Good morning. Welcome to the Waters Corporation third quarter 2021 financial results conference call. All participants will be on a listen-only mode until the question and answer session of the conference call. The conference call is being recorded, and if you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Manager of Investor Relations. Please go ahead, sir.
Thank you, operator. Good morning, everyone, and welcome to the Waters Corporation third quarter earnings conference call. Before we begin, I will cover the cautionary language. During the course of this conference call, we will make various forward-looking statements regarding future events or future financial performance of the company. In particular, we will provide guidance regarding possible future results of the company and commentary on potential market and business conditions that may impact Waters Corporation over the fourth quarter, full year 2021 and 2022. We caution you that any and all such statements are only our present expectations, and that actual events or results may differ materially from those indicated in the forward-looking statements.
For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations, see the risk factors included in our annual report on Form 10-K for the fiscal year ended December 31st, 2020 in Part I under the caption Risk Factors, and in our most recent quarterly report on Form 10-Q for the quarter ended July 3rd, 2021 in Part I.A under the caption Risk Factors, both of which are on file with the SEC, as well as the cautionary language included in this morning's press release, including with respect to risks related to the effects of the COVID-19 pandemic on our business.
We further caution you that the company does not intend to update any of its predictions or projections except during our regularly scheduled quarterly earnings release conference calls and webcasts, or as otherwise required by law. The next earnings release call and webcast is currently planned for February 1st, 2022. During today's call, we will be referring to certain non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures are attached to our earnings release issued this morning and in the appendix of our presentation, which are available on the company's website. In our discussions of the results of operations, we may refer to non-GAAP results, which exclude the impact of items such as those outlined in our schedule titled Reconciliation of GAAP to Adjusted Non-GAAP Financials included in this morning's press release and in the appendix of our presentation.
Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2020. In addition, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis. Now, I'd like to turn the call over to Dr. Udit Batra, Waters President and CEO. Udit.
Thank you, Caspar, and good morning, everyone. Along with Caspar, joining me on this morning's call is Amol Chaubal, Senior Vice President and Chief Financial Officer, Waters Corporation. We have reported another quarter of strong, broad-based momentum across our portfolio and geographies. We first thank our over 7,000 colleagues around the globe who represent the indomitable spirit of Waters. Our teams have remained focused on supporting our customers and developing and delivering exciting new products despite the continuing impact of the pandemic. September first marked one year since I joined the company, and what a year it has been. I'm often asked what is different. I would first like to talk about what is the same, because that is what is giving us the ability to compete more effectively.
Our brand stands for deep scientific expertise, a clear understanding of our customers' challenges, and courage to invest in game-changing innovation. This remains the same. What we have injected with our new leadership team is a stronger focus on execution, a sense of urgency, and accountability. We are a work in progress, but the trend is positive. Now moving to slide three, which summarizes where we are on our journey. We're sustaining our commercial momentum with another strong quarter, delivering stacked sales growth of 6%, showing solid business performance with minimal COVID tailwinds. Meanwhile, our commercial initiatives and strong traction of new products like Premier Columns and Instruments and Arc HPLC were well-positioned to deliver market plus growth through 2022. We're building on this momentum by taking decisive steps in solving key problems that are present in higher growth adjacencies like biologics manufacturing.
I will now provide a brief overview of our third quarter operating results, as well as commentary on our end markets, geographies and technologies. Amol will then review our financial results in detail and provide comments on our updated financial outlook. We will then open up the phone lines to take your questions. Moving now to slide 4. In the third quarter, our revenue grew 11% as reported and on a constant currency basis, reflecting continued strength in our pharma and industrial end markets with balanced demand for our instruments and recurring revenue products. This translates to a 6% stacked CAGR for the quarter versus 2019 on a constant currency basis.
Year to date, revenue has increased 21% with a constant currency stacked CAGR versus 2019 also above 6%. Our top line growth resulted in Q3 non-GAAP adjusted earnings per share of $2.66, growing 23% year-over-year. Year-to-date, non-GAAP adjusted earnings per share have grown 39% to $7.54. Looking more closely at our top-line results for the quarter on slide five in constant currency. First, by operating segment, the Waters Division grew 9% while TA grew by 27%. By end market, our largest market category, Pharma, grew 16%, Industrial grew 9%, while Academic & Government declined by 11%. In Pharma, we saw a broad-based continued strength in sales across customer segments, geographies, and applications.
Strength was both in small molecule and large molecule applications, which both grew in mid-teens for the quarter. Industrial growth was regionally broad and led by our TA business, which saw strong growth globally in thermal, microcalorimetry, and rheology. Turning to Academic and Government, which is about 10% of our business, continued strength in Europe was offset by softer performance in China and other regions. Moving now to our sales performance by geography. On a constant currency basis, sales in the Americas grew 16%, with the U.S. growing 13%. Sales in Europe grew 8%. Sales in Asia grew 8%, with India over 40%, and China sales were down 3%. Now to a bit of clarification on China. Demand remains very healthy, as does the execution of our initiatives.
