Executives
Quintin J. Lai - Vice President of Investor Relations
Jan A. Bertsch - Chief Financial Officer, Executive Vice President and Interim Treasurer
Rakesh Sachdev - Chief Executive Officer, President and Director
Analysts
Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division
S. Brandon Couillard - Jefferies & Company, Inc., Research Division
Daniel L. Leonard - Leerink Swann LLC, Research Division
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division
Isaac Ro - Goldman Sachs Group Inc., Research Division
Jonathan P. Groberg - Macquarie Research
Tracy Marshbanks - First Analysis Securities Corporation, Research Division
Timothy C. Evans - Wells Fargo Securities, LLC, Research Division
Peter Lawson - Mizuho Securities USA Inc., Research Division
Michael J. Sison - KeyBanc Capital Markets Inc., Research Division
Dmitry Silversteyn - Longbow Research LLC
Derik De Bruin - BofA Merrill Lynch, Research Division
Steve Willoughby - Cleveland Research Company
Sigma-Aldrich (SIAL) Q3 2012 Earnings Call October 23, 2012 11:00 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the Sigma-Aldrich Corporation Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Quintin Lai. You may begin.
Quintin J. Lai
Good morning. Thank you, Amy. Thank you to everyone participating on the call and webcast. Presenting for the company, we have Rakesh Sachdev, President and Chief Executive Officer; and Jan Bertsch, Executive Vice President and Chief Financial Officer.
Jan will lead off with a review of the performance in the third quarter and the first 9 months of 2012 performance. Rakesh will then provide an update on the activities that contributed to the results and our outlook for the remainder of the year. Then we'll open up the call for your questions and comments. We will be using a slide presentation as part of today's call. That presentation can be viewed on our Investor Relations website at www.sigma-aldrich.com.
Before beginning the review, I want to remind you that today's comments include forward-looking statements about future activities and our expectations for sales, earnings, cash flow and other possible future events -- results. While we believe these expectations are based on reasonable assumptions, actual results may differ materially due to any number of factors, including the risk factors listed in our annual report on Form 10-K for the year ended December 31, 2011, and in the cautionary statement included in today's press release and in the slide presentation. We have no plans to update these forward-looking statements after this call.
Also in today's conference call, we are providing information on non-GAAP financial measures. Management uses these measures in its internal analysis of results and believes this information may be informative to investors as well. For a reconciliation of non-GAAP measures, please see today's earnings release and the appendix to the slide presentation. With that, Jan will start with a summary of our third quarter results. Jan?
Jan A. Bertsch
Thank you, Quintin. As reported in today's earnings release, third quarter sales were $639 million, a reported increase of 2% over third quarter 2011. Our organic sales growth, which excludes the impact of changes in foreign currency exchange rates and the benefit of recent acquisitions, was 2%. Our third quarter operating income was $156 million. Net income was $112 million, and reported diluted EPS was $0.92.
Our adjusted diluted EPS, which excludes $0.02 of restructuring costs, was $0.94. Year-over-year changes in FX rates caused an $0.11 EPS headwind. Excluding this impact, adjusted EPS would have grown by 9% to $1.05. Our effective tax rate was 28%, which is below the 31% in the first half of 2002 (sic) [2012].
This is partially due to the release of certain tax contingencies, which were part of our overall expectation for the second half of the year. For the fourth quarter and the full year 2012, we expect the tax rate to be about 30%, which anticipates the reinstatement of the R&D tax credit.
We were pleased with strong third quarter free cash flow generation of $122 million, which was an increase of 36% from the same quarter last year and more than double that of second quarter of 2012. In the third quarter, we returned about $73 million to shareholders in the form of $49 million in share repurchases and $24 million in dividends.
For the first 9 months of 2012, we generated in excess of $1.9 billion of sales. Organic sales growth during this period was 3%. Acquisitions added 5 percentage points to overall sales growth, and changes in FX lowered growth by 4 percentage points. Operating income for the first 9 months of 2012 was $495 million. Net income was $344 million, and diluted GAAP EPS was $2.82. For the first 9 months of the year, we generated $290 million of free cash flow as compared to $300 million last year. We remain on track to generate in excess of $400 million of free cash flow for the full year 2012.
Now let's look at our sales performance. Research generated 68% of our overall sales for the company in the third quarter. Reported sales declined by 4% as compared to the same period last year. Organic sales growth was 1%, roughly in line with our second half 2012 expectation of low-single digit growth. Changes in FX rates lowered growth by 6% and acquisitions contributed 1% growth. For the first 9 months of the year, reported Research sales declined 1% as compared to the same period last year. Organic sales growth was 2%. Changes in FX lowered growth by 4% and acquisitions contributed 1%.
In the third quarter, Sigma-Aldrich Fine Chemicals or SAFC generated 32% of overall sales for the company. Reported sales grew by 17%. Organic sales growth was 5% and was about 5 percentage points below our internal expectation. Changes in FX rates lowered growth by 5% and acquisitions added 17% to overall growth. For the first 9 months of the year, SAFC reported sales growth was 16%. SAFC organic sales growth was 5%. Changes in FX lowered growth by 4% and acquisitions contributed 15%.
Now let me explain where the SAFC miss came from. We had a large bioscience order of industrial cell culture media that was pushed out into the fourth quarter. This was about 1 percentage point of the miss, which we expect to recover in the fourth quarter. The bigger impact in the quarter came from volatility we had in our Hitech LED chemical precursor business, which makes up less than 5% of overall company sales. This contributed about 3 percentage points of the SAFC miss in the quarter.
Our volumes of LED chemicals shipped in the quarter grew strong double digits. However, our expectation was that the growth was going to be even stronger, but we were impacted by late quarter inventory adjustments by some of our LED customers, and we expect these corrections will affect overall demand for the next 3 to 6 months. In addition, the pricing environment for LED chemical precursors declined more than we had expected, thereby affecting sales growth. As we and others have brought more capacity online and coupled with the temporary excess supply, we saw prices drop further in the third quarter.
