Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2012 Third Quarter Earnings Conference Call. My name is Mansi, and I will be your operator for today. Session towards the end of this conference. As a reminder, this call is being recorded for replay purposes. I would now like to introduce our moderator for the call, Mr.
Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may now begin.
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 Archived on the Investors section of our website thermofisher.com under the heading Webcasts and Presentations until November 23, 2012. A copy of the press release of our 2012 Q3 earnings and future expectations is available on our website under the heading Financial Results.
So before we begin, I'll cover the brief briefly just the Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in the company's Quarterly report on Form 10 Q for the quarter ended June 30, 2012 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 views as of any date subsequent to today.
Also during the call, we'll be referring to certain financial measures not prepared in accordance with generally accepted accounting principles A reconciliation of these non GAAP financial measures to the most directly comparable GAAP measures is available in the press with that, I'll now turn
the call over to Mark. Thanks, Ken, and good morning, everyone. Thank you for joining us today on our Q3 earnings call. I'm very pleased to report that we continued our growth momentum from the first half of the year into Q3. Our teams executed well to deliver record 3rd quarter revenue and EPS by continuing to focus on our initiatives to grow the business and gain market share.
Our strong results so far this year positions us to meet our goals for 2012 and give us a solid foundation as we move into 2013. Later in the call, I'll share a few thoughts on our updated guidance as we close out the year. But first, let me focus on the quarter, starting with our financial highlights, Then moving on to what we saw in our end markets and ending with some great examples of how we're positioning the company for continued growth and success. So first the financials. As I mentioned, we delivered record 3rd quarter adjusted EPS with an 11% increase over 2011.
Our revenue, another record performance, grew by 5% over last year. Finally, our adjusted operating income also increased 5% in Q3. 3. Our results highlight how well we've continued to navigate the economic environment. Our strong top line performance, solid operational discipline and effective capital deployment have resulted in adjusted EPS growth of The dynamics of our end markets have played out as we expected.
We planned accordingly. We executed well and we've set ourselves up to deliver a very strong year. Let's talk about our growth for a minute and where it's coming from and I'll share a few observations. First, our value proposition is really making a difference for our customers and puts us in a unique position in our industry. We have innovative high impact products through our Thermo Scientific brand.
We have a leading channel to market through Fisher Scientific And we have the most comprehensive service capabilities through Unity Lab Services. This differentiated offering is what we bring to our customers I recently visited several of our largest European accounts, serving markets ranging from pharma to Industrial. It was clear from my discussions that they appreciate the value we provide as a strategic partner and they're looking to us to help them achieve their goals in the current environment. 2nd, our global presence is a key advantage In terms of market penetration and cost efficiency, as you know, we're expanding our presence in emerging markets and we had another strong quarter in the APAC region. China came in with better than 20% growth again this quarter.
The team there is doing fantastic work and we plan to have the grand opening for our new life sciences consumable plant in Suzhou next month. I'll mention here that we had excellent growth in the quarter in South Korea And good growth in India as well. In fact, I just came back from visiting our operations in Mumbai. For us, India is about a $2,000,000,000 addressable market. We're very excited about the long term opportunities that we have there in industries such as pharmaceutical, healthcare, food safety and the environment.
The last point I want to make about growth is that we never stop innovating. Our innovation pipeline is full and we're The new analytical instrument products we've recently launched are selling well. The Q Exactive has turned out to be a game changing instrument for mass spectrometry customers in both research and applied markets. We also have excellent momentum with our share gain initiatives in gas chromatography, where we are leveraging the leading technologies of both Thermo Fisher and Dionix. Both our TRACE 1300 GC And our TSQ-eight thousand Triple Quad GCMS systems launched earlier this year are selling extremely well, especially in applied markets such as food safety and environmental testing.
I'll highlight some of our more recent launches within Specialty Diagnostics in a minute. While we have a lot of initiatives in place to position the company for growth, we are also being prudent and carefully managing our costs as we always do. Through our productivity levers, including our PPI business system, sourcing programs and global footprint optimization, We delivered 70 basis points of adjusted operating margin expansion through the 1st 9 months of the year. Looking ahead, We know the potential for sequestration is around the corner. We've been planning for it.
We'll closely monitor the market environment and we'll take additional cost actions as necessary. Turning to our 4 primary end markets, as I mentioned at the beginning of my comments, the dynamics played out And we are continuing to gain share across a broad base of customers. Our value proposition is really resonating And we're helping our pharma and biotech customers meet their goals for both innovation and productivity. Once again, we grew in the high single digits with these customers and saw continued strength in our bioprocess production business as well as clinical trials logistics. We had a good quarter in Healthcare and Diagnostics, which grew in the mid single digits.
We have great momentum here and had strong sales across a number of our specialty diagnostic businesses, including biomarkers. We've significantly enhanced our specialty diagnostics portfolio over the past year and we're clearly benefiting from being able to offer these customers a more comprehensive menu of products. We're also leveraging our extensive Asia Pacific presence to serve growing healthcare needs in that region and accelerate growth of our Specialty Diagnostic businesses. Looking at our other 2 key end markets, Our comparisons with the year ago quarter were more of a story here. In academic and government end markets conditions were basically the same As what we've been seeing all year, so our view here hasn't changed.
