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Thermo Fisher Scientific Inc. (NYSE:TMO)

Q4 2009 Earnings Call Transcript

February 3, 2010 8:30 am ET

Executives

Kenneth Apicerno – VP, IR

Marc Casper – President and CEO

Pete Wilver – SVP and CFO

Analysts

Ross Muken – Deutsche Bank

Quintin Lai – Robert W. Baird

Tycho Peterson – J.P. Morgan

John Wood [ph] – Jefferies & Company

Derek De Bruin – UBS

Marshall Urist – Morgan Stanley

Doug Schenkel – Cowen and Company

Patrick Mooney – Thomas Weisel Partners

Isaac Ro – Leerink Swann

Tony Butler – Barclays Capital

Jon Groberg – Macquarie Research

Operator

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific fourth quarter 2009 earnings conference call. I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin the call.

Kenneth Apicerno

Good morning, and thank you for joining us today. On the call with me is Marc Casper, our President and Chief Executive Officer; and, Pete Wilver, Senior Vice President and Chief Financial Officer.

Please be aware that this call is being webcast live and will be archived on the Investor section of our Web site, thermofisher.com, under the heading Webcast and Presentations until February 26th. A copy of the press release of our fourth quarter 2009 earnings and future expectations is available on our Web site under the heading Financial Results.

But before we begin, let me briefly cover our Safe Harbor. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's Form 10-Q for the quarter ended September 26th, 2009 under the caption Risk Factors, which is on file with the Securities and Exchange Commission, and available in the Investors section of our Web site under the heading SEC Filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change, and therefore you should not rely upon these forward-looking statements as representing our views as of any date subsequent to today.

Also during the call today, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our fourth quarter 2009 earnings and future expectations and also in the Investors section of our Web site under the heading Financial Results.

So with that, I'd like to now turn the call over to Marc.

March Casper

Thanks, Ken. Good morning, every one, and thank you for joining us for our review of our 2009 results and our outlook for 2010. I feel good about our performance in 2009 and how our employees handled the challenges we faced in a difficult economy. While no company was completely spared from the impact, I’m pleased to say that Thermo Fisher Scientific weathered it very well.

We successfully executed on our strategy for navigating through these tough times and achieved the goals we set out to accomplish. As a result of this focused execution and the tremendous efforts of our employees across the world, we achieved our financial goals for the quarter and year coming in at high end of our adjusted EPS guidance for 2009.

Now let me address these actions in greater detail. We took significant costs out of the company. In fact, we took out more than the previously stated $115 million we targeted for the year. During 2009, we initiated the closure of 50 manufacturing sites incremental to our normal run rate. We reduced headcount and we managed discretionary costs extremely tightly. We anticipate that the combination of these actions will benefit us by an additional $25 million in 2010.

We maintained our commitment to innovation. We spent nearly $250 million in R&D in 2009, the same level of investment we made in 2008, and launched a very strong suite of products during the year. I’ll talk more about that later.

We continue to expand in Asia. We built on our leading presence by adding about 225 people in China and India last year. We also enhanced our commercial capabilities there to investments and information technology.

We made strategic acquisitions to complement our capabilities, and we were very disciplined in our approach. We deployed $650 million to acquire seven companies. You probably know of the two largest, Biolab and B.R.A.H.M.S. Biolab gave us leading customer channels in Australia and New Zealand. And B.R.A.H.M.S. added innovative biomarker tests to our growing specialty diagnostic portfolio. The others are small, but promising businesses that straightened our technology positions in gas chromatography, microbiology, and diagnostics, and extended our customer channels in Europe.

We continue to invest in our people. Unlike many companies, we gave our employees merit increases last year, and that will pay significant dividends going forward. Our employees are energized and determined to regain our growth momentum moving into 2010.

And financially, we delivered sequential improvement as the year progressed. And primary end markets began to recover. In the third quarter, we returned to adjusted EP S growth. In the fourth quarter, our EPS growth was even better, and we delivered organic revenue growth as well.

Let me review our results in a little more detail before moving on to our outlook for 2010. For the fourth quarter, revenues were a record $2.8 billion for the quarter, 7% higher than 2008. As I mentioned, I’m pleased to report that we returned to organic growth coming in at 1%. As we said last quarter, consumables are back to growing at historical rates. We also saw growth in services, which reverses the decline we had been seeing in the first three quarters of the year. Sales of instruments and equipment improved sequentially, but have not yet returned to growth.

We continue our trend of sequential margin improvement, although our adjusted operating margin declined 60 basis points year-over-year. This was primarily due to two factors. One, our productivity in cost actions were more than offset by adverse mix; and second, we had the initial impact of lower margins for the businesses we acquired.

We were very pleased on the other hand to achieve 5% growth in adjusted EPS over Q4 of 2008 to $0.91, leading to solid growth in EPS during the second half of the year. Free cash flow was another bright spot. We generated a $461 million in the quarter, $100 million more that Q4 last year. So the full year revenues came in at $10.1 billion, a 4% decrease from 2008. Organically, revenues declined 3%. Adjusted operating margin declined by 80 basis points to 17%. Adjusted EPS came in at $3.05, which was the high end of our guidance range.

Last, we finished the year with record free cash flow generating over $1.4 billion. Just to remind you, we spent $650 million on acquisitions and $450 million on buybacks in 2009. So relative to market conditions, we performed well, and we are in a stronger position than many companies going into 2010.

Let me talk a little bit about what we’re seeing in our primary end markets as we move into a new year. In BioPharma markets, we’re seeing gradual improvement. We continue to gain share with our top 20 accounts, which are mostly BioPharma customers as growth in these groups significantly outpaces the average growth of the company. It’s clear that our strategy, based on the unique value proposition we can offer our customers, is working.

The economic climate has actually been good catalyst for change that should benefit our business model. We’re gaining share because we have a portfolio unlike any other company in our industry. In addition, we continue to innovate with the focus on the advanced technologies and productivity improvements our customers want and need, especially in times like this. Even in the face of tight budgets, this unique combination continues to create significant opportunities for us.

In government and academic markets, global stimulus programs are the biggest story. We've said all along that we expect to benefit between $100 million and $200 million here. We recorded revenues of approximately $50 million tied to global stimulus programs in 2009, primarily from Japan and China for forensic and environmental market applications. We anticipate receiving another $50 million to $150 million in revenues from global stimulus purchases this year as the fall money starts to increase here in the United States.

