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 Wover, 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 Web Katz and Presentations until August 24, 2012. A copy of the press release of our 2012 Q2 and future expectations is available on our website under the heading Financial Results. So before we begin, let me briefly Kucova of Safe Harbor statement.
Various remarks that we make about the company's future expectations, plans and prospects constitute forward forward looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. C. Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, Durst, including those discussed in the company's Annual Report on Form 10 ks for the year ended December 30 1, 2011, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and available in the Investors section of our website under the heading SEC Filings. While we may elect to update forward looking statements at some point in the future. We specifically disclaim any obligation to do so.
Even if our estimates change, therefore, you should not rely on these forward looking statements as representing our views as of any date subsequent to today. C. Also during this call, we will be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our Q1 2012 earnings and future expectations and also in the Investors section of our website under the heading Financial Information. With that, I will now turn the call over to Mark Casper.
Well, good morning. And This is Mark. And don't worry, I know Pete is here as well as is Ken. And I know from our investor perspective, Ken is always the the highest rated IR executive out there in the industry and he's smiling next to me. So no anxiety should be on the phone.
We actually have good news to report throughout this call. So I'm pleased to report that we had another excellent quarter, with record Q2
results on both the top and bottom line. The quarter was all
about execution. Our teams executed well. The quarter was all about execution. Our teams executed well to deliver solid revenue growth and another quarter of double digit growth in adjusted EPS. Our strong performance in the first half puts us in very good position to achieve our revenue and earnings goals for the full year.
I'll frame my remarks this morning by first covering the financial highlights, give you a sense of what we're seeing in our key end markets relative to our results and then review some of the exciting new developments we announced during the quarter and in recent weeks. First, the financials. Our revenue grew by 9% over last year. Our adjusted operating income increased 16% in Q2. And we achieved 100 and and I will now turn
the call over
to Mark. Our Q2 results clearly show that our teams are focused on the right priorities. Our growth initiatives are delivering real value for our customers and our ongoing cost actions are strengthening the bottom line. On the growth side of the equation, our investments in Asia Pacific are really paying off with strong results again this quarter. Polio, and we continue to innovate to keep that pipeline full.
Our unique value proposition is clearly resonating across a broader customer set from Pharma and Biotech where we initiated the approach to medical device manufacturers, reference and contract testing labs as well. Turning to cost actions for a moment. This is an area that we're always extremely focused on and is a key contributor to our margin expansion. Keshi. Well, PPI is just one of the ways that we drive margin expansion.
As you know, we have multiple levers we can pull. And in the environment we're managing through today, this gives us the ability to quickly adapt to changing market conditions. Keay. For example, our restructuring actions are being implemented smoothly and are contributing to our growth on the bottom line. Let me now put our 2nd quarter performance Always with a sharp eye on using our unique depth of capabilities to gain competitive advantage.
I'll start with a focus on our 4 key end markets and then I'll comment on our performance in the major geographies. From an overall perspective, our end markets remain consistent with what we've been seeing in recent quarters. Let me provide a bit more detail. Starting with academic and government, these markets are consistent with what we've been seeing so far this year. They're still down low single digits as we expected, So our outlook here hasn't changed.
As we said last quarter, our customers remain active in their research efforts And laboratory consumable spending has been steady despite the capital equipment side being somewhat constrained. Turning to Healthcare and Diagnostics. Conditions were basically a continuation of what we've seen over the last several quarters. In particular, sales of clinical diagnostic products remained very robust, driven largely by ongoing strength in our biomarkers business. Schnee.
In Industrial and Applied Markets, we continue to do very well in aggregate with high analyzes again this quarter, particularly from key customers in the mining industry. Last, we continue to see strength in pharma and biotech, where we believe we continue to gain share. Our bioprocess production business had another great quarter. Demand for syrup, media and single use disposable products was driven by growth in biotherapeutics in the U. S.
And increased production of vaccines and biosimilars in Asia Pacific countries. Let me make a few comments on end markets from a geographic perspective. We did see some weakening in Europe during the quarter as expected, although the positive news is that we're still growing there. We saw excellent growth in Asia Pacific and our performance there was slightly stronger than in Q1. On the topic of Asia Pacific, let me mention here and our team in China delivered another quarter of revenue growth topping 20%.
Growth in China is coming from investments our customers are making across our key end markets, including biopharma, healthcare and environmental monitoring. We continue to attract top talent in China as we build out our manufacturing, R and D and commercial capabilities to fully leverage our value proposition and gain market Chair. Now I'll turn to a few of the business highlights in the Q2, all of which are great examples of how we're creating value for our customers by strengthening our industry leading offering. I said last quarter that I believe 2012 will be a banner year for innovation. And judging from the range of significant new products we've launched so far this year, I stand by that statement.
