Good morning, ladies and gentlemen. Welcome to the Thermo Fisher Scientific 2014 third quarter earnings 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. Ken Apicerno, Vice President, Investor Relations.
Good morning. Thank you for joining us. On the call with me today is Marc Casper, our President and Chief Executive Officer, and Peter Wilver, Senior Vice President and Chief Financial Officer. Please note, this call is being webcast live and will be archived on the investors section of our website, thermofisher.com, under the heading Webcasts and Presentations until November 21st, 2014. A copy of the press release of our 2014 third quarter earnings and future expectations is also available on 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 the 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 June 28th, 2014, 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 will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third quarter 2014 earnings and future expectations, and also in the investor section of our website under the heading Financial Information. Also, before we get started, one other item to note is that the commentary that we provide on today's call regarding the company's total revenue growth and revenue growth by end market and geography are on an organic basis only and therefore do not include the performance of Life Technologies. With that, I will now turn the call over to Marc.
Thanks, Ken, and good morning, everyone. Thank you for joining us today for our Q3 earnings call. I'm pleased to report that we had a strong quarter, and we're on track to achieve a successful year. Financially, we delivered good top-line growth and outstanding growth in adjusted EPS. We continued to strengthen our position as the industry leader by innovating and gaining share in the markets we serve. I'm also pleased to report that our integration of Life Technologies is progressing ahead of our expectations. I'll cover more on these highlights later in my remarks, but first, let me start with the financials. As you saw in our press release, our total revenue for the quarter grew 31% year-over-year. Adjusted operating income was $915 million in Q3, and we expanded our adjusted operating margin by 250 basis points to 21.9%.
Turning to our adjusted EPS performance, we delivered another outstanding quarter with 32% growth in adjusted EPS to $1.71 per share. Our team effectively leveraged our top-line growth and drove excellent productivity through the operational discipline of our PPI business system. This resulted in outstanding performance on the bottom line. We also generated good cash flow in Q3. We're continuing to use our strong cash flow to pay down debt, and we're on track to reach our target leverage by Q3 of 2015. As we move into 2015, we intend to resume our strategy of disciplined capital deployment. As you know, this is a combination of strengthening our strategic position through M&A and returning capital to our shareholders through buybacks and dividends. I'll now turn to our four key end markets and give you some color on what we saw relative to our overall growth in the quarter.
At a high level, we delivered mid-single-digit growth in three of our end markets, and similar to last quarter, academic and government grew in the low single digits. Industrial and applied markets, our performance here was stronger in Q3 than in the first half of the year. To give you a couple of the highlights, first, we had good performance in our channel, with some nice wins from industrial customers who are recognizing the benefits of our customer value proposition. In addition, our chromatography business reported good growth. In diagnostics and healthcare, we performed well again this quarter. The dynamic in this end market was pretty similar to what we saw in Q2. Our clinical diagnostics businesses had another good quarter with continued strong sales of our biomarker tests. Our growth in immunodiagnostics business was very strong, driven largely by demand for allergy tests.
In particular, our VIEW allergy test has been well-received and is growing rapidly. This is a test that we developed for our Japanese customer base and launched at the beginning of the year. Turning to pharma and biotech, we saw good growth from this customer set in the quarter, and our biopharma services business continues to perform well. One recent development in this end market that we're excited about is our new partnership with longtime customers GSK and Pfizer. We signed an agreement with them to develop a universal next-gen sequencing oncology test that could serve as a companion diagnostic for multiple drug programs. The goal of the diagnostic is to enable a comprehensive set of analysis of multiple and relevant genetic markers using a single test. With this information, cancer patients could potentially benefit from therapies that are much more targeted to their tumor's genetic profile.
In academic and government, conditions were very similar to Q2, with year-over-year improvement in North America offset by weakness in China. Before I move on to the business highlights, let me give you some commentary from a geographic perspective. At a high level, we haven't seen any significant changes in our key geographies since last quarter. That said, I do want to make a comment on China. Our growth in China in Q3 was in the low single digits, a little better than Q2, but below what we included in our previous guidance. This was due to the slow release of funding by the Chinese government, which is impacting revenue. The good news is that despite the conditions in China, we again delivered mid-single digit growth for the company overall.
This speaks to the advantages we have through our global geographic coverage, diverse end markets, and strength of our value proposition. Let me now shift to highlight some of the exciting new products we launched in the quarter that strengthened our leadership position and creates new opportunities for us to gain market share. As you know, innovation is a core element of our growth strategy, and we've had a very strong year of new product introductions across our technology portfolio. Early in Q3, we launched a breakthrough UHPLC system, the Thermo Scientific Vanquish. This is a significant technology advancement because it solves two key issues for our customers in applied markets. First, these customers need exceptional accuracy and precision as they separate out individual components in their samples. Second, they need to run their analysis faster to improve productivity and manage the high volume of samples in their labs.
