Thermo Fisher Scientific Inc. (TMO) Q2 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2013 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like 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 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 August 23, 2013. A copy of the press release of our 2013 second quarter earnings and future expectations is available on our website under the heading, Financial Results. So before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's quarterly report on Form 10-Q for the quarter ended March 30, 2013, 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 on the press release of our second quarter 2013 earnings and future expectations and also in the Investors section of our website under the heading, Financial Information. So with that, I'll now turn the call over to Marc.

Thanks, Ken. Good morning, everyone. Thank you for joining us today for our second quarter earnings call. I'm pleased to report that we delivered another solid quarter. Our growth initiatives are clearly creating value for our customers, and as always, we continue to carefully manage our costs. The result was good performance on the top and bottom line, and I'm proud of our teams for getting the job done. With a solid first half behind us, we're in a great position for the balance of the year. I'm confident that we'll continue our momentum to achieve the goals we've laid out for 2013. With that, let me move onto the highlights for the quarter, starting with the financials. Our revenue and adjusted EPS were both second quarter records. Revenues grew 4% and adjusted EPS increased 8%. Turning to operating income. Our adjusted operating income grew 6% and our adjusted operating margin expanded by 30 basis points. The environment is still challenging, and conditions remain similar to what we've seen during the past few quarters, but we've been very diligent as we always are about making sure that we're capitalizing on our growth initiatives and that we continue to fund them by controlling our costs. As you know, we use our PPI business system to make sure that we're delivering the best products and services to our customers as efficiently as possible. Our results clearly show that our formula is working. Let me take a moment now to put some color around our performance in the context of our key end markets. From a macro perspective, I would say that the dynamics are pretty consistent with what we've seen in prior quarters. Starting with academic and government, we grew here slightly in Q2. That said, our view on this end market hasn't changed and we still expect it to remain challenging for the balance of the year. This was the first full quarter of sequestration and markets in the U.S. were slightly weaker as a result. However, that was offset somewhat by growth in academic and government markets outside the United States. In industrial and applied markets, they remained weak overall, similar to what we saw last quarter, and again, it declined in the low single digits. Our businesses serving core industrial customers continue to face a challenging environment, and we haven't seen an inflection point yet. Applied Markets are certainly faring better than industrial for the most part and are providing some offsets here. For example, we continue to see very strong demand globally for our products used in food safety applications. Turning to health care and diagnostics, growth was very consistent with Q1 and remained in the low single digits. Looking at this end market by geography, we did see some effect from lower health care utilization in the U.S., but that was offset by a slight improvement in Europe. From a product perspective, we continue to see strong demand for our biomarker tests and our clinical diagnostic offerings. Finally, in pharma and biotech, markets were very strong for us again this quarter, and we're really strengthening our relationship with these customers and continuing to gain share. We grew here in the high single digits as we have for quite a few quarters now. So to sum it up, overall, our end markets are playing out as we expected. We're executing according to our plans and we're well-positioned for the balance of the year. Before I get into the business highlights for the quarter, let me give you a quick update on where we are with our pending acquisition of Life Technologies, which we announced in April. As I mentioned during our Analyst Meeting back in May, we appointed the integration leaders and the planning is now in full swing. The teams from both companies are working together well, and they're making great progress. As we move forward, we're really energized about the opportunities we see for the combined company. In terms of additional progress we've made to date, we secured a significant portion of our debt and equity financing, which we announced during the quarter, and Pete will give you more of those details. We're also making progress on the regulatory front, and we continue to expect that we'll complete the transaction early in 2014. Now I'll turn to some of the business highlights for Q2 using our 3 key growth drivers as a framework: they are technology innovation, our value proposition and presence in emerging markets. First, it was an exceptional quarter for innovation. As you know, we basically stole the show at the American society of Mass Spectrometry this year with the launch of 3 new mass spec platforms that have the potential to revolutionize the way our customers work. Customer applications are evolving all the time, getting more and more sophisticated as the knowledge base expands. That leads them to push the limits of their experiments and the performance of their instruments. This is probably most obvious in life sciences research, where our customers want to analyze increasingly complex biological samples. So we combined the best of the best of Thermo Scientific mass analyzers; our flagship, Orbitrap; our linear ion trap and our triple quad platforms and the result was an entirely new class of instrument that we launched at ASMS, the Orbitrap Fusion Tribrid. With