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Executives

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

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

Analysts

Ross Muken - Deutsche Bank AG, Research Division

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

Jonathan P. Groberg - Macquarie Research

Doug Schenkel - Cowen and Company, LLC, Research Division

Amit Bhalla - Citigroup Inc, Research Division

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

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

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

Peter Lawson - Mizuho Securities USA Inc., Research Division

Derek De Vries - BofA Merrill Lynch, Research Division

Thermo Fisher Scientific (TMO) Q4 2011 Earnings Call February 1, 2012 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2011 Fourth Quarter and Full Year 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 J. Apicerno

Thank you. 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, our 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 March 2, 2012. A copy of the press release of our 2011 fourth quarter and full year 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 October 1, 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 fourth 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. Thank you for joining us today for our 2011 fourth quarter and year-end earnings call. As I look back at 2011, it was a year where we significantly advanced Thermo Fisher Scientific's strategic position as the industry leader. And it was another year of consistently executing our proven strategy to create shareholder value.

In 2011, we delivered excellent adjusted EPS growth, with a 20% increase year-over-year for another record performance. I'm proud of our teams for executing on their plans to translate our top line results into strong bottom line growth.

You will recall from our Analyst Meeting last year that I said our priority was to consistently deliver strong adjusted EPS growth, and we clearly met that objective again in 2011. Before I cover our achievements for the full year, let's turn to the fourth quarter financials and I'll try to give you a sense of the playing field as we see it based on how our businesses closed out the year.

As you read in our press release, adjusted EPS for Q4 grew 23% to a record $1.18. Revenues in the fourth quarter increased 15% to a record $3.13 billion. We also expanded our adjusted operating margin by 100 basis points in the quarter to 18.9%.

We ended the year on a strong note and I'm especially pleased with our top line growth. We came in just above the high end of our expectations due to 3 reasons. First, our teams executed well against their plans. Second, we benefited from early traction on the additional share gain initiatives we put in place in the third quarter, which I'll highlight later in my remarks. And third, while the market conditions played out pretty much as we expected, we did see sequential improvement in the academic and government customer segment later in the quarter.

Let me take a few minutes to provide an overview of what we saw in our end markets in more detail. Let's start with academic and government. As you recall, we saw a significant slowdown in this end market in Q3. Uncertainty around the future of NIH budgets, as well as the budget crisis in many European countries was causing many of our customers to put their buying decisions on hold.

In Q4, although conditions got sequentially better, the market was still relatively weak overall. Once the U.S. federal budget for 2012 was passed, with the small increase for NIH, we believe that our customers gained more confidence and that some pent-up demand kicked in late in the quarter, especially in spending for laboratory consumables.

In addition, we believe that some of our new share gain initiatives began to take hold. By share gain initiatives, I'm referring to our focus on arming our commercial teams with the best products, targeting our sales efforts with the greatest opportunities and then converting those opportunities into revenues by closing sales. Specific examples include our Q Exactive launch, adding new HPLC capabilities from Dionex and leveraging our channels to drive sales of our specialty diagnostic products.

Turning to Pharma and Biotech, we had a very strong finish to the year in this customer set driven by demand in research, development and manufacturing. In research applications, we had solid momentum in mass spectrometry. I'm especially pleased with the robust demand for our new Q Exactive system, which we believe is already gaining share in the Q-TOF space for protein identification and metabolomic research.

In drug development, our Biopharma Services business also continues to perform very well. Our value proposition here around outsourcing clinical trials, logistics and packaging, is really resonating with these customers at a time when an increased productivity is critical to their success.

And in manufacturing, our BioProcess Production products continue to enjoy strong growth. In healthcare and diagnostics, market conditions have remained consistent with what we've seen throughout the year. Demand for our specialty diagnostic products remains strong, especially in our clinical diagnostics business and in the legacy Phadia business now called immunodiagnostics. I'll give you an update on Phadia in a few moments.

Last, demand from industrial-implied markets generated strong growth in both revenues and bookings during the quarter. As an example, our Process Instruments businesses continued the excellent moment we've seen here all year long.

So to summarize, academic and government, although still relatively weak, improved sequentially. Pharma and Biotech had a slight uptick and 2 of our end markets, industrial and applied, and healthcare and diagnostics, performed similarly to what we saw in Q3.

Let me also comment here that from a geographic perspective, emerging markets had another terrific quarter, with China, India and Brazil all reporting better than 20% revenue growth. This is a good time to turn to our scorecard for the year because the progress we made in 2011 sets us up well to meet our growth goals for 2012.

Looking at our full year financial results, as I mentioned in my opening comments, we delivered 20% adjusted EPS growth to a record $4.16. We grew revenues by 11% to $11.73 billion. We expanded our adjusted operating margins for the full year to 18.1%. And finally, we had a strong year for free cash flow generating $1.42 billion. So you can see we delivered solid operating performance and that led to our record EPS results.

You've heard me talk about the 3 key contributors to growing our EPS, the first is top line growth, the second is margin expansion and the third is effective capital deployment. I used this as the framework for my 2011 overview, with a few highlights of how these achievements ideally position us for growth in 2012.

First, I'll cover top line growth. As I just mentioned, emerging markets generated strong double-digit growth in the fourth quarter, in line with the trend we've seen throughout the year. Asia-Pacific alone now accounts for 15% of our total company revenues, that's up from 13% in 2010. We're benefiting from our unique scale and depth of capabilities and that is translating into above market growth in India and China, as well as significant growth in Brazil. Our expanding presence in emerging markets will continue to be an important growth driver for us in 2012.