You may recall the long list of new products We launched in Q1, including the TRACE 13 100 gas chromatograph, the new iCap Q ICP mass spec We continued our innovation streak in Q2 with a number of launches at 2 important industry conferences for us, ASMS and Akama. Let me give you a few of the highlights. First, I'll cover ASMS, which as most of you know is the world's premier Case, our industry leading offering, specifically our Orbitrap Hybrid platform, which remains far and above the industry standard. We launched our QXactiv system a year ago and it continues to hit the ball out of the park for our research customers. This year, we enhanced the capabilities of this flagship instrument by launching 3 next generation software packages that help our customers fully leverage the power of the QXactive in key applications from research to applied markets.
These were among the 8 software packages we introduced at ASMS. In terms of new instruments, we launched the Exacti Plus LCMS system for laboratory customers who need to perform high volume screening in a range of applications from metabolomics to environmental analysis and food safety testing. The beauty of the Exacta Plus is that it can be readily upgraded to match the higher performance of the Premier Q Exacta. We also introduced a new triple quad at ASMS, the TSQ-eight thousand, So customers can view targeted compounds at much lower concentrations. This is especially relevant for food safety and environmental testing applications.
Turning to Acama, which took place in late June, we showcase a range of products designed to help customers meet their productivity goals, whether they're working in pharma and bio Thermometer, the 1st research grade FTIR instrument designed for simple one touch operation. The IS-fifty If you look at all of our new product launches so far this year, you'll see that we've had a significant new development in almost every one of our core analytical Chairman Platforms. We look forward to updating you on new developments in the balance of the year as well as the customer uptake of new technologies we've launched in the past few months. We've also strengthened our customer offering by deploying capital on strategic M and A. In May, we announced our acquisition of Dow and Ingalls, and I will now turn the call over to Mark.
Thank you, Mark. Thank you, Mark. Thank you, Mark. Thank you, Mark. Thank you, Mark.
Thank you, Mark. Thank you, Mark. Thank you, Mark. Thank you, Mark. Thank you, Mark.
Thank you, Mark. We now have the ability to help our customers manage risk, quality and total costs in our chemical supply chain to support their production needs. You all probably saw our announcement last week about our agreement to acquire One Lambda, the global leader in transplant diagnostics. We believe it will be an Excellent addition to our Specialty Diagnostics portfolio, because it will enhance our leadership with strong technologies that generate high margins and create opportunities for long term growth. One Lambda has great technology, its human leukocyte antigen and antibody tests are designed to improve the success rate for transplant patients.
It's a nice complement to our immunosuppressant assays for monitoring drugs in transplant patients and gives us a comprehensive offering for the transplant testing workflow. We're also excited about being able to leverage our strength in emerging markets to accelerate One Lambda's penetration We expect the transaction to close in Q4. Both of these acquisitions are good use of our capital and meet all of our acquisition criteria. They strengthen our strategic position, they expand our offering for our customers and they create value for our shareholders. Our capital deployment strategy also includes returning capital to our shareholders.
Including the $100,000,000 we spent to buy back our stock in Q2, buyback authorization of $500,000,000 If you add that to the $250,000,000 we had remaining at the end of Q2, We have a total of $750,000,000 available for buying back our stock in the second half of the year. Before I turn it over to Pete, let me give you a high level view of our Our guidance reflects the addition of Doe and Ingalls as well as our decision to divest our laboratory workstations business. It also incorporates somewhat more unfavorable FX rates. I'll let Pete get into the details, but the net result is that we now expect to achieve revenue 12,140,000,000 $12,260,000,000 in 2012. This results in 5% to 6% revenue growth year over year, which is the same growth that we've guided to all year.
On the bottom line, We're raising our adjusted EPS guidance to a new range of $4.74 to $4.84 The world has played out as we expected and our teams executed very well, setting the right growth priorities while tightly managing costs. Our growth initiatives continue to deliver results, especially in new products and emerging markets. We complemented those activities with strategic M and A, And we look forward to adding One Lambda to our specialty diagnostics portfolio. All of this added up to a strong first half and that positions us very well to deliver on our goals for the full year. Now I'll turn the call over to Pete Wilbur.
Pete? Thanks, Mark. Good morning, everyone. Similar to last quarter, I'm going to start with an overview of the total company's financial performance and then I'll provide some color on each of our three segments before moving on to our updated guidance. As your As Mark mentioned, we moved our laboratory workstations business to discontinued operations effective with Q2 reporting.
So So all the continuing operations numbers I'm going to share with you today have been revised to exclude this business from both current and prior periods. As Mark said, our strong financial results this quarter were driven by really solid execution by our teams. This led to another quarter of double digit growth in adjusted EPS with a 23% increase to a 2nd quarter record of 1.22 GAAP EPS in Q2 was $0.63 down 54% from $1.36 in the prior year's quarter, primarily as a result of the gain on divestitures last year. GAAP EPS includes a $0.02 operating loss in the Laboratory Workstations business. So we would have reported $0.02 lower adjusted EPS and 21% growth had we not discontinued this business.
