Waters Corporation (WAT) Q3 2026 Earnings Report, Transcript and Summary

Welcome to the Waters Corporation Third Quarter 2026 Financial Results Conference Call. [Operator Instructions] This call is being recorded. If anyone has objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Head of Investor Relations. Please go ahead, sir.

Thank you, Ryan, and good morning, everyone. Welcome to Waters Corporation's third quarter earnings call. Joining me today are Dr. Udit Batra, our President and Chief Executive Officer; and Amol Chaubal, our Senior Vice President and Chief Financial Officer. Before we begin, I will cover the cautionary language. In this conference call, we will make various forward-looking statements regarding future events or financial performance. We will provide guidance and commentary on possible future results and potential market and business conditions that may impact Waters over the fourth quarter of 2026, full year 2026 and 2027. These statements are only our present expectations and are subject to risks and uncertainties. Please see the risk factors in our SEC filings and the cautionary language included in this morning's earnings release. During today's call, we will refer to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are in our earnings release and the appendix of today's slide presentation. Unless stated otherwise, all organic revenue growth rates are presented on a constant currency basis and are in comparison to the third quarter of 2025. For acquired business revenue, unless stated otherwise, all growth rates are presented on an as-reported basis, covering the current period in comparison to the revenue as reported by BD for the prior year comparable period that predates Waters' ownership. Finally, we do not intend to update our guidance, predictions or projections except as part of a regularly scheduled earnings release or as otherwise required by law. On today's call, Udit will open with our key messages and business highlights. Amol will then walk through our financial results and updated guidance and we will close with your questions. With that, it is my pleasure to turn the call over to Udit.