Another key aspect of our revenue growth, new product innovation, continues to reinforce our position as the technology leader across all of our business segments. We had numerous examples in 2011, let me highlight 3. One is our flagship mass spectrometry launch, the Q Exactive, which integrates a quadrupole mass spec with our leading Orbitrap technology. As I mentioned earlier, the Q Exactive is gaining share for us in the Q-TOF market, which we have not historically participated in. We're very excited about the possibilities and what this means for our customers in both research and applied markets. An example in Specialty Diagnostics is a new version of our market-leading MRSA test that we launched in Europe. This makes screening for deadly hospital-acquired infections even more accurate.

And in laboratory products, you may recall that we launched a new line of ultra-low temperature freezers that consolidates all of our legacy product lines into a single platform. With this new platform, we're now able to manufacture high-quality freezers more efficiently and in the regions closer to our customers, which allows us to significantly drive down logistics costs. We will continue our strong momentum in technology innovation in 2012. And I'm looking forward to highlighting a number of significant new products that we'll introduce during the course of the year and major industry events, including PITTCON, Analytica, ASMS and AACC to name a few.

Another key aspect of our top line growth is how we deliver a unique value proposition to our customers by lowering their costs, improving their productivity, while at the same time accelerating their innovation. One example that I already mentioned is our outsourcing capability through our Biopharma Services business, which had a very strong growth in 2011. A new example is our Unity Lab Services brand, which we officially launched a few weeks ago. We're excited about the potential here because Unity Lab Services combines our extensive instrument and equipment service organizations with our asset management and outsourcing services, now all under a single brand. This covers third-party vendors as well. The ability to bring all these capabilities together is a real differentiator for us in the marketplace. We see this as yet another vehicle for accelerating our top line growth, not only in 2012, but well into the future.

Let me now turn to our second key contributor to EPS growth, and that's margin expansion. As you know, we have a number of levers that drive our margin performance, including pricing, volume leverage, PPI, our global sourcing efforts, low-cost region manufacturing and restructuring. In a typical year, we generate about 2% of productivity savings from these activities. That was the case in 2011, where we achieved more than $200 million in productivity savings that contributed directly to our bottom line.

While we're always focused on carefully managing our costs, as economic conditions change, we can quickly adjust by launching additional restructuring actions. For instance, in Q3 and Q4 of 2011, we implemented a number of incremental actions to address the academic and government weakness. This included tightening our discretionary spend, initiating additional site consolidations and targeted workforce reductions in some of our businesses. In 2011, we initiated restructuring activities with an annualized benefit of about $100 million. We realized a portion of that benefit at the end of 2011, and we expect to reap the balance of it in 2012 and a small amount in 2013. I want to point out that these activities are about 2x to 3x what we would do as a matter of course during the year.

The third key contributor to our EPS growth is effective capital deployment. Here, we focus on our growth investments such as strategic acquisitions, as well as returning capital to our shareholders. You know that we made a number of strategic acquisitions in 2011. Dionex and Phadia were by far the largest, but we also made several smaller acquisitions such as Sterilin and TREK, that added key capabilities to strengthen our competitive position and create value for both our customers and our shareholders.

Let me take a few minutes to update you on the progress we've made with Dionex and Phadia. First, Dionex, which brought a leading offering of chromatography instruments, software, consumables and services to our Analytical Technology segment. If you remember back when we closed the deal in May of 2011, we outlined about $60 million in the total adjusted operating income synergies by year 3. That included $40 million from cost synergies and about $20 million from revenue synergies. We also plan to gain greater tax efficiencies by leveraging our global financial structure.

To give you a sense of how we're tracking at this point, in terms of cost synergies, we are ahead of our goal of capturing $15 million in year one. In terms of revenue synergies, our results to date are even better, with us being well ahead of our goal, and we believe we will achieve our year 3 revenue synergy target as early as one year ahead of plan. Our commercial teams are clearly demonstrating to our customers the value we've created by combining Dionex and Thermo Fisher. As a result, we're accelerating our momentum in mass spectrometry, clearly gaining share in HPLC and strengthening our presence in high-growth life sciences and applied markets.

Turning to Phadia. We closed the acquisition in August of 2011, adding leading specialty in vitro diagnostic products for allergy and autoimmune testing to our portfolio. This meaningfully increased our scale and depth of capabilities in high-growth specialty diagnostic markets. We're only 5 months in, and both the cost and revenue synergies are tracking according to our plans. In terms of upside, we're already seeing significant incremental value from better-than-expected tax synergies, as well as from lower financing costs.

From the standpoint of returning capital to our shareholders, we deployed $1.3 billion in 2011 to buy back more than 24 million shares of our stock. Even in a year that was very active on the acquisition front, we were able to use our strong cash flow and balance sheet to increase shareholder value, while maintaining our financial flexibility.

Moving on to our guidance for 2012, let me provide you with a high-level view on our outlook. Pete will get into the details in his commentary, but our general assumption going into 2012 is that our end markets will be about the same as they were in the second half of 2011. Also, given the relative strength of the dollar, we believe we'll face some pretty significant headwinds from foreign exchange.

With the uncertainty that still exists in the global economy, we are assuming about 3% organic growth for 2012. As I mentioned, we have a number of actions in place to reduce costs, as well as contingency plans that we can quickly implement if end markets get worse. We've also implemented share gain initiatives that will drive our top line growth into the future. Based on this macro view, let me quickly give our expectations for 2012 adjusted EPS and revenues.

As you can read in our press release, we expect to achieve adjusted EPS in the range of $4.67 to $4.82 for 2012, which would result in 12% to 16% EPS growth over our strong performance in 2011. In terms of revenue growth, we expect to generate a range of $12.15 billion to $12.35 billion for a 4% to 5% increase year-over-year.

