Waters Corp (WAT) 2004 Q1 法說會逐字稿

Welcome to the Waters Corporation first quarter financial results conference call.

(OPERATOR INSTRUCTIONS)

I would like to introduce your host for today's call, Mr. Douglas Berthiaume, Chairman, President and Chief Executive Officer of Waters Corporation. Sir, you may begin.

Thank you, Jenny. Good morning and welcome to the Waters Corporation first quarter conference call.

With me as usual on today's call is John Ornell, Waters CFO, Art Caputo, President of Waters Division and Gene Cassis, VP Investor Relations.

As our normal practice, I will provide an overview of the first quarter's results and then John will take you through the financial details and then he'll lay out our full year 2004 financial outlook for you.

Finally, we'll open it up for Q&A.

Before I begin I'd like John to cover the cautionary language. John would you please?

During the course of this conference call we may 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 Q2 and full year 2004.

We caution you that all such statements are only predictions and that actual events or results may differ materially.

For a detailed discussion of risks and contingencies that could cause our actual performance to differ significantly from present expectation see our 10-K annual report for December 31st 2003, in part 1 under caption Business Risk Factors.

We further caution you that the company does not obligate or commit itself by providing this guidance to update predictions.

We do not plan to update predictions regarding possible future income statement results except during our regularly scheduled quarterly earnings release conference call and Web casts.

The next earnings release call and web cast is currently planned for July 2004.

Thank you, John.

So, our first quarter results in almost every respect came in favorable to our expectations. With $255m of sales revenue that was up 15% over 2003 and operating EPS of 37 cents and that was up 23% over 2003.

We did have some non-operating items in the quarter and John will detail them in his remarks.

We are pleased about our results this quarter because we saw good measurable progress in almost every important operating area and strategic element of our business.

Our sales and earnings growth reflect that and in addition we had an extraordinary free cash flow quarter. Our operating free cash flow was $71m this quarter.

That was compared to $30m in the first quarter 2003. It is by far our best start to a year in terms of cash flow.

From market perspective we continue to see good demand starting the year from the pharmaceutical industry. We also saw good conditions in the industrial segment, both for industrial chemical count as well as environmental analysis applications.

Our product line perspective, HPLC was a clear winner with very healthy organic sales growth of 68%. Our TA Instruments group about 8%.

Our Mass Spectrometry declined in organic terms 16% that decline was expected due to a strong shipment quarter in the first quarter of 2003.

Our queue top product line continues to be affected by week conditions in proteomic applications and sales continued to decline in this product line.

On the other hand our Tandem quadruple lines experienced strong double-digit growth as the new Quattro Premier has substantially regained market share in our key account.

Our Quattro Micro continues to produce good strong double-digit growth, as well. We are optimistic about our MS business as we continue to grow our Quattro line face more favorable year-over-year comparisons as we go out this year and prepare to launch new products. HPLC results in the first quarter were very encouraging.

A continuation and strengthening of the trend we saw developing in the second half of last year. On the January call we cited level of optimism concerning improving pharmaceutical end markets.

I'm happy to tell you that this trend strengthened throughout the quarter and was geographically broad based with North America, Europe and Asia all performing well. It's also important to note that this growth does not include any sales of our revolutionary Acquity UPLC System. This innovative new platform was introduced at the Pittsburgh conference in March where it was recognized with Editor Gold award reserved for the best new product launched at that show.

Customers attending the conference were extremely interested in Acquity, not only a tool for the chromatographer but as a powerful front end to our Mass Spectrometry systems. Another of our strategic initiatives is our aggressive entry in civil lab informatics market.

Starting from our strong core Empower and MassLynx data platform and now adding the combined product portfolio and technological strength of pro-own lab control in our recent acquisition of NuGenesis we feel we are now uniquely to provide full range of informatics products to customers we think are poised to accelerate investment in these important areas of their businesses.

Our TA instruments business had another solid quarter with core products revenues up about 8%. TA was strong in North America and Europe.

We believe that we continue to grow faster than the overall market and plan to maintain our technological leadership with new product introductions in this area planned in 2005.

We also continue to believe there are opportunities for good solid profitable bolt-on product acquisitions in this segment of our business, much like the Rheology product like we acquired early last year and which was successfully absorbed in the overall TA business.

As we approach the ASMS conference we are preparing to introduce a new Q-Talk base system directed at Proteomics and bio-market discovery applications.

The softness that we have experienced within Q-Talk line in recent quarters has not diminished our view of the longer-term business potential for this product category.