Our customers are dealing with the weaker funding environment and spending Grew in the low single digits for the quarter. Last, in Industrial and Applied Markets, we declined in the low single digits in Q3. This is where we had our toughest comparison having grown in the mid teens in Q3 last year. Some of our Customers are taking longer to make decisions in the current environment. We did see pockets of strength however.
For example, our air quality monitors are selling well, Let me cover a few of our business highlights for the quarter. These are good examples of some of the initiatives we're pursuing to better serve our customers and generate growth. First, you know we're committed to innovation and I already mentioned that our key thermo scientific products introduced this year in analytical technologies are doing quite well. This quarter, we launched new products in our specialty diagnostics portfolio at the American Association For Clinical Chemistry, including new immunoassays, Analyzers and related chemistry controls. This reinforces that we're focused on helping our customers in clinical laboratories improve both And patient care.
For example, our new QMS tacrolimus immunoassay, which is now available in Europe, is used to monitor the most commonly prescribed immunosuppressant drug for transplant patients to prevent organ rejection. This is a liquid ready to use assay with barcoded reagents that runs on our INDiGO benchtop analyzer. We recently upgraded this successful analyzer platform to launch a new generation instrument called INDiGO Plus in the U. S. This new analyzer is designed to deliver higher throughput for specialty testing in the clinical lab, including drugs of abuse screening and monitoring of therapeutic drugs.
In immunodiagnostics, Our offering for the diagnosis and monitoring of allergies, asthma and autoimmune diseases. Our EYLEA rheumatoid factor assays give clinicians a reliable and simple tool for the diagnosis of arthritis. And our immunocap triptase assays provides an indication of systemic mast cell disease. Both of these assays are clear for sale in the U. S.
Let me turn a minute to our Biosciences which as you know has been doing well all year, especially in bioprocess production for the biotech industry. We also have a great opportunity here for our molecular biology portfolio, which we haven't talked about as much. We had some developments here in the quarter that speak to our initiatives to expand our offering and better serve our customers on a global scale. You may remember that we acquired 2 businesses a couple of years ago, Fermentis and Finzymes, to increase our capabilities in the high growth market for PCR Fermentis had a significant presence in Vilnius, Lithuania, which is known for its outstanding academic institutions and a highly skilled Last month, we established a center of excellence for molecular biology in Vilnius. The new facility provides products for our life sciences customers globally, who are accelerating their work in PCR based testing and DNA research develop treatments for disease.
In addition to world class reagent production, the site has an outstanding R and D center that's focused on the development of new products for all Aspects of Molecular Biology. The new center not only increases our depth of capabilities to support our global customer base, but also strengthens our presence in emerging high growth markets within Eastern Europe. Let me now turn to capital deployment, an important And give you a quick update on our activities in the quarter. First, as you know, in September, we closed our acquisition of One Lambda, which is now part of our Specialty Diagnostics segment. I participated in our day 1 activities at the headquarters in California and it was great to And it's a nice complement to our immunosuppressant assays for monitoring therapeutic drugs.
We're very excited about this combination and the opportunities it offers to prevent donor rejection and ultimately improve the lives of transplant patients around the world. I'll make one last comment to highlight the effectiveness of our capital deployment strategy. When you look back, we've reported excellent free cash flow so far this year, generating about $1,200,000,000 in the 1st 9 months. This has allowed us to invest to expand our offering for our customers, such as our recent acquisitions of Dow and Ingalls and One Lambda. And it's allowed us to return about $900,000,000 of capital to our shareholders and stock buybacks and dividends through the Q3 of this year.
Before I turn it over to Pete, I'll make some comments about our full year guidance. As you saw in our press release, we're raising both our revenue and adjusted EPS guidance for 2012. We have a strong 9 months behind us And we're also factoring in the close of One Lambda and slightly improved foreign exchange rates. We now expect to generate revenue of 12.32 to $12,401,000,000 in 2012, which leads to 7% revenue growth year over year. In terms of our adjusted EPS, we're raising our guidance to a new range of $4.81 to 4.88 which leads to 16% to 17% adjusted EPS growth over 2011.
So let me summarize the key takeaways from Q3. It was a great quarter. We executed well and we're seeing the results of our growth initiatives and our strong revenue and earnings performance. We continue to keep a close eye on our end markets and are prepared to take additional actions if necessary to ensure that we successfully navigate the economic environment. We were able to raise our guidance throughout the year in a tough environment and are confident that we'll achieve our goals
I'll start with an overview of the total company's financial performance and then provide some color on each of our 3 segments before moving on to our updated guidance. To reinforce what Mark said, in Q3, we delivered another quarter of strong top and bottom line results, which led to an 11% increase in adjusted EPS to a 3rd quarter record of 1.19 GAAP EPS in Q3 was $0.79 up 14% from $0.69 in the prior year's quarter. Starting with the top line, total revenue increased 5% year over year. On a pro form a basis, as if Fadia were owned for the entire Q3 in includes 1% growth from acquisitions other than Fadia, which was more than offset by a 3% headwind from foreign currency translation. 2 things to note.
