Douglas A. Berthiaume - Chairman, Chief Executive Officer and President John A. Ornell - Chief Financial Officer and Vice President of Finance & Administration Arthur G. Caputo - Executive Vice President and President of the Waters Division

Ross Muken - ISI Group Inc., Research Division Jonathan P. Groberg - Macquarie Research Timothy C. Evans - Wells Fargo Securities, LLC, Research Division Daniel L. Leonard - Leerink Swann LLC, Research Division Doug Schenkel - Cowen and Company, LLC, Research Division Daniel Brennan - Morgan Stanley, Research Division Charles Anthony Butler - Barclays Capital, Research Division Amit Bhalla - Citigroup Inc, Research Division Jon Davis Wood - Jefferies & Company, Inc., Research Division Isaac Ro - Goldman Sachs Group Inc., Research Division Tycho W. Peterson - JP Morgan Chase & Co, Research Division Peter Lawson - Mizuho Securities USA Inc., Research Division Sung Ji Nam - Cantor Fitzgerald & Co., Research Division Derik De Bruin - BofA Merrill Lynch, Research Division Daniel Arias - UBS Investment Bank, Research Division Steve Willoughby - Cleveland Research Company Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division

Good morning. Welcome to the Waters Corporation Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. 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, and good morning, and welcome to the Waters Corporation Third Quarter Financial Results Conference Call. With me on today's call, as is usual, is John Ornell, the Waters' Chief Financial Officer; Art Caputo, the President of the Waters Division; and Gene Cassis, Vice President of Investor Relations. And as is our normal practice, I will start with an overview of the quarter's results. John will follow with details of our financials and provide you with our 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 2012. 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 present expectations, see our 10-K annual report for the fiscal year ended December 31, 2011 in Part I under the caption Business Risk Factors, and the cautionary language included in this morning's press release and 8-K. 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 earnings release conference calls and webcasts. The next earnings release conference call and webcast is currently planned for January 2013. 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 to 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 listed in our schedule, entitled Reconciliation of Net Income Per Diluted Share, included in this morning's press release.

Thank you, John. Well, our third quarter in total was much like we saw in the first half of 2012. Constant currency sales were up about 2% in the quarter, and within the range that we had discussed 3 months ago. Looking at our results by customer category, we also saw a general continuation of first half trends with pharmaceutical end markets delivering more stable growth in an otherwise challenging demand environment. In the third quarter, there was a more pronounced spread in our geographically defined segments, with Asia delivering relatively strong revenue growth with more constrained demand in the U.S. than we had earlier anticipated. Throughout the quarter, we focused our field organizations towards promoting the superior value of Waters' offering in order to maintain a disciplined pricing strategy, and at the same time, we've closely monitored our expenses. These steps, in combination with the continuation of our share repurchase program, allowed us to grow our adjusted earnings per share despite the demand and currency headwinds we encountered in the quarter. As in prior periods of economic pressure, our recurring revenue, the combination of our service and chemical consumables product lines, stabilized our overall business performance, and in the third quarter solid growth for these recurring lines largely offset a modest decline in instrument system sales. In general, order flow through the quarter did not suggest an overall weakening or strengthening of demand as we approach the fourth quarter. Looking at the quarter's performance for the Waters division geographically, China was the engine of our Asian growth in the quarter, and we saw nice increases in all segments of our business there. General concerns that we have recently heard regarding a slowing of economic growth in China are not apparent in our third quarter results or in the outlook…

Thank you, Doug, and good morning, everyone. Third quarter sales decreased by 1% and non-GAAP earnings per share were up 4% at $1.18 this quarter compared to earnings of $1.14 last year. On a GAAP basis, our earnings were $1.12 this quarter versus $1.10 last year, and a reconciliation of our GAAP to non-GAAP earnings is attached to our press release issued this morning. Reviewing Q3 sales results in comparison to Q3 last year. Before foreign currency translation, sales were up a bit over 2% from prior year's third quarter. Translation reduced sales by about 3%. Looking at our sales growth geographically and before foreign exchange effects, sales within the U.S. were down 4%, Europe's sales were up 4%, Japan was down 1%, and sales in Asia outside of Japan were up 9%. On the product front and in constant currency within the Waters division, instrument system sales decreased by 2% and recurring revenues grew by 7% this quarter. Within our TA Instruments division, sales increased by 1% versus prior year. Now I would like to comment on our Q3 non-GAAP financial performance versus prior year. Gross margin performance came in at 59.4%, down somewhat from Q3 last year, principally due to foreign currency translation and sales mix. SG&A expenses were down 4% as a result of favorable foreign currency translation, tighter spending controls and lower variable compensation. R&D expenses increased by just 1% this quarter. On the tax front, a minor shift in operating profits among our legal entities raised our effective operating tax rate to about 16.5% going forward. Offsetting this in Q3 was a slight true-up of our tax accruals from final 2001 returns filed this quarter, keeping our tax rate at about 16% this period. Net interest expense was $5.9 million, and share count came in…

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

[Operator Instructions] Our first question comes from Ross Muken with IS Group (sic) [ISI Group].

