Life Technologies Corporation Q2 2009 Earnings Call Transcript

Jul.28.09 | About: Thermo Fisher (TMO)

Life Technologies Corporation (NASDAQ:LIFE)

Q2 2009 Earnings Call Transcript

July 28, 2009 4:00 pm ET

Executives

Amanda Clardy – VP, IR and Corporate Communications

Greg Lucier – Chairman and CEO

David Hoffmeister – SVP and CFO

Mark Stevenson – President and COO

Bernd Brust – President and Chief Commercial Operations Officer

Analysts

Tycho Peterson – JP Morgan

Quintin Lai – Robert W. Baird

Ross Muken – Deutsche Bank

Derik De Bruin – UBS

Doug Schenkel – Cowen

Isaac Ro – Leerink Swann

Jon Wood – Bank of America/Merrill Lynch

Marshall Urist – Morgan Stanley

Jon Groberg – Macquarie

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Life Technologies Corporation earnings conference call. My name is Louisa, and I will be your operator for today. (Operator instructions)

I would now like to turn the call over to Ms. Amanda Clardy, Vice President of Investor Relations and Corporate Communications for Life Technologies. Please proceed ma'am.

Amanda Clardy

Thank you Louisa and good afternoon everyone. Welcome to Life Technologies Second Quarter 2009 Earnings Conference Call. Joining me on the call today are speakers, Greg Lucier, our Chairman and CEO; and David Hoffmeister, our Chief Financial Officer. In addition, we have Mark Stevenson, our President and Chief Operating Officer; and Bernd Brust our Chief Commercial Officer joining us for Q&A.

If you haven’t received a copy of today’s press release you can obtain one from our website at lifetechnologies.com.

Before we begin, I want to remind our listeners that our discussion today will include forward-looking statements including, but not limited to statements about future expectations, plans and prospects for the company. We believe these statements are based on reasonable assumptions, but actual results may differ materially from those indicated. It is our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995.

Additionally, we will be discussing GAAP and non-GAAP measures. A full reconciliation of the non-GAAP measures to GAAP can be found in today’s press release or on our web site.

For today’s call we will be referencing a presentation that you can view online. Instructions to access the web cast are on our website. Additionally, we will be posting the presentation to our website upon the conclusion of this conference call.

Greg will begin today’s call with highlights for the first half and an update on our integration progress. He will then be followed by David, who will give a more detailed review of the company’s second quarter operating results and our expectations for the rest of 2009.

I will now hand the call over to Greg Lucier.

Greg Lucier

Thanks, Amanda. We are extremely pleased to have delivered another quarter of SOLiD operating results. It has been a great first-half of the year and with good performance from legacy businesses, despite the tough macroeconomic conditions we all face today.

In Q2 total company revenue grew 2% to $839 million. Revenue growth without the impact from foreign currency was 7.5%. Instrument revenue grew in the mid-teens as a result of good growth in all our instrument lines as well as sales of H1N1 related systems, which I will discuss in more detail in a moment.

Consumables and services revenue grew as expected in the mid-single digits. Gross margin was a robust 66.7% equivalent to the first quarter and as a result of the integration related savings and positive price realization. We had another the impressive quarter of operating margin expansion resulting in ending operating margin of 27.2%, a 410 basis point improvement.

Operating income improved 20% or 36% excluding the impact of currency. All of this resulted in non-GAAP earnings per share of $0.79 and free cash flow of $105 million. As we announced in our press release today, we have used a good portion of our cash to repay $200 million of our outstanding debt. Without question this was a great quarter, everything was firing on all cylinders and we accomplished quite a lot.

I believe this performance once again demonstrates the strength of our operating model, the diversity of our technology portfolio and hard work of our people. It shows how essential our products are to the everyday work of our customers around the world.

Before I get into the details of the quarter, I think it is important to note a factor that had a significant effect on our performance, so we can keep it in perspective when thinking about the future. In the last few months, we've all seen the world's attention focus on influenza A H1N1 virus. The CDC, World Health Organization, and other health agencies around the globe have been focused on detection and prevention since the outbreak first began.

Life Technologies was contacted early on in the outbreak soon after the first case was discovered to help outfit labs around the world with our 7500 Fast and Fast DX PCR machines that run CDC developed assays. The assay also utilizes several critical biological components from us. We are pleased to be able to respond quickly to the needs of these global health organizations, and have created a dedicated team to continue to provide as much support as necessary.

Our response to these agencies would not have been possible if Invitrogen and Applied Biosystems had been separate companies. We are able to provide our customers with a complete solution from instruments to reagents to service. It is a true testament to the strategic rationale for our combination and could not have come at a more critical time.

The revenue we received from this quarter from H1N1 related products was approximately $15 million. As we do with each quarter, let me now give you an update on our strategic objectives for the year, growing our core business, flawlessly executing upon our integration plan, and investing for future growth.

The first objective, growing our core business, focuses on delivering to our current customers the best possible products, services and support. Obviously our results in the first half of the year are a testament to how we are doing in this area. In the second quarter, we launched some notable new instruments as well as hundreds of new reagents, successfully implemented a new version of our reagent website for more convenient transactions, launched our first marketing promotion that combined products from both legacy companies, and completed a small technology purchase for IP-related to digital PCR, which will further expand our considerable PCR patent estate.

These achievements are examples of the continuous improvements we make to grow our business. In addition, you may recall that we announced a small divestiture several weeks ago. This business which generated about $6 million in revenue per quarter provided an information management system for laboratories. This is an example of how we are focusing on our core business by finding the rightful owner for pieces that are not a strategic fit for Life Technologies going forward.

It is critical for a company to focus on its core competencies in order to be successful, and we've shown that by making these difficult trade-offs we deliver better financial results.