In fact, we believe that ASMS 2004 will demonstrate the powerful benefits that we have long anticipated that we could drive by combining innovative new UPLC technology with state-of-the-art Mass Spectrometry.

We are confident that this exciting new system to be introduced at ASMS with its enhanced Mass Spec performance, innovative software capabilities and incorporating ground breaking new UPLC will mark the start of more comprehensive approach to protein analysis.

With introduction in late May, we expect initial shipments in late 2004.

In summary, as you can tell we are please wide our first quarter's results and we're optimistic about our business prospects for the remainder of 2004 and beyond. That confidence is the result of improving trends in demand, strengthening market place and a very strong new product pipeline.

With our demonstrated capacity to generate substantial free cash flow we intend to leverage our strong base operating performance with a continuing focus on synergistic acquisition and to continue our share buyback program.

Now, I'd like to turn it over to John for financial overview.

Thank you, Doug and good morning. Financial results for the first quarter exceeded our expectation with adjusted earnings per diluted share of 37 cents for the quarter versus 30 cents in the first quarter of 2003.

On a GAAP basis, EPS this quarter were 33 cents versus 26 cents in the first quarter of 2003. The strength we saw in our business in the fourth quarter of 2003 continued throughout the first quarter with sales growing 15% on a reported basis including a favorable foreign exchange benefit of 7%.

Looking at sales by product line and before currency impacts we saw sales of HPLC products grow faster than expected at 16% with sales growth geographically broad-based.

As expected our Mass Spectrometry products shipments declined 19% before adjusting for sale of Mass Spectrometry product line last year, Mass Spectrometry sales declined by 16% with this adjustment.

As discussed in our January conference call Q1 of 2003 provided the most difficult quarterly comparison for Mass Spectrometry sales and we will enjoy easier comparisons for the remainder of 2004.

Our Mass Spectrometry sales continue to trend of sequential quarterly growth and increase by 13% over the fourth quarter of 2003.

Our thermal analysis continued positive performance with growth of 8% this quarter. Lastly, the addition of the NuGenesis Informatics business increased sales by $3m. Gross margin improved by 50 basis points over Q1 last year due to higher volume of informatics business, manufacturing cost savings and HPLC volume leverage offset by slight decrease in Mass Spectrometry margins. SG&A expenses increased this quarter as result of foreign currency translation, which is responsible for half of the increased spending this quarter.

SG&A was also impacted by the addition of NuGenesis business and investments in field sales and service resources, resulting from conversion of Asia distributors, direct sales and service personnel for the Mass Spectrometry business.

Our effective tax rate on GAAP basis was 20% this quarter as result of the tax effect of the litigation charge at full US tax rates. Without this transaction our tax rate was 22% and remains on track for 22% this year before unusual charges. This quarter included a charge of $7.8m relating to the HPLC patent litigation in Europe, where we have made provision for estimated settlement cost and legal fees relating to our ongoing patent litigation.

While these cases continue and uncertainty remains, we believe this charge will cover the liability Waters is likely to incur as legal proceedings draw to a close.

Our buyback program continued this quarter as we purchased 2.1m shares for $80.6m. Debt increased during the quarter due to the stock buyback and the acquisition of NuGenesis. We are comfortable with the current debt level on the balance sheet and generally comfortable with moderate amount of leverage going forward.

Overall the company remains in net cash position and net interest income position. We are of course constantly exploring way to optimize our cash management and when it is beneficial from financing and tax perspective we will redeploy cash for debt pay down purposes.

We continue to maintain strong balance sheet with strong free cash flow of approximately $53m this quarter that includes 18m-dollar litigation and settlement payment. Without this payment free cash flow was $71m.

Accounts receivable days sales outstanding stood at 79 days at quarter end, down from 84 in Q1 last year as result of improved collection activities around the globe. This improvement was made in the face of unfavorable foreign exchange impact that increased DSO by two days versus last year.

We are very pleased with our strong start to the year and currently believe that we will be able to experience stronger growth than previously estimated. Our HPLC products look to grow faster than our original estimate and we are now comfortable with 10% growth for this business on a full-year basis.

We believe Mass Spectrometry sales will achieve high single digit growth rate despite a slow start and our TA Instruments business looks to be on track for high digit growth rate, as well. This business improvement coupled with a still relatively strong foreign currency market provides an overall mid-teens growth rate for sales is comprised of 10% growth from core businesses, 2 to 3% growth from informatics businesses and 3 to 4% growth from foreign exchange assuming exchange rates remain at today's levels.