A shipment of approximately $12 million got delayed at an airport in the last few days of the quarter due to a third-party shipping issue and has been delivered in the first few days of the fourth quarter. Looking therefore at China orders for the quarter, this was up mid-teens year-over-year. Really no challenge from a demand perspective. In the U.S., growth was led by a broad-based continued strength in our pharma and industrial end markets. In pharma, we saw strength across our instrument and chemistry portfolios. In industrial, our Waters and TA businesses both saw strong growth. European demand remains robust across all end markets, with continued strength in pharma, industrial, and Academic and Government. For the quarter, India was our fastest-growing market, driven by very strong growth in instrument sales to our pharma customers.
As you know, India is primarily a small molecule and generic market for export, and this is indicative of continued strength in global pharmaceutical demand for small molecule drugs. By products and services, customer demand for our instruments remains strong after an impressive first half of the year, while recurring revenues also continued to see sustained growth. Overall, instrument sales grew 10% for the quarter, driven by robust demand, our improved commercial execution, new product contribution, and instrument replacement. In LC, the newly released Arc HPLC continued to see strong growth and uptake of our Premier instruments, both Arc and ACQUITY, especially for applications in novel modalities like mRNA and biologics, remain solid. The strength we are seeing in our LC instrument portfolio remains a positive indicator for sustainable future growth in consumables and service.
In Mass Spec, demand strength from pharma customers continued, with strong demand for our single quads, led by users for oligo and biologics purification, as well as strength in our tandem quads used in late-stage drug development. We're also encouraged by early interest in our SELECT SERIES MRT time-of-flight platform, which delivers highest quality resolution at fast speeds. Now for our recurring revenues. Chemistry sales grew 13%, driven by an increase in utilization of our pharma customers, as well as strength in our industrial end markets. Demand for our new Premier columns remains strong, while our e-commerce initiative is progressing and making it easier for our customers to do business with us. So far this year, our chemistry consumables have grown almost double digits when compared to our 2019 base.
We're pleased that our Premier technology is continuing to provide important benefits in separation and purification of mRNA and oligonucleotide molecules, given its unique ability to reduce selective binding of plasmids and mRNA to various surfaces. Service also grew double digits again this quarter, even as last year's comps have become tougher. On a two-year stack basis, service grew 7% in constant currency for the quarter and 6% year-to-date. By focusing on our value proposition and commercial execution, we have seen an increase in service plan attachment rates and plan renewals. Finally, DA had a great quarter, with sales up almost 30% as demand has rebounded, with strong growth across all regions.
TA instrument sales have grown at 8% on a two-year stack basis so far this year, driven by strong demand for our thermal instruments used in the analysis of advanced materials, as well as microcalorimetry instrument demand for our pharma and academic customers. Moving now to slide six. Let me now focus on why we believe that we will continue to deliver market plus growth. I think you are used to seeing these initiatives. Let me use the same frame. Starting from the left-hand side of the slide. In 2021, we expect our instrument replacement initiative to deliver over $30 million in revenue.
In 2022, we expect this to become over $40 million, which means an incremental $10 million over 2021. Our focus on commercial execution is positively impacting our service business, with plan coverage rates having increased by 2% so far this year compared to the first three quarters of 2019. In 2022, we think a further 100 basis points of expansion in service plan adoption is attainable. Growth in e-commerce adoption also remains strong, with chemistry sales through our e-commerce channels approaching roughly 30% versus the 21% we saw in 2019. We expect this to continue reaching over 35% by the end of next year. So far, this year's revenue from contract organizations has grown over 40% versus the comparable period in 2019.
Next year, we expect this to grow low double digits for the year versus 2021. New products continue to do well. We are just taking the example of Arc HPLC and Premier to illustrate the point here. Both Arc HPLC and Premier continue to be strong drivers with over $45 million revenue expected from these sources for this year in total, and separate to the replacement initiatives. 2022, we are expecting this number to be over $60 million. In all, these initiatives alone should give us approximately 1% over our base business growth for 2022, which reaffirms our belief in market plus growth rates. Moving now to slide seven, we operate a strong core business in healthy and durable end markets.
This strong foundation provides us a platform for solving critical problems facing our industry, where we can bring our scientific expertise and product portfolio capabilities. I would like to say there are three areas of focus, which also happen to be in high-growth end markets. First, in the biologics arena on the reagent side and bio separations, we believe there are significant problems to solve in separating and purifying these newer modalities. Having a deeper understanding of reagents coupled with our chemistry expertise will allow us to solve these problems. Second, in bioprocessing, the largest challenge I felt as an engineer in bioprocessing versus small molecule processing was that once you defined the process, you got stuck with it because it was in the Drug Master File. We have to decouple the process from the product.
Separately, the process development timescales are longer versus small molecules, given the sheer complexity of attributes you need to measure. A simple and robust tool that can measure multiple attributes is a potential solution. We believe that the BioAccord is the right LC-MS tool that can begin to address this challenge. Third area is diagnostics, where we need a fast, unbiased detection of multiple biomarkers to enable early disease detection. We believe, again, Mass Spec has a significant role to play here. Moving now on to slide eight. Let me illustrate what I mean by sharing what we are doing to solve some of the key problems in bioprocessing. Last week, we announced a partnership with Sartorius, a leader in bioprocessing. We will combine our Waters BioAccord system as a bioprocess analyzer with Sartorius Ambr bioreactors, giving scientists both faster and at-line direct access to advanced quality characterization information.