The second objective we are focusing on in 2009 is executing a flawless integration of Invitrogen and Applied Biosystems. The integration is going extremely well, and we not only remain on track to deliver our three-year synergy target, we are now confident we will achieve more than originally communicated for our first year synergies. We now expect to achieve $95 million of synergy realization in 2009 versus our most recent guidance of $80 million.

This increase in 2009 expectation is because we executed so effectively on our own original target, we were able to accelerate a number of actions that we had originally planned for 2010 with no impact on customers or on our business performance. We could not be more pleased with the efforts that our employees from across the company have put in to achieving the promise of this combination. When we originally announced the deal, there were many skeptics who couldn't see the vision and promise what our combined company could be, but our employees from both legacy companies rallied around what we had to accomplish to make one plus one equal more than two, and I can honestly say that they have not disappointed.

I'm very proud to be part of this effort. I want to thank our people for going the extra mile for our customers and their colleagues each and every day. I would also like to highlight a major effort within the company over the last few months to further integrate our product offerings for our customers, and offer them even greater choice across our portfolio. In early July, we launched these key changes, which included making 1400 AB products available through Invitrogen sales channels, enhancing our assistance to support new coding, pricing, invoicing and distribution process and aligning compensation plans for our sales force to support these additional products.

Now we don't expect these actions to generate substantial revenue in 2009, but there are a significant step towards capitalizing on the full potential of our combined company in front of our customers. As you can see from our integration tracker scorecard, all areas of the project are green, which signifies that everything is on track. We have over 50 full-time people on the integration effort and track over 7800 individual task line items. The largest part of the project in the last 90 days has been the development of these commercial systems to enable more co-operation in the field between the legacy, Invitrogen and AB sales teams.

With these changes now complete and fully tested, we believe we will be able to create a much more powerful solution for our customers.

Third and final objective that I want to talk about today is how we intend to invest for the future. One of the great benefits of our core business is that our product mix is heavily weighted towards high margin consumables allow us to generate enough cash to continue investing in the future of our business, and while we pay very close attention to executing on our strategies of today, we're always looking ahead on what might come next.

We also believe that companies that not only weather tough economic times, but perhaps also take advantage of this time to invest for the future are the ones that ultimately achieve even greater shareholder value. To that end, we plan on investing in some critical R&D and sales and marketing programs that will drive even further growth.

Our areas of interest include further acceleration of our sequencing roadmap and ramping up of our synthetic biology toolset to support biofuels research, continued expansion of our sales and service footprint around the globe.

I will now hand it over to David to give you more details on our financial results for the first half and second quarter. David?

David Hoffmeister

Thanks, Greg, and good afternoon everyone. This quarter we grew revenue 2% including currency and 7.5% organically. We clearly are very happy with this level of organic revenue growth; however it is worth reiterating what Greg mentioned earlier about the revenue from H1N1 related sales. We estimate this added approximately $15 million of benefit resulting in roughly 2 points of organic growth to the quarter. We don't expect this level of revenue from H1N1 related products in the future.

The rest of our strong performance was due to the continued strength in all of our divisions and several new product launches. Molecular Biology Systems grew approximately 8% organically to $399 million in total revenue. The majority of H1N1 related revenue for products was in this division, resulting in approximately 4 points of organic growth for Molecular Biology Systems.

Aside from H1N1 related revenue, a few notable areas that contributed to growth in this division were next-generation sequencing reagent kits, including Sample Prep [ph], a new transfection product launched last quarter and multiple new product launches this quarter, including pre-designed TaqMan Assays for disease research, a range of reagents for animal health, and a whole transcription kit for SOLiD.

Genetic Systems had a strong quarter with $233 million in total revenue, representing 11% organic growth. To better understand the factors contributing to this growth, I will give some color on the different businesses in this division. The largest division is CE research with approximately 50% of the total revenue. This business declined in the low single digits in the quarter. You'll recall that our own original guidance called for declines of high-single to low-double digits, but we have had recent success with several large deals in the hospital and clinical labs markets as well as in emerging geographies.

However, given that these deals are unpredictable and lumpy in nature, we are not prepared to change our original expectations for this business at this point. The second largest business in this division is our Applied Markets unit, which includes kits and CE systems most importantly for forensics. This business grew in the mid-teens bolstered by several large orders in the Asia-Pacific region.

The last business in Genetic Systems is next-generation sequencing. We had continued acceleration for demand of our SOLiD next-generation sequencing product this quarter and hit a record win rate for new orders. Our system is now at the point where we are clearly the leader in throughput and accuracy, which is critically important in such areas as cancer research. This is clearly paying off in the number of new wins for SOLiD, such as the one we announced today with the University of Queensland’s Institute for Molecular Biology.

Our third division, Cell Systems grew revenue by 4.5% organically to $201 million. Most product areas within Cell Systems contributed to this growth. Our most successful Invitrogen product launch ever, Countess, continues to drive meaningful growth and is a great example of how we are increasingly able to solve customer problems with benchtop instruments.

Our stem cell business continues to grow significantly as many of the products are now considered the gold standard in stem cell research and are validated across many protocols. We have a new website specifically designed for stem cell researchers that is helping to drive traffic to our product offerings.

We also had our largest revenue quarter ever for our research cell culture media and reagents partly due to the success of our new bottle design. Growth in these business units were slightly offset by year-over-year decline in bio-production related products. As a reminder bio-production revenues, which are approximately 20% of this division are very lumpy, so fluctuations in growth is typical.

Moving on to the last division Mass Spec, our joint venture with MDS, revenue declined 12% organically in the second quarter. Recall Q2 2008 was a high-volume quarter for Mass Spec and therefore created a difficult comparison period. First half organic growth for the division was a negative 6.8%, which is in line with our expectations. The end markets for this division appear to be stabilizing and in fact we saw good growth outside the United States, especially in Europe and China. In terms of the future, we still expect this business to be flat to down 10% for the year, and we would anticipate that the NIH stimulus will be of modest benefit to growth in the fourth quarter.

