Thermo Fisher Scientific Inc. (TMO) Q1 2013 Earnings Report, Transcript and Summary

Kenneth J. Apicerno - Vice President of Investor Relations and Treasurer Marc N. Casper - Chief Executive Officer, President, Director, Member of Strategy & Finance Committee and Member of Science & Technology Committee Peter M. Wilver - Chief Financial Officer and Senior Vice President

Tycho W. Peterson - JP Morgan Chase & Co, Research Division Ross Muken - ISI Group Inc., Research Division Daniel Brennan - Morgan Stanley, Research Division Steve Willoughby - Cleveland Research Company Derik De Bruin - BofA Merrill Lynch, Research Division Doug Schenkel - Cowen and Company, LLC, Research Division Daniel Arias - UBS Investment Bank, Research Division Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division Vamil Divan - Crédit Suisse AG, Research Division Amit Bhalla - Citigroup Inc, Research Division Isaac Ro - Goldman Sachs Group Inc., Research Division Peter Lawson - Mizuho Securities USA Inc., Research Division Daniel L. Leonard - Leerink Swann LLC, Research Division

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2013 First Quarter Earnings Conference Call. My name is Sharon and I will be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin the call.

Good morning, and thank you for joining us. On the call with me today is Marc Casper, our President and Chief Executive Officer; and Pete Wilver, Senior Vice President and Chief Financial Officer. Please note that this call is being webcast live, and will be archived on the Investors section of our website, thermofisher.com, under the heading Webcasts and Presentations until May 17, 2013. A copy of the press release of our 2013 first quarter earnings and future expectations is available on our website under the heading Financial Results. So before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's annual report on Form 10-K for the year ended December 31, 2012, 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. Also, during this call, we'll be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first quarter 2013 earnings and future expectations and also in the Investors section of our website under the heading, Financial Information. So with that, I will now turn the call over to Marc.

