Executive Summary / Key Takeaways

• Waters Corporation, a leader in analytical instruments for regulated markets, is capitalizing on the early stages of an instrument replacement cycle and robust demand in high-volume applications like GLP-1 and PFAS testing, driving better-than-expected performance.
• The company's revitalized portfolio, featuring differentiated technologies like the Alliance iS HPLC and Xevo TQ Absolute MS, commands premium pricing and provides quantifiable advantages in sensitivity, efficiency, and data integrity, strengthening its competitive moat against larger rivals.
• Strong Q1 2025 results, with 7% constant currency sales growth and 11% instrument growth, led to a raised full-year 2025 guidance range of 5% to 7% constant currency sales growth and adjusted EPS of $12.75 to $13.05.
• Waters is proactively mitigating external headwinds, including a $45 million gross tariff exposure and U.S. academic/government policy changes, through operational agility, selective surcharges, and cost controls, offsetting the net impact on original EPS guidance.
• While facing competition from diversified players like Thermo Fisher (TMO) and Agilent (A), Waters' focus on downstream, regulated workflows, coupled with strategic investments in high-growth adjacencies and operational efficiency, positions it for sustained high single-digit earnings growth.

Waters Corporation, with a history spanning over 65 years, has established itself as a critical provider of analytical instruments and software, primarily serving the life, materials, and food sciences. The company's core strength lies in its expertise across chromatography (HPLC, UPLC), mass spectrometry (MS), and thermal analysis (TA Instruments), complemented by its powerful Empower software platform. Waters strategically focuses on downstream, high-volume, regulated applications, particularly within pharmaceutical quality control (QA/QC), manufacturing, and the expanding generics market. This positioning has historically provided a degree of resilience, tying its performance closely to manufacturing output and CapEx spending trends in these stable sectors.

The broader analytical instruments market is currently in the early stages of recovery following a period of constrained customer CapEx spending. Waters' performance is intrinsically linked to this cycle, and the company is keenly focused on capitalizing on the emerging instrument replacement wave. Key competitors in this landscape include diversified giants like Thermo Fisher Scientific and Agilent Technologies, as well as more specialized players such as Danaher Corporation (DHR) (via its life sciences tools) and Bio-Rad Laboratories (BIO). While larger rivals may offer broader portfolios or greater scale, Waters differentiates itself through specialized technology, a deep understanding of regulated workflows, and a focus on profitability and operational efficiency, often achieving higher margins and better capital efficiency (ROIC) than some peers.

Technological Leadership and the Innovation Engine

At the heart of Waters' competitive strategy is its differentiated technology portfolio, designed to meet the stringent requirements of regulated environments and address evolving scientific needs, particularly in the rapidly growing large molecule space. The company's core platforms, LC and MS, are continuously enhanced through significant R&D investment, which increased 5% in Q1 2025, driven by new product and technology initiatives.

The Alliance iS HPLC system is a prime example of this innovation. Designed for smarter, more capable separations, it reduces common user errors by up to 40%, delivers over threefold improvements in day-to-day reproducibility, and decreases carryover by up to two orders of magnitude. When paired with MaxPeak Premier columns, it boosts sensitivity by up to 80 times. This system is seeing strong adoption in both replacement and greenfield opportunities, particularly in new pharmaceutical manufacturing facilities. The recent expansion of the Alliance iS Bio line with integrated PDA detection further enhances spectral insights for biopharma development and QC.

In mass spectrometry, the Xevo TQ Absolute stands out as Waters' top-selling system. Its market-leading sensitivity and sustainable design (45% smaller, 50% less nitrogen/electricity than comparable tandem quads) are driving demand in high-volume quantitative testing, including pharmaceutical quantitation and environmental analysis like PFAS testing. The Xevo MRT, a high-performing bench-top MS, offers up to 6x greater resolution and 2x better mass accuracy than competitive systems, targeting discovery workflows. The QDa II mass detector, an evolution of a best-seller, provides a 20% enhancement in mass range and consumes up to 70% less energy than competing products, notably integrating with Empower software for seamless regulatory submission of large molecule data.

Waters' software, particularly Empower, is a critical differentiator, fostering switching costs and enhancing customer loyalty. The integration of Wyatt Technology's multi-angle light scattering (MALS) and differential Refractive Index (RI) detectors with Empower is a significant milestone, saving up to six months on compliant software validation in biopharmaceutical QC and reducing analysis time for biotherapeutic peptides and proteins by 20%. This expands the scope of critical quality attributes manageable within a compliant software environment. In chemistry, MaxPeak Premier Columns, designed for complex molecules, continue to see strong growth, exceeding 30% in Q1 2025. New BioResolve Protein A Affinity Columns accelerate antibody titer measurements by up to two days and provide up to 7x improvements in sensitivity and 2x more attribute information.

For investors, this technological edge translates into a strong competitive moat. The quantifiable benefits offered by Waters' instruments and software allow the company to command premium pricing, contributing to its robust gross margins (62.08% TTM). This innovation pipeline, coupled with a focus on regulated workflows, positions Waters to capture market share in key growth areas and maintain profitability against rivals who may compete more aggressively on price or offer less specialized solutions.

Financial Performance and Operational Agility

Waters delivered a strong start to 2025, with first-quarter sales reaching $661.7 million, a 4% increase on a reported basis and 7% in constant currency, landing at the high end of guidance. This performance was broad-based across most major regions, excluding Europe, and driven primarily by a significant 11% constant currency increase in instrument sales. Recurring revenues (chemistry and service), representing a resilient portion of the business, grew mid-single digits in constant currency, although reported growth was impacted by two fewer days in the quarter compared to the prior year.