Thank you, Caspar, and good morning, everyone. Let me start by thanking our colleagues around the globe who continue to work with rigor and with speed to accelerate the benefits of pioneering science. We delivered another quarter of exceptional results with outstanding year-over-year and quarter-over-quarter momentum across our divisions. We grew double digits organically, extending our long-standing trend of delivering industry-leading results with revenue stepping up approximately 5% from the second quarter. In our acquired businesses, we are well ahead of our expected pace of transformation and integration with underlying growth building as our commercial actions, new product launches and revenue synergies take hold. New sources of growth are also amplifying our results as improving end markets and rising customer lab activity lifts demand for our products in preclinical and downstream settings. Together, these trends give us a fantastic fourth quarter outlook with our guidance calling for double-digit growth across both our organic and acquired businesses on a days adjusted basis. They also drive a USD 43 million raise to our full year revenue guidance. In our third quarter, total company as-reported revenue was $1.767 billion, comprising of $871 million of organic revenue and $896 million of Waters Bioscience and Waters Diagnostic Solutions. Organic revenue was 9% as reported and 10% in constant currency at the high end of our constant currency guidance range with orders outpacing sales by approximately $20 million. Biosciences and Diagnostics grew revenue by 1% on a reported basis, slightly ahead of plan and consistent with our guided seasonality assumptions. Adjusted EPS grew 21% to $4.10, driven by strong top line momentum, operational excellence and the cost actions we announced last quarter, which are now flowing through the P&L. Let me now cover these drivers of strength in more detail. Beginning with the Analytical Sciences division, growth was 8% as reported and 9% in constant currency, led by 12% growth in chemistry, low double-digit growth in instruments and high single-digit growth in service. Pharma grew double digits with broad-based strength across ethical pharma, generics, CROs, CDMOs and biotech, all before reshoring has begun to contribute. Growth was strong in every region, led by over 20% growth in China, mid-teens in India, high single digits in the U.S. and mid-single digits in Europe. Non-pharma grew mid-single digits with broad demand across industrial, food and environmental testing. The Biosciences division grew 2% as reported led by high single-digit growth in both research and clinical reagents. Customer traction for our newly launched FACSDiscover A7 flow cytometer has been strong since its mid-September launch, and we expect it to become a meaningful contributor to instrument growth starting in the fourth quarter. In China, we returned to growth following a low double-digit decline last quarter, as localization came online ahead of schedule and new leadership drove better execution. This is the first quarter of positive growth for Biosciences in China in 10 quarters. The Advanced Diagnostics division grew 2% on a reported basis. The acquired Diagnostic Solutions business was flat on a reported basis as expected. China DRG diluted growth by approximately 200 basis points in the final quarter before it annualizes into the baseline. As we outlined last quarter, we are managing channel inventory to end customer demand compared with last quarter's third quarter build. Excluding both, underlying growth was approximately 5%. Also within the division, the organic clinical business unit grew 17% as reported and 18% in constant currency. We grew double digits across all regions, fueled by test and portfolio expansion in LC-MS diagnostics and due to lead sharing from our acquired Molecular Diagnostics business. The Materials Sciences division grew 7% as reported and 9% in constant currency, sustaining the high single-digit growth we returned to last quarter. Growth was led by materials testing for semiconductors and data center build-outs, along with thermal analysis for aerospace and defense. Separately, we saw a broad rebound in China which grew well into the double digits. Several parts of the portfolio stand out where growth accelerated meaningfully versus the second quarter. In flow reagents, reported growth accelerated 400 basis points to 8% as research reagents grew high single digits, up from low single digits last quarter on stronger commercial execution, improving end markets and pricing. Growth was led by our highly differentiated Horizon Real Dyes, which grew mid-double digits. In chemistry consumables, growth accelerated 200 basis points to 12%. This marks our sixth quarter -- sixth consecutive quarter of double-digit growth, again, led by bioseparations, where MaxPeak premier columns grew mid-double digits. Since the second quarter, we have observed a contribution from AI-driven workflows in pharma R&D settings, which has helped sustain double-digit chemistry growth against double-digit comparisons. LC-MS instrument growth accelerated 200 basis points to 10% or 11%, including clinical LC-MS driven by robust instrument replacement and strong adoption of our new products. Complex Biologics spanning bioseparations and bioanalytical characterization is where our capabilities, portfolio and differentiation show most clearly. This is a result of a deliberate multiyear strategy of entering faster-growing adjacencies in large molecule applications, where our leading solutions continue to outperform the market. The Xevo MRT mass spectrometer is a clear example of our innovation network with sales more than tripling year-over-year. The recent launch of the Xevo MRT P10 system builds on the success by setting a new standard for speed and throughput in OMEX research. We have also delivered strong clinical mass spec growth throughout the year, marking further success in our LC-MS into diagnostics, high-growth adjacency in hospitals and specialty labs as well as for DMPK and other pharma clinical workflows. Our position in these labs has been further strengthened by the recent launch of our Xevo TQ Absolute XR IVD instrument, the industry's most sensitive and robust clinical mass spec. Now turning to our acquired businesses. The rapid execution initiatives under our 180-day growth revitalization plan are delivering tangible results and the benefits are progressively taking hold. On pricing, net price realization scaled to 120 basis points, up from 90 basis points last quarter, giving us further confidence that we will meet or exceed the 150 basis points over the next several quarters. On reagent rental compliance, our dedicated team is now addressing the global opportunity we identified. We expect to begin recapturing low to mid-single-digit millions of dollars per quarter beginning in the fourth quarter and further adding to our opportunity ahead. In Biosciences, local manufacturing in China came online ahead of schedule and was a key driver of the geography's return to growth. Looking ahead versus first half levels, local manufacturing, better execution, including faster export license approvals and DRG annualizing into the baseline should together add about 200 basis points to Biosciences growth over the next several quarters. Together, these actions have driven a clear inflection in growth. Our guidance implies 5% constant currency growth for our acquired businesses in the second half of 2026 with further runway to grow faster as these benefits continue to take hold. In addition, as part of our second phase of execution initiatives, we have now launched a localization initiative for our microbiology portfolio in China, which we expect to further augment growth in the quarters ahead. In parallel, the first full tranche of revenue synergies from our combination is now entering our results. With the BACTEC FXI culture system and the FACSDiscover A7 flow cytometer now launched, service plan attachment pricing and new digital channels beginning to generate incremental sales, the fourth quarter marks the first in which all of these levers contribute together. With this progress, we firmly remain on track to deliver $50 million of revenue synergies in 2026. We're also applying our launch excellence model to our Onclarity HPV Self-Collection Kit launch in molecular diagnostics. This FDA-cleared solution enables individuals to collect their own sample at home, expanding access for the more than 24 million people in the U.S. who are unscreened or underscreened for HPV, the cause of nearly all cervical cancers. We recently announced commercial partnerships for this breakthrough innovation with Quest Diagnostics and Labcorp who are adding it to their test menus with revenue expected to begin next year as samples are processed on our BD COR platform. Turning to legacy Waters. Our strategy across commercial execution, new product innovation and deliberate expansion into faster-growing adjacencies continues to play out successfully, delivering the high single-digit growth we committed to at our Investor Day in early 2025. Over the past 8 quarters, we have averaged approximately 8% organic constant currency growth, well ahead of 2% for the life science tools market and 5% for our closest peer. We remain in the middle innings of the instrument replacement cycle, which continues to drive strong instrument growth. Separate from replacement are idiosyncratic growth drivers across GLP-1s, PFAS testing, India generics and biologics are still scaling. We continue to estimate they will add more than 200 basis points of annual growth through 2030. China has also improved significantly this year with organic growth of 11% year-to-date, making it accretive to company growth once again. The resurgence in China, biotech, CRO and CDMO activity is becoming a structural tailwind reinforced by China's latest 5-year plan and its bold 2030 targets for biopharma. With these attractive and diversified sources of growth, legacy Waters is a durable high single-digit grower. In addition, new growth vectors are set to add further momentum across pharma, reshoring, semiconductor and data center testing and AI-driven demand in the quarters ahead. Given strong conversion trends, we also expect our Empower subscription transition to turn neutral to growth next year. For pharma reshoring, we have already received double-digit millions of dollars in orders tied to new sites as projects move from construction into instrument outfitting. In semiconductor and data testing, growth is accelerating in the Materials Sciences division as chip production output and data center build out scale further. Next year, we also expect to increasingly capture this opportunity in Analytical Sciences. Across both divisions, we serve an addressable market of approximately $600 million, growing