this extremely high-resolution system, customers can perform analysis that were previously not possible. For example, cell biologist can conduct experiments in parallel for faster and deeper analysis of proteomes and up to a twofold increase in low-level protein identification. The Orbitrap Fusion has the potential to dramatically change the way experiments are run and that can greatly accelerate the pace of life sciences research. We also redesigned our triple stage quadrupole systems to boost performance and ease-of-use. The Quantiva provides the absolutely lowest levels of detections for toxicology, food and environmental testing, while the Endura provides maximum up time and throughput in forensics, pharma QA/QC and other applied markets. Since many of our customers use both our hybrid and triple quad technologies in their labs, we also made it easier to integrate these platforms and manage all the data. In fact, we launched a suite of 10 new software packages at ASMS. All of these systems have been very well received by our customers. One last point on innovation. We're very pleased that Thermo Fisher was once again recognized by R&D Magazine on its list of the year's top 100 technologies, but this was the first time that we actually won 5 awards for our Thermo Scientific products. Our winners include TruNarc handheld drug analyzer, the iS50 and iCAP Q spectrometers, along with our Dionex ICS-4000 and the EASY-Spray accessory for our chromatography portfolio. It's clear to see that our commitment to innovation is creating value for our customers and contributing to our growth. Let me spend a few minutes on our value proposition, our second key growth driver, and give you some examples that highlight the clear advantages it gives us with our customers. I've already talked about mass spec in the context of innovation, but let me add here that one of the reasons we're so successful in building this franchise is that we've established deep relationships with our customers, and we've done that by partnering with them over the years to deliver a value proposition that only Thermo Fisher can provide. This is evident in the research and scientific community, which has contributed significantly to strengthening our position in mass spec, but it's also increasingly evident in Applied Markets, where our customers in food safety, for example, are turning to us first because of our unique depth of capabilities in chromatography. Another example is our Specialty Diagnostics business. A long-term customer, Roche, recently extended our partnership in the area of biomarkers. They renewed a new long-term contract with us to use our PCT assay for sepsis on their instrument systems outside the United States. Our widely recognized value proposition is very instrumental in helping us open the door to new potential opportunities as well. For example, during my trip to China during the quarter, I had the chance to meet with the party secretary of one of the key provinces and his staff. We discussed extensively how Thermo Fisher's mission is aligned with the primary societal issues in China. He was amazed of the value proposition I described and how we're able to address the country's most pressing needs in health care, the environment and food safety. That's a good segue to emerging markets, the third element of our growth strategy. In short, Asia-Pacific was very strong for us again this quarter. Our teams in China delivered outstanding growth, well above 20%, which is the 8th quarter in a row of 20% or more organic growth. Although our core industrial markets remained weak in the region, we're seeing very good growth in healthcare and Applied Markets. This is particularly benefiting our mass spec, chromatography and air quality product lines. To build on our capabilities in the region and support continued growth, we invested about $10 million to establish a new China Innovation and Technology Training Center in Shanghai, which we opened in Q2. The new center will significantly expand product engineering and development to meet the specific needs of our Asia-Pacific customers. The facility will also support the training of a couple thousands customers every year and the use of our analytical instruments and other technologies, a real differentiator that will help us fuel future organic growth. In other emerging markets, our business in Brazil benefited again this quarter from the government stimulus project. This continued our momentum in the country, which delivered double-digit growth again this quarter. Turning now to our guidance. We're updating both our revenue and adjusted EPS guidance for the year as you saw in our press release. Pete will get into the details, but at a high-level, we're updating our revenue range to reflect the increased headwinds we're experiencing from currency exchange rates, which are partially offset by our solid operating performance. We now expect to deliver between $12.83 billion and $12.95 billion in 2013. This will result in 3% to 4% growth for the year that we previously communicated. In terms of our adjusted EPS guidance, we're raising the low end by $0.02. This primarily reflects our solid operating performance in the first 6 months of the year and some offset from currency exchange and a slightly higher share count. Our adjusted EPS growth remains at 7% to 9% over last year. So before I turn the call over to Pete, let me summarize the key takeaways for the quarter. Overall, our end markets played out as we expected and our solid execution led to good growth at the top and bottom line. We delivered a solid first half that puts us in an excellent position to achieve our growth goals for the year. We have a lot to look forward to as we continue to reap the benefits of our commitment to innovation, leveraging our value proposition and expanding in emerging markets. We now have the opportunity to build on these strengths through our pending acquisition of Life Technologies and are excited about the value this transaction will create for our customers and shareholders alike. Now I'll turn it over to Pete. Pete?

