Thermo Fisher Scientific Inc. (TMO) Q3 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2013 Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin the call.

Thank you. Good morning, and thank you for joining us. On the call with me today is Marc Casper, our President and Chief Executive Officer; and Pete Wilver, our 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 & Presentations until November 22, 2013. A copy of the press release of our 2013 third 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 June 29, 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 the call today, 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 third 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. Thanks for joining us today for our third quarter earnings call. I'm pleased to report that we executed well to deliver strong bottom line performance again this quarter, continuing the excellent growth momentum we've had all year. In a challenging market environment, we delivered 2% organic growth, which keeps us on track to achieve our full year guidance. Our bottom line results are a testament to our operational discipline and our ability to deliver strong earnings growth. With 3 quarters of the year behind us, I'm confident that we'll achieve the growth goals we laid out for 2013. With that, let's move into the highlights from the quarter, starting with the financials. Our revenue and adjusted EPS were both third quarter records. Reported revenue grew 3%, and adjusted EPS rose 9%. Turning to operating income. Our adjusted operating income grew 8%, and adjusted operating margin was a particular bright spot, with 70 basis points of expansion. Pete will go through the details behind our strong operating performance in the quarter, but as you know, we're always driving productivity across our businesses. We use our PPI Business System to improve our processes, so we can deliver the best products and services to our customers as efficiently as possible. This strengthens our competitive position and strengthens our bottom line. Let me take a moment now to talk about our performance with the current market environment as the backdrop. At a macro level, we've generally seen a continuation of the market conditions we've experienced all year. I'll give you some color on the performance by our 4 key end markets. Starting with academic and government, because it's probably top of mind, this end market was somewhat softer in Q3, given the environment in the U.S. As a result we were down here in the low single digits. Our customers continue to feel the effects of sequestration, along with the added uncertainty leading up to the budget standoff late in the quarter. Of course, the deal reached last week ensures that sequestration will be with us for the balance of the year. That said, we benefited from certain academic and government markets outside the U.S. The best example was a significant order for analytical instruments that we shipped to the Japanese National Police Agency for use in forensic toxicology and drugs-of-abuse screening. This was a result of a relationship we've built with this agency since we first supplied them with mass spectrometers back in 2008. Turning to industrial and applied markets. They pretty much played out as we expected, and we reported low single-digit growth here against an easy comp in Q3 last year. Getting into the details, core industrial markets remained weak overall, as they have been through the first half of the year. Our businesses serving these customers continue to face a challenging environment, and we still have an inflection point -- we still haven't seen an inflection point. However, we continue to see strength in some applied markets, particularly in China, which was an offset to the core industrial softness. Turning to health care and diagnostics, we didn't see any significant change here during the quarter, and our growth remained in the low single digits in Q3. We saw a carryover of the softness we experienced in Q2 as a result of lower healthcare utilization in the U.S., and our anatomical pathology business continues to be affected by lower U.S. reimbursement rates. The bright spot here was the performance of our transplant diagnostics business, formerly One Lambda. Although it wasn't included in our organic growth until mid-September, it's just over a year now since we acquired the business, which provides antibody and molecular tests to improve outcomes for transplant patients. And it's been a very nice addition to our Specialty Diagnostics portfolio. In the first year of ownership, transplant diagnostics delivered high single-digit revenue growth. Finally, in our pharma and biotech end markets, we continue to perform very well, growing in the high single digits. Our ongoing momentum here is a clear sign that our value proposition is resonating with these customers, and we're continuing to gain share. So to sum it all up, the overall market environment has been consistent with what we've seen all year long. We continue to look at this as an opportunity to leverage our scale and unique depth of capabilities to help our customers manage through and achieve their own success. Before I move on to our growth drivers and the business highlights for the quarter, let me give you a quick update on our pending acquisition of Life Technologies. First, as you probably know, Life Technologies shareholders voted to approve the transaction in late August. In addition to that important milestone, the integration planning teams are right on schedule, and day 1 planning is nearly complete. We continue to work through the regulatory process, and Pete will give you an update on our financing activities. Now that we're getting into the more detailed planning, we continue to feel very good about the synergy targets we originally laid out. The teams from both companies are excited about the value this combination will create for our customers, our employees and our shareholders. And as we stated when we first announced the transaction, we continue to expect an early 2014 close. Now I'll turn to some of the business highlights for the quarter in line with the elements of our