double digits with clear room to gain share. For AI-driven demand, I will now cover this in three parts. The shift we are seeing with our customers, the strategy that positions Waters to lead and the growth it is unlocking in our portfolio. Over the past several months, I've spent significant time with our pharma customers. Artificial intelligence has become a key topic in these conversations. Realizing its benefits has quickly become a key enterprise priority for our customers, not just in research but in development and quality control as well. At Waters, we managed this fast emerging space with a weekly AI council, which I chair and which reaches into the organization. Our customers view Waters as a key partner in the AI transformation of the lab and for good reason. Over several years, we have developed a clear strategy and launched leading solutions that leverage our unique market position in several ways. In research, our customers are using AI to supercharge discovery output. Like others, our strategy advances lab in the loop science by enabling agents to autonomously run AI designed experiments on our instruments. Where Waters stands apart is what happens next. Our cloud-based platform answers a clear customer need, allowing this work to transfer seamlessly between labs globally and move downstream into Empower on a single platform with no handoff. In development, our customers' objective is to accelerate drug development and streamline regulatory submission. Empower is the compliance system of record for regulated chromatography, holding terabytes of validated data for each customer, a data set that is unique in our industry. As a central part of our strategy, we are deploying Empower AI features that unlock insights from this data to increase productivity and to improve accuracy. In QC, our customers' objective is to boost efficiency and improve accuracy while maintaining compliance. Here, our strategy is bringing AI, ML and automation directly into the validated environment on our customers on our Empower platform, preserving data integrity with a complete audit trail for regulators. This matters. This matters because data remains compliant only while it stays within Empower. That is why these capabilities must live inside our platform and be trusted to keep data safe. Together, this positions Waters for distinct sources of AI-driven growth, spanning discovery, development and QC, enabling growth across both higher volume and higher value vectors. Let me explain what that means in practice. The first is higher volume. In research, AI is already generating more hypotheses and creating more physical samples that must be separated, purified and measured driving more LC-MS runs and greater column consumption. This demand is coming from two sources. Our instrument systems and separation solutions are placed in AI-enabled labs at 8 of the top 10 global pharma companies where experiment volume is rising. At the same time, a new class of customer is emerging. AI-native biotech companies are reimagining the lab from a clean sheet using AI to create de novo labs run by agents and selecting Waters' instruments to test the molecules that their model is designed. So far, in 2026, dozens of these companies in the U.S. and China have become first-time Waters' customers. Last month, we took a step in supporting these customers with the launch of Waters' AI Link, which aligns our instruments with Anthropic's model context protocol and model hardware standard. This reduces the time to connect AI agents to our instruments from weeks to hours and strengthens our leading role as labs move towards AI directed autonomous operations. This progress is particularly valuable as we have the widest portfolio of instruments for bioanalytical characterization across LC-MS, light scattering, flow, CDMS and other techniques. In downstream applications, we are connecting these instruments through automated workflows that run as one process from sample to readout with Empower, then bringing the data together. The same dynamic is lifting our consumables growth. MaxPeak premier columns are unique in the industry because their innovative surface technology eliminates hours of column conditioning time and reduces screening time in between injections. It also delivers sharper peaks and more accurate results from less sample. This is exactly what these AI workflows need most, higher throughput, efficient sample use and better data to train models. And it is one reason why both large pharma and tech buyers are choosing Waters as they scale. The second is higher value. In late-stage development and manufacturing QC, we are turning Empower into a connected intelligent platform consistent with the strategy we laid out at our March 2025 Investor Day. We're bringing new AI-enabled features to the more than 500,000 Empower users who support the release of over 80% of medicines globally, delivered by a premium tier in our subscription model. For the first time, these features make our unique data set a core part of the Empower product, turning compliant data that has long sat within Empower into a source of insight and value. We launched the first of these AI-powered anomaly detection in February of 2025. Last week, we announced AI-powered peak integration, which automates one of the most manual and variable steps in chromatography. In a pilot with a large pharma customer, it reduced manual interventions by up to 95%, with 76% greater accuracy and 72% lower user-to-user variability. Several more AI applications are set to launch in the first half of 2027, which will accelerate column selection, method development and release time lines. Each new capability makes Empower more valuable to the labs already running it and is accelerating the transition to our subscription model. On top of that transition, the premium tier, these features sit on is expected to generate a substantial increase in revenue per lab over time. Beyond our customers, AI is also changing how we run Waters, most visibly in our integration. AI tools helped us complete our organizational restructuring and reach our target cost structure well ahead of plan, a key reason why we are set to achieve the $200 million of run rate cost savings more than 2 years ahead of schedule. AI is also accelerating procurement savings with data cube negotiation advisers that consolidate spend across our organic and acquired businesses. This lets us identify savings instantly, optimize pricing and move contracts from BD to Waters faster. Finally, we have integrated AI into our products and services, launching 10 lighthouse programs several years ago to apply AI and machine learning across the portfolio. One example is our Service AI Advisor, which turns decades of free-form service notes into answers that engineers and customers can access in everyday language. It has saved millions of dollars in parts, improved fixed rates by 10% and avoided hundreds of unnecessary service visits making our already differentiated service even stronger. We have also built intelligence directly into our instruments. Our Alliance iS HPLC system, for example, uses guided setup, automated checks and built-in error detection to prevent up to 40% of common user errors before they affect the result. Extending our reach in large molecules this morning, we announced the acquisition of MOBILion Systems, the pioneer of SLIM high-resolution ion mobility separation technology. While a small tuck-in financially, it gives Waters a unique advantage in proteomics, enabling us to lead first in research and over time in the clinic. The acquisition broadens our entry into Discovery Proteomics, a $2.2 billion market growing high single digits by pairing SLIM's separation power with our Xevo MRT mass spectrometer for superior analysis of complex proteins. Xevo MRT offers an unparalleled combination of resolution and sensitivity at speed. Together with SLIM, it enables data generation at the scale that foundation and frontier models need opening the door for accelerated proteomics discovery. It also leverages our ability to take proteomics downstream. Over time, we will pair this technology with our industry-leading tandem quadrupole portfolio creating a long-term opportunity to translate protein biomarker discoveries into validation in clinical trial cohorts. From there, our large installed base of mass specs in routine clinical settings provides the platform to turn these discoveries into validated tests, expanding our menu into blood-based screening for early detection, such as MCED, Alzheimer's and Parkinson's and for minimal residual disease monitoring. I will now cover our updated full year 2026 guidance and provide our initial commentary on 2027 ahead of formal guidance in February. For 2026, our strong third quarter results and our fourth quarter outlook, which is meaningfully faster than our prior guidance implied, underpinned a $43 million raise to our full year revenue guidance at the midpoint, which Amol will detail. This reflects 7% combined company constant currency growth in the second half, comprising approximately 9% for the legacy Waters business and approximately 5% for the legacy BD business despite 4 fewer selling days in the fourth quarter. We expect strong momentum to continue thereafter, and we will enter 2027 with more diversified sources of growth than at any point in our history. This gives us the confidence to share a starting framework for next year. As a starting assumption, we expect legacy Waters to grow high single digits and legacy BD to grow mid-single digits. Together, these combine to mid-single-digit plus organic growth for the combined company ahead of our deal model. Importantly, this is while making starting assumptions for both businesses that are prudently below their second half base despite our existing growth drivers carrying into next year and being joined by numerous incremental growth vectors. Our ambition is higher than the starting point. With execution initiatives, pricing, revenue synergies, pharma reshoring and AI-driven demand, all expected to gain pace, we see a critical path to a high single-digit growth potential for the combined company in 2027. On adjusted operating margin, our starting framework calls for 100 basis points of expansion to 29.2%, already underwritten by the 2027 carryover of cost synergies taken this year. Volume leverage and further cost synergy realization offer upside potential net of reinvestment. This supports low teens adjusted EPS growth in 2027 as a starting point on a 2026 EPS that is well ahead of our deal model and with mid-teens as the upside case as these drivers build throughout the year. Even on these starting assumptions, we are set for industry-leading growth and margin expansion in 2027. With that, I will now turn the call over to Amol to cover our financial results and guidance in more detail.

