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Thermo Fisher Scientific (NYSE:TMO)

Q1 2011 Earnings Call

April 27, 2011 8:30 am ET

Executives

Peter Wilver - Chief Financial Officer and Senior Vice President

Marc Casper - Chief Executive Officer, President, Director, Member of Strategy & Finance Committee and Member of Science & Technology Committee

Kenneth Apicerno - Vice President of Investor Relations and Treasurer

Analysts

Derik De Bruin - UBS Investment Bank

Jonathan Groberg - Macquarie Research

Ross Muken - Deutsche Bank AG

Tycho Peterson - JP Morgan Chase & Co

Quintin Lai - Robert W. Baird & Co. Incorporated

Marshall Urist - Morgan Stanley

Sung Ji Nam - Gleacher & Company, Inc.

Peter Lawson - Mizuho Securities USA Inc.

Isaac Ro - Goldman Sachs Group Inc.

Doug Schenkel - Cowen and Company, LLC

Jon Wood - Jefferies & Company, Inc.

Amit Bhalla - Citigroup Inc

Charles Butler - Barclays Capital

Operator

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific First Quarter 2011 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. On the call with me today is Marc Casper, our President and Chief Executive Officer; and Pete Wilver, Senior Vice President and Chief Financial Officer.

Please note that this call is being webcast live and will be archived on our Investors section of our website, thermofisher.com, under the heading Webcasts and Presentations until May 20, 2011. A copy of the press release of our first quarter 2011 earnings and future expectations is available on our website under the heading Financial Results.

So before we begin, let me briefly cover our Safe Harbor statement. 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-K for the full year ended December 31, 2010 under the caption Risk Factors, which is on file with the Securities and Exchange Commission and available in the Investors section of our website 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. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

Also during this call we'll 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 first quarter 2011 earnings and future expectations and also in the Investors section of our website under the heading Financial Results.

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

Marc Casper

Thanks, Ken. Good morning, everyone, and thank you for joining us for our first quarter 2011 earnings call. I'm pleased to report that we're off to a good start to the year, delivering double-digit growth in our primary financial metric, adjusted earnings per share. We achieved record first quarter EPS results and also expanded our adjusted operating margin through our ongoing focus on productivity. All in all, we had a solid performance in the quarter on top of the exceptional Q1 results we reported in 2010. This puts us in an excellent position to deliver on our goals for the full year.

Let me review our first quarter highlights. As I said, adjusted EPS was a first quarter record, increasing by 12% to $0.92 per share. We expanded our adjusted operating margin by 30 basis points to 17.6% in the quarter. Our investments in research and development continue to strengthen our depth of capabilities across our technology portfolio and we had an excellent quarter in that regard. I'll talk later about the new launches we highlighted at PITTCON in March.

Growth in emerging markets was particularly strong in Q1. For example, we had greater than 20% growth in China and over 30% growth in India and Brazil. I've talked a lot about our continuing investments to expand our Asia-Pacific presence. During the quarter, we announced our plans to build a new factory in Suzhou to support China's focus on building out its R&D infrastructure. This will give us the capacity to produce laboratory consumables for growing local life sciences markets.

I was in China the week they unveiled their 12 5-year plan and it's exciting to see how closely Thermo Fisher is aligned with their priorities in healthcare and life sciences, environmental protection, energy and public safety. I'd like to say a few words now on Japan, which represents about 3% of our total revenues. Although we don't have any manufacturing there, we do have extensive commercial operations in the country. Most important, we were relieved to learn that all 400 of our Japanese employees were safe. We also learned that we had no damage or significant interruption to our operations. I have to say that I'm extremely proud of how our leadership team in Japan responded to the crisis on all fronts. Concern and support for our employees was the first priority, then they made contingency plans for the business so we could continue to serve our customers.

So despite the horrific situation, our Japan team managed through the quarter with no significant negative impact on performance. Our best view on the outlook for Japan at this point is that we don't see a material impact on our business, but we'll continue to watch the situation closely and of course, we'll take the appropriate actions as necessary.

On a humanitarian note, we instituted a company match for our employees worldwide to make cash donations to the international Red Cross. We also immediately offered our personal radiation detectors and dosimeters to protect first responders and even the media during the early days following the disaster. Our handheld detectors were also used to screen food for radioactive contamination.

So let me now turn to the key contributors to our performance this quarter. As I stated previously, delivering strong EPS results is our primary financial metric and we do that consistently by driving top line growth through continuous innovation and expansion in emerging markets, operational excellence and effective capital deployment. So first, I'll talk about top line revenue growth in the quarter.

You've seen the negative headlines in the media over the past few months from the natural disasters in Asia-Pacific to the harsh winter in the U.S. and more recently, the U.S. government budget uncertainty. I am pleased to say that we powered through those headwinds by executing well operationally and by capitalizing on continued strength in our industrial and diagnostics end markets. As you saw in our press release, revenues grew 4% to a first quarter record of $2.72 billion compared with $2.63 billion a year ago. Our businesses serving the industrial sector are doing quite well, driven by demand for our Process Instruments. More specifically, sales of our handheld instruments continue to strengthen, along with our longer lead-time systems for the metals, mining and commodity materials industries.

We've been highlighting the performance of our Clinical Diagnostics business for the past 2 quarters and I'm pleased to say that our share gains came again in Q1. We recorded double-digit growth here, driven by sales of our biomarker test kits. Our second EPS growth driver, operational excellence, continues to give us the ability to translate top line growth into excellent bottom line results. We have several productivity levers that we can pull to adjust to changing market dynamics and our teams continue to execute very well to consistently deliver solid margin expansion.