On a pro form a basis, as if Dionix and Fadia were owned for the Q2 in 2011, Reported revenue was up 1% and organic revenue was up 4%. Pro form a revenue included 1% growth from acquisitions other than Dionys and Fadia, which was more than offset by a 3% headwind from foreign currency translation. Please note that the components of the change in revenue did not sum due to rounding. We continue to strengthen our backlog with bookings exceeding revenue by $15,000,000 or about 0.5%. Looking at revenue by geography, our growth profile was Pretty consistent with what we've been seeing for the past few quarters.
North America and Europe grew in the low single digits. Asia Pacific grew in the low double digits with Turning to adjusted operating income. Our teams once again delivered strong bottom line results. Q2 adjusted operating income was up 16%, Reflecting great execution. Adjusted operating margin was up 19% or 110 basis points.
Our margin expansion was driven by good pull through on our organic growth, strong contribution from our productivity and cost actions and solid accretion from recent acquisitions. Similar to the last couple of quarters, inflation on resin and other oil based products continues to be a minor headwind, As a reminder, we expect to achieve about $50,000,000 of benefits this year and an incremental $15,000,000 in 2013. We're also evaluating additional restructuring actions and continuing to maintain tight controls on our spending given the uncertainty in some of our end markets. Moving on to the details of the P and L. As a reminder, the Dionys and Fadia acquisitions both have as well as higher than average SG and A and R and D expense.
So until the anniversary, you'll continue to see that impact in our year over year margins. Total company adjusted gross margin came in at 44.7 percent in Q2, up 2 10 basis Site Consolidations and our PPI Business System in addition to the benefit from acquisitions. Adjusted SG and A in Q2 was 22.6 percent of revenue, up 80 basis points from the 2011 quarter, primarily as a result of acquisitions. And finally, R and D expense came in at 3% of revenues, up 10 basis points year over year, again as a result of acquisitions. Below the line, net interest expense was the same as last quarter at $51,000,000 which was $18,000,000 above Q2 last year as a result of the down 280 basis points from last year, primarily as a result of acquisition tax synergies and our ongoing tax planning efforts.
During the quarter, we deployed another $100,000,000 of cash to buy back 2,000,000 shares of our stock. And average diluted shares were 369,000,000 in the quarter, down 1,000,000 from Q1 and down 17,000,000 or 4% from last year, Reflecting the benefit of our 2011 and 2012 share buybacks. Turning to cash flow and the balance sheet. We had excellent cash flow this quarter. Year to date cash flow from continuing operations was $909,000,000 and free cash flow was $782,000,000 year to after deducting net capital expenditures of $127,000,000 Year to date free cash flow was up 38% year over year, We ended the quarter with about $735,000,000 in cash and investments, down $56,000,000 from Q1, primarily as a result of paying down some of our outstanding commercial paper.
And our total debt at the end of Q2 was $6,500,000,000 of our 3 segments. Starting with Analytical Technologies, total revenue grew 8%. On a Pro form a basis, assuming Dionys was owned for the full quarter in the prior year, Analytical Technologies total revenue increased 1% and organic revenue growth was 5%. Consistent with last quarter, we saw strong growth in instruments sold to industrial and applied markets as well as in our businesses serving bioprocess production. Adjusted operating income in Analytical Technologies increased 10% and adjusted operating margin was 17.5%, up 40 basis points.
Margin expansion was driven by strong pull through on organic growth and contribution from our productivity actions, partially offset by strategic investments, Inflation and Product Mix. Turning to the Specialty Diagnostics segment, total revenue grew 28%. Services segment, total revenue grew 2% and organic revenue increased by 4%. In the quarter, we had solid growth in laboratory consumables and our clinical Logistics business continued to deliver strong results. Adjusted operating income in Laboratory Products and Services grew 1% With adjusted operating margin coming in at 14.2%.
This was 30 basis points below the year ago quarter, but up 20 basis points As you saw in our press release, we're updating our 2012 guidance to reflect classification of the laboratory workstations business as a discontinued operation, Removing lab workstations and lower FX rates reduced revenue by about $185,000,000 $40,000,000 respectively, guidance range of $12,140,000,000 to $12,260,000,000 which represents reported growth of 5% to 6% 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 year, In terms of FX, the estimated full year impact has increased to $365,000,000 which results in a 3% headwind on our reported revenue and adjusted QPS. And we're assuming that completed acquisitions other than Dionys and Fadia will contribute approximately 1% to our expected growth in 2012. We also recently announced the acquisition of One Lambda and an additional $500,000,000 share authorization along with an expected debt issuance of $1,300,000,000 to fund these two activities. We've not included any benefit from One Lambda in our guidance as we don't expect interest expense related to prefunding the acquisition debt. As usual, we haven't attempted to forecast future foreign exchange rates and our guidance does not include any future acquisitions or divestitures.
In terms of our full year 2012 adjusted EPS guidance. With a strong first half of the year under our belt and with the impact of these actions that I just described, We're raising the high and low ends of our guidance as well as tightening the range, resulting in a $0.02 increase to the midpoint. Our revised EPS guidance range is $4.74 to $4.84 which represents 14% to 16% growth over 2011. To again bridge from the midpoint of our previous guidance, Doe and Ingalls adds about 0 point In terms of adjusted operating margin, we're still expecting expansion of 70 to 90 basis points for the year. And below the line, we're expecting our net interest expense to be up about $70,000,000 to $75,000,000 over last year and up about $15,000,000 versus our previous guidance As a result of the expected new debt issuance and our adjusted income tax rate to remain in the range of 17% to 18%.
