Waters Corporation (WAT) Q3 2011 Earnings Report, Transcript and Summary

Good morning. Welcome to the Waters Corporation Third Quarter 2011 Financial Results Conference Call. [Operator Instructions] This conference is being recorded. [Operator Instructions] I would like to introduce your host for today's call, Mr. Douglas Berthiaume, Chairman, President and Chief Executive Officer of Waters Corporation. Sir, you may begin.

Thank you. Well, good morning, and welcome to the Waters Corporation Third Quarter Financial Results Conference Call. With me on today's call is John Ornell, Waters' Chief Financial Officer; Art Caputo, the President of the Waters Division; and Gene Cassis, the Vice President of Investor Relations. And as it is our normal practice, I will start with an overview of the quarter's highlight, John will follow with details of our financial results and provide you with an outlook for the full year. But before we get going, I'd like John to cover the cautionary language.

During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the company. In particular, we will provide guidance regarding possible future income statement results of the company, this time for Q4 2011. We caution you that all such statements are only predictions and that actual events or results may differ materially. For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our current expectations, see our 10-K Annual Report for the fiscal year ended December 31, 2010, in Part I under the caption Business Risk Factors. We further caution you that the company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding possible future income statement results, except during our regularly scheduled quarterly earnings release conference calls and webcasts. The next earnings call and webcast is currently planned after January 2012. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure is attached in our company's earnings release issued this morning. In our discussions of the results of operations, we may refer to pro forma results, which exclude the impact of items such as those outlined in the schedule entitled Reconciliation of Net Income Per Diluted Share included in this morning's press release.

Thank you, John. Well our sales grew at 13% in the third quarter, and our adjusted earnings were up 15%. This growth in revenue is, I think, indicative of continued health in our end markets and the strength of our product offerings. During the quarter, we began shipping the new instrument systems that we launched at ASMS while enjoying the continued ramp of the performance-leading platforms that drove our growth during the first half of 2011. Our key customer segments including Biopharmaceutical, Chemical and the combination of Government and Academic, all grew in the quarter while geographically, growth was more balanced than we might have expected, with the Americas, Europe and Asia all delivering constant currency sales growth within a few percentage points of one another. Overall, I think it was a very solid quarter. Within the Waters division, constant currency sales to the pharmaceutical industry grew at about the same rate as the overall business, with no significant changes in drivers from what we saw during the first half of the year. Applications within pharma that are driving growth include Regulated Bioanalysis, biological pharmaceutical development and QC testing. Businesses CROs in the quarter was robust while sales to our largest accounts was sequentially above the second quarter's results and up year-over-year. Global government and university revenue growth was stronger in the third quarter than the second quarter, and continued shipments of research products such as our newly introduced SYNAPT G2-S should benefit university revenues as we close the year. Instrument sales to industrial chemical customers, a business you should know that represents less than 10% of our overall sales, held up fairly well in the quarter, with strength in Asian markets offsetting slower growth in Europe and the United States. You look at TA. The division delivered yet another double-digit sales growth quarter. Sales growth for TA was also geographically balanced with strong growth across the division's product line. New business opportunities associated with high temperature and biological applications, along with broader adoption of recently introduced discovery platform instruments, provide us with confidence that the division can continue to grow in future quarters despite ongoing economy-related concerns. Sales within our applied markets, dominated by food and environmental applications grew at a double-digit rate in the quarter. On the food safety front, during the quarter, Waters participated in the opening of the International Food Safety Training Laboratory. It's located on the campus of the University of Maryland, and in cooperation with the University and the USFDA, together with Waters Corporation, it's the world's only permanent food safety lab that provides hands-on lab training and classroom lessons on regulatory standards, educating both international government agencies and food exporters. I think this is a great strategic investment for us, and I think you can look for more of these kinds of things as we go forward. Looking at our sales geographically. Constant currency sales growth in Europe exceeded our overall sales performance. Mass Spectrometry sales to government and university labs, as well as strong Food Analysis business highlighted our European performance. In Asia, outside of Japan, sales were in line with our expectations, with China and India continuing to fuel growth despite strong growth in the 2010 comparison quarter. Mass Spectrometry system sales to government and university accounts were meaningful contributors to our growth in China, while LC and LC/MS instrument sales to pharmaceutical accounts were strong in India. In the U.S., we benefited from strong chromatography instrument shipments to pharmaceutical accounts, continuing the trend of H-Class adoption that we saw during the first half of the year. Sales to university labs were down, likely due to a combination of funding issues and ordering delays associated with the continued evaluation of new high-end MS technology. Now I'll talk about a few product line dynamics that we saw in the quarter. Our recurring revenues, that is the combination of service and chromatography consumables, grew at a high single-digit rate in the quarter. The growth in chromatography consumables was primarily driven by ACQUITY column sales, while our service sales benefited from expanding business in our developing regions, including China, India, South America and Eastern Europe. If you look at our Waters division instrument system sales, growth was higher for LC/MS instruments in the quarter, with continued strong sales of tandem quadrupole technology systems and the benefit of initial shipments of SYNAPT G2-S instruments. You may recall we introduced the SYNAPT G2-S, which is a research performance orthogonal Tof platform, at this year's ASMS Conference, and had informed customers that first shipments were planned for September of 2011. For our tandem quadrupole systems, the Xevo TQ-S and benchtop detector system sales were in high demand during the third quarter, with food testing and clinical applications leading the way. On the chromatography front, UPLC systems again grew at a double-digit rate, with H-Class dominating ACQUITY sales. During the quarter, we began shipping our new ACQUITY I-Class and we expect this enhanced UPLC technology to become the preferred front end in LC/MS instrument shipments in the upcoming quarters. As I mentioned earlier, customer demand for our new product momentum held up well in the quarter, and consequently, we delivered solid results. Financially, our margins and strong cash flow in the quarter are again indicative of the health of our business. During the quarter, we continued to invest in programs and new product initiatives to assure future growth while deploying our cash flow to aggressively repurchase our shares. As we close 2011 and look toward 2012, we see no reason to change our fundamental business strategy that has served us well for many years. That is a focused technology and product strategy, intent on expanding our market share by extending the application range of our technologies, broadening the global reach of our sales and continuously striving to offer unmatched customer service and support. When you look at the fourth quarter and the start of 2012, we currently see a likely continuation of the trends that have supported our sales growth through the first 9 months of 2011. The macroeconomic uncertainties that have dominated recent headlines certainly have and will continue to require us to carefully monitor market conditions while we manage our business. In addition, as we make our way through the fourth quarter and into 2012, our quarterly and full year comparison periods will have relatively high sales growth rates that reflect the recovery that we saw from the 2009 weakness. However, at this point, I'm pleased to tell you that customers are continuing to deploy their 2011 capital budgets and are discussing with us new instrument requirements for their labs in 2012. So I think that's encouraging. Now I'd like to turn it over to John for a more detailed review of our financials and the future financial growth.