As you know, PPI and PPI-Lean are ingrained in the way we run our company and we continue to leverage these programs to improve productivity and strengthen our global competitive position. During the quarter, I had the opportunity to participate in some of the daily standup meetings at our flagship laboratory equipment facility in Asheville, North Carolina. It's really impressive to see how PPI-Lean has had a profound impact on quality, product availability, cost and cash flow at this site. In addition, by implementing PPI-Lean, the Asheville team has been able to grow site capacity to keep pace with customer demand, while averting typical expansion costs. This is just 1 example of the intensity around productivity being demonstrated at many sites across our company. I'm very proud of our teams across the company and the commitment they demonstrate to PPI.

Our third key contributor to EPS growth is effective capital deployment, and that continues to provide us with multiple avenues for creating shareholder value. We had a lot of activity recently in terms of capital management that will benefit us this year and over the long term. We sold our 2 laboratory testing services businesses, Athena Diagnostics and Lancaster Laboratories, which generated total proceeds of approximately $940 million. We deployed $538 million to repurchase 9.6 million of our -- shares of our stock during the quarter and we also authorized an additional $750 million stock repurchase program and of that, we have $700 million remaining at the end of -- at the start of Q2.

Let me make a couple of remarks on recent acquisitions. I've commented in previous quarters about the great contributions from our Ahura Scientific and B.R.A.H.M.S. acquisitions, and they continue to do very well. Roughly a year ago, we acquired Finnzymes and Fermentas. Both of these businesses expanded our offerings in high-growth markets for PCR-based testing and they delivered double-digit growth in the quarter.

I'll also remind you -- I'd also like to remind you where we are with the Dionex acquisition. As we announced at the beginning of Q2, the European commission is reviewing our filing and we anticipate closing in mid-May. In the meantime, the integration planning teams from both companies have been actively engaged and are preparing for day 1. We are excited about the opportunities this combination will bring to our customers in growing markets around the world, particularly applied markets such as environmental analysis, water testing and food safety.

So we're focused on accelerating our long-term growth and strengthening our industry leadership by effectively deploying our cash and putting our balance sheet to work. I'd like to now highlight a key growth theme within the company, as I've done in the past few quarters. The intent here is to demonstrate how our ongoing investments broaden the growth opportunities for Thermo Fisher by collectively driving our revenue growth, leveraging our unique depth of capabilities across the company and fulfilling our mission which is to enable our customers to make the world healthier, cleaner and safer. Today, the theme is commitment to continuous innovation. I've talked in the past about how we maintain our level of R&D spend through the economic recession. I am pleased to say that we're starting to reap the benefits of that decision now. For example, we showcased a range of innovative new instruments at PITTCON in March. As I walked the show floor, it was clear that our customers recognize Thermo Fisher as the only company with the depth of capabilities in technologies and applications expertise to help them solve a broad range of analytical challenges. Let me highlight some of the new products under our Thermo Scientific brand that stood out this year.

We're known for our leadership in mass spectrometry-based analysis and we continue to innovate there so our customers can spend less time performing experiments and more quickly draw conclusions from the results. Take our Thermo Scientific Exactive ultra-high resolution LC/MS system which is used for non-targeted screening to determine, for example, whether or not an Olympic athlete is using performance-enhancing drugs. In the past, a sample would have been analyzed multiple times. First to screen for known compounds, followed by a second experiment to identify unknown compounds such as new drug metabolites and then typically a third time to determine the quantity of compounds of interest such as a designer steroid. We've introduced the new ExactFinder software to help our customers handle and interpret the large amounts of data generated during this type of complex analysis. When used with our Exactive mass spectrometer, all of these experiments can be conducted at the same time and in 1 run. In addition, because all the information in the sample is recorded and archived, you can go back and reanalyze the data to find new compounds of interest.

This powerful combination gives customers much faster access to qualitative and quantitative data for both drug screening and confirmation.

Turning to chemical analysis, we continue to broaden the applications for our comprehensive molecular spectroscopy offering, including UV-Vis, Raman and FT-IR by developing more compact user-friendly products. 1 of the headliners at PITTCON in this category was our new Thermo Scientific iS5, a smaller and lighter version of our leading iS10 FT-IR instrument, which we introduced a couple of years ago. The iS5's rugged construction means that the instrument can safely be moved closer to the sample without compromising performance, for example, positioning it near a production line to be used by a quality assurance team. Despite its compact size, the iS5's performance is comparable to larger instruments found in most analytical labs.

We also introduced a whole new line of portable instruments, the Thermo Scientific Niton XFL, which is a fully equipped x-ray analyzer that can be deployed in the field. It's typically used for mining and exploration, as well as quality testing for consumer goods and electronics. The 30-pound unit can sit on a back of a truck or be mounted on a tripod to create an on-site lab that provides fast and precise elemental analysis.

So innovation will always be critical to our growth and we are committed to make investments that will strengthen our position as the technology leader. Let me also tell you that I'm really, really excited about the new mass spectrometry launches we have planned for ASMS this year which you'll hear about in June. So before I wrap up, let me give you an update on our annual guidance for 2011. As you saw in our press release, we're raising both our revenue and adjusted EPS outlook. The new guidance includes the acquisition of Dionex with the assumption of a mid-May close and now excludes the Athena and Lancaster businesses, which we sold at beginning of Q2. We are raising our adjusted EPS guidance by $0.05 to a new range of $4.05 to $4.15 for the full year in 2011. This would result in 17% to 20% growth over our strong results in 2010.

We're also raising our revenue guidance for the year and now expect to achieve 2011 revenues in the range of $11.52 billion to $11.62 billion for 9% to 10% revenue growth over 2010.

Before I hand the call over to Pete, let me summarize my remarks this morning with a few key points. We remain focused on continuing our track record of delivering strong adjusted EPS growth. We successfully executed our plans, even in the face of some unexpected headwinds to deliver solid first quarter performance. I'm excited about our prospects for the year and our results in Q1 put us in great position to achieve our goals for growth.

Now I'll turn the call over to Pete Wilver. Pete?