We're estimating our full year average diluted share count to be in the range of 364,000,000 to 368,000,000, down This estimate assumes that we'll use the remaining $750,000,000 of our current share buyback authorization through December of this year. Finally, we're assuming that we'll deploy $150,000,000 towards dividends this year and we expect capital expenditures to be in the range of $300,000,000 to 310,000,000 In interpreting our guidance ranges, as I stated previously, you should focus on the midpoint as our most likely view of how we see 2012 playing out. Results above or below the midpoint will depend on the relative strength of our markets during the balance of the year. So before we turn to Q and A, let me say that I'm very pleased to An excellent second quarter and a strong first half of the year that positions us very well to meet our growth goals in 2012. Ken.
Operator, we're ready to take calls.
Thank you.
John, are you there?
Yes. Can you hear me?
Sure.
Thanks, Elaine, for taking the question and congratulations on a really solid quarter and what everyone else is saying is a So first, I wondered I really appreciate all the color that you gave Mark, but I wondered if you could talk a little bit more, I think unless I missed it, you didn't say much about the U. S. Some people have been talking about a bit of a slowing in the U. S. I'm just curious kind of what you're seeing specifically in the U.
S. And what your outlook there is for In the second half of the
year. So John U. S. Was slightly stronger than the Q1, but not materially so. U.
S. Is hanging in there with low single digit organic growth.
And is that your expectation for the
As we look at the second half, basically, when we started the year, we looked at organic growth Being around 3% for the full year, we have staying with that guidance. So we had 4% first half organic So that implies a 2% organic growth in the second half and that basically implies a little bit of a slowdown. That's more likely to be in the U. S. And Western Europe And it is really in Asia Pacific.
So probably slightly slow in the second half, but we don't really forecast by geography. We typically forecast by our businesses.
And then if I can just follow-up on that, I think you both kind of mentioned the past restructuring, but also saying like given the environment It's very uncertain. So considering maybe doing more, can you maybe just talk about 1, what the trigger would be for that? And to what that would entail on your end?
Yes. The way that we think about it is we're always looking at Cost based, right? And that last year we specifically put in $100,000,000 program that we've been executing against. In addition to that, we've been looking at selective cost actions and those programs or not programs, but those actions that make
And have
the right result for the mid- and long term health of the business. We're taking those actions as we go. It's probably incremental to it, but it's not under the banner of some incremental program. It's just more good management of the business.
Okay. Thanks, Glenn. I'll hop back in.
Thanks, Sean.
Your next question is from the line of Ross Muken from ISI Group. You may proceed.
Hi, good morning guys.
Good morning, Ross.
So as far back as I can remember at least since you You've taken over Mark. This is probably the best quarter organically you've had versus peers. As you look at sort of the components Where you saw strength and I know you probably haven't had much time to check out all the earnings reports like we do. But I guess relative to either your internal expectations Based on what you're seeing in the macro, based on what you had heard for throughout the quarter regionally, products specific, etcetera. Where do you feel like the biggest outperformance was for the business in the environment?
So Ross, what do you call it? Thanks for the question. Welcome back to the conference call. A couple of things. Actually, if you look at the results and we do Look at all of those reports and we do read all of the competitor reports as pretty much real time.
Actually, this quarter is actually very So 3 quarters in a row, our organic growth has been very strong relative to the peer set. So I actually I think you're seeing a nice consistent trend of us delivering very strong organic growth, 5% in Q4, 4% in Q1, 4% in Q2 and relative The share gain initiatives we've had. If I say where do I feel I think the teams here are executing extraordinarily well. They're very focused on We have great products and are very focused on serving our customer needs. Our value proposition is incredibly relevant In today's environment, right, our customers are living in a tougher world.
They need productivity. They understand our scale. They understand our depth of capabilities. We've been at this 5 years in terms of since the merger in building those capabilities, and you're seeing us harvesting those That hard work, and it's showing up in our organic growth results. So it's less about a particular geography or a particular product.
It's really about A value proposition that resonates in today's environment. We feel great about it.
And maybe on the guidance Increase on EPS. Obviously, I think that's not something we've seen from many businesses in this environment, given the Macro backdrop and what we saw in sort of the June timeframe. And so as you guys were sort of debating The forecast and we're looking at sort of early trends in July, How comfortable were you or how did you think about sort of how aggressive you wanted to get with sort of the guidance move Visavis sort of the bigger picture and what other large corporates were doing with their outlooks. And then I have sort of a cleanup question on that as well.
Sure. So Ross in terms of guidance, the world has been playing out at least the first half As we expected and articulated in February, right, when we set out our original guidance. So we expected Europe to get weaker as the year went on. We expected Sequestration would not get resolved during this year. We factored those things into our guidance.