Scientists across Sartorius, Waters, and some of our customers have already shown that the combined offering will shorten product development timelines considerably, taking what currently takes six weeks to analyze down to only two days. It also lays the foundation for using the BioAccord as a bioprocess analyzer for process control and quality testing in the future. BioAccord is both versatile and easy to use, and we expect that process engineers will be able to master its operation within one to two weeks. In fact, one of our customers had summer interns use the BioAccord and gave raving reviews on how simple it is to use. I'm also an engineer who has been out of the lab for many years, and I was able to learn quickly.
Resulting configuration will allow direct analysis of drug substance, not just cell culture media, while targeting over 250 cell culture media analytes. Separately, we also announced a multi-year collaboration with University of Delaware to develop technology for analytical characterization of manufacturing processes for biologics and novel modalities. Through these partnerships, researchers from both Waters and the University of Delaware will identify and develop solutions that can provide better aseptic sampling, make sensor and analytical instrument improvements, and develop data analytics and process control. This partnership will help us expand our capabilities to characterize biological manufacturing processes in order to drive improvements in quality, yields, efficiency, and process control. In summary, 2020, 2021 so far has been a very successful year for Waters. We are laser-focused on our commercial execution.
The markets we serve are in a healthy state, and our geographic regions have rebounded solidly from pandemic lows. Meanwhile, I'm convinced of the great opportunity that lies ahead of us in higher growth adjacencies to impact and deliver value by extending our scientific expertise and product portfolio towards helping customers solve the most complex problems in our industry. With that, I'd like to pass the call over to Amol for a deeper review of third quarter financials and our outlook for the remainder of 2021. Amol?
Thank you, Udit, and good morning, everyone. As Udit outlined, we recorded net sales of $659 million in the third quarter, an increase of 11% in constant currency. Reported sales growth was also 11%. Looking at product line growth, our recurring revenue, which represents the combination of chemistry and service revenue, increased by 11% for the quarter, while instrument sales increased 10%. Chemistry revenues were up 13%, and service revenues were up 10%. As we noted in our last earnings call, recurring revenues were not impacted by a difference in calendar days this quarter. Looking ahead, there are six fewer days in fourth quarter of this year compared to 2020. Now I would like to comment on our third quarter non-GAAP financial performance versus the prior year.
Gross margin for the quarter was 58.9% compared to 55.8% in the third quarter of 2020. Improvement was driven primarily by volume leverage and revenue mix. The foreign exchange benefit in the quarter was about 1%. Moving down to P&L, operating expenses increased by approximately 17% on a constant currency basis and on a reported basis. The increase was primarily attributable to higher labor costs due to the normalization of prior year cost actions, as well as higher variable compensation on the higher sales volume. In the quarter, our effective operating tax rate was 11.7%, a decrease from last year due to some favorable quarter-specific discrete items. Excluding the impact of these discrete items, our year-to-date tax rate is consistent with the prior year.
Our average share count came in at 61.9 million shares, or about 400,000 less than the third quarter of last year as a result of our share repurchase program. Our non-GAAP earnings per fully diluted share for the third quarter increased 23% to $2.66, in comparison to $2.16 last year. On a GAAP basis, our earnings per fully diluted share increased to $2.60 compared to $2.03 last year. A reconciliation of our GAAP to non-GAAP earnings is attached in the press release issued this morning and in the appendix of this presentation. Turning to free cash flow, capital deployment, and our balance sheet. We define free cash flow as cash from operations, less capital expenditures, and excludes special items.
In the third quarter of 2021, free cash flow was $140 million, after funding $40 million of capital expenditures. Excluded from the free cash flow was $12 million relating to investment in our Taunton precision chemistry operations. Year to date, free cash flow has increased to $488 million and at approximately $0.25 of each dollar of sales converted into free cash flow. In the third quarter, accounts receivable DSO came in at 71 days, down five days compared to the third quarter of last year, and down two days compared to the last quarter. Inventory DIO decreased by 13 days compared to the third quarter of last year. Given the higher sales volume and our proactive measures to secure supply, inventory increased by $62 million in comparison to the prior year.
We maintain a strong balance sheet, access to liquidity, and well-structured debt maturity profile. In terms of returning capital to shareholders, we repurchased approximately 369,000 shares of our common stock for $151 million in Q3. At the end of the quarter, our net debt position was $958 million, with net debt to EBITDA ratio of about one. Our capital deployment priorities are to invest in growth, maintain balance sheet strength and flexibility, return capital to shareholders, and to deploy capital to well-thought-out, attractive and adjacent growth opportunities. As we look forward to the remainder of the year, I would like to provide you with some update on our thoughts for 2021 on slide 11. Throughout this year, we've seen good momentum driven by robust end market demand and strong commercial execution.