Peter Wilver

Thanks, Marc. Good morning, everyone. As Marc mentioned, in early April, we closed on the divestitures on our 2 laboratory testing service businesses, Athena Diagnostics and Lancaster Laboratories, for total proceeds of $940 million. Financial results for these 2 businesses are reported as discontinued operations for all periods presented, so they are excluded from my comments.

We're pleased to report another quarter of strong adjusted earnings per share, with 12% year-over-year growth to a first quarter record of $0.92 compared to $0.82 last year. GAAP EPS in Q1 was $0.64, up 14% from $0.56 in the prior year's quarter.

Moving on to our top line performance. Reported revenues increased 4% year-over-year to a first quarter record $2.72 billion. Organic revenue growth was 1%, excluding a 2% benefit from acquisitions and a 1% favorable impact from foreign currency translation. In the quarter, the Japan stimulus and Biosite transition headwinds that we previously mentioned negatively affected our organic growth by about $80 million or 3%. Excluding these 2 items, our Q1 organic growth was 4%, which was in line with our expectations.

We also continued to strengthen our backlog this quarter with bookings exceeding revenues by 2%.

By segment, Analytical Technologies' Q1 revenues grew 9% on a reported basis and 5% organically. Excluding the Japan stimulus headwind, organic growth in this segment was 10%, driven by another strong quarter in Clinical Diagnostics, specifically our Biomarkers business. Our Instruments businesses serving industrial and applied markets also continued to deliver strong year-over-year growth.

In the Laboratory Products and Services segment, Q1 revenues grew 1% on a reported basis and declined 1% organically. Our growth this quarter was in line with our expectations, taking into account the Biosite transition and our strong growth in Q1 last year. In the quarter, our BioPharma Services business had strong growth and we had good contribution from flu, which helped offset some budget-related delays in academic and government end markets.

By geography, we saw low single-digit growth in Europe and North America was essentially flat, primarily as a result of the Biosite transition and particularly strong growth in Q1 2010. Asia was down slightly, but grew in the low-teens if you exclude the Japan stimulus impact driven by strong growth in China and India, as Marc mentioned. Rest of the world grew in the mid-double digits from a relatively small base driven by Brazil and the Middle East.

Turning to adjusted operating income, we had strong bottom line results with Q1 adjusted operating income increasing 5% year-over-year to $478 million. Adjusted operating margin was 17.6%, up 30 basis points from 17.3% in the year-ago quarter. The year-over-year margin expansion was driven by organic growth pull through and strong cost productivity from our PPI and PPI-Lean projects, global sourcing initiatives and ongoing restructuring actions. These gains were partially offset by the strategic investments in R&D and commercial resources that we initiated last year to drive future growth.

By segment, Q1 adjusted operating income in Analytical Technologies increased by 11% year-over-year. Adjusted operating margin was 21%, up 40 basis points versus 20.6% last year, driven by pull through on organic volume growth, the benefits of global sourcing and productivity and moderately higher prices.

Turning to our Laboratory Products and Services segment, Q1 adjusted operating income decreased slightly year-over-year. Adjusted operating margin was 13.7%, down 20 basis points from the year-ago quarter. In this segment, solid productivity was offset by pull through on the organic volume decline and strategic growth investments.

Moving on to the details of the P&L. Total company adjusted gross margin was 42.5% in Q1, up 50 basis points from the year-ago quarter. This margin expansion was driven by a pull through on organic revenue growth and the benefits of our global sourcing and strong cost productivity actions.

Adjusted SG&A in Q1 was 22.2% of revenue, flat to the year-ago quarter. And R&D expense was 2.75% of revenue in Q1, up about 25 basis points from last year.

Moving below the line, our Q1 net interest expense increased $3 million year-over-year to $23 million, driven primarily by higher interest expense as a result of issuing $2.2 billion of senior notes to prefund our pending acquisition of Dionex, partially offset by higher interest income. Adjusted other income was a gain of $1 million, up $4 million from last year, primarily as a result of lower currency transaction losses on foreign entity cash.

Our adjusted tax rate in the quarter was 20.5%, down 50 basis points from last year as a result of our tax planning initiatives and the extension of the R&D tax credit into 2011. As Marc mentioned, we authorized an additional $750 million of share repurchases this quarter on top of the $488 million we had remaining on our previous authorization. During the quarter, we deployed $538 million of our cash to buy back 9.6 million shares, which left $700 million remaining at the quarter end under our current authorization through February 2012.

Average diluted shares were $395 million in the quarter, down $23 million or 6% from last year, reflecting the benefit of our 2010 and 2011 share buyback programs, as well as redemption of our convertible debt.

Turning to the balance sheet. Free cash flow from continuing operations was $263 million in the quarter after deducting net capital expenditures of $63 million. This was down about $24 million from the year-ago quarter, primarily as a result of tax payment timing and moderately higher capital expenditures.

We ended the quarter with $2.8 billion in cash and investments, up $1.9 billion from Q4. This increase resulted from the Dionex acquisition prefunding and our free cash flow, partially offset by share buybacks. Our total debt was $4.3 billion, up $2.2 billion from Q4 as a result of the Dionex acquisition prefunding.

And early in Q2, we used $415 million in cash to redeem the remaining 300 million of our outstanding convertible debt. This activity will be reflected in our Q2 ending cash and debt balances.

Now moving on to our guidance for 2011 which now includes the Dionex acquisition and excludes the Athena Diagnostics and Lancaster Laboratories divestitures. We're raising both the low- and high-end of our adjusted EPS guidance by $0.05 to a new range of $4.05 to $4.15, which represents 17% to 20% growth over our 2010 adjusted EPS of $3.46. In terms of revenue, we're tightening the range by $20 million and raising the midpoint by $180 million to a new range of $11.52 billion to $11.62 billion. This range represents growth of 9% to 10% compared to our 2010 reported revenues of $10.57 billion.

