Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2013 Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, today's call is being recorded. I would like to introduce our moderator for the call, Mr.
Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin the call.
Thank you. Good morning and thank you for joining us. On the call with me today is Mark Casper, our President and Chief Executive Officer and Pete Wilbur, 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 22, 2013, a copy of the press release of our 2013 3rd Quarter earnings and future expectations is available on our website under the heading Financial Results. So before we begin, let me briefly cover our Safe Harbor statement.
Various remarks that we may make about the company's future expectations, plans and prospects constitute forward looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in the company's quarterly report 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 Q3 2013 earnings and future expectations and also in the Investors section of our website under the heading Financial Information. So with that, I'll now turn the call over to Mark.
Well to deliver strong bottom line performance again this quarter, continuing the excellent growth momentum we've had all year. In a challenging market environment, we delivered 2% organic growth, which keeps us on track to achieve our full year guidance. Our bottom line results are a testament to our operational And our ability to deliver strong earnings growth. With 3 quarters of the year behind us, I'm confident that we'll achieve the growth calls we laid out for With that, let's move into the highlights from the quarter starting with the financials. Our revenue and adjusted EPS were both 3rd quarter records.
Reported revenue grew 3% and adjusted EPS rose 9%. Turning to operating income. Our adjusted operating income grew 8% and adjusted operating margin was a particular bright spot with 70 basis points of expansion. Pete will go through the details behind our strong operating performance in the quarter. But as you know, we're always driving productivity across our businesses.
We use our PPI business system to improve our processes, so we can deliver the best products and services to our as efficiently as possible. This strengthens our competitive position and strengthens our bottom line. Let me take a moment now to talk about our performance with the current Market environment as the backdrop. At a macro level, we've generally seen a continuation of the market conditions we've experienced all year. I'll give you some color on the performance by our 4 key end markets.
Starting with academic and government, because it's probably top of mind, This end market was somewhat softer in Q3 given the environment in the U. S. As a result, we were down here in the low single digits. Our customers continue to feel the effects of sequestration along with the added uncertainty leading up to the budget standoff late in the quarter. Of course, the deal reached last week ensures that sequestration will be with us for the balance of the year.
That said, we benefited from certain Government markets outside the U. S. The best example was a significant order for analytical instruments that we shipped to the Japanese National Police Agency for use in forensic toxicology and drugs of abuse screening. This was a result of a relationship we've built with this agency since we first We applied them with mass spectrometers back in 2,008. Turning to industrial and applied markets, they pretty much played out as we expected And we reported low single digit growth here against an easy comp in Q3 last year.
Getting into the details, Core industrial markets remained weak overall as they have been through the first half of the year. Our businesses serving these customers continue to face a challenging environment And we still have an inflection point. We still haven't seen an inflection point. However, we continue to see strength in some applied markets, particularly in China, which was an offset to the core industrial softness. Turning to Healthcare and Diagnostics.
We didn't see any significant change here during the quarter And our growth remained in the low single digits in Q3. We saw a carryover of the softness we experienced in Q2 as a result of lower healthcare utilization in the U. S. And our Anatomical Pathology business continues to be affected by lower U. S.
Reimbursement rates. The bright spot here was the performance of our transplant diagnostics business, formerly One Lambda. Although it wasn't included in our organic growth until mid September, it's just And it's been a very nice addition to our Specialty Diagnostics portfolio. In the 1st year of ownership, Transplant Diagnostics delivered high single digit revenue growth. Finally, in our pharma and biotech end markets, we continue to perform very well growing in the high single digits.
Our ongoing momentum here is a clear sign that our value proposition is resonating with these customers and we're continuing to gain share. So to sum it all up, the overall market environment has been consistent with what we've seen all year long. We continue to look at this as an opportunity to leverage our scale and unique depth of capabilities to help our customers manage through and achieve their own success. Before I move on to our growth drivers and the business highlights for the quarter, let me give you a quick update on our pending acquisition of Life Technologies. First, as you probably know, Life Technologies shareholders voted to approve the transaction in late August.
In addition to that important milestone, the integration planning teams are right on schedule and day 1 planning is nearly complete. We continue to work through the regulatory process and Pete will give you an update on our financing activities. Now that we're getting into the more detailed planning, we continue to feel very good about the synergy targets we originally laid out. The teams from both companies are excited about the value This combination will create for our customers, our employees and our shareholders. And as we stated when we first announced the transaction, We continue to expect an early 2014 close.
Now I'll turn to some of the business highlights for the quarter in line with the elements of our growth strategy, specifically around technology innovation and our presence in emerging markets. It's been a terrific year for us in terms of innovation. And you know about our major Thermo Scientific product launches in the first half of the year at both Pitcon and the American Society of Mass Spectrometry. Before I cover our Q3 highlights, let me take a moment to remind you of the profound impact our new products are having on our customers. You'll recall that we launched 3 new mass spectrometry platforms at applications and the Endura and Quantiva Triple Quads, which are geared more towards customers in applied markets.