growth strategy, specifically around technology innovation and our presence in emerging markets. It's been a terrific year for us in terms of innovation, and you know about our major Thermo Scientific product launches in the first half of the year at both Pittcon and the American Society of Mass Spectrometry. Before I cover our Q3 highlights, let me take a moment to remind you of the profound impact our new products are having on our customers. You'll recall that we launched 3 new mass spectrometry platforms at ASMS: the Orbitrap Fusion Trifid for life sciences applications; and the Endura and Quantiva triple quads, which are geared more towards customers in applied markets. We've had great customer uptake of these products, and we began shipping all 3 in the quarter. Let me relate a brief anecdote shared by one of our early adopters of the Fusion system, Dr. Josh Coon from the University of Wisconsin. In proteomic research, yeast has served as a common test organism for many years. In the past, it had taken about 4 hours to analyze a single yeast proteome. But with the Fusion Trifid, Dr. Coon and his team were able to perform a complete analysis in 1 hour. Dr. Coon described the Fusion's blazing spectral acquisition speed as truly unprecedented. He said that the fourfold reduction in analysis time will transform the speed and number of proteomes that can be analyzed, opening up new avenues of research. Dr. Coon also predicts that the comprehensive analysis of the human proteome in just a few hours is within reach using this exciting new platform. I think this tells you why we label some of these new technologies as groundbreaking and why we've been investing to keep our innovation pipeline strong. While we like to talk about mass spec innovation because of our leadership position, I want to emphasize that we innovate across our technology platforms. In Q3, we launched a number of new Thermo Scientific products, as we do just about every quarter. At the American Association of Clinical Chemistry, we announced 2 of our products received FDA 510 clearance: one was our Tacrolimus immunoassay used in organ transplant monitoring; and other was our MAS Omni·CARDIO control, which improves cardiac testing. At the BioProcess International Conference held last month, Thermo Fisher showcased new innovations that, for the first time, combined our bioscience and analytical instrument technologies for bioprocess applications. We introduced several technologies that meet increasing customer demand for the development and production of biologics. Now I'll just mention one of them. We launched our first bench-top process mass spec for biologics research, the Prima BT gas analyzer. Customers can now analyze complex gases that are a byproduct of the cell culture process, so they can better understand cell growth and more quickly scale up production. Last, I want to highlight a new product in one of our portable instrument offerings. At our Analyst Meeting last May, we talked about our microPHAZIR AG analyzer, which is used for testing in animal feed, which at the time was still in development. We launched the product in Q3, opening a completely new market by helping feed manufacturers do on-site inspection to improve quality and reduce production costs. I think my recap makes it clear that we have a strong innovation pipeline, and we've launched significant products across our businesses all year long. Turning to Asia Pacific and emerging markets, our growing presence in these regions is creating value for our customers, and our teams there delivered another great quarter. We continued our excellent growth momentum in China, with 20% revenue growth in Q3. I recently returned from a trip to China in September, and our teams are doing a great job leveraging our unique scale and depth of capabilities to gain market share. The opportunities in China are perfectly aligned with our mission to enable our customers to make the world healthier, cleaner and safer. And let me give you a couple of examples. We won a significant order to supply laboratory equipment to the Chinese Center for Disease Control and Prevention. Only locally manufactured products were continued for this project or considered for this project, and our new Suzhou manufacturing center was a key factor in this customer win. In air quality monitoring, we continue to see a steady source of growth for us. You may recall that we moved the headquarters of this business to China a few years back, and it's really helped us to gain greater access to this important growth market. We expanded our presence in Asia Pacific during the quarter as well by opening a new production facility in Singapore to support increasing global demand for vaccines, therapeutic drugs and other biologics. This added capacity will help ensure a safe and uninterrupted supply of materials for our biopharma customers and will also serve as a logistics hub for the efficient delivery of these critical supplies. Turning to Brazil, we continued our strong momentum here as well, growing better than 20% in Q3. We strengthened our commercial presence in Brazil to support the country's rapid growth. Turning now to our guidance. As you saw in our press release, with 3 strong quarters behind us, we're raising the low end of both our revenue and adjusted EPS guidance. Pete will cover the details, but at a high level, we're bringing up the low end of our revenue guidance by $40 million and now expect to deliver between $12.87 billion and $12.95 billion in 2013. This will result in 3% to 4% growth for the year. We're also raising the low end of our adjusted EPS by $0.02 in this -- $0.02 this quarter for growth of 7% to 9% over last year. So before I turn the call over to Pete, let me leave you with the key points of the quarter. First, we executed well to deliver another strong quarter of adjusted EPS growth. Our scale and depth of capabilities are a key competitive advantage, and we continue to build on our leadership positions. The integration planning for Life Technologies is progressing well, and we look forward to the value this transaction will create. With that, I'll turn the call over to Pete.