1, the components of the pro form a change in revenue do not sum due to rounding. And 2, Q3 is the last quarter we'll be reporting revenue on a pro form a basis, given we passed the 1 year anniversary of the Fadia acquisition in Q3. In terms of bookings, we continue to strengthen our backlog with bookings slightly exceeding revenue in the quarter. Looking at revenue by geography, we saw growth across all regions. North America and Rest of World Turning to adjusted operating income, we delivered a good quarter.
Q3 adjusted operating income was up 5% And adjusted operating margin was 18.7 percent, flat versus prior year. This quarter, we had very robust contributions from our productivity and cost actions. We continue to benefit from successfully executing on the $100,000,000 restructuring program that we initiated last year, We're still on track to achieve about $50,000,000 of benefit this year and $15,000,000 of incremental carryover benefit in 2013 from that restructuring program. We've also continued to evaluate additional restructuring actions given the uncertain economic environment and have initiated another $75,000,000 of actions throughout this year with the majority of the benefits coming in 2013. In total, we realized about $16,000,000 of benefit from our restructuring actions in Q3.
Despite all these actions and strong growth in the quarter, our margin expansion was lower than you might expect, primarily as a result of 2 factors. First, we experienced higher than normal transactional FX losses this year compared with gains in the prior year's quarter, which resulted in over 40 basis points of headwind from FX. 2nd, we made incremental strategic Investments this quarter of about 25 basis points above our run rate, primarily in emerging markets to continue the growth momentum we are seeing there, as well as in information technology to improve our efficiency and customer service. Moving on to the details of the P and L. Total company adjusted gross margin came in at 44% in Q3, flat versus the prior year.
As I mentioned, we delivered very strong productivity this and third, our PPI business system, where employees reduce waste and improve efficiency. These benefits were offset by foreign exchange Adjusted SG and A in Q3 was 22.3 percent of revenue, down 10 basis points from the 2011 quarter. And finally, R and D expense came in at 3% of revenues, which was flat year over year. As a reminder, R and D as a percent of our manufacturing revenue is about 5.5%. Below the line, net interest expense was $54,000,000 which was $12,000,000 above Q3 last year as a result of the debt we issued to fund the Fadia and One Lambda acquisitions.
Our adjusted tax rate in the quarter was 16.9%, down slightly from Q2 and down 160 basis points from last year, primarily as a result of acquisition tax synergies and our ongoing tax planning efforts. As you saw in our press release, We had another significant quarter in terms of returning capital to our shareholders. During Q3, we spent $400,000,000 to buy back 7,100,000 shares of our stock. And through the 1st 9 months of this year, we've deployed $800,000,000 of cash to buy back $15,100,000 of our shares and distributed another $95,000,000 in dividends. Average diluted shares were 365,000,000 in the quarter, down $4,000,000 from Q2 and down $17,000,000 or 5% from last year, reflecting the benefit of our 2011 and 2012 share buyback programs.
Turning to cash flow and the balance sheet. We had excellent cash flow this quarter. Year to date cash flow from continuing operations was $1,401,000,000 and free cash flow was $1,200,000,000 after deducting net capital expenditures of 199,000,000 Year to date free cash flow was up 39% year over year, primarily as a result of higher operating income, lower cash taxes and improved working capital, partially offset by higher interest expense. So we continue to execute very well here. We ended the quarter with about $835,000,000 in cash and investments, up $100,000,000 from Q2.
Our total debt at the end of Q3 was $7,470,000,000 up $940,000,000 from Q2 as a result of our $1,300,000,000 debt offering in August, partially offset by paying down $350,000,000 of our outstanding commercial paper balance. So with that, let me turn to this quarter's performance by each of our 3 business segments. Starting with Analytical Technologies, total revenue grew 1% And organic revenue increased 3%. This quarter, we saw strong growth in our businesses serving bioprocess production as well as in a number of our businesses serving Applied Markets, such as our HPLC products. This was partially offset by softness in some of our industrial markets.
Adjusted operating income in Analytical Technologies decreased 2% and adjusted operating margin was 18.9%, down 60 basis points. In this segment, we had strong contribution from our productivity actions and good pull through on organic growth, but this was more than offset by the impact of targeted strategic investments and foreign exchange. Turning to the Specialty Diagnostics segment, total revenue grew 15%. On a pro form a basis, assuming Fadia were owned for the entire Q3 of the prior year, total revenue increased 2% and organic revenue grew 5%. We continue to see strong growth in our Clinical Diagnostics business, including biomarkers.
And in general, we delivered good growth across the segment. Adjusted operating income in the segment increased 13% with adjusted operating margin at 24.1%, down 30 basis points from the prior year, primarily as a result of foreign exchange. In the Laboratory Products and Services segment, total revenue grew 5% and organic revenue also increased by 5%. In the quarter, we had solid growth in laboratory consumables and our clinical trials logistics business continued to deliver strong results. This segment is performing well with 5% organic growth so far this year, partially as a result of strength in our channel.