Thank you, Udit, and good morning, everyone. In the third quarter of 2026, we delivered total company as reported revenue of $1.767 billion. Organic revenue was $871 million, up 9% as reported and 10% in constant currency. Sequentially, revenue stepped up 5.2%, well ahead of 3.6% sequential step-up embedded in our guidance midpoint and meaningfully above prior year levels. Biosciences and Diagnostic Solutions generated $896 million of revenue, slightly ahead of our guidance and representing 1% reported growth versus the prior year comparable period. By geography, as reported revenue was $749 million in the Americas, $523 million in Europe and $495 million in Asia. Adjusted gross margin was 55.8% and adjusted operating margin was 30.1%, driven by strong top line momentum, operational excellence and cost synergies flowing through the P&L as planned. Our operating tax rate was 15.4% and net interest expense was $53 million. Together, this resulted in adjusted EPS growth of 21% to $4.10, $0.05 above the high end of our guidance range. On a GAAP basis, diluted earnings per share were $0.82, reflecting acquisition-related purchase accounting charges, integration and acquisition-related costs and restructuring costs. Free cash flow was $68 million after approximately $81 million of BD integration, restructuring and SAP-related costs and $240 million of timing items primarily related to higher receivables from strong sequential sales and SAP migration. With our successful SAP go-live, we expect timing items to normalize in 2027. Turning to our results by operating segments. The Analytical Sciences division delivered as reported revenue of $703 million, up 8% as reported and 9% in constant currency. In constant currency, instruments grew 10%, chemistry grew 12% and service grew 8%. Pharma grew low double digits, while non-pharma grew mid-single digits, led by industrial. The Biosciences division delivered as-reported revenue of $396 million, representing 2% reported growth versus the prior year comparable period. Flow Clinical grew 4%, led by high single-digit reagent growth on strong execution and customer activity. Flow Research grew 1%, led by RUO reagents, which grew high single digits on strong execution, pricing and improving customer activity trends. The Advanced Diagnostics division delivered as-reported revenue of $575 million, representing 2% reported growth versus the prior year comparable period. Diagnostic Solutions delivered $500 million of reported revenue, flat year-over-year. In Microbiology, reported revenue was $346 million, reflecting 4% growth. Ex China, growth was 6%, while China declined more than 20% due to DRG headwinds, which annualized into the baseline beginning the fourth quarter. In Molecular Diagnostics and Point of Care, reported revenue was $154 million, down 6%, reflecting channel inventory timing and lower respiratory testing. The Clinical business unit, which reflects our mass spec diagnostic portfolio, delivered $75 million of revenue, up 17% as reported and 18% in constant currency with double-digit growth across all regions. The Materials Sciences division delivered as-reported revenue of $93 million, up 7% as reported and 9% in constant currency, led by electronics testing for semiconductors and data center applications and thermal analysis for aerospace and defense. Now turning to our full year outlook and fourth quarter guidance. We entered the fourth quarter with long-standing industry-leading growth at our legacy businesses, strengthening performance at our acquired businesses, improving trends in China and AI-driven experimental volumes rising from large pharma and tech bios. Beginning with organic revenue, we are raising our full year 2026 organic constant currency revenue growth guidance by 140 basis points at the midpoint to 9.1% to 9.7%. Including the effect of foreign exchange translation, 2026 organic reported revenue is now expected to be $3.429 billion to $3.447 billion. Turning to our acquired businesses. We now expect Biosciences and Diagnostic Solutions to deliver approximately $3.05 billion of reported revenue in 2026, raising our prior guidance by $5 million, which reflects an $8 million underlying raise, partially offset by $3 million of incremental FX impact. Together, total 2026 reported revenue is expected to be approximately $6.479 billion to $6.497 billion, a $43 million raise at the midpoint. We expect to deliver full year adjusted EBIT margin of 28.2%, net interest expense of $196 million and a 15.4% tax rate. Putting this all together, we are also raising our full year 2026 adjusted earnings per fully diluted share guide to the range of $14.60 to $14.70. This represents year-over-year growth of 11% to 12% and 13% to 14% in constant currency. For the fourth quarter of 2026, we expect organic constant currency revenue growth to be in the range of 7% to 9%. Including the effect of currency translation, organic reported revenue is expected to be in the range of $984 million to $1.002 billion. We expect Biosciences and Diagnostic Solutions revenue to be approximately $817 million, representing 6.7% reported growth versus prior year comparable period. Together, this results in total reported fourth quarter 2026 revenue of $1.801 billion to $1.819 billion. Fourth quarter adjusted earnings per fully diluted share is expected to be in the range of $4.58 to $4.68. At the midpoint, our organic revenue guidance calls for a 14% quarter-over-quarter step-up between third and the fourth quarter, prudently below the seasonal patterns of the last 2 years. On a days adjusted basis, given the 4 fewer days in the quarter, our fourth quarter guidance reflects 9% to 11% organic growth and approximately 10% reported growth for our acquired businesses, underscoring strong momentum heading into year-end without assuming a budget flush. With that, I will hand it back to Caspar.