Thanks, Marc. Good morning, everyone. I'll start with an overview of our financial performance for the total company, provide some color on each of our 3 segments, update you on our recent financing actions to fund the Life Technologies acquisition and then conclude with our guidance. As you saw in our press release, we delivered a solid quarter of top and bottom line results, resulting in an 8% increase in adjusted EPS to $1.32. GAAP EPS in Q2 was $0.76, up 21% from $0.63 in Q2 last year. Looking at the top line, Q2 total revenue increased 4% year-over-year and we delivered 2% organic growth. Q2 reported revenue includes 2% growth from acquisitions and a nominal negative impact from foreign exchange. Although the revenue impact of FX in the quarter was minimal, as a result of the mix of currencies, primarily weakening of the Japanese yen, the earnings impact was significant, resulting in about 50 basis points of adjusted operating margin dilution and $0.04 or 3% of adjusted EPS dilution year-over-year. Bookings were slightly less than revenue in the quarter, but bookings grew organically in all 3 segments. By geography, North America declined in the low single digits. Europe grew in the mid-single digits, and consistent with previous quarters, Asia-Pacific grew in the high single digits, with China once again delivering very strong growth of over 20%. Rest-of-world grew in the high single digits as well. Looking at our operational performance, Q2 adjusted operating income was up 6% and adjusted operating margin was 19.3%, up 30 basis points from the prior year. We continue to have very strong contribution from our productivity and cost actions, which was partially offset by foreign exchange as I mentioned previously. We initiated another $10 million of restructuring actions this quarter to help offset some of the FX headwind we're experiencing. This brings the total amount of restructuring benefit we expect to realize this year to $85 million when combined with the $75 million of benefit from restructuring actions that we initiated and communicated in previous quarters. In total, we realized about $24 million of benefit from these actions in Q2 and about $45 million in the first half of the year. We continue to make strategic investments to drive growth this quarter, primarily in emerging markets to strengthen our global presence and to continue our growth momentum there. Moving on to the details of the P&L, total company adjusted gross margin came in at 44.2% in Q2, down 50 basis points from the prior year, primarily as a result of unfavorable foreign exchange and the medical device tax, partially offset by contribution from 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 Q2 was 22% of revenue, down 60 basis points from the 2012 quarter as a result of volume leverage and our restructuring actions. And finally, R&D expense came in at 3% of revenue, essentially in line with the prior year. Below the line, net interest expense in Q2 was $57 million, $7 million above last year as a result of the debt we issued in Q3 2012 to fund the One Lambda acquisition. Our adjusted tax rate in the quarter was 15.6%, consistent with our previous guidance and 160 basis points lower than last year as a result of acquisition tax synergies and our ongoing tax planning efforts. In terms of returning capital, we paid out $54 million in dividends to our shareholders in the quarter. As we discussed on the Q1 call, we've suspended our buyback program in light of our pending acquisition of Life Technologies. So there were no share buybacks in the quarter. Average diluted shares were 363.5 million in Q2, down 5.7 million or 2% from last year, reflecting the benefit of our previous share buyback programs. However, our share count is up by 1.8 million shares from Q1, primarily as a result of option dilution. Turning to cash flow and the balance sheet. Year-to-date cash flow from continuing operations was $778 million and free cash flow was $650 million after deducting net capital expenditures of $128 million. Year-to-date free cash flow was down from the prior year, primarily as a result of increased working capital investment. As expected, we also expended $58 million on fees associated with the financing of our pending acquisition of Life Technologies, which lowered free cash flow in the quarter. We anticipate that our working capital performance will improve in the second half of the year, although our full-year results will be negatively impacted by the financing fees, which were not included in our previous full year outlook for free cash flow. We ended the quarter with $1.4 billion in cash and investments, up $405 million sequentially from Q1, driven by our free cash flow. Our total debt at the end of Q2 was $7.1 billion, essentially flat with Q1. Now let me wrap up my comments on the total company with a quick update on our return on invested capital performance. Our trailing 12 months adjusted ROIC through the second quarter of 2013 was 9.7%, up another 10 basis points from Q1 so we continue to make good progress on return on invested capital. So with that, now I'll walk you through the performance of our 3 business segments. Starting with Analytical Technologies. In Q2, total revenue grew 4% and organic revenue also increased 4%. We saw a strong growth in our BioProcess Production business again this quarter, as well as in our chromatography and mass spec business, which benefited from strong performance in China. This was partially offset by the softness we continue to see in our core industrial markets, which are more highly represented in this segment. Adjusted operating income in Analytical Technologies increased 5% and adjusted operating margin was 17.7%, up 30 basis points. During the quarter, we delivered very strong productivity, which was partially offset by unfavorable foreign exchange and strategic investments. Turning to the Specialty Diagnostics segment. In Q2, total revenue grew 8% and organic growth was 2%. We continued to deliver very good growth in our clinical diagnostics business, and Europe is starting to stabilize across the segment. However, we did see some softness in the segment due to lower healthcare utilization in the U.S., as Marc mentioned. Adjusted operating income in the segment increased 9% in Q2, with adjusted operating margin at 27.3%, up 10 basis points from the