We expect sales growth to result in earnings per diluted share of $1.75 for the full year within a normal 3 to 6 cent tolerance and before unusual charges. Turning to the second quarter, we believe that sales currency will grow around 12% with currency adding approximately 4 to 5% to this growth.

At the sales level earnings per diluted share for the quarter are projected to be 40 cents normal 1 to 2 cent tolerance for the quarter.

Back to you, Doug.

Thank you, John. At this point I think we can turn it over for Q&A.

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from Darryl Pardi of Merrill Lynch. You may ask your question.

Good morning, guys.

Hi, Darryl.

Can you give a sense how the HPLC growth broke out from instruments versus consumables versus service?

Sure we can. I mean the basic answer is that they were all double-digits. I think that's probably as much detail as we'd like to go into.

OK. Were they all relatively close then to the 16% than a few percentage points?

Service is a little bit better. Chemistry, probably little bit lower than average and instruments in the average.

Great. Thanks. That's helpful. Then within pharmaceutical where was most of the strength coming from? Could you break out how growth looked like I guess from sort of the regulated aspect of pharma versus non-regulated?

We saw pretty good performance across the applications. I would say you know again we saw it across the United States, Europe and in Asia. So in Asia you're probably looking at more strength production application rather than early-stage discovery.

Uh-huh.

Whereas in the United States it was a fairly balanced mix actually across large pharma biotechnology and generics.

So I don't think that there's any particular standout of what we saw. In the past we had seen softer conditions in early-stage discovery. I'd say that wasn't as noticeable this quarter. I meant other than the fact our Q-TOF and prodiomics application still stays weak.

OK, and last question. On the Acquity any sense for I assume you guys are taking orders at this point?

Yes, we are.

Can you give us a sense of what the backlog might look like?

No, we prefer not to get into specific backlog talk about it. I think we continue to be wowed by the enthusiasm of our customer base about this technology. But, we're trying not to get too overoptimistic. We're going to let some water flow under this bridge before we take it totally to the bank as it reflects our forecast. It's very encouraging, but watch this phase for further notice.

Great. Thank you very much.

Spencer (ph) you may ask your question.

I have a couple quick questions. Just going back to the Acquity UPLC, what type of customers are showing traction or interest in that product line? Also, actually start with that.

OK. I'll say -- give you a nickel's worth and Art can check in. I think it's fair to say that we when we initially laid out this product line we thought that the by far the initial response would be from high value added customers seeking ultra sensitivity. That would be the early adopters.

What we've seen, we have exposed this technology over really the last three or four months or so to seminar participants and customers is the interest across almost every application from those seeking very high sensitivity and very high resolution and things like biomarker, protein analysis applications all the way to pharmaceutical QAQC.

So, if you just monitor the customers' interest, it's really across the board. We still think the people who were buying sight unseen are the early adopters and the high sensitivity application. Art has more current information.

Yes, a lot of what you said, Doug, is absolutely correct. What we found since the introduction is that the response to the marketplace to this technology is quite analogous to when we saw HPLC move to from LC to HPLC or gas chromatography move to capillary gas chromatography. The demand for productivity and the customer base is such that the customers see this as providing something for everybody.

So whether it's speed, sensitivity or resolution they are after, because it's so comparable to HPLC, UPLC is being viewed as a next-generation of HPLC and to our pleasant supply the customer base is looking at it as a practical evolution of HPLC.

Do you see any potential for kind of cannibalization with existing product lines?

We think there will be because of its applicability and comparability to HPLC it is very possible it will cannibalize HPLC systems and to what extent is certainly the question we have and how quickly that happens is the question for us right now.

Clearly, the net effect of this is still additive to growth rate. And its a tough call as to what the net effect of this technology is going to be.

We think that early on we're more likely to get pretty much added growth out of it and not much cannibalization. But as it goes through the next year or so, we're likely to see a more dramatic effect of what you call cannibalization.

Thanks. One more question and then I'll get back in queue. The second quarter outlook that you provided, I was looking at my model and noticed that the EPS line was pretty in line in terms of based on 9% growth that I had and you communicated much higher organic growth and then on top of that some effects, I was just curious what areas of the margin that we are thinking about, I should be thinking about in terms of adding additional input to it?

Not knowing your model and detail, I can say that based on my model there is a pretty significant increase in EPS based on the increase in sales. I mean, one piece is for sure Nu Genesis comes in full -- with a full quarter's worth of sales but also with a full quarter's worth of expenses.