So let's talk about the revenue line. Obviously, the trends you saw in the quarter were fairly consistent with what we've seen sort of in the broader market. I guess, as we think about what we saw toward the end of the quarter and through the jump off point to 4Q, I mean, what are sort of the puts and takes or sort of the opportunities and risks on either, whether it would be by segment or geography, that you sort of see? Because what I'm trying to get at is when you look at the 4Q guide, it's basically almost an acceleration, I guess, on the CapEx side of the business because you have a bit of a tougher comp, and so I'm just trying to see where you see sort of the key inflection points that kind of get us to that 2% midpoint.

Ross, I don't think we're intending to say that we're seeing a real step function in what's coming at the fourth quarter. The pattern of activity over the third quarter wasn't highly variable. It was a pretty consistent quarter. We didn't see a significant drop in demand late in the quarter, as some have talked about. Pretty consistent. Now the fourth quarter is always a big quarter. It's the biggest quarter of the year and it was, of course, last year, but we don't really see much of a change in the momentum that we're expecting in the fourth quarter. And I'd say early on, it's early on in the fourth quarter, but that's reflected in how we're seeing early on in the fourth quarter of this year.

I guess my point, so if you look at like the U.S., which deteriorated q-on-q, I mean, there's really no reason for that to get better. If anything, with sort of the uncertainty from the fiscal cliff, I mean, most CapEx companies are citing an assumption that, that actually gets worse. I know you have a bit of a different mix than the traditional industrial guy, but I guess, what are you sort of baking into the forecast for kind of that 4Q trend, particularly in the U.S. business?

Ross, just to embroider a little bit, when you look at our geographic segments, sometimes you have to look at specific order details that happen in the base and -- versus what we anticipate happening in this fourth quarter. In the case of the United States, for instance, the third quarter of last year had some very large orders that were unique to the third quarter and didn't repeat in the fourth quarter. We are very strongly anticipating almost a swing in that. So we'll see some large orders come in, in the U.S. in the fourth quarter this year that weren't in the fourth quarter base. So when you annualize or adjust for that, we're still seeing that the underlying trends to be essentially what we've seen in the last couple of quarters. U.S. demand, we don't expect to make a step function, but we do expect that this quarterly adjustment of these large orders will swing in the favor of the U.S. in the fourth quarter, where they swung unfavorably in the third quarter. Does that help?

Yes, I think so. And so, I guess, I mean, if we do see a pause in the U.S. in the fourth quarter, I mean, how comfortable do you feel on the cost front? I mean, you managed costs exceptionally well in the last few quarters. How much more room do you feel like is there?

Well, we think that our -- as you know, we don't try to empty the bucket in our forecast. We don't -- we try to strike a reasonable course, hopefully erring a little bit on the conservative side as we posture ourselves. We don't want to get ahead of ourselves on the spending line and then have to carve back dramatically. So we think as we plan for our revenue line, we hope that there are opportunities to exceed that, and so we've planned our spending accordingly. I think that probably says it as well as I could say it.

Our next question comes from Jon Groberg with Macquarie.

Just one quick clarification and then a question for you, Doug, and I'll just ask them at the same time. So, John, on the gross margin, can you just -- it looked like mix -- since instruments were down and some of the consumables chemistry were up, I would have thought maybe mix would have been a little bit better, but you highlighted mix as one of the reasons gross margins were down. So can you maybe just talk a little bit about gross margin? And then, Doug, just wanted to clarify on the '13, maybe give a little bit color on what you mean. Is it more balanced approach? Is it you focus maybe on spending a little bit more in '13 to ensure better revenue growth in kind of the out years? Maybe just give a little bit more color as to what you meant by a more balanced approach.