prior year, primarily as a result of productivity savings, acquisitions and favorable mix. This was partially offset by unfavorable foreign exchange, strategic investments and the medical device tax. In the Laboratory Products and Services segment, total revenue and organic growth -- organic revenue both grew 3%. Our clinical trials logistics business continued to deliver strong growth and our laboratory consumables business had good growth as well. Muted conditions in the U.S. academic and government end market, as a result of sequestration, continue to be a significant headwind in this segment. Adjusted operating income in Laboratory Products and Services grew 3% and adjusted operating margin was 14.5%, up 10 basis points, driven by improved productivity, offset partially by strategic investments. Before I move on to 2013 guidance, I want to provide a brief update on our activities to finance the Life Technologies acquisition. As a reminder, we put in place a fully committed $12.5 billion bridge loan facility when we announced the transaction with the intent to reduce the amount of that facility as we secure more permanent forms of financing. To date, we have secured $7.5 billion of permanent financing, which consists of a $5 billion term loan facility, which allows for LIBOR-based borrowings, and we don't expect to drop on this facility until we're ready to close the acquisition. So there are currently no funds borrowed, and therefore, no related interest expense at this point, and $2.5 billion of equity via forward sales of Thermo Fisher common shares. As a forward transaction, no shares have been issued yet so there's no impact to our share count, except for a slight amount of treasury stock method dilution based on our shares trading above the forward price. We expect to issue the related shares just before we close the acquisition. With these 2 financing arrangements in place, we've reduced our bridge commitment by $7.5 billion and we'll reduce the bridge facility to 0 once we've secured the rest of the financing. At this point, we expect the remainder of the financing will consist of $3.5 billion to $4 billion in debt, which will most likely be in the form of bonds and up to $750 million of equity or equity-linked securities, the amount of which will be dependent on our available cash upon closing the transaction. We'll continue to update you as we finalize these financing arrangements. In terms of the average interest rate on new debt, although rates have gone up a bit, we still expect our average rate to be at or below our previously communicated average of 3.25% to 3.5%. So with that, I'd like to review the details of our 2013 guidance. Please note that as I mentioned on our Q1 call, our 2013 earnings guidance does not include the acquisition of Life Technologies or the impact of related financing activities. In terms of our reported revenue guidance, many foreign currencies, specifically in the Asia-Pacific region have weakened further since our previous guidance and we now expect an additional $50 million of revenue headwind from foreign exchange for the year. On the organic revenue front, we're raising the low end of our organic growth guidance by $40 million based on our year-to-date performance, which offsets a portion of the FX headwind. That results in a narrower guidance range, as well as a $20 million increase in the midpoint of our organic growth, but we're still expecting 2% organic growth for the year at the midpoint. The net result on reported revenue is that we're lowering the high-end of our guidance by $50 million for FX and the low end by only $10 million, which leads to our new range of $12.83 billion to $12.95 billion. This range represents reported growth of 3% to 4% over 2012, which is unchanged from our previous guidance. Completed acquisitions are expected to contribute about 1.5% to our reported revenue growth in 2013, no change from our previous guidance and we now expect foreign exchange to have a negative impact on our top line of about 3/4 of 1%, which as I mentioned, has deteriorated since our previous guidance. The bottom line impact from FX on our full year is even more significant and is now expected to result in 30 basis points of adjusted operating margin dilution and $0.11 or 2% of adjusted EPS dilution year-over-year. In terms of our adjusted EPS guidance, we're raising the low end and tightening our previous range by $0.02, in line with our new revenue range. This results in our new adjusted EPS guidance range of $5.29 to $5.39 or 7% to 9% growth over 2012. To bridge the midpoint, which is up $0.01 versus our previous guidance, we lost about $0.03 as a result of the FX headwinds and another $0.01 as a result of a slightly higher share count due to the equity forward accounting. This was more than offset by improved operating performance, which contributed about $0.04 and a slightly lower tax rate, which added another $0.01. 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, and moving below the line, we're expecting net interest expense to be consistent with our previous guidance. We're forecasting our adjusted income tax rate to be at about 14.5% at the low-end of our previous guidance, and we're assuming that we'll return a total of about $310 million of capital to shareholders, composed of $90 million in share buybacks that we completed in Q1 and about $220 million in dividends for the full year, unchanged from our previous guidance. Full-year average diluted shares are estimated to be in the range of 364 million to 366 million, about 1 million shares higher than our previous guidance, as a result of the equity forward accounting, as I mentioned earlier. Finally, we expect capital expenditures to be in the range of $300 million to $315 million and free cash flow to be in the range of $1.7 billion to $1.8 billion, which was $100 million lower than our previous guidance, primarily as a result of financing fees and transaction cost associated with our pending acquisition of Life Technologies. In interpreting our revenue and adjusted EPS guidance ranges as I said in the past, you should focus on our 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 growth in revenue and adjusted EPS. With half the year behind us, I believe we're well-positioned to meet our full year goals. With that, I'll turn the call over to the operator for Q&A.

