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Thermo Fisher Scientific (NYSE:TMO)

Q3 2011 Earnings Call

October 26, 2011 8:30 am ET

Executives

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

Peter M. Wilver - Chief Financial Officer and Senior Vice President

Kenneth J. Apicerno - Vice President of Investor Relations and Treasurer

Analysts

Ross Muken - Deutsche Bank AG, Research Division

Paul R. Knight - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Jonathan P. Groberg - Macquarie Research

Amit Bhalla - Citigroup Inc, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Nandita Koshal - Barclays Capital, Research Division

Peter Lawson - Mizuho Securities USA Inc., Research Division

Doug Schenkel - Cowen and Company, LLC, Research Division

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Tycho W Peterson - JP Morgan Chase & Co, Research Division

Derek De Vries - BofA Merrill Lynch, Research Division

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific Third Quarter 2011 Earnings Conference Call. My name is Tahicia, and I will your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin your call.

Kenneth J. 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, this call is being webcast live and will be archived on the Investors section of our website, thermofisher.com, under the heading Webcasts and Presentations until November 18, 2011. A copy of the press release of our third 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-Q for the quarter ended July 2, 2011, 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 third quarter 2011 earnings and future expectations, and also in the Investors section of our website under the heading Financial Information.

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

Marc N. Casper

Thanks, Ken. Good morning, everyone, and thank you for joining us on our earnings call for the third quarter of 2011. Let me start by saying that we had another quarter of excellent earnings growth, with a 23% increase in adjusted EPS over 2010. We reported double-digit adjusted EPS performance every quarter this year, and our teams did an outstanding job in executing their operating plans to deliver on our goals again this quarter. As I've been saying for the past couple of years, Thermo Fisher is committed not only to delivering strong growth in adjusted EPS, but to do so consistently. Our results in Q3 clearly continued that trend. In fact, on a year-to-date basis, adjusted EPS is up 19%.

Our 3 drivers of adjusted EPS growth haven't changed. They are: 1, top line growth through new product innovation, expansion in emerging markets and our efforts to leverage our unmatched commercial reach to gain share; 2, our focus on operational excellence through PPI and PPI Lean, as well as low-cost region sourcing and manufacturing; and 3, our ability to effectively deploy our capital to create shareholder value.

All of this added up to a third quarter record of $1.7 in adjusted EPS. Before I cover our EPS drivers in more detail, let me point out that we also delivered excellent adjusted operating margin expansion in the quarter, with an increase of 120 basis points to 18.4% over the same quarter last year. This margin improvement was a significant contributor to our strong EPS performance in Q3.

So turning to the top line, the first key contributor to our EPS growth. We achieved a 13% increase in revenues for the quarter to $2.97 billion. Let me give you some color on what we're seeing in our businesses.

Starting with our business in serving the industrial sector. We performed well across our portfolio, with strong revenue and bookings consistent with what we've been seeing all year. Our process instruments for materials and mineral applications performed very well in Q3. We also had another strong quarter for our handheld analyzers, continuing the great momentum we've had here for quite some time.

Across our Specialty Diagnostics businesses serving the healthcare industry, growth was driven by our various share gain initiatives. We saw a strong demand again this quarter for our clinical diagnostic products, driven by sales of our biomarker tests to detect sepsis and our test kits for drugs of abuse. We were also pleased to see good growth in the quarter in our Microbiology business, as well as our healthcare customer channel. Our new immuno diagnostics business, formerly Phadia, is off to a great start as well, with growth in excess of 10%. I'll give you an integration update in a few moments.

Moving on to Pharma and Biotech, we had a number of highlights in the quarter. As we've seen throughout the year, both our Biopharma Services and our Bioprocess Production businesses once again had a strong quarter. Our Pharma and Biotech customers are collaborating much more closely with us to drive productivity by leveraging our industry-leading services capability, which I'll talk about more later in the call. I'm also pleased to note that our HPLC business, which was dramatically strengthened through the Dionex acquisition, is clearly gaining share, with strong double-digit revenue growth.

The one notable headwind that we had to manage through in the third quarter was the academic and government market segments. As Pete and I mentioned in the September Investor Conferences that we attended, we began to see a softening in demand from the quarters in the U.S. and Europe late in the quarter. We've implemented a number of cost-reduction initiatives to mitigate the effect on our bottom line results, and we are continuing to drive additional actions in Q4. We have also put in place very targeted share gain action plans to maximize our performance in this segment, given our capabilities to help our customers meet their own productivity goals.

Let me make a quick comment on our top line growth from a geographic perspective. Our progress in leveraging our industry leadership in emerging markets is clearly paying off. We again performed very well in our Asia-Pacific countries, including China and India, both growing at above 20% in the quarter.

I just got back from China a couple of weeks ago where I met with a number of our customers who showed great enthusiasm about working closely with us. In fact, we're collaborating with our customers in the Biopharma, environmental and healthcare markets to develop comprehensive product and services solutions tailored to meet their specific needs. I was very impressed by the excellent progress our teams there are making with these initiatives.

Turning to new products. We had a steady stream of new launches in the quarter. Let me give you some of the innovation highlights under our Thermo Scientific brand. First, our Specialty Diagnostics business launched 2 chemistry analyzers. One is called Indigo, a fully automated compact chemistry analyzer that recently received clearance from the U.S. Food and Drug Administration for routine clinical chemistry administrations. The Indigo analyzer supports our specialty assays business, where we have leadership positions in drugs of abuse testing and therapeutic drug monitoring. This was part of our strong new product lineup at AACC, the leading conference for clinical laboratory professionals and clinical researchers.

Our other new chemistry analyzer, the Gallery Plus, was launched specifically for food, beverage and water analysis. The Gallery Plus is ideal for high-volume labs because customers can simultaneously analyze several parameters from a single sample.