Okay. Jon, on the gross margin front, starting first, looking at currency, we had a much more favorable currency environment from a gross margin perspective in the 2011 period. We had a strongly appreciating yen and a relatively weaker pound, and that is always a recipe for higher margins for this business. So against that strong base of comparison, currency translation hurt gross margins by somewhere around 50 bps. Of the remainder, somewhere around 40 bps of the difference year-over-year within the quarter is more of a product story within TA. We saw what we think is a temporary shift away from shipments of some of its higher-end products that actually created a little backlog there that we think comes back in the fourth quarter, but affected margins at TA and for the overall business in this quarter, and a higher service mix within the quarter was favorable to operating margins, but not as favorable to gross margins. So I think as we think about all of that and look at Q4, thinking about margins kind of coming back to being somewhere around 60.5% is where we are currently comfortable.

Yes, John, as it relates to 2013, first, as I'm sure you remember, we don't provide detailed guidance until we finish the fourth quarter and have our conference call in January. So we're going to stick with that. But in terms of, perhaps, what I'm hinting at, is the most difficult time that companies like Waters and many others has in looking and planning and executing the next year is when you have a dramatic change in momentum as you exit the year. As you'll recall, in 2008, as economic conditions rapidly deteriorated, it was a year that was looking very good and most plans were anticipating pretty strong growth, and then all of a sudden, you had to dramatically react to a change in demand dynamics. We don't anticipate that for 2013, and in that sense, I think it's going to be easier to balance and to plan for the coming year. A lot of open issues, of course, for 2013, political issues, economic issues, government spending, but I think, if anything, the planning is going to be more or less on the conservative side, and potentially more opportunity for an improvement as life goes on in 2013. But for us, that means that we can focus on the things that we're good at, where we're able to produce reasonable results in that tough economic climate when we can see it -- particularly when we can see it coming at us at that rate of speed. So I think that's kind of what I mean when I say, 2013, right now, you wouldn't say that there are a tremendous amount of upside opportunities, but it's not going to be a dramatic change, and therefore, I think it's going to be easier to balance your execution next year. Does that help?

Yes. So I recognize you weren't going to give specific guidance, but that's helpful. So it's not -- I get a few e-mails. They're just kind of comments around, is there a significant change that you're kind of posturing towards for 2013? It doesn't sound like that's the case. I think that's helpful.

Our next question comes from Tim Evans with Wells Fargo.

I was hoping maybe you can make some comments on pricing across your various product lines.

Sure. I would say, with very few exceptions, our pricing has held up across the board. There's nothing in these results that you should interpret as significant price pressures entering into the competitive equation. We have nothing in our gross margin analysis that reflects any significant price concessions, and we don't believe that we stand to gain a whole lot by adjusting our pricing mechanisms, and in particular, places where we have seen weaknesses this quarter, we can't find any lost business because of price. We frankly don't see a whole lot of business being lost to competition that we didn't have in previous quarters. So we don't see a lot of market share changes. It's largely -- our results are largely due to economic factors, not individual competitive factors, I would say.

Our next question comes from Dan Leonard with Leerink Swann.

I just wanted to revisit the gross margin commentary. I appreciate that the year-over-year comparison was heavily influenced by foreign currency, but I wouldn't think the sequential Q2 to Q3 comparison would have been influenced by foreign currency very much at all and yet, there was a big sequential drop in margins. So I'm curious if you can offer more color into that, John. And then also, what gives you comfort that gross margins will increase sequentially at about 100 bps in the fourth quarter?

Yes, there were small differences in currency, Q2 to Q3. Sometimes, there's differences in the accounting for the value of inventory quarter-to-quarter, so it's really tough to get it down to a difference of 10 or 20 bps on the margin line. Certainly, within the quarter, what was different, though, was the product mix piece versus the year-over-year. We did not see, for example, the TA shift away from the shipments of high-end products in the quarter in Q2, so we had a very strong margin, actually, at TA there. So I would say the bigger difference, Q2 to Q3, is more of a product story than it is the currency difference. And for the fourth quarter, typically, what we see is a meaningful pick up year-over-year, really associated with volume leverage of the manufacturing organizations. So we have a relatively fixed base of manufacturing cost. We're producing more. We're getting favorable manufacturing variances on that. So if you go back in time, you'll see that Q4 traditionally has a much higher gross margin year-over-year. We're still expecting about a 40 bps decline versus history, and that's really all currency in the fourth quarter versus the prior year.

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

First, just a clarifying question on gross margins. John, is the 60.5% gross margin guidance for the year or for the quarter?

That's for the quarter. That would bring the year to somewhere around maybe 60.25%.