Even though this is going to be a headwind in the fourth quarter, we are starting to see stabilization in prices. The good news is that we have been getting price reductions from our suppliers and have gained efficiencies from our processes, which have been mitigating some of the margin impact. In addition, we saw some softness in our supply solutions business with industrial companies in China. Rakesh will discuss our fourth quarter outlook in Research and SAFC in a few minutes.
Looking at the various business units in Research. The overall markets that we serve remained relatively stable from the second quarter. Analytical sales continued to be our strongest product segment in the Research business unit and grew across the board with high-single digit organic sales growth. Biology sales were relatively flat on an organic basis for the quarter, reflecting slightly negative sales growth year-over-year as compared to slightly positive in our second quarter results. Chemistry again -- was again soft, with a mid-single digit organic sales decline in the quarter. These product segments continue to be impacted by Pharma consolidation and site closures that we highlighted on our second quarter conference call.
For SAFC, Bioscience organic sales growth was in the low-single digits, impacted by a large industrial cell culture media order, as I mentioned, that slipped from the third quarter into the fourth quarter. Hitech also grew in the low-single digits, also as I just explained. We were pleased with the Q3 performance of our Custom Pharma business. We feel we have good momentum here. We're seeing strong demand by our pharma customers for high-potency compounds, and we are benefiting from capacity increases in our Verona, Wisconsin facility.
Turning to geographies. North American sales were flat. European sales remained stable at low-single digit growth. Asia Pacific and Latin America, including Japan, remained our highest growing region with mid-single digit sales growth, which was consistent with sales growth in the second quarter.
Our adjusted operating income margin in the third quarter 2012 was 25%, a decrease of 100 basis points from the same period last year. Headwinds from changes in foreign exchange rates caused a 190-basis-point margin drop year-over-year. Also, incremental amortization from recent acquisitions, which we don't exclude from our adjusted EPS calculations, caused a 60-basis-point drop. Excluding these impacts, our operating margin would have been 27.5% or 150 basis points higher than our operating margin in the same period last year. This improvement is the result of a combination of cost reduction initiatives and strategic pricing actions that we've taken this year.
We often get the question: How can we improve our industry-leading margins? Our response is threefold. First, we have natural leverage when organic sales growth is achieved through volume and pricing initiative. Second, we are constantly looking to optimize our operations as a result of our continuous improvement culture. These actions, even the small ones, add up. And third, in low-growth environments, we have the ability to manage discretionary spending, while continuing to invest in our long-term growth initiatives.
Changes in foreign currency rates, since our last guidance update in July, have marginally lessened the negative EPS impact from FX that we were expecting for the full year. This incremental benefit is offset by our lowered outlook in SAFC. Because of this offset, we do not expect a net impact to overall adjusted EPS guidance for the full year 2012.
As many of you know, over 60% of our sales come from outside the U.S., while a significant portion of our expenses are denominated in U.S. dollars. This creates a currency imbalance in our cash flow and our earnings. We have initiated a foreign currency hedging program to mitigate fluctuations to our earnings and our cash flow. We have just started the program with select currencies and expect to expand this program over the next year.
Now Rakesh will comment on operating highlights in the third quarter and our 2012 forecast. Rakesh?
Rakesh Sachdev
Thanks, Jan, and good morning to all the folks who are on the call. Overall, our company delivered solid earnings despite the market and timing challenges we encountered in our SAFC business. As indicated in today's release, we are reaffirming our full year adjusted EPS guidance of $3.80 to $3.90.
Our end markets for Research products were generally stable in the quarter, and we expect they will remain so in the near term. In SAFC, our custom manufacturing and industrial cell culture media businesses for Biopharma remained stable and strong. Overall, our global supply solutions business also remained stable. These businesses make up greater than 75% of our SAFC sales.
Our e-commerce channel continues to be an important path to our customers, and we saw a 4% sales growth in the quarter. We are enhancing our content and expanding our offerings to make our industry-leading website a must-visit destination for researchers. You will see upcoming announcements as we further expand our e-commerce presence in emerging markets, which represent our highest growth opportunity.
We were recently voted the top strategic partner supplier by China Novartis Institute for BioMedical Research, and we are honored to have been awarded this designation. And this is a testament to our China team and their dedication to provide the best service and quality in the timeliest manner.
Looking at Research. Our end markets were generally unchanged from the second quarter. Academic sales continue to the stable in the low-single digit growth range. In the U.S., we are expecting current demand trends to continue until there is better visibility on the fate of sequestration. Remember, U.S. NIH-related exposure for us is about 5% of overall sales. So even if sequestration were to occur in its current proposed form, it probably would be an impact of about 0.5% of growth for us.
While our SAFC manufacturing business for Pharma continues to grow impressively, our Research business with large pharma remained soft, especially in our chemistry portfolio. As we discussed last quarter, recent layoff announcements and site closures have been a drag on our business. However, barring further consolidations of the sites we have seen over the past 12 months, we feel the magnitude of this drag should lessen in 2013.
Our Analytical business was again a strong growth contributor in the quarter. Our increased focus on the applied markets is beginning to pay dividends. As an example, we are seeing strong customer uptake of our analytical and reference standards. We feel that we are well positioned to grow in this fragmented marketplace. As another example, we see improvements in analytical instrument sensitivity and worldwide adoption of clinical diagnostic platforms as opportunities for us to provide high-purity, high-quality consumables in these applied markets.
When we couple our technical strengths with our capabilities in worldwide distribution, we see significant headroom for future growth. We believe the applied markets, which include testing and standards in environmental, food and water quality, forensics and clinical diagnostics, represent a significant avenue for potential sales growth, both organic and inorganic. We are finding meaningful opportunities to take our innovative products and research and apply them to the testing arena, such as sample prep for diagnostic applications and OEM opportunities for diagnostic kits. Acquisitions we made in the applied markets including Cerilliant and RTC, continue to be strong double-digit growth engines in the U.S., and we are now beginning to ramp up sales of their products in international markets.