We believe that this momentum will continue and expect our near-term growth initiatives to continue to contribute meaningfully to our performance. Looking at the fourth quarter, the comparison is more challenging as it was the first quarter in our transformation journey and was further favorably impacted by post-lockdown elevated year-end budget plus spending. In addition, we have six fewer calendar days in the fourth quarter of this year. This dynamic supports raising full-year 2021 guidance to 15%-16% constant currency sales growth. At current exchange rates, the positive currency translation is expected to add approximately 1 percentage point, resulting in full-year reported sales growth guidance of 16%-17%. Gross margin for the full year is expected to be approximately 58%-59%, and operating margin is expected to be approximately 29%-30%.
We expect our full-year net interest expense to be $34 million and full-year tax rate to be 14%-15%. Average diluted 2021 share count is expected to be approximately 62 million. Our share repurchase program will also continue into Q4, and we'll provide quarterly updates as appropriate. Rolling all this together on a non-GAAP basis, full-year 2021 earnings per fully diluted share are now projected in the range of $10.94-$11.04. This includes a positive currency impact of approximately two percentage points at today's rates and assumes no material adverse supply impact from COVID. Looking at the fourth quarter of 2021, we expect constant currency sales growth to be 5%-7%.
At today's rates, currency translation is expected to subtract approximately 2 percentage points, resulting in a fourth quarter reported sales growth guidance of 3%-5%. Fourth quarter non-GAAP earnings per fully diluted share are estimated to be in the range $3.40-$3.50. This includes a negative currency impact of approximately 3 percentage points at today's rates and assumes no material adverse supply impact from COVID. Now, I would like to turn it back to Udit for summary comments. Udit.
Thank you, Amol. Before I wrap things up, I would like to make a few comments on our ESG efforts and our core principles to fuel innovation and make a positive impact. This includes doing our part to reduce our environmental footprint and leave the world better than we found it, being representative of a diverse society we live in, and providing effective governance that enhances long-term shareholder value. You will see more of our progress in each of these areas in our 2021 sustainability report coming out later this month. Turning to slide 10, I was particularly moved recently by the new internship program we developed with Team New England, designed to increase access to STEM education for students of all backgrounds.
Over the course of six weeks, we gave high school students a hands-on learning experience with a mix of science, business, and soft skills. Over 70 Waters employees were involved who gave practical exposure and mentorship. We look forward to continuing these efforts in the future. In summary, we continue to be pleased with our performance this year. We're sustaining our commercial momentum with our initiatives, which continue to perform well and should provide a multi-year benefit as we continue to strengthen our core. We're continuing to track 6% on a two-year CAGR for our revenue in constant currency, showing that our core is strong. We're focused on accelerating innovation to our portfolio and reaching these higher growth rates areas in adjacent markets. With that, we will now begin the Q&A answer session. Thank you.
Operator.
Thank you. Our first question is from Dan Brennan. Allen, your line is open.
Great. Thanks, guys. Thanks for the call. Thanks for the questions here. Maybe first off, Udit, just on 2022, you know, you provided some early look here with some of the drivers in terms of how they're gonna impact. I'm just wondering, as we think ahead, given the comp you're coming off of, for 2021, what's the right way to think about, you know, the early look for 2022 here? Consensus had you growing organically about 5%, which would imply a pretty nice acceleration on a two-year stack basis.
Thanks. Thanks for the question, Dan. Look, first, just this year, I mean, we're tracking at a 6%+ sort of stacked growth rate. Really, the base business is doing rather nicely. We would feel that the transformation is now hitting its stride, so the base business should continue to track along those lines. Now, we've always said market plus, and what gives us conviction that it's gonna be market plus is the initiatives that we have outlined, including the replacement, additional penetration in different channels, and better launch of new products. Wherever the market is, we expect to be market plus given the initiatives. In terms of what you should expect for next year, again, the same logic applies, right?
If the market is four, we should be 4 +. If it's five, we should be 5 +, and if it's six, we should be 6 +. Now, there's no reason to believe that the market should slow down. All our end markets are doing super well. I mean, you saw that year to date, both pharma and industrial are tracking close to 20%. On a two-year basis, they're well ahead of what we've seen over the history of Waters. We feel really good, we're going into the next year, and we have concrete initiatives that make us believe that we should be market plus.
Great. Just maybe as a follow-up, you've been at the helm about a year plus right now. You've done, obviously, you've outlined some areas for improvement, which you've executed on in terms of new product, commercial execution, customer identification, where you were lagging. How do we think about the evolution of your impact on the business? Should we expect at some point here as we enter 2022 that there's gonna be possibly a new wave of kind of initiatives, just kind of thinking through what the next leg is for Waters? Related to that, just wondering how M&A kind of fits into that. Thank you.
Dan, thanks. Thanks for the question. First, we have to make sure we do more of the same, right? I mean, and that's that I feel really good about, especially with the leadership of Jonathan Pratt and Jianqing Bennett really executing even further on our initiatives. Second, I feel very good about our ability to bring in new products to the market. They have tremendous traction, right? Especially the products that we've launched recently, Arc HPLC, the Premier Columns, both adding significantly to the top line. The MRT, the Select Series MRT, has a lot of interest from our customers across proteomics, across imaging, and across many different segments. I feel very good about what our pipeline is contributing, and there is more to come there.