Okay. So you guys have been managing spend very aggressively. Specifically, R&D spend looks to be tracking to grow at the lowest rate since 2009 this year, and SG&A, factoring in FX, is expected to decline year-over-year in 2012 for the first time since 2009. In your prepared remarks, Doug, you talked about the fact that investors should recognize that you intend to balance near and long-term interests next year. Could you specifically talk about whether or not you can maintain investment at these levels or whether you do need to catch up next year, keeping in mind that you are going to be investing for both the near term and the long term?

Yes, sure, Doug. I think in the R&D area this year, you're probably seeing a little bit of a dynamic of some of the major spend in the software area that we've had beginning to modulate a bit as our unified platform gets completed. So you're seeing some of that gross spend dynamic in software modulated from what it was a couple of years ago. In general, I'd have you believe that our R&D spend is going to be pretty close to the sales growth. So R&D spending over a relevant period of 3 to 5 years is going to grow at about our level of sales. Now we, of course, are able to leverage our R&D spending more than some because of the high consumables rate in our business that doesn't require a high level of R&D spend to support that sales volume. So in a year where our instrument business is suffering the economic conditions that it is, it's the consumables business that's supplying the lion's share of our growth, and that's what you're seeing in that R&D versus top line growth. But long-term, I'd have you modeling R&D growth not substantially different than revenue growth.

And on the SG&A side?

I'm sorry, the SG&A growth long-term?

Yes.

We think that we can continue to, in a long-term sense, a 3- to 5-year period, spend SG&A at a lower rate than sales growth. We're clearly doing that this year, and that's not easy when your sales growth is under as much pressure, but -- and it's -- as I said earlier, it's easier to do when you see this coming at you, and it's not a dramatic change at the end of a quarter going into the next year. So we still feel pretty good at being able to leverage our operating income with lower SG&A spending versus sales growth. It was a challenge this year, probably a bigger challenge than it is in most years, but we achieved that, and I'll have you believe that we're going to strive to achieve that next year also.

So no change to what you guys have said over the last couple of quarters. As long as organic is or constant currency growth is in that 3% range or so next year, you can get a little bit of operating leverage without compromising the long term.

That is exactly my point.

Our next question comes from Daniel Brennan with Morgan Stanley.

I just wanted to get some color on the trends in the quarter from your large pharmaceutical customers. I know you've kind of highlighted how generics was strong, offsetting some weakness elsewhere, but could you just give us some color after -- certainly, the slow start to the year, I know last quarter, you saw a strong growth, but yet it was mostly, I think, related to the backlog that was up from Q1 to Q2. So any color on just kind of what trends you're seeing from your large pharmaceutical customers would be helpful.

Yes. I'd say we're seeing in large pharma remarkably consistent conditions right through the year, mid-single-digit growth in that pharma category. I'd say, maybe a little bit of flavor is that we see it strongest in the small molecule Q&A area as opposed to the front end of R&D. I think that shows, to some extent, the conservatism of this customer base, focused on what they have to spend on and perhaps delaying some of the more futures. I don't know that, that's a good sign forever and ever, but I think it is something that we're seeing in our sales base, and it's been remarkably consistent, as I've said. It's -- it hasn't wavered too much, right, from the first quarter of this year, up at mid-single-digit demand pace.

Okay. And then maybe just one other quick one. Just in terms of applied market trends, I know you highlighted food, which you still see as a positive long-term growth opportunity, but can you as well just kind of tease out some color there? I know last quarter, you had pointed to sustained weakness in some of the more cyclical areas, but kind of what are you seeing today? And has industrial chemical -- have those worsened? Are those performing as expected? And on the flip side, kind of environmental and food, any kind of update there will be helpful.

I think the industrial applications are challenged. I mean, I think across the board, the industrial customers are clearly most challenged in their performance currently. We are hearing the most concern about their near-term expectations. Certainly, we saw in TA, which is -- tends to be a harbinger of the industrial markets, that their growth modulated in the third quarter. Even though their orders rate was a little bit stronger than their flow-through rate, it was still softer in the third quarter than in the second quarter. So I think that broad-based, industrial segment is clearly not terribly robust. You saw it today. DuPont results were not great, and I think that's consistent across that large industrial category. I think in the applied markets, it's really a geography-by-geography story. China's food safety business continues to be strong. Environmental applications in China continued to look pretty good. Food applications, on the other hand, in the United States, I think still await a more rigorous regulatory climate. They passed, of course, some of the laws, but the regulations have still not really stepped up to mean that, that spending in the U.S. has gotten terribly robust. So it's largely a case-by-case. But clearly, in an environment where our instrument businesses are running flat to a little down, in the hardware sense, pharma is the biggest piece of that, it's in mid-single digits, and everything else is not terribly robust.