So, the sale that is we get from NuGenesis for Q1 and going forward are all at 0 contribution. Foreign exchange get maybe 20 to 25% flow through to the bottom line. So, the difference in organic growth isn't so great, if you will. Q2 versus Q1, there is a huge flow through to the bottom line that you'd expect delta perhaps versus original guidance.

I'm sorry, was your question about how does organic growth go from 9 to higher?

Well, it seemed like, seemed to me that the top line guidance for Q2 seemed little bit higher. EPS is maintaining steady level at least within the estimate. I was just curious if there is any additional charge? It sounds like the NuGenesis charges would kind of add up some of that -

OK. I thought it was a different question. Thanks.

Larry Neibor of Robert Baird and Company, you may ask your question.

Thank you. Good morning.

Good morning, Larry.

Are you planning on expanding further into the hybrid Mass Spectrometry market? Some of your competitors have been very successful with new types of hybrids.

Well, I think if by talking about hybrid you're talking about pairing various separation devices with various stages of Mass Spectrometry, uh, we're clearly in that world. You know, the quadruple time of flight or Q-TOF helped revolutionize that process of hybrid Mass Spectrometry.

And the answer is yes, we continue to look at that both from a separation point of view in pairing novel separation as well as looking at various stages of Mass Spectrometry that can produce both greater resolution and greater sensitivity. But, we're not prepared to talk about introductions any more than we've already laid out.

Thank you. Second question. I think you mentioned that you're viewing the thermal analysis area as potential area for more future acquisitions. Which technologies within that space industrial space do you find potentially attractive?

I'm not going to go into individual elements for obvious reasons, but I think you can look at what we've done in the past. We acquired more rheology product lines.

We like to stay pretty close to home. And as we have looked more at this segment of the market -- unlike chromatography, you know, there are some businesses out there that have a meaningful level of sales. I'd say in the 15 to $50 m kind of range that upon closer analysis really look pretty available to leverage your existing business, easily added into a product line mix without requiring substantial levels of investment and can really leverage the existing infrastructure.

We haven't found that a kind of broadly the case in HPLC or Mass Spectrometry, but the industrial market at least starting from where we are and starting with our organization has shown itself a pretty capable of doing that. So, we're optimistic about it.

Thank you.

Derik DeBruin of UBS. You may ask your question.

Hi, thank you very much and congratulations on a really good quarter. So how soon do you think you will see uptick with the Acquity in terms of having customers doing replacements from the current 5 micron chemistry's to sub-2 micron chemistry?

--.

Well, basically as we ramped this new product, obviously, we are -- this quarter getting the whole field trained, we have introduced that the customers and will get units flowing this quarter into the marketplace.

Our early indications are that many of what we call the thought leaders, analytical laboratories, people responsible for message development will act almost immediately on this technology. They are enthusiastic about it, they clearly see the benefits and all indications are that once they actually put their hands on it and look at the results because these people tend to be the thought leaders in the proof of principal because they are making pretty hefty claims we'll begin to see penetration of this technology immediately in that level.

The demonstrations we've done in the plant here in Milford and some demonstrations I've done into the field and certainly the early testing those customers clearly see the benefit and we believe we'll adopt this technology at a very rapid rate.

Great. Given your strong cash flow for the quarter, what's your free cash flow guidance for the year?

On cash flow?

Yes.

In the quarter there were certainly some timing issues as it relates to cash flow, there were some tax payments that were made in the comparison that quarter last year that hadn't been made in first quarter this year.

We had a pretty significant increase in deferred revenue, AP contributed and there was a difference in the number of payrolls actually in the first quarter for about $6 m, as well.

So, great quarter, but some amount of timing versus perhaps the rest of the year. So, we are still comfortable holding at 200 m plus for the year at this stage.

Great. And just looking at the break-out for segment, I know you don't break out specific numbers, can you give us a general idea what it was this quarter?

I'm sorry, I didn't hear that question.

Just the revenue breakout percentage of revenue for each of the different segments for the quarter?

By product line?

Yes, just by HPLC, Mass Spectrometry and TA. Yes.

TA is about 10% of the business, grew about 8%, HPLC roughly 70% of the business, growing at 16%. And Mass Spectrometry about 20% of the business and incorporating the inorganic, down about 19.

Great. And I guess just one final question with respect to your guidance for the different segments, is the 10% Mass Spectrometry and high single digits for TA and -- 10% for HPLC and high single digit for the other two, that's organic or all in the currencies?

That's organic.

OK, great. Thanks a lot.