For the longer term, when market conditions become less choppy, we remain confident that Thermo Fisher is a company that's well positioned to achieve strong mid-single digit organic growth and continue to deliver strong adjusted EPS growth as well.

So to sum up my remarks, we are pleased to end 2011 with an excellent fourth quarter in both revenues and earnings, and to deliver 20% of adjusted EPS growth for the full year. We believe that our combination of momentum in emerging markets, successful new product launches and strong performance by new acquisitions, coupled with decisive cost actions, positions us well to achieve our goals for 2012.

With that, I'll now hand the call over to Pete Wilver, our CFO. Pete?

Peter M. Wilver

Thanks, Marc. Good morning, everyone. We're pleased to report another quarter of strong adjusted earnings per share, with 23% year-over-year growth to a fourth quarter record of $1.18 compared to $0.96 last year. For the full year, adjusted EPS was a record $4.16, up 20% from $3.46 last year.

GAAP earnings per share in Q4 was $0.77, up 3% from $0.75 in the prior year's quarter. And GAAP EPS for the full year was $3.46, up 37% from $2.53 last year, reflecting the gain on sale of discontinued operations.

Starting with our top line performance. For the quarter, reported revenue increased 15% year-over-year to a fourth quarter record $3.13 billion. On a pro forma basis in Q4, as if Dionex and Phadia were owned in both years, total revenue increased by 6% year-over-year and organic revenue growth was 5%. In addition to organic growth, Q4 pro forma revenue increased by 1% from acquisitions other than Dionex and Phadia.

Foreign currency translation had a negligible impact on our reported revenue this quarter, as average foreign exchange rates were essentially flat year-over-year. For the full year, reported revenues increased by 11% year-over-year to $11.73 billion. On a pro forma basis, including the results of Dionex and Phadia, from the beginning of the quarter they were acquired and for the comparable periods in 2010, full year revenue increased by 7% year-over-year and organic revenue growth was 3%.

The Japan stimulus and biosite transition headwinds that we experienced in the first half of the year, negatively affected our full year organic growth by about $100 million or 1%. So excluding these 2 items, our full year organic growth was 4%.

For the year, favorable foreign currency translation increased revenue by slightly more than 2%, and we added a little more than 1% from acquisitions other than Dionex and Phadia. We continue to strengthen backlog in the quarter, with bookings exceeding revenue by 2% in the quarter and by 1% for the full year.

Now let me cover our revenue performance by each of the 3 segments. First, Analytical Technologies Q4 revenue grew 23% on a reported basis. On a pro forma basis, including Dionex, Analytical Technologies revenue increased 8% year-over-year and organic revenue growth was also 8%.

In the quarter, we continued to see particularly strong growth in our instrument businesses serving industrial and applied markets, and in our BioProcess Production products. Our mass spec and chromatography business also delivered strong year-over-year growth.

For the full year, Analytical Technologies reported revenue grew 19%. And on a pro forma basis, including Dionex, Analytical Technologies revenue increased 9% year-over-year and organic revenue growth was 6%.

Turning to the Specialty Diagnostics segment, Q4 revenue grew 32% on a reported basis. On a pro forma basis, including Phadia, Specialty Diagnostics revenue increased 7% year-over-year and organic revenue growth was 6%.

In the segment, we continue to see strong growth in clinical diagnostics. And Phadia, now called immunodiagnostics, again contributed nicely to growth. For the full year, Specialty Diagnostics reported revenue grew 15%. On a pro forma basis including Phadia, revenue increased 7% year-over-year and organic revenue growth was 4%.

In the Laboratory Products and Services segment, Q4 revenue increased 5% on a reported basis and grew 3% organically. In the quarter, our Biopharma Services business continued to deliver strong growth. However, similar to last quarter, this segment was most affected by the challenging conditions in our academic and government markets, which declined low-single digits in the quarter. For the full year, Laboratory Products and Services revenue grew 5% on a reported basis and 2% organically.

By geography, as Marc mentioned, we continued to see organic growth in the double digits in Asia-Pacific, with both China and India again growing above 20%. North America grew in the low-single digits, Europe in the mid-single digits and rest of world, which is less than 3% of our revenue, declined in the low-single digits versus a tough comparison in the prior year's quarter driven by several large orders.

For the full year, we also saw double-digit growth in Asia-Pacific, with China and India both growing above 20%. North America and Europe grew in the low-single digits and rest of the world grew in the mid-single digits.

Turning to adjusted operating income. We had strong bottom line results, with Q4 adjusted operating income up 22% year-over-year to $592 million. Adjusted operating margin was 18.9%, up 100 basis points from 17.9% in the year-ago quarter. The year-over-year margin expansion was driven by pull-through on organic growth and strong contribution from our productivity and cost actions.

And we continued to see good accretion in the quarter from our recent acquisitions. However, similar to last quarter, we also continued to see inflationary pressure in some of our direct material costs, particularly oil-based raw materials like plastic resin, which we partially offset with additional sourcing initiatives. We also continued to see some pricing pressure on equipment, particularly in our Laboratory Products and Services segment.

We're executing as planned on the incremental restructuring actions that we talked about on last quarter's call, and realized about $9 million of benefit from those actions in the quarter, over and above our normal productivity and restructuring efforts. During the year, we initiated about $100 million of restructuring actions in response to the tougher market conditions, which as Marc said, is significantly above our normal run rate. I'll discuss the 2012 impact of these and other restructuring actions later in my comments when I talk about our 2012 guidance.