Other revenue was $6.8 million. As a reminder this is associated with our Mass Spec division, but not in the joint-venture and consists of consumable products used on discontinued Mass Spec systems.

In terms of organic growth by region, excluding the Mass Spec division, the Americas and Europe both grew 6%, Asia-Pacific was up 30%, and Japan grew 1%. Currency this quarter impacted revenue growth by approximately 5.5 percentage points net of our hedging program. The negative impact to EPS was approximately $0.14, including foreign currency impacts accounted for in revenue, other income, and the Mass Spec joint venture.

Before I begin with the additional financial comparisons, let me remind you that we are comparing all of our non-GAAP financial results to the pro forma income statements we published on our website that combines Invitrogen and AB for all of 2008.

Second quarter non-GAAP gross margin was 66.7%, an increase of 140 basis points from Q2 ‘08. This improvement was primarily due to synergy realization, improved price and manufacturing plant productivity. This was somewhat offset by product mix and currency exchange.

Second quarter operating expenses were $332 million, a decrease of approximately $15.5 over prior year’s levels, due mostly to reduced currency exchange impact and savings from integration related synergies, somewhat offset by increases in employee bonuses and depreciation. Sequentially operating expenses grew by approximately 4% due to headcount related expenses and outside service fees, somewhat offset by additional synergy realization.

Operating income was $228 million, an increase of 20% year-over-year including the impact from currency and 36% excluding the impact from currency.

Operating margin was 27.2% representing 410 basis points of improvement over the prior year including the impact from currency. This level of operating margin expansion primarily resulted from organic revenue growth and the realization of integration related synergies.

In terms of other income line items, we had $700,000 of interest income and $9.6 million of other income consisting of $14.5 million of income from our Mass Spec joint venture offset by foreign currency losses.

Interest expense for the quarter was $39 million. As Greg mentioned earlier, we just repaid $200 million of term loan B debt last week. This repayment will result in lower interest expense in the long term, however, in the short term the related debt issuance costs are expensed at the time of repayment. The acceleration of this amortization will be approximately $7 million in the third quarter.

Our non-GAAP tax rate was 29.3%. We expect our full-year tax rate to be 29.5%, which is slightly above our previous full-year expectations of 29%. The increase is due to a greater amount of income earned in the United States than originally expected.

Our diluted share count for the quarter was 179 million. As you will recall, our share count is impacted by our stock price in the quarter due to our convertible debt and employee stock options. Assuming our stock price continues to increase throughout the year, our share count in the second half is expected to be between the range of 183 million and 186 million shares.

Our non-GAAP earnings per share were $0.79. GAAP earnings per share were $0.22, which includes $0.42 per share of acquisition-related amortization expenses, $0.04 per share of non-cash interest expense associated with the adoption of APB 14-1, and $0.11 per share of business integration costs and other expense.

Comparability year-over-year is limited for your earnings per share figures due to the merger with Applied Biosystems.

Moving on to the balance sheet and cash flow, our ending cash and short-term investments were $583 million. This compares to last quarter’s balance of $465 million.

Cash from operating activities were $147 million, capital expenditures were $42 million and free cash flow was $105 million.

Our ending debt as of June 30 was approximately $3.5 billion. This is made up of our convertible debt of $1.15 billion and straight debt of approximately $2.4 billion. As I mentioned, we have now repaid $200 million of this debt.

For the first half of 2009, revenue increased 6.5% organically, and operating margins have expanded by 300 basis points including the impact from currency. Clearly this is the result of a multiple of things ranging from hard work on the integration efforts to conservative expense spending due to the uncertain economic environment we are operating in to timing.

Nonetheless, we remain cautious about expecting the first-half trend to continue. With that in mind I will now move on to our expectations for second half of the year.

We now expect second half organic revenue growth to be in the mid-single digits versus low-single digits we indicated last quarter. With that level of organic growth in the second half, we expect full-year non-GAAP EPS to be in the range of $2.70 to $2.80.

This revised guidance includes several items that are important to note. First, we have now included the expected Q4 impact of the NIH stimulus, although we believe it will be minimal in 2009. As we have stated before, we expect most of the revenue impact from the stimulus package will fall in 2010.

The second item included in our revised expectations is the increased synergy target for 2009 that Greg specified earlier. Through the second quarter, we have now completed actions that will ensure realization of $80 million of this, this year, and we expect to generate another $15 million in the coming two quarters, resulting in a full year 2009 synergy realization of $95 million.

The third item included in the new guidance is the revised impact of currency exchange rates. In the third quarter, we expect currency exchange at today's rates and with our hedging programs to negatively impact growth rates by approximately 2 to 3 points. In the fourth quarter, again at today's rates we expect it will be flat to positive one point of growth.

The last new item now included in our guidance is the impact from our divestiture mentioned earlier. The LIMS analytical software business contributed about $6 million per quarter in revenue with approximately 10% operating margins. We have removed this contribution from our outlook starting in August.

And finally, as is our practice, I will also give you a few items to take into consideration for the coming quarter. Although the second half organic growth rate is expected to be in the mid-single digits, it will be unequally distributed by quarter. We expect to grow organically in the low-single digits in the third quarter and in the high single digits in the fourth quarter. As you will recall the majority in the $30 million of royalty revenue declines that we have previously communicated happens in the second half of this year with approximately $12 million to $15 million of the decline occurring in the third quarter.

Gross margins are expected to be sequentially lower due to added royalty revenue decline, lower price realization, lower fixed costs absorption as well as a the shift in mix to more instrument sales.

Operating expenses will increase sequentially due to several R&D and marketing programs that began late in the second quarter.