Turning to our lab equipment business, we introduced a whole new platform in our ultralow temperature freezer line. This platform provides sample storage and protection and a variety of capacities while setting new standards for energy efficiency and space utilization for any lab looking to improve productivity. Given our industry leading position in lab equipment, this is a significant platform launch for us.

Finally, on analytical instruments. During our second quarter earnings call, we highlighted that we launched several significant new mass spectrometer products at ASMS in Q2. I'm pleased to report that there has been a lot of interest in and adoption of our new Q Exactive hybrid mass spectrometer.

Let me turn to our second key EPS growth driver, operational excellence. You know our strong track record around productivity, which continues to give us the ability to leverage our top line growth for strong bottom line results. We have a number of levers we could pull to protect the bottom line. Given the revenue headwinds that we saw in academic and government markets late in the third quarter, we've increased our activities here. Let me cover 3 of the productivity levers that I consider to be the most important.

First, PPI and PPI Lean. As you know, practical process improvement is ingrained in our company culture. At this point in the year, we've generated more than $60 million of productivity savings and we continue to ramp up our PPI project activity to streamline our processes and better serve our customers.

Second, low-cost region manufacturing. We typically save 20% to 30% by manufacturing in low-cost regions, primarily China, Mexico and Eastern Europe. To remind you, only about 10% of our manufacturing revenue comes from these regions, so we still have plenty of opportunity here.

And third, facility rationalization. We continue to focus on improving our revenue facility and constantly re-evaluate our global footprint to improve our cost structure and strengthen our global competitive position. So still a lot of opportunity for productivity gains in all of these areas.

Our ability to translate top line growth into strong bottom line results has always been a key strength of our company. When market conditions become a bit more challenging, our productivity levers are a particular advantage for us.

Moving on to our third key driver of EPS growth. We continue to create value for our shareholders through effective capital deployment. First, a quick update on Dionex. The integration is continuing to progress very well. The business delivered good growth and profitability, and as I mentioned earlier, we're especially pleased with the early momentum we're seeing in our HPLC share gain initiatives. The cost and revenue synergies are right on track with our plan and we benefited from tax efficiencies as well.

The most recent highlight, of course, is the acquisition of Phadia. With our new allergy and autoimmunity diagnostic testing business, which we completed that in late August. We've been talking a lot about Phadia since we first announced the deal back in May, so I'm not going to go into the details again today. But I do want to mention here that the integration is going very smoothly and the business is continuing to deliver strong growth, so it's off to a great start. I did participate in our day 1 integration activities in Sweden and Germany, and there was tremendous excitement about the potential that this combination has to offer our customers. We will be able to provide them with innovative new tests based on Phadia's robust R&D pipeline and we can continue to use our strong presence in Asia-Pacific to being these tests to customers in emerging markets, while leveraging our healthcare customer channel in the U.S. as well.

I want to welcome our new colleagues at ThermoFisher, and we're looking forward to working together to strengthen our presence in these high-growth markets. As you saw in our announcement a couple of weeks ago, following the close of Phadia, we established a third reporting segment for our Specialty Diagnostics business. This took effect in Q3. Pete will go into the details, but I want to make a point here that we've made this change to give our investors greater visibility in all 3 of our major businesses. This new reporting structure highlights our Specialty Diagnostics capabilities, which now total more than $2 billion in revenue, as well as our high-growth Analytical Technologies and market-leading Laboratory Products and Services businesses.

Clearly, it's been a productive year so far for M&A. But I also want to highlight that we continue to deploy our capital to buy back our stock. In the third quarter, we spent $225 million to repurchase 4 million shares. For the first 9 months of this year, we spent nearly $1 billion to repurchase 17.4 million of our shares. So we continue to be focused in generating strong returns by effectively deploying our cash flow and balance sheets to create value, both with M&A and share buybacks.

Switching gears, I'll now highlight a key growth theme as I've done every quarter to illustrate how we really leverage our unique depth of capabilities for the benefit of our customers. As you know, pharmaceutical companies continue to look for ways to reduce their cost structure and increase productivity. While outsourcing has become a standard practice in some industries, it's going a step further in the pharmaceutical industry. You've heard me talk about our relationship with Eli Lilly and the extent to which we support their clinical trials operations with materials manufacturing, packaging and labeling at their technology center in Indianapolis. What you may not be aware is the fact that we haven't even brought our managed services model that we're rolling out the pharmaceutical customers large and small. Our value proposition here is that we can offer a range of expertise and support to reduce their time and cost of lab operation so they can focus on the science, innovation and commercialization of new drugs. This managed services model incorporates our vast experience in designing and maintaining scientific labs for a variety of organizations.

We've developed a list of nearly 50 standard operating procedures that when implemented, ensure that a lab is operating as efficiently as possible. In fact, our managed services capabilities and the opportunity associated with it is not limited to the pharmaceutical industry. We recently signed an agreement with a major industrial company to develop a comprehensive chemical management program at a new R&D site being built in the southwest.

Our long-term goal is to build sustainable relationships with key customers and bring added value to their business through innovative products, world-class service and support.

Before I hand the call over to Pete, let me give you an update on our annual guidance for 2011. As you saw on our press release, we are revising our revenue and adjusted EPS guidance to reflect our market outlook at this point in the year, including less favorable foreign exchange rates. The change in guidance is driven primarily by our assumption that the softer academic and government market environment that we saw in the U.S. and Europe late in the third quarter will continue throughout Q4.

In the U.S., customer funding is impacted because the government is still operating under a continuing resolution authority and European governments are still sorting out their budgetary responses to the fiscal situation there. As I mentioned earlier, we are taking swift cost actions to offset these pressures on our top line to protect our bottom line earnings growth.