Thank you, Amol. That concludes our prepared remarks. We are now happy to open the lines and take your questions.

[Operator Instructions] Our first question will come from the line of Tycho Peterson with Jefferies.

I appreciate you guys laying out the framework here for '27. I guess maybe if we think about what could accelerate here, can you just talk a little bit -- BD, obviously, you're low single digit this quarter. What does it take to get back to the 5% to 6% longer-term growth algo there? And then overall, you said there's a potential path here to high single-digit combined. What would it take to get there versus the mid-single-digit starting point?

Thank you, Tycho, for the question. Look, as you saw, an extremely strong Q3 print. I mean, we are growing double digits for our Waters legacy business. And for the acquired businesses, we orchestrated a spot landing as we had planned. Now as you look into Q4, for both the businesses on a days-adjusted basis, you see double-digit growth, right, as Amol just pointed out. And now as we think about 2027, I mean, you have to look at the second half of the year. And when you look at that, you basically find that the acquired businesses on an organic constant currency basis are growing at 5% and the base business -- the base Waters business is growing at 9%, right? So 5% and 9% for 50% of the businesses. So mid-single-digit plus is a prudent starting point if you just take that as a jumping off point from the second half of the year, right? So that's where we started. And we'll get into a lot more detail in February. But when you think of upside, which was your question, I mean, we've already done 120 basis points of pricing in this quarter, well ahead of plan. We expect that to be at least 150 basis points going forward. New products as in A7, FXI, COR are starting to generate momentum already as we go to the end of the year. And our execution muscle is now sort of permeated across all of Waters. Pair that with improving end markets, you start to see really very tangible levers for growth. Now there are 3 things that I'd point out that can add even more, which are reshoring, which is not in the numbers. As I said, they're already double-digit million of orders. We've not put that into this mid-single-digit plus starting point. AI benefits are not in the mid-single-digit plus. And then remember, China has been accretive already year-to-date on our base business. It's grown 11% versus close to a double-digit growth for the base business. Going forward, we expect China to be at least neutral, if not accretive. So several growth drivers starting from really stable execution, new levers across pricing, new products, reshoring, AI, China and, of course, semiconductor and data center demand. So we feel pretty good about where we're starting.