[Operator Instructions] Our first question comes from Jon Groberg of Macquarie.

Marc, I just wanted to focus a little on the government and academic because it sounds like, if I heard you correctly, overall, you saw some growth in the quarter, and I think it was down in the first quarter. So I just wanted to get a little bit more insight geographically kind of how you saw things change, and maybe in the U.S., how much of a headwind that's being on the LP&S (sic) [LPS] business right now. And in China, maybe how much it's growing, given the industrial business is down.

Sure. So Jon, essentially, the end markets, the conditions are the same, the academic and government. The nuance in the quarter was we had our first full quarter of sequestration, right? So you had it slightly weaker in the U.S. That was offset by a little bit of strength in the markets outside the U.S. so we reported slight growth, but I wouldn't read much of a trend or change from what we saw in previous quarters. In terms of where you see the headwind most, as you mentioned correctly, lab products and services are going to have the largest exposure to the U.S. academic and government proportion so that's where the headwind would be the most significant.

And just to be clear, is that --- how much of a headwind is that right now to the life -- to the LPS business?

It's probably in the range of 1% to 2% for that segment.

Okay. And then just a quick follow-up on your comments on life, Marc, I'm guessing you're spending a lot of time getting to know the business quite a bit better, the products, end markets and customers. And I'm just curious, as you kind of you look through and think of the potential, the combined in proteomics and genomics, and what you both have in forensics and opportunities in bio production. I just -- I don't know, as dig into it, do you have any kind of further thoughts or some of your early discussions with customers about where you think there's some -- what's getting you even more excited, I think, was your comment on the call.

Yes. Since our last update, which was at the Analyst Meeting, we have -- our integration teams are really in the full action mode at this point. So I've had an opportunity to interact with several thousand of our soon-to-be new colleagues at life technologies through Town Halls, and at the same point, really get to know the integration teams and their progress. We're excited, I mean, obviously about what the potential is in the future and the feedback we get from our customers. Obviously, we're still 2 separate companies, but the feedback we're getting kind of inbound calls has been very, very, very positive. And I think there's great opportunities in the life science research area over time when you think about the workflows that have an intersection between proteomics and genomics. I actually thought that at the Analyst Meeting, the microbiologists that we had talked, give you a good example of how their work has both genomics and proteomics and literally side by side in dealing with the challenges of infection in the healthcare system so I thought that was a good example that our collaborator in the U.K. highlighted that particular venue.

Our next question is from Dan Brennan of Morgan Stanley.

Just wanted to get a little more clarity on the Pharma customer base for you. It certainly continues to perform quite well, maybe just 2 questions there. Number one, anything notable, Marc and Pete, on kind of spending patterns in the quarter? You can hear some rumblings already this quarter about maybe some capital budget restraints as we end -- kind of get towards the end of the quarter. I'm just wondering in your high single digit growth kind of, any further clarity you can provide on the pacing and/or the dynamics underneath that.

Pharma has been really strong for us. It's clear that we're continuing to gain share, which we have for a number of quarters. We've seen really good strength across the portfolio, obviously, highlighted by our clinical trials logistics business, where our value proposition is just -- is really is phenomenal in terms of the ability to have a very high quality offering that reduces our customers' costs, and we are benefiting from our BioProcess Production capabilities, which is coming from demand for vaccines and bio-therapeutics from around the world. In terms of the pattern for the quarter, no. In fact, the quarter ended fairly strong for us so we feel good about the pacing of the orders, and we thought that gave us confidence that when we thought about our guidance for the year that we have slightly raised the organic outlook on the low end as we post solid for 6 months behind us.

Great. And then maybe one more customer question, Marc and Pete, just in terms of industrial. I know you said things kind of trended as you expected in the quarter, but since that business is the one that you've incorporated the biggest headwind within your full year guidance, just interested to hear kind of anything notable kind of within pacing or geographic on industrial just -- if it's spot in line or are there any kind of opportunity maybe to see some improvement in industrial as -- while China is weak and the rest of the world looks like we're gaining some traction.

So Dan, in terms of industrial, in the industrial and applied markets, we were down low single digits, which was similar to last quarter. It was actually at the low-end of our expectations in terms of the end market. We have not seen the inflection point in the core industrials. So we continue to remain cautious on the outlook. And to give you a little bit more flavor or color, on the core industrial side, we had good strength in molecular spectroscopy, which is primarily a result of strong new products that we've launched over the last 18 months or so. But in certain parts of the industrial segments, driven primarily by commodity materials, pretty weak. Examples there would be portable instruments used for scrap metal sorting would be a weak end market right now. And then on the applied side, we continue to see pockets of strength, and that's helping offset some of the weakness in core industrial.

Our next question is from Tycho Peterson of JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: You made a comment on the health care channel about a little bit of a slowdown there, and I guess, we -- going back to Q2 '09 when you had a bigger slowdown there, I'm just wondering if you can talk in your visibility. I don't think it's anything close to the de-stocking issues you had before, but can you talk about your visibility in the healthcare channel and maybe just elaborate on the comments you made?

Yes. So Tyco, for the quarter, in aggregate, the conditions were incredibly similar to Q1, right? So the performance was almost identical, but we did provide a little more color because as we look at the broad healthcare industry, there's clearly, in the U.S., some headwinds that aren't particularly significant, but there's a little bit of a headwind on utilization, and we saw that nicely offset by some strength in Europe, really, Europe is stabilizing for us and continued momentum in emerging markets. So we provided a little bit more color, but the results in terms of organic growth in that customer set was pretty much identical between Q1 and Q2. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then on the new mass spec systems, can you help us just think about the sizing and the market opportunity for the Orbitrap, the new fusion and the 2 triple quads? And these things always take a couple of quarters to gain traction, but when do you think those start to actually have some impact on revenues?