I'd like to provide you some additional color on our new guidance, as there are a lot of pluses and minuses compared to our previous guidance. First, as I mentioned, Athena and Lancaster had been classified as discontinued operations, so they've been removed from our guidance and continuing operations financials in all current and historical periods. For 2010, this results in a reduction of $220 million in our reported revenues from $10.79 billion to $10.57 billion and a reduction of $0.11 to our adjusted EPS from $3.57 to $3.46. For 2011, this results in a reduction of our previous revenue guidance by about $240 million and our adjusted EPS guidance by about $0.13.

In terms of the Dionex acquisition it has not yet closed, but we're expecting it to close in mid-May so we've assumed this in our guidance. Adding Dionex from mid-May onward adds about $310 million of revenue or 3% and $0.09 to our adjusted EPS.

Favorable foreign currency translation compared to our previous guidance also adds about $100 million to our revenue and $0.03 to our adjusted EPS. This results in a total impact of favorable foreign currency about 1.75% on our 2011 revenue growth. Consistent with past practice, we haven't attempted to forecast future currency exchange rates.

And finally, we expect about $0.06 accretion from accelerating our share buyback activity into Q1 and utilizing our new $750 million share buyback authorization to February 2012. So all this nets to the $0.05 increase in adjusted EPS and $180 million increase in reported revenues.

In terms of organic revenue growth, the midpoint of our revenue guidance remains unchanged at about 4% growth. We still expect our growth to accelerate throughout the year with Q2 at the lower end of mid-single-digit growth and the second half of the year high higher as comparisons get easier.

In addition to Dionex, our reported revenue guidance includes about 1% growth from completed acquisitions and does not include any other future acquisitions or divestitures. To give you a little more detail on our earnings guidance, we're expecting adjusted operating margin expansion of 65 to 95 basis points compared to our 2010 adjusted operating margin of 17.4% after restating for the Athena and Lancaster divestitures. This is consistent with our previous guidance of 50 to 80 basis points of margin expansion, plus the expected accretion from the Dionex acquisition.

Moving below the line, we're expecting net interest expense to be up about $45 million to $50 million year-over-year, reflecting the incremental interest cost related to the Dionex acquisition. Our adjusted income tax rate is expected to be in the range of 20% to 21%, which is down 1% from our previous range as a result of removing Athena and Lancaster from our rate and tax synergies related to Dionex. And our full year average diluted shares are estimated to be in the range of $385 million to $390 million. This estimate reflects the redemption of our convertible debt early in Q2 and assumes that we'll use the remaining $700 million of our current share buyback authorization through its expiration in February 2012.

So in summary, we're pleased to start off the year with a strong quarter, providing us positive momentum that positions us well to achieve our 2011 goals.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank AG

So as we think about sort of the progression of the end markets, I mean, Mark, you provided some brief commentary on some of the pockets of sort of strength and relative weakness. I was hoping maybe you could dive in a little bit more. It seems like the emerging markets, the applied and industrial continue to kind of be the net winners for the business and then you've got a few pieces maybe that have lagged. Maybe highlight relevant to kind of your internal expectations where the largest deltas were and in terms of for the outlook, where you have the highest degree of confidence in what markets maybe you are kind of watching the most closely and kind of keeping an eye on.

Marc Casper

In terms of end markets, let's go through the 4 markets, starting with industrial and applied. Look, clearly industrial and applied markets are very strong and we're seeing benefits in the area such as food safety and QA/QC and other routine testing which is served by our molecular elemental spectroscopy instruments. We're also beginning to really see significant strength in bookings and revenue of our later cycle products, which is what we expected to happen, areas like the mining industry, those manufacturing commodities such as steel and cement are really picking up substantially. From a healthcare and diagnostics perspective, the second of the end markets, our Specialty Diagnostics business is continuing to do very well, in particular the Clinical Diagnostics business, and our Biomarkers business is continuing to enjoy and deliver share gains. We also benefited in the quarter from a stronger flu season than the 2010 period. From an academic and government perspective, really what was unusual in the quarter was the U.S. government working under the continuing resolution authority and clearly that headwind is behind us. So the good news is through all that budgeting process in the U.S, there really wasn't any major changes to the budgets and 1 of the positives is that the food safety budget actually got slightly better. So that's encouraging for the midterm. And we're expecting more of a normalized set of market conditions in government and academic for the balance of the year. In BioPharma in the quarter, conditions were very similar to what we saw at the end of last year, which was in line with what we expected. The BioPharma end market was softer than our company average, mostly due to the very difficult comparison of about 20% growth in Q1 of last year. And within the BioPharma customers set, our BioPharma Services business and our Scientific Instruments business had really strong performance with those customers in the quarter.

Ross Muken - Deutsche Bank AG

Okay. That's helpful. I mean, we spent a lot of the latter half of last year kind of contemplating cash flow utilization and sort of the balance sheet and getting to optimal debt levels and then you now significantly uptick kind of your activity there, you've been quite aggressive with buying the stock. I mean, do you feel like the pace at which we've seen kind of the capital deployment and sort of the consistency on the buyback side is sort of something that we should assume continues on into the future and in turn we're now kind of that you've gotten comfortable in your seat as sort of the CEO and gotten the confidence of the board, we're back to kind of the Legacy Thermo which was clearly known for its excellent capital deployment capabilities?

Marc Casper

Yes. From my perspective, I think the company has a really strong track record of generating cash flow and deploying it wisely and that's going to be a mix of M&A and return of capital. And we're trying to be consistent on the return of capital and then when the right M&A that meets our criteria that can create shareholder value is available, we'll pursue it because we have confidence in our ability to deliver there. We did a onetime acceleration, if you will, in Q1 simply because we sold 2 assets. We had $900-plus million of proceeds and we put an incremental authorization in to deploy a lot of that capital. But I think you should of it as we did $750 million authorization for the balance of this year and we have $700 million remaining, and we'll spend that during the course of the next 10 or 11 months.

Ross Muken - Deutsche Bank AG

Great, Marc. Thanks.