Adjusted operating income in Laboratory Products and Services grew 7% and adjusted operating margin was 14.2%, up 30 basis points driven by solid cost Now moving on to our guidance. As you saw in our press release, we're raising and tightening our 2012 guidance To bridge from the midpoint of our previous revenue guidance, the addition of One Lambda added about 50,000,000 Foreign currency translation increased revenues by about $85,000,000 and we added $25,000,000 of organic growth. This leads to a new revenue guidance range of $12,320,000,000 to $12,401,000,000 which represents reported growth of about 7% Compared to our prior year revenue of $11,560,000,000 On a pro form a basis, as if Dionix and Fadia were owned for all of the prior The midpoint of our organic growth guidance remains at about 3%, but is slightly higher than our previous guidance. In terms of FX, the estimated full year negative impact on revenue is now $280,000,000 versus the $365,000,000 we included in our previous guidance. So So for the full year, we're now assuming a 2% year over year headwind on reported revenue and 3% on adjusted EPS.
We're estimating that completed acquisitions other than Dionys and Fadia will contribute approximately 1% to our expected growth in 2012. And as usual, we're using recent FX rates and our guidance does not include any future acquisitions or divestitures. In terms of our full year 2012 adjusted EPS, we are again raising guidance this quarter. With 3 strong quarters of the year behind us and reflecting the impact of the revenue factors I just described, we're raising both the high and low ends of our adjusted EPS guidance as well as tightening the range, resulting in a $0.05 increase to a new midpoint of $4.84 Our revised adjusted EPS guidance range is $4.81 to $4.88 which represents 16% to 17% growth over 2011. To once again bridge from the midpoint of our previous adjusted EPS guidance, One Lambda adds about 0 point 0 $3 FX adds about $0.01 and our improved operational performance including the tax rate adds another cent.
As a reminder, in our previous guidance, we had already included the favorable impact of our recent $500,000,000 share buyback, as well as the unfavorable impact of the interest expense relating to our $1,300,000,000 debt offering. In terms of adjusted operating margin, we delivered 70 basis points of margin expansion through the 1st 9 months of the year and we expect to deliver about 70 basis points for the full year. Below the line, we're expecting our net interest expense to be up about $70,000,000 over last year, unchanged from our previous guidance. As a reminder, we have $350,000,000 of senior notes coming due at year end, which we intend to pay down. We expect our adjusted income tax rate to be in the range of 17.0% to 17.5% and we're estimating our full year average diluted share count to be in the range of $364,000,000 to $368,000,000 down 4% to 5% from last year and consistent with our previous guidance.
In terms of return of capital, we started Q4 with $350,000,000 remaining on our existing share buyback authorization and our guidance assumes that we'll spend the entire $350,000,000 through its expiration at the end of this year. We're also assuming that we'll pay another $47,000,000 in dividends in Q4, consistent with our current rate. Finally, we expect capital expenditures to be in the range of $290,000,000 to $300,000,000 for the year. In interpreting our guidance ranges, as I've stated previously, we should focus on the midpoint as our most likely view of how we see 2012 playing out. So before we turn to Q and A, I'd like to say that I'm very pleased with how we performed in the 1st 3 quarters of the year And I'm looking forward to a strong finish to 2012.
Now I'll turn the call over to Q and A. Ken?
Thanks, Pete. Operator, we're ready to open it up for questions.
Thank In order to allow everyone in the queue an opportunity to ask the Thermo Fisher management team, I would like to ask you We have a first question in the queue from the line of John Groberg from Macquarie. Please go ahead.
Hey, good morning. Thanks a million for the question and congratulations again on a solid quarter. So do you think, Mark, you could maybe there's a lot of interest obviously and focus given throughout this earnings season on just kind of Sequential trends and specifically I think kind of capital equipment weakness going into the kind of ending the quarter and going into the 4th quarter. So Can you maybe just talk about kind of what you saw and what you're seeing there?
Yes. From the How both Q3 played out and how we thought about our guidance at the beginning of Q4, Remarkably consistent activity throughout the quarter and going into the beginning of this quarter. We feel good about the guidance that we outlined.
So nothing of note in terms of things that were I know you said industrial was maybe a little bit weaker in But there's nothing major of note there that you see changing in your markets?
From the way I thought about that question was more about what do the 13 weeks look like. Looking forward, right, which is as We're sitting here today on the end markets. Our basic assumptions are industrial and applied markets. While we continue to see good pockets of strength in environmental and food safety, as we look to Q4, our guidance is reflecting a softening of the industrial end markets. And obviously, we have another difficult comparison.
So we're assuming that the end market in industrial gets it's going to get a little bit
Okay. And then if I can just follow-up specifically on lab products and services. And maybe Mark, maybe you guys over the last few years, it's been a business that Has a good year and then kind of doesn't have as good of a year, then has a good year and maybe not as good of a year. And looks like this year it's shaping out to Stabilize the margins. And can you is there something sustainable you think happening there?
Or maybe just talk a little bit about that business?
Yes. Our Lab Products and Services business is basically Driving productivity for our customers. And as the economic environment came out of the And we are making a huge difference for our customers. So it doesn't mean that every single Quarter is going to be perfect smooth growth, but the reality is that the business is doing well and it's contributing to our earnings growth and it's contributing to our Top line growth as well. So we're excited about the prospects of that business.
Great. Thanks, Milan.
Thanks, Sean.
Thank you for your question Mr. Groberg. We have a next question from the line of John Wood from Jefferies. Please go ahead.
Hey, thanks a lot. Good morning.
Good morning.