In our core biology and chemistry segments, we are executing on a number of strategic initiatives to augment and broaden our portfolio of products. We recently announced an agreement to distribute mass spectrometry-based tagging chemistries. We are preparing the launch of a value brand label in our emerging markets. We are engineering new cell lines to enable customized toxicology screens, and we continue to work closer with our customers, both directly and through our dealer networks.
Turning to SAFC. Third quarter organic sales growth was 5%. Jan covered many of the moving pieces in her section, and I wanted to reassure you that we continue to feel good about the long-term prospects for our SAFC commercial business and its ability to organically grow in the mid- to high-single digits in the fourth quarter. Overall bookings for SAFC grew by 4% during the quarter. We were pleased with our double-digit Custom Pharma growth performance in the quarter and believe that we are well positioned for continued growth in 2013. Q4 should be another strong quarter for Custom Pharma even though the comps will be tougher relative to a very strong Q4 of 2011.
As Jan noted earlier, Bioscience was impacted by timing issues, with a large order getting pushed out of the third quarter into the fourth quarter. Due to the changes in expectations for Hitech, we are trimming our forecast for SAFC from low-double digit organic sales growth to mid- to high-single digit growth for the fourth quarter. We remain positive on the long-term growth trends of our Hitech business. We are expecting continued volume growth in the fourth quarter, even though some customers likely will continue efforts to manage their inventory, and we feel good about further growth in 2013. We think the LED business continues to have a solid secular growth potential as high-efficiency lighting regulations come into effect and consumer adoption ramps up over the next several years.
While we remain on track with our long-term integration of BioReliance, we are not yet satisfied with its performance to date. Sales in Q3 were flat compared to Q2. The macroeconomic conditions and relatively long sales cycles have resulted in slow growth than we had anticipated. However, we remain confident that the pipeline that we are working with and the integration plan we have developed will provide the expected sales synergies. For the Research Organics business we recently acquired, our performance has started to exceed our expectations as we continue to drive new sales.
For our updated guidance, we expect organic sales growth in Research to remain in the low-single digits for Q4 and could see an improvement from our Q2 and Q3 levels based on what we have experienced beginning in September. For SAFC, we expect mid- to high-single digit organic sales growth in Q4. We expect a sequential improvement from 5% growth in Q3, but we are keeping a conservative range because of the lumpy nature of large order patterns. For the full year, we expect total company organic sales growth to be around 3%, which is at the midpoint of our prior guidance range of low- to mid-single digits. For the full year 2012, we expect changes in FX to lower sales by approximately 3% and acquisitions to increase sales by approximately 6%, and we are reaffirming our adjusted EPS guidance of $3.80 to $3.90.
In conclusion, I want to provide an update on our strategic initiatives. First, we are driving our company to become more customer-intimate and end-market-focused. Today, we address 3 broad end markets: commercial, research and applied. These markets have different growth dynamics and opportunities, and we are increasingly driving compelling value propositions to enhance our success in all 3 segments.
The research markets look to us to be their supplier of a broad range of innovative and essential products that are readily available. The commercial markets, such as biopharma and electronics, look to us to provide customized solutions in a regulated environment. And the applied markets, such as food and beverage testing, environmental testing and clinical diagnostics, look to us to provide focused, standardized solutions in a highly regulated environment where simplicity, accuracy and throughput are important.
We are strategically expanding our products and services as we focus our R&D and sales and marketing efforts towards these 3 end markets. And we have a strong culture of continuous improvement. I'm proud of our 9,000 employees that are fully dedicated to working safely, to helping our customers and to finding ways to work more efficiently.
Finally, we continue to generate strong cash flow and returns on capital. We put significant effort in determining how we put this cash to work as we have been active in M&A, share repurchases and dividend payouts. We expect to continue our policies on share repurchases and dividends, and our top priority continues to be investing for growth, both organically and through M&A. We are strict with our criteria that these investments must fit our strategy and that our return metrics, which is demonstrated by a strong track record of generating an ROIC that significantly surpasses our cost of capital.
Again, on behalf of the worldwide Sigma-Aldrich organization, I thank you for joining us today. And now let's open up the call for your comments and questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Jeff Elliott of Robert Baird.
Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division
Just on Hitech, I was wondering would you be able to give us a little bit more color on what happened with pricing there. And then what gives you confidence that, that is going to stabilize in the near term?
Rakesh Sachdev
Yes, Jeff. As I mentioned in the last earnings call, we had begun to see price declines, which we had expected because we expected that with capacity coming onstream that Hitech pricing would come down. I think towards sort of the middle, end of Q3, we saw price declines that were a little higher than what we had expected. I can tell you that based on what I'm hearing from our own people that the pricing has stabilized, that we're not seeing further declines in pricing. And I think this is a common phenomena. There's going to be a need again for more capacity down the road, and I think pricing will tighten up and hopefully, come back to more normal levels. So -- and as Jan mentioned, we have been also getting price downs from our suppliers. So we have mitigated a lot of the margin impact. So while it doesn't show up in the sales revenue growth numbers, we are still making fairly good margins in this business, and so we're not dissatisfied. We expect Q4 to be even stronger than Q3. And clearly, based on our conversations with our customers, we expect 2013 to be much stronger than 2012.
Operator
[Operator Instructions] Our next question comes from Jon Wood of Jefferies.
S. Brandon Couillard - Jefferies & Company, Inc., Research Division
This is actually Brandon Couillard in for Jon. Rakesh, could you give us -- or Jan, could you give us a sense of the pricing in the -- the net pricing in the third quarter and perhaps break it down between Research and SAFC? And I think you normally take a price increase October 1, although, I think, last year, you did a little bit earlier in July. How does that look in the third quarter and the second half of the year?