Thanks, Ken. Good morning, everyone. Thank you for joining us today for our first quarter earnings call. We're very pleased to report a solid Q1, and we'll go through the business highlights in a few minutes as we usually do. But before I discuss the quarter, I want to spend a moment on our exciting announcement last week of our agreement to acquire Life Technologies. This acquisition represents the largest transaction for our company since the merger that created Thermo Fisher Scientific. It will make us an unrivaled leader in our industry, serving customers in research, Specialty Diagnostics and applied markets. Combining the leader in genomics with the leader in proteomics will establish technology and innovation leadership across key life sciences markets. The transaction also expands our commercial infrastructure and global presence, making us the ultimate partner for our customers. We're going out to Carlsbad next week to meet with the members of the Life Technologies team and begin the integration planning. As we said last Monday, we look forward to completing the transaction early in 2014. With that, I'll now move onto our Q1 results, starting with our financial performance, which is what we're focused on discussing today. As you read in our press release, we continued our trend of consistently delivering strong double-digit adjusted EPS growth in Q1. We had a 17% increase year-over-year that set a new record. Revenue was a first quarter record, growing 4% over last year. In terms of our adjusted operating income, we grew 7% with 40 basis points of operating margin expansion. So we performed well and in line with our expectations, even though the underlying market conditions were challenging. Two factors, in particular, created more pressure on the top line: first, sequestration took effect in the U.S. in early March, as we had assumed it would; and second, we haven't seen a recovery in global industrial markets. In fact, some have weakened. As a result of these factors, we've implemented some additional contingency actions. I am pleased to say that our teams executed very well to deliver solid performance in Q1. Let me briefly describe what we saw in our key end markets in the first 3 months of the year relative to the expectations we laid out for you during our last call. From an overall perspective, I would say that the dynamics in our key end markets played out at the lower end of what we factored into our guidance range for the year. Starting with academic and government, we're obviously now living in a world of sequestration. Our customers were bracing for it. We anticipated it and we planned for it. We saw a slight decline in Q1, and we continue to see the impact more in our capital equipment businesses and less so on the consumables side. Growth was also slightly negative in industrial and applied markets. Bookings softness continued, primarily in our businesses serving core industrial applications. However, we continue to see pockets of strength in applied markets. One example is the very strong demand for our products used in environmental applications, especially in China, and I'll give you more details on that in a few moments. Turning to health care and diagnostics. Our performance continues to be driven by strong demand for our novel biomarker tests and our clinical diagnostic products, and we saw some benefit from the flu as well. We grew here during Q1, in line with the company average. Last, pharma and biotech was the end market that once again really stood out for us in the quarter. Market conditions were fairly similar to what we've been seeing for quite some time, but our businesses serving this customer set performed extremely well. We grew here in the high single digits as we have for the past several quarters. Our clinical trials logistics business was the key contributor, with another outstanding quarter. It's clear that our outsourcing services are creating tremendous value for these customers. We also continued to see strength in our BioProcess Production business, driven by demand for our single-use technologies used to produce biotherapeutics, biosimilars and vaccines. Our outperformance in this end market contributed to our good top line growth for the quarter overall. So in summary, our teams executed very well in a challenging environment to ensure that we met our goals for growth. We continue to keep a sharp eye on costs so we can fund our key growth initiatives in technology innovation, our value proposition and expansion in emerging markets. I'll now use our 3 growth drivers as a framework to cover some of the many business highlights we had in Q1. I always like to start with technology innovation because it is the lifeblood of our company. Our leading portfolio of products and services gives us a unique value proposition for our customers, and we are committed to building on that. We had an excellent start to the year with a strong lineup of new Thermo Scientific products launched at Pittcon. There were numerous introductions across our Analytical Technologies platform, but I'll highlight just a few this morning. The most significant development was the new version of our Chromeleon chromatography data system, which you probably know is the industry's gold standard. We've now significantly raised the bar with Chromeleon 7.2, which allows our mass spectrometry and chromatography systems to be controlled on a single data platform for the first time. This is a huge advance for our customers because these instruments can now be linked across their enterprise so they can share vast amounts of data. This is a real benefit for large universities and pharmaceutical researchers who want to facilitate collaboration between laboratories. Turning to Applied Markets. We launched new elemental and spectroscopy systems that build on our leading platforms by adopting research-grade tools for use in any lab. We strengthened our highly successful iCAP elemental analysis platform with the launch of the new iCAP 7000. It incorporates a unique, high-resolution CID imager to detect lower levels of harmful trace elements such as lead, mercury and chromium. Customers need this level of sensitivity to meet increasingly strict global regulatory standards for food, drinking water and soil. Also making its Pittcon debut was the picoSpin 45 miniature NMR spectrometer, which is our first NMR product offering. In addition to Pittcon, we launched new products across our portfolio during the quarter. Let me mention 2 from our Specialty Diagnostics business. First, we introduced the Brilliance GBS test in Europe, which rapidly identifies Group B strep, a severe infection that can be passed from mother to baby during delivery. Another new test, the SureTect system, makes it easier for food safety laboratories to quickly detect bacterial pathogens in food products before they're released to the market. As you know, we're a company that's committed to innovation to help our customers meet their goals. This promises to be another excellent year on that front, and we're looking forward to announcing new breakthroughs at the upcoming American Society of Mass Spectrometry Conference in June. Our second key growth driver, our unique value proposition, comes from the combination of our leading technologies, our customer channels and our applications expertise. Let me give you a great recent example. Harvard Medical School has been a long-time customer of ours, mostly for our analytical instruments used in protein research. We're now collaborating with the university to establish the new Thermo Fisher Center for multiplexed proteomics, to accelerate progress in proteome analysis. Harvard Med will use our hybrid Orbitrap mass spectrometry systems and our protein reagents and kits to conduct the research. With our help, Harvard will also provide training courses to the scientific community to help foster growth of these important new methods in life science research. This is another example of how our customers rely on us as a partner to help them meet their goals for both innovation and productivity. Now let me turn to some of the highlights during the quarter in Asia-Pacific and emerging markets, our third key growth driver. As I mentioned earlier, we continued our excellent momentum in China, with our teams there delivering 20% growth in Q1. Our leading scale in the region is a key competitive advantage for us, and has resulted in some significant customer wins. Three markets, in particular, contributed to our Asia-Pacific performance in the quarter. First, environmental markets continue to be very strong, as the Chinese government expands its particulate air monitoring network to its Tier 2 cities. This has created significant new opportunities for our PM-2.5 particulate monitoring instruments. In addition, we're leading the market in meeting increasing needs for technologies that address heavy metals monitoring in water and soil as well. Second, the China Food and Drug Administration placed a large order for our Dionex Ultimate 3000 HPLC systems used for food safety testing. And third, we saw strong growth in our Specialty Diagnostics businesses in China as a result of our commercial focus on helping customers improve health care. For example, we're working closely with local hospitals to train them to use our biomarker test for diagnosing and treating sepsis. One last comment on emerging markets. We had strong growth in Brazil in Q1, driven by the recent approval of the country's government stimulus budget, which is fueling industrial markets and academic research. We're also seeing increased spending by the healthcare industry and this is reflected in our strong sales there to large testing labs. So to summarize, our growth strategy is clearly working, and our scale and unique depth of capabilities continues to differentiate us and give us new opportunities to gain share. Before I turn the call over to Pete, let me make some comments on our guidance for the year. At a high-level, we have these 2 new data points. First, we delivered good revenue and adjusted EPS growth in Q1; and second, we've decided to suspend share buybacks in light of our pending acquisition of Life Technologies, which will impact our adjusted EPS. Pete will get into the details, but the take away on our updated guidance is we're raising the low end of our revenue range by $40 million to reflect our good growth in Q1, resulting in 3% to 4% growth year-over-year, and we're updating our adjusted EPS range to reflect the suspension of our share buybacks and our updated revenue guidance. The new range will result in 7% to 9% growth over 2012. So to summarize, we had a solid quarter. Our teams executed well, in spite of the underlying market conditions, to deliver good top line growth and double-digit adjusted EPS performance. We're pleased that we carried our growth momentum into 2013 and we're very excited about our future outlook. With that, I'm going to turn the call over to Pete.