Finally, to your question on M&A. Look, I mean, we've outlined the areas of growth we are interested in. I think what you will see is that we're not just interested in entering these areas willy-nilly. We are really thinking hard about what are the key problems to solve, right? As an example, with bioprocessing, as an engineer and freshly minted after finishing my PhD, days into my new job, I was ushered into a manufacturing plant where we were still manufacturing vaccines using chicken embryo eggs. I sat with eggs, opening them up, and I won't tell you the rest of the process. The process was designed many years ago, probably decades ago. The reason is that's how MMR vaccines are still manufactured today.
Why we have much better technology in cell culture to be able to manufacture the same type of vaccines. The reason for that sort of conservatism is that the process and the product are indistinguishable in the Drug Master File that you file for biologics. That's something that we really wanna work on. We believe that our collaboration with the University of Delaware will help us make strides in that direction. I'm super excited about what we just announced with Sartorius. I mean, Sartorius is a leader in bioprocessing, and they have probably the deepest penetration of small early-stage bioreactors that are used for clone selection. That collaboration has two benefits. One, we're able to take the BioAccord and improve a process that takes about six weeks down to two days.
That's been shown by in collaboration with Sartorius scientists and our scientists as well as customers. Very excited about that. There are several hundred Ambr bioreactors out there, and we hope to be able to take advantage of that. Secondly, it opens up for Waters a higher growth area where we would have not otherwise entered. I mean, in this case, we wanna enter with the capabilities that we possess. We feel extremely good about the initiative. In summary, continuing the commercial momentum, second, recharging innovation, and third, looking to enter these faster growth areas through first partnerships and increasingly open to M&A if it makes sense.
I remind you that for M&A, we are a financially disciplined company, so you won't see us jumping in headfirst into something that doesn't make.
Thank you. Our next question is from Tycho Peterson, JP. Morgan.
Udit, maybe I'll start with China. You noted the $12 million shipment delay. It doesn't sound like you're flagging any demand issues, but I'm just curious if you could elaborate a little bit on what you're seeing in that market. You know, any comments on supply chain, obviously, there's a lot of focus on that in the current environment.
Tycho, thanks for the question. Look, China year-to-date is over 30% growth, only second to India in organic growth. From a demand perspective, for the quarter, we were up mid-teens. Unfortunately, a shipment got stuck in the last few days of the quarter, which made it to our customers now. If you included that into the Q3 numbers, it would be high single digits to low teens for China growth. Really nothing to flag from a China perspective. In fact, I would say very happy with our new leader in China who's been implementing initiatives really well. Arc HPLC has great traction. We've built really strong commercial momentum even in our food and environmental markets.
Mass spec's doing super well. Feel extremely good about where we are in China, so nothing really to flag from a demand perspective. On your question on supply chain, look, like everybody else, in fact, we are seeing constraints in shipping in different ports that appear sporadically, right? We don't think it's a systemic issue, it's a sporadic issue. We're not unique in experiencing those challenges. In fact, I was with a few colleagues from different industries last week, and virtually everyone is experiencing sort of a little bit of unpredictable changes in supply chain. We're not immune to that, and I think if somebody tells you that they are, they're probably not shipping as much.
The other two pieces are of the supply chain that are being talked about a lot are inflation. We do see inflation specifically in U.S. labor, but nothing we haven't been able to offset by price increases with our customers. Hopefully that gives you enough color on how we feel. China, really nothing to flag, no problem at all from a demand perspective and from a supply chain perspective, feeling what everybody else feels. Really happy with the way our teams are working to surmount these issues and passing on prices where it makes sense to our customers.
For the follow-up, Academic Government, it's only 10%, but it was down 11%. Can you maybe just touch on what you're seeing there and do you expect that to turn in the fourth quarter, with the budget flush?
Look, Tycho, for AMG, I mean, we grew year to date, we're growing roughly 6%. If you look at the consumables revenue, that's tracking nicely. There's activity across our customers. Tracking in double digits. Recurring revenues are still growing double digits like with other end markets. Nothing to sort of point out systemically overall if you look at the market. The performance is a bit different by region. Europe's doing extremely well, whereas China and the U.S. are a bit slower. That has to do with two reasons. One, as we pointed out, Academic & Government is a small portion of our business, and historically has not been a huge focus for Waters.
With John's arrival, we have started to increase our focus on that segment as well. If you think about the instruments part of the business, that really depends on deep KOL relationships and customer relationships. This, over time, had sort of slowed down in many markets. In Europe, we've come out of the gates very well. We've started to reestablish those relationships, and you'll see the impact in the results year-to-date. In U.S. and China, that's a work in progress, and we'll give you updates as we go along. I'm optimistic with the activity I see, especially on e-commerce and in procurement, and you see the results in our consumables business. On the instrument side, with improving KOL relationships, I expect that to return as well.
Thank you. Our next question is Vijay Kumar, Evercore.
Hey, guys. Good morning, and thanks for taking my question. Udit, one for you. The $12 million shipping delay in 3Q, what segment did that impact? Was that instrument impact or government academia? I'm curious, how do you assess Q4 for any supply chain disruption? I'd be curious about the visibility you have.