Rakesh Sachdev
Well, Brandon, first of all, I think most of the pricing we get in our business is in the Research side. In fact, we normally don't get a lot of pricing in SAFC. And in fact, pricing was negative in SAFC, if you think of what happened in Hitech year-over-year because prices were down. We don't break out what the pricing is. I think it's fair to assume that we typically get 1% to 2% overall in pricing as a company. We did not take a price increase October 1, that was not in our plan. We typically do that more in the early part of the year and middle part of the year. So we are developing our plans for pricing going forward. But no, there was no pricing that came onstream in the quarter or October 1.
S. Brandon Couillard - Jefferies & Company, Inc., Research Division
Okay. And then, Jan, what does the revised outlook contemplate for the FX impact to EPS for the full year 2012?
Jan A. Bertsch
Okay. On the FX side, for the fourth quarter, we're looking at, I would say, about 1% FX headwind compared to last year, which is -- we had guided previously to $0.25 for the full year. It may be now a bit lower because of what I mentioned that we saw a little bit less pressure on the EPS side, a little bit improvement in the rate from call to call. And that would relate then to about a 3% on a full year basis year-over-year FX impact.
S. Brandon Couillard - Jefferies & Company, Inc., Research Division
And in terms of revenue, right, not EPS?
Rakesh Sachdev
Was your question on EPS or revenue?
S. Brandon Couillard - Jefferies & Company, Inc., Research Division
On EPS.
Rakesh Sachdev
Well, as Jan said, we -- I think at the last call, we said a $0.25 headwind for the full year. We expect that to be a tad better than $0.25. I think when we guided at the last call, we were sitting at -- our internal forecast were based in the low-120s on the euro. Now our forecast is based on the high-120s or 130, and I think we pick up some -- remember, we have a little bit of a field lag in the company the way we recognize the impact of that, and so we will see -- hopefully see some benefit in Q4 than the prior guidance. But as we said, because we are lowering our outlook in SAFC, I think it's pretty much going to be a wash.
S. Brandon Couillard - Jefferies & Company, Inc., Research Division
And then lastly, could you give us a breakdown of the gross margin factors in the third quarter between currency, mix and the impact of the acquisition activities?
Rakesh Sachdev
Yes.
Jan A. Bertsch
Yes. On the gross margin for the third quarter -- on a year-over-year basis, we were about 51% gross margin in the third quarter. A year ago, we were about 53%. The majority of that, I would say, 150 basis points or so, related to FX. And then, acquisitions probably were about the remaining balance because our new acquisitions carry a lower gross margin than our traditional or our legacy business does. So I think the combination of those 2 factors explains the year-over-year piece. I think for the fourth quarter, I am going to assume something pretty flat to the third quarter.
Rakesh Sachdev
And just to add to what Jan said, I think if you would take out the effect of FX and some of the new acquisitions that have -- because -- also because of purchase accounting that have a lower margin. But if you take out of the effect of new acquisitions and FX, I think we are sitting probably close to about 53% gross margin, whether it's for the quarter or for the full year.
Operator
Our next question comes from Dan Leonard of Leerink Swann.
Daniel L. Leonard - Leerink Swann LLC, Research Division
On the expense line, you guys always hustle after expense management, but this quarter was the first time, in a little while, I recall, your operating expenses being down year-over-year. Is that the type of -- can you keep that up in a tougher macro environment?
Jan A. Bertsch
I think we had an extraordinarily good quarter in the third quarter. I mean, you're right, we have very, very strong cost management. And early in the year, we said that we -- based on the macroeconomic conditions, that we wanted to put some cost reduction actions in place, and we did that. And as a result of that, we have seen our costs being lowered throughout the year. But I think as we look forward -- and also, the restructuring actions that we took played a bit of a role in that. So we'll see part of these actions continuing and part of the actions were, I think, short-term reductions in our discretionary spending line. So as we look forward into the next quarter, I would not expect to repeat that same level of performance that we had in the third quarter. I would say something more in the low- to mid-$150 million kind of range instead of where we ended up, which was about $147 million in the third quarter because we've got some delayed spending on initiatives that I think that we'll attack in the fourth quarter. We mentioned previously about some spending on our next-generation SAP initiative for the company, and we'll start that up soon. So I think more like the low- to mid-150s is a good range to look at for the fourth quarter.
Daniel L. Leonard - Leerink Swann LLC, Research Division
Okay. That's helpful. And then for my follow-up. Rakesh, you mentioned you were launching a value brand line of products in emerging markets. How do we think about that affecting your margin profile in emerging markets going forward, especially important because those are growing faster than your corporate average?
Rakesh Sachdev
So we have been very careful in identifying the products that we are going to launch as value brands. Obviously, we have -- when we put our facilities in China, we have identified those products that we can offer at a slightly lower price but still preserve the same margin percent. So I -- the way to think about this is our margin percent on these value brands will be about the same as our non-value brand products, even though they might be at a lower price.
Operator
Our next question comes from Tycho Peterson.
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Just to be clear on the margin question, can you break out the contribution to the margin erosion from SAFC, in particular the pricing component in Hitech? How much of a dropoff in pricing was it that you saw?
Rakesh Sachdev
Well, we don't kind of -- we don't like to break out the pricing on the Hitech because of the competitive nature. But I would say that -- I don't have the number in front of me, but the Hitech -- the net margin that we still got for the full company, net of the Research price increases that we got on pricing and the reduction in Hitech, we are still within our range of the 1.5%. So it was probably less than 50 basis points, I would say. I don't have the exact number.
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Okay. And then in your comments you talked about BioReliance and maybe it was tracking a little bit below expectations. Can you talk about the integration initiatives, what you think it takes to get that back on track? And then any update to your accretion targets for BioReliance on the bottom line?