Our next question comes from Tony Butler with Barclays Capital.

Doug, if we stick with industrial for a minute, in Q2, you made reference to the UPC2 raising eyebrows, I think, for industrial customers. So the question really is, despite new product introductions, does anyone really care? Or are they just so afraid of their future CapEx? And then second, could you comment on -- I guess, in Q3, there was the rollout of the G2S, and what you're seeing there?

Sure. I'll handle the UPC2, and maybe Art can just talk a little bit about the G2S. The UPC2, Tony, we are extraordinarily enthusiastic about. It's been a good product launch. But to be fair, perhaps not quite as strong on the uptake this year as we thought it might, and I do think that, that reflects to the fact that it's a new product this year. It's not in people's capital base. They didn't plan and budget for it, and I fully suspect that we're going to see a ramp function next year as those conditions change, and we've run the samples. We've got it in our demo labs. The customer reaction to this, I think, is a huge sleeper for us next year. It is something that we continued to be very optimistic on. But to be fair, it's been a little bit tougher slog this year than I thought it would because the results on the actual samples have been so good. But I think we'll continue to report on this. I'd say this is a major opportunity for us in 2013. Art, do you want to talk about G2S?

Yes. Yes, the G2S has done quite well for us. It's a -- in that particular segment of high-end mass spectrometry, the key there is to continually evolve your performance. That market space is keyed into that, and the nature of that segment is that they will make investments and upgrade if they believe that the performance of the system is enabling them to produce more information, better results. We have seen that play out with this product. What plays against us somewhat is the suppressed capital expenditures we see in that segment. So we're not getting the kind of velocity that we believe that product would get where capital's more readily available, but we've had some very outstanding results with this product, particularly in metabolite ID and a lot of the important applications that we think represent the future growth opportunity for that product.

Does that cover it, Tony?

You bet.

Our next question comes from Amit Bhalla with Citi.

I just wanted to just continue on that mass spec line for a second, and tie in your earlier comments on price and share. Given that you said you're not seeing much in price competition and share doesn't seem like it's moved much, it's a little bit in contrast of what you said in the past about the mass spec market. So can you just talk about the competitive landscape in mass spec and tell us where you're at?

Well, I think, clearly, the mass spec market, particularly the high-end, is the most challenged in this climate. So I think we're clearly seeing the most demand pressure come in that segment. It's also heavily influenced in that high-end in the bio segment of the marketplace, and that seems to be one of the more problematic areas in those pharma applications today. So I have no question it would, say, in our hardware area, the high-end mass spec arena is the most challenging right now, but it's -- we don't see a whole lot of share movement in there. There may be a little bit of share movement. It's tough to tell on a quarter-to-quarter basis, but I think it's more macroeconomics that's affecting our business there than anything else. In the triple quad area and in the single quad area, our results have been quite nice, quite good, and no sign of dramatic price competition. We are holding our own and there's no real competitive news in that segment of the marketplace, I mean.

And, Doug, just a follow-up on Europe. Given that it grew 4% and you called out strength in pharma in 3Q, can you go into a little bit more detail regionally about the pharma strength in Europe?

Well, I just think -- pretty much what I've said about pharma was typical in Europe, that the big pharma business was reasonably strong. It was concentrated in kind of those traditional pharma strongholds of small molecule, traditional drugs, weighted towards QA/QC applications rather than in major investments in the front end of R&D. So the normal suspects in terms of the big pharma entities in Europe were pretty good. Now 4%, I don't want anybody to think is the most robust conditions we've ever faced, but in a world of tough conditions, it was pretty consistent across the quarter.

Any regional weakness though in southern Europe that you can point to or not?

I wouldn't say of note in pharma. So if -- some of these large European and U.S. pharmaceutical companies have operations in Italy or have it in Spain. We don't notice that they're treating Southern Europe tremendously different for these large pharmaceutical companies. Certainly, local businesses and local government and university spending is affected in Southern Europe, particularly in Spain, I'd say. I wouldn't say in Italy we're seeing terribly deficient conditions, but Spain's a challenge, but not particularly in the large pharma segment. It's more in the everything else segment, I'd say.

Our next question comes from Jon Wood with Jeffries. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Doug, so it looks like your share repurchase pacing slowed a little bit in the third quarter from the first half. Can you give us kind of an update for the year there on the share repurchase front, and then any commentary you can offer on the change in the M&A landscape at the margin would be helpful.