Firstly, Vijay, good morning. Similar to what I just said to Tycho. Really nothing to be concerned about from a demand perspective in China. The $12 million had made it to the customers, and it is a bit spread. It's basically all instruments. It's not any consumables. It's all instruments, and it's made it to the customers. A bit spread across the different customer segments, pharma, industrial, as well as academic and government. Nothing sort of one segment feeling more pain. In terms of how we're dealing with these issues, look, we have a superb supply chain department. We have extreme transparency on the shipments and the timing of the shipments.
We have started to build inventory where we see order spikes in the different regions. We feel that we should be able to manage through the volatility that we are seeing in different
That's helpful.
Regions and with that.
That's helpful, Udit. I did have one on gross margins. You know, 3Q gross margin is very consistent with 2Q. I recall FX has an impact on you guys at the gross margin line. Given the 200 basis points headwind in Q4, any comments on FX impact on gross margins either in Q4 or as we look to fiscal 2022?
Yeah. Vijay, I mean, we do expect our gross margins in Q4 to be about 58%-59%, right? We've seen so far in Q3, as you said, 1% tailwind on the gross margin. Looking ahead, I mean, dollar has sort of strengthened, and most currencies we are operationally hedged except pound, and that's the currency where we are exposed. Other than that, I mean, we've sort of included that in our guide, and that's why you see we have close to a $0.10 headwind on EPS versus the last earnings call in our Q4 EPS guide.
Thank you. Our next question is from Jack Meehan with Nephron Research.
Thank you. Good morning. I wanted to just get a little bit more color on the shipment you flagged in China, the $12 million. That was delivered in October. You know, obviously, the supply chain dynamic seems to be getting incrementally more challenging each week. I was just curious what, you know, how things are going there, and does your guidance contemplate, you know, any orders could slip from 4Q into 2022 as well?
Morning, Jack. Look, nothing that we have visibility on that will go from Q4 to Q1. As I said, there is increased inventory in the different regions where we are seeing the demand going extremely well. From an overall perspective, the $12 million was shipped rather promptly in Q4, right? It's just unfortunate the quarter ends on the day as it does, and the shipping closes out towards the end of the quarter. I don't see anything that gives us visibility at this point that would tell us that there would be an impact in Q4.
In terms of what is within our hands, I mean, you heard me talk about earlier, the extreme transparency that we have on supply chain, the processes that are much improved over the last year, and then finally, the increased inventory in the different regions. Feel reasonably comfortable that we should be able to manage a rather ambitious end of the year.
Great. Then was just curious about labor trends. You called out the fact that you are now above the pre-pandemic levels. Was just curious if you felt like there was more spend coming in in 4Q, and just maybe overall competition for labor, how you think you're managing in terms of retention?
Yeah, look, I mean, U.S. labor continues to be sort of a place where we are seeing inflationary pressures, right? I think with a strong HR function, we've put a lot of measures in place to reduce attrition and sustain talent, right? However, that doesn't play out so much in terms of cost and operating expenses into Q4. As you model Q4, what you have to keep in mind is Q4 is a heavy revenue quarter for us, and that results in commission payments accrued heavily in Q4, which is why you typically see historically our operating expenses, especially SG&A, are heavier in Q4, and that's reflected in our guide.
Thank you. Our next question is from Patrick Donnelly with Citi. Your line's open.
Great. Thanks, guys. Udit, maybe one on the 2022 commentary. You know, certainly appreciate you're expecting to continue to grow above market. You know, when we look at 2021, you know, it feels like one of the accelerants for you guys was the replacement cycle. You know, I think last quarter you talked about, you know, maybe the sixth or seventh inning using the baseball analogy. How do you think about that in 2022 kind of setting up as an opportunity for you guys to continue on that front? Or was that mainly condensed into 2021 when we think about what the growth rate could look like there?
Patrick, thanks for the question. Unfortunately, I was learning baseball, so I kept using the baseball analogy, and as people have talked sense into me to start talking in revenue numbers. That's why we put that slide together, which was slide six in the prepared remarks. Look, we saw, say, 1%-1.5% acceleration on a stacked basis due to the initiatives. The initiatives were not just the instrument replacement. We saw service attachment increase of aftermarket. We saw e-commerce adoption go from 20 %- 27%, 28%. Contract organizations grew, which was a new channel for us, grew roughly 40% on a two-year basis. New product contribution also did extremely well.
Across the board, 1%-1.5% sort of benefit over what I would say the base growth and robust end markets. Next year, we think that's roughly 1% versus the base market growth or whatever the base market growth will be. For instrument replacement, this year we had roughly $30 million or so of benefit. Next year it'll be $40 million, which is $10 million incremental, right? That's how I would think about it, right? For service, 200 basis points, another 100 basis points on top. The 200 basis points already benefits us next year. Then e-commerce goes, and then you can read the chart. I think that for me is how I would think about 2022 and beyond, right?