You're welcome.

Vivek Khanna (ph) of Argus Partners, you may ask your question.

Hi, good morning. I just had a question in terms of the NuGenesis business. How much is that expected to add in the second quarter?

It is about 6 m or so in the quarter.

OK. And then there is a lot of I guess hypothesis developing out there that SDMS is the way to do proteomics etc. I'm just wondering what you think of the new Q-TOF will be able to offer that potentially the SDMS today offers that you will be able to somewhat combat that threat, I guess?

What the Q-TOF will offer that the SDMS doesn't?

Yes, something to that. How you expect to regain some of the share because speculation that FTMS is taking all the share. I am just curious to get your thought.

Yes, I am curious to get your thoughts. You know, we continue to see a great deal of interest in proteomics and biomarket discovery areas. We hear a lot about interest in the FTMS product line, but frankly nobody talks specifically about what they're doing.

So, I did notice that one of those guys reported their life science revenues were up 5% this quarter.

So I don't know weather that signifies huge FTMS revenues or no FTMS revenues. But, I think what we believe is that the combination of improved Mass Spectrometry with our new Q-TOF technology and Acquity UPLC and particularly in this instance, new manual scale Acquity. This is kind of a daughter of Acquity UPLC and combine it with new software, we think we've got a system and an application that's going to compete with anything else in the marketplace.

And we talked to customers about that. We've shown them the early betas on that system. And we've gotten a great deal of interest.

So, we're not ready to ship. So the proof of the pudding will be in the eating there. It will be substantially less expensive than the competing instruments.

So, we'll see. But I think certainly we're going to be in a dramatically better position both fms than we've been in the last year and-a-half.

And shipment, should we expect sometime in 4 Q, is that what you mean by late '04?

Yes.

OK. Great.

Yes, I wouldn't want you to put a lot into your sales model for that this year, but we do plan to fulfill orders this year, but it will really be providing volume shipments next year.

Then, can I get deferred revenue number, if you have that?

Yes, sure the ending number for the quarter 80.5 m.

And so, that's substantial jump. Do you expect to start shipping against that beginning in the second quarter? Is that because people are giving you advances for -

These are related to service contracts that you know we recognize in revenue on monthly as we go through the year. There was probably few million dollars of NuGenesis added to that. There wasn't significant increase as there typically is in the first quarter as people run annual contract that is renew January timeframe.

Great. Thanks a lot. Nice job in the quarter.

Thank you.

Doug Fisher (ph) with Madadore Capital, you may ask your question.

Hi, guys. Congratulations on the quarter, very strong. Just wanted to be clear from your comments, the guidance that you've laid out for the remainder of the year it sounds like based on what you said about not wanting to take the early indication of interest to the bank on Acquity. It sounds like there is not too much baked into that yet for that product line. Is that accurate?

It's right, I think it's fair to say that I don't want to be quoted as saying I don't think there is much revenue for Acquity this year. I think what it is safer to say, we are being cautious about the net uptick resulting from Acquity versus our other product lines. So, we're clearly loose a little bit versus our original budget for the year.

We've gotten a bit more bullish in our financial forecast. We're probably a little bit more bullish than our financial forecast right now, but it's end of the first quarter we'd like to have another quarter underneath us before we tick it up or as Emerald would say take it up another level. We are being a little bit more cautious.

That makes since given you only introduced the product last month. Another question, just when you talk about cannibalization, I'm just wondering if that is really the right way to characterize it?

You know, I guess in one sense it is, but in the other, you've got a product that as I understand it, carries a higher sales price, locks in a high margin proprietary consumable, you know, I would think it would give you the opportunity for share capture.

So when we talk about cannibalization, it almost has a negative connotation. Is that the right way we should be happening think about it?

When I think about it looks like there should be the opportunity to spark a replacement cycle on the instrumentation side and also for share capture plus the price in margin driver, as I mentioned. What's the right way to look at it in your mind?

I agree fully with what you just said.

Almost sounds like you read our marketing plan.

I wish I could. Thanks again, guys.

Larry Neibor of Robert Baird and Company, you may ask your question.

Thank you. With the proprietary chemistry that you'll have with Acquity what type of lead time do you think that will give you until competitors inch near or around your IP?

Sure, Art -

Sure. One of the things we managed to do in the design of this system, we have been working on it for well over two years and some concepts go back even further than that.