Sure. John, maybe you can just touch base on share repurchase.

Sure. On the share repurchase front, John, we had a target for the year of around 300 million. We had a kind of a front-end loading to that. So I'd say we're probably, from a full year perspective, just about on target to get to that 300 million. So it's a little bit stronger in the first half than the second, but it gives us a little bit of an advantage on the weighted share count to do it that way.

And, John, on the M&A front, I'd say there's not much news from our perspective. We continue to look at several things in the TA portfolio that offer opportunities to fill it out. Those are not meant to be huge opportunities. And then our more mainstream or in something orthogonal to what we do, we don't see anything that should pique your interest on the horizon. Jon Davis Wood - Jefferies & Company, Inc., Research Division: All right, great. One follow-up. Doug, in a prior comment, you talked about some software-related spending moderating, but I think, if I'm not mistaken, you've got a pretty material step-up in amortization on the internal software side next year. Is that a true net event in the P&L? Or is there an offset somewhere in terms of lower spending to implement that?

Well, I think, true, as we launch new unified products, you're absolutely right that some of the spending for the development of software gets deferred and then amortized as cost of sales when you sell that software, and we'll be selling more of that software as unified started to get launched this year, and gets launched faster next year. But the revenue goes up as those products come on and the revenue is incremental.

Right.

So we don't see the gross margin as being substantially challenged by that.

The dollars of gross margin -- we could have a little bit of a...

Right.

Depressant on gross margin percentage early on while we're ramping it, but certainly, the dollars should be covered in incremental sales.

So we don't think it's going to be a material -- something that you will notice in a material sense.

[Operator Instructions] Our next question comes from Isaac Ro with Goldman Sachs.

Doug, I was hoping that you or John could maybe just sort of put a little more color around your assumptions on the U.S. improving in the fourth quarter, and the reason I asked is, obviously, all the checks we've done, you would suggest that there's a heightened level of uncertainty around budgeting, and so one of the first things that often goes is capital equipment. So if you kind of compare this year's outlook for fourth quarter, at least in some of these academic and pharmaceutical end markets to this year, if you can you put some more colors on why you're so confident. Beyond just a couple of large orders, why North America should improve sequentially.

Sure, John, you want to handle some details? And if you need more color, I'll...

Sure. Yes, I think as we think about the fourth quarter and look at the various markets, as Doug had said, there was a little bit of a blip in the base quarter in the U.S. in Q3 last year that maybe gave a little different impression on the underlying run rate for the U.S. than what we see in the order rate. But that being said, I would tell you that as we think about Q4 and we look at a 2% expected organic growth rate, we're looking at relatively a flattish performance from many of the developed economies in the world. So U.S., Europe, Japan are all expected to be somewhat flattish in that performance, and the expectation for ROW, Asia, maybe some of Eastern Europe economies are likely to continue to grow at a high-single-digit rate. And so we're not -- we're really not expecting a dramatic change when you think about the developed world in sum total. So I think the U.S. versus Europe dynamic, we're not expecting Europe to continue at 4, but we're not expecting the U.S. to continue at minus 4.

Our next question comes from Tycho Peterson with JPMC. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: I want to go back to some of the comments you made earlier on pricing and market dynamics. And it sounds like you're not losing a lot of share here, but I'm wondering, in light of the numbers we've seen within the industry, if you can talk about what you think the underlying growth in the mass spec market is today. And do you see that potentially changing, in other words, accelerating as we move more to diagnostics and some additional applied markets?

Sure. I think, overall, the mass spec piece of the market is the most challenged right now, and if you're thinking about -- you look across all of us, you're talking low-single-digit growth and probably, the hardware piece is even softer than that across the industry. Of that kind of flattish revenue growth dynamic, Tycho, mass spec, I think, is weaker than HPLC. So I think the marketplace is, this year, down a little bit in the -- just the mass spec piece. Now it's -- you got LC/MS, and you've got overlaps between what the dynamic is in just the MS piece of the market. But clearly, to the extent that you can isolate those factors, they are higher dollar purchases. Capital spending is more restrained in those higher dollar items. They're not used as much in QC, which are much more resistant to growth. They're more in the discovery segment that people can control a little bit more. So all of those factors say mass spec is more challenged than the LC piece. The LC piece certainly has more service and consumables elements to it, and I think we're seeing that. On the other hand, I think the most challenged is the high-end research-grade instruments. I think that piece of the segment is most challenged. The triple quad into drug metabolism studies, the single quads are less challenged, and that's where we're seeing the best performance. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then maybe a quick follow-up for John on margins. As we think about gross margins over the next couple of years, are there obvious levers that you can pull? I mean, we're modeling about 20 bps of margin improvement going out the next couple of years per year. Can you just talk us through where you are in the manufacturing transitions? And are there other obvious levers on the gross margin side that we could be thinking about?