By segment, Q4 adjusted operating income in Analytical Technologies increased 38% year-over-year. Adjusted operating margin was 21.1%, up 240 basis points versus 18.7% last year. In Specialty Diagnostics, Q4 adjusted operating income increased 42% year-over-year with adjusted operating margin at 24%, up 180 basis points from the year-ago quarter. And in our Laboratory Products and Services segment, Q4 adjusted operating income declined by 4%, with adjusted operating margin at 13.2%, 110 basis points below the year-ago quarter.

We generated strong productivity of over 125 basis points in Laboratory Products and Services, again, this quarter. And we reinvested about 40 basis points into Asia and other growth investments. This net productivity was more than offset by inflation, unfavorable mix and some nonrecurring items.

For the full year, total company-adjusted operating margin increased to 18.1%, up 75 basis points year-over-year. By segment, full year Analytical Technologies adjusted operating margin increased 170 basis points to 18.7%, Specialty Diagnostics was up 150 basis points to 24.2% and Laboratory Products and Services decreased 50 basis points to 13.7%.

Moving on to the details of the P&L, total company-adjusted gross margin was 44.3% in Q4, up 170 basis points from the year-ago quarter. Year-over-year, gross margin expansion benefited from our productivity actions and the accretive impact of recent acquisitions, but raw material inflation and mix were dilutive in the quarter.

For the full year, adjusted gross margin was 43.2%, up 120 basis points from 42% in the prior year. Adjusted SG&A in Q4 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 continued to tightly control discretionary cost and restructure our cost base. For the full year, adjusted SG&A was 22.1%, an increase of 20 basis points, again, driven by the dilutive impact of acquisitions.

R&D expense was 3.1% of revenue in Q4, up 20 basis points from last year as a result of our recent acquisitions. For the full year, R&D was 2.9%, also up 20 basis points or $55 million, driven by our recent acquisitions and slightly increased investments to expand our new product pipeline for the future.

Moving below the line, Q4 net interest expense increased $35 million year-over-year to $51 million, driven by higher interest expense as a result of issuing debt to fund the Dionex and Phadia acquisitions. Our adjusted tax rate in the quarter was 17.6%, down 90 basis points from last year as a result of our ongoing tax planning initiatives, including tax synergies enabled by the Dionex and Phadia acquisitions. For the full year, our adjusted tax rate was 19.1%, at the favorable end of previous guidance and down 80 basis points from 2010.

During the quarter, we deployed $350 million of our cash to buy back 7 million shares of our stock. In total, we spent $1.3 billion to repurchase 24.5 million shares in 2011. And at the beginning of the year, we had $650 million left against our current authorization that expires in November 2012. Average diluted shares were 376 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. For the full year, average diluted shares were 385 million, down 25 million or 6% from 2010.

Turning to the balance sheet. Our cash flow was exceptionally strong in Q4. Full year cash flow from continuing operations was $1.68 billion and free cash flow was $1.42 billion after deducting net capital expenditures of $258 million. Full year free cash flow was up about $250 million year-over-year, primarily as a result of higher adjusted net income, partially offset by higher cash restructuring.

We ended the quarter with $1 billion in cash and investments, up $126 million from Q3. The increase in the quarter was driven by our free cash flow, partially offset by share buybacks and pay down of a portion of our outstanding commercial paper. Our total debt was $7.0 billion, down $100 million from Q3 as a result of paying down outstanding commercial paper.

Now moving on to our guidance for 2012. We're initiating adjusted EPS guidance of $4.67 to $4.82, which represents growth of 12% to 16% over our 2011 EPS of $4.16. In terms of revenue, we're initiating 2011 guidance in the range of $12.15 billion to $12.35 billion, 4% to 5% above our 2011 reported revenues of $11.73 billion. On a pro forma basis, as if Dionex and Phadia were owned in both years, the midpoint of our organic growth guidance is about 3%. Foreign currency, as Marc indicated, is unfavorable in 2012 assuming current rates, resulting in a $400 million year-over-year headwind in revenue and a 4% headwind in adjusted EPS.

And completed acquisitions, other than Dionex and Phadia, contribute a little less than 0.5% to our expected growth in 2012. Consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates, and our guidance does not include any future acquisitions or divestitures.

To give you a little more detail on our earnings guidance, we're expecting adjusted operating margin expansion of 70 to 90 basis points compared to 2011. Positive contributors to our margin expansion are expected to be: pull-through on organic revenue growth at marginal rates; moderate price increases comparable to the environment we experienced in 2011; the full year benefit of our 2011 acquisitions, including incremental synergies; and productivity and cost reduction actions that contribute over 200 basis points including PPI and PPI Lean, as well as low-cost region manufacturing; global sourcing, including low-cost region sourcing, net of direct material inflation; and over $50 million of benefit from the full year impact of the restructuring actions we initiated in 2011, as well as planned actions in 2012.

These benefits will be offset by normal inflation under indirect cost base, slight margin dilution from foreign exchange given the significant top line impact and some select strategic investments that will drive growth in emerging markets and enhance our customer experience.

Moving below the line, we're expecting net interest expense to be up $55 million to $60 million year-over-year, reflecting the full year interest cost of the debt issued to fund the Dionex and Phadia acquisitions. Our adjusted income tax rate is forecast to be in the range of 17% to 18%, down from 19.1% in 2011, primarily as a result of our continuing tax planning initiatives and tax synergies related to the Dionex and Phadia acquisitions.

And full year average diluted shares are estimated to be in the range of 365 million to 370 million, down 4% to 5% from 2011, which assumes that we'll use the remaining $650 million of our current share buyback authorization through its expiration in November 2012.