We believe it will take the competition an extremely long time to respond to the broad base capabilities of this system. Almost every component of this system has been designed specifically for this UPLC application and it is one of the very few systems in the marketplace that does in fact work off a complete system concept, meaning chemistry has been designed right along with the instrumentation and so while we think the competition can attack certain components of the system, it would be extremely difficult for them to wrap the entire system and provide the kind of integrated performance we provide here.

So, we suspect that we'll have at least 12 to 24 month jump before anybody is even able to come close to making claims comparable to what we've made on this system.

Great. Thank you.

Uh-huh.

Steve Unger with Bear Stearns, you may ask your question.

Hi, good morning. Could you be little bit more specific, I guess on the HPLC strength in the pharmaceutical market? Is this replacement sales in the QA QC part or plan expansion in QA QC or in the discovery sense?

Well, frankly we always get replacement sales as part of our normal run rate of our business. I think the way to think about this is that in 2002 and through most of 2003 we clearly saw pharmaceutical companies and bio-tech companies in the replacement cycles and departments had more difficult times pushing through needed capital requests just to sustain their programs.

And we saw that quarter after quarter as our sales guys would come in and say, look, this customer needs the gear, they've got the approved program, but the capital requests are not being released by, pick a name, Mr. Big Pharma. It's not a case where we saw competition taking the business. We just saw very conservative management of those programs in a broad swap of accounts.

We started to see that change kind of really in the fourth quarter of last year. We saw our sales guys report that. We saw it through our discussions with the customers who came through here. We ascertain a lot of them in terms of technology seminars. They come through our building both in the United States, Asia and in Europe.

And we just saw a general movement when they say we are getting our programs funded. We're releasing those programs. There's a general more optimistic attitude in a broad swath of accounts. We saw that, if anything, pick up in the first quarter of this year, budgets were approved earlier, release of purchase orders were released.

So, I wouldn't search too much for a -- is it a replacement cycle or is it new products? We saw all of those. We do think over a relevant range -- call it a year or two years, there will be pent up replacement orders that come through.

We know that over roughly a two-year period they delayed replacements. So, whether we're going to see that in somebody buying five Acquities, rather than somebody buying five alliances and how that would be characterized will be hard to pin your particular reason on. But there is no question that we feel pent up replacement demand coming from this customer base.

And the visibility on that for the rest of the year you feel that is still strong and will continue throughout the year?

We believe so.

OK. And then moving to the recent settlement that you had with ABI and others, does that free you up to enter into the Maldy market and do you have plan to introduce a Maldy product at ASMS this summer in May?

The answer is yes as it relates to that technology we have licensed the appropriate Maldy front-end technology on a worldwide basis. So as it relates to a specific patent, we have a license to that patent. And we are certainly currently talking about offering that capability in our product line. We are not specifically offering a new engineered Q-TOF instrument at ASMS this year.

OK. And then just one last financial type question. The impact of acquisitions and foreign exchange on the bottom line in the first quarter

The foreign exchange is about a 2 cent benefit year-over-year on the bottom line and the acquisition was pretty much a push in the first quarter and we've assessed for the year the NuGenesis acquisition will be neutral to earnings.

OK. And Creon labs, does that impact revenues?

Yes, I mean, it's rather small, not a large business. We're growing that business year over year. But really we're in the process of integrating it with NuGenesis to create a larger business model going forward. But it's impact in the quarter wouldn't have been large, either.

OK. Great job. Thanks, guys.

Thanks.

(OPERATOR INSTRUCTIONS)

Chris Moss (ph) with Shaper Benson, you may ask your question.

Good morning guys. I just have a quick question for you regarding the cash flow impact of the litigation provisions? I guess I'm curious is that something that's going to be coming out of your acute litigation expenses or how should we expect that to flow?

Yes, this quarter what happened we had $18m payment to Applera that you did see. We highlighted as an item that wasn't in the 71, but in the 53 that we describe as cash flow for the quarter and then on a going forward basis, the $8m we set aside this quarter will be payment that we plan to make perhaps later this year or even beyond that depending on when the litigation settles.

OK, that would only be for a settlement that would not necessarily incorporate litigation costs?

Yes I'm sorry it's an estimate for settlement and remaining legal fees on those cases, as well. That's correct.

Got you. Second question, I can't remember, John, if we spoke about this before, as far as manufacturing of Acquity is that going to be manufactured in the United States or manufactured elsewhere?

That will be manufactured here in our facility in Millford, Mass.

Thank you very much.

You're welcome.

At this time there are no further questions.

Very good. Thank you all and look forward to talking to you again in July.

This concludes the conference call. You may disconnect at this time.