Thanks, Marc. Good morning, everyone. As Marc said, we had a solid Q1, driven largely by strong operational execution by our teams around the globe. I'm very pleased with our results this quarter given the macro environment. So I'll start with an overview of our financial performance for the total company, and then provide some color on each of our 3 segments before moving on to guidance. As you saw in our press release, we delivered another quarter of solid top and bottom line results with a 17% increase in adjusted EPS to a record of $1.37. GAAP EPS in Q1 was $0.93, up 24% from $0.75 in Q1 last year. Looking at the top line, Q1 total revenue increased 4% year-over-year and we delivered 3% organic growth. Q1 reported revenue includes 3% growth from acquisitions and a 1% headwind from FX. And as in some previous quarters, the revenue components I just mentioned do not sum due to rounding. In terms of bookings, we continued to strengthen our backlog, with bookings exceeding revenue by about 1% in the quarter. By geography, North America grew in the low single digits. Europe was just slightly negative, and consistent with previous quarters. Asia-Pacific grew in the high single digits, with China coming in very strong once again at over 20% growth. Rest of world grew in the mid-teens. Turning to the bottom line. Q1 adjusted operating income was up 7% and adjusted operating margin was 19.3%, up 40 basis points from the prior year. Once again, this quarter, we had very strong contribution from our productivity and cost actions, which was partially offset by unfavorable mix and foreign exchange, specifically the weakening of the Japanese yen. I told you on our Q4 call that we expected to realize $65 million of benefit this year from the $100 million restructuring program that we initiated in 2011 and the $75 million program that we initiated last year. And in March, as a result of sequestration being implemented in the U.S., we triggered an additional $10 million of contingency cost actions, which increases the total expected impact of restructuring actions in 2013 to $75 million. In total, we realized about $20 million of benefit from these actions in Q1. Consistent with last year, we made strategic investments this quarter, primarily in emerging markets to strengthen our global presence and continue our growth momentum there. Moving onto the details of the P&L. Total company adjusted gross margin came in at 44% in Q1, down 90 basis points from the prior year, primarily as a result of unfavorable mix and the medical device tax, partially offset by acquisitions. As I mentioned, we delivered very strong productivity in the quarter, which was driven by our primary productivity levers: Global sourcing, site consolidations and our PPI business system. Adjusted SG&A in Q1 was 21.7% of revenue, down 130 basis points from the 2012 quarter as a result of volume leverage and our restructuring actions. Finally, R&D expense came in at 3.1% of revenue, up 10 basis points from the prior year, primarily as a result of acquisitions. Below the line, net interest expense in Q1 was $57 million, $6 million above last year, as a result of the debt we issued in Q3 2012 to fund the One Lambda acquisition. Adjusted other income was $3 million, up $1 million year-over-year, primarily as a result of non-operating currency translation gains. Our adjusted tax rate in the quarter was 11.7%, 590 basis points lower than last year, as a result of acquisition tax synergies and our ongoing tax planning efforts. And as planned, we recognized the benefit of both the full year 2012 and the first quarter 2013 R&D tax credits in the quarter. We also realized about $15 million of foreign tax credit benefit specific to Q1 that had already been included in our previous full-year guidance. In terms of return of capital, during the quarter, we spent $90 million to buy back 1.3 million shares of our stock, and paid out $54 million in dividends to our shareholders. Average diluted shares were 361.7 million in the quarter, down 8.4 million or 2% from last year, reflecting the benefit of our share buyback programs. Turning to cash flow and the balance sheet. Cash flow from continuing operations was $299 million and free cash flow was $236 million after deducting net capital expenditures of $63 million. Free cash flow in Q1 was down from the prior year, primarily as a result of higher working capital investment from a low year end base. We anticipate working capital performance to improve throughout the year and haven't changed our full-year view. We ended the quarter with $1 billion of cash and investments, up $153 million from Q4, and our total debt at the end of Q1 was $7.12 billion, essentially flat with Q4. To wrap up my comments on the total company, I wanted to provide you with a quick update on our return on invested capital performance. Our trailing 12 months adjusted ROIC in the first quarter of 2013 was 9.6%, up 25 basis points from Q4. Given our recent acquisition of One Lambda in Q3 2012, this gives you an indication of the strength of returns in the underlying business. So with that, now I'll walk you through the performance of each of our 3 business segments. Before I get into the details, please note that during the quarter, we made a minor change in our segment reporting to better align like businesses within our segments. The full year impact results in a shift from Analytical Technologies to Laboratory Products and Services of around $100 million in revenue and $20 million in adjusted operating income. All prior period numbers have been restated and are detailed in the reconciliation package on our website. Starting with Analytical Technologies, in