So the triple quad market is one of the largest, if not, the largest market in mass spectrometry. We're one of 4 participants in that market that have been in that market forever, and we're the company now with the new systems, right? So we have 2 new systems launched, and that will allow for both the replacement cycle for our current customers and a share gain opportunity for taking share from other competitors. On the Orbitrap Tribrid product, the Fusion, we're very excited. Actually, the feedback from our collaborators have been incredibly positive, and it's a little early to call how big it will be, but I would say that when I thought about the enthusiasm I have for the Q Exactive a couple of years ago and said that was going to be a whole new category of instruments, that was clearly the case and I would say my early read on the feedback is that this could be very significant in 2014. We clearly -- we're already starting to ship the product so it's not as if it's all in the future, but I think this can be a really significant growth driver 6 months out from now with some nice momentum in the short term. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: And last quick one on life, have you guys filed in China at this point for anti-trust? And then secondly, as we think about the integration, how easy are things like PPI to transfer over to their business and how easy is it with the life products in your catalog? Can you just talk about some of those metrics as well?

Yes, so the integration team, so I'd do that one first, then we'll go to regulatory. So from an integration team perspective, in terms of getting the right products on the right e-commerce platform and then the right training, the right commercial teams for that, that stuff is all being thought through, and that will get metered out over the first year or 2. If you look at how we phased our synergies, revenue synergies typically really start to roll in, in year 2 and 3. Cost synergies start on day 1. So there's a little bit of time, and obviously, we try to shorten that window as much as we can, but we feel very confident with our ability to not only successfully integrate the business, but drive good growth out of it. In terms of the regulatory process, we are continuing to go through that process. It's going according to our expectations. We're still anticipating exactly as we have before that we're going to close early in 2014 and we don't really comment on the specific filings and the nuances of where we are with those things, but it's going according to the plans we've laid out.

Our next question is from Ross Muken of ISI Group.

On Europe, we got some decent PMI data today. I know most of the weakness you've seen has been more so focused on the Specialty Diagnostics business for Phadia. I mean, as we think about sort of the general trajectory there in the region, if we do get sort of a modest recovery, or at least, a modest return to growth overall, what's the correlation between that and some of those businesses that have struggled and maybe have been more reimbursement or utilization related? And what are you sort of assuming for that in the back half of the year in terms of growth?

So when we looked at the quarter, our Specialty Diagnostics business, which has a significant exposure to Europe primarily because of our immuno diagnostics business, which as you mentioned, we definitely saw a stabilization there. So we -- and the question is, is it one quarter or is it the beginning of a trend? And that's hard to tell, but we're watching it closely and we were happy with the stabilization that we saw. Now in terms of what we're assuming in our outlook for the full year, we really haven't changed the geographic outlook particularly significantly. We thought about it more from an end market perspective as we look at the remainder of the year, Ross.

And maybe just on China, you guys have done a tremendous job there. There's been a lot of noise. I mean, you kind of talked about it. One of the prior questions in terms of some of the commodity-related businesses, industrial-related businesses being softer, but as you think about sort of the go-forward, I mean, today, there was a big piece about them continuing to do hospital reform. It seems like healthcare and the multinationals are investing. I mean, as you try to put all the pieces together of your performance versus sort of the perception of what's going on in that market, where do you feel like the biggest disconnect is to where you're kind of insulated from maybe some of the concerns that people have had?

So when you look at our business in China, we're using our scale to our advantage, right? We have manufacturing. We have an R&D center. We have multiple training centers. We have a business headquartered there. We're closing in quickly on 3,000 colleagues. We recruit from the best universities. We are clearly very well-positioned in the market, and that's helping us drive significant growth, having quite a number of quarters of 20%-plus growth and this being one of our stronger quarters that we've had. When I look at why, so that's sort of our strategy, but we're very well aligned with the societal needs and the 5-year plan, right, which is around environmental protection, food safety and expanding health care capabilities, particularly in the west. And while I mentioned in my prepared remarks, to get multiple hours with an entire government for 100 million people in a province to really talk about our capabilities and their challenges and what the opportunities are for alignment, gives you a sense of the importance, even though they brought up in the dialogue that, yes, the industrial economy in their own province is a little bit weaker, right, and that has an effect on their GDP growth, but nonetheless, they thought it's important enough to actually talk through what we could do and collaborate together to really meet their needs on their own priorities as well.

Our next question is from Derik De Bruin of Bank of America Merrill Lynch.

I just sort of want to follow-up on Tyco's question on Specialty Diagnostics. I mean you -- basically, over the last couple of quarters, you've seen organic revenue growth go from 6% in Q4, 4% last quarter, 2% this quarter. I'm just wondering how we should think about that business on a go-forward basis. And just given that, particularly, since the next couple of quarters, the comps actually get tougher on that from an organic basis. Can you just help us think about what's going on the overall dynamics of that business?

I think it's always most helpful to think about what the long-term trends are for that business as opposed to the next 2 quarters. And my view is in the long-term, given the portfolio and the societal needs for our products, that's a solid mid-single-digit growth business for us, and we feel good about that in the midterm outlook. In terms of the comparison, yes, you're right, we have tougher comparisons, and I would say that we're not expecting significant changes in the organic growth in the second half of the year in Specialty Diagnostics, nothing particularly meaningful.

Great, and then just one quick follow up on this. It's like so what do you see in terms of your plans for Specialty Diagnostics business once you have the Life Technologies capabilities there? I mean, what sort of -- I mean, how much do you intend to expand this business? What are sort of some of the augments you can do with the life portfolio?