We expect capital expenditures to ramp up in the remaining quarters and to be in line with our guidance of $175 million to $200 million for the year, including $50 million of integration related capital.

Free cash flow for the year is expected to be approximately $475 million, and this is an increase in our estimate given last quarter of $450 million.

With that, I will now hand the call back over to Greg for closing remarks.

Greg Lucier

Thanks, David. So to wrap up the first half of the year, without question we posted some great results. Organic growth in the mid-single digits and organic margin expansion of hundreds of basis points in this type of economy says a lot about the type of business we have, especially if you look at other companies in this space and beyond.

Clearly our focus on the academic market continues to pay off as does the investments that both legacy companies have made in Asia. We remain focused on driving growth in our core business and sometimes that means making hard choices to divest good business units that just aren’t strategic to where we want to take the company.

We will continue to take a hard look at our portfolio and make those decisions as necessary. We are generating strong free cash flow, which is giving us the ability to rapidly pay down our debt each and every quarter, and finally we are making tremendous progress on our integration efforts so much so that we are able to be a key partner to agencies such as the CDC, something as critical as H1N1 detection. This is a perfect example of the promise of the merger between Invitrogen and Applied Biosystems. Had we been standalone companies, we never could have provided the rapid response or work flow solution that the World Health Organization needed in this situation.

We are more confident than ever that this was the right combination at the right time.

With that I will hand it back over to Amanda for questions and answers.

Amanda Clardy

Thank you, Greg. Louisa, you can now open up the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Tycho Peterson with JP Morgan. Please proceed.

Tycho Peterson – JP Morgan

Hi, good afternoon and congratulations on a great quarter.

Greg Lucier

Thank you.

David Hoffmeister

Thank you.

Tycho Peterson – JP Morgan

You know maybe, David, I will take the bait on a comment that you had made about SOLiD and you quoted kind of record win rates, can you just give us a sense of where these systems are being placed, demand within core genome centers, outside the genome centers, and maybe US International. And then as a follow-up the acquisition you announced, it looks like there are some sequencing applications. So what is the timeline in terms of incorporating that into the sequencing pathway?

Greg Lucier

Thanks, Tycho. Let me actually hand that over to Mark Stevenson.

Mark Stevenson

Hi Tycho, it is Mark here. So firstly on SOLiD, we are seeing really this uptake of SOLiD going on and really translation of research centers around the world. We will quote just an example of one in Australia. It is really where the labs see the advantage of the throughput and the accuracy, particularly our win rate in cancer centers where that application is important in the accuracy, and also while customers are doing gene expression and the throughput translates into higher tag number in those gene expression applications. So it is really helping carrying it around the world for us and it was a great quarter in terms of the win rates as we said. In terms of the digital PCR technology, it is really an IP play [ph] at this point that we see broader applications not just in the PCR as you point to but also there may be some applications into next-generation sequencing.

It is something as we invest for the future you will see as roll out as well as licensing program as we go into 2010.

Tycho Peterson – JP Morgan

Okay, that is helpful. Maybe turning to the integration process, you know I appreciate you guys updating the synergy targets, Greg can you comment a little bit on what that you are pulling forward here, these roof top [ph] closures or these working out input costs a little bit more aggressively?

Greg Lucier

Well, I think it is primarily related to the items that we have really targeted for 2009 into the early part of 2010. So as we had said before, these are synergies around some of the back-office areas of finance, HR, IT, the support structure as well as eliminating the existing overhead that was in place with the (inaudible) structure. And then also we have seen some ability to accelerate the commercial synergies around where we are putting AB products into supply centers around the world, and our pricing realization has been able to be a little bit more successful than we thought we would be able to do only in 2009.

So overall I think it really was spread across the integration. These were ideas and tasks that we had targeted in the first quarter or so of 2010 that we are able to move into this calendar year and get them done.

Tycho Peterson – JP Morgan

Okay, that is great. I will get back in the queue. Thanks.

Operator

Your next question comes from the line of Quintin Lai with Robert W. Baird. Please proceed.

Quintin Lai – Robert W. Baird

Hi, good afternoon, and congratulations from us as well.

Greg Lucier

Thank you.

Quintin Lai – Robert W. Baird

With respect to the comments on the NIH and the impact on the back half of the year and then 2010, is that guidance based on kind of instruments starting off in the fourth quarter, which I guess are less of a percentage of your overall business, and then as those projects start to really ramp up that is when we will start to see the impact in 2010?

Greg Lucier

Well, I think that – yes. So what we said again is that we expect that the impact in 2009 will be minimal. It is hard to predict because not much of the money has started to flow yet. We think that most of the impact will be in 2010, and we think that the purchases will probably start with instruments and then move into consumables. What we have seen that there is probably going to be more funds in 2011 than we originally expected as well.

Quintin Lai – Robert W. Baird

Okay, and then the guidance in the back half of the year with respect to H1N1, is that assuming that the instruments that were placed, the reagent consumption starts to come down over the back half or you say you are not expecting another impact, you know, could you talk a little bit about what you saw in Q2? Was it mostly instruments or instruments and consumables?

Mark Stevenson

Hi Quintin, this is Mark. I will take the second part on the H1N1. So the initial amount was very much the public health labs, particularly here in the US gearing up with instruments. What we expect during the second half of the year is more consumable usage on those instrument platforms, both here in the US and also other countries around the world that have started now monitoring.

Quintin Lai – Robert W. Baird

Okay, so that is – so you're still expecting a bit more H1N1 but at a more modest pacing than we saw in Q2?

Mark Stevenson

That is correct. We expect some amount of benefit, but not at the level that we saw in Q2.

Quintin Lai – Robert W. Baird

Okay, and then just kind of as a strategic question follow-up, the fact that you were able to ramp up so quickly and help out the public labs, does it costs you too maybe kind of rethink how fast your progress towards maybe a diagnostic strategy now that you have combined the two companies?

Greg Lucier

Yes, I think that is a very good follow-up and certainly we see this as a model for how we might initially enter certainly some of the diagnostics space. In just the last couple of weeks, we introduced two platforms at the WACR the main cancer meeting, and at that we had both the 7500 DX, and also our new CE instrument, the 3500. And this opportunity for partner organizations like we did with the CDC to partner with us in different content or different assays, allows us now to start to write content onto those platforms as we begin to build out a larger strategy into diagnostics.

Quintin Lai – Robert W. Baird

All right, thanks.

Operator

Your next question comes from the line of Ross Muken with Deutsche Bank. Please proceed.

Ross Muken – Deutsche Bank

Hi thanks and again congratulations. Can you talk about Asia-Pac? It seemed like growth there was really off the charts. You know, I want to see what some of the core elements of that were if we look at your results, it seems like you also indicated some of the forensics business were strong ex-US. I want to see if there is any sort of correlation there. And then in general, why you think that that growth was more indicative of some of the strength in the end markets or was it some synergy capture as well there from a revenue perspective. What is the sort of breakdown of the performance there?

Bernd Brust

Hi Ross, this is Bernd. You know I think it is a little bit of all of the above that you just mentioned. Certainly the end markets continue to see considerable strength in both the research as well as the applied markets. Synergies, the two teams are certainly starting to work closer together to drive portfolio synergies in that region, but if I look at Asia Pacific particularly the greater China market, the organic growth in all segments continues to be incredibly healthy.

Ross Muken – Deutsche Bank

Great. You know, Greg when you were going through some of your commentary, you threw out a word I hadn’t heard you use much before and that was biofuels, it is sort of another part of the space from molecular biology perspective that hasn't been talked about a lot. Is there sort of a distinct strategy there, it is not a space that you sell much into either with the some of the venture backed companies or some of the larger players who were dealing there and some of the alternative energies.

Greg Lucier

You know, Ross, we are selling into the biofuels space now. As you say, primarily into these start-ups that have been funded as well as some work around the energy labs. As we look forward with the stimulus funding, considerable amount of money will go to the Department of Energy, specifically earmarked for biofuels research, and as we look at what needs to be done in that space, it is very reminiscent of real back into the core, core beginnings of the Invitrogen and in ABI. And so we have lot of the toolsets necessary to really create synthetic biology toolkits that we think is what is going to be needed here in biofuels, and our goal over the next 12 months is to finish off the other 30% and really create a kind of end-to-end piece of tools if you will for biofuels researchers around the world.

Ross Muken – Deutsche Bank

Great, thanks Greg and one – a couple of quick cleanup things for David, just again what was the FX impact on the bottom line for the quarter, and how should we think about sort of the hedging going forward, is it sort of what we have seen throughout the year, has there been any sort of change to the strategy, is the sort of relative volatility we had seen more in the first half here more indicative of what we are likely to see going forward. And just also one cleanup on the royalty, you talked about with PCR for Q3, can you just give us again sort of what the full-year impact is that you have spoken to on that number relative to the 12 to 15 for Q3?

David Hoffmeister

Yes, okay, so one at a time. The currency impact in the second quarter was – on the bottom line was $0.14 EPS. The question in terms of, what do we expect in the second half in terms of volatility, yes, we're assuming that it is going to be equally volatile in the second half of the year. And then your final question on the revenue around the royalty impact, you know full year, we said it could drop $30 million and it would be back-end loaded with the impact particularly in Q3 of $12 million of $15 million drop in royalty income.

Ross Muken – Deutsche Bank

Okay, just – sorry to point on this on the currency, that just seems like in terms of margin points are a little higher on the EPS line than I would have thought for the quarter. How does that compare to sort of what we saw in Q1?

David Hoffmeister

It is pretty comparable but higher and it is simply due to the mix of currencies.

Ross Muken – Deutsche Bank

Okay.

David Hoffmeister

And again you know we tried to explain this before, you know, our big currencies are sterling, Canadian dollar, yen and euro, and it can swing $0.03 to $0.05 just based on that mix.

Ross Muken – Deutsche Bank

Okay great. Thank you, David.

Operator

Your next question comes from line of Derik De Bruin with UBS. Please proceed.

Derik De Bruin – UBS

Hi, good afternoon.

Greg Lucier

Good afternoon.

Derik De Bruin – UBS

So, you had adjusted operating margin of 27.1% during the quarter. You know, I know you are not going to give an outlook for 2010 on this, but you basically beat my estimate by over 250 basis points, and I guess you know how sustainable is that number going forward as we kind of look at them? And the estimated royalties are going to come in that. I am just curious as to where given all the synergies that are going to be coming in, where that operating margin is going to cap?

Greg Lucier

I think it is reasonable to have it somewhere in the high 20s, but again we expect the operating margin to come down in the second half of the year, you know as we tried to lay out on the call.

Derik De Bruin – UBS

Right, obviously, but the royalties will have an impact on – I'm just trying to say if it is like the high 20s number is something you think for the overall business it is certainly a target longer-term going forward that is where I'm trying to get to?

Greg Lucier

Yes, I think it is a longer-term target, yes.

Derik De Bruin – UBS

Okay that is great, and I guess how many, just going back to the NIH question, I guess how many grants are you aware of that specifically specified SOLiD as part of the grant process?

Amanda Clardy

Mark, why don’t you take that one?

Mark Stevenson

Oh, yes, it is Mark here. We don't have a specific number. We have a huge increase in the number of grant applications that we have been supporting and we are aware of. At this stage, a lot of people will put in for grants to get funded actually by project, and then both either specified or non-specified, we expect to then compete on SOLiD and other projects. A lot will be disease focused projects, where we will also compete with our consumables going through this as the labs get more funding.

Greg Lucier

We're pretty optimistic, you know, this market is really just getting going for us to get position ourselves as the money starts to flow at the end of this year, and beginning of next.

Derik De Bruin – UBS

I'm just wondering if like, are there grants out there that have 10, 15, 20 SOLiD specified in their grant applications?

Mark Stevenson

We don't have details on all of that. What we know is there are multiple units being put in similar to the customer we announced today that had 2 originally and had scaled up to 11 instruments. We will expect (inaudible) as same as customers get money, they will add SOLiD to scale up with more additional units to increase their throughput.

Derik De Bruin – UBS

Okay, and just one final question, I mean during the quarter there were some issues with manufacturing at Genzyme with respect to some contamination, and I guess – were you involved, were you potentially exposed to that or I guess does that have any impact on your business, and I guess just in terms of a broader perspective, it is like, my understanding is that certainly just given the nature of cell culture that those that have a contamination that is probably more common than people would imagine. I guess, can you talk a little bit just about the cell culture space, and specifically what you have seen in that, and if there anything to say about that particular issue at Genzyme?

Greg Lucier

Maybe I can grab that one Derik. As you know we never comment on who our customers are for cell culture by our production business. So I really can't comment to Genzyme specifically. But more broadly, these types of issues that Genzyme is facing are not in the ordinary, but not extraordinary either and it is just part of the process of biological manufacturing.

The one highlight I would say that as situations like that took place at Genzyme happen, we created a whole new business around using PCR technology for rapid viral detection and it is enjoying great growth. So it is a nice compliment to our bioproduction space and further enhances the overall solution we can give to companies like Genzyme and others in that whole biological manufacturing area.

Derik De Bruin – UBS

Great, thanks a lot.

Operator

Your next question comes from the line of Doug Schenkel with Cowen. Please proceed.

Doug Schenkel – Cowen

Good afternoon and thanks for taking my questions. Let me start with a couple of synergy-related items, does the acceleration in year one synergies that you have talked about in your prepared remarks at all impact your longer-term synergy targets, specifically I believe you year three target outlined a couple of quarters ago was for $150 million in cost synergies and $60 million in revenue synergies. And I guess the second question on synergies is in terms of your 2009 increase, is any of that driven by greater than expected sales synergies or market share capture?

Greg Lucier

Well, as I said in my comments, the overall synergies were now increasing in today's release is just for what we have achieved in 2009. And it is primarily a pull forward from 2010. The overall target for the integration remains the same for the project as we originally specified. In terms of your last part, in terms of where it is coming from, as I mentioned in an earlier question, it really has come from a whole variety of tasks that we had lined up for this integration, including greater commercial synergies in terms of pull through of products from the new channels or the various channels that we have to the customer.

Doug Schenkel – Cowen

Okay, and then let me turn to H1N1, was there any H1N1 contributions factored into your earlier guidance, and then are there specific instruments, which have exceeded your expectations in terms of the demand related to H1N1?

Greg Lucier

Yes, we urgently had minimal instruments in that guidance with certainly exceeded our expectations. Really the instruments that has been most adopted has been the 7500 Fast DX, which was the one that was cleared by the FDA for use with the CDC test. This is an instrument that is being developed now for the diagnostic use under (inaudible) and so it has been that instrument and we accelerated manufacturing in Singapore in order to bring forth the necessary shipments in a timely manner.

Doug Schenkel – Cowen

Okay, and then last area I wanted to touch on in terms of sequencing. In Q1 I believe you indicated that you – revenue recorded a decent number of SOLiDs in the quarter, maybe more than you had in the previous few quarters and that CE for research held up better than expected, especially at the higher end in part via the use of CE to validate next gen sequencing works. Can you talk about how these dynamics played out in the second quarter and then one last follow-up on that, could you also just talk about timelines for next gen sequencing pipelines relative to what you have outlined in the past, specifically SOLiD 4 and your initiatives in single molecule.

Greg Lucier

Yes, I will take the three parts of that questions. Firstly, the dynamics are pretty much the same. We continue to see you know, over time see research will decline, but in that segment we had diagnostic customers that are buying that platforms and using them in more validated settings. We also have recourse in that genetic systems. The update in the applied markets, which is forensic labs that we continue to talk about particularly in Asia this last quarter adopted more systems.

In terms of the roadmap for SOLiD, we have a really robust roadmap and you know, as you saw as we published the first example of a whole genome with 17 X coverage with 50 gigabytes run with beta. We are really making tremendous progress on that. We will update the system later on during the summer to a version 3.5 for our customers that will be a minor update of software and consumables but really give them tremendous more performance on this roadmap, and then early next year we will upgrade our system and introduce version 4, which will really then take us ahead in terms of where we are, in terms of performance in the system, and really accentuate this end-to-end applications workflow for these throughput in applications.

So we are really making tremendous progress on that. We also continue to invest in next-generation systems for single molecule. We really see that as a complimentary application. Will there room for our short rate systems and then also be in the market with a longer rate systems in a competitive timeframe as we come out with that product.

Doug Schenkel – Cowen

Okay, thanks a lot for taking the questions.

Operator

Your next question comes from the line of Isaac Ro with Leerink Swann. Please proceed.

Isaac Ro – Leerink Swann

Hi, thanks for taking the question. Excuse me. First I was just looking at the sort of long-term R&D for new product development. Could you maybe give us a sense of how those efforts are being divided up between maybe the three business units these days; Mark, can talk a little bit about the generic systems and the next gen efforts. On sequencing I'm wondering, you know, how do you kind of gauge that verses your investments in the consumables like stem cells, maybe the (inaudible).