Rakesh Sachdev
Sure. So as I said, we were expecting and we were pushing for the sequential growth in Q3 versus Q2 in BioReliance, and it was fairly flat. And there are 2 or 3 things that sort of caused that. But let me just say this, we still expect Q4 to be our strongest quarter of the year. We're still expecting good growth there. I think, as I said, there are a couple of things that are happening there. We had some temporary delays around the startup for 3 specific customers that we'd been working on, around business in clinical genomics and gene tox and also some animal health services, and that'll come back. There has been just some slow recovery on the tox side and some slowness in the U.S. side. But our teams are working. I think we have identified some very good synergistic opportunities. We are working with our Carlsbad facility in California where we manufacture vaccines, where we are taking a complete value proposition to our customers, not only with our vaccines but also the testing and the qualification of the vaccines that go with it.
As I said in the last call, the sales synergies, because the sales cycle is longer when you're doing -- selling this kind of service, and I think we'll start seeing some of the sales synergy. We have seen some of the sales synergies this year, but really we'll see more next year and then the following couple of years. So I think it takes -- in my view, it will take about 2 to 3 years to get to full synergy level.
Operator
Our next question comes from Paul Knight of CLSA.
Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division
Could you talk about your comments earlier on the pharmaceutical spending environment? Obviously, a lot of cost cuts now. Is that going to get better in Q4? I mean, what's your guess on how that end market changes? And also, part of that question is, what's your percent exposure right now, I guess, to Pharma, in particular?
Rakesh Sachdev
Yes. So if you look at Pharma, again, as I mentioned, we've got -- our exposure to Pharma is both on the commercial side, as well as the research side. So if you look at our exposure on the Commercial side, which is a good part of our SAFC business, I think it's about at least 15% to 20% of the SAFC business, that business, as I said has been growing impressively. It's -- so far this year, it has been growing double digit every quarter. I think the comps will be a little tougher in Q4. But I expect that business will grow for us over -- in double digits for the full year, so I think that's going well. I remain very optimistic about a similar trajectory in this business with Pharma in 2013. I think it looks good. Now when you look at the business we do with Pharma and Research, it's a little bit of -- it's a mixed bag. With the large pharma companies, we have clearly seen a decline, and that's been a manifestation as a result of pharma companies, one, moving work away from the developed world and actually reducing some of their R&D. But when we look at the work we've been doing with the small -- medium to smaller pharma companies, we've actually seen growth. So if we look at the total growth for us with Research and Pharma, it isn't too bad because we are negating some of the decline, although not all of it, with large pharma, with some of the growth that we have seen in the small and medium pharma. I expect that in 2013, some of the comps will change. I think unless, as I said, there are some other announcements of consolidations. I think 2013, I expect will definitely should be a better year for us with Pharma than 2012.
Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division
And can you split out on -- amongst your Pharma customers, is it a clear now, at this point, transition to large molecule work?
Rakesh Sachdev
No. There's still a lot of work being done in small molecules. So I don't think we should say that the work has moved from small molecule to large molecule. Clearly, there's greater -- there is emphasis on large molecules, and we play in that as well. But if you look at all the business that the CROs are doing, in fact, most of the CRO work that is being done for large pharma is related to small molecules. There's very little large molecule work that's being done in places like China and India on -- with large -- for large pharma. Now that's growing but it's still a small piece.
Operator
Our next question comes from Isaac Ro of Goldman Sachs.
Isaac Ro - Goldman Sachs Group Inc., Research Division
Wanted to just start off with a really just long-term question about organic growth. I mean, at the analyst meeting earlier this year, you guys did guide to 6% to 7% organic, plus 2% to 3% from acquisitions. And granted 2012 is a difficult year, and so if we put that aside, can you maybe give us a sense of what kind of global GDP growth you would need on an underlying basis to achieve those growth levels for the long term in 2013 and beyond?
Rakesh Sachdev
Yes. I think that's a very good question. What I would say is that if you looked at the components of our growth that took us to that 6% to 7% growth, clearly, we have said that our commercial business, which is about 1/3 of our business has to grow in the mid- to high-single digits, really in the -- closer to the high-single digits. And we're not backing away from that because of the secular growth that we have and the exposure that we have to the different kinds of end markets. So that we will continue to drive that. As you know, we have driven that over the last 2 years. This year, because of the anomaly on the pricing on Hitech it might change it a little bit. But I still remain pretty confident that in the commercial markets, we will achieve that. Now on the Research side, there are really 2 or 3 things that has to happen. One, the emerging markets -- we have to continue to drive growth in the emerging markets, and that's an important part of our Research growth. The second one, as I said earlier, is that we have clearly seen growth opportunities in the applied markets. They're not your traditional research markets. I mean, that business is going to -- still sits under the umbrella of our Research business. But we are clearly seeing double-digit growth in the applied markets. Now you could say that's still a smaller piece of our total business, but we will drive more growth in the applied labs. And you'll hear me talk a lot more about that. And frankly, the Research business, the traditional Research business in the developed world, which is the remaining piece, in the U.S. and Europe, has to also grow, and our strategy there around growth has been to improve availability, offer the innovation that our customers need. We are getting even more successful working with dealers. What we are finding is that in several countries where we did not have the ability to reach out to every small customer in the research labs that through -- I think what we have begun to see in places like Japan, that we can actually accelerate growth in fairly traditional markets. So it's a combination of many things. I will say that clearly in this macro environment, that 6% to 7% looks daunting, and I don't want to downplay that, clearly. But we have to fire on several cylinders. I think we understand the map around how to get there and where we need to invest, and we're clearly going to be a very, very focused in getting to those growth goals. We are not backing down at all.
Isaac Ro - Goldman Sachs Group Inc., Research Division
Great. Thanks very much for the color. If I could ask a follow-up on margins. You guys have also given some long-term margin guidance, call it, 26% or 27% by 2014. I'm just wondering how sensitive is that margin expansion goal relative to the top line picture that we just painted there. Can you still achieve that if your top line growth is closer to the mid-single digits?
Rakesh Sachdev
I think so. I think we have achieved that -- in fact, we have achieved some pretty impressive margin expansion numbers even though our growth has been lighter than the 6%, 7% that we were shooting for. So if we can get to the 6%, 7%, I think we will have an opportunity to expand margins even more.