Thank you, Doug, and good morning. Third quarter sales increased by 13%, and non-GAAP earnings per diluted share were up 16% to $1.14 this quarter compared to earnings of $0.98 last year. On a GAAP basis, our earnings were $1.10 this quarter versus $1.02 last year, and a reconciliation of our GAAP to non-GAAP earnings is included in our press release issued this morning. Reviewing Q3 sales results in comparison to Q3 last year, sales were up 13%, and this growth includes 4 points of growth from foreign currency translation. Looking at our sales growth geographically and before foreign exchange effects, sales within the U.S. were up 8%, Europe sales were up 13%, Japan was up 6% and sales in Asia outside of Japan were up 8% against the strong base of comparison. On the product front and in constant currency within the Waters division, instrument system sales increased by 10% and recurring revenues grew by 8% this quarter. Within our TA Instruments division, sales increased by 11% versus prior year. Now I would like to comment on our Q3 non-GAAP reported financial performance versus prior year. Gross margin performance came in as expected at 60.3%, up 90 basis points from Q3 last year and consistent with last quarter's performance. SG&A expenses increased by 11% this quarter. Our currency translation increased expenses by about 4% this quarter. R&D expenses increased by 14% with currency translation responsible for 2% of this difference [ph]. Our full year effective operating income tax rate came in a little higher than expected at 16.6%. This is 40 basis points higher than our July expectation and is due to a modest shift in profits to our higher tax rate jurisdictions. Applying this new tax rate to our year-to-date income results in a 17.4% operating tax rate within the quarter to catch up to the new full year 16.6% tax rate. EPS was reduced by $0.02 as a result. On the balance sheet, cash and short-term investments totaled $1.2 billion and debt totaled $972 million, bringing us to a net cash position of about $222 million. During the quarter, the company refinanced its 5-year $1 billion bank facility that was set to expire at the end of 2011 into a new 5-year facility. As for share repurchases, we bought 1.8 million shares of our common stock for $144 million. This leaves $259 million remaining on the current authorized share repurchase program. We define free cash flow as cash from operations less capital expenditures plus any non-cash tax benefit from stock-based compensation accounting and excluding unusual nonrecurring items. For Q3, free cash flow came in at $111 million after funding $16 million of CapEx. Accounts receivable days sales outstanding stood at 71 days this quarter, down 6 days from Q3 last year. Currency effects decreased DSO 2 days this quarter versus prior year. Inventories were about flat this quarter, but remained elevated from year-end levels. We expect inventories to decline in the fourth quarter as inventory build associated with new products is relieved. As we now think about the fourth quarter, we have a less favorable foreign exchange environment than we did back in July when we last gave guidance. In the current FX rates, it's likely that the currency will be closer to neutral to sales this quarter, maybe adding just a point -- half a point of currency for the full quarter. Regarding organic growth, we currently believe that 7% is a reasonable growth expectation for the quarter given a difficult base of comparison in our current business momentum. Moving down to P&L. Gross margins are expected to be about 61%. Operating expenses are expected to grow at above 4%, slower than previous quarters given an easier base of comparison and less FX impact. Net interest expense is expected to be approximately $5.5 million, and we now expect our operating tax rate to be about 16.5%. Our fully-diluted average outstanding share count is likely to be near 91 million shares outstanding. And rolling all of this together, we currently expect Q4 non-GAAP earnings per fully diluted share to be in the range of $1.49 to $1.54 per share. On a full year basis, this would bring our sales growth to 13% with currency translation providing about 3% of this growth. Non-GAAP earnings per fully diluted share would be in the range of $4.75 and $4.80. Doug?