Yes, so I think -- let me talk through it from a couple of perspectives. Let me step back one level, which is our priority post-close is to successfully integrate Life Technologies, maximize the value for our customers and deliver on the expectations for our shareholders. So when we think about our priorities, it's going to be around organic growth, and we do see really great capabilities of leveraging the infrastructure that we have in Specialty Diagnostics to continue the theme that we've had for many, many years, which is taking life sciences tools and moving them into clinical applications and I think that when you look at the portfolio of Life Technologies and you look at next-gen sequencing and you look at QPCR, you think about our own mass spectrometry, there are a number of great technologies that can be moved into the clinic and some are already happening, and I think you'll see us continue to leverage those capabilities to drive growth over time.

Our next question comes from Doug Schenkel of Cowen and Company.

I have, I guess, a couple of questions on the separation analysis market. So let me just run through those, and I'll get back into the queue. So early data from a couple of your competitors in mass spec suggests the market's growing at mid-single-digit to high-single-digit levels. Would you agree with that and what are you seeing at different product classes and end markets? And then on the liquid chromatography front, are there any changes in competitive dynamics or notable changes in demand patterns, either on the QA/QC or non-QA/QC front? And are you confidently gaining share via Dionex and if so, should we view this as an example of how you can gain share via both growing breadth and innovation in line with the 2 -- I guess, 2 of 3 components of your value proposition?

That's very well said, Doug. I have to go back to the transcript and put that on my script next time. Let's do the second half first, which is about chrome and the value proposition. We had a very strong quarter in our chromatography business. HPLC did very well, and while all of the competitors haven't reported yet, at least, from the early read, it looks like we gained share again. So that's a good thing, and I think customers respect our technology, the great people that we have and the fact that we have incredible commercial reach, all right? I mean, we just have a huge scale sort of capabilities and our customers are very collaborative, right, so the great momentum in chromatography and food safety as an example, and that's a good area to highlight. So we feel good about the momentum in HPLC. In terms of the market growth, on mass spectrometry, I mean, it's somewhere in the mid to high single digits. I think that seems like a reasonable assumption. We feel good about our performance. We're particularly excited about the new products that we launched, and feel like that positions us for continued momentum going out into the balance of this year and into 2014.

Our next question is from Brandon Couillard of Jefferies.

Pete, could you parse out the puts and takes around the gross margin experience in the quarter between mix, currency, acquisitions and productivity? I'm assuming the medical device tax was still around, I don't know, 15 basis points of headwind, but what exactly changes in the second half to get you towards the operating margin expansion goal for the year?

Well, so I'll do it at the EBITDA margin expansion level rather than gross margins just because the numbers are more relevant probably to our full-year guidance of 30 to 50 basis points. In the quarter, we had, as I said, 50 basis points of FX dilution. We actually had over 200 basis points of productivity, which is consistent with what we've had in the past and even net of inflation, we were still over 100 basis points. We spent about 80 basis points on investments, which I said in my comments, is really around emerging markets, and then we got 50 basis points of benefit from acquisitions, which is really around our One Lambda acquisition, which really performed very well in the quarter. That's what nets down to the 30 basis points. For the full year, the numbers aren't dramatically different than that other than, obviously, FX. The acquisition will be only for basically 3 quarters of the year. FX is around 30 basis points for the full year and then the productivity and investments, I would assume, is about the same numbers in the full year bridge.

That's helpful. And then Marc, I realize Japan's a relatively small market for you, but could you speak to how that market performed, and in particular, did you see any impact from any stimulus-related orders yet?

Yes. So in terms of Japan, you're right. It's not a huge market for us, but given our scale, we actually have a large organization there. It grew in line with the company a little better than the company average. I would say that we have seen some meaningful orders on the stimulus, and those should translate into revenue in the second half of the year, which is clearly a good thing.

Our next question is from Dan Arias of UBS.

Pete, any change on the yen assumption for the year relative to last quarter?

It's deteriorated a little bit. We're now using an assumption of 100.

Okay. And then maybe, Marc, to follow-up on the China question, as we get these sort of up-and-down macro data points and kind of go back and forth on whether we're doing better or worse. Are you finding that ordering patterns at all move with the macro sentiment intra-quarter, or for the most part, is spending fairly smooth? I mean, clearly, the growth speaks for itself there, but I'm trying to get a sense of whether you do see any fluctuation maybe month-to-month?

We've had incredibly stable business in aggregate in China for the last few years, right. So we haven't noticed particularly big patterns in the quarter. So we had a very strong quarter, well over 20% growth. I was in the quarter in -- I was in China in late May, early June, and the business was doing -- was kind of about that rate then and it obviously finished then. So we saw a nice stability in terms of the strong momentum. So we clearly read the headlines that we see about -- there is ups and downs, but at least in the end markets that we're serving in aggregate, they continue to be strong and quite stable.

Our next question is from Isaac Ro of Goldman Sachs.