Okay. Great. And then just one follow-up on the fourth quarter guide. You've taken revenue above the Street. EPS, you're just rolling over the 3Q beat. Anything here to think about in the near term that would lead to the conservatism for 4Q earnings? And how do we think about the leverage for next year on the earnings side?

Yes. I mean, look, at the end of the day, we've taken the midpoint of our revenue up by $43 million, and we've passed EPS raise roughly at the operating margin, 28% or $0.10. Now one could say, like why are you not passing it at a gross margin level. Now some of the gross margin that is generated by that incremental raise gets used in things like commission and variable bonuses, call it, 1/3. The remaining 2/3, we are investing is roughly about $6 million, $7 million into accelerating higher growth programs like Rapid Sterility as an example, or like what we announced this morning, proteomics as an example. And so we are passing operating margin level benefit from that $43 million sales raise.

Your next question will come from the line of Vijay Kumar with Evercore ISI.

Udit, maybe on your comments around things that are not contemplated in fiscal '27, right? You mentioned AI. I'm curious, is there a way to quantify what AI means from a revenue contribution? You have legacy -- you had some legacy assumptions, right? I think the business does mid-singles and then during periods of replacement cycles, you get a couple of hundred basis points higher growth, and that's how you build it up the high singles. But now is AI incremental to that? Any way to quantify or size it, if you will, please?

Vijay, I mean, I made several remarks in my -- several comments in my prepared remarks on AI. Let me sort of pick up the most important theme here, right, which is extremely tangible. I mean, Waters has a privileged position in quality control of medicines across the industry, where in Empower for over 80% of medicines globally resides terabytes of data that has been collected over decades that we've just started to mine the insights from. We have turned Empower into a connected intelligent platform consistent with the strategy that we presented, as you referred to, in March of 2025 at our Investor Day. Now as an example, we launched our AI-powered anomaly detection in 2025 already. And last week, and listen to this, right? So last week, we announced our AI-powered peak integration, which now reduces manual interventions by 95% -- by 95% while improving the user experience, so you and I can use this product and reducing variability dramatically. So yes, there are tangible benefits that are measurable. And several more applications are coming in the first half of 2027, so that customers can mine insights without ever having the fear of losing compliance. So this is a very tangible outcome where Waters has a unique position. On drug discovery, I went through quite a bit. And here, the AI Link that we've launched allows us to sort of use Anthropic's model context protocol, their model hardware standard to make it easy to connect to Waters. So we will benefit as drug discovery accelerates because we are present in all of these labs, including the TechBios. And we've also shown that we've used AI to deliver marked improvements in cost synergies and accelerated it. But with all of that said, I think it's too early to start quantifying things. I mean we've grown at a sustained high single-digit level over the last 2 years. We've set ambitious targets. We meet them by having concrete plans. So I feel very good about where we are on Empower, very good about applications across our portfolio, delivering benefits and synergies. We're very well placed on the drug discovery side. But I think it's too early to start quantifying the impact.

Understood. And Amol, maybe one for you. I think on this margin assumptions for '27, we're at $200 million run rate of cost savings, right? I think by my math, the incremental next year is about $125 million. So you should be north of 150 bps of margin expansion. So I'm curious, is there some reinvestments, which is offsetting what the synergy math implies for margins?

Yes, Vijay, don't forget that we did not have the first 6 weeks of BD in our '26 numbers. And those first 6 weeks, you don't sell much, but you still have costs that are largely straight line, like you pay salaries for people, et cetera. So those 6 weeks when they come into our P&L next year are roughly 70 basis points headwind to the margin. And so that, coupled with the cost synergies that we have already puts us in spot for the 29.2% that we said is the starting assumption. And then what we generate from volume leverage, pricing, et cetera, sort of gives us a framework for the upside.

Your next question will come from the line of Doug Schenkel with UBS.

So you've been very clear about your guidance philosophy. I just want to make sure nothing is changing as we kind of think about the framework for 2027. Those are robust and impressive targets. I just want to make sure nothing is changing there. And specifically, as we think about free cash flow within that construct, the Street is at roughly $1.5 billion. Given your framework and the margin trajectory you're on, is there scope for meaningful upside to that estimate? Or are there cash cost or working capital requirements we should be contemplating?