With this backdrop, we're revising our adjusted EPS guidance to a new range of $4.11 to $4.17 for the full year in 2011. This would result in 19% to 21% growth over our strong 2010 results. We are also revising our annual revenue guidance and now expect to achieve a range of $11.62 billion to $11.70 billion for 10% to 11% revenue growth over 2010.

So let me summarize my remarks this morning with a few key points. We had another quarter of excellent earnings growth with strong double-digit adjusted EPS performance and 120 basis points of margin expansion. We delivered good growth at the top line despite pressure from academic and government markets. We'll continue to manage our cost base to reflect the current environment, and we're committed to building on our strong momentum in new products and emerging markets.

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

Peter M. Wilver

Thanks, Mark. Good morning, everyone. As you know, we completed the acquisition of Phadia in August. Similar to our reporting of Dionex, given the significant size of this investment, we're providing visibility to the revenue growth performance of the combined companies by calculating organic growth on a pro forma basis as if Phadia were owned for the entire third quarter and both years. As Marc mentioned, following the acquisition, we established a new reporting structure to provide visibility into our company, highlighting our leading capabilities in all 3 segments: Analytical Technologies, Specialty Diagnostics and Laboratory Products and Services. This structure is also aligned with the way we manage these businesses to best serve our customers and to capitalize on our growth opportunities. So effective this quarter, I'll be providing details on all 3 segments later in my comments.

We're pleased to report another quarter of strong adjusted earnings per share with 23% year-over-year growth to a third quarter record of $1.7 compared to $0.87 last year. GAAP earnings per share in Q3 was $0.69, up 5% from $0.66 in the prior year's quarter, including acquisition-related costs for Phadia.

Moving on to our top line performance, reported revenue increased 13% year-over-year to a third quarter record of $2.97 billion. On a pro forma basis, as if both Dionex and Phadia were owned for the entire third quarter and both years, total revenue increased by 7% year-over-year and organic revenue growth was 3%. In addition to the organic growth, Q3 pro forma revenue increased by 3% as a result of favorable foreign currency translation and another 1% from acquisitions other than Dionex and Phadia. Bookings were essentially in line with revenue in the quarter.

Now let me cover our revenue performance by each of the 3 segments. First, Analytical Technologies Q3 revenue grew 22% on a reported basis. On a pro forma basis, including Dionex, Analytical Technologies revenue increased 9% year-over-year and organic revenue growth was 5%. In the quarter, we continue to see strong growth in our instrument businesses serving industrial and applied markets. Also, our Biosciences business, particularly our bioprocess production products continued to deliver strong year-over-year growth. Growth in this segment was, however, affected by challenging conditions in academic and government markets in the U.S. and Europe, as Marc referenced in his comments.

Turning to the Specialty Diagnostics segment. Q3 revenue grew 20% on a reported basis. On a pro forma basis, including Phadia, Specialty Diagnostics revenue increased 11% year-over-year and organic revenue growth was 6%. In this segment, we continue to see strong growth in clinical diagnostics, specifically our biomarkers business and Phadia, now called immunodiagnostics, delivered better than 10% growth. We also had mid-single digit growth in our channel businesses serving healthcare markets, which is also a part of this segment.

In the Laboratory Products and Services segment, Q3 revenues increased 5% on a reported basis and grew 1.5% organically. This segment has the highest exposure and was most affected by academic and government markets, although our Biopharma Services business continued to deliver strong growth.

By geography, we continue to see organic growth in the high teens in Asia-Pacific. China and India again performed very well, with both growing above 20% as Marc mentioned. North America and Europe both grow on the low-single digits and rest of world declined in the mid-single digits versus a tough comparison of high 20s growth in the prior year's quarter.

Turning to adjusted operating income, we had strong bottom line results, with Q3 adjusted operating income up 21% year-over-year to $547 million. Adjusted operating margin was 18.4%, up 120 basis points from 17.2% in the year-ago quarter. Year-over-year margin expansion was driven by pull-through on organic growth and strong contribution from our cost-productivity actions. And we continue to see nice accretion in the quarter from our recent acquisitions.

However, similar to last quarter, we continue to encounter inflationary pressure in some of our direct material costs, particularly oil-based raw materials like plastic resin, which we partially offset with additional global sourcing initiatives. We also began to implement incremental restructuring actions and discretionary cost controls this quarter in response to the more challenging market conditions. These totaled about $30 million in annualized benefit over and above our normal productivity efforts driven through PPI and PPI Lean projects.

By segment, Q3 adjusted operating income and Analytical Technologies increased 36% year-over-year and adjusted operating margin was 19.5%, up 210 basis points versus last year. In Specialty Diagnostics, Q3 adjusted operating income increased 27% year-over-year with adjusted operating margin at 24.4%, up 140 basis points from the year-ago quarter.

And then Laboratory Products and Services segments, Q3 adjusted operating income grew by 6% with adjusted operating margin at 13.5%, slightly above the year-ago quarter.

Moving onto the details of the P&L, total company adjusted gross margin was 43.6% in Q3, up 190 basis points from the year-ago quarter. The year-over-year margin expansion was driven by our productivity actions and global sourcing initiatives, which were partially offset by raw material inflation and some unfavorable product line mix. Gross margin was also benefited from the accretive impact of recent acquisitions.

Adjusted SG&A in Q3 was 22.3% of revenue, 50 basis points higher than 21.8% last year, driven by the dilutive impact of our acquisitions. Excluding acquisitions, we delivered good year-over-year margin expansion as we continue to tightly control discretionary cost and restructure our cost base. R&D expense was 2.9% of revenue in Q3, up 20 basis points from last year as a result of our growth investments and our recent acquisitions.

Moving below the line, our Q3 net interest expense increased $27 million year-over-year to $43 million, driven by higher interest expense as a result of issuing debt to fund the Dionex and Phadia acquisitions. This was partially offset by higher year-over-year interest income due to larger average cash balances and slightly higher interest rates on foreign cash.