Thank you, John. Amy, at this point, I think we can open it up for Q&A.

[Operator Instructions] Our first question comes from Ross Muken with Deutsche Bank.

As we think about sort of the organic growth as we progress into 4Q, the 7% number implies a fairly strong macro environment relative to the comp. Most of the large industrials talked about CapEx slowdown into 4Q mid. Certainly, it doesn't look like you saw it in the quarter. But as you think about sort of puts and takes on that 7% number, where are the businesses where you have the sort of least visibility? And where, obviously, x consumables do you feel the most comfort in terms of the order rates that you've been seeing?

Well, Ross, I mean, maybe answer it this way. Because I do think you're right to point out that the comparable fourth quarter in 2010 was a strong quarter. So this comparison is somewhat more difficult than the third quarter. But we've tried to strike a balance between what we're seeing in our current business conditions and kind of what everybody's talking about around us. The -- certainly the things that encourage us is the response to our new products, the fact that we've only recently launched the G2-S and the response has been very strong. We really didn't get much kick out of the new I-Class in this quarter because we really just launched it in midyear and really only started shipping it late in the third quarter. So 2 very important products likely to continue to build momentum for us. The geographic balance that we saw in the quarter I think is very impressive. I mean if you'd asked us at this point last quarter about Europe, we would've been somewhat more pessimistic about what we were going to get out of Europe and actually somewhat more optimistic than what we saw out of some of the smaller areas in Asia. As it turned out, that was a bit of a flip-flop. We know the dynamics in Asia, and they're one-off sort of. We also originally thought that we'd be having to take down backlog to achieve these numbers in the third quarter, and we would not -- it was not necessary for us to take down back. So all of those things kind of add confidence to what we're expecting in the fourth quarter. On the other hand, you've got the continuing soap opera stuff in Europe that could significantly have an effect on government and university spending in particular. We haven't seen that so far. So that's a might be. You certainly have fiscal pressures around the world, certainly looming in the United States. We don't think that's likely to be a fourth quarter issue that could well impact 2012, and so that's probably what's looming. We just don't see from our early indicators of quotes, attendance at seminars, that kind of thing, to see any near-term issues that dramatically would conservatize our view of the fourth quarter.

I guess relative to the assumption on 7%, relative to what we saw last year, how much are you sort of dependent on a budget flush and sort of your typical end-of-year kind of step up? And to what degree, if you could just remind us, did we see that last year?

I'd say on the upfront, Ross, if you look at kind of the division of the business across the quarters, you typically see somewhere from 28% to 30% of our business in the third quarter, largely associated with that flush that you described. We're looking at the fourth quarter here being somewhat typical to maybe a little light versus history. So I would say that, yes, we're banking on a kind of a traditional year-end budget flush, but not one that's outlandish versus history.

Okay, and I guess just one final point on this. And so to the degree that you think back to past slowdowns, right, from a CapEx standpoint, so again I'm just focused on the instruments. Where and when do you typically start to see that show up in the order rate? Is there a lag between when you start to see economic indicators and/or customer budgets and/or customer revenues start to dip, and then you see it 3 months later, 6 months later, 9 months later? Is there some sort of correlation or sign for you guys that you're kind of looking for to get comfort in sort of where the trajectory is going?

Ross, I think the only substantive thing to say is we rarely see major changes in momentum this late in the year. Typically, what happens is that those budgets are pretty well set, particularly with big pharma, and they have taken the actions that they're likely to take for this year and they're focused on next year. So sometimes you can see large pharmaceutical accounts delay capital spending out of the first quarter into later on in the year. And frankly, that's probably with our largest customers what's become typical, that they're releasing less of their capital early on in the year and waiting to see how things evolve. I think we need to move on to the next question -- questioner.