So let me start, Doug, with the guidance philosophy topic, and then Amol will address the free cash flow question, right? So on the guidance philosophy, nothing changes, right? I mean, as you said, we've delivered sustained high single-digit growth, meaning 8% on average over the last 8 quarters, which is industry-leading. And so we set ambitious targets, and we step-by-step sort of overcome them, right? Remember, we started 2026 with a 5.5% to 7% guidance range on an organic basis. And we're ending the year with over 330 basis points ahead of that number at the midpoint of the guide, right? So we start the year having sort of a firm footing, which is mid-single digit plus for the next year. And then step by step, we get constructive through the year. We clearly have levers that we've outlined that allow us to reach the high single-digit domain. I outlined some of them to Tycho's question. And those quantified. Teams are working on them, but we like to look at data and then move forward. So the philosophy has not changed. It will be a stepwise process over the next year as it was this year. And as I said, I mean, it was a 300 basis point gap from the starting point to the end point. Amol, on free cash flow?

Yes. And Doug, great question on free cash flow. And the way I would think about it is, look, I mean, historically, Waters was 25% net income and free cash flow was also 25% of sales, which is like 100% conversion of adjusted net income. And that is how the combined businesses will get to, but think of it in 4 layers, right? So the underlying layer is we are starting at 27% operating margin, 21% net income margin. And we've committed to go to 32% operating margin by 2030 and 25% net income margin by 2030. So the base free cash flow should be 100% conversion at that 21%, 25% level. Now, the second layer on that comes with all these onetime integration costs and onetime transaction costs that are very heavy in the initial years. But as you get to 29%, 30%, they fade out, right? And so that is sort of dragging the free cash flow down in years like 2026. And that drag will progressively come down. And that drag in the beginning is like 8%. And as you get out to the out years like '28, '29, it will become like 1%, 2%. The third thing is because this is the first year with the BD TSAs, we have close to $150 million receivable from BD because BD pays us at a certain delay to their activity. And as we exit the ERPs in '28 and '29 or sort of in the '28 time frame when we bring these businesses onto our ERPs, that $150 million will go away and will be a -- use of cash this year will be a source of cash in '28. And then the last piece is our inventory levels. We're not happy where they are, close to 160 days. Historically, we've been at 110 days for legacy Waters. Our teams are working towards getting there over the course of next 4, 5 years. And as they cover ground, that will be accretive or source of cash over the next 5 years.

Yes. I mean -- and to the last point, Doug -- and firstly, congratulations also on your new role. Look, on the last point, we are deploying AI tools to start to look at optimizing our receivables and payables. And that's really, really showing tangible benefit. This is to the first question that was asked already, but I think this is a tangible example of improving free cash flow.

Your next question will come from the line of Dan Brennan with TD Cowen.

Congrats on the quarter. Maybe just on BD to start. I know you made the shift this quarter given the fiscal year-end is kind of tilting next year to December. So just give us a little color underneath like how the quarter kind of came in? Any backlog you guys might have built as you made that shift? And I know you've already given color about what's implied for the fourth quarter, but just any more granularity on what you're seeing in the different businesses right now as we head into year-end?

Sure, Dan. Thank you for the question. So as I started by saying earlier, I mean, it's a spot landing, and it was very deliberate. We wanted to lower the inventory on trade. I would say we exceeded the spot landing by $1 million. So that's quite nicely done. Now to the 2 businesses, on Bioscience, I mean, the business came in at 2% in actual rates. But the enduring thing here is that flow reagents on the research and the clinical side are growing high single digits. I'll remind you that the recurring part of that business in Bioscience is close to 70%, 75% of the business, right? So reagents are growing nicely, driven by the Real Dyes on the research side, really strong execution also on pricing. We saw 120 basis points of incremental price coming through this quarter as our tactical plan started to take hold. And the most interesting thing here is that China, after 10 quarters of decline, was positive, right? Went into positive growth territory where we sort of localized our portfolio, and we were pretty clear early on that we were going to do this. It localized faster, and we saw positive growth in China. And finally, A7 was launched in the middle of September, has a fantastic funnel, which should lead to a great instrument growth in Q4. So that's on the Bioscience side for the quarter. On Diagnostic Solutions, the business basically orchestrated a spot landing, as I said. Ex China, it was 2%. Ex POC, which is where we sort of lowered the inventory in trade, the business was basically growing at 5%. Microbiology, again, was mid-single digits and ex-China added 200 basis points to that growth. Here, again, pricing was 120 basis points with reagent rental recovery starting to contribute -- will start to contribute in Q4 at a low single-digit millions level. And again, here also, we have fantastic new products in FXI, BD COR, where you would have read our press releases in our commercial agreements with Labcorp and Quest. I mean, momentum is building there as well, right? So in Q2, we installed 15 BD CORs; in Q3, we installed 25; and Q4 is ahead of that pace already, right? So really nice momentum underlying the business net of that inventory in trade that we wanted to lower. Now as you look at the setup for the balance of the year and 2027, it's really strong, right? So second half of the year, the 2 businesses are traversing at 5% constant currency growth. And as you go into 2027, that becomes a nice starting point for the business with several levers for upside as execution improves, pricing improves, localization in China starts to show benefit, new products start contributing and revenue synergies start to pick up momentum. So we feel very good about where we are and happy that we are starting to see the execution sort of that we see in legacy Waters flow into Bioscience and Diagnostic Solutions.