Thanks, Marc. Good morning, everyone. As I've done in the past, I'll start with an overview of our financial performance for the total company, provide some color on each of our 3 segments, briefly review the status of our financing activities related to the Life Technologies acquisition, and then conclude with some color on our updated 2013 guidance. As you saw in our press release and heard from Marc, we delivered a solid quarter, resulting in a 9% increase in adjusted EPS to $1.30. GAAP EPS in Q3 was $0.86, also up 9% from $0.79 in Q3 last year. Looking at the top line, Q3 total revenue increased 3% year-over-year, and we delivered 2% organic growth. Q3 reported revenue includes 1% growth from acquisitions and a nominal negative impact from foreign exchange. Although the revenue impact of FX in the quarter was minimal, similar to the past few quarters, the mix of currencies, including the weakening of the Japanese yen, drove a significant negative impact on earnings. This resulted in about 40 basis points of adjusted operating margin dilution and $0.03 or 2% of adjusted EPS dilution year-over-year in the quarter. In terms of orders, we've returned to growth in our backlog, with bookings slightly exceeding revenue in the quarter. By geography, North America declined slightly. Europe grew in the low single digits. And consistent with previous quarters, Asia Pacific grew in the high single digits, with China once again delivering very strong growth of 20%. Rest of world grew over 20%, primarily driven by Latin America. Looking at our operational performance, Q3 adjusted operating income was up 8%, and we delivered very strong adjusted operating margin of 19.4%, up 70 basis points from the prior year. Our adjusted operating margin expansion was driven by very strong contribution from our primary productivity levers, global sourcing, site consolidations and our PPI Business System, and we also benefited from acquisition accretion. These gains were partially offset by growth investments and foreign exchange. The $85 million benefit from restructuring actions that we previously communicated for this year continues to provide some offset to the FX headwind. And in total, we realized about $20 million of benefit from these restructuring actions in Q3 and about $65 million year-to-date. In terms of driving growth, we continue to make strategic investments, primarily in emerging markets, to strengthen our global presence and to continue our strong growth momentum there. Moving on to the details of the P&L, total company adjusted gross margin came in at 44% in Q3, flat to the prior year, with accretion from acquisitions being offset by unfavorable foreign exchange. Adjusted SG&A in Q3 was 21.6% of revenue, down 70 basis points from the 2012 quarter as a result of volume leverage and the previously mentioned productivity actions. Finally, R&D expense came in at 3% of revenue, essentially flat with the prior year. Below the line, net interest expense in Q3 was $57 million, $3 million above last year, as a result of the debt we issued in mid-Q3 2012 to fund the One Lambda acquisition. Our adjusted tax rate in the quarter was 15.3%, consistent with our previous guidance and 160 basis points lower than last year, as a result of acquisition tax synergies and our ongoing tax planning efforts. In terms of returning capital, we paid out $54 million in dividends to our shareholders in the quarter. And as discussed on previous calls, we've suspended our share buyback program in light of our pending acquisition of Life Technologies, so there were no share buybacks in the quarter. Average diluted shares were 367.3 million in Q3, up 1.9 million or 1% from last year, reflecting the accounting impact of the equity forward we entered into in the second quarter. Our share count increased by 3.8 million shares from Q2, primarily as a result of the equity forward accounting and option dilution. Turning to cash flow and the balance sheet, cash flow from continuing operations for the first 9 months of the year was $1.29 billion, and free cash flow was $1.11 billion after deducting net capital expenditures of $170 million. Year-to-date free cash flow was down slightly from the prior year, primarily as a result of increased working capital investment, along with financing fees and transaction costs related to Life Technologies. We ended the quarter with $1.85 billion in cash and investments, up $480 million sequentially from Q2, driven by our strong free cash flow. This build in our cash balance is tracking in line with our expectations related to the Life Technologies financing. Our total debt at the end of Q3 was $7.11 billion, essentially flat with Q2. So let me wrap up my comments on the total company with a quick update on our return on invested capital performance. Our trailing 12 months adjusted ROIC through the third quarter of 2013 was 9.8%, up 10 basis points from Q2, so we continue to make good progress on this important metric. So with that, now I'll walk you through the performance of our 3 business segments. Starting with Analytical Technologies, in Q3 total revenue grew 1%, and organic revenue also increased 1%. We had strong growth in our mass spec business again this quarter, and we're seeing great traction from the mass specs we launched at ASMS in June. And we continue to benefit from great performance in China. We also saw good growth in instrumentation for the applied markets. This growth was partially offset by the softness we continue to see in our core industrial markets, which are most highly represented in this segment, as well as in some U.S. government-funded projects. Adjusted operating income in Analytical Technologies decreased 3%, and adjusted operating margin was 18.1%, down 80 basis points. During the quarter, we were negatively impacted by foreign exchange, product mix and strategic investments, which were partially offset by continued strong productivity. Turning to the Specialty Diagnostics segment. In Q3 total revenue grew 7%, and organic growth was 1%. In the quarter, we delivered good growth in our clinical diagnostics business, specifically in biomarkers. And although it didn't impact our organic growth for the segment until late in the quarter, we saw a very nice growth in our transplant diagnostics business, which has consistently been performing above expectations. However, as Marc mentioned, we continue to see some softness in this segment relating to healthcare utilization and reimbursement pressure. Adjusted operating income in the segment increased 20% in Q3, with adjusted operating margin at 26.8%. This was up 270 basis points from the prior year, primarily as a result of productivity savings, acquisition accretion and favorable mix. In the Laboratory Products and Services segment, both reported and organic revenue grew 4%. Our clinical trials logistics business continued to deliver strong growth, and our channel business had good growth as well. Weakened conditions in the U.S. academic and government end market, as a result of sequestration and the uncertainties surrounding the government shutdown, continued to be a headwind in this segment. Adjusted operating income in Laboratory Products and Services grew 7%, and adjusted operating margin was 14.9%, up 50 basis points, driven by strong productivity. Before I move on to 2013 guidance, I want to provide you with a brief update on the status of the Life Technologies financing. As I mentioned on our Q2 call, we secured $7.5 billion of permanent financing, consisting of a $5 billion term loan facility and $2.5 billion from a forward sale of equity, both of which we plan to draw down closer to the close. For the remainder of the financing, there's no material change from what I reported on our Q2 call. We still expect that the remainder of the financing, in addition to cash on hand, will consist of $3.5 billion to $4 billion in debt, which will likely be in the form of bonds, and up to $750 million of equity or equity-linked securities. We'll continue to update you as we finalize these arrangements. And in terms of the average interest rate on the new debt, we still expect to meet our previously communicated range of 3.25% to 3.5%. So with that, I'd like to review the details of our updated 2013 guidance. Please note that, as I mentioned on our earlier calls, our 2013 earnings guidance does not include the acquisition of Life Technologies or the impact of the related transaction and financing costs. As you saw in our press release, we're raising the low end of our reported revenue guidance by $40 million, reflecting our solid performance for the first 3 quarters of the year. This results in a revised revenue guidance range of $12.87 billion to $12.95 billion, which represents reported growth of 3% to 4% compared to our 2012 revenues of $12.51 billion, consistent with our previous guidance. In terms of organic revenue growth, we're expecting to be in the range of 2% to 2.5% for the full year. Completed acquisitions are expected to contribute about 1.5% to our reported revenue growth, no change from our previous guidance. And we now expect foreign exchange to have a negative impact on our top line of about 60 basis points, which has improved slightly since our previous guidance. The bottom line impact from FX on our full year continues to be significant and is expected to result in 30 basis points 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 by $0.02, reflecting our solid operating performance in the first 9 months of the year and consistent with the increase in our revenue range. This results in our new adjusted EPS guidance range of $5.31 to $5.39 or 7% to 9% growth over 2012, up $0.01 at the midpoint versus our previous guidance. Consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates, and our guidance doesn't include any future acquisitions or divestitures. Turning to adjusted operating margin. We're raising the low end of our range by 10 basis points and now expect expansion of 40 to 50 basis points. Moving below the line, there are no changes from our previous guidance for net interest expense, tax rate, capital expenditures, free cash flow or return of capital. We're still expecting net interest expense to be up $15 million versus last year and that our adjusted income tax rate will be about 14.5%. We expect capital expenditures to be in the range of $300 million to $315 million and free cash flow to be in the range of $1.7 billion to $1.8 billion. And we're still 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 of dividends for the full year. Finally, full year average diluted shares are now estimated to be in the range of 365 million to 366 million shares, up 1 million shares at the low end from our previous guidance, as a result of option and equity forward dilution related to our higher stock price. In interpreting our revenue and adjusted EPS guidance ranges, as I've said in the past, you should focus on the midpoint as our most likely view of how we see the year playing out. Results above or below the midpoint would depend on the relative strength of our markets during the year, as well as the economic factors we've discussed. So in summary, we once again managed through the macro environment, executed well and delivered strong adjusted EPS. With 3 quarters of the year behind us, I believe that we're well positioned to meet our full year goals. With that, I'll turn the call back to Ken.