In healthcare, sales of our consumable products to US hospitals continue to grow. In particular, we saw a strong demand for flu tests provided by our microbiology business and through our healthcare channel.

Finally, industrial markets, last quarter I described them as bouncing along the bottom, but now they seem to have stabilized. We do believe we’ve seen the worst and we should even start to see some growth here. As you know, the nature of our instrumentation sales to industrial markets is that they will likely lag general industrial economic growth typically by two or three quarters. So that is the way to think about the pace of recovery here. We're seeing some signs of a pickup in the macro industrial end market. If that is sustained, we should see improved demand towards the end of 2010. At a minimum, the year-over-year comparisons will certainly get easier.

So as we look ahead, we are excited about the many prospects we have as the world leader in serving science. We had our annual leadership meeting about a month ago with our top 230 managers in the company. This was my first leadership meeting in the role of CEO. And it was inspiring to see how energized the team is about the opportunities we have for 2010 and beyond.

We’re incredibly focused on getting back to our long term track record of growth. To achieve our goals for 2010, we focused on four priorities. One, investing to drive sustainable top line growth; second, leveraging our unique value proposition; third, expanding our operating margins; and fourth, deploying our capital to create shareholder value.

Let me briefly touch on each one, first, investing to drive sustainable top line growth. We backtracked in 2009 because of the economy, and we plan to get back on track in 2010. We have many opportunities to grow. We serve attractive end markets. Life sciences and healthcare, which I touched on earlier, offer excellent prospects for us. Let me remind you this represents over two-thirds of our business. Environmental markets, especially air quality monitoring, will continue to offer growth as well. The opportunity right now is in developing markets like China and India. But we are optimistic that we’ll see growth again in the US given the encouraging regulatory enforcement outlook and the fact that climate change may be back on the government agenda.

We are committed to innovation. We have some excellent examples in 2009. You heard me talk about our new Thermo Scientific LTQ Velos mass spectrometry platform for example. Velos products have had the fastest uptake of any new mass spec product we've ever launched. You’ll see an impressive line of new products from us, both the PITTCON and analytical over the next couple of months.

Given our track record of successful new product introductions, we are going to increase our investment in R&D this year by approximately $30 million. This is in addition to the natural increase in R&D that occurs when we acquire new businesses. We believe that exciting growth prospects – we believe that the exciting growth prospects for our leading technology platforms, such as new applications from ASPAC, and new capabilities in specialty diagnostics and biosciences, easily justify these investments.

We will also accelerate our expansion in Asia. We generated about $1 billion of revenue in Asia today, and have about 3,000 employees there. But there's still plenty of room to grow, especially in China and India. We are in the process of building our second demo lab in China. It will be located in Beijing close to the large universities and government research labs. We’re also setting up a laboratory supply chain in Singapore to support the region’s growing needs.

Another priority is to leverage or unique value proposition for our customers. And our focus here is to continue to grow at our top 20 accounts at a pace faster than the company average. We will partner with our customers to drive behavioral change, helping them to standardize the way they equip their laboratories and research facilities.

Through our Lean Lab program, we can help our customers improve productivity, and that is really gaining traction in this economy. We will also leverage our applications expertise across the company to help customers create more efficient workflows for testing the safety of food or performing stem cell research for example.

Expanding operating margins is also a top priority. We will continue to manage our cost base tightly. Spending money only the most important initiatives, whether it's R&D or IT systems that yield the highest return on investment. We’ll continue to optimize our infrastructure reducing our footprint while expanding our presence in low cost regions.

And of course PPI, our Practical Process Improvement program, is well-engraved in the company and the way we do business here. Our track record on operating margins prior to 2009 was very consistent. And we plan to return to expanding operating margins this year.

Last, but an equally important priority, is to effectively deploy our capital, to strengthen our portfolio, and extend our leadership position. We will continue to utilize our strong balance sheet to create long term shareholder value. We’re off to a good start in this regard. In mid-January, we signed an agreement to acquire Ahura Scientific, a leading innovator in handheld spectroscopy instruments. With this portfolio of handheld instruments for chemical analysis and for the health and public safety applications, Ahura Scientific is an excellent complement to our breadth of handheld and benchtop elemental analysis process. This acquisition will accelerate our ability to offer customers an unmatched set of tools for laboratory quality analysis in the field.

And on Monday of this week, we announced our agreement to acquire Finnzymes, which strengthens our offerings for molecular biology applications. Finnzymes is a provider of high performance PCR solutions. The acquisition augments our portfolio with an integrated suite of bioreagents, consumables, and instruments for improved PCR workflows in genomic research, genetic testing, forensics, and flu testing. We expect both of these acquisitions to close in Q1.

So now, let me turn to a high level summary of our outlook for 2010 before I hand the call to Pete to give you more details. Based on what we’re seeing in our primary end market today and our key assumptions for the year, which Pete will outline, we expect to grow revenues by 5% to 7% in 2010 to a range of $10.60 billion to $10.80 billion. That should translate to organic growth of between 2% to 4%. We expect to achieve adjusted EPS growth of 8% to 13% to a range of $3.30 to $3.45. So even though the economy at this point of the year is still far from robust, our outlook is positive and we’re pleased to get back on the path of growth.

Now I’d like to hand the call over to our CFO, Pete Wilver. Pete?

Pete Wilver

Thanks, Marc. Good morning, everyone. As Marc said, we’re pleased to report solid improvement in our earnings per share for the fourth quarter with 5% growth as of $0.91, compared to $0.87 last year. Full year adjusted EPS was $3.05, down 3%, versus $3.13 last year, and at the high end of our previous guidance of $2.95 to $3.05. GAAP earnings per share in Q4 was $0.65, down from $0.67 in the prior year’s quarter.

Moving on to the details of our financial results, reported revenues in Q4 increased 7% year-over-year to $2.84 billion. Organic revenue growth was 1% in the quarter, excluding foreign currency translation of positive 3% and another 3% from acquisitions. We had one more day in the quarter compared to last year as a result of our fiscal calendar, which primarily benefits our consumables revenue.

Our Q4 results continue our trend of good sequential improvement and organic revenue growth. Compared to Q3, we maintained mid single digit growth in consumables, returned to growth and services, and improved to a mid single digit decline in instruments and equipment from a high single digit decline in Q3.

Full year revenues were $10.11 billion, a 4% decline from our 2008 revenues of $10.50 billion. Full year organic revenues declined 3%, excluding foreign currency translation of negative 2% and positive 1% from acquisitions. For the full year, we had one less day in 2009 as a result of the leap year in 2008. Bookings exceeded revenues in the quarter by 3% and by 1% for the full year.