We've had great customer uptake of these products and we began shipping all 3 in the quarter. Let me relay a brief anecdote shared by one of our early adopters of the Fusion system, Doctor. Josh Kuhn from the University of Wisconsin. In proteomic research, yeast has served as a common test organism for many years. In the past, it had taken about 4 hours to analyze a single yeast proteome.
But with the Fusion TriBrid, Doctor. Coon and team were able to perform a complete analysis in 1 hour. Doctor. Kuhn described the Fusion's blazing spectral acquisition speed as truly unprecedented. He said that the fourfold reduction in analysis time will transform the speed and number of proteomes that can be analyzed opening up new avenues of research.
Doctor. Coon also predicts that the comprehensive analysis of the human proteome in just a few hours is within reach using this I think this tells you why we label some of these new technologies as groundbreaking and why we've been investing to keep our innovation pipeline While we like to talk about mass spec innovation because of our leadership position, I want to emphasize that we innovate across our technology platforms. In Q3, we launched a number of new Thermo Scientific products as we do just about every quarter. At the American Association of Clinical Chemistry, We announced 2 of our products received FDA 510 clearance. 1 was our tacrolimus immunoassay using Thermo Fisher showcased new innovations that for the first time combined our bioscience and analytical instrument technologies for Bioprocess Applications.
We introduced several technologies that meet increasing customer demand for the development and production of biologics and I'll just mention one of them. We launched our 1st benchtop process mass spec for biologics research, the Prima BT Gas Analyzer. Customers can now analyze complex gases that are a byproduct of the cell culture process, so they can better understand cell growth and more quickly scale up production. Last, I want to highlight a new product in one of our portable instrument offerings. At our analyst meeting last May, we talked about our Microphasor 8 gs analyzer, which is used for testing in animal feed, which at the time was still in development.
We launched the product in Q3, opening a completely new by helping feed manufacturers do on-site inspection to improve quality and reduce production costs. I think my recap makes it clear that we have a strong innovation pipeline And we've launched significant products across our businesses all year long. Turning to Asia Pacific and Emerging Markets. Our growing presence in these regions is creating value for our customers and our teams there delivered another great quarter. We continued our excellent growth momentum in China with 20 I recently returned from a trip to China in September and our teams are doing a great job leveraging our unique scale and depth of capabilities The opportunities in China are perfectly aligned with our mission to enable our customers to make the world healthier, cleaner and safer.
And let me give you a couple of We won a significant order to supply laboratory equipment to the Chinese Center For Disease Control and Prevention. Only locally manufactured Products will continue for this project were considered for this project and our new Suzhou manufacturing center was a key factor in this customer win. In air quality monitoring, we continue to see a steady source of growth for us. You may recall that we moved the headquarters of this business to China a few years back And it's really helped us to gain greater access to this important growth market. We expanded our presence in Asia Pacific during the quarter as well by opening a new production This added capacity will help ensure a safe and uninterrupted supply of materials for our biopharma customers and will also serve as a logistics hub for the efficient delivery of these critical supplies.
Turning to Brazil. We continued our strong momentum here as well growing better than 20% in Q3. We're strengthening our commercial presence in Brazil to support the country's rapid growth. Turning now to our guidance. As you saw in our press release, With 3 strong quarters behind us, we're raising the low end of both our revenue and adjusted EPS guidance.
Pete will cover the details, but at a high level, We're bringing up the low end of our revenue guidance by $40,000,000 and now expect to deliver between $12,870,000,000 12.9 $5,000,000,000 in 20.13. This will result in 3% to 4% growth for the year. We're also raising the low end of our adjusted EPS by $0.02 and $0.02 this quarter for growth of 7% to 9% over last year. So before I turn the call over to Pete, let me leave you with the key points of the quarter. First, we executed well to deliver another strong quarter of adjusted EPS growth.
Our scale and depth of capabilities are a key competitive advantage and we continue to build on our leadership positions. The integration planning for Life Technologies is progressing well and we look forward to the value this transaction will create. With that, I'll turn the call over to Pete.
Thanks, Mark. Good morning, everyone. As I've done in the past, I'll start with an overview of our financial performance for the total company, provide some color on each of our three segments, briefly review the status of our financing activities related to the Life Technologies acquisition, and then conclude with some color on our updated 2013 guidance. As you saw in our press release and heard from Mark, we delivered a solid quarter, resulting in a 9% increase in adjusted EPS to 1.30 GAAP EPS in Q3 was $0.86 also up 9% from $0.79 in Q3 last year. Looking at the top line, Q3 total revenue increased 3% year over year and we delivered 2% organic growth.
Q3 reported revenue includes 1% growth from acquisitions and a nominal negative impact from foreign exchange. Although the revenue impact of FX in the quarter was minimal, similar to the past few quarters, the mix of currencies including the weakening of the Japanese yen drove a significant negative impact on earnings. This resulted in about 40 basis points of adjusted operating margin dilution and $0.03 or 2 percent of adjusted EPS dilution year over year in the quarter. In terms of orders, we With China once again delivering very strong growth of 20%. Rest of World grew over 20%, primarily driven by Latin America.