Adjusted other income was a $2 million loss versus $1.8 million income in the prior year, primarily as a result of some favorable items in the prior year.

Adjusted tax rate in the quarter was 18.5%, down 110 basis points from last year as a result of our tax planning initiatives, including tax synergies related to the Dionex and Phadia acquisitions. And during the quarter, we deployed $225 million of our cash to buy back 4 million shares of our stock, which left $250 million remaining at the quarter end under our current $750 million authorization that expires in February 2012.

Average diluted shares were 383 million in the quarter, down 22 million or 5% 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, we continue to maintain a strong balance sheet and deliver solid cash flow performance. Year-to-date cash flow from continuing operations was $1.04 billion. Free cash flow was $862 million after deducting net capital expenditures of $179 million. Year-to-date free cash flow was flat year-over-year, primarily as a result of higher operating income and improved working capital performance, offset by higher interest payments and the timing of cash taxes. We ended the quarter with $900 million in cash and investments, down $500 million from Q2, primarily as a result of closing Phadia.

Total debt was $7.1 billion, up $3.1 billion from Q2 as a result of issuing $2.1 billion of senior notes and $1 billion of commercial paper to fund the Phadia acquisition.

And now moving on to our guidance for 2011. As Marc mentioned, since we last provided guidance in August following the Phadia acquisition, our academic and government markets have become more challenging and foreign currency exchange rates are less favorable. As a result, we're lowering the midpoint of our 2011 guidance range by $180 million to a new range of $11.62 billion to $11.70 billion. This range represents growth of 10% to 11% over our 2010 reported revenue of $10.57 billion.

In terms of pro forma revenue growth including Dionex and Phadia, the midpoint of our revenue -- reported revenue guidance represents about 6% growth. This translates to midpoint organic growth for the year of about 3%, excluding favorable foreign currency of 2% and completed acquisitions other than Dionex and Phadia of 1%. As I mentioned last quarter, the Biosite and Japan stimulus headwinds we experienced in the first half have a negative impact of about 1% on our full year 2011 organic growth.

Moving to our earnings guidance, primarily as a result of our revised revenue outlook, we're slightly lowering the midpoint of our adjusted EPS guidance by $0.06 to a new range of $4.11 to $4.17, which still represents very strong growth of 19% to 21% over our 2010 adjusted EPS of $3.46. This guidance includes our completed acquisitions and it does not include any other future acquisitions or divestitures.

In interpreting our revenue and adjusted EPS guidance ranges, as I said in the past, you should focus on the midpoint as our most likely view of how we see 2011 playing out. Results above or below the midpoint will depend of the relative strength of our markets in the fourth quarter.

In terms of some color on below the line items, our full year adjusted income tax rate is now expected to be 19% to 19.5%, slightly lower than last year and our previous guidance, primarily as a result of incremental tax synergies related to Dionex and Phadia. And our full year average diluted shares are estimated to be in the range of 383 million to 387 million, down slightly from our previous range. This estimate assumes that we'll use the remaining $250 million of our current share buyback authorization through its expiration in February 2012.

Bridge the $0.06 change from the midpoint of our previous guidance to our current guidance. We lost about $0.12 as a result of lower revenue, offset by incremental cost actions of $0.03 and a net improvement and below the line items, including our adjusted tax rate and a lower share count of another $0.03.

As I mentioned earlier, we've already begun executing incremental restructuring actions and strict discretionary cost controls, which helped us deliver strong financial results and year-over-year margin expansion this quarter. We're also implementing additional cost actions in the fourth quarter to further align our cost structure with our current outlook.

Finally, we continue to reap the benefits of our investments in new products and services, as well as our industry leading presence in Asia-Pac and other emerging markets, all of which position us well for future growth.

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 from Deutsche Bank.

Ross Muken - Deutsche Bank AG, Research Division

On the outlook, so I think Pete, you mentioned it was a $0.12 delta on revenue and you're offsetting some of it with cost. That seems like a pretty big delta given we only have half the year to go. So in terms of when you started to see some of the shift in demand on the revenue line and sort of the magnitude, I guess, what was sort of most surprising to you in terms of trend? And then in sort of the inference for organic growth for Q4, it seems like you're implying something in the very low single-digit range despite an easier comp. And I guess, the assumption there is you saw some weakness in Q3 and then things are expecting to kind of continue or worsen to Q4. Is that a correct characterization or not?

Peter M. Wilver

So there’s a lot embedded there, Ross. Let me try to break it down into the pieces. In terms of what we saw from a timing perspective, we really saw academic and government weakened later in Q3. And order of magnitude, we saw mid-single digit decline for academic and government in the third quarter, which prior for our first 2 quarters even through July and parts of August, you're looking at low-single digit growth, so a very large swing in actually what happened in Q3. So that's the magnitude of that. In terms of organic growth outlook for the fourth quarter, it's 2% to 3% is what we're looking at for the fourth quarter at this point. So it's really been -- looking at academic and government and given the shortfall of late in the quarter, we've assumed that that's going to continue. As I mentioned in the opening comments, there's not a huge catalyst for change if you all listen in my mind in the fourth quarter because the U.S. is still going through the continuing resolution authority right now, and that's going to put a dampener in the short term on the academic and government markets. And Europe, as you see in the headlines everyday is still going through its fiscal response to the problems that is happening in southern Europe. So very short-term catalysts. We're not assuming they're going to change a lot and hence, we're reflecting that in our outlook.

Ross Muken - Deutsche Bank AG, Research Division

And I guess, in terms of going back to the Analyst Day and the early color you gave on 2012 were obviously a little bit of a different jump-off point, a few things have happened. But as I think about your sort of your core end markets going into next year versus what your expectation when you first gave some color, obviously, government and academic seems to be a delta for the worse. Are there any other markets where you feel like either performance is better or worse than what you what you had expected when you originally gave that color?