Q1, total revenue was flat and organic revenue increased 1%. In the quarter, we saw strong growth in our BioProcess Production, mass spec and air quality businesses. This is partially offset by the softness we've been experiencing in some of our industrial markets, which are more highly represented in this segment. Adjusted operating income in Analytical Technologies decreased 2% and adjusted operating margin was 18%, down 20 basis points. During the quarter, we delivered very strong productivity, which was offset by unfavorable product mix, strategic investments and foreign exchange. Turning to the Specialty Diagnostics segment. In Q1, total revenue grew 2% and organic growth was 4%. We continued to deliver strong growth in our clinical diagnostics business, including biomarkers, and in general, we delivered good growth across the segment, and our microbiology and healthcare market channel businesses benefited from a strong flu season. In Q1, adjusted operating income in the segment increased 19% with adjusted operating margin at 27.5%, up 200 basis points from the prior year, primarily as a result of strong productivity, acquisitions and nice volume pull through. This was partially offset by strategic investments and the medical device tax. In the Laboratory Products and Services segment, total revenue grew 5% and organic revenue grew 3%. In the quarter, as Marc mentioned, our clinical trials logistics business continued to deliver strong growth, which was partially offset by continued weakness in our laboratory products businesses. As you know, the muted conditions in the academic and government end market are a big factor in this segment. Adjusted operating income in Laboratory Products and Services grew 3% and adjusted operating margin was 14.1%, down 20 basis points, driven by strategic investments and unfavorable mix. So with that, I'd like to review the details of our 2013 guidance. Please note that, as we stated in the press release, our 2013 guidance does not include the acquisition of Life Technologies or the impact of related financing activities. On the top line, with the quarter behind us, we're raising the low end of our revenue range by $40 million. This leads to a new revenue guidance range of $12.84 billion to $13.0 billion, which represents reported growth of 3% to 4%. On an organic basis, we're still guiding to growth of about 1% to 3%, consistent with our previous guidance. Completed acquisitions will contribute about 1.5% to our reported revenue growth in 2013, no change from our previous guidance. And the negative FX impact on our top line has deteriorated slightly to a little less than 0.5%. However, we're now expecting a more significant unfavorable bottom line impact from FX as a result of the mix of currencies, in particular, the weakening Japanese yen. Specifically, we're expecting an incremental FX headwind of approximately 20 basis points of margin and $0.07 on adjusted EPS versus our previous guidance. We plan to fully offset this with increased productivity, so we're not changing our margin or adjusted EPS guidance as a result of this headwind. Also, as we mentioned in the press release, we're suspending our share buyback program as a result of our recently announced acquisition of Life Technologies. We expect this to create another $0.07 headwind in our adjusted EPS versus our previous guidance, as a result of higher diluted shares. So to summarize the change in our full-year 2013 adjusted EPS guidance, we're decreasing both the high and low end of our range by $0.07 to reflect suspension of our buyback program, but importantly, we're maintaining our previous operational guidance and tightening the low end of the range by $0.02, consistent with the tightening of our revenue range. This results in a revised adjusted EPS guidance range of $5.27 to $5.39, which represents 7% to 9% growth over 2012. Consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates, and our guidance does not include any future acquisitions or divestitures. Turning to adjusted operating margin. We're expecting expansion of 30 to 50 basis points, consistent with our previous guidance, although the high-end is somewhat less likely as a result of the FX headwinds that I mentioned previously. Moving below the line, we're expecting net interest expense to be consistent with our previous guidance, and we're forecasting our adjusted income tax rate to be in the range of 14.5% to 15%, consistent with our previous guidance. We're assuming that we'll return a total of about $310 million of capital to shareholders, composed of the $90 million in share buybacks that we completed in Q1 and about $220 million in dividends for the year. This is down about $500 million from our previous guidance as a result of our decision to suspend share buybacks. Therefore, our full-year average diluted shares are now estimated to be in the range of 365 -- 363 million to 365 million, up 5 million from our previous guidance. Finally, we expect capital expenditures to be in the range of $300 million to $325 million and free cash flow to be in the range of $1.8 billion to $1.9 billion, no change from our previous guidance. In interpreting our revenue and adjusted EPS guidance range, as I've said in the past, you should focus on the midpoint as our most likely view of how we see the year playing out. Results above or below the midpoint will depend on the relative strength of our markets during the year, as well as the economic factors we've discussed. In summary, we once again managed through the macro environment, executed well and delivered good revenue growth and very strong adjusted EPS. With that, I'll turn the call over to the operator for Q&A.