Operator

And the next question comes from the line of Marshall Urist with Morgan Stanley.

Marshall Urist - Morgan Stanley

Thanks for taking the questions. First one, just, Marc, can you maybe talk about the book-to-bill? Obviously, that seemed positive in the quarter and if we can just get a sense of where that was strongest across the different end markets, just to give us a sense of momentum. And I know you mentioned it earlier, but maybe on the academic end markets side, have you already seen that sort of start to normalize so far in the quarter?

Peter Wilver

Marshall, this is Pete. So on the book-to-bill, as I said, bookings exceeded revenues by about 2%. Both segments were positive there, the Analytical Technologies was a little bit stronger than Laboratories Products and Services, but both had positive book-to-bill. We really don't track that metric by end market but certainly, you would have to believe that the industrial end market is driving that, some of the longer cycle businesses are in that end market, so they're going to drive a book-to-bill above 1, driving future revenue growth.

Marc Casper

And very qualitatively, because it's obviously early in the quarter, some of the hesitancy in the U.S. on academic and government because of budget uncertainty, the qualitative feedback is that seems to be behind us and customers are getting back to a more normalized situation. It's early, but that's the read.

Marshall Urist - Morgan Stanley

Okay, great, thanks. I appreciate that it's so early. And then maybe just on Dionex and I realize it hasn't been closed, but if you could maybe talk a little bit more detail about operationally from the top line to -- end markets have obviously been strong in the markets where Dionex is. So what are your assumptions on that business as you think about the rest of the year? And maybe what are the kind of pressure points that you're thinking about that could sort of move it one way or the other?

Marc Casper

So we're looking forward to day 1 and right now it continues to look like it'll be a mid-May close, which is what we've assumed in the guidance. From a -- as we've gone through the integration planning and looking at the outlook for the year, we feel very good about the $0.13 to $0.15 of earnings that we expect from an accretion perspective over the first 12 months of ownership. So when we -- we've gone now with the benefit of several months of very detailed integration planning. We feel very good about our ability to deliver that and in the guidance that Pete walked through in a fair amount of detail, that's embedded for the period of ownership that we have. So we feel very good about what's going on with Dionex and how that's going to be integrated into the company and we're looking forward to closing and getting going.

Marshall Urist - Morgan Stanley

Okay, great. Thanks, guys.

Operator

And your next question comes from the line of Jon Groberg from Macquarie.

Jonathan Groberg - Macquarie Research

Thanks for taking the question. Could you maybe, Marc, I know you don't like to get into too much detail, but would you mind providing a little detail on what you think about the pacing for the year, specifically with respect to Lab Products and Services, how you kind of would expect that to develop after a tougher [indiscernible] comp and in the Biosite standpoint?

Marc Casper

So here's for sure, your question is a little bit broken up, Jon. So is the question the pacing for Lab Products and Services through the balance of the year?

Jonathan Groberg - Macquarie Research

Yes, yes. I mean, you talked high-level about how you thought 2Q overall would be at the lower end of the mid-single and get a little bit better. And I'm just kind -- I'm trying to -- this is -- the Lab Products and Services business is one that seems to be tougher for people to get a handle on for a lot of different reasons. So I'm just -- just if you could maybe help us understand how you expect that business to play out.

Peter Wilver

Hi, Jon, this is Pete. So in terms of organic revenue growth, so we reported 1% in Q1 which means that we need to be basically mid-single digits or around 5% average for the last 3 quarters of the year in order to get to the midpoint of our guidance of 5%. Certainly for the year, Analytical Technologies is going to be stronger than the average and Laboratory Products and Services is going to be a little bit lower than the average, just as a result of some of the comp issues that we have. In terms of Q2, I'm expecting positive organic growth in both segments and then it will accelerate into Q3 and Q4.

Jonathan Groberg - Macquarie Research

Okay. That's helpful. I guess one question that I often get is Lab Products and Services, if you go back -- way back to the Fisher, I mean, it used to be a pretty consistent business at kind of the mid-single-digit. Here we're in 2011, I recognize some particular headwinds, but is there anything that's changed from an end market standpoint that you think that is now a kind of a structurally lower growth business then maybe it was over the previous years kind of before the 2009 period?

Marc Casper

No. We feel very good about the prospects. In fact I think 1 of the challenges for people to analyze is that we're so unique because of our leadership position. There's just nobody that has those set of capabilities. And it's a great business that has good growth prospects and has good earnings prospects. We made some decisions, things like Biosite, and we've talked in the past where a decision where the company's going to generate better cash flows and effectively -- better to have a smaller core set of suppliers where we're going to make more money than have a large supplier where you don't make any money on. So it's been unfortunately 4 quarters of discussing a headwind, we're down to 1 to go, but the reality is it's a great business and we're very positive about what the outlook is for it.

Jonathan Groberg - Macquarie Research

Okay. Thanks a million.

Operator

And your next question comes from the line of Doug Schenkel with Cowen and Company.

Doug Schenkel - Cowen and Company, LLC

Thanks for taking the questions. You guys have had, in your words, several months of integration efforts behind you in the context of the Dionex deal. Any thoughts you can share on the outlook beyond 2011? When would you expect to see some sales synergy opportunities really present themselves? And how long do you think you're going to need to invest in integration efforts? I guess I'm just trying to get at when might we expect more meaningful accretion related to this deal?

Marc Casper

Yes. So, Doug, when you look at the planning efforts that are underway, they cover everything from how the businesses will be integrated to the cost side, as well as what you have to do to capitalize on the revenue opportunities. You'll see a little bit of revenue synergies towards the end of the first 12 months of ownership. They become more meaningful in years 2 and 3 of ownership and we're highly confident in our ability to deliver that. Obviously, the synergies ramp up in years 2 and 3, so that drives incremental accretion. And as does -- the business is a healthy growing business and a healthy growing business is also going to expand earnings. So it's a business that's going to create a nice tailwind for the company for many, many years to come, just be giving us growth and margin profiles and synergies. So when we get to guidance for '12, which is a ways away, we'll obviously articulate sort of how, to the best of our ability, how that's contributing to the growth. But obviously, that will be a nice positive looking at next year as well.