Peter M. Wilver

Let me comment, Ross, on what we're seeing broadly in the markets and some more detail. At a high level, our markets in Q3 were very similar to what we've seen in the last few quarters with the obvious exception of academic and government. So I'm not going to delve into that because we just talked about it. But in industrial and applied markets, third quarter is very strong for us, both in revenues and in bookings across the broad base of our businesses. We're obviously following the external factors quite closely and we're monitoring the market, but the third quarter was strong for us. So if you're thinking back to May, we're sitting here in October, industrial very similar. In terms of Biopharma, for us, Ross, that grew a little bit better than the company average. The 2 businesses that we've been highlighting all year continue to perform strongly, and we're benefiting from the fact that we helped our customers drive their own productivity, which is why we've done well in this segment. So I'd say that Pharma biotech hasn't changed a lot for us as this year has unfolded. And healthcare and diagnostics, that's been pretty consistent demand as well. Growth in specialty diagnostics for us was driven both by market growth as well as our share gain initiatives. So if I think about the whole year, 3 of our 4 customer segments representing roughly 75% of our business, pretty consistent, and 1 segment under very significant pressure relative to what we have seen in May. So that's our view on where we are with the end markets.

Operator

The next question comes from the line of Quintin Lai from Robert W. Baird.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

So as we look at the implied guidance, it looks like $1.13, $1.19 for EPS, that's still be about 18% to kind of 20-some percent EPS growth year-on-year for that quarter. So Marc, given what you're seeing in the academic, let's say that 2012's continuation of the trends that you're seeing now, given maybe let's say a low-single digit organic environment, given all the other things you've got with acquisitions and all that, is it still okay to say that you still think that double-digit EPS growth is achievable as we look on to 2012?

Peter M. Wilver

So Quintin, a few things. As you were mentioning on our Q4 outlook, what's implied in the outlook or in the guidance is 19% to 24% EPS growth for the quarter. So another strong double-digit growth for us and assuming, as I mentioned to Ross, 2% to 3% organic revenue growth is what's implied in that. So we're clearly getting a lot of leverage from the top line into the bottom line. In terms of our outlook and guidance for 2012, we're going to do that like we've done in years past, specifically in the beginning of the year. We typically do it in the February timeframe. So we'll go through the process of finishing our own internal operating plans and setting out the EPS objectives. But clearly, as you look at 2012, we bought a lot of shares back. That's favorable. We've been active on the M&A front, both with Phadia and Dionex. Those businesses are both performing very well, right on track with our integration plans. And those 3 actions, in and of itself, will be strong contributors of earnings growth as well as our strong track record of driving margin expansion. So while the specifics were outlined in February as we've done in every other year past, I feel very confident that we're going to have going to have very strong financial performance in 2012.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

And then one of the other areas of concern is what's the future outlook for China since you just come back. What are you hearing, I mean, from your customers, from the government in terms of kind of the near and midterm growth outlooks there?

Peter M. Wilver

Yes, it's a question that I get asked a lot from our investors, owners. I spend a fair amount of time -- I think I saw it in the range of 30-plus customers when I was in China. And so those customers are excited about doing business with us. Some of them are small customers that want to do a lot more, some are big customers that also are excited about expanding the relationship. Our teams are performing extremely well. We have growth well over 20%. The outlook for strong revenue growth looks positive. So it's harder for us to comment broadly on China, but I can comment specifically on what our business's outlook is, and that looks very encouraging and our team is executing very well.

Operator

Your next question comes from the line of Jon Wood from Jefferies.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Marc, probably for Pete too. So if you roll up all of the restructuring you've kind of done in the first half of '11 and then what you've discussed in 3Q and 4Q, taken all over that, rolling it up, what kind of net benefit does that suggest to 2012 in terms of operating profit?

Marc N. Casper

In terms of the total amount of benefit from the actions that we've taken so far including the $30 million that I referenced that we beginning we've initiated since the beginning of Q3, it's about $70 million on an annualized basis. Obviously, we're getting some of that this year, and we'll get some incremental next year. So it's probably a little less than and 1/2 this year and then we get all of it next year, or almost all of it next year. So it's another $30 million to $35 million incremental benefit.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Okay. One quick follow-up. The free chase outlook, could you update us on that? I looks thanks for that. The free cash outlook. Could you update us on that? It looks like your conversion ratio is a bit below the 90%. You've kind of talked about historically. Has something structurally changed in terms of Phadia or Dionex? And just kind of give us a rule of thumb on how to think about the free cash conversion in 2012.

Peter M. Wilver

Yes, I don't think the model has changed. So the assumption of 90% is good. Year-to-date, we've had a little bit of an impact because of timing of cash tax payments. I mean, we're basically almost paid the full bill through 3 quarters, so we'll get a little of benefit in the fourth quarter. I'd say that the cash flow outlook right across and the free cash basis of that right now on a free cash basis for 2011, probably brackets around $1.3 billion, maybe slightly above that.

Operator

Your next question comes from the line of Doug Schenkel from Cowen and Company.

Doug Schenkel - Cowen and Company, LLC, Research Division

I just want to run through a little math here. Total academic government as a percentage of sales is right about 20% after the mergers? Is that right?

Marc N. Casper

No, it's still close to 23%, 24%.

Doug Schenkel - Cowen and Company, LLC, Research Division

So low 20s. So if we assume that whole group is down mid-single digits in Q4 along the lines of what you described to happen in Q3. That's about, I think, about $30 million or about 1 point of growth year-over-year. You guys lowered guidance by, I think, it's $180 million at the midpoint. In your response to one of Ross' questions, you made it seem as no other areas are holding up pretty well. Can you just explain what I'm missing here in terms, including maybe breaking down how much of this change is foreign exchange, how much of it is coming up short of your internal expectations for Q3 and how much of it's Q4?