Hey, so Mark, just I know it's early, but if we kind of look out to 2013, Is it reasonable to assume kind of a normal year on capital redeployment in terms of percentage of free cash flow back to I mean, obviously, you're tracking well ahead of that with something like 75% returned year to date. But I'd love to hear kind of The way you're thinking big picture about redeployment in 2013?
John, as we think about 2013, we're going to give our guidance in late January when we do our Q4 earnings call. So we'll come out with our plans for capital deployment. But clearly, we obviously have a dividend in place and We're likely to return some portion of our cash flow to through buybacks. I mean that's consistent with the modeling that Pete laid out in May. But we have more debt on the balance sheet, so we'll probably strengthen the balance sheet by repaying some debt.
And then obviously, we'll be opportunistic on terrific acquisitions.
Okay, great. My follow-up is for Pete. On the restructuring program this year, the $75,000,000 what do you expect to be the payout Or payback in terms of savings of that program in 2013?
So it's probably something in the range of 45,000,000 Which will help. So kind of similar to what we're getting this year on a year over year basis? So we're going to get same as the $100,000,000 we put in place Sure. We'll get a portion of it this year, most of it next year and then a little bit of carryover into 2014.
Got it. Thanks a lot.
Thanks, John.
Thank you. We have our next question from the line of Dan Leonard from Leerink and Swan. Please go ahead.
Thank you. For the Q4, can you maybe comment on your organic growth outlook for the Q4? It seems like it might be negative. And I'm wondering Is there anything there besides the softer industrial assumption? So what's implied in
the guidance is about 1% organic growth for the 4th quarter.
Okay. That's
the midpoint.
And then on the gross margin or I guess on the operating margin in Specialty Diagnostics, it's oscillated quite a bit year to date with the Q3 being the low point. Can you give a little more color on what's driving the oscillation in that line?
So in the Q4, as I mentioned in my comments, the margin decline year over year was really impacted by foreign exchange. In Specialty Diagnostics, it was a 100 basis point headwind. So when I look down at all the other factors that affect margins year over year, That's the prime factor. Everything else was pretty much in line. We had good pull through on organic growth.
We always have inflation of some level, which offsets some of our productivity, but the big factor was really foreign exchange.
But I was more speaking to the prior quarters, it was $25,000,000 and $27,200,000,000 then $24,100,000 I'm just not sure where the trend line might
So it's probably best to look at the more recent quarters. Okay. We've got transplant diagnostics coming in Q4, so we'll probably see a little uptick as a result of that.
Okay. Thank you.
Thanks, Tim.
Thank you. Next question is from the line of Ross Muken from ISI Group. Please go ahead.
Good morning, Rob.
Good morning, guys. So you finally gotten into a pretty good groove here In terms of outperforming the peers on growth, execution, etcetera, I mean, if you sort of go back to Q3 of last Which was obviously a challenging period for you guys and you think about sort of in the organization how you've approached things Differently and how you've approached The Street differently. I mean walk us through sort of the transition path from what was a tough And the sort of lessons learned and sort of what how you sort of reflected that in the business for the last couple of quarters where you've had Obviously, much better execution and really done well versus the peers in the broader market.
So Ross, I think the way that we think about it here is our job is to do a great job of serving our customers, Do a great job of communicating how we're performing and what our expectations are and manage the company well. And Q3 was a disappointment to our shareholder base and it wasn't something it wasn't our best quarter. And When I think about it, for all of us, it was a reenergizing moment, right? I mean, it was one of those things where, Well, if you look at it versus Q2 or Q1, it really wasn't that different, but it disappointed. And therefore, we used it to reenergize our 39,000 colleagues.
We Learn from it. And if I think about the last four quarters, we've got a lot of confidence, I mean, across the company. Our customers are excited to working with us. I'm spending a huge amount of time with customers as is the entire leadership team. And Pete's out there visiting CFOs and heads of procurement at organizations.
I mean, We're having fun, right? And we don't make excuses. We deliver good results and we don't get too high. We're not sitting here doing victory It's a tough world out there, but we feel good about our prospects. We feel great about our market position.
And our job is to communicate how we think
That makes total sense. I mean, obviously, as you're kind of going into the 4th quarter, You talked about some of the puts and takes and obviously industrial is a key piece. I mean as you were thinking about the fiscal cliff, the sequester, as you're talking about that with customers, There's a lot of questions, right, both on demand, on taxes, etcetera. I mean, how do you sort of contingency plan for that? I mean, you've left a wider range maybe typical by a penny or so for the Q4.
But how do you sort of put in place at least whether it's on the cost side, Maybe it's on what you do with buyback etcetera measures to make sure you feel comfortable about sort of your bottom line execution is obviously it's harder to know What pushes and pulls will happen over the next couple of months?
Yes. I think that, first of all, we put on the top line to reflect that uncertainty, right, with a 1% organic growth at the midpoint. And the basic underlying assumptions is that we've got good momentum in Pharma and Biotech. We have good position with Healthcare and Diagnostics. So not big changes There, industrial will soften and we're assuming that academic and government because the comp is harder is going Again, be more muted in terms of contribution to our growth in the quarter.
So that's the assumption we made. We've been managing our costs aggressively to position ourselves for this environment. And that was what Pete Refer to with the $75,000,000 of additional work, we chose not to do it in a program, but actually just do the work The range is a little wider as Pete articulated and we think it's a reasonable assumption given the uncertainty in the end markets.