Okay, thanks, Pete. Shannon, we're ready to take questions.

[Operator Instructions] Our first question is from Ross Muken of ISI Group.

So maybe, Marc, just digging in a little bit on the markets, particularly on the Analytical Tech business, how would you sort of characterize the pacing of orders or pacing of revenues in the quarter in some of the more short-cycle businesses? And in some of the areas where you had weakness, did things get incrementally better at any point, did they stay relatively stable? I'm just trying to get a sense for the jump-off point relative to sort of what we've seen in the macro, which is maybe a modest improvement in some of the subsectors.

Yes, so -- Ross, thank you for the question. Let me focus just on the Analytical Technologies, which is where you focused the question. So within that, we have our largest exposure to core industrial businesses -- or markets, and for us, that's most dependent on things like commodity materials. We didn't see any change to the quarter in terms of patterns, so it continues to be a soft market. It's been soft all year. So that's the kind of the industrial portion of that business. When you look at within that same segment, we also have our mass spectrometry and chromatography businesses, and our mass spectrometry business had an outstanding quarter, and our liquid chromatography business was very, very strong as well. So there's a lot of details within that portfolio, but we didn't see a lot of change month-to-month. There was more industrials very soft, but areas that you would expect Thermo Fisher to continue to gain share, things like life science, mass spec and HPLC, that continues to be consistent.

And maybe just from a competitive perspective, it's always tough to tease out relative growth rates amongst the peers just because the businesses differ so much. What I found interesting on my last Asia trip was a lot of your competitors were saying how harder -- how much harder it is to compete against Thermo today than 12 months, 24, 36 months ago. Where do you feel like you're seeing the most success of sort of the integrated strategy? Where is the channel having the most impact? I'm just curious, across the business, it seems like that momentum has increased. Where do you feel like we're actually seeing it in the numbers, although, obviously, it's tough to tease out in the totals?

All right. So China's been growing consistently in that 20% range for us now for quite a number of quarters. We have a very integrated strategy, right? So because of our scale, we believe that we're able to put the best people on board, which allows us to execute, in a way, a harder strategy, but that strategy has manufacturing facilities that are geared towards the local market. I mean, that's why I picked out the Chinese CDC, right, which is, in this particular order, they wanted just local manufactured products, right, and the reality is we were able to do that, right, big order. Our customers want some degree of tailoring of our global products to meet their specific needs, which is why our China technology center exists. Environmentally, you get off the airplane in China, you know that there's air quality issues, right? You don't literally have to even -- you can see it when you're landing, right, which is why our business is globally headquartered there for air monitoring. So when you look at it, we have broad breadth -- broad-range strength in the market, and we're using our scale to create a really positive customer experience. Our executive team spends an enormous amount of time in China. I was there in September. I'm going back next week. The rest of the -- the rest of my direct reports do the same thing because the government is very important to decision-making, and building those strong relationships is an advantage, and scale matters. Little companies just don't have the same access as an industry leader has, and we're trying to take that to the next level every time.

Our next question comes from Jon Groberg of Macquarie.

Congratulations on another really remarkable quarter from an adjusted EPS and margin standpoint. And, Marc, I just want to focus on that for a second. So if I look back over the last -- just looking at this year more on an annual basis -- I know we're only 3 quarters through, but if you look back kind of to 2011, 2012, 2013, you're kind of in that 2.5% to 3.5% organic growth. But if I look at this year, you're doing 40 bps, 40 to 50 bps of operating margin expansion, that's not including the medical device tax, which probably gives you another 20 bps, the unfavorable FX that Pete mentioned. So I'm just curious, if that's kind of the realm of growth that we're in, say, over the next year or 2, you're still in that 2.5% to 3.5%, is that still -- is that still feasible, what you're doing there? Do you feel like you're really starving the organization some? And I mean, I'm just trying to think about kind of the levers that you feel like you still have to pull as if the macro doesn't really improve that much.

Jon, it's a great question right? So we have a very strong operating system at the company, our PPI Business System. And our 39,000 colleagues are constantly trying to make the company better every day and more efficient. And as we went into this period of a muted recovery coming out of the recession, our team has done a very good job of streamlining the organization, eliminating waste, so that we can fund R&D and our significant expansion in emerging markets. So we're not starving the organization in terms of a bright future. In fact, I've spent most of my comments today actually on new product launches, and I have to cut them short, otherwise, we'd run out of time for Q&A, right? So we're spending for a bright future, and we feel like we're taking out the appropriate costs to deliver very strong returns for our shareholders. Looking forward, if we continue in this muted growth environment, we believe the ability to drive good bottom line performance is clearly something that we have the skill to do and the ability to do. And as we get into our guidance process for 2014 early in the year, we'll articulate our plans. But we've lived through periods of rapid growth, we've lived through a couple of recessions, and we've lived through a period of muted growth. And pretty consistent to that is we've been very focused on driving bottom line improvement.

Just, as a quick follow-up to that, just as a point of clarification, as you mentioned with Life, you're getting closer to day 1 planning in place, getting closer to that, potentially closing that acquisition. As you go and talk to investors, is the number that you talk -- I'm trying to think about -- do we think about the core Thermo business still getting the margin expansion that you would get otherwise, and then layering on top of that what you expect from Life?

Yes, I mean, at a simplistic level, yes. I mean, what we'll do is, when we give out the -- when we close the transaction and give out the guidance, we'll bridge the details enough so that everyone can understand what we're doing. But our base business without Life continues to have to generate good earnings growth. And then obviously, you're going to get the positive synergies and accretions from that acquisition as well on top of that.

Our next question is from Daniel Brennan of Morgan Stanley.

Marc, I wanted to dig in a little on China, maybe just get some color there. Within your China business, can you give us some sense of how the different segments did within China? And specifically, like on the more industrial side of your business, have you seen any change, either for the better or for the worse?

So industrial -- core industrial continues to be soft in China. So that's going to affect the Analytical Technologies segment the most. There were certainly bright spots on the applied markets in China, particularly air quality continues to be strong in that market. Health care continues to be a good growth driver as well, so Specialty Diagnostics will benefit from that. And then mass spec had a very, very strong quarter in China as well. So that gives you a little bit of a flavor. Headwinds continue in industrial, the rest of the business performing solidly.

Okay. And the same maybe on the LPS side, which you had pretty strong growth certainly this quarter, I know you highlighted the clinical trial logistics business. Can you -- could you just break it down like how the channel business converts to clinical trials business? And on the channel side, is this share gains or you're just growing in line with the market right now?

We had good, good momentum in our channel business in the quarter. We had very strong momentum in our clinical trials logistics business. I would say that our share in our channel business, we probably grew share slightly in the quarter, and that's not growing hugely different from the rate of the market but probably a little faster than the market.

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

So just -- I don't know if you are going to answer this, but I'm going to ask you anyway. Obviously, there's been a lot of FX moves since you guys first announced the Life transaction and some of your accretion expectations for that transaction. Can you -- are you in the point where you're just can sort of update sort of what your expectations are for that just considering [ph] -- how the currencies have moved all over the place?

Yes. Certainly, there's a lot of things that have changed since April 15 on the Life acquisition pluses and minuses, and so I'm not going to answer one piece of that equation. So we'll give you updated guidance once we close the transaction.

Great. And I guess, speaking of the U.S. academic markets and some of the uncertainty there, just like what's your sort of working assumption for that customer segment as we sort of look about -- look into Q4? And if you sort of look into 2014, I mean, are you expecting that segment of the market to be flattish? I'm just curious in terms of what your current planning is.

So let me limit it to what we saw and a little bit on Q4. We'll deal with all of '14 holistically through our guidance process. Let me start -- longer term, as you take it out of years, I don't think we're -- our view on academic and government continues to be the same, which is going to be a low single-digit growth market for us in the long term, not so different than what we talked about at the Analyst Meeting. I don't think there's a big change even with all the stuff going on in Washington. So when I look at the performance in academic and government, year-to-date, we're down low single digits, I mean, basically. And our view for the fourth quarter is fairly similar to that environment. Basically, we're not assuming a particularly material effect from the government shutdown. Obviously, a little bit of a headwind. But we also know that sequestration is certainly with us for the rest of the year, so that means that -- any optimism that maybe sequestration would go away this year, that fades, from customers' viewpoint. So similar to Q3 is how we're thinking about it.

Our next question is from Tycho Peterson of JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: First one, just on pharma and some of the trends. Obviously, you guys have had really good momentum there. Can you maybe just talk about the sustainability of those trends? And the deals seem to be getting a bit bigger. At the same time, we see the Merck news about cutting R&D. So maybe just talk on your view on the pharma business for the next quarter or 2.

If we look back now over the past few years, we've been growing well above the company average share. We're clearly gaining share. Our customers are benefiting from the productivity that we deliver for them, and we feel like our value proposition is very well suited to help customers navigate a tough environment. So we never like any of our customers to be struggling, but what I can tell you is that we're on the phone the minute those issues happen, and we're they're coming out with new ways of helping them navigate those environments. Our clinical trials logistics business, obviously, has done very well for quite some time. And the reason for that is we're just substantially lower cost than the in-house capability, and our quality and performance metrics are truly outstanding, so customers are getting comparable or better quality at a lower cost. And as customers are tightening their belts, they've been driving more and more business to us, and we've been cross-selling across the portfolio as well. So our view is that it's our job to help our customers be successful, and we'll continue to focus on navigating that environment going forward. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then just a follow-up on mass spec. You spend a lot of time talking about the new products. Can you talk about the degree to which those new products are seeing uptick in the clinical segments? I mean I think that was one of the things out of ASMS was just mass spec moving more into the clinical side. And then can you also just talk about competitive dynamics to the extent you think you're taking share, both in mass spec and then LC with the Dionex addition?

Yes. So for -- clinical research is growing in importance for us. It's still early in terms of the adoption for us, but it's -- but we're seeing some of it in clinical research. And the new products have done very well. We started shipping the products in the quarter. The uptake has been very strong. And one of the things I'm very passionate about is that the Q Exactive, which is -- we launched a couple years back, just had a fabulous quarter, right? So we launched another high-end system, but we don't lose any momentum in the Q Exactive. I wasn't expecting to lose any momentum because it serves a different market, but it's nice to actually see the facts play out that way in terms of performance. HPLC was very strong for us, so I feel good about how our teams are executing around the world.

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

One thing I'm having a hard time reconciling is better-than-expected LPS growth in the quarter and the negative commentary on the academic/government end market in the U.S. I say this because, in the past, you pointed out that LPS was the segment you thought would get most impacted by U.S. government weakness. And I believe that's what was at least previously embedded in guidance. So the question is, has there been a notable source or are there notable sources of upside within LPS outside academic/government that have exceeded your expectations? And then is the offset that academic/government weakness has been maybe a bit more pronounced in either AT or maybe even Specialty Diagnostics than you expected?

This is a great question. So when you look at the academic and government performance, you see the pressures in AT and in LPS. But the consumable mix is the vast majority in LP&S (sic) [LPS], so it's more muted, the effect, than the capital equipment effect that you would see in AT. So you see some pressures, Doug, in the Lab Products and Services, but you see a lot more pressure on more the routine capital equipment, which is in the other segments, so that's part of it. The other thing is because pharma is overrepresented, it's a good thing, in Lab Products and Services, that's really been a very strong driver of that. Because you have a clinical trials logistics business there, our channel business, our lab consumables, things that are very pharma and biotech focused, we have a disproportionate weighting in that segment. So I think those factors would say why does the performance consistently look very strong in Lab Products and Services.

Okay, that's helpful. So SG&A spend was a bit lower than, I think, some of us expected. This is probably largely because of mix and some progress you're making on the PPI side. That said, I am wondering if some of this is also a function of planning for the closure of the Life deal. You guys have been executing well to plan this year, but I think it's also fair to say that Life's performance has been a bit disappointing relative to expectations. So point here is some of the SG&A pullback related to what's been going on in Life as you move towards the closure of the deal.