Operator
Our next question comes from Jon Groberg of Macquarie.
Jonathan P. Groberg - Macquarie Research
So can I just get a little bit more color around the Research business? You said it's about 68% of your sales. And you mentioned 3 of the categories. So I just wanted to get a little bit more color, can you maybe, one, tell us on essential and labware kind of what that did and then maybe from an end market, what academic and government did? And then maybe just give us a little bit more color geographically as well on Research. And the reason I'm just -- I want to dig in is kind of the -- this is all kind of one question around the Research market. But if your -- it looks like you're not really getting much volume growth, right? And I'm just curious in a more difficult funding environment, are you starting to see any pushback or do you anticipate any pushback on pricing in that research market?
Rakesh Sachdev
So again, we don't break it up anymore, the research specialties and essential like we used to. But I can give you some color. So if you look at our Research business, clearly, if you look at it from a product line standpoint, which is -- was your first question, clearly, our highest growth in the Research segment is Analytical products. And that's 15% of our business, but it's growing very nicely. Our Chemistry business, again, that's about a little less than 15% of our business, and that has been -- has declined this year in the mid-single digits, and we think that, that will start stabilizing. I would say everything else has been fairly flat. If you look at our biology business, that has been fairly flat. Our lab essentials business has had low-single digit growth, and our labware growth, in fact, we do sell some labwares, and that actually has been a little softer. In fact, our reagents business has been -- if I look at Q3 versus Q2, we actually saw some strength a little bit. But our labware business was weaker than the prior quarters. And again, there, our margins are much lower so it doesn't affect us that much on the margin side. If you look at from a pricing standpoint, are we seeing any pressure in pricing? Listen, there's-- I don't think our pricing environment really has changed much. We haven't seen anything. Pricing is something we manage proactively ourselves, and so we decide if there is a certain business or a certain product where there needs to be a price adjustment. Both down or up, we take action on that. But I would say in the Research business, we proactively manage the business. It's the SAFC business where our customers are clearly helping us manage our pricing.
Jonathan P. Groberg - Macquarie Research
And just could you maybe talk, again, just geographically on the Research business, how it went? And then again, was -- academic and government, was that down or was that flat?
Rakesh Sachdev
No. Academic was -- in fact, Academic was a slightly up in Q3. Our industrial and chemical industry business was also up. Where we saw some soft -- Pharma was down because of what I just said. Because of a lot of the chemistry business that we do, it was a down a little bit. And then biotech was also down a little bit, but nothing significant. We haven't seen any significant change from Q2. The trends have been fairly stable. And as far as geographically, you said, in -- again, North America is probably -- on the research standpoint, is probably the weakest of the 3 regions. It was fairly flattish. Europe, we had low-single digit growth, and international growth was, of course, much higher.
Operator
Our next question comes from Tracy Marshbanks of First Analysis.
Tracy Marshbanks - First Analysis Securities Corporation, Research Division
Just to follow up on that geographic. Could you tease out from APLA what you were seeing in the major markets there on a country basis?
Rakesh Sachdev
Yes. So in APLA, again, I mentioned -- or Jan mentioned that if you look at India and China -- let's talk about our core markets. India, again, we saw double-digit growth. So India was a good growth country for us in Q3, it was also in Q2. In China, our Research business continued to grow at the same rate we have seen in the previous quarters. However, our supply solutions business, which is a business that we do in SAFC, mostly for industrial companies, declined. And so we have seen a slowdown with industrial companies, not on the Research side, but on the supply solutions side in China. Although, I got to tell you, towards the tail end of the quarter, again, we are beginning to see some good orders come in from China on the industrial side. So I can't sit here and tell you that, that's a trend that's likely to continue. Frankly, in our own internal estimates, we are estimating that China will -- again, the industrial side should be stronger in Q4, so it's too early to say that we are seeing a trend. I would say Japan has been consistent, no real change there. Brazil kind of goes up and down. But I would say the International business on Research has been very consistent. The only thing that we have seen is some slowdown in China for the industrial markets.
Tracy Marshbanks - First Analysis Securities Corporation, Research Division
Okay. And a follow-up on BioReliance. I mean, you've had the business a while now, and you've sort of talked about you've obviously learned some things and learned about the market. Should I take your comments as you still have this -- you still see the same potential growth rates, margin opportunity, cross-selling opportunity and it's a matter of time to get that in place and sell and package or do you have just sort of a different, reduced outlook?
Rakesh Sachdev
Absolutely. No, we are very much on the same page. Clearly, we have been jointly making a lot of calls to customers, and we have remained very, very optimistic about what this business is going to do for us in the coming few years. There's no question. I -- and the fact that we were flat in Q3 really doesn't -- we didn't buy this business for what it was going to do in 2012, and so I think the fundamentals still remain very much appropriate as we had thought about it when we bought the company.
Operator
Our next question comes from Tim Evans of Wells Fargo.
Timothy C. Evans - Wells Fargo Securities, LLC, Research Division
Rakesh, I believe last quarter you talked about the Research business being just a little bit shaky in China. I believe you just said that this quarter you saw same growth. So would you still characterize that in the same way as you did last quarter?
Rakesh Sachdev
As I said, the growth in China has been fairly consistent throughout the year in Research. Now I think we are going to drive more growth in China because I would like to see the China growth to remain very strong. In fact, we think we have lots of opportunities in China. And so there is some volatility in China. But every time I say that, we have some months that come out very strong and that's part of the issue with China, that it is not consistent month-to-month. I know that based on what we are selling right now and some of the orders in China that Q4 is going to look very strong. But the first half of Q3, it looked somewhat weak. And so I would say that overall, it's still going to be a double-digit growth country for us. I think -- expectations are -- at least my expectations are much higher, that we continue to drive more growth.
Timothy C. Evans - Wells Fargo Securities, LLC, Research Division
Right. I guess the thing that just leaves me scratching my head a bit on that is that you would kind of expect maybe less volatility in the type of business that you're in, the consumables-oriented recurring business. So to what do you attribute the volatility?