Mark Stevenson

You know, I can see we are very active in looking at the portfolio. I mean, our first priority and our largest investment is in sequencing and we certainly talk about investments there. We absolutely have a strong roadmap and Greg talked about some of the many new products we have introduced in real-time PCR. Within that molecular biology franchise we are really investing around our core qPCR, the reagents, the ambient brands, some of the transfection device that you saw. So we are really building out those everyday needs for the lab in that molecular biology section, and that takes nearly a third of our proportion of our investment that goes in R&D.

And the third area is really investing around the cell, particularly as you say around stem cells. It continues to be active growth. You saw us launch a new website for that. There is new products and sell lines we have been introducing as well as investments around the cellular analysis space. We think in the same way we've been able to really automate and simplify the workflow around molecular biology and sequencing, we can also do around the cell analysis space. We are investing heavily against that and we see good opportunity to grow as ever more people go to single cell work or they go to look for analyzing within the cellular context.

Isaac Ro – Leerink Swann

Okay, great and then David, a question on the numbers here. I think you said $50 million of this year’s CapEx budget going into integration related activities, is it fair to say the majority of that $50 million would roll off in 2010?

David Hoffmeister

No.

Amanda Clardy

A portion will.

David Hoffmeister

A portion will, but I think that and we haven’t put together our detailed budget yet for 2010, but I think that our capital expenditures will still have a significant portion of integrated related investment – integration related investment in 2010.

Isaac Ro – Leerink Swann

Okay, great and then just you know, it's a follow-up on Derik's questions regarding long-term margin potential of the company. I'm just wondering, you know, can you maybe highlight a couple of areas where you see upside today versus you know, when the merger closed last year and then you know, how is that list sort of evolved if a couple of things moved here or you are seeing new opportunities?

Greg Lucier

You bet. In terms of where the upside is happening, first one I would tell you is we have been putting together a dynamite manufacturing strategy where we are taking the best practices from some of the key facilities that AB and Invitrogen had, bringing it together and then applying it across the entire operational network. That is giving us good improvement. As I mentioned before, we've also seen really accelerated improvement with price realization across the AB consumables portfolio and now moving into the AB instrument portfolio, and I think we had outlined that was going to be a key area of integration when we put the project together and it is certainly meeting or exceeding our expectations.

Isaac Ro – Leerink Swann

Great, thank you very much.

Operator

Your next question comes from the line of Jon Wood with Bank of America Merrill Lynch. Please proceed.

Jon Wood – Bank of America/Merrill Lynch

Hi, thank you. So David on the cash flow outlook it looks like you've done about 250 or so in operating cash the first half and then your net income – your guidance was about 250 and net income in the back half of the year. So it is basically about 150 million of I guess balance sheet changes and I noticed that DSO or the receivables ticked up. So is that the primary source of cash from the balance sheet to get you to the 650?

Amanda Clardy

Yes, so he is referring to the difference between the fixed fees [ph] without the integration related.

David Hoffmeister

Okay, yes, yes. So it is you know, we in this quarter we did see an increase in our accounts receivable. We do expect that we will be able to increase, we'll bring that down and we also expect some improvement in inventory. You know, offsetting that in terms of free cash flows we expect capital expenditures would be higher in the second half of the year.

Jon Wood – Bank of America/Merrill Lynch

Okay, and then you referenced in the prepared comments $7 million of debt, you know, I guess accelerated debt amortization. That's not in the adjusted numbers or at the guidance.

David Hoffmeister

Yes, it is.

Jon Wood – Bank of America/Merrill Lynch

It is, okay. Okay, and then also on the synergy you mentioned you exited 2Q on an $80 million run rate. So is it reasonable to assume there was about $20 million of synergies in the second quarter?

David Hoffmeister

No, what we meant by that $80 million is that we've taken actions through the second quarter that will generate $80 million in savings for the full year, and what we expect to do it will take further actions in the second half of the year that will generate another $15 million in synergies so that our total realized synergies for the year will be $95 million.

Jon Wood – Bank of America/Merrill Lynch

Understood. Okay, thank you.

Operator

Your next question comes from the line of Marshall Urist with Morgan Stanley. Please proceed.

Marshall Urist – Morgan Stanley

Yes. Hi guys. So a couple of questions on the geographic trends, I mean the US or the Americas and Europe both you know moved around sequentially, pretty meaningfully. Could you give us some idea of you know, what – were there particular end-markets that improved or sort of got worse and some of the one-time stuff in the quarter that might have caused those changes?

Bernd Brust

Hi, this is Bernd, you know if you look at the Americas and Europe, I mean fairly stable in what we are seeing there. The US is seeing more and more strength in academic. The research markets are healthy there at this point. We continue to see some challenges in the industrial markets, and farm and biotech, although I think they have started to stabilize a little bit as well and we are seeing good strength in Latin America if we look at our Americas region.

In Europe, it's really the core countries in UK, Germany, and France that are holding their own fairly well. The UK particularly was very strong, but that region really has been in that level for sometime now and we stay pretty consistent in the market segments around the academic world over the last three or four years now.

Marshall Urist – Morgan Stanley

Okay, great. Thanks and then I appreciate the detail you guys gave on CE, but could you help us understand a little bit better. Is this through sort of installed base growth on the applied market side or are we are seeing kind of an upgrade cycle that people going to you know, to higher end or higher throughput instruments on the CE side and how that impacts your visibility in that business?

Mark Stevenson

You know, this is Mark here. It's really true installed base growth. So, you know, what we see for example in China is that you know, the forensic labs, while the primary labs may have been equipped. Now we are equipping the secondary and tertiary labs as they build out their forensic strategy. As you see in diagnostic labs, we see some content that goes into diagnostic companies that runs very well where you really want to sequence it on the CE platform. It's robust, it's proven. It's now, you know, we will have a CE IDT [ph] mark on it. So it is very much a validated solution. So this is new installed base that will also take new consumables. You know, on the downside what we see is the deinstallation goes on within the genome centers as they switch to next-generation sequencing, and that trend has been the offsetting trend we have seen in this business.