[Operator Instructions] Our next question comes from Jon Wood with Jefferies. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Doug, I understand your comments kind of on 2012 qualitatively in the prepared remarks. Can you just talk about how you guys are thinking about the budget next year? So I noticed operating expense growth about 4% in the fourth quarter. Will you guys set up 2012 to deliver P&L leverage if you guys experience an organic growth rate that's typically below what you guys see in a mid-cycle environment? Just anything you're willing to offer on how you're planning the expense side for next year would be helpful.

Sure, Jon. I mean I think you're right to look at kind of the fourth quarter dynamics and recognize that particularly in this climate, we don't want to get carried away moving into the new year. So Art's being pretty conservative with his organization in terms of their spending plans, and that means that they'd like to spend more and we're holding back a bit. We think that's prudent in this climate and gives us some opportunity so that we don't have a big amount of spending going into a year when, if things slow down a bit, we can't moderate to accommodate it. So you know we're always planning to be able to leverage our bottom line to the extent that we grow expenses at a somewhat slower rate than we grow our top line. You can be certain that that's how we'll craft our budgets for 2012. And we typically craft our budgets so that we move incremental spending later on in the year rather than early in the year, and that gives us the ability to titrate that back if conditions should evolve more slowly than we currently think. So hopefully that gives you a flavor. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Yes, that was very good. One quick last one for John. On the stock buyback side, any thoughts on 4Q? Looks like you stepped up 3Q rate quite a bit. What do we expect for the fourth quarter in terms of repurchase?

Yes, we definitely, hopefully, took advantage of what was a nice buying opportunity in the third quarter. The budget was to do the -- a buyback a little more equally with maybe $60 million to $70 million a quarter. We'll do at least that in the fourth quarter and see what else we might exercise beyond that. But I'd say a base case of somewhere around $75 million is probably reasonable.

Our next question comes from Isaac Ro with Goldman Sachs.

This is actually Jeff in for Isaac. Looking back to the time period, knowing it's still different now than back in '08, '09. How can you describe what you're seeing is different now in terms of your visibility? And also, looking at the expense structure, what have you done in the last 3 years that gives you a little bit more leverage if we do see a slowing as we start into next year?

Well, I think there are a whole bunch of differences between what we see now versus what was going on in 2008, probably macroeconomic economists are better equipped to tell you. But from my perspective, what happened in 2008 was much more sudden. What we're seeing now, if anything, looks like a lazy curveball that's been coming in it seems like forever. If you talk about Europe or you look at the fiscal pressures facing the U.S -- in 2008, we saw the rapid decline of the auto industry in the U.S. and worldwide that had a pretty dramatic effect -- derivative effect through the industrial chemical worldwide marketplace. We saw our business kind of from the major chemical suppliers really go down as they saw their business evaporate with the auto companies. We certainly just saw that rapid movement and people responding to that kind of stimulus immediately. I think it's really different now because people had one eye on a coming slowdown in government and academic. What happens, are we going to have a double-dip recession, et cetera. It's a much different mindset that companies have had, and companies have been much more prudent as to their spending plans. So I think we've been living with that. It's not likely that you're setting up to fall off a cliff. Might be setting up to look at slower conditions than we currently see, but I don't see a dramatic movement from the kind of conditions that we're seeing. And as we say, as our early indicators are as we go into the fourth quarter, certainly we're not seeing that kind of wary. But we're seeing a constant concern or cautiousness across the board with maybe the exception of some of our Asian businesses that continue to be pretty robust.

And looking at the Asian businesses, I know the growth was coming off from a tougher comp. Could you maybe provide a little bit more color of how the growth in emerging markets turn throughout the quarter, both on a sequential and geographic basis?

Are you speaking about Asia in particular?

Yes, Asia. Anywhere -- India, China, any of the smaller countries as well.

Yes, no. I think the India and China business continue to be very strong. Stronger than the average Asia business, interestingly. We're seeing some dynamics in the countries where we're facing local currency weakness. Frankly, we think we see some of that in India with rupee weakness but the business continues to be strong through that. So it's really some of the smaller territories in Asia. Reasonably strong, interestingly enough, in Japan. Very strong in China and very strong India. And I think we don't see any indications that the dynamics, including our product line and the customer availability of capital, is changing that.

So I guess it's more on the lines of the purchasing power that some of these smaller countries are declining as their currencies have moved in. It's kind of like we saw in '09 with India, is that correct?