Finally, we expect capital expenditures to be in the range of $300 million to $325 million, and free cash flow to exceed $1.5 billion. In interpreting our revenue and adjusted EPS guidance ranges, as I've said in the past, you should focus on the midpoint as our most likely view of how we see 2012 playing out. Results above or below the midpoint will depend on the relative strength of our markets during the year. We set a fairly wide range on revenue at this point given the uncertainty in the global economy, but we're committed to taking the cost actions required to meet our earnings goals.

So in summary, we finished 2011 on a strong note. And overall, it was a good year for us. We successfully completed and integrated a number of key strategic acquisitions and we also delivered exceptionally strong adjusted EPS growth, while funding a number of growth investments such as new products and emerging markets.

And while our academic and government markets continue to face some challenges, we've responded with decisive cost actions and are positioned well to achieve our earnings growth goals in 2012. I'm excited about our growth prospects for the long term and believe that we're continuing to strike the right balance between disciplined cost management and growth investments to maximize our performance. 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 of Deutsche Bank.

Ross Muken - Deutsche Bank AG, Research Division

Obviously, the tone of this call is decidedly better than the last. You gave a lot of commentary, Marc, on the back half sort of changes in some of your end markets. As we head into '12 and you think about sort of the upper and lower ranges in the guidance and what would sort of cause us to maybe get to a level outside of it, I mean where do you see sort of the biggest potential changes as we head into '12 that could cause sort of results to be on either side? Are there 2 or 3 places where you think there's the biggest potential delta, or is it all sort of either moderately better or moderately worse?

Marc N. Casper

Ross, thanks. So I would say, the Deltas are really going to be driven by the macro economy either on the favorable or on the unfavorable end. We're assuming muted economic growth globally, no major changes in the academic and government funding environment assumed here that we saw in the second half, which is obviously the weakest environment that we've seen in, certainly in the 10-plus years that we've been at the company. So we're assuming conditions pretty similar to that. And it's really going to be macroeconomic effects, for the positive or negative, that could drive big changes off of that.

Ross Muken - Deutsche Bank AG, Research Division

I guess now that you've sort of had time to reflect on sort of Q3 and some of the extraordinary things you saw, and you sort of dug in to kind of some of the reasoning and you gave, obviously, on the academic markets some of the explanation, do you feel like your ability to sort of react to some of these changes now is going to be better? Or in looking back, do you feel as if that was probably not an event that was within any sort of standard deviation of the normal and so, hopefully, not something that likely repeats itself in the future?

Marc N. Casper

I think if you think about how well we responded, I think it's actually quite impressive, right? You have unprecedented change in demand. In that quarter we initiated huge amount of restructuring, significant share gain activities and drove the strongest organic growth that we had all year in the fourth quarter with 5% organic growth. So we saw weakness in the second half of Q3 and we reacted on a dime with that. It doesn't mean that you're going to translate those actions into revenue in that first 30-day period, but to see the results coming out, really, right after that, I think is fantastic. So the company is moving well. I'm proud of the 39,000 employees. I mean, a phenomenal effort around the world to deliver just a great finish to the year.

Ross Muken - Deutsche Bank AG, Research Division

And I promise the last one, so Pete, just in terms of sort of call outs for this year, I mean we've obviously had the last couple of years, whether it's contract-based or days-based sort of comp effects, anything specific on the sequential sort of progression this year just to keep in mind as we do our models?

Peter M. Wilver

No. There's nothing really significant in 2012. The only thing to note is that the headline organic growth numbers that form the compare for 2012 are a little bit misleading because of the prior year comparisons we had in 2010. So it would look like the comps are easier in the first half and harder in the second half, and it's actually opposite to that just because of some of the prior year comps.

Ross Muken - Deutsche Bank AG, Research Division

Just to clarify, so if we think about it, it's the way the guidance works now it's, just based on that comp effect, you'd assume that you're higher in the first part of the year and lower in the back half the year?

Peter M. Wilver

No. The comps are tougher in the first half...

Ross Muken - Deutsche Bank AG, Research Division

Yes -- no, organically, right?

Peter M. Wilver

Yes. And you're talking about 2011, you mean?

Ross Muken - Deutsche Bank AG, Research Division

'12.

Peter M. Wilver

2012, the comps are tougher in the first half, so organically that would make it generally lower in the first half than in the second half.

Operator

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

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

Marc, if you think about capital allocations, $650 million left on the buyback, what's your balance right now on capital? Is it a buyback orientation or are you seeing M&A opportunities in the world?

Marc N. Casper

Yes. Paul, thanks for the question. So in terms of our capital deployment strategy, it's been very consistent with a balance of focus on growing the business with acquisitions that meet our criteria and strengthen our company's competitive position, improving the offering from a customer perspective and clearly, creating shareholder value, as well as some return of capital. So what we said when we did our last authorization, is that we're assuming about half of our cash flow is going to be returned in the form of buybacks. And that if acquisitions meet our criteria, then we'll pursue them. As we look at our pipeline, we have a good pipeline. But we're only going to pursue acquisitions that we feel excited about. And we're very focused on executing well against Dionex and Phadia, and the good news there is that they're going well.

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

Then last, what portion of your CapEx goes to emerging markets this year?

Marc N. Casper

In terms of CapEx, we've got a big facility expansion. But I would say, it's a little more than the weighting of the business. I'd say probably 15% to 20% would be the mix of our CapEx in emerging markets.