Looking at our operational performance, Q3 adjusted operating income was up 8% and we delivered very strong adjusted operating margin of These gains were partially offset by growth investments and foreign exchange. The $85,000,000 benefit from restructuring actions actions in Q3 and about $65,000,000 year to date. In terms of driving growth, we continue to make strategic investments, primarily in emerging markets to strengthen our global presence and to continue our strong growth momentum there. Moving on to the details of the P and L. Total company adjusted gross margin came in at 44% in Q3, flat to the prior year, with accretion from acquisitions being offset by unfavorable foreign exchange.
Adjusted SG and A in Q3 was 21.6 percent of revenue, down 70 basis points from the 2012 quarter as a result of volume leverage and the previously mentioned Finally, R and D expense came in at 3% of revenue, essentially flat with the prior year. Below the line, net interest expense in Q3 was $57,000,000 $3,000,000 above last year as a result of the debt we issued in mid Q3 2012 to fund the One Lambda acquisition. Our adjusted tax rate in the quarter was 15.3% consistent with our previous guidance and 160 basis points lower than last year as a result of acquisition tax synergies and our ongoing tax planning efforts. In terms of returning capital, we paid out $54,000,000 in dividends to our shareholders in the quarter. And as discussed On previous calls, we've suspended our share buyback program in light of our pending acquisition of Life Technologies, so there were no share buybacks in the quarter.
Average diluted shares were 367,300,000 in Q3, up 1,900,000 or 1% from last year, reflecting the accounting impact of the equity forward we entered into in the 2nd quarter. Our share count increased by 3,800,000 shares from Q2, primarily as a result of the equity forward accounting and option dilution. Turning to cash flow and the balance sheet. Cash flow from continuing operations for the 1st 9 months of the year was $1,290,000,000 and free cash flow was $1,110,000,000 after deducting net capital expenditures of $170,000,000 Year to date free cash flow was down slightly from the prior year, primarily as a result of increased working capital investment along with financing fees and transaction costs related to Life Technologies. We ended the quarter with $1,850,000,000 in cash and investments, up $480,000,000 sequentially from Q2, driven by our strong free cash flow.
This build in our cash balance is tracking in line with our expectations related to the Life Technologies financing. Our total debt at the end of Q3 was $7,110,000,000 essentially flat with Q2. So let me wrap up my comments on the total company with a quick update on our return on invested capital performance. Our trailing 12 months adjusted ROIC Through the Q3 of 2013 was 9.8%, up 10 basis points from Q2, so we continue to make good progress on this important metric. So with that, now I'll walk you through the performance of our 3 business segments.
Starting with Analytical In Q3, total revenue grew 1% and organic revenue also increased 1%. We had strong growth in our mass spec business again this quarter and we're seeing great traction from the mass specs we launched at ASMS in June And we continue to benefit from great performance in China. We also saw good growth in instrumentation for the applied markets. This growth was partially offset by the softness we continue to see in our core industrial markets, which are most highly represented in this segment, as well as in some U. S.
Government funded projects. Adjusted operating income in Analytical Technologies decreased 3% and adjusted operating margin was 18.1%, down 80 basis points. During the quarter, we were negatively impacted Turning to the Specialty Diagnostics segment. In Q3, total revenue grew 7% and organic growth was 1%. In the quarter, we delivered good growth in our Clinical Diagnostics business, specifically in biomarkers.
And although it didn't impact our organic growth Late in the quarter, we saw very nice growth in our transplant diagnostics business, which has consistently been performing above expectations. However, as Mark mentioned, we continue to see some softness in this segment relating to health care utilization and reimbursement pressure. Adjusted operating income in the segment increased 20% in Q3 with adjusted operating margin at 26.8%. This was up 270 basis points from the prior year, primarily as a result of productivity savings, acquisition accretion and favorable mix. In the Laboratory Products and Services segment, both reported and organic revenue grew 4%.
Our Clinical Trials Logistics business continued to deliver strong growth and our channel business had good growth as well. Weakened conditions in the U. S. Academic and government end market as a result of Sequestration and the uncertainty surrounding the government shutdown continued to be a headwind in this segment. Adjusted operating income in Laboratory Products and Services grew 7% and adjusted operating margin was 14.9%, up 50 basis points driven by strong productivity.
Before I move on to 2013 guidance, I want to provide you with a brief update on the status of the Life Technologies financing. As I mentioned on our Q2 call, we secured $7,500,000,000 of permanent Consisting of a $5,000,000,000 term loan facility and $2,500,000,000 from a forward sale of equity, both of which we plan to draw down closer to For the remainder of the financing, there's no material change from what I reported on our Q2 call. We still expect that the remainder of Financing in addition to cash on hand will consist of $3,500,000,000 to $4,000,000,000 in debt, which will likely be in the form of bonds and up to $750,000,000 of equity or equity linked securities. We'll continue to update you as we finalize these arrangements. And in terms of the average interest rate on the new debt, we still expect to meet our previously communicated range of 3.25% to 3.5%.