Sure. I think as we look at major product transfers and movement of production into Singapore and into Ireland, for the most part, the large amount -- the large transfers of those newer products is principally done. Over time, sure, there'll be -- incremental products will make their way into some of these lower-cost areas, but I would say that it's going to be a bit more of a challenge in a low-growth environment to think about leveraging manufacturing costs and providing meaningful gross margin improvement, and we -- the expectation will be to, at least, hold those gross margins. And to the extent that instruments can grow a few percent or better, then I think we're beginning to talk about a continuation of the volume leverage trends that will provide another 10 or 20 bps per year in what we believe will be a stable pricing environment, but there isn't a step function of gross margin improvement that we're looking at based on product transfers at this stage.

Our next question comes from Peter Lawson with Mizuho Securities.

John, just on the U.S. business, where do you focus for growth for Q4 and 2013?

2000 and what, Peter?

For Q4 and 2013, where do you think the growth will be in that U.S. business?

We are not providing 2013 guidance, Peter. You're talking about this year, 2012?

I'm just -- I guess, when you look at the end markets, if you wanted to rank them, where would you be focusing more resources for various end markets within the U.S.?

I think, Peter, as we look at opportunities for the business, we still believe that the area of clinical diagnostics here in the States represents a meaningful opportunity. We think that the legislation that's been passed, but not enacted, in food safety is something that is likely to come to the forefront, perhaps once we get through the election cycle. So to the extent that there's legislation enacted and in place that looks like what's in the EU, I think there's a meaningful opportunity for improvement in sales into the food safety side of the business, so those are at least a couple of areas that we look at and focus on. And I would say, just the new chromatography system, UPC2, is something that is going to impact all markets, including the U.S. So I think from a new product perspective, coupled with the clinical diagnostics and the food safety, those are probably the bigger areas in the States that we look forward to growth in 2013 generally.

But that comment, I'd suggest, Peter, is really on the margin. Our field resources and our marketing resources, well over 60% of our business is life science oriented. We're still going to focus most of those resources on pharma, CROs, biotech customers who are the main stream of our business. So yes, we have opportunities that arise differentially quarter-to-quarter, but the mass of our resources stays focused on a pretty predictable subset of customers.

And that balanced approach comment, that doesn't infer any changes in the way you're attacking various different markets.

No, I mean not -- again, we introduce a new product like UPC2. We overweight demonstration activities, and we have to move some people around our laboratories to run more demos that maybe last quarter, they were doing in a different area, but it's really kind of on the margin. That's one of the reasons why we can introduce a new technology like this, and not have to layer on huge amounts of new resource. We can just move them, and then the next quarter, they'll kind of move off that a little bit and move into another area. So it's largely -- still most of their activity is focused in very traditional areas, calling on customers that we don't think are going away. They may have reduced their capital spending somewhat this year, but we've seen this dynamic year over 30 years, and they're not going away. And in all likelihood, they'll be back spending at a more regular pace as we go through future quarters, and we need to pay the same amount of attention to them quarter-after-quarter.

Our next question comes from Sung Ji Nam with Cantor Fitzgerald. Sung Ji Nam - Cantor Fitzgerald & Co., Research Division: Just was wondering if you could give an update on the I-Class since H-Class doing well, and it sounds like there's good demand potentially for UPC2 going forward. But just curious as to -- is all the UPLC that's being placed, going forward, going to be I-Class? Or just kind of curious just if you could provide more color there.

Well, sure. Art's right here. I'm sure he'd be delighted to talk about the I-Class.

Yes, the I-Class, as we've spoken in the past, is largely focused into the use with high-end mass spectrometry. It provides the optimum separating power and performance that gives it the leverage in those research-type applications. The I-Class represents the top of the food chain amongst our entire ACQUITY line. So this product, which was rolled out roughly 1 year or more ago, has actually done quite well. It has basically enabled us to cover a broad range of UPLC utilization across the market space. We find the I-Class centers in as a very high-performance UPLC system for general applications and research, as I mentioned, largely on the front end of mass spectrometry. And as you move downstream into the development and routine areas, it speeds the method development and the process that enables you to now utilize the H-Class, which we find now going more and more into the development and quality control applications. So it's a great compliment. It fills a very important part of the cycle as we move the market space more and more into the UPLC capability region, and in all is doing quite well, and we've yet to see any competitive product that approaches its capability in that -- in the region of UPLC.