Peter M. Wilver

So the split of the $180 million if you look at it at the midpoint, it's about 1/3 FX and about 2/3 organic. And so that's the 1% organic change from our previous guidance to where we are today. I think the only problem with your math is that you're starting with 0 versus starting with we were assuming some level of growth in academic and government. So the delta is a little bit bigger. As Marc said, we've been clipping along at about low single digits to low end of mid-single digits, and we saw a mid-single digit decline in Q3. So we're expecting comparable growth profile in Q4 versus, obviously, an expectation that we would had some growth.

Marc N. Casper

So Doug, it kind of ballpark, you assume about a 7-point delta between what we had been seeing and what we saw in Q3 between low growth versus mid-single-digit decline.

Doug Schenkel - Cowen and Company, LLC, Research Division

So I know the intent of this new cut of the revenue model is to provide a greater degree of clarity for investors. But at this point, again, maybe I'm just a little slow, but for me, it's a little hard to see what's really going on with the underlying Analytical Technologies and Specialty Diagnostics growth given the new divisional structure and the fact that you're blending Dionex and Phadia into what you're calling adjusted organic growth. For instance, in Specialty Diagnostics, it's hard to see what you did with Phadia. It's hard to see what's embedded in Q4. And I'd say more importantly, it's hard to figure out what's going on with the underlying business. Can you just talk a little bit, I mean, obviously, it would be great if you would break this out. And I think it would be helpful for us and even helpful for you guys. But to the extent you're not going to do that, can you provide a little more guidance on how the underlying businesses, meaning, not Dionex, not Phadia, are holding up to make sure that those are holding the plan?

Marc N. Casper

When we acquired Dionex and Phadia, we did the pro forma because effectively, we wanted to give as much visibility to the underlying performance year-over-year. I think what's important to understand in Q3, whether you use the pro forma math or you didn't use the pro forma math, organic growth would've been 3% either way. So it would not have changed the organic growth number from the 3% number for the quarter. So that's at the company level. And Pete, anything you want to comment on the segments?

Peter M. Wilver

No. In terms of the segments for Specialty Diagnostics, it's probably about a percentage point or so accretive in the quarter. And then in terms of Analytical Technologies, Dionex is less than 1/2 of percentage point, accretive. And remember, in Analytical Technologies, with Dionex, we do have product substitution issues there which is make that number very hard to figure out. We haven't gone the trouble to try to figure out what if someone had purchased Dionex, HPLC versus a Thermo Scientific one. So just haven't gone through that process to try to determine that.

Operator

Next question comes from the line of Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

If I just look at 2012 and refer back to the Analyst Day in May, is it fair to say you guys still expect call expect call 5% organic growth and 13% to 15% on the EPS line off of the new 2012 EPS guidance range?

Marc N. Casper

Well, for the 2011 guidance range?

Isaac Ro - Goldman Sachs Group Inc., Research Division

I'm sorry, yes. Using the 2011 guidance as a base, is it fair to still look at the framework for 2012 that you offered in May is the right way for next year to shape up?

Marc N. Casper

We're going to do our guidance update for 2012 and give our guidance for the year in February,Isaac. So that's the timeframe there. And as I'd mentioned earlier, 3 of our 4 markets are similar outlook, 1 of which is less than -- we haven't finished on our operating plans to determine the right level of growth and margin expansion and EPS assumptions until we go through that process.

Isaac Ro - Goldman Sachs Group Inc., Research Division

And then, Pete, I think I might have missed if you guys updated the tax rate guidance. You guys are obviously turning little below the previous range, you had expected -- wondering if you had an update there?

Peter M. Wilver

Yes, the update is we're expecting 19% to 19.5% for the full year.

Operator

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

Amit Bhalla - Citigroup Inc, Research Division

I'm wondering if you could talk a little bit about the demand for some of your short versus your longer cycle capital products, orders were more in line revenue this quarter. So maybe, you could talk geographically and maybe product line between those short- and long-cycle products?

Peter M. Wilver

Yes where you look at the industrial and applied markets, we're really looking at GDP growth and outlook as the key driver, we saw very good demand in terms of bookings for both short, non-cycle products, like handhelds and long-cycle products, like materials and minerals process instrumentations. So that was sort of I was describing the markets for that site. So they're very representative short cycle look good, long lead time, later cycle stuff, look good as well. So very good quarter for Industrial and Applied throughout what we've seen in 2011 so far.

Amit Bhalla - Citigroup Inc, Research Division

And can you talk geographically, are there any other differences along the same lines?

Marc N. Casper

No, we have a very strong presence with Asia-Pacific with our industrial, and that's -- it's been a key beneficiary. So Asia-Pacific is going to be the fastest-growing region like it is for the company. But not any particular nuances that are really materially different in Europe and U.S. as a company as a whole.

Amit Bhalla - Citigroup Inc, Research Division

Just a question on Phadia, now that Phadia is in your hands, in the U.S. market, do you have any different view of blood-based testing versus skin prick testing and how that conversion -- how quick that conversion take place in the U.S. market?

Marc N. Casper

I think the assumptions that we talked about at the time of the acquisition of a slow-but-steady conversation of skin prick to blood base. Nothing has changed in our assumptions there. So we've seen our Immunodiagnostic business, which was formerly Phadia, being a very fast growing business. High single digit, low double- digit type growth business. Really driven by partially the conversion of skin prick testing, but also the increase in asthma and allergy incidents and new products from autoimmune disease and revenue synergies that we get. So we think the business is has very bright prospects.

Operator

Your next question comes from the line of Peter Lawson from Mizuho Securities.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Marc, there seems to be a greater focus in your commentary around the share gains in the past, and where these gains coming from. It seems it's PLC, but what other areas there and what are you doing to drive that share gain?