Operator

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

Jonathan P. Groberg - Macquarie Research

Just 2 quick questions for me. One, Marc, a lot of us are trying to kind of figure out the whole wind down of the stimulus, and so maybe just kind of talk about how you expect that playing out in 2012? And then the second question, with respect to your commercial strategy, there's a lot of commentary that maybe you might be more inclined to use price as a part of your commercial strategy to gain share. Your gross margins look pretty good in the fourth quarter, so just curious kind of what you see with pricing as you move into 2012?

Marc N. Casper

Sure. Stimulus was not a big factor for us in terms of demand last year. We don't see it as a big effect, obviously, for those customers that had some stimulus funds, they obviously are going to have to find alternative funds, but we don't see that as a big factor in 2012. From a commercial strategy, as certainly you've heard me say for many years, we're very focused on getting appropriate price for our products. So we're not a company that is driving discounting or aggressive pricing behavior. In fact, what we have done in certain customer sets, where they're under more pressures, we've helped them select the right products from a value perspective, but we've been very disciplined on maintaining and maximizing our price.

Jonathan P. Groberg - Macquarie Research

So if I can just quickly follow-up on that, maybe if you think about your guidance, your op margin guidance for '12 of 70 to 90 bps. I know you don't like to give all the details of the different pieces, but would you expect gross margins to kind of also continue to see the updraft that you've seen over your history?

Peter M. Wilver

Jon, this is Pete. So when you look at the pieces of the P&L, the 70 to 90 basis points, it gets a little bit clouded by the acquisition impact because we're going to get a full year of Dionex and Phadia, and both of them had higher than average gross margin and higher than average SG&A and R&D. So what you're going to see is gross margin go up and then also SG&A and R&D percent of revenue go up. But if you take that out of the equation, you would see gross margin improving and SG&A leverage improving and R&D about flat.

Operator

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

Doug Schenkel - Cowen and Company, LLC, Research Division

I guess starting with a question on cash deployment. You haven't described anything different from what you've described in the past on today's call. That being said, you completed a series of big deals last year from a financial flexibility and integration perspective. With that in mind, do you feel that you're ready to do another deal of similar size if there were one that made sense for you? And then I guess on the same topic, any change in how you guys are thinking about dividends?

Marc N. Casper

Yes. So Doug, in terms of M&A, we follow our criteria strictly. We are focused on executing well against the deals that we completed last year. So that's our priority. We evaluate the various opportunities out there. If the right thing came up, that met our criteria, that was great for our shareholders, we would consider it. But right now, our focus is executing well on what we did. In terms of dividends, if I look back over the years, it's been a very small topic of discussion. There's been a lot more questions about dividend policy over the last 6 to 9 months. It's something that we -- we obviously return a lot of capital to our shareholders and it's a topic that we'll continue to discuss with our board about what's the right mix of return of capital.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay. And then an unrelated follow-up. Marc, again for you. You highlighted successful share initiatives as one of the 3 key drivers to revenue growth in the quarter and in fact, what drove you to exceed the high end of the guidance range. How broad-based were these wins? I know you mentioned some specifics in mass spec and HPLC. But I'm curious if these were much broader than that and how do you think about these heading into next year in terms of what's incorporated into guidance?

Marc N. Casper

Yes. I mean, they're focused on a few areas, right, in terms of the ones I highlighted. They were also focused on the fact that we had our commercial teams out in the field with customers. We took out a lot of just the normal routine paperwork and stuff you do and just basically said, "You know what, Q4, we're going to just focus on our customers and not worry about a lot of those administrative things." So that helps as well. In terms of what's in our guidance, we have some great products and some very targeted commercial strategies that's embedded in the guidance. And as we continue to see new opportunities, we'll add them to the mix.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay. And if I could sneak in one last one for Pete. One of the few blemishes on this quarter, if you will, was maybe the lab products and services operating margin coming in a bit lighter, at least relative to what I was expecting. Anything unusual here? And is this a scenario where you think you can get some material improvement in 2012?

Peter M. Wilver

Sure. So as I said in my comments, we did generate strong cost productivity in lab products and services, as the norm. But that was more than offset by -- we had some unfavorable mix and several unfavorable items, a number of which were nonrecurring or the result of year-over-year comparisons. So if you look at the net impact of operational provisions in the quarter, this quarter, this year was negative and last year was positive. So we had sort of the double impact of favorability last year and unfavorability this year. Normally, those things sort of net out to a negligible impact. As well, we're talking about doing a lot of restructuring and in particular, we've got our laboratory workstations business, one of our other Laboratory Products manufacturing businesses, in the middle of some pretty significant projects to reduce their cost. And this is, obviously, good for the longer term in terms of lowering their cost base. But in the short term, in the quarter, they incurred duplicate operating costs as we consolidated their operation. So we had a number of things that I would considered to be one-offs in the quarter. Looking forward, obviously, we don't provide specific margin guidance by segment, but under most scenarios, I'd expect Laboratory Products and Services margins to be stable in 2012.

Operator

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

Amit Bhalla - Citigroup Inc, Research Division

I wanted to talk about just the academic and government end market for a second. Can you just talk about the trajectory that you saw throughout the fourth quarter and January? And just talk to us a little bit about your comfort with visibility with your assumptions into 2012.

Marc N. Casper

Sure. So in terms of the fourth quarter in academic and government, certainly, they improved sequentially from what we experienced in Q3. And we believe that the improvement was really driven by pent-up demand that we saw late in the quarter, particularly in our Lab Consumables business, as well as some of the share gain initiatives that we implemented in Q3. So that's pretty much how it played out in Q4. In terms of January, while we don't have it by every single customer site globally, I would say in aggregate, our January performance is very consistent with the guidance that we outlined for the full year.