Great. Appreciate the time and congrats again. It was great execution.
Thank you, Ross.
Thank you. We have a next question in the queue from the line of Daniel Brennan from Morgan Stanley. Please go ahead.
Hi, guys. Thanks for taking my call.
Good morning. Sorry
Mark, you discussed in your prepared remarks how the company continues to take share. Maybe can you just highlight the key businesses where this is occurring and where you see the biggest opportunities Going forward for continued share gains?
Yes. So we only have maybe 20 minutes left, so I can't use it all up on This one, Dan. No, I'm joking. But the areas of highlights is, if you look at it in the quarter, Life Sciences Mass Spec did really well. Bioprocess Production did really well.
HPLC did really well. GC did exceptionally well. So that gives you a flavor
of the instrument portion.
Our channel
business is doing well in the marketplace. So I Our channel business is doing well in the marketplace, so I feel good about that. More of our biopharma customers are Outsourcing activities from in house to us. So, its share of wallet is increasing. We don't have that many competitors there, but we're taking more of that business that used to be done in house.
So that gives you a flavor for Some of the areas where we feel like we're gaining market share.
And are you seeing related to that, I mean, some of that is obviously innovation driven, but Given the environment we're in and your kind of strategy to kind of get closer to your customers and deliver more, how much is that really playing into it now? Whether it be you're able to offer Price or you can just offer a spectrum of services that competitors can't. Can you kind of distinguish between that?
Yes. I mean it's not really price driven. When you look at the on the technology side, that's clearly just great product, right? So that we talked about at the Analyst Day. We talked about it At some of the conference earlier in the year, we just have a sweet spot in our innovation launches.
So that's driving that portion. But the environment, More of our customers are just spending disproportionate time with us. I mean that's the reality, which is they're thinking about how do they make their innovation goals, how do they make their productivity goals. And this industry is so fragmented, we are so much larger than the other players that it's too much work to go to the smaller players. Why do you want to have 7 meetings when you can meet with 1 company and say, okay, what do you need to accomplish?
And then we just put the playbook out and say, okay, here's how you're going to make your productivity goals. That's resonating incredibly well with the customer base.
Great. Thanks a lot. Congratulations.
Thank you.
Okay. We have a next
Hey, Mark. The VWR and Fisher Businesses 10, 15 years ago never grew even in a good year 5%. What's Behind 5% product growth at that division?
So in lab products and services, you have Our channel business, you have our lab consumables, lab equipment and very strong growth from our biopharma services business, which is our outsourcing business. So it's a blend of all of those businesses. And those businesses generally are serving the sweet spot of customers driving for productivity and particularly our biopharma services business as well as our channel business is really helping our customers there. So that's why you're seeing Nice strong sustainable growth.
Okay. Thank you.
You're welcome.
Thank you. We have a next question from the line of Derek de Bruin from of America, please go ahead.
Hi, good morning.
Good morning, Derek.
So Couple of questions that are sort of boring. How are you thinking about the med device tax next year? Do you guys get impacted by that dramatically?
So, yes, the answer is not dramatically, but yes, we are affected by it. And it's about $25,000,000 of cost That will be picking up in our Specialty Diagnostics business as a result of the regulation that goes into effect January 1.
Great. Since you mentioned formatus in the PCR markets, what are you seeing in the dynamics of that market Now that some of the QPCR patents have expired, what's happening with pricing in the space and the competitive landscape?
We are a small player. So our prospects there we think are good because we're leveraging our huge commercial reach. When I look at our portfolio, we have very good products. We have a huge sales force. And we are manufacturing in a Very, very low cost location with an incredibly talented workforce.
My last trip to Lithuania is just We have a huge number of PhDs, huge number of folks with master's degrees and Great relationship with the local university, so we can really get terrific employees. So we like our competitive position. For us, it's one of the very few businesses we have where we're relatively niche player and we're building that out to gain share. Great.
I'll get back in the queue. Thanks.
Thanks, Tarek.
Thank you. Next question is from the line of Amit Bala from Assiti, please go ahead.
Hi, everyone. Wanted to just ask about Fadia and Dionix Their contribution in the quarter, they have heavy presence in Europe. And I know I think last quarter the businesses were dilutive. So can you talk a little bit about the performance this quarter?
Yes. So Dionix is 100% integrated into the business at this point. It's well over a year past the acquisition and Fadia is at the anniversary as well. But the organic growth of the company would be the same with or without Those businesses, obviously only Fadia was pro form a. So we would have delivered the 4% growth either way.
Could you be a little more specific on just how Fadia is doing the U. S. Versus Europe?
Sure. Absolutely. So in terms of Fadia, North America It's doing extremely well with good growth. We also have launched some new products that will position the business for bright growth. We're still seeing significant Softness in Southern Europe, which we highlighted last quarter.
So, Fadia in aggregate is growing a little bit less than especially the Diagnostics
Okay. And then on the mass spec side, you talked about gaining share there. Can you just talk about what your view is of Market growth and what are the types of accounts and products you're gaining share from within mass spec? Thanks.