Marc N. Casper

Yes, so when you look at our commercial reach, it unparalleled in the industry. It's something that we talk about periodically. We probably didn't talk about it as much in the last couple of quarters. But when you look at the various product categories clearly, we gained share in chromatography, which we mentioned in the prepared remarks, but also our healthcare market channel had a very good quarter in the U.S. in terms of performance. Our diagnostics businesses broadly did well, our clinical diagnostics business performed very well in the share gain perspective. And when I look at our performance in certain regions, including country like China or India, I think I feel very confident that we had above market growth through our initiatives there.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And just on the longer-term for margin expansion, is there a lot of upside to that lab products business or it more of a cash cow for you guys?

Peter M. Wilver

In terms of margin expansion, you're going to see more expansion in Analytical Technologies and Specialty Diagnostics because within our lab products business, we have our channels business, which margin expansion is going to continue but at a slower rate simply because we don't manufacture all of the products. And Biopharma Services as well, it's more of a people-intensive business. But the Lab products portion of that, where we make equipment and consumables is really very good margin expansion prospects.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And then just finally, Peter, I missed your color on backlog bookings versus revenue?

Peter M. Wilver

So I said basically, bookings were in line with revenues in the quarter.

Operator

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

Jonathan P. Groberg - Macquarie Research

Can you just remind us what the growth rate in China and India has been year-to-date and what was it in 2010?

Peter M. Wilver

In terms of growth rate for China and India, both are greater than 20% for the year-to-date numbers. And I don't have it memorized what we did last year, but it was strong -- it was our fastest growing geographies.

Marc N. Casper

Stronger this year than it was last year.

Peter M. Wilver

Yes, so we accelerated last year.

Jonathan P. Groberg - Macquarie Research

I guess, the reason for the question is from number -- I guess, as you think about I mean, I know you're not giving me 2012 guidance, but it's -- these regions have been a strong driver of growth and when you're over there, Marc, some other part of the question has been asked, but certainly your expectation that what you're seeing and what you're doing internally able to sustain these types of growth or would you expect some deceleration from the level that you're currently at as I think about those geographies in particular?

Marc N. Casper

The way we characterize that -- if you look at our internal plans, so assuming market is exactly the same as it is today in those regions, I believe that we can sustain these types of growth. So if the markets get better, we have higher aspirations that the markets get worse, then you may see those growth rates come down. But of the market condition were exactly as they were today, it's a very good pipeline of initiatives to drive and sustain the types of growth rates you've seen.

Jonathan P. Groberg - Macquarie Research

And then on the academic and government, if you could just clarify or maybe delineate between instruments and Consumables in terms of what you saw halfway through the quarter and your outlook for the -- thinking about those 2 different segments?

Peter M. Wilver

The pressure we're seeing clearly more in the equipment and instrumentation side. I mean, it's broad-based, but it's more definitely heavily weighted towards instruments and equipment and capital purchase decisions.

Operator

Your next question comes from the line of Paul Knight from CLSA.

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

Marc, in the past, I know Fisher has, before it was even owned by Thermo would have a lot of cyclicality and lab equipment, lab hoods, things tied to capacity expansion. Is that the weakest part of what you see in the business right now?

Marc N. Casper

Yes, I would say in terms of -- as Pete was just talking about, lab equipment, workstation those types of products clearly are being impacted by weak academic and government funding. And how that really shows up at the detailed level, with the number of large tenders, big projects is a lot less. So you're still getting the small replacement business but the large projects we saw a real slowdown in the third quarter.

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

And is the math correct that emerging markets are still showing one of your best growth rates for the year?

Marc N. Casper

Emerging markets growing very quickly. And as Pete mentioned, we had very strong growth across Asia-Pacific, much, much faster than the company average. So we're seeing excellent performance in our emerging markets.

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

And your China expansion ahead or right on schedule for what, second half next year in Suzhou?

Marc N. Casper

We're due to come online in the second half, which is what we were expecting in terms of it. We just broke ground. So depending on how fast the construction goes, it will happen sometime in the second half.

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

And then lastly, what happens after Suzhou? Is it a new plant a year? Is it a new plant every couple of years? How do you grow the business there?

Marc N. Casper

So when we look at the growth, manufacturing footprint is part of it, but also it's commercial expansion. So we're not constrained by how fast you put on new factors. I think you'll see us continue to build out our presence in Asia-Pacific from a manufacturing perspective, both to take advantage of the cost, but also to be closer to the customers and deal with the import duties and those types of things. So I don't think it's a factor here, but we've been on the trend for every couple of years expanding our capacity in the region.

Operator

Your next question comes from the line of Derek De Vries from Bank of America.

Derek De Vries - BofA Merrill Lynch, Research Division

So I have kind of a multi-parter here so bear with me. So basically since the middle of 2010 in the LPS business, we've had to deal with a number of one-offs and changes. We flew in Biosite and the growth in this business has been choppy to say the least. And now we have more choppiness in terms of the academic funding. I realize that it's workstations and the furniture and a lot of that stuff that the Fisher guys have and the Fisher business which is unpredictable. But I'm worried that over the trend of the last few quarters, we've seen not particularly robust performance out of this business, and I'm just wondering, does this business go back to a point where it's consistently, and I stress the term consistently, delivering kind of a 3% to 4% organic revenue growth rate?

Marc N. Casper

Derek, when I look at the Lab Products and Services business, I think that we have good prospects there, right? Is it to have more exposure to academic and government right now and is that a headwind? Sure. But I can associate with big chunks of this business for a decade, and when I look at it, I think that we have the industry leading channel, we'll benefit from expansion in emerging markets where we've had a smaller mix as a percent of the total. So if you think about it, Asia-Pacific is much less of the total of that business in aggregate. So therefore, it doesn't yet enjoy the full impact of the other parts of the business has. So we're expanding that. And if I look at our Biopharma Services business, I see great opportunities to help our pharmaceutical customers. So I do think you'll see that business return to a better growth prospects on a going forward basis

Derek De Vries - BofA Merrill Lynch, Research Division

I guess, with that in mind, can you help us break down what do Biopharma Services do and do in the quarter? There's just one thing I'm trying to get to the underlying growth problem and where the hiccup is and the demand for it. Because I said, if you're telling me that it's all equipment, it's all this and it's not the core consumables that have really been impacted, that's one thing. But I'm worried that we're starting to see weakness in the overall underlying demand for the core consumables.