So with that, I'd like to review the details of our updated 2013 guidance. Please note that as I mentioned on our earlier calls, Our 2013 earnings guidance does not include the acquisition of Life Technologies or the impact of the related transaction and financing As you saw in our press release, we're raising the low end of our reported revenue guidance by $40,000,000 reflecting our solid performance for the 1st 3 quarters of the year. This results in our revised revenue guidance range of $12,870,000,000 to $12,950,000,000 which represents reported growth of 3% to 4% compared to our 2012 revenues of $12,510,000,000 consistent with our previous guidance. In terms of organic revenue growth, we're expecting to be in the range of 2% to 2.5% for the full year. Completed acquisitions are expected to contribute about 1.5% to our reported revenue growth, no change from our previous guidance.
And we now expect foreign exchange to have a negative impact on our top line of about 60 basis points, which has improved slightly since our previous guidance. The bottom line impact from FX on our full year continues to be significant and is expected to result in 30 basis points operating margin dilution and $0.11 or 2 percent of adjusted EPS dilution year over year. In terms of our adjusted EPS guidance, We're raising the low end by $0.02 reflecting our solid operating performance in the 1st 9 months of the year and consistent with the increase in our revenue range. This results in our new adjusted EPS guidance range of $5.31 to $5.39 or 7% to 9% growth over 2012, up $0.01 at the midpoint versus our previous guidance. Consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates And our guidance doesn't include any future acquisitions or divestitures.
Turning to adjusted operating margin. Moving below the line, there are no changes from our previous guidance for net interest expense, tax rate, capital expenditures, Free cash flow or return of capital. We're still expecting net interest expense to be up $15,000,000 versus last year and that our adjusted income tax rate will be about 14.5%. We expect capital expenditures to be in the range of $300,000,000 to $315,000,000 and free cash flow to be in the range of $1,700,000,000 to $1,800,000,000 And we're still assuming that we'll return a total of about $310,000,000 Capital to shareholders composed of the $90,000,000 in share buybacks that we completed in Q1 and about $220,000,000 of dividends for the full year. Finally, full year average diluted shares are now estimated to be in the range of 365 to 366,000,000 shares, up 1,000,000 shares at the low end from our previous guidance as a result of option and equity forward dilution related to our higher stock price.
In interpreting our revenue and adjusted EPS guidance ranges, as I've said in the past, You should focus on the midpoint as our most likely view of how we see the year playing out. Results above or below the midpoint will depend on the relative strength of our markets during the year as as well as the economic factors we've discussed. So in summary, we once again managed through the macro environment, With that, I'll turn the call back to Ken.
Okay. Thanks Pete. Shannon, we're ready to take questions.
If your question has been answered or you wish to move yourself in the queue, please press the pound key. In order to allow everyone in the queue an opportunity to address the Our first question is from Ross Muken of ISI Group. You may begin.
Good morning, gentlemen. Good
morning. Good morning.
So maybe Mark just digging in a little bit on the markets, particularly on the Analytical Tech How would you sort of characterize the pacing of orders or pacing of revenues in the quarter in some of the more short cycle businesses? And in some of the areas where you had weakness, did things get incrementally better at any point? Did they stay relatively stable? I'm just trying to get a sense for the jump off point relative to sort of what we've seen in the macro, which is maybe a modest improvement In some of the subsectors?
Yes. So Ross, thank you for the question. Let me focus just on the analytical technologies, Which is where you focus the question. So within that, we have our largest exposure to core industrial Businesses or Markets. And for us that's most dependent on things like commodity materials, right?
We didn't see any change through the quarter In terms of pattern, so continues to be soft market. It's been soft all year. So that's kind of the industrial portion of that business. When you look at within that same segment, We also have our mass spectrometry and chromatography businesses. And our mass spectrometry business had An outstanding quarter and our liquid chromatography business was very, very strong as well.
So there's a lot of details Within that portfolio, but we didn't see a lot of change month to month. It was more industrial is very soft, but Areas that you would expect Thermo Fisher to continue to gain share are things like life science, mass spec and HPLC that continues to be consistent.
And maybe just from a competitive perspective, it's always tough to tease out relative growth rates amongst the peers just because the businesses What I found interesting on my last Asia trip was a lot of your competitors were saying how much harder it is to compete Thermo today than 12 months, 24, 36 months ago. Where do you feel like you're seeing the most success The integrated strategy and where is the channel having the most impact? I'm just curious across the business, it seems like that momentum Has increased. Where do you feel like we're actually seeing it in the numbers, although obviously it's tough to tease out in the totals?
Right. So China has been growing consistently in that 20% range for us now for quite a number of quarters. We have a very integrated strategy, right? So because of our scale, we believe that we are able to put the best people facilities that are geared towards the local market. I mean that's why I picked out the Chinese CDC, right, Which is in this particular order they wanted just local manufactured products, right?