Yes, so in terms of the SG&A, we certainly are still continuing to make investments in the business. The leverage we're getting in SG&A year-over-year is really about the restructuring activity that we're doing and PPI activities that drive costs out of the system. So they're really not any material impact related to planning for Life. Obviously, there's a very small piece of our company that's really directly overlapping with Life in terms of the cost base, so that's not anything that's impacting the numbers.

Okay. And if I could sneak in one more.

Sure.

You guys continue to do really well in APAC and rest of world, and you recognize strong underlying demand in these markets. But across most end markets in these geographies, it does appear like you're outperforming many of your peers. I guess, what I'm wondering is, how much of your outperformance in these geographies versus your competitors is attributable to you having a better reach than your competitors in your opinion? And are there opportunities you're actively looking at where you could repeat what you did with China, environmental? And more generally, are you thinking it might make sense, given really what have become kind of long-standing trends in these geographies to accelerate really reallocation of sources to areas, say, in Latin America or certain areas of APAC?

Sure. So Doug, thanks. A few things. One of -- I'll mention one more time, this the China CDC order in lab equipment. We moved one of our business units, actually a large one, the headquarters to China about a year ago basically to position this business for the very strong funding environment that's likely to continue for many years in China. So we're always looking at our portfolio around the world and trying to optimize it to position us for growth. I think the combination with Life Technologies actually gives us some interesting opportunities, where the markets in some other countries might have been just a little subscale for us to really want to put the infrastructure in place to build a very, very superior experience for our customers but the combined entity is worth doing. So I think when you get down to the South Koreas of the world, parts of Southeast Asia, we're going to be able to replicate the very strong capabilities we have in China in some of these markets, not at the same level of cost or investment but just because we have enough scale that we're going to get a quick enough return to do it. So I actually think the combination will position us for better growth over time.

Our next question is from Isaac Ro of Goldman Sachs.

I wanted to start maybe with a bigger concern thought on just gaining wallet share across 2 of your specific end markets, one being academic and pharma and the second being pharma. And the reason I ask is you're probably looking at a period of protracted slowdowns in funding in academia, there's been, obviously, some continued cuts in the pharma side. So just thematically, if you look at the combined portfolio you have and the competitive advantage you have with channel, are there a couple of new initiatives you can specifically point to where you think you think you can use the franchise to gain wallet share in a slower growth environment?

Yes. So, Isaac, obviously, we've been doing this with pharmaceutical customers for quite some time, and we'll continue to do that. So we think that a -- that type of requirement of productivity from our customers is always a good opportunity and the fact that we have a stronger offering in production chemicals now, and when we close Life Technologies, an even stronger offering in some of the life sciences research reagents, it will give us more opportunities to go to those customers and bring new value and help them navigate the environment. On the academic and government side or academic side, decision-making is a little bit different, but the economic needs are the same, right? You're dealing more at the lab level than the enterprise level. And I had the chance to meet with a number of academic customers this week, actually, here in Boston because of ASH. She[ph]is here. And they love the Thermo Fisher value proposition, how we can help navigate what's a tough environment for them. So it's more at the micro level, but we can help them save money, so they can continue doing the important research they're doing, and then it's a great opportunity.

Okay. And then just a tactical question. You guys called out in your prepared comments a couple times you've strengthened the transplant diagnostics business. So I'm wondering, should we expect that kind of pacing to continue through the balance of this year? How do you feel about the prospects over the next 12 months, just given that you have the asset under your control for full 12 months now? And do you think you can maybe accelerate the growth from here? Just trying to gauge expectations for that specific business.

As you look -- we had assumed kind of mid-single-digit growth when we announced the acquisition. It's been growing at the high single digits. We think the business has good momentum. It'll start to show up in our organic growth. Not a huge business, but it's a nice business that the integration has gone incredibly smoothly, and the team's done a great job. So we're going to -- we'll try to maximize the top line performance that we can get out of it. And certainly, that's embedded in our guidance as we set that out for 2014.

Our next question is from Paul Knight of Janney Capital Markets.

When you look at the analytical instruments business, did we go into a double dip or what happened in 3Q while the industrial market-- did it delay or what do think the color is there?

Industrial, I don't think it changed much. Basically, we just haven't seen an upswing, right? And when you get into all of the details, basically, it's the core industrial, the commodity material markets continue to be very soft. That's where we have our largest mix of that part of the business. Applied markets, clearly, there's some nice pockets of strength, so I didn't really see a big change in the third quarter, Paul.

And that's what, spectroscopy, gas chromatography, those kind of things?

Yes, I mean, you have your chemical analysis, instruments, your process instruments, molecular spectroscopy, those types of instruments would be most affected. Portable instruments would be another one that would be affected by the economic downturn.

And then, Marc, these PMI readings have been pretty strong at least until -- we don't know what this month is, but PMI has been good. I mean, if PMI drives better sales, what do you think the lag factor is, is it -- should it show up this quarter, or should it show up next quarter, what's your experience?

Usually, 2 quarters lag is typically what we see in our business. So we're definitely paying attention to that. That's clearly positive news, but it hasn't sustained yet in terms of orders momentum at this point.