I probably see some of that, although it hasn't been consistent. We're seeing some customers complain about the cost going up because of weaker currencies, and then they bounce back the following quarter. So I think to some extent, these countries are still investing in the kind of food safety laboratories and regulated and pharmaceutical businesses. And I think they're finding the way to invest. Just on another front, the emerging -- well, not emerging, but the growth markets in Latin America also continue to be strong. Mexico, Brazil, and actually some of the smaller South American countries. Brazil has really come on in the last couple of years and boy, we've looked to the next 5 or 6 years in Brazil and that could well become what India and China have done in the last 3 or 4 years.

[Operator Instructions] Our next question comes from Tony Butler with Barclays Capital.

Doug, I just want to make sure that I understand your characterization of expenses in Q4. This is more preemptive, is that correct? And I'm sorry, just to slide a second in on an end market with pharma. Amgen did make comments they had fired some people on exploratory a couple of weeks back. Pfizer is moving some folks from Groton up to Cambridge. Just as it pertains to the pharma customer, if I may. Doug, are there any changes at any of the feel, any of Art's folks are seeing today that you think lead you to believe that there's any change in that dynamic that may lead to some reduction in the early part of '12 or at any other point in time or is it just status quo?

Tony, I think any quarter, particularly with the number of pharma companies that we're doing business with, you see some of that going on and I got to say, every quarter we've seen some of it. With -- whether it's AstraZeneca or Pfizer moving to reduce resources and sandwich several quarters ago. I think what we're seeing is the net balance of all of those things so far has resulted in increased investment. Just today or yesterday, Novartis talked about restructuring some business in Switzerland, I think principally because of the strength of the Swiss franc. But they reiterated there's not much of that that's hitting their laboratory or their R&D resources. I think that's probably the most consistent dynamic that we see. Is that net-net, the large pharmas have in major ways gone through their restructuring. They've addressed a lot of their R&D spending in the last 4 or 5 years as they saw this looming issue of products going off patent. They still do some of it around the edges and the fringes, and your comments about Amgen, I'm sure part of that. But for the most part, we've seen new initiatives and new investments more than make up for it. And I think that's what we've seen so far, and kind of the indications are more or less along those lines as we go on forward. In terms of the fourth quarter, they -- we're always at this point of the year cognizant of the budget structuring that's coming for next year. It's hard not to be a little bit more cautious with an eye to everything going on in the world. So maybe we're a little bit more cognizant of not putting increased heads on the ground that don't pay for themselves very quickly. And we did have a good comparison in terms of the expense load in the base versus this year. But we're not doing, I wouldn't say, anything heroic to manage expenses in the fourth quarter. We just probably have a little extra dose of prudency that goes into that mix.

Our next question comes from Amit Bhalla with Citi.

This is Adam [ph] in for Amit today. I was just wondering, you mentioned on your commentary that you saw slower growth in industrial in the Europe and the U.S., and I was wondering if you could provide a little more color on that.

Well, let's see. I think we characterize kind of the overall characterization of our industrial accounts. I think it's safe to say that TA does the bulk of their business in industrial accounts and they had a good quarter with those accounts. But in the Waters business, you're talking about environmental accounts, the classical large chemical accounts that are the DuPonts, the Dows of the world. And that business was a little bit slower all in than the rest of our business, but not tremendously so. But it was slower than the residual of the business.

Okay. And then I also had a question on guidance for full year fiscal '11. So it looks like it came down from 480 to 490 that you gave out on the second quarter call. I'm just wondering what the difference is, if it was all FX-related? If there was something else that I maybe missed in the commentary?

Yes, FX is about 1.5 points or so of reduction versus where rates were initially. So there's a few cents, $0.04 associated with that. We've just tweaked back our organic expectation to 7 from just over 7, couple of cents. Tax is $0.01, so it is about $0.08 or so midpoint to midpoint but it's different from where we were before largely due to FX.

Next question comes from Derik De Bruin with Bank of America.

So I guess a couple of questions. As the patent clip sort of hits, are you expecting, or I guess it's are you expecting -- could you see a decrease in demand for drug manufacturing QA/QC, Big Pharma, and is that going to be offset by increased demand from your generic customers? And I guess I've had a question from clients basically asking if how's the pill count going to change, and are you positioned to -- are you as strongly positioned in the generic markets to meet the increased pill count likely there as you were in the Big Pharma markets as that changes? I guess, if could you just talk about the dynamic of where you are in the Big Pharma accounts, how the manufacturing's likely to change, and where you are in the generic account --

I think, I'll ask Art to comment in a second. But the pill count is almost certainly to go up as a result of that dynamic, and our market share in generics is very high. So to the extent that generics are investing to cover that increased demand, I'm highly confident that we'll get more than our share of the potential business. As it relates to patents, products coming off patent, price -- if Big Pharma hasn't seen this cliff coming at them for the last 10 years and we've [ph] been dealing with it for that length of time in the restructuring. Now maybe when they get in the middle of it. It's more an issue of do the things they have in plans and the new products that they hope to come into play, if those don't come to fruition, and they have to deal more significantly and it affects their R&D, then of course, they could cut back further. I think -- I believe that they have substantially addressed this problem in the past 5 years as an industry. So I don't expect that you're going to see just because a cholesterol drug comes off patent in a year or so that that specific action is going to be reflected in management actions then. They haven't taken those actions by now, there's no way to make up for it when that tsunami hits. But Art, do you want to comment on...