Amit Bhalla - Citigroup Inc, Research Division

And secondly, in terms of the Unity Lab Services, obviously, you're pretty excited about the opportunity. So can you talk a little bit about what kind of revenue opportunity that is and what you're seeing in the pharmaceutical outsourcing market?

Marc N. Casper

Yes. So when you look at the Unity Lab Services, and this is the focus on the laboratory, it's not the clinical trials outsourcing business, that represents, in order of magnitude, 7% to 8% of our revenue and growing high-single digits type of growth. So very strong growth. And we think with the capabilities we're pulling together, it can actually grow faster than that over time. So that's a good opportunity. The other half of our services is the outsourcing activities and clinical trials, and that's been a strong growth for us for quite a period of time.

Amit Bhalla - Citigroup Inc, Research Division

Any chance you could put some numbers around that strong growth that you're talking about in outsourcing? Just want to get a better idea of the trend there.

Marc N. Casper

High-single digit type growths.

Operator

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

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

Marc, can you give us some sense of, at least directionally, how to think about the various segments in 2012 vis-a-vis that 3% kind of midpoint consolidated?

Marc N. Casper

Yes. I mean, at a high level if you think about the guidance, what I would say is, clearly, academic and government we're assuming to be on the negative equation on growth. And when I look at the other 3 segments, we're looking for strong growth across as we've demonstrated in Biopharma, healthcare, diagnostics and industrial and applied, and that's the basic mix. If you kind of dig into that in a little bit more detail, in Biopharma, we have a very unique value proposition around customer productivity. We have a number of new products, services and very deep relationships with the customers. So we think we're very well positioned to gain share with this customer set. We've demonstrated that over a long period of time. In healthcare and diagnostics, our products are very well attuned to the needs of those customers. Our portfolio is really focused on improving patient care and lowering the cost of care, and we have lots of examples of that. So we think good solid growth here is reasonable with our products really focused on infectious disease diagnostics, monitoring therapeutic drugs for organ transplantation patients, helping pediatricians identify and treat allergies are the kinds of things we do. And then industrial and applied, a lot of our products are used to drive customer productivities, so that positions us well there and we're expecting continued growth. Obviously, that market has done very well for us. So comps get a little bit harder, but I think that gives you a framework for the 4 markets.

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

That's great. My last one, my follow-up for Pete, I just want to make sure I'm thinking about the various buckets correctly. If I look at -- in 2012, the incremental Dionex and Phadia accretion, the FX and then the tax benefit, it looks like your guidance assumes somewhere around 6% to 10% kind of core EPS growth. Does that sound correct to you?

Peter M. Wilver

I haven't thought about it excluding all those things. But if you think about the growth year-over-year, we're guiding to 12% to 16%, maybe 1/3 of that comes from the acquisition and the balance is the core and the capital deployment. Obviously, the tax rate relates to Phadia and Dionex as well, some of that. It's part of that accretion.

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

Okay. So we should think about some of that tax benefit is included in the net accretion?

Peter M. Wilver

Exactly.

Operator

Your next question comes from the line of Tycho Peterson, JPMorgan.

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

Maybe first for Pete. Are you able to break out specifically what the contribution from Phadia and Dionex were in the quarter, what they each did to the top line?

Peter M. Wilver

Yes. In terms of the top line, total acquisitions, Phadia and Dionex combined, was about 50 basis points.

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

Okay. And then as we think about some of the cost initiatives you've taken, I mean you announced some additional ones back in January. Understanding your operating margin guidance, but how should we think about additional initiatives flowing through versus being reinvested in Asia? And how much of this is you proactively trying to manage your footprint into faster growing markets, i.e., Asia and maybe less indicative of some of the end market headwinds that are out there?

Peter M. Wilver

Well, certainly, on an ongoing basis, we do restructuring efforts. And some of that flows to the bottom line and some of it we do reinvest. So certainly, we've made pretty significant reinvestments in 2011. And at the same time, we were expanding margins. So the plan is to do that in 2012 as well. So we have about, I'd say, 50 basis points of investments that are funded by both our productivity actions, as well as some of those restructuring actions.

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

But if we think about those investments, I mean, you're 15% from Asia today, I mean do you have a target of 20% in the next 2 years? Or I mean, how do we think about where you see those reinvestments taking you in Asia?

Marc N. Casper

I would say that we continue to increase our Asian percentage. If you go back 5 years ago it was 8%, so we've doubled it. A point-ish a year is a reasonable assumption. It may be a little bit more than that, but somewhere in that range we keep increasing the mix in terms of Asia.

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

Okay. And are there additional investments in R&D that you're making? I mean you were pretty vocal, not too long ago, about stepping up your R&D investment. How do we think about R&D spend on a go-forward basis?

Marc N. Casper

So R&D spend, we did a ramp-up back in 2010. And other than the effect of acquisitions, just Phadia and Dionex will increase just as a percent of sales for the company on the full year effect. We're comfortable with the level of R&D. So R&D, excluding acquisitions is pretty flat as a percent of sales.

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

And then last one for Pete, on free cash flow guidance. I mean rough math looks like about 85% of net income. How do you think about the opportunity to maybe improve cash conversion? Some of your peers are well north of 110% or 120%, so how do you think about the opportunity to more effectively convert some of that cash?

Peter M. Wilver

Well, I don't think very many of our peers are 120% of adjusted net, they might be that number on GAAP net income. But certainly, our goal is to get to 90%, that would be about $1.55 billion for the year. So sort of setting the minimum at $1.5 billion. And we're certainly going to drive to get to at least 90% of our adjusted net. And obviously, the lever there is working capital.

