to the following: an increase of approximately $3.9 million as a result of currency translation, an increase of approximately $1.7 million related to Sarbanes-Oxley compliance expenses; an increase attributable to annual merit increases effective in April of both years across most divisions, other headcount additions and related fringe benefits and indirect costs of $8.7 million; an increase in travel expenses of $3.3 million and an increase in expenses associated with a new building in Milford, Massachusetts acquired in the prior year. The impact of these increases was offset by lower management incentive compensation expense. Management believes that selling and administrative expenses will grow at, or slightly above, the rate of sales growth for the full year.

Research and Development Expenses:

Research and development expenses were $16.5 million for the 2005 Quarter and $33.2 million for the 2005 Period compared to $15.7 million for the 2004 Quarter and $31.8 million for the 2004 Period, an increase of 5% for the 2005 Quarter and the 2005 Period. Research and development expenses increased $0.8 million for the 2005 Quarter and $1.4 million for the 2005 Period due primarily to the merit increases effective in April of both years across most divisions, other headcount additions and related fringe benefits and indirect costs, and currency translation.

Litigation Provisions:

The Company recorded the benefit of a litigation judgment in the 2004 Quarter in the amount of $17.1 million and a provision of $7.8 million in the first quarter of 2004. The judgment benefit received in the 2004 Quarter is related to the conclusion of the Company’s litigation with Perkin-Elmer Corporation. The provision in the 2004 Period is related to the ongoing patent infringement litigation with Hewlett-Packard Corporation. There were no charges incurred in the 2005 Quarter and 2005 Period related to these cases.

Interest Expense:

Interest expense was $5.8 million for the 2005 Quarter and $9.9 million for the 2005 Period, compared to $1.9 million for the 2004 Quarter and $3.8 million for the 2004 Period. The increase of $3.9 million for the 2005 Quarter and $6.1 million for the 2005 Period is due primarily to interest expense on additional borrowings against the Company’s credit facilities to fund the stock repurchase program.

Interest Income:

Interest income was $5.3 million for the 2005 Quarter and $9.8 million for the 2005 Period, compared to $2.9 million for the 2004 Quarter and $5.0 million for the 2004 Period. The increase in interest income for the 2005 Quarter and the 2005 Period is primarily attributable to increases in the Company’s cash balances.

Provision for Income Taxes:

The Company’s effective tax rates for the three months ended July 2, 2005 and July 3, 2004 were 18.7% and 25.2%, respectively. The effective tax rate for the three months ended July 3, 2004 was impacted by the net tax effect of a litigation settlement. The effective tax rate, excluding this item and corresponding tax effect, was 22.0% for the three months ended July 3, 2004. For the quarter ended July 2, 2005, the Company lowered its effective tax rate from 20.0% to 19.3% on a full year basis. This is attributable to the Company’s quarterly assessment of projected full year taxable income by jurisdiction. The decrease in effective tax rates for the three months ended July 2, 2005 from July 3, 2004, excluding the previously described items, is primarily attributable to the increase in income in international jurisdictions with lower effective tax rates.

     The Company’s effective tax rates for the six months ended July 2, 2005 and July 3, 2004 were 19.3% and 23.2%, respectively. The effective tax rate for the six months ended July 3, 2004 was impacted by the net tax effect of certain litigation charges and settlements. The effective tax rate, excluding these items and corresponding tax effects, was 22.0% for the six months ended July 3, 2004. The decrease in effective tax rates for the six months ended July 2, 2005 from July 3, 2004, excluding the previously described items, is primarily attributable to the increase in income in international jurisdictions with lower effective tax rates.

     In October 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. The AJCA contains a series of provisions, several of which are pertinent to the Company. The AJCA creates a temporary incentive for U.S. multi-national corporations to repatriate accumulated income abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. It has been the Company’s practice to permanently reinvest all foreign earnings into foreign operations. On July 12, 2005, the Board of Directors of the Company approved the repatriation of $500.0 million as a qualified distribution in accordance with the AJCA. The Company will use the repatriated cash to fund current and future operating expenses within the parameters of IRS guidance. During the third quarter of 2005, the Company will record a tax liability of approximately $22.0 million to $28.0 million for the federal, state and foreign taxes related to such repatriation. It is expected that a majority of this tax liability will be paid during the fourth quarter of 2005 and the first quarter of 2006.

Impact of New Accounting Pronouncements:

In December 2004, the FASB issued SFAS No. 123(R) “Share-Based Payments” (“SFAS 123R”) which amends SFAS No. 123 “Accounting for Stock-Based Compensation”. This standard requires that all share-based payments to employees, including grants of employee stock options, be recognized in the statement of operations based on their fair values. This charge will be allocated to line items within the statement of operations based on underlying employee service. The Company will begin recognizing these charges in fiscal year 2006. The final standard allows alternative methods for determining fair value. The Company is considering alternative equity compensation structures as well as valuation methods. The adoption of SFAS 123R will have a material impact on the Company’s results of operations in various line items within the statements of operations. Due to the alternatives being considered, management is unable to quantify the future impact on results of operations.

Liquidity and Capital Resources

      Condensed Consolidated Statements of Cash Flows (in thousands):

Net cash provided from operating activities was $163.1 million and $128.1 million in the 2005 Period and 2004 Period, respectively. The primary sources of net cash provided from operating activities were net income, the adding back of depreciation and amortization, the reduction of accounts receivable, and the increase in deferred revenue. Included in the net income for the 2004 Period was $17.1 million in proceeds for the Perkin-Elmer litigation judgment. Depreciation and amortization increased in the 2005 Period primarily from the effect of the purchase of a new building in Milford, Massachusetts. The change in accounts receivable in 2005 Period compared to the 2004 Period is primarily attributable to the timing of payments made by customers which resulted in the days-sales-outstanding (“DSO”) decreasing to 73 days at July 2, 2005 from 78 days at July 3, 2004. Currency translation decreased DSO by approximately one day in the 2005 Period.

     The changes in accounts payable and other current liabilities in the 2005 Period versus the 2004 Period are primarily due to higher incentive compensation payments made in the 2005 Period based on 2004 results. The change in accounts payable and other current liabilities was also impacted by the lower accounts payable balance, which was offset by increases in tax liabilities resulting from the timing of estimated tax payments. The increases in deferred revenue and customer advances are from invoicing for annual service contracts at the beginning of each fiscal year and overall growth in the service business. The reduction in the change in accrued litigation is primarily a result of an $18.1 million payment made in the 2004 Period regarding the Applera litigation, offset by a $7.8 million provision, also made in the 2004 Period, related to the Hewlett-Packard litigation.

     Net cash used in investing activities totaled $26.7 million and $77.4 million in the 2005 Period and 2004 Period, respectively. Additions to fixed assets and intangible assets were $26.7 million in the 2005 Period and $35.9 million in the 2004 Period. Included in the 2004 Period was a 250 thousand square foot building purchase adjacent to the Company’s headquarters for $18.1 million. The remaining increase is primarily a result of recent expansion efforts related to multiple facilities to accommodate future growth. Cash paid for business acquisitions, net of cash acquired were zero and $41.5 million in the 2005 Period and the 2004 Period, respectively.

     With respect to cash provided by (used in) financing activities, the Company repurchased 4.2 million shares of its common stock for an aggregate of $175.0 million during the 2004 Period. On October 25, 2004, the Company’s Board of Directors authorized the Company to repurchase up to an additional $500.0 million in outstanding common shares over a two-year period. The Company believes that the share repurchase program benefits shareholders by increasing earnings per share through reducing the outstanding shares and that the Company is likely to have adequate financial flexibility to fund these share repurchases given current cash and debt levels. As of July 2, 2005, 6.8 million shares have been purchased under this plan for an aggregate of $304.9 million of which $248.6 million was paid in the 2005 Period. The Company received $11.2 million of proceeds from other financing activities in the 2005 Period from the exercise of stock options and the purchase of shares pursuant to its employee stock purchase plans. The Company also made net payments of $8.2 million on derivative contracts. The Company received $21.6 million of proceeds from other financing activities in the 2004 Period from the exercise of stock options and the purchase of shares pursuant to the employee stock purchase plans.

     The Company had net borrowings at the end of the 2005 Period of $657.4 million, primarily relating to borrowings in the U.S. under the Company’s syndicated committed Credit Agreement (the “Credit Agreement”), dated December 2004. The Credit Agreement provides a $250.0 million term loan facility and a $450.0 million revolving facility which includes both a letter of credit and a swingline subfacility. The Company increased its net borrowings of bank debt by $200.8 million and $163.2 million during the 2005 Period and 2004 Period, respectively.