And the reality is we were able to do that in our big order. Our customers want some degree of tailoring of our global products to meet their specific needs, which is why our China Technology Center Environmental, you get off the airplane in China, you know that there's air quality issues, right? You don't literally have to even you can see when you're landing, Right, which is why our business is globally headquartered there for air monitoring. So when you look at it, we have broad range strength in the market and are using I was there in September. I'm going back next week.
The rest of the the rest of my direct reports do the same thing because The government is very important to decision making and building those strong relationships is an advantage Scale matters. Little companies just don't have the same access as an industry leader has and we're trying to take that to the next level every time.
Great. Thanks, Mark.
Thank you, Ross.
Thank you. Our next question comes from John Groberg of Macquarie. You may begin.
Thanks and congratulations on another really remarkable quarter from an adjusted EPS and margin standpoint. And Mark, I just want to focus on that for a second. So if I look back over the last looking at this year more on an annual basis, I know we're only 3 quarters through, but if you look back kind of 2011, 2012, 13, you're kind of in that 2.5% to 3.5% organic growth. But if I look at this year, you're doing 40 bps 40 to 50 bps of operating margin expansion, that's not including the medical device tax, which probably gives you another 20 bps, the unfavorable FX that Pete mentioned. So I'm just curious if that's kind of the realm of growth that we're in, say over the next year or 2 still in that 2.5 to 3.5.
Is that still feasible what you're doing there? Do you feel like you're really starving the organization some? And Anyway, that's I'm just trying to think about kind of the levers that you feel like you still have to pull if the macro doesn't really improve that much?
So, John, it's a great question, right? So, we have a very strong operating system at the company, our PPI business system. And our 39,000 colleagues These are constantly trying to make the company better every day and more efficient. And as we went into this period of a muted recovery coming out of the recession, Our team has done a very good job of streamlining the organization, eliminating waste, so that we We can fund R and D and our significant expansion in emerging markets. So we're not starving the organization in terms of a bright future.
In fact, I spent most of my comments today actually on new product launches and I had to cut them short otherwise we'd run out of time for Q and A, right? So we're spending For a bright future, and we feel like we're taking out the appropriate cost to deliver very strong returns for our shareholders. Looking forward, if we continue in this muted growth environment, we believe the ability to drive Good bottom line performance is clearly something that we have the skill to do and the ability to do. And as we get into our guidance process For 2014 early in the year, we'll articulate our plans. But we've lived through periods of rapid growth.
We've lived through Couple of recessions and we've lived through a period of muted growth and pretty consistent to that as we've been very focused on driving bottom line improvement.
Thanks. Just as a quick follow-up to that, just as a point of clarification, as you mentioned with Life, you're getting closer to You have day 1 planning in place, getting closer to that potentially closing that acquisition. As you go and talk to the investors, Is the number that you talk I'm trying to think about do we think about the core Thermo business still getting the margin expansion that you would get otherwise And then layering on top of that, what you expect from life?
Yes. I mean, at a simplistic level, yes. I mean, what we'll do is When we give out the when we close the transaction give out the guidance, we'll bridge the details enough so that everyone can understand what we're doing. But our base business So that Life continues to have to generate good earnings growth. And then obviously, you're going to get the positive
question is from Daniel Brennan of Morgan Stanley. You may begin.
Good morning and thanks for taking the questions.
Mark, I wanted to dig in
a little on China, maybe just get some color there within your China business. Can you give us some sense of how the different segments did within China? And specifically like on the more industrial side of your business, have you seen any change that are for the better for the worse?
So core industrial Continues to be soft in China. So that's going to affect the Analytical Technologies segment the most. There were certainly bright spots on the applied markets in China, particularly air quality continues to Be strong in that market. Healthcare continues to be a good growth driver as well. So specialty diagnostics will benefit from that.
And then mass spec had a very, very strong quarter In China as well. So that gives you a little bit of a flavor. Headwinds continue in industrial. The rest of the business Performing solidly.
Okay. And then, Kasim, maybe on the LPS side, which you had Pretty strong growth certainly this quarter. And I know you highlighted the clinical trial logistics business. Could you just break it down like how the channel business did versus On the channel side, is this share gains or are you just growing in line with
We had good momentum in our channel business in the quarter. We had very strong momentum in our Clinical trials logistics business. I would say that our share in our channel business, We probably grew share slightly in the quarter, not growing hugely different from the rate of the market, but probably a little faster than the market.
Okay, great. I'll leave it with those 2. Thanks, Ian. Thanks, Dan.
Thank you. Our next question is from Derik De Bruin of Bank of America, you may begin.
Tarek, you're on mute?
Hi, it's me. Sorry about that.
Sure. Hey, so just
to I don't know if you're going to answer this, but I'm going to ask it anyway. Obviously, there's been a lot of FX For that transaction, can you are you in the point where you can sort of update, sort of what your expectations are for that just How the currency has
moved all over the place?
Yes. Certainly there's a lot of things that have changed since April 15 The Life acquisition pluses and minuses and so I would not going to answer one piece of that equation. So we'll give you updated guidance Once we close the transaction.