[Operator Instructions] Your first question is from the line of Tycho Peterson with JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: I'm just wondering if you can give us a sense of how things trended throughout the quarter. Obviously, the macro data got a little bit worse toward the end of the quarter. So can you give us a sense of the monthly progression of trends, in particular, on the industrial business?

Yes. I would say that, as you look at the industrial businesses, Tycho, they continue to be soft for us. We declined in the low single digits, and we didn't see an inflection point in the quarter. So as I look at the 3 months, basically remained weak. Bookings were softer than revenue for our industrial customer base. So it was pretty consistent as a soft end market, so we haven't seen that positive turn yet. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then you guys didn't call out the 2 fewer days for LPS. Was that just lost in the noise or was there any impact you can quantify from 2 fewer selling days or fewer selling days, I guess?

I think we've learned over the years that when you start talking about billing days, it gets in a circle that is not worth doing. Yes, there were some impact from billing days, but you had some things like the flu that helped and other offsets. So I think it's all lost in the noise. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: And then on pharma, you're putting up great numbers for that business. Are there larger contract wins that are coming through? And one of your competitors mentioned some delays on the equipment side. Is that anything that you've experienced as well?

So on the pharmaceutical and biotech customers, this is driven by really share of wallet with the existing customers. It's not about big customer wins. It's about just expanding the impact that we're having with our customers, and we clearly are gaining good momentum. I would say that our value proposition is really resonating quite well with that customer set. As I mentioned in the prepared remarks, the greatest strength has really been in the clinical trials, logistics and BioProcess Production. We saw some good progress in instrumentation, but clearly softer than those other 2 businesses. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then last one, any longer-term thoughts on the dividend? I know, obviously, you're building up cash now for the deal. But as we think about the longer-term delevering story, any thoughts on the dividend on a go-forward basis?

From a capital deployment standpoint, as we highlighted last week, our intention, once we close the Life transaction, is to spend the first 2 years in the mode of debt repayment to get our leverage ratios back to our target of between 2.5x and 3x leverage, and after that, returning back to our more historical returns of capital. I would say that when we look at the world today, if we were right -- if we were through that period of close the transaction, did our 2 years of debt repayment, we would have a higher emphasis on dividends than buybacks. So I think that's -- would be appropriate, but I think given that we're talking probably 2.5 years out, what you're going to hear is a strong commitment on return of capital. As it gets closer, we'll refine our thinking. We plan on continuing to focus on increasing our dividends in line with our growth and earnings in the meantime.

Your next question is from the line of Ross Muken with ISI Group.

So as you were debating sort of what to do with the guidance, obviously, lots of sort of pushes and pulls here. You had FX go against you and the macro, as you said, sort of challenging. You had the sequester. And then on the positive side, you've obviously turned on the sort of restructuring spigot a little more and pulled in a bit more cost. But as you were trying to debate where the biggest sort of deltas, as we go throughout the year, sort of positive and negative are, and I think that's a pretty good outcome relative to what many have expected given some of the commentary, where do you feel like the biggest wiggle room is, sort of the upside or downside, given sort of all these moving parts?

So Ross, thanks for the question. First of all, the big factor is, one way or another, that's going to swing the results off of the midpoint, is going to be the strength of the end markets, right. So if we see a positive inflection point in industrials or negative, that's going to be a major swing factor. And then obviously, if there's ever a resolution later in the year on sequestration of some sort, that obviously can be a positive swing factor as well. So that's -- more of the end markets is going to be the delta. As we went through that process of thinking about guidance, basically, our conclusion was the team executed extremely well. We had been taking restructuring actions, as we mentioned at the beginning of the year. We had some additional ones ready to go, should U.S. government not be able to solve sequestration. So things that we just wanted to get a definitive view on, and we implemented those actions. So yes, I mean, the world has its challenges. The end markets are on the lower end of our guidance. The Japanese yen is a real headwind, but our team is doing a real good job of gaining share in biopharma and managing the cost base well. So that's how we thought about our guidance for the year.

And from an end market perspective, I appreciate all the commentary you gave. I guess where were you sort of most surprised by the magnitude of weakness or softness? And how well do you feel like you're doing relative to peers in terms of both share gains, just from utilizing sort of size, scale and channel in what is a tougher environment, as we heard from several customers, the desire to use Thermo as more as their preferred supplier in new areas given some of the budget pressures? And then also from the new product standpoint, where you highlighted a ton of new instruments, et cetera, where you're really kind of thought leading and driving some new innovation?

I would say that our customers are clearly looking for ways to navigate their own funding challenges, and that is a huge advantage for us. And as we've said for a while, we really optimized the commercial relationship with our big biopharma customers, and then have expanded it to other customer sets. So I think we're particularly well-positioned to grow with customers that are trying to drive productivity and accelerate innovation. So I feel very good about that. And I think the results there show, at least in the biopharma, show that we clearly are performing extremely well relative to the market, where I would think the market growth is quite muted in that customer set.

Your next question is from the line of Daniel Brennan with Morgan Stanley.

Marc, I wanted to dig back in just one more question on kind of industrial. I know you cited in the -- in your prepared remarks, I believe, China's strong, environmental looked good. So I just wanted to understand a bit more. When you mentioned industrial, is it any particularly geographies? Is it -- within industrial, any more color, maybe food testing, maybe more pure industrial? Just kind of looking for the color on kind of where the weakness resides.

Yes, when you look at our customer set, we have industrial and we have applied markets there, right. So industrial was generally soft around the world, softest in Europe of that group, but generally soft. And if you get down to a further level of detail, kind of the basic infrastructure type products that we provide, certain metals and scrap and those types of things, were soft in the quarter, as a representative example. So that's -- basically what we see now for a couple of quarters is a continued soft market. On applied, there were some interesting pockets of strength, which is also consistent with what we've seen. Food safety continues to be very positive and very good, as I mentioned in my thoughts about China, and environmental's doing very well for us. The publicity in terms of the air quality problems in China, in particular, but elsewhere as well, is leading to very, very strong growth for us in a very attractive market.

Great. Maybe a follow-up just kind of on the sequester. What's your latest intelligence telling you how your U.S. economic customers are behaving in particular? How much of an impact do you think you've been feeling now versus the pacing of the spending as the year unfolds?