And last, were you surprised by pharma and biotech in the quarter?

No, it's been incredibly consistent with high single-digit growth now for quite a number of quarters, so the team's doing a good job of executing.

Our next question is from Dan Arias of UBS.

Marc, maybe on -- another on the industrial markets. How do you feel about where those customers are broadly in their product cycle? Do you feel like if you remove the macro factors from the purchasing, which is in there, you're sort of left with a decent portion of that segment, that's maybe due for a tech upgrade?

Yes, what I would say is that our product portfolio, ourselves internally, is very strong. We've been launching a number of new products. So as customers release funds, we think we're well positioned to capture market share. I think, basically, customers are being cautious right now. And when we get to a period of a little bit more optimism in the customer base, I think we're very well positioned to see an acceleration of growth.

And maybe one on diagnostics. What are your thoughts at this point on penetrating the U.S. physician base with the Phadia products that do sell well up in Europe -- well in Europe? Do you feel like, over the near term and the midterm, you have the ability to convert a portion of that market that's kind of like doing prick testing and sort of an antiquated way of going about things?

Yes, I would say that we're expecting to see us building momentum in driving penetration in the U.S. for our allergy products. It's -- we do a lot of doctor -- end doctor visits to explain the technology and do education. And as that education becomes stronger and stronger, we think that we're well positioned to have good growth.

Our next question is from Amit Bhalla of Citigroup.

A question on Lab Products and Services, the revenue side has been quite strong, but what kind of struck me was the operating margin of the business at 14.9%. I've looked back last 2 years or so, and this is probably the highest it's been. You said that productivity is kind of the reason for the op margin expansion. And I was wondering if you could go into some detail about how much headway you still have on op margin expansion in that business.

When you say headway, you mean headroom or?

Headroom, yes.

Well, I think, obviously, in the Laboratory Products and Services segment, it's a little more challenging to get a margin expansion just because of the mix of self-manufactured versus sourced products. So this is a really strong performance for that quarter, but we still have room to expand margins. I would say, on an annual basis, if we're thinking about 50 to 100 basis points at the company level, you're probably in the 20 to 40 basis points range here in this segment is what you could expect as long as we get mid-single-digit kind of organic growth.

Okay. And then, second, just in Analytical Technologies, I was wondering if you could give some color on BioProcess Production in the quarter.

So we had good growth in BioProcess Production in the quarter, not as strong as the first half, but the pipeline looks incredibly strong. So I would say that it's growing well, well above the company average, and I feel like we're well positioned.

Anything, Marc, that drove the less-than-strong performance there versus the first half? Any more color you can give?

It was actually a strong performance, but we've been growing double digits for a while, and this was more in the mid to high single digits. I don't think there's anything much to it. I looked at the pipeline, and it looks like the next few quarters look strong.

Our next question is from Jeff Elliott of Robert W. Baird. Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division: I was wondering if you could give some more color on Brazil. You said it grew over 20% in that market. Can you talk about what's driving the growth and how sustainable it is?

Yes, we've had a few good quarters now in a row in Brazil. Our diagnostic business, in particular, is driving good growth in that market. So there had been some changes in the reimbursement and regulatory environment that had put some pressures on that business over the past year or so, and that's clearly subsided. That's been probably the biggest driver. Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division: And then on the clinical trials logistics business, can you talk about what's driving the growth there? How much of that is shift towards outsourcing versus you adding additional services? And can you update us on the competitive landscape in that market?

Yes, so it's really about the outsourcing trends, it's what's driving it. And what customers are doing is most of the biopharma customers’ use us in some fashion, but it's the question of how penetrated we are. And for the most part, we have lots of opportunity to increase our share of wallet, if you will. So it's less about new services than it is going from being surplus capacity to being a portion of capacity, to being the sole-source provider of that capacity, and we're seeing more and more customers move towards using us as the sole or primary provider, and that's a great opportunity, and we think we got lots and lots of legs in that strategy in terms of driving growth.

Our final question is from Steve Willoughby of Cleveland Research.

Two things for you. One, I was wondering if you could just comment on how you're thinking about the 3 different business units and their growth in the fourth quarter as compared to their growth this past quarter. And then secondly, just do you have any early read on what the flu season is looking like? And any thoughts on the impact to the company from that?

So in terms of the 3 segments, I would say that the fourth quarter would be pretty similar to what we saw in the first 9 months of the year. And, Pete, do you want to comment quickly on flu?

Well, in terms of flu, we definitely have a tough comparison in Q4. We had a very strong flu season in 2012. And basically, what's assumed in our guidance right now is that we have kind of an average flu season. We don't have any good insight yet on the strength of the season.

So let me wrap it up. As we look sitting here in October, we have 3 strong quarters behind us, and we're on track to achieve our growth goals for the year. Life Technologies integration planning is progressing very well. I'm really confident that we'll be in an excellent position going into 2014, and I'm looking forward to updating you early in the year. Thank you, again, for your time this morning and, certainly, for your support of Thermo Fisher Scientific. Thanks, everyone.

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