I just want to ask a little bit about market share trends and specifically, with regards to trends in LPS, I think earlier, in your comments, you did mention that you saw some broad market share gains in the business, and that's been in the last few quarters, of course. And if you look at the sales funnel, going forward, do you think it's possible that you could see continuation or acceleration in those share gains? Or is it fair to say that over the last 12 or 18 months, you've been unusually strong on the market share front?

Yes. My view is that we like our prospects, and we feel like our value proposition's such that it will continue to deliver good organic growth for us going forward. So we're not assuming big changes in the end markets. We're not assuming big changes in our performance, meaning that the share gain momentum we have, we expect it to continue, right? And as obviously when we think about our guidance range, stronger end markets mean we'll raise our aspirations and weaker end markets means we'll come in more in the lower end of things so that we try to drive that same steady share gain momentum, and the variable change is just what are the market conditions.

Sure. And then just one follow-up, sort of a big picture question, if you look broadly at your portfolio, can you maybe comment as to what percentage of your products and services are purchased via maybe a centralized procurement method and maybe what percentage are purchased by the individual user? And the reason I ask is I'm trying to just assess kind of how that modality will change post life.

Yes, so in terms of -- it's a very tricky question because it's always collaborative, right. There are some customers that the end user just buys it with very little business insight, and there are others that business has a heavier weighing, but people don't buy things without the end-user involved. I would say my best estimate of the customer base that is more heavily business-oriented is very much in the biopharma area. It's going to be your biggest area. So that represents 25% of our revenue and a meaningful proportion, the business community plays a significant role. And when you look at the mix, it doesn't change all that much when you combine the company in terms of the exposure.

Our next question is from Amit Bhalla of Citi.

Pete, a question for you on some of the cost actions. You've added some incremental cost actions in each of the first 2 quarters. I'm just wondering how you're thinking about the remainder of the year, and any incremental cost savings you're assuming to put in place in 3 and 4Q?

Yes, so the $10 million that we put in place this year -- or excuse me, this quarter, brings the total for the year to $85 million. So those are actions that we didn't actually shut down the factories in this quarter or do the restructuring actions there. They will actually be executed in Q3 and Q4. So that's when we'll realize the benefits. We're expecting $85 million for the full year. We've realized $45 million through the first half, so that would say we're going to get around $20 million a quarter for the rest of the year.

I guess, anything you're seeing that would make you put additional cost savings in place? That's the [indiscernible].

Well, certainly, we've continued to put cost actions in place and primarily because of the FX headwind. So we're trying to offset the negative impact of the FX headwinds. So at this point, we're not expecting that to deteriorate further. If our markets deteriorated further and/or FX deteriorated further, then we would potentially put more actions in place, but at this point, we don't have any plans to do that.

Okay, great, and just on pricing, any comments you can give just on the global environment for pricing, and if there's anything notable within diagnostics?

So it's very similar to this quarter to what it's been in previous quarters. The split in pricing between consumables and equipment, it's stronger on consumables and relatively weak on equipment, somewhere between 0% and 0.5% net for the total company. Specifically, in diagnostics, it's probably around that same range. I mean, obviously, that's the consumables business for the most part so we do get some price in that business.

Our next question is from Steve Willoughby of Cleveland Research.

I just wonder if you could provide a little bit more color regarding your business in China. And just maybe remind us, what it looks like in China compared to your overall business in light of some of your comments regarding the LC and mass spec, seeing some strength there, and also in light of maybe some industrial slowdown going on in China these days.

So when you think about the end markets in China, the LC and mass spec, clearly used very heavily in food safety, used in the academic settings for life sciences research, which are the big drivers and the other big business we obviously have there is environmental, which the minute you get off the airplane, in China, you realize that the environmental opportunity is huge, which is why the business is actually headquartered in China. Healthcare is a strong growing market for us as well. Industrial has been weak now for quite some time, as infrastructure build hasn't been particularly strong. So those businesses have felt the softening, but we've been able to power through that softening, actually deliver very consistent, strong, 20% or better organic growth now for the last couple of years.

Is the mix in your business in China, is it any different than the overall company really?

Yes, I mean, the answer is yes. There's going to be less exposure in aggregate lab products and services and Specialty Diagnostics, more exposure to the Analytical Technologies portion.

Our last question is from Jeff Elliott of Robert W. Baird. Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division: When you look at the clinical trials logistics business, where do you think we're at in terms of the overall shift towards outsourcing? And what do think the long-term growth prospects are for that business?

We feel good about the prospects for our clinical trials logistics business. In fact, we delivered very strong growth now consistently for quite a few quarters, and feel like there's still a huge amount of in-house activity that goes on in biopharma that allows us to continue to drive significant growth. So we feel like that business is well positioned for quite some time ahead, and it's been traditionally growing somewhere between the mid and high single digits on a fairly consistent basis. So let me just make a couple of quick closing comments. First of all, I want to just note that I am pleased with our solid first half performance. We remain confident that we'll continue our momentum to achieve our goals for the year. And we, of course, look forward to updating you on our progress in the Q3 call, and finally, thank you for the continued support of Thermo Fisher Scientific. Thanks, everyone.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.