Yes. Most of what you said, Doug, is exactly the case. The added element is that many of these companies as of few years ago, really started to emphasize expanding off of the traditional small molecule drug development and have added large molecule drug development eyeing the pharmaceutical marketplace to support their business. And that in itself is also a very strong offsetting factor. So the pushes and shoves, net-net is, and I think you could see it in our results today, is this response that that industry has developed over the last few years that I think is giving us the ability to maintain our business in the large accounts and find additional opportunities in the generics. And even now, the generics are starting to take a close look at their future and saying, "The small molecule pipeline might run out. We need to start looking at the Biopharmaceutical segment as well," and they're beginning to gear up to understand what they have to do to do business there. So if you take these factors, it's still very active and vibrant, and we're up to our necks and working with these companies, not only looking at current needs but working with them to establish the future.

Excellent point.

Just one follow-up question, if I may, and it's a quick one. I guess, are you better positioned in the generic markets with ACQUITY than you were in Big Pharma, the QA/QC line? So they adopted the ACQUITY more generally?

Yes. ACQUITY, initially -- of course, when a generic company incorporates a drug coming off patent, their first and most economic -- economically prudent direction is to replicate exactly what had been happening. But the other element that has made ACQUITY so successful in the generic world is that as soon as the drug comes off patent, more than one generic company starts chasing it. And whoever can get the market first in the generic world usually takes a dominant position on that new drug in their portfolio. So ACQUITY has proven to be one of the major tools that they use to accelerate their development work to enter the market with the drugs that come off patent. So we've seen outstanding response from the generic market, and it's actually -- to be frank, the generic companies have adopted ACQUITY at a much faster rate than the Big Pharma accounts early on in the introduction of that product.

Our next question comes from Jon Groberg with Macquarie Capital.

Just one question for you, Doug. I guess, as I look at the new products pipeline, the new product portfolio that you currently have I should say, and then compare it to the past, I mean it seems like it's about as forward it's ever been. And I'm just curious what the pipeline looks like and how you're thinking about R&D and how you maintain this momentum, I guess, in what could be a little bit more of a difficult environment over the next couple of years.

I think it's an insightful question, Jon, because I think we clearly are different from a number of players in the tool space, and that we kind of live and hopefully not die on our ability to continue to bring new capabilities that customers want to the marketplace. And that's how we've maintained our strong growth rate over the years. It hasn't been through consistently deploying a lot of capital on high-cost acquisitions. And I think you -- we're proud of that record and what we've been able to deliver in terms of novel, innovative capabilities to this worldwide marketplace. I think you see it in the G2-S, the I-Class, the whole ACQUITY revolution that Waters really brought to the marketplace these last several years. I think you're going to see the emerging investment that we've made in data come to the market and we've begun to bring that. But a unified platform, which was a major investment for us over the past 5 years, and actually continues to be, is going to I think pay a lot of dividends as it becomes harder and harder for many competitors to make that kind of investment which encompasses the broad fields of both chromatography data and Mass Spectrometry. You're certainly going to see TA fill out their new discovery platform across the various models in the whole thermal area, as well as to take advantage of the bolt-on kind of high-temperature acquisitions that they've made. That is probably the one area where we've been more active, in the small bolt-on acquisitions space. So we think that the R&D pipeline for the next several years is very rich, and I mean if you think about it, the G2-S has really only started shipping this quarter. The I-Class is really not even -- just a few units shipped in the third quarter. So you got almost a full year of implementation of those products as we go into 2012. So we're optimistic about our opportunities to make hay with this new product offering.

Our next question comes from Steve Willoughby with Cleveland Research.

Two quick ones. First, I know you guys mentioned you made a small acquisition in the TA business last quarter. Just wonder if you could comment on how much revenue that added this quarter. And then secondly, given last year there was some timing shifts on the new product launches, so I'm just wondering how shipments of the new product launches compared to your expectations going into the quarter.

In terms of the shipments, of expectations, we're just about right on our expectation. But the interesting thing was that our original model had us taking down that original backlog. And in fact, with -- particularly with the G2-S, we did take some of that backlog down. But our order rate was robust enough so that we didn't really ship greater than our order rate in the quarter. I think that's a strong indicator of the strength of the business.