Our next question comes from Derik De Bruin with Bank of America.

A couple of quick ones. John, when we look at the 16.5% tax rate, is that something we should think about carrying forward?

Yes, I'd say at this stage, as we look at the production of products around the world, which really drives this rate, we're pretty comfortable that what we see for a mix right now was likely to be consistent with the mix that we're beginning to look at for next year. So I, right now, would anticipate that, that rate would hold as we think about 2012.

Okay, and just -- if we assume that your currencies is where they are today, sort of like stabilized, and we don't get any real changes for next -- going into next year, is FX a help or a hurt to the gross -- to the overall margin of the company?

I'd say, right now, I mean, that rate has certainly gone up and down. I think it's getting to be something relatively neutral at levels where it exists today. I'd have to do some analysis to completely prove that, but I wouldn't think that FX from a sales perspective or even from a contribution perspective is going to be a meaningful piece of the overall earnings picture next year.

Our next question comes from Dan Arias with UBS.

You guys mentioned better demand for small molecule focuses this quarter, so I guess, can you comment on budgets in biotech, maybe particularly with respect to smaller companies, where cash is obviously a bit more of a concern?

Well, I think our performance this quarter was less robust in that biotech segment of the marketplace, as well as in the biomolecules segment of the traditional pharma business. We don't think that, that's a long-term market dynamic. Almost all of big pharma is kind of torqueing their businesses around to focus more on biopharmaceuticals rather than the more traditional small molecule drug marketplace. What we do think we see in this kind of period when there are clearly capital controls on, the thing that you can cut back on is the new stuff and the new stuff is bio. So -- and you can't cut back on worn-out instruments that are controlling production of the old drugs. So in macro terms, we think that's really what you're seeing kind of in the near-term. Over the long term, and I think that you'll see this in 2013, the bio segment, including the smaller bio markets, are likely to come back into the picture and be a more traditional piece of the pharma marketplace.

Okay. And can I just ask quickly for you to remind us how much of your business is food safety at this point?

Somewhere around 6%, 7%, something like that.

Our next question comes from Steve Willoughby with Cleveland Research.

Just given lots of talk on the mass spec market, I was wondering if you could provide some commentary on how you guys see the liquid chromatography market these days. And then secondly, any expectations you guys have for a budget flush in the fourth quarter?

Sure. I think, as -- everything in the hardware area and the life science market, I think the hardware business for chromatography is pretty flat right now. It's a little bit stronger than the mass spec piece of the marketplace, but I'd say that's a characterization of the global marketplace, strongest in China, strongest in traditional pharma applications, as I've said. I don't think that there's any indication of significant market share moves in this climate. We don't see it. We don't see major lost business or gained business. Times like this, it's awfully difficult, I think, to see any kind of significant market share move. In times of low demand, people tend to stick with what they've done. As things change or get a little bit more robust, I think you can look for a little bit more swings to new products and new dynamics, but I'd say there's not much change in the liquid chromatography market. Boy, maybe on the fringe there's some, but we can't see it.

The next question comes from Jeff Elliott with Robert W. Baird. Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division: You talked about strength in the generic customer base despite some challenges in India. I'm just kind of curious, what's going on there? What's driving the strength among the generics manufacturers?

Well, I think what's going on in generics is what you'd almost expect in India. That's one reason why we think it's inevitable for India to come back, because the generic marketplace is growing pretty robustly as ethical pharmaceuticals come off patent, and you're still seeing the business grow for something like LIPITOR that just recently came off patent and has now substantially gone generic. So the long-term flow of products into the generic market, I think, is unquestioned. What you're seeing is a specific dynamic in India with the rupee being very weak, with government policies in India not being terribly clear. So generic companies and regulatory snafus in Italy [ph] among some of the generic companies causing individual problems. So we think that's limited to India, but almost everywhere else, the generic business is pretty robust. So I think you're going to see India return. Whether it's 1 quarter out or 2 quarters out remains to be seen, but other than that, I think the conditions are still very good for the whole class of generic drug manufacturers.

Okay, we have no one left in the queue at this point.

Good.

Very good. Well, thank you, all, for being with us. We look forward to updating you on our next conference call. Thank you.

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