     The Company believes that the cash and cash equivalent balance of $615.2 million at the end of the 2005 Period and expected cash flow from operating activities together with borrowings available from the Credit Agreement and other short-term domestic facilities will be sufficient to fund working capital, capital spending requirements, acquisitions, authorized share repurchase amounts and any adverse final determination of ongoing litigation for at least the next twelve months. Management believes, as of the date of this report, that its financial position along with expected future cash flows from earnings based on historical trends and the ability to raise funds from a number of financing alternatives and external sources will be sufficient to meet operating and investing needs for the foreseeable future.

Contractual Obligations and Commercial Commitments:

A summary of the Company’s contractual obligations and commercial commitments is included in the Company’s annual report on Form 10-K for the year ended December 31, 2004. The Company reviewed its contractual obligations and commercial commitments as of July 2, 2005, and determined that there were no significant changes.

     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 that any outcome of such matters will not be material to its financial position or results of operations.

     During fiscal year 2005, the Company expects to contribute approximately $6.5 million to the Company’s retirement plans in the third quarter of 2005. No payments were made in the 2005 Period.

     The Company also anticipates paying a majority of the tax liability related to the recently adopted $500.0 million dividend repatriation under AJCA in the fourth quarter of 2005 and the first quarter of 2006. It is estimated that this tax liability will be between $22.0 million and $28.0 million.

     The Company is not aware of any undisclosed risks and uncertainties, including but not limited to product technical obsolescence, regulatory compliance, protection of intellectual property rights, changes in pharmaceutical industry spending, competitive advantages, current and pending litigation, and changes in foreign exchanges rates, that are reasonably likely to occur and could materially and negatively affect the Company’s existing cash balance or its ability to borrow funds from its credit facility. The Company also believes there are no provisions in the Credit Agreement, its real estate leases, and supplier and collaborative agreements that would accelerate payments, require additional collateral or impair its ability to continue to enter into critical transactions. The Company has not paid any dividends and does not plan to pay any dividends in the foreseeable future.

Critical Accounting Policies and Estimates

In the Company’s annual report on Form 10-K for the year ended December 31, 2004, the Company’s most critical accounting policies and estimates upon which its financial status depends, were identified as those relating to revenue recognition, loss provisions on accounts receivable and inventory, valuation of equity investments, long-lived assets, intangible assets and goodwill, warranty, income taxes and litigation. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the 2005 Period. The Company did not make any changes in those policies during the 2005 Period.

Forward-Looking Information

Safe Harbor Statement under Private Securities Litigation Reform Act of 1995

The statements included in this quarterly report on Form 10-Q may contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) regarding future results and events, including statements regarding expected financial results, future growth and customer demand and uncertainty relating to patent litigation that involve a number of risks and uncertainties. For this purpose, any statements contained herein that are not statements of historical fact may be deemed forward-looking statements. Without limiting the foregoing, the words, “believes”, “anticipates”, “plans”, “expects”, “intends”, “appears”, “estimates”, “projects”, and similar expressions are intended to identify forward-looking statements. The Company’s actual future results may differ significantly from the results discussed in the forward-looking statements within this quarterly report for a variety of reasons, including and without limitation, fluctuations in capital expenditures by our customers, in particular large pharmaceutical companies, introduction of competing products, such as improved research-grade mass spectrometers, by other companies, pressures on prices from competitors and/or customers, regulatory obstacles to new product introductions, lack of acceptance of new products, other changes in the demands of the Company’s healthcare and pharmaceutical company customers, changes in distribution of the Company’s products, changes in the healthcare market and the pharmaceutical industry, loss of market share through competition, potential product liability or other claims against the Company as a result of the use of its products, risks associated with lawsuits and other legal actions particularly involving claims for infringement of patents and other intellectual property rights, and foreign exchange rate fluctuations potentially adversely affecting translation of the Company’s future non-U.S. operating results . Such factors and others are discussed more fully in the section entitled “Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission (the “SEC”), which “Risk Factors” discussion is incorporated by reference in this quarterly report. The forward-looking statements included in this quarterly report represent the Company’s estimates or views as of the date of this quarterly report and should not be relied upon as representing the Company’s estimates or views as of any date subsequent to the date of this quarterly report. The Company specifically disclaims any obligation to update these forward-looking statements in the future.

WATERS CORPORATION AND SUBSIDIARIES