By segment, analytical technologies Q4 revenue increased 5% on a reported basis and declined 2% organically. We saw improvement in demand for our instruments, specifically those serving industrial markets, and continued to see good sequential improvement in the quarter across all our businesses. Our specialty diagnostics and biosciences businesses had solid growth in the mid to high single digits. And new products continued to be a growth driver, specifically in our scientific instrument product line. For the full year, analytical technologies declined 7% on a reported basis and 6% organically.

In laboratory products and services segment, Q4 revenues increased 9% on a reported basis and 5% organically. During the quarter, we a saw solid growth in our laboratory consumables, BioPharma services, and catalogue businesses. For the full year, revenues in laboratory products and services were essentially flat, both on a reported basis and organically.

Looking at organic growth by geography, we saw North America return to positive growth in a low single digit this quarter. Asia Pacific continued to see strong growth in the high single digits driven by both China and India. The rest of the world rebounded to double digit growth driven by strong demand in the Middle East. Europe declined mid-single digits against the tougher comparison of mid single digit growth in the prior year and continued softness in capital equipment. For the full year, North America declined slightly more than the company average, and Europe declined in the mid single digits. Asia Pac and the rest of the world have positive growth in the low single digits.

Turning to adjusted operating income, Q4 increased 4% year-over-year to $510 million. Adjusted operating margin was 18%, down 60 basis points from our record 18.6% in the year ago quarter. Q4 adjusted operating margin again showed considerable improvement sequentially, up 70 basis from Q3 – 70 basis points from Q3, driven by continued productivity and cost reduction actions.

On a year-over-year basis, we also generated strong productivity. However, that was more than offset by adverse segment and product mix, realized price increases less than inflation, excess in obsolete inventory reserves related to site consolidations, and investment to support commercial expansion. Also our recent acquisitions lowered our adjusted operating margin in the quarter by about 15 basis points.

For the full year, adjusted operating margin contracted by 80 basis points to 17% as compared to 17.8% in the prior year. By segment, analytical technologies Q4 adjusted operating income increased by 2% year-over-year. And adjusted operating margin was 21.8%, down 50 basis points versus 22.3% last year. For the full year, analytical technologies adjusted operating margin decreased 120 basis points to 20.2%.

Laboratory products and services Q4 adjusted operating income increased by 5%, and adjusted operating margin was 14.1%, down 60 basis points versus 14.7% in the 2008 quarter. For the full year, laboratory products and services adjusted operating margin contracted 50 basis points to 13.7%.

Moving to the details of the P&L, total company adjusted gross margin was 41.5% in Q4, flat with the year ago quarter, and up 30 basis points from the previous quarter as a result of volume leverage and the impact of our sourcing and productivity initiatives. For the full year, adjusted gross margin was 41.1%, down 20 basis points from 41.3% in the prior year.

Adjusted SG&A was 21.1% of revenue in Q4, up 50 basis points from 20.6% in the year ago quarter driven by investments to support commercial expansion and our recent acquisitions. For the full year, adjusted SG&A percent of revenue increased 60 basis points to 21.7%.

R&D expense was 2.4% of revenue in Q4, up 0.1% from last year. For the full year, R&D expense was $246 million or 2.4%, essentially flat with the prior year as we maintained our spending level for technology development to continue building our new product pipeline for future growth.

Finally, as Marc mentioned, we executed well against the cost reduction plan than we laid out at our May analyst meeting. Exceeding our $115 million cost reduction goal for 2009. We anticipated these actions will benefit us by an additional $25 million year-over-year in 2010 consistent with our original plan.

Moving below the line, our Q4 adjusted net interest expense increased $3 million year-over-year to $26 million, reflecting a much less favorable interest income environment. Other income was a loss of $2 million, $1 million more than the prior year, primarily as a result of currency transaction losses on foreign entity cash.

Our adjusted tax rate for the year for the full year was 20%, equal to our full year estimate at the end of Q3, and down 70 basis points from Q4 2008, primarily as a result of the tax planning that we implemented late in 2008 and all of 2009, along with lower overall pretax income, particularly in the higher tax jurisdictions.

Average diluted shares were $422 million for the quarter, down $5 million from last year, primarily as a result of the $500 million share buyback program we completed in Q2 of 2009. For the full year, average diluted shares were $423 million, down $12 million from $435 million in 2008.

In terms of the balance sheet, our cash flow performance was exceptionally strong in Q4. Full year free cash flow was $1.47 billion or 114% of adjusted net income after deducting net capital expenditures of $194 million. This was a record year for us and we exceeded our 2008 free cash flow by almost $300 million, primarily as a result of working capital improvement and lower net capital expenditures.

We ended the year with $1.57 billion in cash and investments, down $185 million from Q3, primarily as a result of acquisitions and a net impact of the debt refinancing we completed in Q4, partially offset by our strong free cash flow. Our total debt was $2.18 billion, up $159 million from Q3, primarily as a result of our debt refinancing.

Moving on to working capital, we had excellent performance in the quarter. Accounts receivable days outstanding were 45 days, down 8 days from Q3 and 5 days from the prior year. Inventory days of supply were 61 days, down 10 days from Q3 and 7 days from the prior year. Our working capital benefited in the quarter by a couple of days as a result of our fiscal calendar and foreign exchange movements late in the quarter. But we also made considerable, tangible progress. These improvements are mostly sustainable, but they also set a high bar for our cash flow metrics in 2010.

Moving on to our future guidance, we’re initiating a 2010 revenue guidance range of $10.60 billion to $10.80 billion, which represents 5% to 7% growth, compared to our 2009 reported revenues of $10.11 billion. This guidance includes a little more than 1.5% growth from past acquisitions and divestitures and assumes no future acquisitions and forward divestitures. It also assumes present foreign currency exchange rates, which would have a favorable impact of a little less than 1.5% on our revenue growth. Consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates.

On an organic basis, our guidance range represents growth 2% to 4%. At the midpoint, we expect both segments to have positive organic growth with slightly higher growth than the laboratory products and services segment.

In terms of adjusted earnings per share, we’re initiating a 2010 guidance range of $3.30 to $3.45, which represents 8% to 13% growth over the 2009 adjusted EPS of $3.05.

To give you a little more detail on our earnings guidance, following are some of the key assumptions included in our guidance. First, adjusted operating margin expansion of 40 basis points to 80 basis points, compared to 2009. Positive contributors to our margin expansion are pull through on organic revenue growth and marginal rates; the full year benefit of our 2009 structural cost action and the completion of facility closures initiated in 2009; practical process improvement and lean and low cost region manufacturing; global sourcing net of direct material inflation, including low cost region sourcing and pricing, although we expected this amount to be lower than in past years as a result of a tougher pricing environment, primarily on capital equipment; headwinds that will unfavorably impact our margin expansion; our salary increases and other inflation; one-time 2009 cost actions, such as furloughs and short term discretionary cost controls, a portion of which will reverse in 2010; slightly higher stock compensation expense; and, increased investments in a few key strategic areas, in R&D to accelerate long term growth, primarily in our mass spectrometry, specialty diagnostics, and biosciences products in selling and marketing, primarily in emerging markets, but also to optimize our European commercial infrastructure, and in information technology, primarily related to our Thermo Scientific Web site and ERP implementation, so viewing these investments as deploying our capital and expect to earn a significant return from them, primarily beyond 2010.

Moving below the line, we’re expecting the current weak interest rate environment to continue. But our Q4 2009 refinancing and higher average cash balance in 2010 will result in about $30 million of improvement in our net interest expense year-over-year. Our guidance is based on an adjusted income tax rate of 21.5%, up from 20% in 2009, primarily as a result of higher income marginal rates.

Full year average diluted shares are estimated to be in the range of $420 million to $425 million, essentially flat with 2009. Consistent with past practice, our adjusted EPS guidance does not include any other significant assumptions with regard to future acquisitions or divestitures, share buybacks, or other external uses of our capital. We expect free cash flow to be in the range of $1.3 billion to $1.4 billion after deducting net capital expenditures of $275 million to $300 million.

Finally, some additional items that will affect our revenue growth. We previously announced that (inaudible) Biosite will terminate our supply agreement with them effective June 30 of 2010. We estimate that this will lower our 2010 revenue by approximately $130 million, offset by about $40 million of revenue from an alternative supplier, for a net reduction of $90 million or about 0.9%. The H1N1 Flu had a positive impact of $50 million on our revenue in 2009, resuming a normal flu season in 2010, which would lower revenues by about $30 million year-over-year or 0.3%. Global stimulus programs, as Marc mentioned, added about $50 million to our revenue in 2009. We’re expecting $150 million of global stimulus revenues in 2010, which would contribute about 0% to 1% growth year-over-year.

Our Q1 2010 fiscal calendar has four more days than Q1 2009, and our Q4 2010 calendar has four less days than Q4 2009. This shift will have an impact on our year-over-year revenue comparisons in those two quarters, primarily in consumables. And lastly, the anniversary date of our Biolab acquisition is April 30th, and the B.R.A.H.M.S. acquisition was completed on October 1st. Neither acquisition will factor into our organic growth until their respective anniversary dates.

So in summary, we’re excited about our growth prospects for 2010 and beyond. And we believe we’ll continue to strike the right balance between prudent cost management and growth investments to maximize long term shareholder value.

With that, I’ll turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) In order to allow everyone in the queue an opportunity to address the Thermo Fisher Scientific management team, I would like to ask that you limit your time on the call to one or two questions. If you have additional questions, please return to the queue and pose your question in turn.

Our first question comes from Ross Muken of Deutsche Bank. Please proceed.

Ross Muken – Deutsche Bank

Hi. Good morning, gentlemen.

Marc Casper

Good morning.

Ross Muken – Deutsche Bank

So it seems like the business is seeing some pretty substantial improvement in some of the end markets and it feels as if you guys sound pretty conservatively optimistic here on the trends as we had into 2010. So if we’re to look at what we’re seeing in the end market versus where the guidance is, where do you think the biggest leverage points are in terms of if the economy were to continue to improve at the rate we’re seeing, with obviously, GDP growth coming in pretty strong and hopefully strong for the first quarter? Where do you think the key leverage points are to drive us to the upper end of the guidance and potentially beyond as we head into 2011, both from an end market perspective as well as some of the investments that you’re making in the business?

Marc Casper

So, Ross, in terms of the positive factors that could lead to the higher end of the guidance, clearly stimulus coming in stronger than we had forecast would be one area. As we looked at stimulus, we feel good about the range that we had given back in April of last year. Japan and China have been particularly strong. In the US, there’s clearly activity going on, but the money’s actually falling relatively slowly. So that could be an upside towards the higher end. I would also then say on the industrial side, depending on how GDP growth picks up, that would also be a driver.

On an encouraging front, we are seeing our services business in industrial customers starting to improve, which is a sign that the instruments and equipment are being utilized, and that’s the very first indicator of an improving situation. So I think those are the two big drivers that one would think about getting to the higher end of the growth rate.

Ross Muken – Deutsche Bank

Thanks. And just one additional question, as we think about where the balance sheet’s positioned today, how are we thinking about – in an improved environment leverage levels and optimum capital management in terms of what you need to drive the type of returns in this business that you’d like to deliver to shareholders. And to that, you talked about improved M&A environment. You guys have executed on that more recently. What should we expect in 2010 in terms of that and to be the focus?

Marc Casper

Ross, if you look back historically, and I think that also is the way we think about it going forward as well, which is we’re very focused on using the company’s strong cash flow generation and strong balance sheet to create shareholder value.

As I said in the past, we had an interesting M&A environment over the last – just a year or so which is – there was very little activity in the first half of 2009 because nobody wanted to sell their company, if you will, off of the low valuations of 2008. You’re starting to see a modest pickup in activity, not dramatic, but we did with B.R.A.H.M.S. acquisition last year. We’ve done two private deals in January and February that our companies that we’re probably thinking about selling, but really had to wait until there was a window. So you’ll see some activity in our industry, I think, during the course of this year. And for those acquisitions that really meet our criteria of dramatically strengthening our portfolio and generating a real return for our shareholders, you’ll see us to be active from that perspective.

In terms of leverage ratios and those things, obviously we focus on making sure that we’re creating value and we continue to look at our balance sheet to make sure we’re deploying it wisely.

Ross Muken – Deutsche Bank

Thank you.

Operator

Our next question comes from Quintin Lai of Robert W. Baird. Please proceed.

Quintin Lai – Robert W. Baird

Hi. Good morning, and congratulations on the nice quarter.

Marc Casper

Thanks, Quintin. Good morning.

Quintin Lai – Robert W. Baird

Again, just following up a little bit on the industrial pick-up. Marc, are there any other initiatives that are out there that may be not in your guidance, but things like alternative energy or nuclear power potential that could impact Thermo?

Marc Casper

I would say that longer term, there are a couple of things on the regulatory front and the government investment front that are really good positive catalysts. But I’m not really believing that that’s going to dramatically affect 2010.

Nuclear’s quite interesting for us, but as primarily the expansion in China. We picked up a very large order at a new facility in the fourth quarter that shifts over a multi-year timeframe, but it gives us a sense of the power of our (inaudible) business in the nuclear industry. And I think that is encouraging, but that is a multi-year benefit.

Air quality is the other one I mentioned briefly in my comment, which is effectively, as governments get more concerned about global warming, that’s a really positive for our air monitoring business. We are by far the industry leader in emissions monitoring. And whenever you hear about more regulations and things that come out of a smoke stack, typically you can think of Thermo Fisher benefiting from that. So again, those are really good catalysts, but probably not very significant in 2010.

Quintin Lai – Robert W. Baird

Thank you. And then I remember at the start of 2009 we talked about a Q1 de-stocking. So actually, if you look at 1% organic revenue growth that you posted in this last quarter, was that against maybe a potentially tougher comp last year? Do you think there might have been some stocking in the fourth quarter of 2008?

Marc Casper

Pete, why don't you answer that.

Pete Wilver

Okay, Quintin, so on the consumable side, I don’t think there is a shift from Q1 to Q4 last year. I think that was solely a Q1 event. But certainly on the equipment side, we actually hung on to our growth longer than some other companies and had a relatively strong Q4 in terms of total organic growth for the company of 4%. So that was actually a pretty good number given the environment that we’re in last year. But I would say it was probably more on the instrument side than it was on the consumable side.

Quintin Lai – Robert W. Baird

All right. Thank you.

Marc Casper

Thank you.

Operator

Our next question comes from Tycho Peterson of J.P. Morgan. Please proceed.

Tycho Peterson – J.P. Morgan

Hey, good morning. And Marc, congrats on the quarter as well.

Marc Casper

Thanks, Tycho. Good morning.

Tycho Peterson – J.P. Morgan

I think last quarter you had talked about regarding stimulus, a 50% capture rate on the grants around mass spec. Can you talk a little bit about whether that’s holding? And then also, you talked about reinvesting in mass spec, if you could talk about that and maybe also the competitive dynamic, obviously, with Danaher and (inaudible) getting a little bit more active in the market, that’d be helpful.

Marc Casper

Sure. So a couple of different points, to address. One, is in terms of the stimulus funds capturing mass spec orders, the way that I would look at it is that we launched our new suite of mass spectrometers, the Velos platform and ASNS in the middle of last year and that has – in the fastest uptake of any product that we’ve ever launched is mass spec. And our Orbitrap franchise had record bookings last year. So we’re seeing very strong demand. A lot of those grants were written around our technology. A lot of that money hasn’t yet turned into orders for anybody. We’re confident in the competitive position of our technology. I’m particularly excited by the fact that the typical grant allocation of $500,000 was increased to $600,000, which really phased well into the Orbitrap family. So we feel very good about that position.

In terms or R&D, we had a firm commitment last year to maintain our R&D expenditure because of the great track record that we’ve had in bringing out innovative products. Even though the end markets were tough, we maintained that commitment. As we look at the opportunities going into 2010 and certainly going into 2011 and '12, we’re very excited about what our technologies can be used for, and we're making a conscious decision to increase our spending by about $30 million, not just for mass spec, but also to strengthen our products and specialty diagnostics and biosciences to go after new applications that we think can accelerate our long term growth. If you think about it, we could go out and spend $30 million on a technology acquisition. We think we're going to get a much higher return by putting the $30 million into our own R&D capabilities. We know the track record of our team. They're terrific. And we think it's going to be really a no-brainer in terms of the returns we'll get down the road.

Tycho Peterson – J.P. Morgan

And then can you comment on the competitive dynamic and how you view the Web (inaudible)?

Marc Casper

Yes. There are always tough competitors out there in mass spectrometry. And what's great about mass spec is everybody claims that they've got the best and the most exciting, and I think that's fine. And you've heard us say in the past that we always like to have a lot of buzz in the market because that means there'll be more funding going into mass spec. I think our track record for itself in this area. We've gone from a distant player nine years ago to a market leader over that period in time. And we feel very good about our prospects. And we never sit back and rest in our (inaudible). We step up to the challenge that our competitors are putting out there. And we feel great about the technologies that we have.

Tycho Peterson – J.P. Morgan

Okay. And as we think about this year, and I know Pete talked about some of the operational leverage on the financial guidance, but can you talk about where you see the biggest opportunities? Is there additional headroom on PPI to roll that out across the company? Is it additional facility closures? Can you just talk about where you see some of the leverage in the model?

Pete Wilver

Hi, Tycho. I'll answer that. I would it's really on the organic growth side. So we're doing everything that we can do from a PPI standpoint. We certainly don't want to – I mean we can deliver more margin expansion in the short term by cutting back on those strategic investments that I and Marc talked about. But that's not where we would want to get additional margin expansion in 2010. It would really be just in terms of pull through on the incremental organic growth that's really the upside opportunity.

Tycho Peterson – J.P. Morgan

Okay. Thank you very much.

Operator

Our next question comes from John Wood [ph] of Jefferies & Company. Please proceed.

John Wood – Jefferies & Company

Hey, thanks a lot. Pete, on the cash flow outlook, have you built the working capital assumptions in line – you ended 2009 basically at all-time lows on the inventory and receivables. Is that what you've modeled in 2010 or will you start to chew up a bit more working capital as you start to grow again?

Pete Wilver

My assumption in the guidance is that those metrics are ones that are going to be tough to duplicate in 2010. And even if we did, given the fact that we're going to grow, we will use additional working capital, so I'm assuming something in the range of $100 million in incremental working capital usage in 2010.

John Wood – Jefferies & Company

Okay. Great. And then on the CapEx, it seems like that's a bit ahead of the historical trend line at $250 million or so. Is that just catch up spend after spending less in 2009? Is that the right level to use beyond 2010?

Pete Wilver

Yes. I would say our average is going to be $250 million. That's basically what we did in 2008. Not consciously from our level, but in terms of the businesses, they had plenty on their plate to do in 2009. So they ended up spending a little bit less than what we would normally spend. So I would say 2010 is a little bit of a catch up year. So $250 million is a better run rate going forward.

John Wood – Jefferies & Company

Okay, understood. And then, Marc, understanding your comments on the M&A side, is it a priority for you and/or the Board to communicate a more consistent strategy in terms of returning cash to shareholders? Or should we expect that in the absence of the M&A opportunities, stay tuned for what comes beyond that?

Marc Casper

The way I think about it is, we review this with our Board periodically. And we discuss the M&A landscape. We discuss various ways of returning capital to our shareholders. And periodically, if you look back over the last many years, we have returned capital to shareholders. And we really haven't done any forward communication in terms of that, so. At some point in time, we've had buyback authorizations. The other points in time, we don't. And that's been our approach. What I can say is we're always talking internally about what's the best way to generate returns for our shareholders, and we'll continue to do that.

John Wood – Jefferies & Company

Okay. You would expect the past strategy to continue for the foreseeable future in terms of the communication.

Marc Casper

Yes. In terms of how we communicate, yes. As things change, we'll certainly communicate that to our shareholders.

John Wood – Jefferies & Company

Okay. Thank you.

Marc Casper

Welcome.

Operator

Our next question comes from Derek De Bruin of UBS. Please proceed.

Derek De Bruin – UBS

Hi. Good morning.

Marc Casper

Good morning.

Pete Wilver

Hi, Derek.

Derek De Bruin – UBS

Hey, just two quick questions. You mentioned that analytical technology to your equipment business was down – the equipment business was basically down mid single digits. Could you just give a little bit more breakdown on industrial equipment versus analytical instrumentation for laboratory usage? How do you model – what should we be thinking about that as we go into next year or going into 2010?

Marc Casper

Generally, we don't break it down with a lot of granularity by segments and markets. But it's clear that the industrial side was the weakest of that customer set, but improved in the fourth quarter. In a way, it's a positive, but it's still going to be the weakest part of our business where your pharmaceutical, and academic, and government customers are going to be a little bit stronger in terms of where those instrument sales were in the last (inaudible).

Derek De Bruin – UBS

Okay. And just another question, so on the – on looking through Asian investments, could you talk a little bit about where you're seeing the growth opportunities in Asia. Could you just do a little bit more – is it mostly industrials investment now by the domestic – but domestic industries, are they starting to invest in the academe? Can you just talk about how you see the Asians rolling out in terms of domestic investment, multinationals, (inaudible) in different markets and what you're doing?

Marc Casper

Sure. The two biggest markets for growth are clearly China and India. I'll comment (inaudible) in a moment. In China, historically, you saw a big emphasis on infrastructure and industrial type demand. You are seeing a much bigger push into life sciences, primarily on the academic research side. And we do a lot of work with the Chinese Academy of Sciences, a lot of interesting stem cell work going on there that we are a big supplier to.

So you're seeing that type of demand increase. You're seeing multinationals move more activity to China. You're seeing R&D spend go up, both the pharmaceutical and industrial companies (inaudible) equip new laboratories. And the reason we're putting it in the second demo lab is we want to tap into that growth.

In India, you're seeing a continued push towards more clinical research being in India. We opened up a clinical packaging facility there. And you (inaudible) make investments to support. But still it's primarily life sciences and healthcare-related growth. Clearly, India needs a lot of infrastructure investments, but that has not been a – not as much of a driver yet.

Derek De Bruin – UBS

In terms of other targets within the prospects of R&D spend in Korea, Taiwan are good as well and provide growth? Or those are still smaller opportunities than you would see in something like India and China? I just want to follow it up with this. Given that there are so many growth opportunities in Asia, it's like when or if it does the Chinese life sciences, which is still very (inaudible), when does that potential become a competitive challenge?

Marc Casper

In terms of local suppliers?

Derek De Bruin – UBS

Of local suppliers, yes.

Marc Casper

We monitor that closely. You see, local suppliers really are the very commodity-oriented type products. You don't see them in a significant way in instrumentation or life science research free agents. And part of the reason that we're building a very capable presence of manufacturing in low cost regions is to be able to compete whenever a new threat comes up. So we feel that our quality is world-class. And where they will take a very low cost in some of those markets and we'd expand our manufacturing to address that should that become a real threat. It's not a real threat today, but it's one that we keep a very close eye on.

Derek De Bruin – UBS

And how much of your manufacturing is at the Asian focus right now (inaudible)?

Marc Casper

In terms of what we manufacture in Asia today, we manufacture about $253 million of (inaudible).

Derek De Bruin – UBS

Thank you.

Marc Casper

Sure.

Operator

Our next question comes from Marshall Urist of Morgan Stanley. Please proceed.

Marshall Urist – Morgan Stanley

Yes. Hi, guys. Good morning. So the first question was just on some of the assumptions and guidance. I know you've been asked about end markets. I was hoping maybe on that 2% to 4% organic you can help us to understand more explicitly what's the underlying assumption on the instrument side as well as what you're assuming for your industrial customers for '10 if you get to that 2% to 4%.

Pete Wilver

Sure. In terms of the consumables equipment services, we honestly don't rollout the company that way. It's much easier for us to do that on a backward look than a forward look. But if you go back to what we talked about as the (inaudible), we're pretty much in line with those numbers, which is consumables in the mid single digits growth, which is basically where we are already. We had equipment in the low single digits decline – mid single digits decline (inaudible) about flat. And then services in low single digits growth. So that's about where we are. Again, we don't rollout the data that way. But nothing has materially changed from what our assumptions were back at that point in time.

Marshall Urist – Morgan Stanley

Okay. Sorry, and just to be clear from that then, you're saying looking forward then – it assumes that instruments are flat in '10?

Pete Wilver

I said yes, mid single digit decline to flat.

Marshall Urist – Morgan Stanley

Okay, got you. Great. And then again, would – just to be clear, would your industrial customers recovering, with that be upsize to those expectations?

Marc Casper

Yes. It depends on how strong the recovery. What we're assuming is a slow recovery that we benefit from late in the year just given the lag, we're thinking second half of the year is where we get some benefit from it. If you see a bigger pick up in GDP growth or you see it accelerating faster, that will be an upsize. On the flip side, if you don't see that recovery and the strength that we saw in the fourth quarter, we're anticipating that – it's something – if macro view gets worse, then obviously that would be a raise. But think of it as a gradual recovery forecast.

Marshall Urist – Morgan Stanley

Okay. Great. And then just second question on price, given some of your comments that the pricing environment is getting difficult. Should we still be assuming that prices is a net positive? Or is it going to be more moving towards neutral if we think about the top line and also from a margin – gross margin perspective?