Rakesh Sachdev
Well, I think it's just -- 2 things. If you leave the industrial piece out, which is volatile, because industrial companies, they're buying less. Our SAFC business has some volatility. But on the Research side, again, the volatility is only within a few percent. Again, remember that China doesn't make a big part of our company today. China is probably about 3% of the total company. So even with that little volatility, we don't -- it doesn't really create volatility for the company. But as we grow this. We are trying to drive sales in new territories of China and we are beginning to get success and some of that is also a little choppy, especially as we go into the interior China. The eastern corridor of China generally is pretty stable for us.
Operator
Our next question comes from Peter Lawson with Mizuho Securities.
Peter Lawson - Mizuho Securities USA Inc., Research Division
Rakesh, so for Q4 revenues, what drives the sequential growth between Q3 and Q4, you think, which end markets, which geographies? And did you mention there was no impact from FX in Q4?
Rakesh Sachdev
So if you just look at sequential growth between Q3 and Q4, if you remove FX on-- put FX on the side, I think we are saying that we are going to see sequential growth in SAFC, 4% to 5% growth in SAFC. Our Bioscience business is going to be stronger. I think Jan mentioned we had a large order on Bioscience that got slipped into Q4. So our Bioscience growth is going to be stronger. I expect our Hitech growth to be yet stronger in Q4 than what we saw in Q3. Our supply solutions business would be about the same. And our Pharma business probably will show a slight reduction compared to Q3 because just of the comp issue with 2011. So -- but overall, in SAFC, which, again, makes up 1/3 of our business, we expect sequential growth. In Research, I think what we have said, it's going to be fairly flat, in the low-single digits. But I think we have seen some signs that give us a little bit of hope that Q4, our Research organic growth should also be better than Q3 and Q2.
Peter Lawson - Mizuho Securities USA Inc., Research Division
And then the FX impact in Q4, what was that again?
Jan A. Bertsch
Yes. Peter, on the sales line, we're anticipating about a 1% headwind in FX relative to last year. And then on an EPS line, as Rakesh had mentioned previously, really pretty flat, maybe marginally a little bit better, but pretty flat.
Peter Lawson - Mizuho Securities USA Inc., Research Division
Got you. And then just with the new hedges, how should we think about FX impact for 2013 if the rates remain where they are?
Jan A. Bertsch
Yes. So really the intent of putting the hedging program in place, which we spoke about at the last call, was really to help mitigate some of the volatility on the earnings line for the company. So as we go into our budgeting process here for next year, we'll be able to lock in some of those rates for currencies that are most critical to us, which include the euro, the yen and some other select currencies. So we are up and running. We have the program in place. We have begun the program. And as we finish with our budgeting process here, we will be able to lock in some more of those currencies for the budget period of 2013. So you will see less volatility relative to our budget.
Operator
Our next question comes from Mike Sison of KeyBanc.
Michael J. Sison - KeyBanc Capital Markets Inc., Research Division
Rakesh, in terms of acquisitions, any areas of focus? When you take a look at what's doing well for you guys, Analytical and Research is doing well, Custom Pharma. Are these areas that there are good opportunities out there?
Rakesh Sachdev
Yes. So Mike, we continue to look at acquisitions. I would say largely or mostly bolt-ons that would help us in each of those 3 end markets that I talked about, applied is one. We have -- in fact, the acquisitions that we made in Cerilliant and RTC were really to help us grow in applied labs and applied markets, and it's working out pretty well for us. In fact, it has exceeded expectations. I would say that on the SAFC side, we've made some acquisitions. BioReliance was clearly one of them. In Research, we will look at selective opportunities, whether it's to enhance our product portfolio or to give us some breadth, including in the emerging markets. And I think we continue to look at all of the above. I think we've got a group of folks who, at any one point, I think I've said before, we look at a least a dozen opportunities and expect that we will continue to mind those and apply our filters. We have pretty strict filters, both on the strategic side, as well as the financial return side. But, yes, we are generating enough cash, and we are aware of that. We have a balance sheet that's quite pristine. And so we will be selective, but we will move forward.
Michael J. Sison - KeyBanc Capital Markets Inc., Research Division
Right. And in terms of the LED business, you talked about some destocking. Do you have pretty good visibility there in terms of how long that will last? And maybe remind us what the long-term growth potential for this business is when you think about getting past the inventory destocking.
Rakesh Sachdev
Yes. So first of all, again, I just want to reemphasize that in terms of volume growth, we saw some good double-digit volume growth in the quarter and expect further double-digit volume growth in the fourth quarter. I think some of this gets muddled because of some of the price declines. Now so the inventory adjustments that also are affecting us, I -- in conversations with our customers, what they are at least telling us that they'll probably doing some adjustments over the next 3 to 6 months, and that's kind of what we have. I think long-term secular growth remains good. We haven't -- we are still in infancy. Somebody probably had the analogy of the baseball game, although I shouldn't be saying that. In which inning are we in the LED? And I think we are really in our infancy, and we're going to see some very strong growth in general lighting in the years to come, and LEDs are going to play a very strong role.
Operator
Our next question comes from Dmitry Silversteyn of Longbow Research.
Dmitry Silversteyn - Longbow Research LLC
First of all, in the Biotech area of the Research chemical side, at one point this was viewed as a growth area, maybe on par with SAFC, targeting sort of double-digit growth organically. It's been, from the commentary that you've given over the last several quarters, one of the weaker areas in Research chemicals. Can you talk a little bit about what your strategy is for turning this business around? Or to ask it differently, what keeps that business from growing at anticipated rates of at least mid- to high-single digits?