Thanks for the question, Alan. The Q Executive is doing So that's for both applied markets as well as traditional life sciences and it's at the high end of that market Segment, so we clearly are seeing very strong momentum with the QX Active and Life Sciences Mass Spec.
And how fast do
you think the market's That's it's probably growing mid single digits I would think, but my take is that we've got a lot of customer
Thanks, Mark.
You're welcome.
Thank you. We have a next question from the line of Doug Henkel from Cowen and Company. Please go ahead.
Ken, are you there? Yes. Can you
guys hear me okay?
Yes.
Okay. Sorry about that. Pete, I think this first question is for you. A solid sequential increase in Analytical Technology operating margins, but I think it was about a 60 basis point year over year decline. Was this as expected?
I guess specifically what I want to get at is there were no changes Pricing dynamics correct. It just sounds like this was FX and the fact that some of the investments you highlighted in your prepared Mark, had a disproportionate impact on this business. Is that correct?
Yes. Really, really same story as I mentioned on Specialty Diagnostics. When I look across the different elements of the year over year margin bridge and how that's trended over the last few quarters, price is basically the same number. Productivity is actually stronger than normal. It's way on the high end.
Investments were higher and FX hit us by about 80 basis points in that segment.
Okay. And then I apologize if I missed this, but One Lambda, what was the contribution in Q3? And can you remind us what your expectation for One Lambda are For year 1, assuming those haven't changed?
Yes. So Doug, in terms of The it was de minimis in Q3. It closed with less than 2 weeks to go or so in the quarter. So it had no impact there or minimal impact.
Then the 1st year accretion in 2013, we guided to $0.09 to 0 point 11 dollars
Okay.
So that does that change because the deal closed a little early? Or should we still be thinking about that for 2013.
Yes. Probably to be honest, I haven't done the year over year compare, but there's we probably lose A little bit on the year over year accretion as a result of getting a little bit more this year.
It shouldn't be a particularly meaningful difference.
No, no. Okay. Thanks. That's all very helpful.
Thank you for your questions. We have a next question in the queue from the line of Jeff Elliott from Robert Baird. Please go Ed.
Yes. Thanks for the question and congrats on the quarter.
Thank you.
I'm going
to try to ask the 2013 question a little bit differently. So I think earlier this year you commented that you saw a path to double digit earnings growth kind of with or without sequestration. And I'm just kind of curious, has the environment changed enough that you're going to back off those earnings comments? Or can you still stand by that double digit growth range?
So Jeff, thanks for the question. So we're right in the midst of our detailed 2013 planning process right now. And it's obviously clear that the environment hasn't gotten any easier and Some of the end markets have gotten tougher, but we're remaining focused on delivering on our goal of 10% adjusted EPS growth in 20 Our plan is to give you the guidance in our Q4 earnings call in late January, but that's the goal we're working towards. Okay. Thanks.
You're welcome.
Thank you. Next question is from the line of Dan Arias from UBS. Please go ahead.
Yes. Thanks very much. Just a question on investment levels going forward. At this point, how are you guys thinking about deployment of SG and A in China and the emerging markets relative to U. S.
And Europe, do those regions continue to get a bigger piece of the pie in near term or have the things that you've done sort of gotten them closer to where they need to be?
I think just given the differential growth rates that we're seeing in emerging markets and is likely to continue for many years. You're going to see more investment in those markets and a tighter Level of investment control, much tighter level in Western Europe and the U. S. So I think that's just the reality. Probably every company is facing That dynamic of a shifting customer base.
So that's the plan. But our job is to manage costs tightly. Where we have to take them down we do and where we're spending to position the company for success we will.
Okay. Thanks. And just quickly on One Lambda, how are you thinking about time lines in terms of extending those products into the emerging markets and seeing a benefit from that?
So just given that We want to really get it right, get the right infrastructure in place. You're probably talking most of that impact late 2013 into 2014 in terms Emerging market expansion. We're already doing work on it. Even though it's only been 5 weeks, it's not as if we haven't started on it. But Takes a while to get momentum in new geographies for business.
And when we do our synergy planning, typically revenue synergies come in sort of the year 2, year 3 time frame, not
Understood. Thanks.
Thank you. Next question is from the line of Peter Lawson. Please go ahead.
Hi. This is Eric Criscolo just filling in for Peter. I guess just getting back to the med device fee quickly, where do you plan on recognizing that fee in your P and L?
That goes into cost of goods sold. So it's going to affect margin not revenue.
Great. Thanks. And then the sluggishness In the industrial end markets this quarter, I know you faced a difficult comp, but was there any other particular sub segment of that that was causing some weakness?
No. I think we had a mid teens comp. And against that comp, we declined low single digits. When you look at it, what I would Classified as the more applied markets did actually quite well and you look at the more classic industrial a little bit softer Mostly characterized by slowing in decision making as opposed to anything more dramatic at this point.
Great. Thank you.
You're welcome.
Thank you. We have our next question from the line of Isaac Ro from Goldman Sachs. Please go ahead.
Hi.
Good morning. Thanks for taking the call. I wanted to talk about China for a minute. That was obviously very strong. And I was wondering if you could comment on Spending patterns you saw across your various end markets there.
And the reason I ask is I'm just trying to get a sense of how the government funding is shaping up relative to the more cyclical spending drivers that you're exposed to in that region.
