Waters Corporation (WAT) Earnings

Management highlights

- Overall Business Performance * The company delivered stronger-than-expected Q2 results, with organic constant currency revenue growth exceeding the high end of prior guidance by 100 basis points, and acquired revenue outpacing guidance by $15 million. Adjusted EPS of $3.05 hit the high end of guidance, growing 3% year-over-year. * All businesses saw growth acceleration, with newly acquired BD businesses now growing mid-single digits just five months post-close, outperforming initial deal expectations. * The 180-day post-acquisition revitalization plan is running ahead of schedule: $75 million in 2026 cumulative cost savings have been delivered already, hitting the full-year target with $200 million in expected annual run-rate savings (ahead of original planning). - Product Innovation and Launches * Legacy analytical sciences launched two new high-resolution mass spec products (cyclic IMS P20 and Zevo MRT P10) and new bioseparation columns that deliver twice the resolving power for GLP-1, insulin, and lipid nanoparticle testing. * The new FACTS DISCOVER A7 spectral flow cytometer, filling a key portfolio gap, will launch September 15, 2026, bringing improved standardization and reproducibility to flow cytometry. * PacTech FXI next-generation blood culture system received FDA 510(k) clearance, enabling U.S. commercial launch. It detects infections up to 3 hours faster, with higher capacity and labor savings, and has over 12,000 existing aged systems in the install base available for replacement. * A new point cell differential scanning calorimeter for battery safety testing was launched, advancing battery thermal analysis capabilities. - Commercial and Integration Execution * New commercial discipline and KPIs have been embedded across acquired businesses, driving rising funnel conversion rates and increased field activity. Dedicated pricing directors have been hired for each acquired division, and partial list price increases have already been implemented, with 90 basis points of price improvement achieved in Q2 already, on track to hit a 150 basis point target. * Export license approval speed for flow research instruments in China doubled in Q2, narrowing the segment's year-over-year decline from 30% in Q1 to mid-single digits in Q2. Localized manufacturing for flow instruments in China is on track to begin contributing to growth in Q4 2026, and a new general manager with a strong track record in China has been appointed to lead biosciences growth in the market. * Revenue synergies are on track to hit the $50 million full-year 2026 target, with early cross-selling of mass spec instruments into pharma DMPK settings already delivering results. - Market Trends and Long-Term Opportunities * End-market recovery has broadened, with U.S. biotech and CRO demand improving, and Chinese pharma growth returning to double-digits, making China accretive to overall growth again, driven by a resurgence in biotech, CDMO, and CRO investment. * PFAS testing growth remains strong, with food analysis now surpassing environmental analysis as the largest PFAS application. GLP-1 testing grew over 40% year-over-year in Q2, running ahead of original expectations, with broad growth across all geographies including India, which nearly doubled its GLP-1 testing revenue. * U.S. pharma reshoring is a clear incremental growth opportunity: 76 tracked expansion projects represent ~$100 billion in total capex, with ~half already under construction. 70% of these sites are existing high-market-share Waters customers, so the company is positioned to capture disproportionate share of resulting instrument demand over 2027-2030.

Guidance

All components of full-year 2026 guidance were raised from prior estimates: - Full-year 2026 organic constant currency revenue growth guidance was raised to 7% to 9% (up from prior lower range). As-reported organic revenue is expected to be $3.37 billion to $3.431 billion, with a 60 basis point foreign exchange headwind. - Acquired biosciences and diagnostic solutions full-year 2026 revenue guidance was raised by a net $10 million (underlying improvement of $25 million offset by $15 million in FX headwinds) to $3.045 billion. - Total 2026 as-reported revenue is expected to be $6.415 billion to $6.476 billion. - Fully adjusted EBIT margin guidance is maintained at 28.2%, as higher cost savings offset FX headwinds. - Full-year 2026 adjusted diluted EPS guidance is raised to $14.45 to $14.65, representing 10% to 12% year-over-year growth (12% to 14% in constant currency). Q3 2026 guidance: - Organic constant currency revenue growth is expected to be 8% to 10%, with as-reported organic revenue of $850 million to $867 million. - Acquired biosciences and diagnostic solutions revenue is expected to be ~$895 million, in line with historical seasonality. - Total Q3 2026 as-reported revenue is expected to be $1.745 billion to $1.762 billion. - Q3 2026 adjusted diluted EPS is expected to be $3.95 to $4.05, representing 16% to 19% year-over-year growth. Guidance assumes prudent seasonality projections below recent historical patterns, and $75 million in total 2026 cost savings will contribute $25 million to Q3 operating income and $50 million to Q4 operating income, supporting margin expansion in H2 2026.