Great. And I guess speaking of the U. S. Academic And some of the uncertainty there. Like what's your sort of working assumption for that customer segment as we sort of Look into Q4 when you sort of look into 2014, I mean, are you expecting that segment of the market to Flattish, I'm just curious in terms of what your current planning is?
So let me limit it to What we saw and a little bit on Q4, we'll deal with all of 14 holistically through our guidance process. Let me start. Longer term, as you take it out of your I don't think I think our view on academic and government continues to be the same, which It's just going to be a low single digit growth market for us in the long term, not so different than what we talked about at the Analyst Meeting. I don't think there's So when I look at the performance in academic and government, year to date We're down low single digits, I mean basically. And our view for the 4th quarter It is fairly similar to that environment.
Basically, we're not assuming a particularly material effect From the government shutdown, obviously, a little bit of a headwind. But we also know that sequestration is certainly with us for the rest of the year. So that means that Any optimism that maybe sequestration would go away this year that fades from customers' viewpoint. So similar to Q3 is how we're thinking about it.
Great. Thanks. I'll get back in queue. Sure.
Thank you. Our next question is from Tycho Peterson of JPMorgan. You may begin.
Good morning, Tycho.
Hey, good morning. Thanks First one just on pharma and some of the trends. Obviously, you guys have had really good momentum there. Can you maybe just talk about the sustainability of those The deals seem to be getting a bit bigger. At the same time, we see the Merck news about cutting R and D.
So maybe just talk on your view on the pharma business for the next quarter or 2.
If we look back now over the past few years, we've been growing well above the company average share. We're clearly gaining share. Our customers are benefiting from the productivity that we deliver for them. And we feel like our value proposition is Very well suited to help customers navigate a tough environment. So we never like any of our customers to be struggling.
But what I can tell you is that we're on the phone the minute those issues happen and we're there coming out with new ways of helping them navigate those Environments, our clinical trials logistics business obviously has done very well for quite some time. And the reason for that is, we're just substantially lower cost in house capability and our quality and performance metrics are truly outstanding. So customers are getting comparable or better quality at a lower cost. And as Customers have tightened their belts, they've been driving more and more business to us and we've been cross selling across the portfolio as well. So our view is that It's our job to help our customers be successful and we'll continue to focus on navigating that environment going forward.
Okay. And then just a follow-up on Matt Speck, you spent a lot of time talking about the new products. Can you talk about the degree to which those new products are seeing uptake in the clinical segments? I mean, I think that was one of the Teams out of ASMS was just mass spec moving more into the clinical side? And then can you also just talk on competitive dynamics to the extent you think you're taking share both in mass spec and then LC What's with the Dionysus addition?
Yes. So clinical research is growing in importance for us. It's still early in terms of the adoption for us, but it's but we're seeing some of it in clinical research. And The new products have done very well. We started shipping the products in the quarter.
The uptake has been very strong. And one of the things that I'm very Question about is that the Q Exactive which is we launched a couple of years back just had a fabulous quarter, right? So we launched Another high end system, but we didn't lose any momentum in the QX Active. I wasn't expecting to lose any momentum because it serves a different market, But it's nice to actually see the facts play out that way in terms of performance. HPLC was very strong for us.
So I feel good about how our teams are executing Around the world.
Okay. Thank you.
Thank you. Our Next question is from Doug Schenkel of Cowen and Company. You may begin.
Good morning, guys.
Good morning, Doug.
One thing I'm having a hard time reconciling is better than expected LPS growth in the quarter and the negative commentary on the academic government end market in the U. S. I say this because in the past You pointed out that LPS was the segment you thought would get most impacted by U. S. Government weakness and I believe that's what was at least previously embedded in guidance.
So the question is, has there been a notable source or are there notable sources of upside within LPS outside academic government that have exceeded your expectations? And then is the offset that academic government weakness has been maybe a bit more pronounced in either AT or maybe even specialty diagnostics than you expected?
This is So when you look at the academic and government performance, you see the pressures in AT and in LPS. But the consumable mix is the vast majority in LP and So it's more muted the effect than the capital equipment effect that you would see in AT. So you see some pressures, Doug, In the lab products and services, but you see a lot more pressure on more of the routine capital equipment, which is in the other segment. So that's part of it. The other thing is because pharma is overrepresented and it's a good thing in lab products and services that's really been a very Strong driver of that because you have a clinical trials logistics business there, our channel business, our lab consumables things that are very pharma and biotech focused, We have a disproportionate weighting in that segment.
So I think those factors would say why does the performance
Some progress you're making on the PPI side. That said, I am wondering if some of this is also a function of planning for the closure of the Life deal. You guys have been executing well to plan this year, but I think it's also fair to say that Life's performance has been a bit disappointing relative to expectations. So point here is some of the SG and A pullback related to what's been going on in life as you move towards the closure of the deal?
Yes. So in terms of the SG and A, we certainly are still continuing to make investments in the business. The leverage we're getting in SG and A year over year is really about the restructuring activity that we're doing and PPI activities that drive cost out of the system. So there are really not any material impact related to Planning for life, obviously, there's a very small piece of our company that's really directly overlapping with life in terms of The cost base, so that's not anything that's impacting the numbers.