So when you think about us sitting with Good execution at the first half and the world playing out as we laid out back at the beginning of the year. We don't see a big change in those expectations. When you look at the various actions that we've taken, We've kept the organic growth guidance the same, which means that we're we have a couple of points Deceleration in the second half, which is a cushion, if you will, right, versus the way we've been trending. But we think that's realistic given The market outlook. And when you look at the fact that we're doing an incremental buyback, you look at the fact that we closed a nice acquisition And Dow and Ingalls, those things are net positives even offsetting the headwinds from FX.
So the 2 dollars increase to the midpoint is we think a good reflection and we always focus on the midpoint of our guidance and we feel The low end protects for a much more challenging world if it unfolds.
And just one quick cleanup on the guidance. I know One Lambda is clearly not in there from a revenue EBIT perspective. But just to be clear, there is a bit of interest expense assumption In there or not to use?
Yes. We added about $15,000,000 of interest and that's to pre fund the acquisition as well as to fund the share buyback.
So that will happen some point in 3 or 4Q I'm assuming?
It will happen sometime probably in Q3 in terms of the debt issuance.
Great. Thanks so much guys. Thanks, Ross.
Your next question is from the line of Vamil Divan from Credit Suisse. You may
proceed. Yes. Thanks for taking the question. So I guess I just had a couple of questions here more related to what you're seeing kind of Sequentially through the course of the quarter, we heard some comments from other companies in terms of April through May to June. Have you seen any significant trends kind of Through the course of the quarter or into July, they give you any cause for that things are getting better or worse in any way?
No, we looked at that. And when we do our guidance, we factor in through the 1st 2 weeks of the quarter that we're living in as well. We feel that the guidance that we've given is reflecting those trends. We didn't see big Changes in June or anything that would lead us to believe of a very different trend in a change in Trend or trajectory, so fairly consistent throughout the quarter. Okay.
And then just one other one if I could. In terms of the I know you guys don't give you on in terms of quarters looking forward for the rest of the year, but you get a lot of questions In terms of how the Q4 might play out with all the questions on sequestration and what's going on in Washington, any guidance you can kind of give just even more Qualitatively in terms of how you expect kind of Q3 versus Q4, just looking at the numbers right now, it looks like we're still seeing
So in terms of our quarterly phasing, just seasonally Q3 is always A relatively weak quarter just because of the vacations in Europe and really around the world, I guess. And Q4 is always our strongest quarter in terms of the year end push on instrumentation. So probably slightly stronger in Q4, but all that depends a little bit on what happens with sequestration.
Okay. Thank you.
Your next question is from the line of Daniel Brennan from Morgan Stanley. You may proceed.
Hi. Thanks for taking the call. I wanted to ask a question on the lab products and services business. 2nd quarter in a row of solid organic growth there versus some peers pointing to more challenging environment. Can you just provide some color Regarding the strength you're seeing now and the kind of the sustainability of those trends?
Sure. When I look at lab products and services, we saw another good quarter in our biopharma services, the clinical trials outsourcing business is doing well. Our channel business is also performing well. So we like The trajectory that we're on in our lab products and services segment.
Maybe related to that, the divestiture of the workstation business, can you just discuss kind of What kind of impact that had on the organic growth in the quarter?
Yes. When you look at organic growth, we would have had as a company about 3.5% organic growth If lab workstations was in the numbers and we had 4% organic growth with lab workstations out of the numbers and we would have had $0.02 Lower adjusted EPS of lab workstations was in the number versus what we did as Pete highlighted. So The decision on LabWorks didn't have nothing to do with any of that stuff. It was more a decision that we made as a management team that we really weren't the best owners for this business and then decided that We were going to sell it to a business that could really help it thrive and grow for the future.
Thanks, Mark. And maybe if I can just sneak one more in. The gross margin strength in the quarter It's better than we had modeled. Could you just tease out the components certainly in the fine dynamics coming into the mix for helping margins? Like Is it possible to quantify like the FineDynamics contribution versus cost cutting?
And in particular, did the company accelerate any facilities closings or any other cost measures that would have led Better gross margin leverage in the quarter? Thank you.
Yes. So in terms of gross margin, certainly the acquisitions benefited The gross margin, that obviously is going to decrease in terms of the impact throughout the year as we anniversary those. And Q2 or excuse me, Q3 Dionex And then Q4, both of them will be fully out. But the gross margin improvement kind of on the core business is really coming from the areas that We continually drive productivity in which is sourcing our PPI business system and restructuring. And the benefit there It's probably about a third, a third, a third between those 3 in terms of improvement on the core business.
Great. Thanks, Pete.
Your next question is from the line of Dan Leonard from Lyric Swann. You may proceed.
Thank you. Two quick ones. First off, in Lab Products and Services, now that you've divested or you're planning to divest the workstations business, How should we think about the margin trajectory of that business going forward? Is that a business where you could increase margins commensurate with the corporate average annually? Or will that still be more
Hickey. Yes. I think in Laboratory Products and Services, it's lower than average and we have the channel business there, which we don't have as much value added cost that we Actually, impact in terms of margin expansion. So there's a lot more direct material cost in that segment. So that segment over time will In general have lower margin expansion than the average for the company just as a result of that.