So when we talk to -- we talk to a lot of our customers obviously, and in the academic and government, we think that as the year continues on, it will get more challenging, because, effectively, we only had 1 month of sequestration in Q1. So when you look at it, we declined just slightly in the quarter, and when you remember back to our February guidance, we said we expect low single-digit declines in that customer set. So we're expecting, as you have the typical 3 months of sequestration in each of the remaining quarters, that end market's a little bit tighter and that's how we've been planning and why we took some additional contingency actions.

[Operator Instructions] And your next question is from the line of Steve Willoughby with Cleveland Research.

The incremental $10 million of belt tightening you guys did in March, should demand remain softer, get worse? How much availability is there to find additional restructurings this year?

So a couple of things. The $10 million -- we did a lot more than $10 million in terms of belt tightening, right. We've done a lot of things in addition, but when we called out the $10 million, that's pure restructuring-type activities. So we obviously manage our costs quite tightly, Steve. But as end markets get more and more muted, you continue to get tighter and tighter so that you're protecting the quality of the company going forward. We have 39,000 amazing employees here. So that belt tightening happens first, and then restructuring is a secondary type set of actions. So right now, we're doing what we think is the right level for the end markets, and obviously if the end markets get to a more challenging situation, we'll do what's appropriate for the long-term health of the company.

Okay. And then can you just provide an update on how some of your recent acquisitions are performing like Phadia, Dionex and One Lambda?

Sure. So if we look at the 3 acquisitions, clearly, Dionex is, from an ROIC perspective, is moving ahead of schedule versus the model. Phadia is pretty much on track, a little bit softer overall top line performance, which we've highlighted in previous calls, much better cash flow, tax planning, integration work that has offset it. One Lambda is doing quite well, is on track, and that integration has gone very smoothly. So I feel good about, in general, how those acquisitions are proceeding.

Your next question is from the line of Derik De Bruin with Bank of America.

Marc, I know you guys aren't -- I wanted to just sort of have the general philosophical question with you in terms of R&D spend and R&D focus, particularly as you started thinking about the Life transaction. I just -- I know I'm just -- I'm curious just in terms of general ways you're sort of going to look at the business and I'm trying to figure out -- I'm just looking at your core Thermo business right know. How much of your general R&D spend goes into high-end molecular cellular biology reagents? How much goes in Analytical Technologies, how much goes into diagnostics? I'm just curious about how you allocate it, and if that's a general guide we can think about for the Life transaction once that's come in.

That's a great question. I would say that if you look at our current spend, the majority of our R&D spend is in our analytical instruments businesses. We spend substantial R&D dollars to support our chromatography and mass spectrometry portfolio, and as you know, it's done very well over the years. We obviously have a number of R&D programs that are significant in things like developing next-generation biomarkers, our new novel biomarkers and a number of technologies across Specialty Diagnostics. When you look at our Biosciences portfolio, there, we obviously have a smaller level of spend, and we'll look at ways to take the best thinking between the combined companies with Life Technologies over time and the integration, to develop really interesting novel products that make a difference for our customers. I would say that the integration teams will work to optimize how we want to spend R&D going forward, and we're looking forward to kicking off that process, really in earnest, starting next week.

Okay. That's helpful. Also, I'm just curious in your clinical trial logistics. I mean, that's -- as I think about the company over the years and just commentary on the business, I mean, I know that was something that you guys -- that was picked up a number of years ago. And I guess, could you just give us a size about what that business is right now and sort of what the growth rate's been and who you compete with it. I just don't really -- I'm just looking for an update on the business, given it's been such a strong driver over the last few quarters.

Yes, order of magnitude, $800-ish million business, in that kind of range. It's growing consistently high single digits well into the double-digit growth, is what we've been experiencing there. We don't really have much competition. We're probably 3x to 4x the next largest competitor. Mostly, it's about customers taking in-house activities and driving that activity to us. Why this business is doing so well is, effectively, we've used our scale to build the highest quality, lowest-cost provider of these services. So we simply are able to do this more effectively than the in-house capabilities, and more and more of our customers are relying on us for that activity. So it's been a really excellent organic growth story for us for quite a number of years, and we feel good about how our team is executing there to build out that business.

And then just one final sort of end-market question, given talking about outsourcing, have you seen an increase in demand from your CRO customers?

Nothing that jumps outs particularly, either on the positive or negative, in terms of what's going on with our CRO base.

Your next question is from the line of Doug Schenkel with Cowen and Company.

You indicated, Marc, that you're heading out to Carlsbad next week, pursuant to getting the integration process of Life going. What update should investors expect from Thermo between now and deal closing? And what has early feedback been from customers you've spoken with on the deal?

So, Doug, in terms of when we get to major milestones, we'll definitely provide updates. So as we get through the major ones, we'll do that. In terms of the customer feedback, basically, the message -- I've spoken to a number of customers and the feedback is they're really looking forward to working with us once the transaction closes. So it's very good.