Segment performance

Total company as-reported Q2 2026 revenue was US$1.645 billion, consisting of $828 million in organic legacy revenue and $817 million in acquired Waters Bioscience and Diagnostic Solutions revenue. Organic revenue grew 7% as-reported and 9% constant currency, while acquired revenue grew 4% as-reported, a 400 basis point acceleration from Q1 2026. 1. **Analytical Sciences Division**: As-reported revenue of $669 million, up 7% as-reported (9% constant currency), contributing 40.7% of total company revenue. In constant currency, instruments grew 8%, chemistry grew 10%, service grew 9%. Pharma end markets grew 11%, academic/government grew 11%, and industrial grew 1%. 2. **Biosciences Division**: As-reported revenue of $368 million, up 3% as-reported (400 basis point acceleration from Q1), contributing 22.4% of total company revenue. Flow Clinical grew 8% as-reported, while Flow Research declined 2% as-reported with improving trajectory through the quarter. 3. **Advanced Diagnostics Division**: As-reported revenue of $521 million, up 7% as-reported, contributing 31.7% of total company revenue. Diagnostic Solutions (acquired business) delivered $449 million in as-reported revenue, up 5% as-reported (400 basis point acceleration from Q1). The legacy clinical business unit delivered $72 million in revenue, up 15% as-reported (14% constant currency). Microbiology grew 4% as-reported, while molecular diagnostics and point of care grew 9% as-reported. 4. **Material Sciences Division**: As-reported revenue of $87 million, up 6% as-reported (8% constant currency), contributing 5.3% of total company revenue. Growth was driven by improved semiconductor, data center, aerospace, and defense testing demand.

Risks & headwinds

- Strengthening of the U.S. dollar creates material foreign exchange translation headwinds for revenue and margins, offsetting portions of organic growth and cost savings. - China's DRG healthcare policy remains a ongoing headwind for diagnostic and flow clinical growth in China, though the impact has been better than expected and will roll into the baseline starting in Q4 2026. - The replacement cycle for analytical instruments has elongated beyond historical 2-3 year norms, extending the recovery timeline from pre-pandemic trends. - Customer ordering patterns in industrial chemical analysis remain lumpy and macro-sensitive, creating volatility in quarterly results.

Analyst Q&A

• Q: Evercore ISI asked how to think about medium-term growth for the acquired BD businesses, given they are already outperforming deal expectations just 5 months post-close despite China headwinds. Is this now a >6% growth asset long-term? /

  A: Management said execution of the integration has been A+, with mid-single-digit growth already achieved. They expect to exit 2026 with 6% or better growth for the combined acquired businesses, supported by new product launches (including the September A7 flow cytometer launch), pricing actions, and instrument replacement demand. China DRG headwinds will roll into the baseline starting in Q4, removing the ongoing drag, setting the business up well for 2027. (238 characters)

• Q: Goldman Sachs asked how much of the acquired business guidance raise comes from pricing, when the 150 basis point pricing target will be achieved, and whether pharma reshoring is incremental to organic growth expectations. /

  A: 0.9% price improvement was achieved in Q2, up from the 0.5% embedded in prior guidance, with the target still to reach 150 basis points as quickly as possible. Reagent rental contract compliance work is also improving pricing and accelerating new product adoption. For reshoring, it is incremental growth for 2027-2030; management has strong visibility on 70+ projects, 70% of which are existing Waters customers, and they are well-positioned to capture most of this demand. (345 characters)

• Q: Jefferies asked how much of flow research pressure comes from U.S. market headwinds versus China, and what other initiatives are in place to turn the business around. Also, what is the margin trajectory for 2027 after maintaining 2026 margin guidance despite higher cost savings? /

  A: Most flow research pressure comes from China, not the U.S., where the market is already improving. The A7 launch in September will fill a gap in the portfolio that addresses remaining headwinds outside China, and a new proven leadership team in China has strong execution plans with localized products launching in Q4. For margins, the 20 million in additional cost savings adds 30 basis points of margin, which is fully offset by FX headwinds leaving 2026 guidance unchanged. Management is still on track for 100 basis points of annual margin expansion, on track to hit the 5-year target of 32% adjusted EBIT margin. (477 characters)

• Q: Leerink Partners asked what GLP-1 testing contribution was in Q2, and what the trajectory looks like going forward. /

  A: GLP-1 testing grew over 40% year-over-year in Q2, with broad-based growth across all geographies: over 30% in the Americas, over 36% in Europe, and nearly doubling in India. Growth is running well ahead of the original 30 basis point contribution target for idiosyncratic GLP-1 growth drivers, with a strong pipeline and strong funnel for both instruments and chemistry, and no signs of slowdown. (241 characters)

• Q: RBC Capital Markets asked for early insights on the PacTech FXI replacement opportunity in diagnostics, comparing it to the successful Alliance HPLC replacement cycle. /

  A: Like Alliance, FXI is a large replacement opportunity with 12,000 existing aged systems ripe for replacement, 4,500 of which are in the U.S. Early customer uptake has been strong, as the product has clear differentiated benefits over competing systems. The existing reagent rental model also creates additional opportunities to delinquent non-compliant accounts to accelerate replacement, driving incremental recurring revenue growth. (225 characters)