Okay. Thank you. And then housekeeping Pete, what are The foreign currency rates you're using in your guidance for the euro?
Yes. So for the euro, it's about 121.
Okay. Thank you.
Yes. Thanks, Dan.
Your next question is from the line of Amit Bala from Citi. You may proceed.
Thanks. Good morning. I wanted to just have you, Mark, elaborate on your comments on the CapEx budgets releases within academic governments. Can you give us a little bit more detail on the types of products that are being impacted and tie in what you're seeing within mass spec in the competitive environment?
Sure. So academic and government really didn't change very much, didn't really change at all in Q2. Consumables broadly did fine, which means it's logical, right? Customers, They're working, right? So they're doing research.
So therefore, they're consuming plastics, reagents and so forth. Instrumentation Really was more aligned with how differentiated the technologies were. So in particular, our mass Spec business had a very nice quarter, but things like lab equipment and more routine instrumentation Would really be a little bit softer and more constrained.
Okay. That's helpful. And the second part for My question is on analytical technologies. You've highlighted biopharma within analytical technologies as a strength in the past. This quarter, I don't think Pete brought that one up, but you did talk about biopharma strength overall.
Can you talk specifically about analytical technologies, anything going on there that we should be aware of?
No. Within analytical technologies, we have our bioprocess production business, which had another terrific quarter that was there. I would say On the instrument side of the business, it was kind of an okay quarter in terms of biopharma. It was up, but it was not probably as strong as some other quarters.
Anything regionally that's impacting that? Or is it just across the board?
I didn't really see any particular regional explanation. I think generally Europe was pretty soft. Okay.
Thank you.
Your next question is from the line of John Wood from Jefferies. You may proceed.
Hey, thanks a lot. Good morning.
King. Good morning.
Hey, so you guys have previously talked about something like 50% of free cash flow back to the shareholder Dividends and repurchases, obviously, you're going to do a lot more than that this year. But just wondering, should we think about a different rule of thumb going forward, specifically in Keane, just given the leverage ratio post the One Lambda deal, meaning, is deleveraging a greater priority For 13 at this point.
I think when we get to we'll do that really in the February guidance. I At a high level, our capital deployment strategy hasn't changed, which is a portion of our capital is going to get returned to our shareholders. A portion is going to be used for M and A that meets our strict criteria in any given year may vary based on the environment. We're comfortable with our leverage ratios hovering between 2.5% and 3% at year end. They should be relatively close to 2.5%.
I don't I wouldn't assume major changes in the capital deployment strategy for 13, but we'll figure that out and communicate it
Got it. Thanks, Mark. One last one. Any view on the timing of Hamilton divestiture? And anything you've it looks like you've written the book value down to close to 0.
Is that accurate? And would you expect to get any material proceeds there?
In terms of the divestiture process, It's ongoing. In terms of the gains and losses, I don't want to speculate on that because I want to wait till we actually Have the buyer negotiate and I don't want to handicap or really comment on the valuation. But I think The write down is a reflection of what we think was an appropriate accounting at the point of the time of the decision to divest it.
It is above 0
Yes. Okay. Thanks, guys.
Your next question is from the line of Doug Schenkel, you may proceed, from Cowen and Company.
Hi, good morning guys and thanks for taking the questions. Maybe just building off of that last question. I think The conclusion has been you've done a good job divesting businesses when you think about Athena and Lancaster last year. And certainly the one you're in the process of divesting makes sense. Could you just describe what the environment is like for these opportunities?
Anisa maybe more importantly, what's the criteria you're going to use moving forward to make divestiture decisions? Is it simply a question of in your words Whether or not you're the best owner for an asset, or is there something we can also look at in terms of size, margin And profile growth rate any other criteria that you would be willing to share with
us? Doug, so we're not contemplating any material So if you want to define material anything nearly as large as lab workstation. So we always do Tiny little things and we'll continue to do that. But we like the portfolio. Our strategy is clearly working.
Look at the organic growth that we're delivering over the Few quarters. That's because the package of businesses we have today fit together, work together and are valued by the So I wouldn't expect really much more on the divestiture front. And if you think about it and you go back over the last 5 years, the ones Divested are very logical and they've been telegraphed if you will. We'd never liked competing with our customers. So we sold our 2 testing labs, which is Athena Lancaster.
And lab workstations has been a business that is a very heavy manufacturing business. It's very different than what we do. And when we look at the long term fit, we think there are companies that have a better ownership with it than we would.
Okay. So if I have it right, it looks like restructuring expense picked up a little bit Q1 to Q2. Was this as planned And assuming I have this right or was it in response to anything that you're seeing in the environment or is there anything else that caused us to accelerate that was different than planned?