Marshall Urist – Morgan Stanley

Okay, great. And then last question, just you guys alluded to some of you know, increased spending on R&D and SG&A into the end of the quarter that will flow through next quarter. Can you help to just quantify that a little bit better in terms of you know, the magnitude there that we should be looking for.

Amanda Clardy

This is Amanda. So I'll give in terms of the numbers now, let Greg talk more about kind of what we are – where we are investing and it is not sizable. Otherwise, we are set up that up, and we are trying to get it across, and our expenses will go up sequentially, but clearly there is only so much you could start in one month. So it is not going to be significant but they will go up sequentially, and maybe Greg you can talk a little bit about more where we are investing for growth in the future.

Greg Lucier

You bet. As I've mentioned in the prepared comments, we are taking advantage of the strength we are having in the business to further build out the whole biofuels toolset kit. We have a number of great projects that I think Mark has talked about in sequencing that we are further investing into, be it a SOLiD roadmap or single molecule detection, and then importantly we are also investing into the commercial front end of the business. We have a number of very positive changes going on. For example, continuing to build up and build out our website not only in Europe and the Americas, but now moving into Asia. So we are just taking advantage of the strength of the business to continue to try to grow the business even faster in subsequent quarters.

Marshall Urist – Morgan Stanley

Okay, great. Thanks guys.

Operator

Your next question comes from the line of Jon Groberg with Macquarie. Please proceed.

Jon Groberg – Macquarie

Yes, thanks for taking the call. I just had one question, I don't know if who wants to answer this, Greg, or if you want to have someone else, but I know this quarter one of the big issues are perhaps, you know, areas of caution was you are going to start moving towards on these more customer facing integration initiatives and it looks like you pulled that off fairly well, but maybe you can just talk about kind of you know, how that went, if there are some issues that either arise or that you are dealing with or just kind of maybe how that process is going. So I think that was, you know, a bit of a concern for investors still.

Bernd Brust

Hi Jon, it is Bernd. Maybe a couple of things, you know, the biggest customer facing change probably that has happened has been some of our customer service consolidations in both the US and Europe that has moved very smoothly and it is pretty much done at this point without much issue actually. The second one that has happened in the second half or the beginning of July is now in place for the second half of the year.

It's where we’ve made some changes to the portfolio for selling teams and so there is some change in what the teams are carrying as you noted two separate selling teams were not consolidated. So Invitrogen sales force now continues to be focused on selling the biological products, best-in-class reagent offerings, and the applied biosystems team continues to focus on providing the customers within the greater workflow solutions.

The big change that we've made in the second half now is that we have moved around 1400 or 1500 AB skews into the Invitrogen selling teams bags so that we have a much broader channel coverage to our customers for that portfolio. Those teams are now being trained and are actively selling those products in addition to the AB teams. The final change that we made effective July 1 was consolidation of some of our front-end systems. So we are now in a common CRM, and although there is some training involved in that that also has gone very, very smoothly and really so far from what we have seen there has been no issue in any of the changes that we have made that have negatively impacted our customers.

Jon Groberg – Macquarie

So just by getting the timeline right, the customer service that kind of – already we're kind of seeing some of the results in this quarter, maybe they showed up, the other ones are going to be more in the second half. Is there any I know it is going smoothly, so you don't really anticipate any – you don't foresee any potentially hiccups here in terms of the second half?

Greg Lucier

At this point, we don't see any issues with the changes that we have made.

Jon Groberg – Macquarie

Okay, great. And then, David, it looks from – if I just look at your cash flow statements it looks like you probably – this $200 million that you paid you probably replaced with new debt, and I'm just curious what that – if that's right. What the terms of the new debt are in terms of what you are paying?

David Hoffmeister

No, we didn’t. We repaid, we've taken on no new debt. We repaid the debt in the third quarter. So the cash flow statement you'd be looking at doesn't reflect a $200 million paid out.

Jon Groberg – Macquarie

It is just all out of your own cash.

David Hoffmeister

Yes.

Jon Groberg – Macquarie

Okay. Is there anything you can do given that this floor of kind of LIBOR at $300 and given where LIBOR is, is there anything that you can do to you know to potentially lower that payment?

David Hoffmeister

No, other than repay it there isn’t – that is the floor.

Jon Groberg – Macquarie

So, it is not worth trying to get some – potentially the credit markets have eased a little bit in terms of trying to potentially, you know, alter that structure with some new debts.

David Hoffmeister

I mean it's the credit markets. We're constantly taking a look at what we could potentially do to lower the interest cost, but as of yet they haven't moved enough so that it you know makes sense.

Jon Groberg – Macquarie

Okay, and then last questions. We think about you know the H1N1 and the potential comp. Is – how – you know, what's kind of in the – what's your take on how prepared some of these public health centers are if we get another – if next year turns out to be worse than this year as many people potentially suggest that it could be. How prepared are they? Would it be a matter that the instruments are now there and it is just an issue of the reagents or would we need even more instrument if we look at next year?

Greg Lucier

Yes, it's hard to predict at this stage. So what we factored in is you know there is a good installed base out there and that we would expect an ongoing level of monitoring. That's really what we factored in at the moment to our estimates.

Jon Groberg – Macquarie

Okay. Thanks, Amanda.

Amanda Clardy

Louisa, I show that we are at the end of our hour. So unfortunately we will not be able to take anymore questions, however, as you know, you can always follow up with me afterwards if there are still additional callers in the queue. This will now conclude our second-quarter 2009 earnings conference call. This web cast will be available via replay on our website for three weeks, and thank you again for joining us this afternoon.

Operator

Thank you for your participation in today's conference. This now concludes the presentation. You may now disconnect and have a great day.

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