Your next question will come from the line of Jack Meehan with Operon Research.

Udit, I wanted to pick up on your commentary around the HPV relationships you're forging with the national labs. Can you just add color? Are you displacing incumbents in this situation? Or are you augmenting existing capacity? And maybe just talk about why they decided to add the BD COR and future revenue potential?

Yes, Jack, thanks for the question. Look, I mean, this is an exciting area where -- I mean, there's roughly 24 million people in the United States alone that are unscreened or partially screened. And we know HPV infections generally lead to cervical cancer. So it's a serious need and having an at-home solution has been a serious value proposition for every collaborator that we work with, including the 2 national labs that you talked about, Labcorp and Quest. We're excited to partner with them. At this point, it's not necessarily displacement. They're adding our CORs into their laboratories, initially starting with the HPV assay and then building on it several of our other assays that are in development. So an exciting partnership. I've spoken to both the CEOs, and we're all excited to sort of partner and ensure that every person around the globe has access to this test. So I don't think we're thinking about it as replacement or anything else. We're just thinking of getting to patients as fast as possible.

Great. And just one broader question. I was wondering if you could provide color in this 2027 framework you laid out. How are you thinking about revenue synergies? So you're on track for $50 million this year. How much do you think that steps up next year and where the source is coming from?

Yes. Hi, Jack. So as a starting assumption, in line with how we underwrote, we underwrote $290 million progressively over 5 years. So another $60 million added in 2027, over and above the $50 million that we have in 2026. But again, that's the starting assumption.

Your next question will come from the line of Dave Westenberg with Piper Sandler.

Congrats on the quarter. I wanted to ask everything we want to know about flow cytometry. First, what drove the 400 basis points in incremental flow reagent revenue? How confident are we that the A7 is going to be the largest beneficiary in the replacement cycle? And then can you confirm that flow cytometry is, maybe an AI beneficiary? We are hearing some of the AI companies start seeing that. And then lastly, how does the A8 and A6 play along? Are you finding that budgets are big enough for these kind of larger flow cytometers that also include imaging? Everything you want to know about.

Yes. Here's a lesson on this in a quick fire, right? So flow reagents, 400 basis points growth comes from pricing, from e-commerce adoption and thirdly, from our Real Dyes, which are a true differentiation in the market, right? So now when you think of A7 itself -- just take a step back, right? A7 solves a long-standing customer need to increase reproducibility of flow cytometry experiments. If you've talked to anybody in flow cores, they'll tell you, jeez, I can't reproduce my experiments from user to user, from lab to lab. And now A7 solves that problem, especially in CROs and in pharma where high volumes are critical, right? So A7 is now a critical tool for us to drive the replacement of the 10,000 instruments that are ready for replacement across the industry. A8 is a higher-end instrument with CellView technology that allows you to image cells as well. So think of A7 as high volume, think of A8 as even a superior analyzer and S8 isolates cells for analysis without destroying them. So each of these occupies a different spot in the portfolio and the needs for our customers. On AI, right, so the best sort of use case is our partnership with IMU Biosciences, who are building a precision immunology platform for population-wide immune mapping, and it's expected to become the world's largest immune data set using our flow cytometry instruments and reagents. So when they saw A7, I mean, these guys were super excited. I met the 2 founders. And with the launch of A7, we increased the reproducibility, they are training AI models. And again, as you talk to heads of flow cores, as you talk to people in pharma, as you talk to the founders of IMU Biosciences, they are thrilled to bits on the reproducibility that they see with A7. And flow cytometry with the vast streams of data is tailor-made for using AI and these advanced chips. So I feel very good about our Bioscience business. I hope that gives a quick fire lesson on flow cytometry.

Your next question will be from Dan Leonard with RBC Capital Markets.

I just have a question on China. I'm hoping you could comment on the outlook for China broadly and especially in diagnostics, where you mentioned that the DRG headwinds will lap in Q4?

Yes. So thanks, Dan. Look, I mean, China overall, I mean, legacy Waters is growing 20%. I mean we've already talked about CDMOs, biotech becoming a structural advantage. On the Bioscience side, the localization has happened faster, and that's leading to growth already after 10 quarters of decline. And your questions on diagnostics. As of Q4, the DRG headwinds will be in the baseline. And incrementally, the new policy is neutral to positive for microbiology and LC-MS, both in terms of consumption and in terms of pricing. And we will augment this with further localization of our BACTEC FXI, which should happen sometime next year, which should again add another source of growth. So we feel good about our Diagnostic Solutions business, especially in China. Overall, China taking a full step back is neutral to accretive to the overall growth of Waters, which is something that hasn't happened in a long, long time, right? So we've seen that throughout this year, and we expect that to be the case even in our legacy businesses as we enter next year.

This will conclude the Q&A portion of the call. I'll now hand the call back to management for any closing remarks.

Thank you, Ryan. This concludes our call. We look forward to connecting with many of you at our upcoming events and conferences.