Operator

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

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

Most of my questions have been answered. But Marc, if you would, could you kind of go over a little bit of how Europe was in the quarter and then what your expectations are in 2012?

Marc N. Casper

Yes. We had a good finish in Europe. We saw strong demand for our analytical instruments and it appeared to us that some of our industrial and some of our pharmaceutical customers in Europe released funds late in the quarter. So it was a nice finish to the year. We're assuming that the conditions in Europe will be on the slower end of growth in terms of a geographic perspective. And obviously, Asia-Pacific, emerging markets being, continuing to have strong momentum next year -- or this year.

Operator

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

Peter Lawson - Mizuho Securities USA Inc., Research Division

Marc, I just wonder if you could give us some more color around the diagnostic business, the volume trends and utilization you're kind of seeing in Q1 and expectations for 2012?

Marc N. Casper

Yes. So in terms of Specialty Diagnostics, we had a good year last year. Our Clinical Diagnostics business, which is our biomarkers, our drugs of abuse testing, our therapeutic drug monitoring products all did very well. Phadia, our immunodiagnostics business, had a very, very good year, both in the period that we owned it and in the period prior to our ownership as well. So 2011, the majority of our business, very strong performance. And as we look at 2012, we're confident that, that's going to be a good growth driver for the company. Utilization is something that we look at. Typically, we don't get hugely affected by utilization because most of our products are used for things that you typically don't defer from a medical perspective. It's typically infectious disease, very children-oriented stuff as well and cancer. So folks that are very sick or parents. So obviously, if you can't afford it, you may not go. But we typically do better than your more routine-type products from areas that we don't play.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And then on the emerging market business, what was your exposure in Q4? And then, the potential negative impact on gross margins in 2012?

Marc N. Casper

In terms of exposure, just to clarify a little bit, Peter?

Peter Lawson - Mizuho Securities USA Inc., Research Division

Just revenue exposure for end of Q4?

Peter M. Wilver

So you're saying our percentage of revenue, it was the 15% of our totals. That's for Asia-Pac. We don't really report an emerging market number.

Peter Lawson - Mizuho Securities USA Inc., Research Division

The number is for the full year or just Q4?

Marc N. Casper

That's the full year and...

Peter M. Wilver

Might be slightly higher. We don't really measure it as it swings a little bit quarter-to-quarter. We don't really measure it on a quarterly basis.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And the gross margins on that business, what do they look like versus corporate?

Marc N. Casper

The margin structure in Asia-Pacific is pretty similar to what we see across the world. It may be slightly lower, but not material.

Operator

Your final question comes from Derek De Vries of Bank of America.

Derek De Vries - BofA Merrill Lynch, Research Division

Couple of questions. I think I might have misheard you. Could you clarify what your implied contribution is from M&A in 2012?

Peter M. Wilver

Implied in...

Derek De Vries - BofA Merrill Lynch, Research Division

In your guidance, in the top line guidance, what's your M&A impact?

Peter M. Wilver

In the top line, it's about 50 basis points. So it's the same number, whether it's in or it's out.

Derek De Vries - BofA Merrill Lynch, Research Division

I'm just a little bit confused then, so...

Marc N. Casper

That's using pro forma...

Derek De Vries - BofA Merrill Lynch, Research Division

That's using a pro -- okay, okay.

Marc N. Casper

All the other acquisitions are contributing about 0.5% of growth.

Peter M. Wilver

Right.

Derek De Vries - BofA Merrill Lynch, Research Division

Got you.

Marc N. Casper

Do you got that one?

Derek De Vries - BofA Merrill Lynch, Research Division

Yes. That's fine. That's what I was looking for. And I guess -- so Marc, when you kind of look at your -- and you're talking about a 2% to 4% top line number and with arguably a difficult market, so when you kind of look at the longer-term growth opportunity for the business, do you think the market right now, is it dampening your growth by 1 point? Is it dampening your growth by 2 points? I guess, if we were under a more normalized market conditions, what's the business doing?

Marc N. Casper

Yes. I mean, at a very simplistic analysis, if we say that academic and government is down low-single digits type range and historically, over long, long periods of history, it is a low single-digit grower. That's roughly a 6-point swing quarter of our business. So you've got a couple of points -- I'm going to do a very simple math, a couple of points of tougher market conditions than what you've historically had seen pretty much for the last decade. So that's the way to frame it. Everything else, I would say is in the range of normalcy. And I think we're performing well. I think we finished on a strong note. I think I feel reasonable with the guidance from where we sit today. And most importantly, I couldn't be more confident about this company being a mid-single digit growth, not even in the strong markets, but just a little bit less choppy than what we're seeing right now.

Derek De Vries - BofA Merrill Lynch, Research Division

And so when you kind of look at where they're -- I realize it's a little early to start thinking about 2013 but obviously, we still have the overhang with [indiscernible] and everything that's out there. It's like what is your working model right now for how you think that old debacle is going to be clarified?

Marc N. Casper

I think our assumption is that the conditions we're seeing in academic and government is going to play out the way I articulated it during the course of the full year. And we're not expecting big changes in trajectory one way or another right now in academic and government, just based on the environment we're living in.

So let me just make a final, couple of closing comments. Obviously, we're pleased to have ended the year on a strong note. We delivered solid growth in revenues and adjusted EPS in the fourth quarter. And again, achieved our earnings growth goals for 2011. I'm confident that our proven strategy for creating shareholder value through top line growth, margin expansion and effective capital deployment positions us to achieve our goals for 2012. I look forward to updating you in April during our Q1 call. And of course, thank you for your support of Thermo Fisher Scientific.

Peter M. Wilver

Thank you.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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