Okay. And if I could sneak in one more. You guys have continued to do really well in APAC and Rest of World and you recognize strong underlying demand in these markets. But across most end markets in these geographies, It does appear like you're outperforming many of your peers. I guess what I'm wondering is how much of your outperformance in these geographies versus your competitors is Attributable to you having a better reach than your competitors in your opinion?
And are there opportunities you're actively looking at where you could Repeat what you did with China Environmental and more generally are you thinking it might make sense given really would have become kind of long standing trends in these geographies To accelerate really reallocation of resources to areas say in Latin America or certain areas of APAC? Thank you.
Sure. So Doug thanks. A few things. One of I mentioned let me just one more time this is China CVC order in lab equipment. We moved one of our business units actually a large one, the headquarters to China about a year ago, Basically to position this business for the very strong funding environment that's likely to continue for many years in China.
So we're always looking at around the world and trying to optimize it to position us for growth. I think the combination with Life Technologies actually gives us some interesting opportunities where the markets in some other countries Might have been just a little subscale for us to really want to put the infrastructure in place to build a very, very superior experience for our customers, but The combined entity is worth doing. So I think when you get down to the South Koreas of the world, Parts of Southeast Asia, we're going to be able to replicate the very strong capabilities we have in China in some of these markets, not at the same level of cost or investment, Just because we have enough scale that we're going to get a quick enough return to do it. So I actually think the combination will position us for better growth Over time.
Thank you. Our next question is from Isaac Joe of Goldman Sachs, you may begin.
Good question. Wanted to start maybe with I think your thought on just gaining wallet share across 2 year specific end markets, one being academic and pharma and the second being pharma. And the reason I We're probably looking at a period of protracted slowdown in funding in academia. There's been obviously some continued cuts In the pharma side, so just thematically if you look at the combined portfolio you have and competitive advantage you have with the channel, Are there a couple of new initiatives you can specifically point to where you think you can use the franchise to gain wallet share in a slower growth environment? Thanks.
Yes. So, Isaac, obviously, we've been doing this with pharmaceutical customers for quite some time and we'll continue to do that. So, we think that That type of requirement of productivity from our customers is always a good opportunity. And the fact that We have a stronger offering in production chemicals now. And when we close Life Technologies, an even stronger offering in Some of the life science research reagents will give us more opportunities to go to those customers and bring new value and help them navigate The environment.
On the academic and government side or academic side, decision making is a little bit different, but the economic needs are the same, You're dealing more at the lab level than the enterprise level. And I had the chance to meet with a number of academic customers this week actually here in Boston because of ASHG is here and they love the Thermo Fisher value proposition, how we can help them navigate It's a tough environment for them. So it's more at the micro level. But if we can help them save money so they can continue to do the important research they're doing, then it's a great opportunity.
Okay. Thanks. And then just a tactical question. You guys called out in the prepared comments a couple of times to strengthen the transplant diagnostics business. So wondering, Should we expect that kind of pacing to continue through the balance of this year?
How do you feel about the prospects over the next 12 months, just given that you have The asset under your control for full 12 months now, do you think you can maybe accelerate the growth from here? Just trying to gauge expectations for that specific Yes. Thanks.
As you look, we had assumed kind of mid single digit growth when we announced the acquisition. It's been growing in the high single digits. We think the business has good momentum. It will start to show up in our organic growth. It's not a huge business, but it's a nice business that The integration has gone incredibly smoothly.
The team has done a great job. So we're going to we'll try to maximize the top line So we can get out of it and certainly that's embedded in our guidance as we set that up for 2014. Thanks so much. Thanks.
Thank you. Our next question is from Paul Knight of Janney Capital Markets. You may begin.
Hi. When you look at the Analytical Instruments business, did we go into a double dip? Or what happened in 3Q? The industrial market, Is it delay or what do you think the color is there?
Industrial, I don't think it changed much. Basically, we just haven't seen an upswing, right? And when you get into all of the details, basically, it's The core industrial, the commodity material markets continue to be very soft. That's where we have our largest mix of that part of the business. Applied markets, Clearly, there's some nice pockets of strength.
So I didn't really see a big change in the Q3, Paul.
And that's what spectroscopy gas chromatography those kind of things?
Yes. I mean you have your chemical analysis instruments, your process instruments, Molecular spectroscopy, those types of instruments would be most affected. Portable instruments would be another one that would be affected by the economic downturn.
And then Mark, these PMI readings have been pretty strong at least until we don't know what this month is. But PMI has been good. I mean, If PMI drives better sales, what do you think the lag factor is? Is it should it show up this quarter or should it show up next Quarter, what's your experience?
Usually 2 quarters lag is typically what we see in our business. So we're definitely paying attention to that. That's clearly positive news, but it hasn't sustained yet in terms of Orders momentum at this point.
And last, were you surprised by pharma and biotech in the quarter?
No, it's been incredibly consistent with high single digit growth now for quite a number of quarters. So team is doing a good job of executing.
Great. Thank you.
Thanks, Paul.