Okay. Mass spec was an important growth driver for you last year, where, I think, again, you grew above the market. You have a very big share position there anyway, but it seemed like you were gaining share last year at the high end. Any changes in those dynamics in Q1 or was it really just a continuation of the momentum you had last year?

We had very strong growth in Q1 in our life sciences mass spec business so I think our team is executing very well.

Okay. And last question, what growth rate expectations have you factored into full year guidance by end market and geography?

So I'll answer that one. In terms of the end markets, it's basically very similar or the same as what we had in our last quarter call. So pharma and biotech, kind of mid- to high- single digits; academic and government, down low single digits; industrial and applied, flat to down low single digits; and health care and diagnostics, low- to mid-single digits; and then in North America, low single digits; Europe, bordering around flat; Asia Pacific, mid- to high- single digits and the rest of the world, low double digits.

Your next question is from Dan Arias with UBS.

Maybe just to go back on the end markets. Marc, on the academic demand, to what extent have the haves and the have-nots sort of separated in terms of buying? Have the more established universities and labs sort of emerged as more resilient spenders or does the softness pretty much evenly apply across the accounts?

I think it's a little too soon to tell how that's going to -- if that's going to -- bifurcate is going to happen or not. We didn't see a particular pattern. Obviously, our scientific advisory board is made up of those folks that come out of the really premier universities, and I have a huge amount of dialogue with them. And they articulated that they are feeling some of the pressure as well. So I'm not sure that we have haves and have-nots. I think people are being mindful of their budgets.

Okay. And then maybe just to go back to the industrial side, obviously, more CapEx-intensive focus there. But for the consumable lines that are going into the markets that are soft, just curious how the recurring revenue streams have held up there. Are they generally at the company average?

Yes, I mean, there's not a lot of consumable business in industrial. It's a very, very small piece of that business.

It's more services supporting the instrumentation, and generally, that's held up okay.

Your next question is from the line of Paul Knight with CLSA. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: You had mentioned that the laboratory products business was a driver last year. Was the continuing strength of that area, I guess, that would largely be Fisher, was that a reason for your bid on Life? And then I guess the second question would be, how is that business, continuing to do well or a little slower than last year, midyear?

Yes, so in terms of our lab products and services segment, it's made up of 3 businesses: our channel, our lab products business, our Biopharma Services business. Clearly, Biopharma Services, which is the clinical trials outsourcing business, is doing very well. The other businesses are doing fine, but feel more pressure from the academic and government muted spending, so they feel that pressure, and I think that they are doing a good job of executing in that more challenging environment. The combination between the 2 companies is really more focused on the higher tech aspects of our business. It's really the combination of the strength of our Specialty Diagnostics, our Analytical Technologies and Life Technologies creating an innovation powerhouse. There obviously are some customer benefits. It's very powerful to have the leading e-commerce channel, which we have from the broad catalog view with the leading e-commerce channel that Life Technologies brings from a customer application view. Having that all in one company is incredibly compelling, and our job, once we close the transaction, will be to really bring that benefit to life, no pun intended, for our customers, so that they can shop by workflow and buy what they need or they can shop a broad set of capabilities through our channel and get it that way. So it's more of the holistic view of putting the companies together, is how we thought about it. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: Is the combination of the 2 e-channels -- is that a very, very obvious synergy and a very obvious cost savings?

It's less of a cost savings in that particular case. There are other things that will drive our cost efficiencies, but it's more about giving customers the easiest way to buy things. And I think maybe to make the example most real is, there's a lot of shop by experiment, shop by application capabilities within the Life Technologies e-commerce platform, and there are many things that we produce at Thermo Fisher, in our chemicals and in our lab consumables, that are very naturally used in those workflows, which Life Technologies doesn't make today. So you can imagine a customer just adding different things to their shopping cart simply because that's how they want to do the experiment, and I think that gives us a really nice share gain opportunity over time.

Your next question is from the line of Vamil Divan with Credit Suisse. Vamil Divan - Crédit Suisse AG, Research Division: So I just wanted to go back on talking about the Life acquisition, and you mentioned some of the initial feedback you've been getting from some of their customers. I guess it's a little bit different than what we were hearing. So I'm just curious more on the, I guess, specifically on their sequencing side of things where I think there's been a lot of focus. Is there anything specific you can share in terms of what you've been hearing from customers? It seems from what we're hearing and also from what we've been reading, I think, there's a fair number of questions as to kind of how that will blend into your business and how that might evolve over time. So anything specific you can share on that front?

No, not really. I mean, if you think about the relationships that we have, I mean, customers like working with us. We have great relationships. A lot of the calls were inbound, just congratulating us. A few of them were outbound from [ph] me as a courtesy, but it's more about their enthusiasm post-close to talk about this stuff. On the sequencing side, it's obviously -- it's an exciting business, but we're not getting into that level of granularity. We're still 2 separate companies and focused on each running our own businesses. Vamil Divan - Crédit Suisse AG, Research Division: Okay. And then one specific question, you mentioned the sepsis biomarker, I think you mentioned in China, it's doing pretty well if I caught your comments correctly. I know your Analyst Day last year, you talked about that product quite a bit, and I was just wondering if you've seen any increased traction in the U.S. with that biomarker.