So we obviously put together the $100,000,000 restructuring plan last year and we've been executing against that. Throughout the year, we're always doing some level of restructuring actions. In addition to that, as Mark said, it's not kind of Program level, it's more the one offs. I wouldn't necessarily read anything into that other than just normal actions that
we Okay. And last one, you continue to pick up share as the numbers suggest and as You mentioned in your prepared remarks, some of this is easy to see via new products and analytical technologies like QXactive. But beyond On specific new product launches, are you evolving how you go to market with products, how you sell products within analytical technologies? In our Channel checks and our conversations with some of your competitors, we're starting to hear more about Thermo doing a better job selling applications solutions, if you will, really connecting different products and services across your analytical technology Product portfolio, is there something that's changing in terms of how you commercialize customer solutions? And if so, how far along are you in this
Just a good comment. Not much more to add Doug. I like the feedback. I would say it's an area that we're focused on. And I think we're doing a better and better job of representing our solutions based capabilities for our customers.
And I still think we have a lot of work to do and a lot of opportunity ahead. It's still young, if you will, but it's but we've been working at it and our customers understand the value of it. And I actually think when customers are More constrained and customers are trying to make sure they're successful, the broader your capabilities and the deeper The better off you're going to be and I think that's really paying off for us.
Okay. Thanks. That's all very helpful. I appreciate you taking the questions.
Thanks, Tim. Casey.
Your next question is from the line of Tycho Peterson from JPMorgan. You may proceed.
Good morning, Tycho. Hey, good morning. I actually want Kind of take a slightly different angle to Doug's last question there. And this is really the Q2 in a row we've seen you outperform a lot of your equipment peers. Can Can you talk to how much of that is share gain versus other factors?
We obviously, as Doug said, see it in mass spec. Are there other obvious areas where we should think about you pulling share? And then how much is pricing a factor in this environment in particular within mass spec?
So there's no Sure. Each company is a little bit different. So when we look at our mix of analytical technology, it's different than the other companies. I do think we had a Good share gain in mass spec. I think our biosciences business is doing well.
And generally, I view that The performance is strong. Pricing has been was up slightly in the quarter, but it It wasn't a big change from what we've seen. So I don't think price is a big factor one way or the other in the performance.
Okay. Just a couple of housekeeping ones. Is Fadia kind of back on track? That was a little bit soft last quarter. There were some seasonality there.
Can you just talk to whether that's recovered?
Yes. So Tycho, let me give a more holistic update on both acquisitions that we are almost at the 1 year anniversary. I think it's a good question It hasn't been asked. So, when you think about Dionys, when you think about Fadia, let's look at it in the 3 criteria that we look at it, which is How's the integration gone? How's the business performing short term?
And what's the long term prospects? Integration for both businesses has gone extraordinarily well. It's Thermo Fisher. I mean, at this point, both of them. They're very well integrated.
The culture is very harmonious and it's Synergies are ahead of plan. When you look at accretion, which is now the reflection of the full package of performance, In 2012, accretion is going to be better for both of those acquisitions and the acquisition model. Foddy, in particular, will be fairly meaningfully more accretive than we articulated back on the $0.30 that we had talked about. When you look at the short term performance of the business, Both businesses actually have more European exposure than the company average. So both of them actually are growing slightly less than the company average In terms of organic growth, but if I look at the longer term prospects for both businesses, we're very, very bullish on What both bring to our company and feel good about it.
So generally feel good, but European exposure hasn't been Particularly helpful.
Okay. And then last one, not to I know you've had a number of questions on Hamilton, not to spend too much time on it. But I mean if we go back years years ago, this was I think Mariah used to joke the competition was 2 guys in a sauce. So it hasn't gotten better over the years presumably. Why did it take so long to divest it?
Was there a period where you thought you could actually really truly turn it around?
We have a terrific team of employees in that business and they've worked very hard To make it the very best business that it can. And we gave them significant resources to try to make the most of it. And When we look at it today, we just think there are companies that it's more core to their activities than ours and we decided that that's the right thing. So It's a decision. It's a tough business, but at the same point, we think it's got good prospects and we think the right owner will bring it to its full potential.
Okay. Thank you.
Your next question is from the line of Derik De Bruin from Bank of America Merrill Lynch. You may proceed.
Hi. How are you? Good. This is Mark. So you're in Q3, you're going to anniversary the weak academic environment that hit you last September.
Since comps get easier, I guess what's kind of built into your academic numbers? Are you still expecting academic to be down year over year? Or is it more Flat. I'm just kind of wondering how you're where are you on that thought process?
So when you look at the comps, industrial gets harder, Both in Q3 and Q4, and obviously in academic, the comparison is easier. When we laid out our guidance, we obviously don't do quarterly guidance, but we laid out our guidance, we assumed that academic and government would be down low single digits For the year, it's down low single digits in the first half and that sort of implies that it's going to be still down off of an easy Tomp. I mean that would be what the math would imply, although we're not we don't really sit there and say what's Q3 exactly going to be versus Q4, but Hopefully that helps you think about modeling.
Yes, that's very helpful. So you've gotten beaten up in the past In your LPS business because organic growth has lagged. Now that you've divested it, I know that where you're planning to divest it, it's been a 5% drag in the organic growth rate In Q2, but can you just give us a flavor of what it has been historically as a drag on the LPS segment?