We also launched new Accucore columns that are specifically designed to optimize performance on the Vanquish system. Of course, Vanquish runs on our gold standard Chromeleon chromatography data system, making it a simple but highly effective tool for customers working in food safety, industrial, or biopharma labs. In our Life Sciences Solutions business, an important part of the integration strategy is to accelerate growth by increasing the impact of new product launches. In the quarter, we launched the Attune Acoustic Focusing Flow Cytometer, which offers life science researchers both high sensitivity and high throughput for cell analysis. I was out with our team in Eugene, Oregon in August, and it was great to see their excitement around this new generation technology. Attune is designed to provide multiple capabilities in a single instrument, providing a cost-effective and versatile solution for customer applications ranging from biomarker discovery to cancer research.
I also want to highlight several examples in the quarter that illustrate how we're supporting a growing trend that we've talked about a lot, the convergence of life science tools and diagnostics. At AACC, the leading expo in North America for clinical customers, we showcased our expanded diagnostic offering of specialty assays, analytical instruments, and genetic analysis technologies. We featured our ImmunoCAP and EliA tests for allergy and autoimmunity testing, as well as assays for drugs of abuse and transplant monitoring. For the first time, we launched new analytical instruments and software that are now listed with the FDA as Class 1 medical devices for clinical use. The Prelude MD HPLC, the Endura MD Mass Spectrometer, and the ClinQuan MD software. In our next-gen sequencing portfolio, we showcased our Ion Torrent PGM and recently launched Ion Chef sample prep system.
Although at the time, both instruments were intended for research use only. Since then, however, we introduced the Ion PGM Dx system in both the U.S. and Europe for clinical use. The PGM Dx will enable our clinical customers to more easily develop and implement new next-gen sequencing diagnostic assays in their laboratories. This means they'll be able to simultaneously screen hundreds of genes from patient samples with the rapid turnaround time required in a clinical setting. All of these new products are great examples of how we fulfill our mission, which is to enable our customers to make the world healthier, cleaner, and safer. Another example of this is our involvement in the Ebola crisis. We're helping our customers, whether they're in government agencies, hospitals, or industry, to get the products they need to contain this global threat.
We're providing a steady supply of necessary reagents to public health labs, here in the U.S. and globally, that are screening to positively identify Ebola in patients who show symptoms. These reagents are used in combination with two independent Ebola assays developed by the CDC and the DoD. Both have received emergency use authorization. We also have more than 400 of our Applied Biosystems 7500 Fast Dx qPCR platforms in labs around the world that have been authorized to run these tests. Before I turn to our guidance, let me give you a quick update on the Life Technologies integration. Our teams continue to make excellent progress implementing their plans, and the revenue growth of our Life Sciences Solutions business is right in line with our acquisition assumptions.
Last quarter, you'll recall that we increased our expected synergies for 2014 to $100 million from the $85 million we announced when we closed the deal. I'm pleased to say that we now expect to deliver a little more than $100 million by the end of the year after accelerating some cost synergy actions. We also remain confident in our overall adjusted operating income synergy target of $350 million for year three, which we highlighted at our May analyst meeting. Turning now to our annual guidance. As you saw in our press release, we've updated our revenue and adjusted EPS guidance primarily on the recent unfavorable changes in FX. We now expect revenue to be in the range of $16.74 billion-$16.82 billion, which leads to 28% growth over 2013.
This led us to tighten our adjusted EPS range to $6.87-$6.95 for a 27%-28% growth in 2014. The key point I want to make here is that despite the FX headwinds, we maintain the midpoint of our adjusted EPS range. Before I turn the call over to Pete, let me leave you with a few thoughts about where we are at this point in the year. In terms of our top-line growth, while certain emerging markets have been weaker than expected, we've delivered solid growth for the company overall. The Life Technologies integration continues to progress very smoothly. Finally, our strong financial performance over the past nine months and our intense focus on driving operational improvements are keeping us on track to achieve our adjusted EPS goal for the year. All of these achievements create a solid foundation for a strong 2015.
With that, I'll now hand the call over to Pete Wilver, our CFO. Pete?
Thanks, Mark. Good morning, everyone. As usual, I'll begin with an overview of our total company Q3 financial performance, then provide some color on our four segments, and conclude with a detailed review of our updated 2014 guidance. As a reminder, at the total company level, we're reporting organic revenue growth using our standard methodology. That means we'll exclude the results of Life Technologies until we reach the one-year anniversary date of the acquisition in early 2015. However, as we've mentioned before, for the Life Sciences Solutions segment, we're providing organic revenue growth on a pro forma basis as if we had owned Life Technologies for all of 2013 and 2014 to give you some insight into the growth performance of that segment. Additionally, our results exclude Cole-Parmer from the date of the divestiture, August 15th, consistent with our previous guidance.
Starting with our overall financial performance, we grew adjusted EPS by 32% to $1.71. GAAP EPS was $1.17 in Q3, up 36% from $0.86 in the prior year. Looking at the top line, we delivered 4% organic revenue growth this quarter, total revenue increased 31% year-over-year. Q3 reported revenue includes 27 points of growth from acquisitions net of divestitures and an immaterial impact from foreign exchange. We strengthened our backlog slightly in the quarter, with bookings a bit higher than revenue. By geography, North America grew in the mid-single digits, Europe grew in the high single digits. Asia-Pacific grew in the low single digits, with China also growing in the low single digits, as Mark mentioned. Rest of the world was mixed, but in aggregate, declined in the low single digits.
Looking at our operational performance, Q3 adjusted operating income increased 48%, adjusted operating margin was 21.9%, up 250 basis points from Q3 last year. Our adjusted operating margin expansion for the quarter was driven primarily by the Life Technologies acquisition and achieving the related synergies. That said, we also continue to see strong contribution from our primary productivity levers: global sourcing, site consolidations, and our PPI business system. We had margin expansion from FX in the third quarter, we expect FX to be dilutive to our margin in the fourth quarter due to the significant strengthening of the dollar versus our major currencies at the end of Q3 and into early Q4. We realized $33 million of synergy benefits in Q3 and $73 million year-to-date. This puts us on track to slightly exceed the $100 million of cost synergies we were targeting for full year 2014.
During the quarter, we continued to make strategic investments primarily to strengthen our core technology platforms and commercial capabilities to accelerate growth. Moving on to the details of the P&L, total company adjusted gross margin came in at 49.1% in Q3, up 510 basis points from the prior year. This was primarily due to the addition of Life Technologies, along with solid productivity across our businesses. Adjusted SG&A in Q3 was 22.9% of revenue, which is 130 basis points unfavorable to 2013 quarter. This is primarily a result of the acquisition and was partially offset by volume leverage and our synergy and productivity actions. Finally, R&D expense came in at 4.2% of revenue for the quarter, 120 basis points above the prior year. This reflects the impact of the relatively higher level of R&D investment in the Life Sciences Solutions segment.
R&D as a percent of our manufacturing revenue in Q3 was 6.6%. Looking at our results below the line, net interest expense in Q3 was $106 million, up $49 million from last year, driven by the interest on the debt we raised to fund the Life Technologies acquisition. Adjusted other income for Q3 was $2 million, slightly higher than Q3 last year. Our adjusted tax rate in the quarter was 14.8%, 50 basis points below last year, primarily as a result of our acquisition tax planning. Our year-to-date rate was 15%, in line with our full-year outlook of about 15%. In terms of returning capital, we paid out $60 million in dividends to our shareholders in the quarter.
Average diluted shares were 403.7 million in Q3, up 36 million or 10% from last year, primarily as a result of the shares we issued to partially fund the Life Technologies acquisition, and to a much lesser extent, option dilution. Turning to cash flow on the balance sheet, cash flow from continuing operations for the first nine months of the year was $1.67 billion, and free cash flow was $1.42 billion after deducting $250 million of net capital expenditures. This is up significantly from our prior year cash flow, primarily as a result of increased operating earnings from the acquisition and standalone business, partially offset by acquisition-related interest expense and cash payments tied to the acquisition and related divestitures. We ended the quarter with $544 million in cash and investments, down $62 million sequentially from Q2.
We used the Cole-Parmer proceeds and cash generated in the quarter, along with surplus cash on the balance sheet to pay down short-term debt during the quarter. As a result, our total debt at the end of Q3 was $14.5 billion, down $1.1 billion from Q2. Our leverage ratio at the end of the quarter was 3.9 times total debt to adjusted EBITDA, and we remain on track to achieve our target leverage ratio of two and a half to three times in Q3 2015. Let me wrap up my comments on the total company with my usual update on our performance in terms of return on invested capital. Our trailing 12 months adjusted ROIC in the third quarter of 2014 was 9.3%, flat to Q2.
This is a good result as increased returns across the business offset the short-term dilution of adding another quarter of the Life Technologies investment into the average invested capital base. With that, now I'll walk you through the performance of our four business segments. Starting with the Life Sciences Solutions segment, in Q3, total revenue grew to $1.07 billion from $167 million in the prior year, primarily as a result of the Life Technologies acquisition, net of the divestitures. On a pro forma basis, assuming Life Technologies was owned for the entire quarter in both periods, organic revenue grew 3% for the second quarter in a row. In the quarter, we saw strong growth in our bioproduction, next-generation sequencing, and cell biology businesses, and we also saw good growth in our applied markets, including human identification and animal food and environmental.
Q3 adjusted operating income for Life Sciences Solutions increased significantly, primarily as a result of the acquisition and achieving the related synergies, with adjusted operating margin up 530 basis points to 28.6%. In the Analytical Instruments segment, both reported and organic revenue grew 3%. In the quarter, we had very strong growth in our chromatography and instrument services businesses, which was partially offset by the weakness in China, very similar to last quarter. Q3 adjusted operating income in Analytical Instruments increased 5%, and adjusted operating margin was 17.5%, up 40 basis points. We delivered very strong productivity and saw a positive contribution from FX that were partially offset by strategic growth investments and unfavorable business mix. Turning to the Specialty Diagnostics segment, in Q3, total revenue grew 7%, and organic growth was very strong again at 6%. We continued to deliver strong growth across much of the portfolio.
As Marc mentioned, our immunodiagnostics business had a very strong quarter, and growth in our clinical diagnostics business was notable as well. Adjusted operating income in the segment increased 10% in Q3, and adjusted operating margin was 27.6%, up 70 basis points from the prior year. In the segment, we had strong pull-through on the organic growth, good productivity, and a positive benefit from FX, partially offset by strategic growth investments. In the Laboratory Products and Services segment, Q3 reported revenue grew 2%, and organic revenue grew 4%. Our biopharma services business continued to have good performance. The segment also benefited from continued improvement in our U.S. academic and government end market, as well as an increased impact of our customer value proposition in industrial markets.
Adjusted operating income in Laboratory Products and Services grew 1% for the quarter, and adjusted operating margin was 15.1%, down 30 basis points, driven by unfavorable business mix and the Cole-Parmer divestiture, partially offset by strong productivity. With that, I'd like to review the details of our updated full year 2014 guidance. As you saw in our press release, we're updating our guidance to reflect our strong year-to-date performance and the impact of the recent unfavorable currency fluctuations. Starting with revenue, with one quarter to go, we're tightening the range by $40 million and lowering the midpoint by $140 million. This change is solely a result of the unfavorable FX impact of current rates on total company revenue for the remainder of the year. This leads to a new full year 2014 revenue guidance range of $16.74 billion-$16.82 billion, which represents year-over-year growth of 28%.
On an organic basis, we're still expecting standalone organic growth for full year 2014 of 3%-4%, no change from our previous guidance. As I mentioned earlier, our total company organic growth does not include the results of Life Technologies. For the Life Sciences Solutions segment, we still expect pro forma organic growth of 2%-3% for full year 2014, also unchanged from our previous guidance. In terms of FX, assuming recent rates, the year-over-year foreign currency impact on our standalone revenue for the full year has gone from a 50 basis points positive in our previous guidance to about 25 basis points negative in our current guidance. We're experiencing a similar unfavorable impact due to the change in FX rates on our Life Sciences Solutions revenue, although this is reflected as acquisition revenues rather than FX in our organic growth calculation.
In terms of margin pull-through on total FX revenue, we're now expecting a minimal positive impact for the full year, down considerably from our previous guidance. Although we've seen a margin benefit from FX year to date, we're assuming a fairly significant negative impact in the fourth quarter due to the recent change in rates. Consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates. Our guidance does not include any future acquisitions or divestitures. Moving to adjusted EPS, as you saw in our press release, we're maintaining the midpoint and tightening the range consistent with the revenue range and reflecting our strong financial results year to date. This leads to a new full year 2014 adjusted EPS guidance range of $6.87-$6.95, which represents growth of 27%-28% over our 2013 earnings per share of $5.42.
As I mentioned earlier, although we have a significant unfavorable earnings impact from FX compared to our previous guidance, which results in about $0.07 of adjusted EPS headwind, we're not changing the midpoint of our adjusted EPS guidance. We expect to offset the FX headwind with a combination of incremental productivity and accelerated acquisition cost synergies, along with about $0.01 of below-the-line benefit. Turning to adjusted operating margin, we're expecting roughly 250 basis points of expansion to about 22% at the higher end of our previous guidance. Moving below the line, we're expecting net interest expense to be in the range of $425 million-$435 million, consistent with our previous guidance. As I mentioned earlier, we're still expecting our adjusted income tax rate to be about 15%, consistent with our previous guidance.
In terms of capital deployment, we're still assuming that we'll return approximately $240 million of capital to shareholders this year through dividends. We're also assuming that we'll continue to use the bulk of our free cash flow to pay down short-term debt. Full year average diluted shares are estimated to be in the range of 402 million-403 million, up about 10% from 2013 consistent with our previous guidance. We're expecting net capital expenditures to be in the range of $410 million-$430 million, down about $50 million from our previous guidance based on actively managing our project spend, as well as identifying some duplicate investments as we get further into the integration. Finally, in terms of our full year 2014 free cash flow, we're maintaining our previous guidance of about $2.2 billion.
We've made good progress on cash flow year to date. As I mentioned on last quarter's call, we'll need to perform very well in Q4 to offset the cash tax headwind created by the one-time gain we realized from the Cole-Parmer divestiture. As always, in interpreting our full year revenue and adjusted EPS guidance ranges, you should focus on the midpoint as our most likely view of how we see the year playing out. Results above or below the midpoint will depend on the relative strength of our markets during Q4. In summary, we delivered a strong quarter, which positions us well to achieve our financial goals for the year. With that, I'll turn the call back over to Ken.
Thanks, Pete. Melissa, we're ready to open it up for Q&A.
At this time, I would like to remind everyone in order to ask a question, press star, then the number one 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 you 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 comes from the line of Ross Muken from ISI Group. Your line is open.
Good morning, gentlemen.
Morning, Ross.
Morning, Ross.
A lot of color, thank you. Can you give us a little bit of understanding of the trending on a geographic base in the Europe business as well as Asia Pac, and I guess more specifically China as we pace through the quarter and how it's matched up to the degree you can dig down on the bookings line? There's obviously a lot of macro concern in both of those regions, we're just trying to get a feel for which parts of your business are showing strength or most stability, and which parts you're probably much more concerned about in those geographic areas.
Ross, thanks for the question. Let's start out with Europe. You've heard us talk many times in the past. We see Europe as a low single-digit market from a growth outlook. We've said that consistently. Our team is executing extremely well in Europe. We actually delivered high single-digit growth in the quarter. Our diagnostics businesses, which have reasonable exposure to the European market, particularly immunodiagnostics and clinical diagnostics, have large presence there. They're both doing extremely well. Our biopharma services business did very well in Europe. The team's executing well. While we don't think that's going to be a high single-digit growth really on a long-term basis, team's doing great. That's positive. Asia Pacific, really the story in Asia Pacific is really around China, which is the way you reflect in your question.
I think about what's going on in China, we delivered low single-digit growth in the quarter, which actually is a little better than what we had in Q2, but it was below the expectations that we had as we thought about last quarter. What we saw in China was a slow release of funds across the markets, and we think that's being driven by the government, both in how they've reorganized the Food Safety Administration, as well as their focus on transparency and cracking down on corruption. The approval times to get funds released is definitely extended significantly. From a longer-term perspective, we continue to remain very positive on China. Our strategy's unchanged. We have a tremendous advantage of scale, a great team, and we're very well aligned with the Chinese priorities, which is clean water, safe food, better environment, expanding healthcare capabilities. The long term is good.
Short term has been quite uncertain. I sum it up this way: revenue growth has been mid-single digits through the first nine months, is what it's averaged out to be. Bookings has been stronger than that, customer activity remains high. Funds are slow to release. As we look at the fourth quarter, in the uncertain environment, what we're assuming is a wider range of outcomes, somewhere from low to mid-single digit growth in the fourth quarter.
Thanks. Maybe just talking to kind of the performance overall in the quarter, I'm looking at the market right now. It looks like people are kind of implying that this was sort of a disappointing result. We took it as more sort of in line. As you think about your execution year to date, how the quarterly EPS is sort of paced, and how that's tracked versus your original expectations, how would you kind of characterize today's result? It seems like overall, 4% organic growth for a choppy macro is a pretty good outcome. I'd be curious how you think about that as well, relative to peers?
Yeah. When I look at where we are at nine months year to date or in Q3, clearly from the beginning of the year, China is slower than I think what anybody would've anticipated if we were sitting here in January. We are right on track to deliver the organic growth outlook that we did. North America's gotten better, and the team has executed very well. I feel good about that to say we're right on track for 3%-4% organic growth for the full year. I'm also very pleased with the organic growth rates of our Life Sciences Solutions segment, which is doing better than it had done for several years in the past.
I don't get excited about 2%-3% growth in terms of our outlook, it's one thing to say it, another thing to actually do it, the team has done a good job of delivering that range of growth. I feel good about that. Our primary metric is adjusted EPS, we are doing an excellent job of delivering strong earnings growth. That's a combination of the synergies, a combination of a smooth integration, and the power of our PPI business system.
When I look at the outlook, when I think about having a $0.07 headwind because of change in FX rates at the end of September and into October, the company's ability to offset that fully at the midpoint of our guidance, I think it gives you a sense of the power of the execution model, it really sets us up for a very strong 2015. That's the high level. Our job is to power through the challenges, what we do is to explain what's going on. At the end of the day, we're going to put up good results, we put up good earnings growth in Q3.
Great. Thanks, guys.
Thanks, Ross.
Your next question comes from the line of Tycho Peterson from JPMorgan. Your line is open.
Hey, thanks, guys. Just following up on the guidance, can you maybe talk about what is stronger to offset China being weaker than anticipated for the fourth quarter? Other aspects where you're feeling a little bit more incrementally positive heading into year end?
Yeah. If you look at it geographically, North America, we're expecting to be a bit stronger than when we had given the guidance a quarter ago. When you think of it from an end market perspective, industrial and applied and healthcare and diagnostics will be a little bit stronger than what we would've said three months ago.
Okay, that's helpful. Then thinking a little bit about the capital deployment priorities heading into next year, as you're at a point where you can start to at least think about deploying a little bit more capital. Can you maybe just talk about the M&A pipeline and how you're thinking about opportunities there? Should we think about bolt-ons or potentially larger deals?
Tycho, thanks for the question. First, on the capital deployment side of the equation, we paid down over $1 billion in debt in the quarter. We're on track to hit our target leverage ratio in Q3 of next year. I think based on how well the integration is going and based on us delivering on the cash flows that we expected to deliver, we feel confident and comfortable as we move into 2015 to once again start our disciplined capital deployment strategy. We don't feel required to wait until Q3 when we actually achieve the target leverage ratio, but actually, sometime earlier in the year, be able to begin executing it. In terms of the M&A pipeline, there's always a pipeline of activity that we look on, and there's always a steady stream of bolt-ons that we would and have been evaluating.
The team's been active, and I would expect over time you'd see us to do some things. The reality is, as you know from the many years of covering the company, is we don't assume any M&A is going to happen. We just assume that we'll have a good pipeline, and if we like the fit of a deal and how it helps our customers, and if it gives us the returns that we want, then we'll go ahead and execute against it. Not much has changed from that dynamic.
The last one, there was some noise lately around the Kinetica software platform. Can you maybe just talk about how important that is in the grand scheme of things and next steps and degree to which you could ultimately be liable, if at all, for drugs that have been approved?
Thanks for the question. In terms of Kinetica, it's a tiny product line. I had to look it up. Over the last 10 years in total, we sold about $1 million worth of the product, okay? It's in the infinitesimal side. We take the issue very seriously, obviously, and the team is conducting a very thorough internal review. In terms of the potential impact, in the U.S., it seems to be a non-issue as the FDA has stated clearly that it independently analyzes the bioequivalence data in their generic drug approval process. That doesn't seem to be an issue, and we're right now going through and confirming what the processes are in Europe, in particular, to understand that better. That's where we are with Kinetica.
Okay. Thank you, congrats on the quarter.
Thanks.
Your next question is from the line of Derik de Bruin from Bank of America Merrill Lynch. Your line is open.
Hi, good morning.
Good morning, Derik.
Hey. Pete, just so we have a little bit of basis and as we start thinking about 2015, can you just give us what you think at today's rates the FX hit would be on 2015, just to help us a little bit better calibrate our model?
It's a little early for us to comment on 2015, but obviously we'll provide a complete guidance as we normally do in January on our Q4 earnings call. That said, if today's rates were to hold over the course of next year, that would clearly be a revenue and earnings headwind compared to where we are today. In terms of the magnitude, we'll get into that when we provide detailed guidance in January.
Okay. The Laboratory Products and Services business has been remarkably strong the last couple of years, you've been pushing about 4% organic revenue growth that's been approaching. A lot of that's been driven by the biopharma services business. I mean, what are some broader thoughts on the LPS business? Does it stay at that rate? Does it normalize more back to the 3% range going forward? I'm just curious in terms of the stability in the business.
Yeah. When you look at the Laboratory Products and Services business, it is the heart of us driving productivity for our customers and which is why the business has continued to do well and has a bright outlook. Effectively, the combination of our channel, which allows customers to manage the huge complexity of life science tools in their research labs, the biopharma services business, which drives significant productivity in the R&D process and the clinical trials logistics outsourcing, and our very large base of equipment and consumables that are used every day in every laboratory, and we help our customers make the right choice on those products means that what we do here is very relevant. Team's executed very well. We've had a good base of customers continuing to take advantage of our capabilities, we've delivered good growth.
Whether it'll be three or four in any given quarter, it's hard to predict exactly, but I do feel good about the growth prospects for the business, Derek.
Okay. Thank you very much. I'll get back in the queue.
Hey, Derek, one other just clarification on your question about FX. As I mentioned in my comments, we have only been reporting the FX revenue and impact related to standalone this year. But obviously going into 2015, some of what we've been referring to in a one big lump as acquisition will be FX. You have to take into account the impact of FX on the Life Sciences Solutions revenue as well. The number will be, just as a starting point, be bigger in terms of revenue outside U.S. dollar.
Right. I know Life had a lot more Euro exposure, certainly on their margin. That's where what I was getting at, just a little bit of magnitude on the impact.
Yeah. As well as yen.
Gotcha. Okay. Thanks.
We'll make sure we bridge that very carefully when we get into January.
Thanks.
Sure.
Your next question comes from the line of Doug Schenkel from Cowen and Company. Your line is open.
Hey, good morning, guys, and thanks for taking the questions. I guess two somewhat related questions. The first is really on LifeTech synergies. Recognizing the update you provided indicates that you guys are tracking a smidge ahead of plan. Based on prior Thermo deals and recognizing, I think a lot of us thought there were a lot of inefficiencies within LifeTech, I think it's fair to assert that the expectations in the investment community were a little bit higher for upside relative to your synergy targets. You guys seem pretty happy with this, and I guess what I'm wondering is if part of this is because you think you're on the cusp of an acceleration in the pace of synergies.
I make this point largely because as you talked about, you maintained EPS guidance for the year in spite of some pretty now intense FX headwinds heading into Q4 and without China coming back. I mean, you've essentially raised underlying EPS guidance for the year by $0.07, even factoring in FX. You guys did acknowledge that you do expect deal synergies to be part of this. I'm just wondering if you think you're on the cusp of really accelerating the pace of deal synergies associated with the Life deal.
Derek, I guess a few things. We have been tracking ahead of the synergies both in the first year and in the longer term, right? From the first year, we've actually increased it three or four times. One of the things that we really don't like to do is that, and it almost sounds cute, that we're raising it by X million each quarter. That isn't the way we like it. First of all, for the simple reason that it affects our colleagues, right? Therefore, I actually don't like the dynamic of talking too much about it, but rather, whether we're on track to achieve our broader goals.
I think given the magnitude of the FX headwinds, we clearly as a team, have been driving productivity hard across the entire business of which every business is focused on and it's the Life Sciences Solutions business as well. Yes, we are accelerating the synergies, and we're also accelerating cost reduction across the company because that's the right thing to do in terms of the environment that we're living in. That's how I think about it. I feel excellent about the $350. What I can say is that we never stop looking for synergies, both on the revenue and the cost side. While we don't use that language inside the company today, we're still getting benefits from the combination of Thermo and Fisher, which happened seven years ago, right? We don't call it a synergy, but we talk about it as our customer value proposition.
We talk about it as our strength in emerging markets, we'll constantly look for upsides.
Okay. Thanks for that, Marc. Peter, I want to take, I guess, a more direct shot at following up on Derek's FX question. Obviously none of us want to predict where rates are going, but if we look at current levels, would you disagree that FX looks like about a 2% headwind at the top line? I guess that's the first part. The second part would be, should we be thinking this flows through at a similar rate to what we've done in the past, or is it drastically different because of the Life deal, as you started to talk about?
I guess the third part to this would be, keeping in mind that you did talk about essentially powering through $0.07 of incremental headwinds in Q4, how should we think about your ability to power through even more intense headwinds at the FX line next year? Thank you.
In terms of total revenue, so if you're looking at the $17 billion number, it's less than 2%. It's somewhere in the range of one and a half would probably be a better number. I don't have the exact calculation in front of me. In terms of pull-through, it's more than what it was for standalone Thermo Fisher Scientific historically, which was generally at the average pull-through of the company, because as you say, when we add Life Technologies, they have much more revenue in foreign currency, primarily the euro and yen, than they have cost. We're exposed a little bit more there. In terms of our ability to power through and offset the whole thing in 2015, it's of a scale that makes that very difficult.
Obviously, when we go through our planning process, we'll be looking at that and determining what levers we have to pull in terms of incremental restructuring, accelerating synergies, just incremental productivity on all the normal things that we do, PPI business system, global sourcing, the whole mix of what we have to attack those types of things. As I said before, we'll give you a full view in January on what our plan is, but it's a big impact to offset completely.
Okay. Thanks, Pete.
Your next question comes from the line of Isaac Ro from Goldman Sachs. Your line is open.
Good morning, guys. Thanks.
Hi, Isaac.
Hi. If you could talk a little bit about the pricing environment, I'd be interested specifically in your comments around pricing in LPS and analytical technology.
Yeah. In terms of pricing environment, very similar to what we've seen over the last few quarters. Price is slightly positive in terms of the environment. In terms of the Laboratory Products and Services, I would say pretty similar to the average of the company. In terms of Analytical Instruments, generally pricing has been okay. We have such differentiation in most of our product lines, and such a high level of vitality where price is just function of the new products in a way, is less so. In the very competitive segments in areas like maybe commodity materials, maybe pricing is a little bit more challenged, but again, positive price overall.
Great. Maybe in the LSS segment, can you talk a little bit more about the initiatives you have in place to continue to accelerate the organic growth profile versus what we saw before the acquisition? Secondly for Pete, can you talk a little bit about how we should think about incremental margin opportunities across the various segments? I would assume it's highest, at least in the short term for LSS given the synergies, but just over a longer-term period, incremental margins by segment would be an interesting sort of general conversation to have.
In terms of what the team is executing on the growth side of the equation within Life Sciences Solutions, first of all, the companies were independent, the newest opportunity is the revenue synergies, right? The revenue synergies leverage our presence in emerging markets. They leverage our corporate accounts and customer value proposition and the strong e-business capabilities of the two companies, right? There's significant revenue synergies that start to generate next year and accelerate over time. That's one. In the base business, excluding revenue synergies within Life Sciences Solutions, we are focused on improving the impact of innovation. That is clearly a big emphasis of the team. The Attune launch is a good example. We have efforts to accelerate growth in qPCR, some interesting things that we're working on in the human identification area and forensics.
There's a number of things in the large installed base of very technically excellent products that we're working on, really picking up the growth rate. Of course, next-gen sequencing is part of that as well, and getting that business, which is actually growing quite well, to continue to strengthen its position and drive growth as well.
In terms of margins, just at a very high level, as you said, Life Sciences Solutions is going to benefit the most from synergies, but of course, they have regular margin expansion and productivity goals like all the other businesses. Analytical Instruments would probably be second in terms of year-over-year margin expansion, just based on the fact that obviously it's all self-manufactured products, and it's lower than the average margin for the company. Specialty Diagnostics next, because it's all self-manufactured products as well, except for the healthcare channel. The margin is relatively high, so it's a little bit harder to get margin expansion. In Laboratory Products and Services, we have the impact of the channel. It's a little bit more difficult to expand margins year-over-year there.
Got it. Thanks a bunch, guys.
Okay.
You're welcome.
Your next question is from the line of Steve Beuchaw from Morgan Stanley. Your line is open.
Hi, good morning, thanks for taking the questions.
Morning.
I'd like to spend just a bit more time on China, maybe a couple there. One, Marc, when you see the recovery in China, where do you think it shows up? What segments of the end market? As you think about how the business there grows in 2015, assuming that budgets start flowing again later in the year, could we see a period of accelerated growth with easy comps? Do we remain in a somewhat slower growth environment, albeit potentially better than what we've seen in 2014?
In terms of where we have the most exposure to China, you would see in our Analytical Instruments segment in terms of our presence there. That would be the biggest beneficiary. In terms of 2015, obviously, the comparison is going to be much easier next year versus the comparison we had next year. That's a positive factor. It's still uncertain to know when the flow of funds is going to pick up. That one I have less visibility to. That'll be something we'll have to see.
Okay, thanks for that. Then one on Instruments. The commentary coming out of ASMS was very positive. The commentary on Vanquish has been optimistic. If you look at that business and how it's trending, if you could do this, excluding the drag from China, can you talk about whether you're seeing any organic pickup there as a function of the new product flow this year? If not, how you think that might emerge going forward? Thanks again.
Yeah. Some new products in mass spec are doing very well. I feel good about that. We had a very strong American Society for Mass Spectrometry show. Chromatography business is doing well. I look at the nine months year to date in those businesses, I feel good about the performance. In that segment, we have a large industrial exposure with our chemical analysis business, particularly around mining and commodity materials, which continues to be quite weak. I think that's somewhat reflected in the numbers. If you take the other angle, you say, outside of China, how is our chrome and mass spec business is doing? It's doing quite well. I feel good about doing that. That's a different lens to think about it. It's doing quite well.
Thanks, Marc.
You're welcome.
Your next question comes from the line of Steve Willoughby from Cleveland Research. Your line is open.
Morning. Thanks for taking my call. Just wondering if you could provide any thoughts you have regarding the competitive environment. Now with your acquisition of Life Tech, obviously, there's been some other large moves recently. Just wondering if you could provide what your thoughts are on the competitive environment and if there are any impacts from Sigma-Aldrich being acquired now on Thermo Fisher?
Yeah, in a consolidating industry, we've been driving the consolidation, and that trend continues. That's something that we've been anticipating for a long period of time. It's taken a while for the industry to consolidate, and we expect that it'll continue to do so. There's a huge advantage of scale, and there's a huge advantage of depth of capabilities, and we have a big head start as the industry leader in terms of executing against it, and we keep looking to strengthen our portfolio and do a great job serving our customers, and we do that. We feel we're very well positioned to grow our market share and strengthen our industry leadership position. That's how I would see it right now.
Okay. Just a little bit more of a nearer term question. A year ago, it seemed like the fourth quarter for many companies in the industry benefited from a year-end budget flush to varying degrees, and consequently, you have a little bit more difficult comps here in the fourth quarter. Based on my math, it looks like your guidance implies roughly kind of 3% to 5.5% organic growth in the fourth quarter. I was just wondering, what your thoughts are on how you're going to be able to overcome the more difficult comps here in the fourth quarter versus what you've been experiencing so far this year?
Yeah. In terms of the guidance for the fourth quarter, if you kind of work your way through the math, which I was actually doing real quick, real time, it's about 2% to 4% organic growth in the quarter. That's the range, which would then, when you kind of do all the math, would put you at the 3% to 4% for the company for the full year. That's what's implied in the guidance.
Okay, thanks very much.
You're welcome.
Your next question comes from the line of Jeff Elliott from Robert W. Baird. Your line is open.
Hey, good morning, guys. Thanks for the question.
Good morning.
Pete, first one for you. On FX, you mentioned the $0.07 incremental headwind. Is that just on the standalone Thermo business or does that include the Life portion as well?
No, that includes the Life portion as well.
Okay. All-in number there. Marc, just you've given some color on mass spec. I guess, can you talk just about the kind of the high-end business, not just the new instruments, but overall high-end mass spec. What's the competitive environment there now?
Q Exactive, the Fusion doing great. Strong booking, strong revenues. We feel good about our position, in terms of how we're doing at the high end. We continue to bring out a steady stream of new products, they're very well-received in the marketplace.
Okay, thanks, guys.
Welcome.
Melissa, we have time for just one more.
Your last question comes from the line of Daniel Arias from Citigroup. Your line is open.
Hi, good morning, guys. Thank you. Marc, on the academic markets, can you just give a little bit more color on the extent to which the improvement that you noted there was a year-over-year effect on an easier compare, whether you're really seeing some material spending pick up there? Just love to get a better feel for what the federally funded folks are doing.
Yeah. Academic and government, Q3 was incredibly similar to Q2. The North American environment or the U.S. environment was positive, and the last two quarters was much better than the many previous quarters. You saw, as we had thought early in the year, that funding would flow through the system. It is, it's not robust, but it clearly is growing, which is very good. The offset has been China, but the net of it is still low single-digit growth. I feel good that all four of the end markets are back to a positive growth environment.
Okay, great. On China, if I could just touch on one additional point. Last quarter, you mentioned that even though the environment was difficult, you felt good about not seeing order cancellations. Fair to say that that's still the case this quarter, and when the team looks out the next quarter or two, that they feel good about what's in the book staying in the book?
Yeah, the environment continues to be consistent with that, and the team's focused on turning those bookings into revenue.
Very good. Thanks.
Thank you. Let me wrap up with a few thoughts. The first of which is 2015. We'll get into the guidance process, as we normally do in January, but let me make a couple of just comments so that, because it kind of went choppy in the way all the questions came out. The first of which is, if we were fast-forwarding to the FX environment that we are in at this moment in time, sure, that would be a headwind. We're going to have some positives, which is synergies will continue to ramp up. We're going to have revenue synergies starting to flow, and we'll be returning to capital deployment. The way that we will always judge the company is when we're sitting across with any of the members of the investment community, are we managing the company extremely well in whatever the environment is?
If we can answer that question and the investor would say, "Yes, you're managing the company extremely well," that's really going to be the output of the financial goals we have for the year. I feel like we'll get into all the details of it, and we'll use the best information we have back in January to articulate that. From the perspective on the quarter that we just finished, we're happy we delivered a strong quarter. It puts us in an excellent position to achieve the growth goals that we had set out for the year, and we're excited about doing that, and setting ourselves up for a strong 2015. Of course, thank you for all the support of Thermo Fisher, and we look forward to coming back to you at the beginning of the year and reporting on our progress.
This concludes today's conference call. You may now disconnect.