The answer is yes. I mean, it is gaining traction in the U.S. as well. Interestingly enough, the uptick in China is spectacular, and I think it's a matter of really trying to triage patients very quickly in the ER setting. We had very good success across the country of getting the opinion leaders to just go from hospital to hospital and basically articulate why the sepsis screening, right up front for a very sick patient, why dealing with it that way makes sense. So we've seen huge demand. In the U.S., we're going through the traditional market development process that we have for all of our other -- our assays, and we clearly are seeing good growth as well.

And your next question is from Amit Bhalla with Citi.

Marc, I just want to come back to industrials for a second. I know you're talking about seeing some softness overall, but in the past, you've also said that your business is a 6-month lag to what's happening in larger industrial companies. Can you tie that to the expectations later in the year for the cadence of your organic growth rate related to industrial weakness?

Yes. What I would say is, in my commentary specifically, that the bookings continue to be soft, means, especially given the lead times of this, that certainly, the conditions here are going to continue to be similar, at least for the next quarter, and it's a little less clear if we're going to see an inflection point for later in the year. We haven't assumed one in how we thought about our guidance so -- but we haven't seen any signs yet that we're seeing a positive turn.

But you don't think it gets worse later in the year because of your lag?

Well, so in the second half of the year, we do have a little bit easier comps. So if it stays at this level or deteriorates, we can basically hold our current organic growth rate in industrial.

Okay, great. And then second, you brought up the Brazil stimulus. Can you put some numbers behind that and what kind of contribution you expect there?

That business is growing. Rates right now are similar to what we're seeing in China. So it's a much smaller business, but doing quite well.

Okay. And just clean up for you, Pete, the device tax impact?

It's about 15 basis points in the quarter, as we had expected. It's pretty much flat across the year, so that's the same number for the full year.

Your next question is from the line of Isaac Ro with Goldman Sachs.

First one had to do with just pricing. Wondering if you can maybe comment, Pete, on how much that contributed to growth this quarter. And then if you look at sort of the outlook for the balance of the year, what your expectations are for pricing?

So pricing is pretty consistent with what we've been seeing, really, for the last couple of years. We did have positive price in the quarter, less than 50 basis points contribution to the growth rate. But it did contribute positively to the bottom line, and I would expect that to be the case for the rest of the year.

Okay, great. And then just one business-specific item on Phadia. I think you mentioned a little softer growth there, and as I recall, I mean, it is coming off some relatively easy comps in the first half of this year. So wondering if you can give us some more detail. Was it a function of the exposure you have to Southern Europe or is it something else? Just curious how should we think about growth in that part of the business for the balance of the year.

Yes, we did have a good quarter, in terms of the Japan pollen season was stronger certainly than last year. We do have large exposure to Southern Europe. That's been a headwind for us. So I think we are factoring in for the rest of the year, Southern Europe continues to be soft, but the key growth drivers continue to develop positively as the year unfolds.

Your next question is from the line of Peter Lawson with Mizuho Securities.

Peter, I'm just wondering if you could give a better breakout on the gross margin pressure this quarter from the mix and med device taxes and FX, please?

Sure. I mean, basically, the big story was mix. In the gross margin level, it was about 100 basis points of headwind on gross margin. And then as I said, the medical device tax was about 15 basis points, so that was the big impact there. FX didn't actually impact gross margin that much in the quarter. It impacted more on the operating margin level.

And just on capital deployment, when do you think you start the buybacks again? Is that kind of a mid-2014 event or is there particularly debt-to-EBITDA number you have to hit? And then will you be increasing the dividend?

So Marc addressed the dividend question earlier on the call, but in terms of returning to share buybacks, we're focused on paying down debt in 2014 and 2015 basically. So we wouldn't initiate any return of capital other than dividends until after we're down in that 2.5% to 3% range, which should be later in the year in 2015.

And your next question is from the line of Dan Leonard with Leerink Swann.

I'll squeeze in one and one follow-up. So my first question, on the operating expense line. How do you think about your operating expense run rate going forward after seeing a pretty big sequential decline from fourth quarter operating expenses? And then my follow-up, your operating margin in diagnostics was very healthy in the quarter, wondering of that's sustainable.

So in terms of the SG&A percent of revenue in the quarter, that's going to pretty close approximate what we're expecting for the full year, so around 22% or a little bit under maybe. And then in terms of Specialty Diagnostics, we had very good margin in the quarter. For the full year, we would expect it to be just a little lower than that, probably in the mid-26s instead of the 27.5%.

So let me wrap it up. First, we're very pleased with the start to the year with a very solid Q1 performance. I think our teams executed very well in spite of the challenging economic environment. Our growth strategy's clearly working, and it's helping us to gain share. We're clearly very excited about our pending acquisition of Life Technologies and the new opportunities that the combination will create, and certainly welcoming our new colleagues to the company after the close of the transaction. And as always, I'd like to thank you for your continued support of Thermo Fisher Scientific and we're looking forward to updating you at our Analyst Meeting in May. Thanks, everyone.

Thank you for joining for today's conference. This concludes the presentation. You may now disconnect. Good day.