Doug Schenkel - Cowen and Company, LLC

Okay. And then maybe just pivoting to an end market question. We're still pretty early in earnings season. Some others in the group where you have some overlap but obviously not -- comprehensive overlap have talked more positively about the pharmaceutical end market. You maybe not did it -- it doesn't sound like you did as well as you normally do there, which you pointed to the comps as really the primary reason. But beyond that, was there anything unusual in the quarter, I mean, typically in mass spec or any other area you want to speak about? Anything unexpected or outside the norm?

Marc Casper

So when you look at BioPharma, the 2 highlights for us that we called out, and I think they're important, is our BioPharma Services business, which is really clinical trial outsourcing, really had a good quarter. So that's encouraging, because in the development cycle for our pharmaceutical customers, activity is picking up. So we feel good about that. And our Scientific Instruments business did really well. So that would sort of just give you a sense of mass spec and [indiscernible] those things had a really nice quarter. Everything else is pretty much consistent with what we've seen in the past and really here it's a comp, right? You have 20% growth here in the prior year periods. So it's a pretty difficult comp. So that's how we think about it.

Doug Schenkel - Cowen and Company, LLC

Okay. Thank you.

Operator

And your next question comes from the line of Tony Butler with Barclays Capital.

Charles Butler - Barclays Capital

Thanks very much. Marc, staying with the same theme in BioPharma, do you feel that the instrumentation placements, the analytical instruments in the BioPharma business were actually replacements? Are these orders for new instruments or additive instruments? Then that I have 1 follow-up.

Marc Casper

So it's a little hard to know definitively, but I think our view is it's mostly that our customers like the technology and are adding the technology, because a lot of our instruments are truly just fundamentally different than previous generations. The Exactive mass spectrometer, there isn't a predecessor. I'm sure there's some other set of mass spectrometers in the past that they're replacing, but I kind of intellectually think about it as new technology being adapted.

Charles Butler - Barclays Capital

Thank you. And my follow-up then is also on Dionex. Are you keeping the brand, or does the brand become Thermo Fisher and then what physically do you call the Dionex facilities at Thermo Fisher or will it remain Dionex? Thanks very much.

Marc Casper

So I love the question, because it's one that we always spend a lot of time internally about as an industry leader. The branding for our products after an orderly transition will be a Thermo Scientific Dionex IC instrument. So it's always -- the brand is always Thermo Scientific on our technologies. Dionex will be a product name so that you don't lose the linkage to the past. But we want to drive the cross-selling synergies across with mass spec and elemental analysis and molecular spectroscopy, so you've got a link to Thermo Scientific. And day 1, every site will have a Thermo Fisher Scientific sign as they do everywhere else in our 300-plus sites around the world. And I know that I'll be at one of the main sites on day one welcoming our employees to the company as will other members of our Executive team around the world. So that one's pretty straightforward.

Charles Butler - Barclays Capital

Thanks, Marc.

Operator

And your next question comes from the line of Tycho Peterson with JPMorgan.

Tycho Peterson - JP Morgan Chase & Co

First question. On some of the incremental investments that you talked about both SG&A and R&D, maybe starting with SG&A, you've obviously talked about expanding the footprint in Asia. Can you just give us an update as to where we are in the process? And the same tone on R&D, you talked about getting some traction from some of that incremental investment this year. Should we assume that Analytical Technologies kind of accelerates in the back half of the year as a result?

Marc Casper

Yes. So, Tycho, thanks for the question. This is a very important one. Let me start with the R&D question, because we chose the words incredibly specifically here in my comments, which is really what you saw in March of 2011 was the benefits of the decision in 2009 to maintain our R&D spend. There's a real lead time to develop your next-generation and breakthrough instrumentation. So we made a decision that wasn't necessarily popular, but we felt it was the right decision at the time to really hold our R&D spend at that period. You're seeing the benefits of those decisions now. In 2010 and 2011, we've increased our R&D and you should start to see the benefits of that kind of very end of this year. But really 2012, 2013 is when those decisions that ramp up start to affect our growth rates. So that's how the R&D plays out. Commercially, we've talked about investments in Asia-Pacific and we talked about some IT/web type investments on the SG&A perspective. And clearly, you saw a nice quarter in emerging markets, which is an area that we are benefiting with 20-plus percent growth in China and 30% plus growth in India and Brazil. And we're continuously redeploying our SG&A. We're moving it from lower return areas to higher return areas and we're getting that, so we're starting to cap off the SG&A spend so that really becomes redeploying the best opportunities.

Tycho Peterson - JP Morgan Chase & Co

Okay. That's helpful. And then 1 for Pete. Can you talk about where your cash is now, net of kind of the Dionex financing or where it will be post close of the deal?

Peter Wilver

Yes. In terms of our cash at the end of the quarter, we were sitting with $2.8 million. Obviously, we need to use about $2.1 billion of that to achieve the Dionex acquisition. So we'll be back down to kind of normal levels between something around $500 million.

Tycho Peterson - JP Morgan Chase & Co

I was asking U.S. versus OUS.

Peter Wilver

Well, obviously it's mostly U.S., but it's either U.S. or pretty readily accessible foreign. So most of our cash right now, it's about 70% U.S. cash.

Tycho Peterson - JP Morgan Chase & Co

Okay. And then last one, I guess. With that in mind, appetite for kind of tucked-in deals here and other technology acquisitions, is that still a priority?

Marc Casper

Yes. The way we think about it is we always have a pipeline of deals. We use our criteria to make sure that those deals are attractive and generate shareholder returns. As I've said in the past, Dionex for instance, only affects 1 of our businesses, only 1 of our dozen divisions within the company. So we have plenty of management capacity, we have financial capacity, but we're very disciplined. We look at a lot of things and we walk away from things that don't meet our criteria and those deals that really squarely fit down with our criteria, we're more than willing to do.