As you think about what's happening beyond, this is now part of our CRM system. This is part of our execution that Jonathan Pratt and Jianqing Bennett are implementing, right? We now have the full list of HPLC, UPLC, as well as the tandem quad in the CRM system that our reps are going through step by step, and replacing. This will continue next year and will go on into the year after. Same thing is true for our service attachment rates. We know where the attachment rates are. We're using that database to now go after it. It has become part of the DNA of the organization. I think that gives me confidence that we will be able to accelerate also next year.
Finally, new products, as I mentioned, are doing very well. MRT has just started to pick up a lot of interest. We've talked about our HPLC and Premier doing very well. Feel reasonably good about that 1% incremental over what would be any sort of market growth.
Yeah, that's helpful. Appreciate that. Maybe just a quick one on the industrial market. You know, you guys put up pretty good results there. It's been a little more mixed across the sector. Can you just talk about what you're seeing there and expectations going forward?
Look, I mean, across all end markets, right? I mean, you look at pharma and now you look at industrial. Industrial, it's roughly 6%-6.5% stacked growth, right? Historically, that's been 4%-5%. We are seeing even a bigger acceleration, relatively speaking, in industrial versus we're seeing with pharma. You know, I must say we're seeing extremely good performance out of the DA business, right? Nice performance across the different customer segments, be it in advanced materials, be it batteries, where we test slurries for renewable batteries, and I don't need to tell you why that's important these days. Electronics, that's growing in the high teens, double digits. The life science part of our DA business also growing nicely.
In TA, we're seeing really good momentum, and again, on a stacked basis, even outpacing the overall business, roughly 8% or so growth. I think industrial, we feel that our customers have found a way to work despite the pandemic. Our service engineers and our sales teams have access to many of these customers, initially virtually, but in many regions, increasingly also physically. Our service engineers, both across Waters and TA are actually more welcome at our customer site than many of their own employees. Industrial has picked up nice strength, and it's true across all geographies. China is doing well.
U.S., Europe, rest of Asia also doing quite well. It's a real area of strength, and we're lucky to have a business like TA that's kind of pointed in that direction.
Thank you. Our next question is from Derik De Bruin from Bank of America.
Thanks for taking the question. This is Michael Ryskin on for Derik. I want to follow up a little bit on the instrument performance you saw in the quarter. I was wondering if you could break out anything you saw different in terms of the LC versus the mass spec, and particularly sort of tying it back to the Academic and Government question. I'm wondering if that was more on the mass spec side and just sort of how you see some of those new product introductions playing out this quarter and going forward.
Firstly, overall, and again, I talk more in terms of stacked growth. I mean, instrument growth for the year is roughly 30%, right? Both LC and mass spec are doing extremely well, right? LC even higher than 30%, mass spec slightly shy of 30%. Nothing to choose between the two sort of product platforms. But I think it makes more sense to talk about it on a stacked basis, right? Historically, Waters have seen instrument growth between 3%-4%. We've sort of steadily now year to date, stacked growth is steadily around 5-ish%. Really nice momentum. This is true both across LC as well as mass spec.
Nothing really to sort of differentiate the two. Now, you asked about mass spec. In particular, in mass spec, the demand is driven by across all our portfolios, across users in high-res mass spec, across our tandem quad, which are both used. The single quad are used for intact mass and also our tandem quad that are used in development as well as food and environmental. Of course, as I mentioned, the BioAccord, we see renewed momentum and a lot of interest in the bioprocessing arena. Mass spec is going from strength to strength. Now, turning to the second part of your question on new products. As I pointed out in the prepared remarks, right, on HPLC.
Just focusing on HPLC for a minute. Arc HPLC as well as the Premier technology, which includes columns as well as the application of this unique technology to our instruments, has led to roughly $45 million in sales in 2021. We expect that to go up to $60+ million, so about $15 million or so incremental. That's in the LC space. On mass spec, new applications for BioAccord, I already mentioned that in the prepared remarks. The MRT has a lot of interest from many of our customers, especially ones who want to use it in the proteomics space and for imaging with our DESI technology, which can be used under ambient conditions, which is quite unique.
New products, I mean, Waters has had a history of introducing game-changing new products. I think what we are doing differently is just making sure that there is a lot of traction once we launch these products, and they're not just.
Okay, great. A quick follow-up actually on the OpEx side. SG&A and R&D both came in a little bit better than we expected in our model. I was just wondering if there's any one-time effect there. I know OpEx probably played a role there as well, being less of a tailwind. Just wondering if you could comment on any trends there. And the $12 million shipment that got delayed to 4Q in China, how should that pull through the model? Is that about a $0.05-$0.10 benefit to 4Q EPS?
On the two questions. The first one, there was no one-time activity in R&D or SG&A, so it's pretty straightforward there. On the $12 million shipment that got delayed, I mean, you know, you can assume it's largely instruments and model it at instrument gross margin. That would have been our-
Thank you. Our next question is from Puneet Souda with SVB Leerink. Your line's open.
Yeah. Hi, thanks for taking my question. The first one is just I wanted to clarify, obviously instrumentation was strong last quarter, and if you pull in this $12 million order back into 3Q, that would be strong this quarter as well. Just wanted to understand if there's, you know, sort of application-wise, what is, you know, driving the instrumentation sale? And maybe just if you could elaborate a little bit, if there was any, you know, in terms of QA/QC of vaccines, maybe the analysis of mRNA cap structure. There were some application notes published by Waters teams around that.