In terms of lab workstations in particular?
Yes, lab workstations, what was the drag on the overall LPS Because one of the focuses has been that business had not did not grow as fast as it had previously thought. And I'm just wondering if this was a bigger if this is a large reason why That business had not done as well in
the past. The results in 2011 were relatively weak. But the numbers are so small that The accretion dilution on both organic growth and the margins is pretty minimal. For this year, it didn't really even Our guidance taking the numbers out. So it wasn't so materially off of the averages that it was making a big impact.
Yes.
I mean, I think, Derek, you know us well enough on this stuff, which is It's not big enough to make a material change, but it was the right decision to sell it, so we're selling it. But we're not sitting here and trying to change the growth rate by a tenth of a point one way or another. In the scheme of things, it doesn't make Cutch.
Right. No, no, that's right. And then finally, can you just give us some more color on Asia? Is the growth you're seeing there share gains From peers, for example, to multinationals that you're selling to that you're just getting bigger share there, you're taking share? Or is it brand new business from domestic Chinese or Asian customers that are showing up.
Could you just give a little flavor of where you're seeing the growth on how that's working?
Yes. So let's focus on China. China was very strong in excess of 20% of growth organically again. When you look at it, We had very good performance widely across the business. And I think a nice example is We talked about the 5 year plan and the focus on health care, the focus on environment.
So it's not a surprise that our Specialty Diagnostics This is doing very well and growing rapidly in China in particular because basically there is a bit care availability opportunity in China called PM2.5, which is basically breathing in particulates in your lungs. And the government has actually decided Accelerate implementation of those regulations and we're capturing about 70% share Of all the air monitors that are being used for that particular application. So it's really it's not taking share from The New York Stock Exchange listed competitors taking share from companies that might be local or really we don't think as much about. So business is performing very well and we continue to be optimistic about our outlook in China in particular.
Great. Thank you very much.
Your next question is from the line of Dan Arias from UBS. You may proceed.
Yes. Hi. Thanks very much. Mark, I guess just given the focus on cost control these days, I'm curious whether you can give us a sense of where you think the biggest need to spend is in order to keep Innovation where it needs to be and to keep people in the right places. Can you just update us on your current view on investment focuses?
Yes. I mean, I think the investment focus is straightforward. We're going to continue Support our R and D efforts and we're going to continue to expand in emerging markets. Those are clear. We'll also make commercial investments around The applications marketing, as Doug asked earlier, some things on the website, things that continue to strengthen the company.
We will manage our cost tightly on all other areas, right? So we're being prudent and frugal on those other things. So making sure that we're as efficient as we can and looking for opportunities to streamline our cost base.
Okay, thanks. And just a follow-up, I'm wondering if you could comment a bit more on Applied market demand, some reports elsewhere of maybe some potential slowing in food and environmental testing areas. Is that something that showed up anywhere for you guys at all?
Nothing that really jumped out from a material perspective one way or the other. We continue to have good momentum in our applied markets.
Very good. Thanks.
Operator, we have time for just one more.
Thank you. And that question will come from the line of Isaac Ro from Goldman Sachs. You may proceed.
Hi, guys. Thanks for fitting me in. Just wanted to ask a general question on pricing. I think you guys mentioned in the earlier comments that pricing generally not a big swing factor. But if you could maybe add a little bit of color in diagnostics and then in pharma.
I think in diagnostics, we're clearly dealing with pretty stagnant volume And the lab companies have generally suggested they're going to look to try and save expenses. So what are you seeing in the diagnostics channel with regards to your basic supply side of the franchise? And then In pharma, some of these larger contracts, just wondering what kind of a tone you see on pricing there?
Yes. In terms of pricing and diagnostics, I mean, that's not an area where we generally get a lot of price. So that's consistent with the past. It's basically flat overall. I don't have a lot of data by market segment in relation The price, but in overall it's about flat.
Okay. And then in pharma?
In pharma, again, we don't cut That way I would say that probably the takeaway message on pricing in Q2 was pretty similar to what we saw in Q1 in aggregate And not really any major changes that we observe. So we pay a lot of attention to it. Obviously, we have a very
Just one last one for me on China. I know you mentioned earlier the comments on the environmental business, but if we look at the economic side, there were some questions in the industry about pacing of government funds getting released over the course of this year. Any updated commentary on that part of the China end market?
No. When we look at China, we've been consistently growing north of 20%. And really there wasn't major swings one way or the other within the business. So we feel good about the overall performance in China and actually feel good about the outlook as well. So Isaac, thank you.
Let me just wrap up the call and add a few quick closing thoughts. One is that I think our teams executed very well to deliver a strong first half. Their focus on new products, emerging markets and strategic acquisitions is clearly driving growth. We continue to manage our costs tightly in line with the economic environment and we're confident that we'll deliver on our growth goals for the year. Thanks for your support of Thermo Fisher Scientific, and we look forward to updating you on our Q3 call.
Thank you, everyone.