The Anter acquisition added about $500,000 or 1.5 points of growth to the TA division.

It really does happened late in the quarter and was de minimis.

The next question comes from Quintin Lai with Robert W. Baird. Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division: The H-Class seems to be continuing to progress nicely. Have you been able to parse out -- is that an upgrade cycle from all the alliances out there, the market share? What other trends are you seeing, Doug?

Let Art chime in here, since he's driven this thing.

Yes. The H-Class, which as we've spoken about in the past, was really designed to pick up on our original ACQUITY market position. And so the H-Class is, as I would describe it, is probably half and half. Half the people who are buying H-Classes are representing people who are buying traditional HPLC systems, both either Waters or competitive units, and they're buying the H-Class with the idea of utilizing that as a future protection on their existing HPLC methods. What we found is that they, probably within a one year, 1.5 period really become active on trying to upgrade their separations to true UPLC. The other half of the H-Class sales are, in fact, purely us moving that technology into areas that were competitive areas. And I'd have to say that coming in with that technology forces the customer to wonder if they are keeping up with the times in terms of their future capability. That product now has broad -- very broad-based approval across the marketplace. And so word-of-mouth has gotten out there, and I'd say that we're in many of the sales that we probably would not have been exposed to in the competitive environment. So it splits about half base business transition. The other half is genuine new business for us.

Our next question comes from Peter Lawson with Mizuho Securities.

Sorry, I joined the call late so apologies if this has been asked. Just around the Novartis cut. What's your take on that? And they seem to be the largest spender within pharma, so does that hurt you?

Well, yes, that was just announced so it's a little hard to tell exactly what the dynamics are going to be. But their public remarks are that it's certainly not focused on their R&D spending. It remains to be seen how much it really can affect them, as we did respond to it a little bit before. But I'm sorry, I'm getting...

It's 1% of our business principally that's going to be potentially impacted in some fashion. So we really don't know what that impact is going to be, but it's of 1%, so it's not likely to be all that meaningful.

Did that answer your question, Peter?

Yes. No, that definitely helps frame things. And then on academia. Just the impact these grant extensions. Do you think that could dampen their instrument spend in 4Q? And apologies if it's been asked.

The whole issue of academic spending, we talked about -- we're not seeing a dramatic change in the academic environment currently. We're all speculating on what the effect of government funding of grants, what the fiscal -- coming fiscal pressures will mean. What it means in Europe versus the U.S. But best we can say is that the academic environment is not a tremendously large piece of our worldwide business. We're not seeing direct impact of drawn out grant times so far. I'd say we will let into the overall dynamics for 2012. It's one of the considerations, but it's probably not one of the more significant ones.

Our next question comes from Doug Schenkel with Cowen & Company.

This is Shaun for Doug. Another one on a hypothetical situation where organic growth might slow next year. How do you feel about your ability to pull the levers that you did in the last downturn? And I know that you talked about your operational cost structure and strategy, but what about specifically your ability to buyback shares pretty aggressively as you did the last time around?

Well, we think we have plenty of dry powder as it relates to a stock buyback. If there was kind of a secular reduction in stock values because of marketplace fear or something like that, I think we've shown that we can balance our operating expense spending with demand dynamics in any meaningful period. If the bottom falls out of demand in any one quarter as it did in the fourth quarter of 2008, you can't catch up with those fall-off-the-cliff dynamics in any one quarter. But you certainly saw that in 2009, we have maintained very good earnings growth in spite of flat demand. So in that kind of environment, I'm confident that we can balance our spending over a broader timeframe. Can't overnight, but we also think that we are kind of being prudent as we go into a period that has some question in it. So we feel reasonably good about our flexibility as long as -- and we do not foresee the kind of dynamics that happened in 2008, frankly. We could see a period of fiscal uncertainty and we could see some demand questions, but we don't see anything dramatic like happened in 2008.

Great. And one more quick one if I could. You mentioned a good quarter for your CRO business. I just wanted to know if you could provide a little bit more detail on whether this is a dynamic driven by one or few larger players or if it was more broad-based?

It was more broad-based. Sometimes it's hard to get -- we speculate on the macro dynamics that it is. We think that in this period, when large pharma is outsourcing more business to CROs, then CROs are gaining a little bit more negotiating power in terms of the economics and saying, "You've got to leave more up to me and how I invest for productivity," and they're looking to things like our ACQUITY to drive more productivity. So we think it's indicative of those kinds of dynamics. And frankly, I think they're favorable to us. Let's see. Operator, I think we can take maybe 3 more questions. I'm cognizant of coming up on an hour here, so maybe we'll take 3 more questions.

Your next question comes from Steve Unger with Lazard.

Quickly, just, did LC for research purposes, did those sales grow year-over-year?

Yes.

Yes.