Rakesh Sachdev
Yes. So again, just to mention, when we talk about the biology business, our emerging biology business is a small part of that business. So if you think about what we do in functional genomics and biomolecules and where we use technologies such as zinc fingers, those get camouflaged in a bigger biology part. I would say that those businesses continue to grow nicely for us. But the overall biology business that also includes small molecule, biomolecules as core biology stuff, that is one that's growing. It has been fairly flat, and I think it camouflages that. Are we driving further growth? Absolutely. We are going to continue to drive growth in the emerging biology side. I would say that the growth has been less in this last, I would say, 3, 4 months because of the same malaise that we have with academia and with Pharma because, again, academia and Pharma generally are the 2 markets where we sell our emerging biology products. And I think they are under the same issues. And as I said, I think the U.S. is one where there is the most uncertainty. Our growth continues nicely in Europe and Asia. And I think until we've -- until this malaise gets settled in the U.S., we're going to see a few quarters of fairly soft growth.
Dmitry Silversteyn - Longbow Research LLC
Second question, more on the balance sheet. Your working capital and your days sales outstanding have crept up this year on a year-over-year basis versus last year. Is this intentional? Is it a function of longer supply chain because you're doing more business internationally, significantly more in 2012 versus 2011? Or is this just an indication of slowing sales and you will rightsize these metrics as you end the year?
Jan A. Bertsch
Dmitry, I think to do working capital justice here, let me just break down the components as we talk about them. First of all, on the inventory side, you see our inventory has increased since the end of last year to the tune of about $50 million, and if you look at it, about half of that is due from SAFC. So it's either to build inventory for businesses that we anticipated large orders for to meet production demand, I would say about half of that increase is for SAFC. About $15 million of that increase is due to new products that we have in the system, and about $10 million of the increase since the end of last year was due to acquisition activity. When we look at accounts receivables and payable side, really on the payable side, we were relatively flat from end of last year to where we are today. But on the receivables side, that's also increased since year end. And it's really increased due to 2 things: one is due to acquisitions, which is probably about half of the increase in the receivables; and the other half is really due to higher sales that we had at the end of the third quarter relative to the end of last year. So that's just an explanation of the working capital increases. But the focus, and I think we've mentioned this previously, is to really focus on improving each of those components for those areas. And we are doing that now, but it's just something that takes some time to be able to gain efficiencies on this front. So we will continue to work on that and hopefully, drive the inventory numbers down throughout 2013 to some extent.
Dmitry Silversteyn - Longbow Research LLC
So the 5-day-or-so increase in days sales outstanding, that -- you're saying that's mostly a function of...
Jan A. Bertsch
Those things go up and down at the end of any particular quarter. So I wouldn't get too worried about that particularly. I mean, we see that move around a little bit. Our focus is really on the long term, trying to put some strategic actions in place to more align the payables and receivables terms and then to decrease inventory over time to the extent that we can. But I wouldn't get too concerned about that particular one metric in this quarter.
Operator
Our next question comes from Derik De Bruin of Bank of America.
Derik De Bruin - BofA Merrill Lynch, Research Division
Most of my questions have been answered, and I know this is going to be a repeat of something that was discussed earlier. But I'm just curious about your outlook on the Pharma markets. I mean, every survey that I've seen, every forecast I've seen, both internally at Bank of America and externally, suggests Pharma R&D is going to be up maybe low-single digits for the foreseeable future. I just -- what gives you sort of confidence that, that business is going to be able to grow in the research market? I mean, given that China and some of the emerging markets are still slow in that sense. I'm basically -- the point of it is like what keep -- what makes the Research chemicals business anything more than sort of like a low-single digit grower for the foreseeable future?
Rakesh Sachdev
Well, first of all, we are not seeing growth in pharma research. And in fact, as I said, we have seen declines in Pharma led by large pharma companies. So if we -- going into 2013 and even if that market is flat for us, that's an improvement from where we have been in 2012. Now, obviously, we're going to try and get positive growth in pharma research in 2013 with some of the things that we talked about. But I think what we have said is we have seen with -- at least with large pharma companies over the last several quarters, a decline, and that's going to level out. And as the comps level out and as we go into 2013, that will be less of a headwind than what we have faced over the last several quarters.
Operator
Our final question comes from Steve Willoughby of Cleveland Research.
Steve Willoughby - Cleveland Research Company
I was wondering as we learn -- getting better arms around the Hitech business, what does seasonality look like in that business? Because I would've thought that this would have probably been one of the stronger quarters just given the ramp into the holiday season and everything. And then my second question is just on the pacing through the quarter, if you could comment about how -- on the Research side, in particular, how demand trends were throughout quarter.
Rakesh Sachdev
So I think as far as the seasonality of the LEDs, I think you need to think about the people who manufacture the LEDs and whether they were -- they had overbought some of the precursors for their CVDs, the equipment they use to make LEDs, which is kind of what happened. But I think -- I don't think you can relate retail sales of products that use LEDs to sort of -- the manufacturers who use -- import products to make the LEDs. So I would say that there's correction taking place. There was a real hype. I think everybody thought that the growth would be a lot more. Clearly, again, I want to say once again the growth has been very strong even amongst the manufacturers of LEDs. We are seeing strong double-digit growth every quarter. I think there was this expectation that the growth would be much, much higher than that, and I think that's where it's being tempered. So I think that's one. Your other question -- I'm sorry what was the other -- you had a second question?
Steve Willoughby - Cleveland Research Company
Yes. It was on the pacing through the quarter on the Research business.
Rakesh Sachdev
On the Research business. So yes, clearly, I think the latter part of the quarter, especially September, we were a little more hopeful with what we saw in Research. And even going into October, we're a little more encouraged. Again, it's shades of gray, but clearly, I think we have seen strength versus the early part of Q3 going into Q4, and that's why I said I think we're still hopeful that we will be able to show a stronger growth in Research in Q4 than we did in Q3.
Quintin J. Lai
All right. I think that concludes it for today. Thanks again for your participation. We expect to release results for the fourth quarter of 2012 before the market opens on Thursday, February 7, 2013, and we'll follow that with a conference call that day at 10:00 Central standard time. This concludes today's call.
Operator
Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.
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