Just wanted to understand if you know if you are working on QA/QC side of the proteins or mRNA vaccines or what is the applications that are driving the instrumentation growth that we have seen here over the last two quarters?
Sure. Look, first, I mean, the instrument growth is driven by strong, robust end markets, better commercial execution. Second, it's our initiatives, be it replacement, be it newer products. Your question is increased applications, and I would break it into two parts. One, we are indeed seeing increased application of our technologies in oligonucleotides, in mRNA. For instance, I met somebody from a leading mRNA company in Cambridge recently, and they basically said, "Look, there are huge aggregation problems with plasmids, with the mRNA molecule itself, as well as with the lipid encapsulated mRNA molecules." They are turning to us to help them solve these problems, one, by retaining more samples by using Premier.
Two, by using LC-MS to elucidate the structures of the molecules themselves. Good application there and a lot of them being in development and discovery and hopefully increasingly in QA/QC. The second area that I would comment on is the wider application of the BioAccord. You'll recall the product was initially launched really focused on LC-MS, which we still believe, in QA/QC, LC-MS has a strong place in QA/QC, provided the instrument that you have is simple, robust and fast and gives you faster results. That same value proposition is equally relevant in early-stage development of complex biologics. We're seeing really good application there.
We demonstrated with Sartorius that within that some experiments that take six weeks can now be turned around within two days. This has been replicated in Sartorius' labs, our labs, and in several customer labs. As you can imagine, there's a ton of excitement on that front. The BioAccord is rather unique here. The results are fast. It's a simple to use instrument. Even somebody like me can use it. It provides you a wide range of results, not just on cell culture media applications where it's much wider than any sort of application used today, but also on the drug substance.
Seeing wider application of our technologies and really excited about where LC-MS is going, especially the BioAccord, with the simplicity, robustness, and need in early-stage development and bioprocessing.
Thank you. Our next question is from Josh Waldman with Cleveland Research.
Good morning, and thanks for taking my questions. I wondered if you could provide a breakout of growth in LC and MS separately here in the quarter. I don't think you provided those numbers. I missed them if you did. And I guess, you know, broadly, it seems like the Waters instrument business was a bit lighter than expected. I mean, any additional color you can provide on maybe what drove this would be helpful. Was it largely timing related, or is it more a reflection of possibly a normalization in orders?
First, to your second question. I mean, year-to-date instrument growth is roughly 30%. I'm quite good about that. I don't know if it's lighter. In Q3, we saw nice growth, double-digit again on instruments with stronger comps in Q3 from last year already. Double-digit growth across the two pieces of two lines of instruments or even three lines of instruments, LC, mass spec, TA. As I mentioned earlier, on a year-to-date basis, and the quarter is the same, LC grew in excess of 30%, mass spec in the mid-20s. Really nothing to choose between the two sort of instrument platforms. It makes less sense to look at it quarter by quarter, given the instrument trajectory.
Again, nothing to choose between the two. Feel that both LC and Mass Spec have significant momentum in Q3 and year-to-date and also going into Q4. Really feel very good about where we are.
Thank you. Our next question is from Catherine Schulte with Baird. Your line's open.
Hey, guys. Thanks for the questions. I guess just first on the instrument side of the business, you know, revenue was down about 8% constant currency last year. Do you think you've largely recaptured that revenue at this point, or is there still some to make up, or do you think there's some that is just soft revenue that won't be recaptured? Would just be curious how you'd allocate across those three buckets.
Catherine, thanks for the question. I think on the instrument side, we really feel that we are on a very, very good track. I mean, if you just look at historical averages, right? I mean, 2020 can confound things given all the COVID impact. On a stacked basis, we're traversing nicely in excess of 5%, close to 6% in some cases, for our instrument business. Historically, that average for Waters and across the industry is between 4%. Really nicely clear of the historical averages. In terms of how much have we clawed back, I mean, we think that just looking at three sort of data points.
One, comparing our stacked growth rates, both instrument and consumables with the rest of the industry wherever there are comparable products, we feel very good that we are operating well ahead of the market. It's market plus performance on instruments. That's the first data point that makes us feel that we're clawing back rather nicely. Second, we have win-loss ratios that we measure internally. Those have been tracking ahead of historical averages for the last four quarters. Finally, there are public reports that are available, which are rather idiosyncratic because they change the definitions every quarter. According to those also, we're doing pretty well on our market share. We feel very good about how we are traversing with gaining our footing.
Now we are a work in progress. There's a lot more to do, a lot more opportunity as well. A lot of applications for our instruments, lot more penetration to be had, but feel really good so far, journey that we have.
Thank you. That concludes the Q&A session of today's call.
Thank you very much for your participation and questions. On behalf of our entire management team, I'd like to thank you for your continued support and interest in Waters. We look forward to updating you on our progress during our fourth quarter 2021 call, which is going to be on February 1st, 2021. Thank you.
Thank you. This does conclude today's call. You may disconnect your lines, and thank you for your participation.