It did. And was that higher or lower than the company average?

About the same.

About the same.

About the same. And that's without the I-Class contributing meaningfully?

That's correct.

Right.

Excellent, okay. And then just on the fourth quarter. I know you had a tough comparison in general with the strong quarter last year. What geographies are the hardest compares? Is it China, is it India or is it the U.S.?

I think it's all 3.

It was pretty broad-based. I know we had a very strong fourth quarter in China, specifically, but ASIA in general. But the overall growth was pretty good across the board, so we're looking at a challenge in each of these environments, probably the largest of which is in Asia.

Your next question comes from Tycho Peterson with JPMC. Tycho W Peterson - JP Morgan Chase & Co, Research Division: Doug, a few minutes ago in your comments, you talked about UNIFI, and part of the strategy seems to be to moved toward more enterprise-wide sales rather than kind of seek specific licenses. Are you starting to see that happen, and to what degree do you think that would also impact instrument sales? I mean can software drive instrument purchases for you guys?

Simply put, I think the answer is yes. But Art, do you want to...

Yes. The way UNIFI is being rolled out. In our enterprise-wide business, we have a very high share [ph] power system. As we rolled out UNIFI, our strategy was to initially roll it out in the form of workstations, meaning specific applications handling small laboratory systems, largely focused from an application standpoint. And so the current releases of UNIFI, initially we put out in a biopharmaceutical system design for that application. The most recent intro a few months ago was for the regulated bioanalysis market space. As we get into next year, we began to expand into more generalized position. The year after that, we will roll into the enterprise-wide marketplace. The reason why the enterprise-wide marketplace is the last on the list, it's we find that our customers will not quickly move off their existing enterprise system. It takes them time to reevaluate it, revalidate and move forward. And while this is upgradable, we're giving them front time before we actually bring it to the marketplace to see how it operates. So the whole strategy, because of its greater, much higher complexity compared to our previous launches, we've chosen to roll it out in this fashion. We believe that will give us the greatest impact. But the ultimate gain will be replacement for the enterprise-wide system, we don't see that happening yet for another couple of years. Tycho W Peterson - JP Morgan Chase & Co, Research Division: Okay. And then can you talk to the competitive dynamics in the PLC market? And obviously post the Dionex deal by Fisher -- by Thermo, but also Shabbat do [ph] making a little bit more of a push here. Are you seeing any more aggressive pricing or any changes in the competitive dynamic between them and Amgen as well?

I'd say it's been a competitive -- most people have now come to the marketplace with some higher pressure systems. We haven't seen any dramatic changes in the competitive environment from the recent introductions, haven't suffered any deterioration in pricing as a result of that, and I'd say it's not a lot of news. Tycho W Peterson - JP Morgan Chase & Co, Research Division: Okay. Then last one, quick one.

I'm sorry, we've got to go on. We're running out of time here, and I want to take a few more questions from people who haven't had a chance. So we have to go on.

So our next question comes from Dan Arias with UBS.

Just on the H-Class, I'm wondering if at this point whether you have a sense of the percentage of customers running HPLC methods on the system versus those who have made the technology transition to UPLC?

Sure. Art, do you want to take that?

Yes. Our estimate is roughly somewhere between 1/3 and 1/2 of the customers that buy into the H-Class, buy it with the idea of transferring their HPLC method, but with the opportunity to begin exploring improvements in productivity by shifting to UPLC. This is the primary advantage of that platform and how it's been positioned in the marketplace. So roughly 1/3 to 1/2 begin on LC. We usually see within a year or so now, we begin to see that development moving forward. The other half to 2/3 of the people who buy H-Class jump right into the UPLC application.

Operator, I think we can take one more question.

Your final question comes from Dan Leonard with Leerink Swann.

This is actually Julian in for Dan. I was wondering if you could provide any color on what you're seeing on the food safety front, specifically in the U.S. Are you seeing any sort of pickup in demand following the legislation passed earlier in the beginning of the year and what you expect from this market going forward? I mean, also I guess maybe any trends internationally if noteworthy.

Yes. We had a very good quarter in the food safety -- the broad food, and including the food safety. I would say we still think that the promise in the U.S. as it relates to the new regulation is largely to come, not in our current run rate. We think our strategic investments in this area with the new training lab at the University of Maryland, and the opportunity to build on that around the world, really becoming interesting. We have a lot of interested sovereign locations recognizing the need to train their people, both within the government sector as well as with the industrial sector, in these emerging food producers and food exporters. It's been very encouraging, and I think bodes very well for continuing to have that area of our business grow at a faster clip.

At this time, there are no other questions.

Okay. Well, thank you all for staying with us. We know we went a little bit longer but it seems like there was that interest. So we hope to talk to you again in another quarter. Take care.

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