Marc Casper

Price is still a net positive in the range of about 1.5%. When you look at that, pricing is still strong on consumables, and that hasn't changed. What is changed a little bit, and this is not dramatic, is that the capital equipment on size of the market is a little bit more difficult to get priced than it was in years past. And that's not a surprise after a year where you've had across the industry volume declines. People really lump that volume and it's the normal part of the cycle. So we think that over time, that comes back to a stronger pricing environment. In the short term, that's a little bit more challenging, less so in high end instrumentation, more so in the mid range to lower end parts of the market.

Marshall Urist – Morgan Stanley

Okay, got you. And one last one, just on the Biosite agreement, I'm just curious. Is it a goal? Are you guys working internally to offset more of that? Or is that what we should be thinking where things will be in the back half of the year when that rolls off?

Pete Wilver

Well the assumption that I gave, which is to lose about $130 million of revenue from the Biosite contract, and then to make up about $40 million from the alternative supplier. That's our best guess at this point in time. If you get that $40 million, we obviously have to do a lot of good execution in order to make that happen. Bringing on a new supplier is no small task. Of course, there could be some upside to that, but that's the midpoint of where we think we're going to end up.

Marshall Urist – Morgan Stanley

Okay. Great. Thanks a lot, guys.

Operator

Our next question comes from Doug Schenkel of Cowen and Company. Please proceed.

Doug Schenkel – Cowen and Company

Hi. Good morning, and thanks for taking the questions.

Marc Casper

Good morning.

Doug Schenkel – Cowen and Company

Just a quick follow-up to one of Marshall's questions, on pricing, just to be clear, it sounds like you guys are still getting of a customary – or (inaudible) to get the customary couple of points on price this year. And if so, again, when do these price cuts – I'm sorry, these price increases get rolled through the system?

Marc Casper

In general, prices – most the pricing starts at the beginning of the year, not all of it does because some customers have contracts. So you get a little bit that rolls in throughout the year. But most of it starts at the beginning of the year. It's (inaudible) across the (inaudible).

Doug Schenkel – Cowen and Company

Okay. And it's about a couple of points typically that you get on the consumable side, is that right?

Marc Casper

We'll probably have a little bit more and that translates to about 1.5% across the portfolio.

Doug Schenkel – Cowen and Company

Okay. And then in Q3 of last year, the way I remember it is there's a delay in shipment at some analytical technology instrument, I think largely NASDAQ's, those got transitioned into the fourth quarter rendering the comp this year on that side a little bit more challenging than normal. Any chance you can just talk about what the magnitude of that headwind do you think turned out to be in the fourth quarter of this year.

Pete Wilver

It was around $15 million of revenue that shifted from Q3 to Q4 last year.

Doug Schenkel – Cowen and Company

Okay. And one last one, last year, we on the cell side got a little ahead of ourselves with our Q1 forecasts. This year, Q1 looks to be one of the most favorable comps we've seen with you guys for a while. In Q1 last year, you had days going against you. You had an uncharacteristic slowdown of the top 20 that counts. There was inventory de-stocking that was starting. The industrial end markets started to become a mess. This year, you got four days coming back. Recognizing you don't provide quarterly guidance, any commentary you can provide on how we should think about the seemingly very favorable dynamics in Q1? That will really be appreciated. Thank you.

Pete Wilver

I think you've laid it out pretty well. Certainly, Q1 is going to be one of the easier comparisons that we have in our history. And basically, I think you need to think about all of the things that you mentioned. The only thing that I would say is in terms of the calendar comp, the way to think to think about the calendar comp, it doesn't really impact us with one day. But when you think about four days, you need to think about that incremental revenue. Of course it's going to be organic growth. But it's like acquisition or foreign exchange revenue, it's going to pull through at our average rates, not the incremental rates you would expect for organic growth because we're adding fixed costs for four days as well. So that's the only caveat I would give. You need to think about it that way.

Doug Schenkel – Cowen and Company

Great. Thank you.

Operator

Our next question comes from Peter Lawson of Thomas Weisel Partners. Please proceed.

Patrick Mooney – Thomas Weisel Partners

This is actually Patrick Mooney filling in for Peter. Thanks for taking the question. You guys mentioned you're seeing some strong co-activity in the US stimulus, but not much is materializing in sales yet. How much of the $50 or $150 million boost in 2010 do you anticipate coming from the US? And when do you anticipate those funds being targeted?

Marc Casper

So there's not a precise number if I use geography. But certainly, the majority of it will come from the US market. And you'll also see a little bit in Europe and a little bit in China and Japan. It will be much – it will be very much towards instrumentation. So if you think about the bulk of the stimulus funds, it's around instruments. There's some follow on through equipment, some follow on through consumables. But think of it benefiting particularly on the (inaudible) the most.

Patrick Mooney – Thomas Weisel Partners

Okay. And then the service – the return to growth, was that more a recovery on the industrial side? Or was Biopharma more willing to outsource some large projects in the quarter?

Pete Wilver

Biopharma Services business, as I mentioned, did have nice growth in the quarter. So that was one of the things that picked up the revenue growth profile in that side of the business. But we also saw it just started a normal service of upper instruments. It didn't return the growth, but it was basically flat in the quarter. And that was pretty much across the board. I can't say it can be attributed to one market segment over another.

Patrick Mooney – Thomas Weisel Partners

Great. Thank you.

Operator

Our next question comes from Isaac Ro of Leerink Swann. Please proceed.

Isaac Ro – Leerink Swann

Yes. Thanks for taking the question. Good morning, guys.

Pete Wilver

Good morning.

Isaac Ro – Leerink Swann

I think, guys, on the initial budget proposal the other day from the White House in inclusion of about another $800 million in incremental FDA funding for food safety. I think that's about 16% of your business, if I remember correctly. So I'm wondering how you think that might help or hinder your outlook for 2010 as that budget goes to the usual betting process in Congress.

Marc Casper

We think it's a smaller proportion of our expenditure to be in the single digits of the total company. And I think we commented a couple quarters ago, if you look at the food safety environment, you see a lot more activity in China and Europe, and Japan in terms of ensuring a safe food supply. So we think it's very encouraging for our industry as well as in particular if the US is going to be stepping funding in regulations. We have good relationships with the FDA. And we have had our team working with them on different technologies. So I feel good about our prospects. And given the success we've had in other markets, I think that should be a positive for us this year and beyond.