Tycho Peterson - JP Morgan Chase & Co

Okay, thank you.

Operator

And your next question comes from the line of Amit Bhalla with Citi.

Amit Bhalla - Citigroup Inc

First question for Pete. Can you talk a little bit about the pricing environment globally and across the different business units? And also talk about any issues you're seeing with increased commodity pricing across your product line.

Peter Wilver

Sure. In terms of pricing, it's pretty consistent with what we saw in 2010. On consumables, where we're seeing reasonable price increases, we got more price in our Analytical Technology segment on the higher-end instruments and consumables than we did in Laboratory Products and Services. But again, that's pretty consistent with what we saw in 2010 and we netted positive price in Q1. And in terms of inflation the 1 area we're seeing, we're obviously impacted by the increase in oil prices. The main impact there is on our resin cost and plastics. That's not a huge raw material purchase for us, but it did impact us in the quarter and we expect it to impact us for the rest of the year. It ends up not being overly material and in Q1 and for the rest of the year, we expect our global sourcing initiatives to pretty significantly outpace our inflation impact.

Amit Bhalla - Citigroup Inc

Okay, great. And just a question on Dionex. I wonder if you could just elaborate a little bit more on the European commission that you still need to take place and your confidence in this mid-May close, since the timing of the close has moved around a lot a little bit.

Marc Casper

Yes. Basically, they have accepted our filing, which is an important milestone, and they are evaluating it and our expectation is a mid-May close and that's really our best view at this point.

Amit Bhalla - Citigroup Inc

When did they accept that filing?

Marc Casper

I don't have it memorized over the last few days, but what I know is it was a couple of weeks ago, right?

Peter Wilver

5 weeks before. In May.

Marc Casper

5 weeks before. But it's -- we've stacked into the date based on the process.

Amit Bhalla - Citigroup Inc

Okay. Thank you.

Operator

And your next question comes from the line of Isaac Ro with Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc.

So for the earnings guidance that I think you guys updated, I just want to make sure the math's right. I think you said negative $0.13 hit from the divestitures, maybe $0.09 add back for Dionex and then $0.03 for FX and $0.03 from accelerated share buybacks. So if I'm doing my math right, that's not quite the $0.05 you guys raised the guidance range by. So did I miss something there?

Peter Wilver

Yes. It's $0.06 for the accelerated share buybacks. You got the other numbers correct.

Isaac Ro - Goldman Sachs Group Inc.

Got it. Okay. And then just, Marc, secondly on pharma end market, could you to talk about your level of visibility in that end market this year given the active M&A environment? And then maybe secondly, do you see an opportunity to get some larger consolidated contracts up for bid this year and therefore get a little bit of market share?

Marc Casper

Yes. Our teams -- in terms of visibility, it's pretty consistent with the past. Most of what we do with BioPharma is consumables, just given the scale of those customers. And so it's fairly consistent and fairly predictable. In terms of we're always looking for opportunities to grow share and grow profitability and there'll be some opportunities. But things don't move quickly in terms of big share gain one way or the other. But we have a good pipeline of activities is the way I would characterize it.

Isaac Ro - Goldman Sachs Group Inc.

Awesome. And then just 1 last 1 of the biomarkers shrink you saw in the quarter. How significant was the contribution from the substance product from B.R.A.H.M.S?

Marc Casper

It's doing very well. I mean, it's a meaningful driver of growth. But that whole part of the business Clinical Diagnostics, which is our specialty assays, drugs of abuse and all of the different chemistry and immunoassay products, really broadly did well but the biomarkers and substance is doing really strong -- is really strong in performing.

Isaac Ro - Goldman Sachs Group Inc.

Got it. Okay. Thanks very much.

Operator

And your next question comes from the line of Quintin Lai with Robert W. Baird.

Quintin Lai - Robert W. Baird & Co. Incorporated

It caught my eye the talk about opening up a new facility in China. It looks like that it's kind of a make in China, sell in China strategy. Marc, could you kind of elaborate on what type of products that you expect to be making there? And is it an opportunity to maybe start making in China to sell worldwide in the future?

Marc Casper

Yes. So, Quintin, in terms of our strategy in China, I think it's well understood what our strategy there is which is use our scale to a significant advantage in serving the Chinese market. So we have multiple applications lab, we hire out of the best universities, we have a number of factories, we do local R&D, we have a division headquarter there. So we have really unique capabilities in China. What the new facility is, is a little bit of a different animal than what we have currently, which is this facility is for lab consumables, primarily plastic ware for life science research for the Chinese market. So if you go in -- I think you've actually been to our instrument and manufacturing facility in China, a lot of those products are used in China, but a lot of those products are used for global export as well. If you go to our glass facility in China, a lot of it's for China and a lot of it's for global export. We see the market growth opportunities so meaningfully in China for lab consumables on the plastics side that we believe we can support a full facility just for local consumption. So it's a little bit of a different angle, but we have a lot of manufacturing presence and experience in the region and have good confidence that this will be a nice driver of growth and profitability in the midterm.

Quintin Lai - Robert W. Baird & Co. Incorporated

Great. And then, Pete, did you -- maybe I missed it, but did you update cash flow guidance for the year?

Peter Wilver

I did not, but it's consistent with our previous guidance of $1.3 billion to $1.4 billion.

Quintin Lai - Robert W. Baird & Co. Incorporated

Excellent. Thank you.

Operator

And your next question comes from the line of Jon Wood with Jefferies.

Jon Wood - Jefferies & Company, Inc.

Quintin stole my question. So, Pete, that $0.09 of Dionex accretion, that I would imagine that excludes the negative carry up until May on the financing. Is that correct?