Marc N. Casper

So at a high level, when you go into it, the primary driver of the weakness in the Lab Products and Services business is the equipment of and the capital side for both our channels business and for our Lab Equipment business that's the primary driver of the weakness that we saw.

Operator

Your next question comes from the line of Nandita Koshal from Barclays Capital.

Nandita Koshal - Barclays Capital, Research Division

I guess, my first question would be around academic and if you could give us a little bit more color around which specific product areas -- I know you mentioned instruments versus consumables and instruments naturally being weaker, but which specific product area might have seen a little bit more of an impact? And then looking forward, as you think about the continuing resolution and some sort of finality on the '12 budget as a catalyst or is this really more a [indiscernible] Process, overhang, which may be continues for a few more months. How are you thinking about an infection in that market or some sort of great change?

Peter M. Wilver

Yes, I think the way we thought about it is for Q4 we're assuming conditions that we saw in Q3 continuing. And the reason for that is it's hard to say which is the continuing resolution, which is the super committee. I think lack of clarity of budgets is the driver in the U.S. as opposed to this specific budget. And once it gets a little bit more clarity I think customers will have more confidence to spend on bigger ticket items. And as Pete said, as you look to the various mixes of products, it's really around the instrumentation equipment was more affected in the academic and government in the consumables portion.

Nandita Koshal - Barclays Capital, Research Division

Was it also areas like mass spec for instance like where you've seen some of the other players come up with a little bit positive commentary? Of course, it could be an academic or outside. But could there be some sort of competitive dynamic there?

Marc N. Casper

Yes, when you look at the types of instruments that we make that are sold to academic and government, that ranges from spectroscopy instruments, that ranges from spectrometers, it's our chromatography instruments, it's our lab equipment that's a range of products you might see in those customers. Do I think it's a competitive dynamic? No, I think it's a market-based dynamic, is what we're facing.

Nandita Koshal - Barclays Capital, Research Division

I guess, if you could clarify, why do you think you guys saw a little bit of a lagged impact? In some of the company's in the space even started seeing the effect in Q2. Is there some sort of explanation or is this random?

Marc N. Casper

What we said in Q2, the effect that we saw was we were expecting a bit of a pickup in Q2. We didn't see it. But we didn't see the decline so I can't -- it's hard to comment on anybody else because if look at what you did say and expect versus what happened. What I can say is that we saw not a pickup in Q2, that we were expecting, that's why we articulated in July and we're expecting it at that lower rate of growth to continue, and we actually saw it go from that low growth to mid-single digit shrink. So it's hard for me to comment on anybody else's because I don't know what their expectations were.

Kenneth J. Apicerno

Operator, we have time for just one more question.

Operator

Our last question comes from the line of Tycho Peterson from JP Morgan.

Tycho W Peterson - JP Morgan Chase & Co, Research Division

I actually want to follow up on the last question because I think it's an important point. I mean, most of your peers or a great numbers peers a great number of peers were pretty cautious around the second quarter talking about the academic softness and you seem to be a little bit more confidence, obviously, with Phadia closing. You bumped numbers up. So can you just talk to your visibility in the economic channel because you seem to have gotten caught flat-footed in kind of mid-September and what steps can you take to try to kind of buck the trend there going forward?

Marc N. Casper

Yes. So I think when you look at the outlook for the year, basically, what we said at the beginning of the year in terms of organic growth for the business and margin expansion, we have stayed consistent with that throughout the year. And as you recall back to the very beginning of the year, what we had assumed was the headwinds that we saw in the first half of Biosciences and the Japan stimulus wouldn't happen in the second half. So you'll have easier comparisons. And you'd see a little bit of a pickup in the second half because of that. If you look at the various changes to guidance, we didn't change guidance throughout the year on those factors. So margin expansion and organic outlook stayed consistent with what we said at the beginning of the year. We raised guidance because of foreign exchange, tax rate and the very positive acquisitions that we did. As we articulated in the previous call, in July, what really start saw, Tycho, was we had expected delivered of an improvement in academic and government. It didn't happen. And we've been in this business a long time, and we've really haven't seen a mid-single digit decline quarter in academic, government before. So that happened. And we responded aggressively on managing cost. We have a number of share gain initiatives I feel really good about, that position us well for the future. And like always, we try to provide as much clarity in the process as we possibly can.

Tycho W Peterson - JP Morgan Chase & Co, Research Division

And then can you talk to the cost-control initiatives you announced $15 million to $17 million? Does that impact R&D details and any color by division?

Marc N. Casper

I think it's very focused on site consolidations, it's focused on selective restructuring actions in the affected parts of the business. As well and then obviously, as Pete said, some very tight cost controls that we have in place. So those businesses are feeling more pressure. We've taken more aggressive actions. But like everything, I think good cost management is part of managing a business effectively and all of our businesses being beings disciplined on the cost side and are working to drive very strong bottom line performance. So Tycho, thank you for the question.

So let me just wrap it up. Thanks for joining us. When I think about where we are, we have a very good track record, a proven track record of delivering strong adjusted EPS growth. We demonstrated that again this quarter with 20% growth in earnings. We remained very focused on executing on our plans to achieve our goals for the year. So thanks for your continued support of Thermo Fisher Scientific, and I look forward to updating you on our progress early in the new year. Thanks, everyone.

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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