Isaac Ro – Leerink Swann

Great. Thanks. And then secondly, just looking at the assets you brought in specialty diagnostics, that was obviously a bright spot on the quarter and there're lots going on for this year as well. Could you maybe touch on the long term strategy that you have there to build off the current asset base that you have, and expectations for how that grows versus the overall business?

Marc Casper

Yes. When you look at our acquisition strategy, the larger things we do are going to be centered towards our analytical technology segment. We see great prospects across specialty diagnostics, analytical instruments, and bio sciences. And interestingly enough, although they are different sizes, we get three deals in one of each – one for each of those three businesses within the segment. So (inaudible) has really built out our biomarker capability in specialty diagnostics. Of course, it's a nice add on to analytical instruments giving a really good technology.

It's very important in really safety applications. What that product does is it detects unknown samples, so used for airport screening, military applications, if you don't know what's in it, package of chemical liquids, you can tell what it is without destroying the product. And then the last one was (inaudible), which really strengthens our offering of our sciences. So you'll see us building our portfolios over time as the right deals are available where we can place shareholder value.

Isaac Ro – Leerink Swann

Okay. Thank you. And very lastly, on just in-house versus distributed products, any thought on the long term goals for the mix between the two, and then maybe how you – how we should think about incremental margin benefits to the company as that mix progresses?

Marc Casper

Well each year, roughly, if you look at the mix of our channel business, we increase the self-manufacturer's portion of that by about a point a year. If you think about it, roughly, a third of that – of the catalogue and channel is self-manufactured product. This year, it goes up by about a point. So that's the basic view. And then obviously, we make a lot more money on our self-manufactured products than we do through our distributed products in that case.

Isaac Ro – Leerink Swann

Okay. Thanks very much.

Marc Casper

Welcome.

Operator

Our next question comes from Tony Butler of Barclays Capital. Please proceed.

Tony Butler – Barclays Capital

Thanks very much. Marc, you made comments about record mass spec in 2009. Could you quantify that a little bit more? Was that in units or was that in total revenues? And I have a couple of follow ups please.

Marc Casper

Sure. My comment was around both bookings, in terms of – and that would be in dollars as well as – as revenue continues to grow as well, so a very strong one on both (inaudible) and shipments.

Tony Butler – Barclays Capital

Thank you. Two financial questions, if I may, the up margin guidance of 40 to 80 bits and the pull through from the organic revenues, that's sided to one business unit or the other lab products or analytical tech or is it equal?

Pete Wilver

In terms of the organic revenue growth?

Tony Butler – Barclays Capital

Yes, or as it turned to up margin improvement.

Pete Wilver

In terms of (inaudible) productivity actions and those types of things, I would say it's not weighted one way or another. But in terms of the organic growth pull through, at any point in our guidance, we're probably going to see higher growth and leverage to our products and services, and we're going to see in analytical technologies in 2010. And certainly, the gross margin is much higher in analytical technology than in laboratory products and services so that overall, we'll have somewhat diluted effects on our gross margins.

Tony Butler – Barclays Capital

Thank you. And then lastly, on the tax rate differences from the guidance in '10 from that of what was in 2009, does that imply or skewed to an increase in overall US revenue? Is that how you arrived at the higher tax rate?

Pete Wilver

It's not really a skew to US revenue. It's just simply that as we make – we have some tax planning that creates reductions in our taxes similar to a mortgage deduction. It's a fixed amount. And as our income goes up, all the incomes attached at incremental rates, whether it's happening in the US or internationally. So it's really just a – it's almost a mixed impact of having higher incremental income.

Tony Butler – Barclays Capital

Appreciate the time.

Kenneth Apicerno

Operator, we're going to take one more caller.

Operator

Our next question comes from Jon Groberg of Macquarie Research. Please proceed.

Jon Groberg – Macquarie Research

Good morning. A quick question to you or Marc, whoever wants to answer. If you look at this quarter, both divisions, first quarter, I can see – (inaudible) where you had top line and organic was only about 1%, 1.5%. You didn't get the operating margins expansion year-over-year, and you laid out some reason why in this quarter. I'm just thinking for investors, as we think about longer term, those that might say, "Look, after the Fisher merger, you just really can't get the leverage in the model that you've got in the past." Can you maybe just talk about those dynamics and how you see the margins story playing out over the next year or even two years?

Pete Wilver

I think the way to look at it is really the guidance that we've laid for 2010, which has basically low single digits organic growth, low to mid, and 40 basis points to 80 basis points of margin expansion, which is pretty much in line with what we've seen in the past. We've always been able to deliver in the past. As I mentioned, we are making some key strategic investments in 2010, which is a little bit of a dilution of that margin expansion, specifically in 2010. But as we see the benefits of those investments in terms of higher growth from new products in Asia and so forth, we'll certainly get that margin expansion back. So I don't think there's anything – we will see any difference long term in our thesis of being able to get close to 100 basis points of margin expansion on mid single digit organic growth. That's still where we see the capability on this business.

Jon Groberg – Macquarie Research

Is there some – maybe just to clarify, is there some minimal – I'm seeing (inaudible) this quarter. I know there's some (inaudible) that you're talking about. Is there some minimum amount of organic growth that you need in order to at least be flat in terms of year-over-year operating margins?

Pete Wilver

That's tough to say. I would say, we can deliver margin expansion with flat organic growth. The business can do that. But it depends on what the comparison is like. There are lots of things that happen in any given quarter. But there's no reason we couldn't deliver a small amount of margin expansion even with flat organic growth.

Jon Groberg – Macquarie Research

Okay. And then just a clarification, I guess, on the share count, I know you're buying back these converts. I'm just curious what's going into your assumptions for flat share count year-over-year. Thanks.

Pete Wilver

Well the reason we're assuming flat share count is we're – hopefully not optimistically, but assuming a higher stock price as we go through the year. And so as – we still do have converts. And so, as we increase the stock price, that increase is the option in convert solution going through time. So that ends up washing out the effects of the converts refinancing.

Marc Casper

So let me make a quick closing comment. We're very proud of how our employees performed in 2009 to achieve our goals. We successfully executed our plans in response to the economic environment. And at the same time, we continued to invest in the future. The actions we took positions very well for growth. I look forward to updating you on our progress as the year unfolds. Thank you for your support of Thermo Fisher Scientific. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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Source: Thermo Fisher Scientific Inc. Q4 2009 Earnings Call Transcript
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