Profitability metrics remained robust. Operating income grew 13% to $151.7 million in Q1 2025, benefiting from higher sales volume and the absence of $10 million in patent litigation provisions incurred in the prior year. Operating income as a percentage of sales improved to 22.9% from 21.0%. Gross margin remained strong at 58.2% in Q1 2025. Net income increased 19% to $121.4 million, resulting in diluted EPS of $2.03 (GAAP) and $2.25 (non-GAAP). The effective tax rate for the quarter was 15.1%, influenced by discrete tax benefits in the prior year and jurisdictional income mix.

The company's operational agility was evident in its response to external pressures. Despite headwinds from foreign currency translation, which decreased total sales growth by 3% in Q1 2025, Waters' focus on operational excellence and pricing helped maintain margins. Selling and administrative expenses remained flat year-over-year, decreasing as a percentage of sales.

Liquidity and cash flow generation remain solid. Net cash provided by operating activities was $259.6 million in Q1 2025. The company continues to manage its balance sheet effectively, reducing net debt borrowings by $170 million in the quarter. As of March 29, 2025, total outstanding debt was $1.5 billion, with $1.8 billion available under its credit facility. The company was in compliance with all debt covenants. Waters anticipates investing approximately $130 million over the next three years in a new ERP system, expected to be funded by existing cash and the credit facility, a strategic operational investment aimed at long-term efficiency.

Outlook, Guidance, and Growth Catalysts

Building on the strong start to the year and continued positive momentum, Waters raised its full-year 2025 guidance. The company now expects constant currency sales growth in the range of 5% to 7%, with reported sales growth projected between 4% and 6% (reflecting anticipated FX headwinds). Full-year adjusted EPS guidance was raised to $12.75 to $13.05, representing approximately 8% to 10% growth (10% to 12% constant currency).

Management's confidence is underpinned by several factors:

• Instrument Replacement Cycle: The recovery in customer CapEx spending is expected to continue, driving the instrument replacement cycle, particularly in Pharma QA/QC and manufacturing.
• Idiosyncratic Growth Drivers: Waters anticipates sustained contributions from high-volume testing areas. GLP-1 testing, where Waters holds a leading position in columns and instruments for manufacturing and post-fill finish testing, is expected to contribute approximately 30 basis points to annual growth. PFAS testing, driven by emerging regulations and the superior sensitivity of the Xevo TQ Absolute, is also projected to add around 30 basis points. The generics market in India, a consistent high-growth region for Waters, is expected to contribute 70 to 100 basis points.
• Operational Execution and Pricing: Continued focus on operational efficiency and the ability to realize strong like-for-like pricing gains (around 200 basis points annually) are factored into the outlook, supporting margin expectations (full-year adjusted operating margin expected around 31%).
• Risk Mitigation: The guidance incorporates the expected impact of newly announced tariffs and U.S. policy changes in the academic and government market. Management's proactive mitigation strategies are expected to limit the net operating margin impact of tariffs to a modest $10 million for 2025, and the combined EPS impact of tariffs and policy changes is fully offset by favorable foreign exchange movements.

For the second quarter of 2025, Waters expects constant currency sales growth of 5% to 7%, translating to reported sales growth of 4% to 6%, with non-GAAP EPS projected between $2.88 and $2.98. Potential additional investments driven by tariff-related capacity shifts and U.S. pharma reshoring initiatives represent potential upside not currently included in the guidance.

Risks and Challenges

Despite the positive outlook, Waters operates in a dynamic environment subject to various risks. Fluctuations in foreign currency exchange rates can impact reported results, although the company employs hedging strategies. Global economic and political conditions, including inflation, interest rates, and geopolitical conflicts, can affect customer spending and supply chains.

The implementation of new tariffs and potential retaliatory measures pose a direct risk, although Waters has taken swift action to mitigate the financial impact through supply chain adjustments and selective surcharges. Changes in U.S. policy, such as those impacting the academic and government sector, can also create headwinds. Competition remains intense, with rivals constantly introducing new products and exerting pricing pressure. Waters' ability to maintain its technological edge and pricing power is crucial.

Operational risks include potential disruptions from the implementation of the new ERP system and reliance on third-party suppliers and contractors. Regulatory compliance, particularly with agencies like the FDA and EPA, is critical and subject to change. While litigation provisions were absent in Q1 2025, legal proceedings are an ongoing risk in the industry. The ability to attract and retain qualified personnel is also vital for continued innovation and execution.

Conclusion

Waters Corporation has demonstrated a strong start to 2025, exceeding expectations and raising its full-year guidance. The company's strategic focus on downstream, high-volume, regulated applications, coupled with a revitalized and differentiated product portfolio, is proving effective in capturing growth as the analytical instrument market begins its recovery. Key technological advantages in LC, MS, and software provide a solid competitive moat, enabling premium pricing and operational efficiencies that support robust margins.

While external headwinds like tariffs and policy changes persist, Waters' proactive mitigation efforts are expected to largely offset their financial impact on earnings. The emerging instrument replacement cycle, combined with sustained contributions from idiosyncratic growth drivers like GLP-1, PFAS, and India, positions Waters for continued high single-digit earnings growth. The company's strong financial health and cash flow generation provide flexibility for strategic investments and potential capital returns. Investors should monitor the pace of the instrument replacement cycle, the execution of strategic initiatives, and the evolving global trade and economic landscape as key factors influencing Waters' trajectory.