Sure. So Isaac, we had our strongest performance of the year this quarter in China on a very difficult comparison. We've seen some softness in industrial markets, but we've seen great growth in applied markets such as environmental and And we've stated many times in the past, we're extraordinarily tightly aligned with the 12 5 year plan. So the big focus on health care expansion, food safety, environmental Improvements is a sweet spot for Thermo Fisher. So we're powering through the tougher industrial end markets and delivering 20% plus growth for Yes, many quarters in a row now.
Yes, it's very impressive. Okay. And then secondly on diagnostics, do you see a heightened level of competition for the assets out there that you're interested in? If So how are you reevaluating your priorities and the kind of hurdle rates you need to get to keep growing that business?
Yes. We don't change I mean, we're growing the business organically. That's the focus. We don't change our hurdle rates because of the competitive dynamics on M and A. So if People are willing to do transactions that are value destroying for their shareholder base, so let them have that and do it.
We're not going to. So our take is we really like the acquisitions we've done. One Lambda looks Extraordinarily attractive. It's brand new, but we feel good about the economics there. And when we see those gems, we'll pounce on them.
And when we don't like the And we've obviously not even looked at a couple of transactions given prices that have transpired. We're extraordinarily disciplined On return metrics.
Got it. Thanks very much.
You're welcome, Isaac.
Thank you for your questions. Next question is from the line of Sung Ji Nam from Cantor. Please go ahead.
Thanks for the question. So just a couple of questions on the end markets. Obviously, you continue to see strength in food and environment. Could you maybe provide more color around food and environmental testing outside of time? Are you seeing strength there given that some of your competitors Are starting to see slowdowns.
I'm just curious as to if you're potentially taking market share or if you're continuing to see the market to grow in that segment?
Well, some of the products that serve that market are doing very well for us. So gas chromatography are Parts of the mass spec business, HPLC, all had strong quarters. And our growth in food safety is not just China, we saw momentum in India and as well as in other parts of the world. So it's not a single geography. The China one just gets more publicity because the opportunity there is just is quite huge in terms of improving the food quality supply within the country.
And then in terms of India, you guys are seeing continued strength, but obviously there is some Challenges with currency in terms of CapEx spending. Are you is that just kind of curious as to what type of what trends you're seeing with
Yes. I was just in India and actually through a number of vehicles I interacted with several 100 customers. I mean, so it's Fascinating catch up on what's going on. I actually think some very recent reforms going on in the country are actually putting More optimism. So there was this period where the currency weakened and there was pessimism in Q3.
But by the end of the third quarter actually And going into this quarter, there seems to be more optimism on what the growth outlook is for the country. So I'm not an economist, but talking to a wide range of customers, There seems to be a view that the government is taking sort of pro growth, pro reform actions, which should help the environment for our business.
Great. Thank you.
Operator, we have time for just one more.
Thank you very much. We have a last Question from the line of Tycho Peterson from JPMorgan. Please go ahead.
Hey, good morning. Thanks for taking the questions. A lot of mine have been answered, but Maybe just one, you talked a lot about the innovation driven gains you've seen in mass spec and other areas. A lot of this seems to be the function of the stepped up R and D that you implemented couple of years ago. Can you just talk at a higher level how you're thinking about R and D investments?
Obviously, you're pulling costs in other areas, but it does seem like you got a fairly could return on the step up in additional R and D. So just wondering how you're thinking about the investments there?
Generally, I'm comfortable with the level that we're Spending on R and D, if a great project comes in front of us, we're willing to spend more, but we also take out areas where we see lower So we are clearly benefiting from the confidence we had in 2,009, 2010 in our R and D pipeline. And if you want to make an interesting analogy, which I always like to do, Which is if you look at this quarter, we spent a lot more money in emerging markets, in this quarter, because we're confident And we're setting ourselves up for a bright 13 2014. And we took that opportunity to strengthen our position in India, strengthen our position in China and a few other markets. And When you're doing well, you're driving good earnings growth. Sometimes you get that opportunity to put some money where you think you're going to get great returns to our shareholders.
And I think We'll be sitting here a couple of years from now and saying that Thermo Fisher made the right call in terms of even further building out our presence in those high growth markets. So That's both our view on innovation Tycho and Emerging Markets.
And then one of the areas you called out as strongest quarter was bioproduction. One of your peers had a delay yesterday, but in general it seems like there's a little bit more enthusiasm for the bioproduction market. Is that a function of your view of the pipelines and what could be coming to market over the next couple of years or biogenerics? Can you just talk to the trends there?
I think you have a big shift towards the So part of it is definitely the demand picture that you just articulated, but part of it is moving from stainless steel to disposables. And we have a very strong position in the plastics side of that business in terms of sterile manufacturing. That's done very well for us. So, Tycho, thank you for the question. Okay.
Thank you.
So let me wrap it up. A few closing thoughts. First of all, I'm very proud of our teams for navigating the tough environment to deliver excellent performance through the 1st 9 months of the year. We're positioned to deliver a strong 2012 and that gives us a solid foundation going into 2013. We look forward to reporting our results for the full year in late January and
Thank you for your participation in today's conference. Ladies and gentlemen, this concludes the presentation. You may now