Thank you. Our next question is from Dan Arias of UBS. You may begin.
Good Good morning, guys. Thanks. Mark, maybe another on the industrial markets. How do you feel about where those customers are broadly in their product cycle? Do you feel like if you remove the macro factors From the purchasing decision there, you're sort of left with a decent portion of that segment that's maybe due for a tech upgrade?
Yes. What I would say is that our product portfolio ourselves internally is very strong. We've been launching a number of new products. So as customers release funds, we think we're well positioned to capture market share. I think basically Customers are being cautious right now.
And when we get to a period of a little bit more optimism in the customer base, I think we're very well positioned to see
Okay. And then maybe one on Diagnostics. What are your thoughts at this point on Penetrating the U. S. Physician base with the body of products that do sell well up in Europe, you feel like Over the near term and the midterm, there's the ability to convert a portion of that market that's currently doing prick testing Sort of inaniquity a way of going about things?
Yes. I would say that we're expecting to see Us building momentum and driving penetration in the U. S. For our allergy products, it's we do a lot of Doctor and doctor visits to explain the technology and do education. And as that education becomes stronger and stronger, We think that we're well positioned to have good growth.
Okay. Thanks. That's all I have.
Thank you. Our next question is from Amit Bala of Citigroup. You may begin.
Good morning.
Good morning. Question on Lab Products Services. The revenue side has been quite strong, but what kind of struck me was the Operating margin of the business at 14.9%. I've looked back last 2 years or so and This is probably the highest it's been. You cited productivity as kind of the reason for the op margin expansion.
I was wondering if you could go Some detail about how much headway you still have on off margin expansion in that business?
When you say headway, you mean headroom or Headroom, Yes. Well, I think obviously in the Laboratory Products and Services segment, it's a little more challenging to get Margin expansion just because of the mix of self manufactured versus sourced products. So this is a really strong performance for that But we still have room to expand margins. I would say on an annual basis if we're thinking 50 to 100 basis points at the company level, you're probably in the 20 to 40 basis point range here in this segment is what you could expect as long as we get Mid single digit kind of organic growth.
Okay. Thanks. And then second just in Analytical Technologies. I was
Production in the quarter, not as strong as the first half, but the pipeline looks incredibly strong. I would say that it's growing well, well above the company average and I feel like we're well positioned.
Anything Mark that drove the Less than strong performance there versus the first half? Any more color you can give?
It was actually strong performance, but we've been growing double digits for a while and this was more in the mid to high single digits. Yes, I don't think there's anything much to it. I looked at the pipeline and looks like the next few quarters look strong.
Okay. Thanks, Mark.
Thank you. Our next question is from Jeff Elliott of Robert W. Baird, you may begin.
Yes. Good morning. Thanks for the question. I was wondering if you could give some more color on Brazil. You said grew over 20% In that market, can you talk about what's driving the growth and how sustainable it is?
We've had a few good quarters now in a row in Brazil. Our diagnostic business in is driving good growth in that market. So there had been some changes in the Reimbursement and regulatory environment that had put some pressures on that business over the past year or so and that's Clearly subsided. That's been probably the biggest driver.
Thanks. And then on the clinical trials logistics business, Can you talk about maybe what's driving the growth there? How much of that is the shift towards outsourcing versus you Adding additional services and can you update us on the competitive landscape in that market?
Yes. So it's really about the outsourcing trend is what's driving it. And what Customers are doing is most of the biopharma customers use us in some fashion, but it's the question of how penetrated we are. And for the most part, we have lots of opportunity to increase our share of wallet, if you will. So it's less about new services than it is going from being Surplus capacity to being a portion of capacity to being the sole source provider of that capacity and we're seeing more and more customers Move towards using us as the sole or primary provider and that's a great opportunity.
And we think we got lots and lots of legs in that strategy in terms of driving
Thank you.
Shannon, we have time for just one more.
Thank you. Our final question is from Steve Willoughby of Cleveland Research, you may begin.
Thanks for taking my questions. Two things for you. 1, I was wondering if you Just comment on how you're thinking about the 3 different business units and their growth in the 4th quarter As compared to their growth this past quarter. And then secondly, just do you have any early read on what the flu season is looking like? And any thoughts on the impact to the company from that?
So in terms of the 3 segments, I would say that the 4th quarter will be pretty similar to what we saw in the 1st 9 months of the year. And Pete, do you want to comment quickly
on flu? Well, in terms of flu, we definitely have a tough comparison in Q4. We had a very strong flu season in 2012 and basically what's assumed in our guidance right now is that we have kind of an average flu season. We don't have Any good insight yet on the strength of the season?
Okay. Thanks very much.
Thanks, Steve. So let me wrap it up. As we look sitting here in October, we have 3 strong quarters behind us and we're on track to achieve our growth goals for the year. Life Technology integration planning is progressing very well. I'm really confident that we'll be in excellent position going into 20 I'm looking forward to updating you early in the year.
Thanks again for your time this morning and certainly for your support of Thermo Fisher Scientific. Thanks everyone.
Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful