Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2015 second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would like to introduce our moderator for the call, Mr. Kenneth Apfel, Vice President of Investor Relations. Mr. Apfel, you may begin the call.
Good morning, and thank you for joining us. On the call with me today is Marc Casper, our President and Chief Executive Officer, and Pete Wilver, Senior Vice President and Chief Financial Officer. Please note that this call is being webcast live and will be archived on the investors section of our website, thermofisher.com, under the heading Webcasts and Presentations until August 14th, 2015. A copy of the press release of our 2015 second quarter earnings and future expectations is available in the Investors section of our website under the heading Financial Results. 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 quarterly report on Form 10-Q for the quarter ended March 28th, 2015, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also 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 second quarter 2015 earnings and future expectations, and also in the Investors section of our website under the heading Financial Information. With that, I now turn the call over to Marc.
Thank you, Ken, and good morning, everyone. Thanks for joining us today for our Q2 call. As you saw in our press release, we had an excellent quarter. Financially, we delivered strong growth on both the top and bottom line. Operationally, our team executed very well, and we gained share with our customers. Strategically, we continued to execute our growth plans with significant new product launches, good progress in emerging markets, and many examples again this quarter that demonstrate how our unique value proposition is resonating with our customers. We also announced a nice bolt-on acquisition near quarter end, which is an example of how we're continuing to deploy capital to create shareholder value. I'll touch on all these achievements, beginning with a financial summary and my end market commentary. I'll cover some of the business highlights from the quarter and close with our updated guidance for the year.
Beginning with the financials. Our revenues in Q2 were $4.27 billion. Our adjusted operating income increased 3% to $950 million. We had good expansion in our adjusted operating margin, which increased 90 basis points to 22.3%. We delivered adjusted EPS of $1.84, which is a 7% increase over Q2 of last year. We fully leveraged our top-line growth while continuing to effectively manage the business to offset the FX headwind. The power of our PPI business system continues to contribute meaningfully to our earnings growth. Let me now put our growth in the context of our end markets. First, in academic and government, we saw good improvement in Q2 as we expected after a soft Q1. Growth here returned to a low single digits. We were encouraged that the proposed increase in NIH funding continues to move forward.
While it's not likely to have any near-term impact if enacted, it would certainly be a real positive down the road. In industrial and applied, we didn't see much change with growth in the low single digits in Q2. Our core industrial businesses remained soft, while our businesses serving applied markets continued to do well. In particular, we had a very strong quarter in chromatography, with high demand for our HPLC and GC products. Turning to diagnostics and healthcare, also not much change here. Conditions in this end market were similar to what we saw in Q1, and we grew in the low single digits. The key contributors to our growth again this quarter were our clinical diagnostics and immunodiagnostics businesses. Last, our performance in pharma and biotech was very strong, and we grew in the mid-teens in Q2.
Given our significant strength here, I want to give you a bit more color on this end market. We believe our performance was driven by a combination of three factors. First, we continue to capitalize on the strong market conditions that we're seeing, especially in biotech. Second, we're effectively leveraging our customer value proposition across our businesses, and that accelerated our excellent growth momentum in this end market. Third, the actions we've taken as part of the integration have fundamentally strengthened the growth trajectory of our biosciences and bioproduction businesses. The revenue synergies are also starting to ramp up and beginning to contribute to our growth. Let me now highlight some of our accomplishments from the quarter in the context of our growth strategy. We made great progress to set ourselves up for another successful year.
As you know, our growth strategy is centered around three things: Our leadership in developing high impact technology innovation, the advantages we have because of our scale in emerging markets, and our ability to leverage our unique customer value proposition to gain share. Starting with innovation, we followed a very productive Q1 with another quarter of significant new product launches. What strikes me is the incredible progress we're making in developing new tools with the potential to have a significant impact on the way our customers identify and treat disease. This is a very exciting time, and Thermo Fisher is playing a key role in meeting some of healthcare's greatest challenges. Let me give you a few examples from the quarter. First, you all know that the American Society for Mass Spectrometry conference is an important venue for us and always presents the opportunity to reinforce our mass spec leadership.
This year, we celebrated our 10th anniversary of the original Orbitrap. It's as much of a game changer in proteomics today as it was back then, and we continue to build on our leadership. Our latest Orbitrap development is the new Fusion Lumos Tribrid system, which we launched at ASMS to expand our Fusion portfolio. With Lumos, we've improved the two fundamental aspects of system performance that are most important to proteomics researchers. One is intact protein analysis, which allows scientists to perform more comprehensive protein characterization. The other is sensitivity, which is now three to five times greater than the previous Orbitrap systems. During the quarter, the Gladstone Institutes at the University of California, San Francisco opened a Thermo Fisher Scientific proteomics facility. Scientists there are using our Orbitrap and TripleQuad technologies to better understand the interactions between genes and the proteins they produce.
The goal of this collaboration is to better understand human biology to more effectively target and cure disease. In response to requests from our customers to manage, analyze, and share the massive volumes of data generated by this kind of research, we also announced at ASMS that we've extended our Thermo Fisher Cloud platform to support proteomics. This new capability complements our existing cloud platforms for Sanger sequencing and qPCR, connecting scientists, instruments, and software in a collaborative, multi-disciplined environment. Another highlight from ASMS was our new Q Exactive GC-MS/MS system, which is the first instrument to combine gas chromatography with high-resolution Orbitrap mass spectrometry. This significantly increases productivity for life science researchers, as well as customers working in anti-doping and food safety laboratories by bringing high sensitivity applications to those traditionally served by GC-MS.
Turning to AACR, the annual meeting of cancer researchers in the U.S., we extended our QuantStudio portfolio by launching two new real-time PCR systems, the QuantStudio three and five. These new products are part of our efforts to accelerate growth in our PCR franchise. At the annual meeting of clinical oncologists called ASCO, we announced our participation in a national clinical trial being run by the National Cancer Institute. The NCI-MATCH program expects to enroll 1,000 patients across the U.S. in a trial that will sequence genetic information to match these patients with the most effective treatments. Medical facilities in the network will use our Oncomine panel and reagents, as well as our Ion Torrent system to sequence as many as 3,000 cancer samples.
This is potentially groundbreaking work that is being made possible by our next-gen sequencing technologies, which are ideally suited to this targeted panel approach to oncology. One final comment on innovation. We added new state-of-the-art capabilities at our bioproduction facility in the U.K. for the manufacture of our proprietary dry powder media. This unique granulated formula has all the benefits of traditional liquid media without the associated storage and transportation costs. This format simplifies cell culture production and is used in a range of drugs, including an increasing number of cancer therapeutics. Turning to the second element of our growth strategy, emerging markets. First, I want to mention that we returned to double-digit growth in China this quarter, growing in the mid-teens, which is encouraging. Next, I wanted to spend a few minutes on a region that we don't talk as much about, the Middle East.
This is a relatively under-penetrated market for us. In May, we opened our first customer experience center in Dubai. This facility showcases a wide range of our technologies, from centrifugation to mass spectrometry and genetic sequencing. We'll provide training there for researchers, healthcare providers, and educational institutions, as well as food and beverage companies. We also plan to collaborate with local universities to train aspiring scientists in the region. The Middle Eastern countries represent a good long-term opportunity for us because they're investing heavily in research, healthcare, food safety, and the environment. As we've done successfully in other emerging markets, our strategy here is to increase our direct commercial presence, starting with demo and application labs like the one in Dubai. We use these as foundation for building strategic partnerships, and I'm encouraged by the progress we've made so far.
The third element of our growth strategy is our customer value proposition. A great example of how we're effectively delivering it is the growth we're driving within our Life Sciences Solutions business. As I mentioned in my end market commentary, we are fully leveraging the capabilities of both companies' biosciences and bioproduction businesses as part of our integration plan. Our team have done a fantastic job of combining our offerings here in a way that really resonates with these customers and drives growth. Customers are also increasingly seeing the benefit of being able to buy Invitrogen and Applied Biosystems branded products through our research market channel, and we're seeing some nice incremental growth as a result of that as well.
Just to give you a quick update on where we are relative to our synergy targets, we've made great progress on the revenue synergies in Q2. We built on the momentum we had early in the year. As we said last quarter, we expect the revenue synergies to ramp up as the year unfolds. We're at $25 million at the halfway point, which puts us right on track to meet or exceed the $60 million in revenue synergies for the full year. In terms of cost synergies, we now expect to deliver $130 million of cost synergies in 2015, which is a $5 million increase over what we discussed last quarter. Before I move on to our guidance, I'll make a quick comment on capital deployment. At the end of June, we announced our agreement to acquire Alfa Aesar, a leading provider of research chemicals for approximately $400 million.
This is a complementary bolt-on that strengthens our research chemicals offering. We expect to complete the acquisition by year-end. The pending Alfa Aesar acquisition is another example of our strategy to effectively deploy capital. If you look at where we are at the halfway point, we bought back $500 million of our stock at the beginning of the year. We've deployed $300 million to acquire Advanced Scientifics in Q1. We've committed approximately $400 million to acquire Alfa Aesar. We pay a quarterly dividend. In total, we're on track to deploy approximately $1.4 billion this year to create value for our customers and our shareholders. Let me give you a quick update on our guidance for 2015.
As you saw in our press release, we're raising both our revenue and adjusted EPS guidance to reflect the impact of current foreign currency exchange rates, as well as strong operating performance. We now expect revenue for the year to be in the range of $16.72 billion-$16.86 billion. We're also raising our adjusted EPS guidance to a new range of $7.28-$7.41. This will be the 5%-6% growth over our strong results in 2014. Given our decision to raise both revenue and earnings guidance, it's clear that we're executing well and we're in a strong position going into the back half of the year. In summary, it was a great quarter. We delivered strong performance, we made excellent progress in executing our growth strategy, and we continued to put our money to work to create shareholder value.
Before I turn the call over to Pete, as you probably know, this is his last earnings call. Pete has made tremendous contributions in defining and executing our growth strategy during his 11 years as CFO. He also did a great job of preparing his successor, Stephen Williamson, to take on this important role. Stephen and I have worked together very closely for a long time. I'm looking forward to partnering with him as he takes on the reins as our CFO on August 1st. That said, Pete is extremely committed to Thermo Fisher and has graciously accepted my offer to reconsider his retirement in March of 2016 to take on a new role outside of finance. He will serve in the newly created position of Executive Vice President and Chief Administrative Officer.
In this capacity, Pete will have responsibility for overseeing some of our corporate functions, which will help me devote more of my time to our customers. Pete is an extremely talented and valued member of the team. I'm pleased that we'll continue to benefit from his deep knowledge of the company and his leadership. With that, I'll turn the call over to Pete.
Thanks, Marc. I appreciate your kind words, and I'm very excited about my next chapter with Thermo Fisher. With that, let's move on to the numbers. As usual, I'll begin with an overview of our total company Q2 financial performance, then provide some color on our four segments, and conclude with our updated 2015 guidance. As you can see from our results, we had a very strong second quarter and delivered a solid first half. In the second quarter, we grew adjusted EPS by 7% to $1.84. This represents very strong underlying operating performance given that we had a 12% headwind from FX in the quarter. GAAP EPS was $1.27 in Q2, up significantly from $0.69 in the year-ago quarter, primarily as a result of lower non-cash acquisition-related charges.
On the top line, organic revenue growth was 6% this quarter. Our reported revenue was down 1% year-over-year. Q2 reported revenue included a 1% decline from divestitures net of acquisitions and a 6% headwind from foreign exchange. Backlog remained steady in the quarter with bookings slightly ahead of revenue. Looking at our growth by geography, both North America and Europe grew in the mid-single digits. Asia-Pacific grew in the high single digits, with China growing in the mid-teens. Rest of world grew in the low single digits. We don't normally provide color on Japan, but given our commentary last quarter, I wanted to provide you with a brief update on developments there. As we noted on last quarter's call, the budget was approved in early April.
As Q2 progressed, we started to see funding begin to flow. Japan returned to low double-digit growth for the quarter. Looking at our operational performance, Q2 adjusted operating income increased 3%. Adjusted operating margin was 22.3%, up 90 basis points from Q2 last year, despite a 100 basis point headwind from FX. At a high level, our adjusted operating margin expansion for the quarter was driven by continued strong contribution from our primary productivity levers: global sourcing, footprint optimization, and our PPI business system, as well as continued contribution from cost synergies. Net acquisitions and divestitures were about 15 basis points dilutive in the quarter, driven by the Cole-Parmer divestiture and ASI acquisition. In terms of synergies, we realized $32 million of incremental cost synergies in Q2.
For the full year, we now expect cost synergies of $130 million, up $5 million from our previous guidance as a result of continuing to accelerate headcount and sourcing synergies. Revenue synergies during the quarter were $20 million, putting us well on track to meet or exceed our full year 2015 guidance of $60 million in revenue synergies, with $20 million of adjusted operating income pull-through. In Q2, we continued to make additional strategic investments, primarily to strengthen our core technology platforms and commercial capabilities and accelerate growth. Moving on to the details of the P&L, total company adjusted gross margin came in at 48.0% in Q2, down 100 basis points from the prior year. The decrease was driven primarily by foreign exchange, unfavorable business mix, and the ASI acquisition.
Adjusted SG&A in Q2 was 21.7% of revenue, which is 170 basis points favorable to Q2 2014, driven primarily by volume leverage and our cost synergy and productivity actions. Finally, R&D expense came in at 4.1% of revenue, 20 basis points below Q2 last year. R&D as a percent of our manufacturing revenue in Q2 was 6.4%. Looking at our results below the line, net interest expense in Q2 was $95 million, down $18 million from last year as a result of reducing our debt over the past 12 months. Adjusted other income for Q2 was $4 million, which is $3 million higher than Q2 last year, driven primarily by non-operating foreign exchange gains. Our adjusted tax rate in the quarter was 14.0%, 30 basis points below last year, primarily as a result of acquisition tax planning.
We returned $60 million of capital through dividends in the quarter, average diluted shares were 401.5 million in Q2, down 1.6 million year-over-year, primarily as a result of the share buybacks we completed in Q1 of this year, partially offset by option dilution. Turning to cash flow and the balance sheet, cash flow from continuing operations for the first half of the year was $849 million, and free cash flow was $663 million after deducting net capital expenditures of $186 million. This is about $160 million lower than the first half of 2014, primarily driven by volume-related working capital investments and the timing of interest and tax payments. We ended the quarter with $770 million in cash and investments, down $100 million sequentially from Q1, as we used surplus cash on the balance sheet as well as cash generated in the quarter to reduce debt.
Our total debt at the end of Q2 was $14.0 billion, down $830 million sequentially from Q1, our leverage ratio at the end of the quarter was 3.4 times total debt to adjusted EBITDA. You may have seen that we continue to capitalize on the favorable interest rate environment, having recently completed a EUR 500 million bond offering consisting of 2.15% seven-year senior notes. We're using the proceeds to pay down short-term debt and pre-fund the Alfa Aesar acquisition. We still expect to achieve a leverage ratio of about three times by the end of 2015. To wrap up my comments on the total company, our trailing 12 months adjusted ROIC in Q2 was 9.1%, up 20 basis points sequentially from Q1. With that, I'll now walk you through the performance of our four business segments.
As I highlighted for the total company, FX was a significant headwind to the top line for our segments, negatively impacted their year-over-year revenue growth to varying degrees. Starting with the Life Sciences Solutions segment, reported revenue increased 2% in Q2, organic revenue grew 7%. In the quarter, we continued to see outstanding growth in our bioproduction business, in addition to very strong growth in biosciences. Q2 adjusted operating income in Life Sciences Solutions increased 8%, adjusted operating margin was 28.6%, up 150 basis points. In this segment, margin benefited from very strong productivity and incremental cost synergies along with meaningful volume leverage. This was partially offset by significantly unfavorable FX and the ASI acquisition. In the Analytical Instruments segment, reported revenue decreased 2% in Q2, organic revenue growth was 4%.
In the quarter, we had strong growth in our chromatography and service businesses, which was partially offset by continued weakness in some of our core industrial markets. Q2 adjusted operating income in Analytical Instruments increased 7%, and adjusted operating margin was 18.0%, up 160 basis points. In this segment, we delivered very strong productivity and good volume leverage, which was partially offset by unfavorable FX and strategic growth investments. Turning to the Specialty Diagnostics Segment, in Q2, total revenue decreased 4%. Organic growth was 2%, driven by our clinical diagnostics and immunodiagnostics businesses. Adjusted operating income in the segment decreased 4% in Q2, and adjusted operating margin was 27.8%, up 20 basis points from the prior year. In the segment, we had strong productivity and solid volume leverage, partially offset by strategic growth investments and unfavorable FX.
Finally, in the Laboratory Products and Services Segment, Q2 reported revenue was flat to prior year and organic growth was 8%. This segment benefited from our strong performance this quarter in the biopharma end market, with our biopharma services business delivering very strong growth along with good growth across the rest of the businesses in the segment. Adjusted operating income and Laboratory Products and Services increased 1%, and adjusted operating margin was 15.4%, up 20 basis points from the prior year. Margin expansion in the quarter was driven by strong productivity, partially offset by unfavorable business mix and the Cole-Parmer divestiture. With that, I'd like to review the details of our full year 2015 guidance. As you saw in our press release, we're increasing both our top and bottom-line guidance as a result of current foreign exchange rates and strong operating performance.
On the top line, we're raising both the low and high end of our guidance range and increasing the midpoint by $40 million. This leads to a new full-year 2015 revenue guidance range of $16.72 billion-$16.86 billion. The increase in our revenue guidance midpoint is due entirely to the change in FX rates. We're still expecting organic revenue growth of about 4% for the full year, consistent with our previous guidance. We still expect acquisitions net of divestitures will contribute about 1% to our reported revenue growth in 2015, which excludes any impact from the pending acquisition of Alfa Aesar. Moving to our adjusted EPS guidance, we're raising the low end by $0.03 and the high end by $0.01 to a new range of $7.28-$7.41.
This range represents year-over-year growth of 5%-6%, which compares to our previous guidance of 4%-6% growth. To bridge the $0.02 increase in the midpoint of our full year 2015 adjusted EPS guidance, we're driving about $0.05 of improvement from operating performance and the accelerated cost synergies, which is being partially offset by about $0.03 of unfavorable pull-through on the change in FX rates. To summarize the impact of FX on our current guidance, it's now a $0.70 or 10% year-over-year headwind to our adjusted EPS. If you were to look at our guidance on an FX-neutral basis, adjusted EPS would be growing 15%-16%, representing very strong underlying operating performance. On the top line, FX is now lowering our revenue by about $950 million or 6%, our reported revenue growth guidance would be 5% on an FX-neutral basis.
In terms of adjusted operating margin pull-through on the FX revenue headwind, we now expect a total impact of $330 million, representing an average pull-through of 35% and 80 basis points of adjusted operating margin dilution. The net result compared to our previous guidance is a positive change in revenue of about $35 million and a $15 million reduction in adjusted operating income. The negative pull-through on the increased revenue is a result of the mix of foreign currency exchange rate changes, which have varying rates of pull-through, along with about $10 million of incremental unfavorable transactional FX. Consistent with past practice, our guidance assumes current foreign currency exchange rates, we haven't attempted to forecast future changes in rates. As I mentioned previously, our guidance does not include the recently announced Alfa Aesar acquisition or any other future acquisitions or divestitures.
Turning to our adjusted operating margin guidance, we now expect 70-80 basis points of expansion year-over-year, which is 10 basis points higher at the low end than our previous guidance. On an FX-neutral basis, our margin expansion would be a very strong 150-160 basis points. Moving below the line, we're still expecting net interest expense to be in the range of $375 million-$385 million. We're forecasting our adjusted income tax rate to be about 14%, consistent with our previous guidance. In terms of capital deployment, we're still assuming that this year we'll return approximately $240 million of capital to shareholders through dividends, as well as $500 million through share buybacks, which we completed in January. Full year average diluted shares are estimated to be in the range of 402 million-403 million, about the same as 2014 and consistent with our previous guidance.
We're expecting net capital expenditures to be in the range of $435 million-$450 million, unchanged from our previous guidance. Finally, we're still expecting about $2.6 billion of free cash flow for full year 2015, consistent with previous guidance. As always, in interpreting our revenue and adjusted EPS guidance ranges, you should focus on the midpoint as our most likely view of how we see things playing out. Results above or below the midpoint will depend on the relative strength of our markets as well as FX fluctuations during the year. In summary, we delivered a very strong top-line growth and bottom-line results in Q2, which positions us well at the halfway point in the year to achieve our 2015 financial goals. With that, I'll turn it back over to Ken.
Thanks, Pete. Operator, we're ready to take questions.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. In order to allow everyone in the queue an opportunity to address the Thermo Fisher management team, I would like to ask that you limit your time on the call to one or two questions. If you have additional questions, please return to the queue and pose your question in turn. Your first question is from the line of Tycho Peterson from J.P. Morgan. Your line is open.
Hey, thanks, guys. Congrats, Pete, on the shortest retirement I've ever seen. Maybe just on some of the sequential improvement we saw here, particular on pharma, mid-teens growth was terrific. Can you maybe just help us think about how much of that is a function of the market conditions versus the life synergies versus, I guess, your value proposition as you described it? Obviously, the growth there is driving a lot of the performance.
Tyco, in terms of the pharma biotech end markets, clearly the underlying conditions are strong, but obviously nothing near the mid-teens type growth. It's been a good market. As you know, biotech funding has been robust. Pharmaceutical companies are spending more money, but the majority of the very strong performance is driven by how our value proposition is resonating with our customers, and particularly how the underlying performance of our bioproduction and biosciences business is performing with that customer set. Our teams have worked very hard in putting together the two companies' capabilities, and in each of those businesses, we're gaining market share, and we're also seeing the benefits from our revenue synergies starting to pick up. Obviously, the revenue synergy is not a huge contributor, but it is a nice contributor to the growth in the customer set.
I guess thinking about the revenue walk for the back half of the year and guidance, the one thing I think that maybe stands out relative to your prior comments is on China, because you're coming off two strong quarters here. Maybe just give us a sense of your thoughts on China in the back half of the year.
Yeah. The team executed very well in the quarter and executed very well in the first half of the year. Our view is that there's still some overhang in the Chinese market as they work through the anti-corruption efforts, and obviously a little bit slower GDP growth. Clearly the conditions in China are better than what we assumed at the beginning of the year and it's been a nice contributor to our growth. In terms of the outlook for the second half specifically, hard to forecast exactly, but it should be better than our original assumptions.
Just last one, was there a catch-up on Japan? Pete, I know you talked about low single-digit growth. I'm just trying to think about the dynamics following the soft first quarter. How do we think about kind of the catch-up?
Yeah. We really didn't see a catch-up. Actually, the funding, it's flowing, but it's still a little bit slow. I would say it's kind of back to it was a normal quarter without any offset from the weakness in Q1.
Okay. Thank you.
Your next question comes from the line of Ross Muken from Evercore ISI. Your line is open.
Good morning and congrats. I guess, it's sort of odd, 2 years in a row we've had this dynamic where strong fourth quarter, weaker first quarter, recovery second quarter. I know you had given us last quarter some commentary that you had been sort of trying to understand the timing dynamic, and obviously we had a bit of a backlog build last quarter as you had very good orders, so that sort of explains some of the sequential improvement. As you think about the pacing and predictability in the business, anything new to share in terms of the magnitude of those sort of inflections on a quarterly basis? We always think of your business as so predictable.
Yeah. Ross, the business is quite predictable. If you think about it, we were not concerned after Q1 in our ability to do the 4% organic growth for the full year. We're not doing victory laps after a strong Q2. We're right where we expected to be at the halfway point of the year. There were a lot of nuances to the calendar. You had less days in Q1 versus the prior year. You had clearly some customers flush some money at the end of last year that bought some products that they knew they would use, and that led to a little bit of a softer start. We saw the improvements happening as that first quarter went on, and the team delivered a great Q2, and we sit at about 4% organic growth.
That's a halfway point, which is where we want it to be, we feel confident in our ability to deliver 4% growth for the full year.
Maybe turning to the sort of obligatory section on M&A. You guys have been more active on the tuck-in side. It's actually kind of contradictory to what we're seeing in the market. I was listening to our company's call before. There's been a lot of large transactions versus small, which is not unusual given where we are in the cycle. I guess as you're thinking about the pipeline and the components of value you're seeing in different sub-segments, how would you sort of characterize, for life sciences and diagnostics and the various areas you touch, activity levels and more so on the midsize, because it seems like that's where you've been more active, how the sourcing and sort of pacing of deals is trending?
Ross, in terms of the industry, it's a $100 billion industry. We're the market leader. We obviously have less than 20% share in aggregate, still very fragmented. Even when you take the largest few players, it's still a very fragmented industry. We have a good pipeline of bolt-on transactions. We've done two that we feel good about. We evaluate others. We always have an interesting pipeline on that front. The way I think about it is we follow our criteria. Is it going to strengthen the company strategically? Is it going to be well received and help our customers? Clearly, is it going to create shareholder value as measured by the rates of returns on those investments? We were able to do two transactions. We'll continue to look at that pipeline over time.
I think we're in a good position from the ability to deploy capital to create shareholder value.
Great. Lastly, I guess Pete, congrats on staying. Is it possible we'll get you to do cameos down the road and maybe pop in on an earnings call? I was just coming to grips with you leaving. Now that you're back, I'm excited about maybe you participating a little bit more. Is it too big of a request to ask you to come back maybe once a year, pop in?
The only cameo you might see Pete is certainly not in the finance or on the earnings calls, but maybe you'll see him occasionally with a tennis racket or golf after hours. You'll have to reach out that way. One of the things is that, for clarity, I think it was after the period where Pete reflected on the transition to CFO and was able to take a deep breath and feel totally confident in Stephen, that he and I started to talk about the next chapter of his life. I think he can add enormous value by not spending time on the finance function, but rather helping us build our capabilities and strengthen the company in some other areas. No more cameos for Pete here, but, you can always reach him on non-finance related topics.
Yes, Ross, I'm very happy to be doing my last earnings call.
Thanks, guys.
Your next question comes from the line of Derik De Bruin from Bank of America Merrill Lynch. Your line is open.
Hi, good afternoon or good morning. Hey, Marc, can I just clarify your China comments? You talked about feeling a little bit better about the second half. Is that optimism driven by your backlog and the orders you have in hand? This leads to a question of how much visibility you have, is the certain China macro instability something we need now to worry about in 2016?
Yeah. It's a good question. In terms of visibility in China, it's less than what it used to be, say, a couple of years ago. It's not perfect. My comment really is saying we were expecting the company average for the year, when we gave the original guidance, and we've been growing. We grew high single digits in Q1, mid-teens in Q2. We're likely to grow, certainly better than the low single digit type growth, mid-single digit growth for the full year. That's really the reflection on the comment. Visibility, I think it's going to take some time before we get back to very clear visibility in China because they're still working through a lot of changes in the government.
Great. I guess I have to ask the obligatory NIH question, how are you thinking about what's going on there? I believe when we had you on the road recently, you were still thinking that maybe the budgets could give you somewhere between 25 and 50 basis points of incremental organic revenue growth if they go through with things. Is that still sort of your thinking on it?
Yeah. The way I think about it, I don't expect the budgeting process and things like the 21st Century Cures to have any impact in this calendar year. Could set us up for a very attractive growth environment for the NIH and U.S. academic and government going forward should those things become law. Those are really good, important pieces of legislation and if we can get those enacted, that clearly is going to be a big improvement in the NIH funding. I think it's almost $9 billion of funding over the upcoming years period. It could be super exciting if it goes through the process.
Great. Thanks.
You're welcome.
Your next question comes from the line of Jon Groberg from UBS. Your line is open.
Great. I'll offer my congratulations to you, Pete, and good luck with the new role in the future, and look forward to seeing you on the tennis court, as Marc said.
Thanks, Jon.
Marc, I want to follow up on kind of your comment. You mentioned, and I was kind of just this morning doing the same thing. You did 2% first quarter, 6% this quarter. The first half you're sitting right at 4%, which is what you expect for the year. If you look at this quarter, I think what will really stand out to people is obviously that biopharma and in particular, I think that Life Sciences Solutions growth of 7%. Many people thought that that business might actually grow below the organic rate of the company. Can you maybe dive in a little bit, give more specific examples? I think you mentioned that the third action point of kind of that growth in biosciences and bioproduction, it really helped that biopharm. And I'm assuming that's somewhat tied to what's happening in Life Sciences Solutions.
Can you maybe provide a little bit more detail or specific details about the actions that you took? Then, kind of secondly, about for the second half of the year, do you expect biopharma to keep growing at this mid-teens rate or high single digit rate, let's call it? The rest of the businesses to stay low single digit or is there something you see that makes you think that maybe diagnostic and healthcare or industrial or something there could get a little bit better in the second half? Thanks.
Good questions and a bunch to it. Let me start with the broader end markets, then I'll hit the specifics within the Life Sciences Solutions, what's going on there. If I think about the second half, we wouldn't expect pharma and biotech to be at that same torrid pace of Q2, but certainly will be a strong end market for us in the second half of the year. Our expectation is that fairly similar conditions in the academic government and diagnostics and healthcare and industrial and applied in the second half, than it was in the first half, probably slight improvements, from where they are, but not particularly material. When you kind of work through the math, that sort of gets you to the 4% growth. Within the Life Sciences Solutions Segment team has done a great job in leveraging the combined capabilities of the company.
That is, obviously there was a lot of redundant cost and there has been an interesting driving of great earnings growth, but also reinvestment in certain parts of the business as while we've been raising synergy targets, we've also been able to strengthen the fundamentals of the business. You're seeing nice impact innovation in the biosciences business, that is clearly helping accelerate the growth there. Commercially, both bioproduction and biosciences is really leveraging the strength of the excellent commercial footprint that Thermo Fisher Scientific has in serving that customer set, leveraging our channel, but also leveraging the corporate accounts and the strong relationships. The combination of good innovation and good commercial execution has put that business on a nice growth path. That's helped us both in the biopharma customer set, but also helped us strengthen our Life Sciences Solutions business.
When you go back to our analyst meeting in May, we expressed our confidence in changing the long-term outlook from 3%-4% organic growth for that business, and we feel good about that. I think a quarter like this shows you some of the early progress that we're making in strengthening the growth outlook for the business.
Yeah, that's helpful. Then if I could just quickly, as you look at your end markets again, if you go back to the life deal again, one could kind of argue that you looked out and said maybe people are too down on government and academic in the long run, and it's not such a bad market. Are there any markets you're seeing like that right now that maybe people are too euphoric in one area, but maybe discounting another, that you think are good markets?
When you think about the business that we have, we serve four end markets. They're slightly off cycle from one another, which actually allows us to deliver very consistent growth because it's unlikely that all four are going to be in a trough, and it's unlikely that all four are going to be at a robust period. You get this nice effect of getting steady organic growth over long periods of time. In terms of the longer-term outlook, we've had obviously choppy academic and government end markets for a while, and things like the 21st Century Cures, things like a recovery longer term in China can be things that help that end market. Will that be a robustly growing market? No, but could it be better than where it is today? Sure. Over time, I think that's probably the one that you'd see opportunities.
Within Thermo Fisher, we're very bullish on the longer-term prospects for our healthcare and diagnostics business, and see that over time being one of our faster-growing markets, particularly because we're driving the penetration of life science tools into that market. Things like mass spectrometry, next-gen sequencing will be longer-term growth drivers for that end market, and we think that we're well-positioned to get very good growth there over time.
Thanks, Marc. Helpful.
Your next question comes from the line of Brandon Couillard from Jefferies. Your line is open.
Thanks, good morning.
Morning.
Marc, I guess, sticking with the theme, if we look at the LPS business and the volatility in that segment's core revenue growth, are there one or two things that you attribute to the volatility we've seen more recently in the growth rates, which is above how this business used to perform? Given the high mix of consumables in the channel business, I would expect I guess a little more consistency. Does that normalize at some point in your view?
Yeah, I think the Laboratory Products and Services business performed really well. If you look back over the last few years, it really has been one of the nice growth drivers for the company. In the quarter, all three of the businesses that make up that segment, our lab products, our customer channels, and our biopharma service business, had a really good quarter. I feel good about it. In terms of why a softer Q1 and then a stronger Q2 really reflects what's going on at the company level. It's not a particularly segment thing, yet the same days of calendar effects in that business as you would elsewhere, and the same days of the budget flush in Q4 starting out with a weaker start. It's a good grower for the company and one that is the heart of our customer value proposition.
I think it's a nice growth driver going forward as it has been historically.
One more for Pete. Would be curious if you could break out the effect of currency and mix, just the components in the gross margin in the second quarter.
Sure. The year-over-year bridge between 49% last year and 48% this year in gross margin, we had about 75 basis points of headwind as a result of FX, and about 80 basis points of unfavorable mix, that's both segment and within-segment mix. Obviously very good productivity over 100 basis points.
Super. Thank you.
Next question comes from the line of Steve Beuchaw from Morgan Stanley. Your line is open.
Hi, good morning. Thanks for taking the questions, everyone. The progress in China is nice to see. I'd say very much in line with maybe a little bit ahead of what you'd anticipated, but I take your comments to mean that you don't anticipate, and this is of course pretty normal for Thermo, anything along the lines of, let's say, a budget flush in China in the latter stages of the year. As we talk to industrials companies and tools companies, it seems like opinions on the likelihood of some sort of budget flush are really all over the map. It'd be interesting to hear your thoughts on that. Why is it you think there are divergent opinions, and what are you watching to get a sense for whether any acceleration in China as a function of that in the latter stages of the year is reasonably possible?
In terms of whether you would have outsized growth at the end of the year, it really is hard to forecast that. If I think back in my 15 years with the company, it's really something that we don't actually spend a ton of time on in terms of what's going to happen in December in that particular market. Generally, the macro trends are pretty favorable in China because GDP growth there is faster than anywhere else in the world, roughly. The needs for our products, environmental protection, food safety, healthcare expansion, are right down the sweet spot. We always think that long term, that we're well positioned to have outsized growth in China and get a little less focused on what's going to happen quarter to quarter.
I will be there again next month and look forward to working with the team and visiting a bunch of customers. Maybe in the Q3 call, I'll have a little more color on how we see the very end of the year playing out.
Got it. Incremental to your comments around the $1.4 billion of capital deployment this year, it's always helpful just to hear how you're thinking about the gating factors for any incremental share repurchase. Are we waiting to see what comes through from the M&A funnel? Are there other gates we ought to consider? Again, I will thank you guys for all the help this morning.
Sure. Right now, with the $1.4 billion that we have deployed and expect to deploy, that would put us at the 3x leverage ratio approximately at the end of the year, which really sets us up for a great position going into 2016. We do evaluate share buybacks from time to time, we do have an authorization. At least at this point, we're not expecting anything in the super short term. We plan to get back to more normal capital deployment as we get into 2016. We're always flexible depending on what's going on in the end markets and what's going on with the stock price at a particular point in time.
All right. Thanks so much.
Your next question comes from the line of Doug Schenkel from Cowen and Company. Your line is open.
Hey, good morning, guys. How would you describe the pricing environment? Really what I'm getting at is how does it compare to recent periods? Given that the value proposition is clearly working more and more, is the outlook improving for pricing in the coming quarters?
Yeah. In terms of the pricing environment, actually Q2 was a strong pricing environment for us. One of the things that we mentioned at the beginning of the year with the foreign exchange headwinds, were we were going to take some incremental actions on pricing, and we saw some of the benefits of that. That at the halfway point of the year, Doug, we're a little bit above 50 basis points on price, which is good. It's a little better than what we've been experienced over the last couple of years. That's going in the right direction and, generally, a pretty stable price environment.
A clarifying question on guidance, or I guess, just that's framed by guidance. As you noted, you provided a lot of detail, so thanks for that, Pete. You increased revenue growth guidance largely due to FX, but you actually indicated that FX is an incremental drag on EPS. Is any of that reflective of changes in what you're expecting by geography? Essentially, have your growth assumptions by geography that are embedded into overall guidance, have they changed?
No, it's really being driven by just the respective changes in foreign currency exchange rates. For instance, compared to our previous guidance, the yen, which pulls through at about 60%, declined by 2.5%, while the pound, which pulls through less than 5%, actually went up by 3.5%. You can see just those two currencies, which are two of our significant currencies, you end up with positive revenue and negative pull-through. It's just the relative changes in the currencies.
Okay. One last one. You guys had a really strong Analytical Instruments margin performance in the quarter. I think you're up 130 basis points sequentially, 160 basis points year-over-year. I think it's fair to say that was better than many expected, in a quarter where I think the organic growth was solid, but about as expected, and FX remained a tough headwind. Is there any additional dynamic to kind of walk through here just to kind of explain just that solid performance and the sustainability moving forward? Thank you.
Yeah. In terms of the year-over-year improvement, 150 basis points, really solid improvement there. We had great productivity, probably 50 basis points or so above what our normal run rate would be. We had really good pull-through on the incremental revenue. That obviously was a little bit offset by foreign exchange, which was a pretty significant headwind. I would say this is an outsized level of expansion, so I wouldn't expect that every quarter going forward, but really good performance this quarter.
Okay. Thanks again.
Yep.
Your next question comes from the line of Isaac Ro from Goldman Sachs. Your line is open.
Hi. Good morning, guys. Thank you. A question first on diagnostics. I used to think of that business as being maybe a mid to high single-digit growth area. Last year, I appreciate you had a little bit of a tougher comp in 2Q versus 1Q, just wondering kind of how you're looking at the growth rate there and wondering whether it's transplant diagnostics or maybe another area, if there was something that's been sort of weighing on the growth rate that could either abate or turn for the better?
Yes. Isaac, good morning. In terms of the diagnostics in healthcare, really, if I think about the first half of low single-digit growth, first quarter you had the calendar, in the first half, a little bit weaker seasonal on both flu and allergy relative to the prior year. Those are really the factors there. The way I think about it is I agree with you. I think on the midterm and beyond, it's actually one of our faster-growing businesses. Transplant did fine, no issues there. I think it's more just as you see some of the new products get launched in future periods, you'll see that growth pick up over time.
Okay, that's helpful. Just another question on bioprocess. I think you touched a little bit qualitatively on how that's going, but wondering if you put some rough numbers. It seems like that market was off to a hot start for everyone in the first quarter, and I'm assuming that was the case, but just wondering if you could put some numbers around bioprocess this quarter as well as your expectations for the balance of the year. Thanks.
Yeah. It's a strong business for us. It was a meaningful contributor to our growth within the Life Sciences Solutions Segment and certainly, of a meaningful scale business, our fastest growing business. Really a good performance. On the specific numbers, it's well above the company average.
Got it. Thanks a bunch.
Your next question comes from the line of Jeff Elliott from Robert W. Baird. Your line is open.
Good morning. Marc, could you provide some additional color on the biopharma end market? I guess specifically what I'm looking for is what are you seeing in large pharma, kind of spec pharma, biotech, and what are the growth rates there?
Biotech by far the fastest growing subset. You may recall, a few quarters ago I talked about, and certainly we reinforced, Alan Aliss reinforced at the analyst meeting, our push from how we approach our customers. We had great momentum with large pharma to really expand our efforts with biotech, and that clearly is paying off, right? The biotech funding environment, as you know, is very strong. That's translating into spending at the life science tools level, and we're well positioned to capitalize on it. But our big pharma customers are doing well, right? Their pipelines look better and more drugs are getting approved, and we're very well positioned because of our value proposition. We're seeing good growth there, with our larger customers as well. Biotech strongest, but not really any particular points of weakness within that customer set.
That's great. A follow-up on the chromatography strength, I guess, how would you position this? Is this mainly a factor of the new products and execution on your side, or are you seeing any disruption in the competitive environment that you're taking advantage of?
No disruption on the competitive front. We have good competitors in the field. In terms, we had really good strength. Our team did a nice job. Ion chromatography did well, the liquid chromatography did well, and gas chromatography did well in the quarter. Really good strength between instruments and consumables. Just really solid execution. New products help, but that wasn't the material driver of the very strong performance.
Excellent. Thanks, guys.
Operator, we have time for just one more.
Your last question comes from the line of Jack Meehan from Barclays. Your line is open.
Hi, thanks, and thanks for squeezing me in. I just wanted to ask one more on the policy side with the NIH funding, and just as you're talking with customers today, I know you're thinking about this maybe as being more of a 2016 helper, but just if you're seeing anybody preparing ahead of the bill, and then whether you think it could actually bleed over from academic into any other customer segments.
We have a lot of dialogue with our academic and government customers. I would say that it is no one's spending in advance of it. I think that a lot of folks are trying to push to get these things over the goal line because it would be good for the U.S. and certainly good for their own environment. You have a lot of folks rallying to get it through, but I don't think anyone is spending yet. I don't think that in the short term, it will bleed into other segments. I do think strong NIH funding actually positions biotech, pharma, and the diagnostics segments better because there is clearly a spillover. Pumping more money into that from a government perspective is a huge positive for the ecosystem down the road. As you know, I'm a big believer in the NIH.
Yeah, got it. Just the last one on the LPS strength. I was just curious on the clinical side of the market, whether you've seen any sort of change in the volume dynamic in the U.S. that you thought was helping there and driving some of the robust growth the past couple of years?
No, nothing particular. The clinical exposure in that segment is a little bit less than the company average, not really a big driver there.
Okay.
Thank you for the question.
Before Marc Casper makes his closing comments, I just wanted to say how much I've enjoyed being CFO for the past 11 years, and I'm really going to miss interacting with our investors and sell-side analysts. As you know, Stephen Williamson and I have worked together for 15 years. He knows the company as well as I do, and I'm very confident that he'll do a great job as CFO and continue to work with Marc Casper and the rest of the team to take Thermo Fisher Scientific to the next level.
Thanks, Peter M. Wilver. I'm really excited about the new role. I hope to meet many of you during the course of the year. I look forward to updating everyone on our Q3 call in October.
With that, to wrap up, we had an excellent Q2. We're in a great position to deliver another strong year, and we look forward to updating you on our progress in the next quarter. Thank you, everyone.
This does conclude today's conference call. You may now disconnect.