Peter Wilver

Yes, it does. That's the net impact of adding it from May onwards with the related debt for that period.

Jon Wood - Jefferies & Company, Inc.

Okay, great. And 1 for Marc on the M&A side. Just on you guys' appetite, do you think that the organization could handle another transaction of a similar size as Dionex within, say, 6 months of close or do you think it's more likely that there would just be the tuck-ins for the next few quarters as you integrate Dionex?

Marc Casper

From an M&A perspective, yes. I mean, the company has the managerial capacity to do another similar size transaction to Dionex as long as it wasn't in routine Scientific Instruments, right? I think that, that would be too much of a stress. But anything else that we do in the company, we have the capacity. So Bioscience, Specialty Diagnostics, other parts of Scientific Instruments or other parts of the company, management is unaffected by the Dionex integration. So that's not a constraint. But again, any M&A we do is going to meet our criteria, strengthen the company strategically and really increasing the value for our customers and obviously, generating meaningful shareholder returns.

Jon Wood - Jefferies & Company, Inc.

Okay, great. Thank you.

Operator

And your next question is from the line of Peter Lawson with Mizuho Securities.

Peter Lawson - Mizuho Securities USA Inc.

Marc, I just wondered if you could talk through the conditions in Europe. How you're looking at the market at the moment?

Marc Casper

Europe is pretty consistent with what we've seen over the past couple of quarters, grew low-single digits organically, Germany is doing pretty well. So that's obviously given the importance of the economy. France is doing pretty well. So we're cautiously optimistic with Europe and at the same point, it's very much in line with what we were expecting when we put our original guidance together.

Peter Lawson - Mizuho Securities USA Inc.

And then a similar question for Asia. Which country is growing fastest there and which product lines?

Marc Casper

So in terms of Asia, China and India have really good momentum, so that's very encouraging. That's been across the board in terms of strength across the portfolio. So I feel very good about that. Obviously, Japan had a big headwind with the big stimulus order, so that is a drag and -- but that obviously sunsets already. It was a 1-quarter effect.

Peter Lawson - Mizuho Securities USA Inc.

Finally, on the academic market, what's the tone from customers at the moment for you?

Marc Casper

I think the tone is relief that the budgets are now settled and that the changes to the budgets in the U.S., particularly with the continuing resolution really made customers nervous, is behind us. So I think there was traumatic changes one way or the other to the budgets, and I think customers are getting back to a more normalized environment.

Peter Lawson - Mizuho Securities USA Inc.

Okay. Thanks so much, Marc.

Operator

And your next question comes from the line of Sung Ji Nam with Gleacher & Company.

Sung Ji Nam - Gleacher & Company, Inc.

Just one quick question. Do you guys consider the assumption for this year, given that you're providing guidance including Dionex? Is it pretty much in line with your prior guidance or are there any updates to that?

Marc Casper

So in terms of the Dionex, the $0.09 that Pete articulated for the period that we own is consistent with the $0.13 to $0.15 that we originally announced over the first 12 months of ownership. And that is consistent with the synergies that we assume at the time of the deal. Now that we've gotten through most of the integration planning, we are comfortable and confident in our ability to deliver the synergies that we articulated at the time of the announcement. And we've done a lot of planning work with that regard. So we feel good about our ability to achieve the accretion numbers and the return numbers that we talked about at the time of the announcement.

Sung Ji Nam - Gleacher & Company, Inc.

Great. Thank you.

Operator

You last question comes from the line of Derik De Bruin with UBS.

Derik De Bruin - UBS Investment Bank

So going back to the question that was asked earlier on just the LPS grow rates. I just want to kind of -- if you could give a little bit more color on that. I mean, Lab Products and Services, it's customer channel, BioPharma Services and Lab Products. Could you just give -- I mean, you mentioned the BioPharma Services was strong. Could you talk a little bit about just the Customer Channels business and the Lab Products business? I mean, particularly, obviously, the comps have a bigger impact on the Customer Channels business than the other 1. Could you talk a little bit more qualitatively about that? I just think probably a little bit more color on those particular segments would make -- I think it will give people a little bit more comfort on the trajectory.

Marc Casper

Yes. So, Derik, thanks for the question. I'll make a couple of quick remarks. 1 is the headwinds that we powered through in the quarter in terms of things like weather and government uncertainty clearly affect consumable businesses more than they affect Analytical Technologies. So the company powered through that. I feel very good about our execution, but that's going to sit a little bit more in Lab Products and Services from Q1 than it will obviously going forward, because we don't believe those are recurring in nature. That's the first thing. And then obviously, Biosite sits in our Customer Channels business and that creates a headwind in Q1 and Q2. If I look at the business and the fundamentals of how Customer Channels, how Lab Products as well as BioPharma Services business is executing, I feel good about it. So I feel good about the outlook, I feel good about the guidance that we're giving this year in terms of our top line growth. So I think our prospects here are good.

Derik De Bruin - UBS Investment Bank

Okay. What is the dollar headwind in Q2 on Biosite?

Marc Casper

That's the last time we'll ever talk about it. So it is what, Pete?

Peter Wilver

Yes. The net number is about $25 million.

Derik De Bruin - UBS Investment Bank

Great. And at what point in time should we take the convert out of the share count?

Peter Wilver

It basically was redeemed right at the beginning of Q2.

Derik De Bruin - UBS Investment Bank

Great. Thanks.

Marc Casper

Thank you. So let me just wrap it up with a couple of quick remarks. So I'm pleased with our good start to the year and the excellent operational performance of our teams. With another excellent and good growth and adjusted EPS and the quarter behind us, we're very well positioned to deliver on our goals for 2011 and we're continuing our track record of strong EPS growth. I'd like to thank you for your interest in Thermo Fisher and I look forward, along with Pete, on updating you at the end of the second quarter on our progress for the year. Thanks, everyone.

Operator

Thank you for your participation in this conference. This concludes the presentation. You may now disconnect. Good day.

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