Thermo Fisher Scientific Inc. (TMO) Q4 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2014 Fourth Quarter and Full Year End Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin the call.

Good morning and thank you for joining us. On the call with me today is Marc Casper, our President and Chief Executive Officer, and Pete Wilver, Senior Vice President and Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our Web-site, thermofisher.com, under the heading Webcasts & Presentations, until February 27, 2015. A copy of the press release of our 2014 fourth quarter and full year earnings is available on our Web-site 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 September 27, 2014, under the caption, Risk Factors, which is on file with the Securities and Exchange Commission and also available in the Investors section of our Web-site 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, including adjusted EPS, adjusted operating income and adjusted operating margin which exclude restricting costs, amortization of acquisition related intangible assets and certain other items. The definitions of and the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the earnings press release and also in the Investors section of our Web-site under the heading Financial Information. So before we get started, one other item, as I mentioned in prior quarters, please note that the commentary that we provide today regarding the Company's Q4 and full year 2014 total revenue growth and revenue growth by end market and geography are on an organic basis only, and therefore do not include the performance of Life Technologies. So with that, I'll now turn the call over to Marc.

Ken, thank you. Good morning everyone. Thanks for joining us on the call today. As you saw in our press release, we finished the year with an outstanding fourth quarter delivering excellent growth on both the top and bottom line. In an environment that still has its challenges, we focused intently on our customers, identified opportunities and executed very well to deliver strong growth. At the same time, we continued to make excellent progress with the integration of Life Technologies and are tracking ahead of our initial goals as we approach the one-year anniversary of the close. Our excellent performance in Q4 topped off what was a great year for us financially, operationally and strategically. This positions the Company well for a strong year ahead and a very bright future over the longer term. We have a lot of ground to cover this morning, so let me get right to our financial performance in the quarter and what we saw in our key end markets. Then I'll cover some of the highlights of the quarter and the year, give you an update on capital deployment and wrap up with our guidance for 2015. So, starting with the quarter, our revenues in Q4 grew 30% year-over-year. Our adjusted operating income increased 48%. We expanded our adjusted operating margin by 280 basis points to 22.8%. And our strong top line growth and operational discipline led to adjusted EPS of $1.99, which is a 39% increase over Q4 of 2013. Thanks to the determination of our team, we ended the year on a very strong note. Looking at our Q4 performance in the context of our key end markets, I'm pleased to say that we saw strength across the board and we executed well to capitalize on year-end opportunities. First, let me start with industrial and applied. We had another quarter of mid-single digit growth. Our Research and Safety Channel, chromatography and life sciences mass spec businesses performed particularly well. We saw some year-end spending with our industrial and applied customers in Europe and we're able to capitalize on that. In diagnostics and healthcare, we performed well again this quarter with growth remaining in the mid single-digits. We saw a strong demand for our ImmunoDiagnostics products as we had all year. Our transplant diagnostics business and healthcare channel also performed very well in Q4. As you may recall, last quarter we talked about our involvement in supporting customers who are working to contain Ebola. We did see some benefit to our Q4 revenue from this activity. Our customers turned to us for help with some of the most difficult challenges and this was another good example. Turning to pharma and biotech, this end market was particularly strong in Q4 coming in with high single-digit growth. We continued to effectively leverage the strength of our value proposition to help these customers accelerate innovation and drive out cost and we also captured opportunities from some year-end spending. Last, I'm pleased to report that our performance in academic and government was also especially strong in the quarter, growing in the high single digits. More specifically, we saw strong sales of our analytical instruments to several government agencies in the U.S., especially in our life sciences mass spec business. In addition, a number of our businesses took advantage of increased academic and government spending in Europe at the end of the year. So in summary, we performed very well across all of our end markets for a strong finish to 2014. That's a good lead into our discussion of the full year. My assessment of the year was pretty simple. We achieved or exceeded all of our goals, whether you measure us by our financial performance, execution of our growth strategy, our integration milestones or our balance sheet. That's a pretty good report card and let me walk you through each of these achievements in a little more detail. First looking at our financial performance, our revenues grew 29% for the full year. Adjusted operating income grew 45% with adjusted operating margin expanding 240 basis points to nearly 22%. Let me make a quick comment on the topic of margin expansion. We benefited from the acquisition and from delivering the related synergies and we also continued to drive productivity through our PPI Business System, sourcing, low-cost-region manufacturing and footprint optimization efforts. When you add it all up, we achieved significant margin expansion last year and looking ahead we still have a lot of runway. Finally, our strong performance led to a year of outstanding adjusted EPS growth with a 28% increase year-over-year. So overall, we had a great year operationally and we achieved a strong year according to all of our key financial metrics including those related to the Life Technologies acquisition. Now let's talk a little bit about executing our growth strategy and the terrific progress we've made there. As you know, the three elements of our strategy are, developing innovative new products, expanding our presence in emerging markets and leveraging our unique customer value proposition to gain market share. Let me review some of the highlights from the year and a few from the quarter. First, 2014 was another strong year of new product innovation. We have the largest R&D budget by far in our industry and invest about $700 million annually, and that investment is resulting in key new product launches across our technology offerings in Analytical Instruments, Life Sciences Solutions and Specialty Diagnostics. I don't have time to go into every product we talked about during the year but just to do a quick recap, here are some of the standouts. In Analytical Instruments, we strengthened our industry leadership across our Thermo Scientific mass spec and chromatography offerings. We launched the new Q Exactive HF which was the latest generation in our Orbitrap family, and we also launched the Prelude and Endura MD systems for clinical use. It was also a pretty big year for chromatography with the launch of Chromeleon 7.2 software and the Vanquish UHPLC system. In our Life Sciences Solutions business, we strengthened our Ion Torrent next-gen sequencing offering with a number of new product launches. Among the highlights was the Ion PGM Dx instrument for clinical use in the U.S. and Europe. We've also been very focused on delivering NGS based panels for clinical oncology, so cancer treatment can be more effectively targeted to the patient. A good example from 2014 was the Oncomine Solid Tumor DNA kit we launched last year in Europe. In October, we leveraged our capabilities and HLA expertise in our Genetics Sciences and Specialty Diagnostics businesses to launch the research-use-only NXType Kit. This is a workflow for HLA Tissue Typing for transplant patients that we believe will play an important role in further improving Tissue Typing accuracy and transplant success rates. We've heard great customer feedback, so this is a clear example of how our businesses are working together to bring value to our customers. Also in Specialty Diagnostics, we launched the PCT Direct for point of care testing to expand the market for our high-growth biomarker business. So as you can see, 2014 was a very strong year for innovation. We put our R&D dollars and expertise to work to deliver high-impact products for customers working in research, applied markets and the clinic, and we have a great lineup ahead for 2015. Turning to emerging markets, the second element of our growth strategy, the big topic in 2014 was China. We continued to strengthen our industry-leading capabilities in China and delivered mid-single-digit growth in 2014 in a muted government funding environment. While the Chinese government works through the process of implementing reforms, we will keep you posted as to when we see an inflection point indicating faster growth. Thermo Fisher's capabilities are well aligned with key government priorities including food safety, a cleaner environment and expansion of the healthcare system. So we remain very bullish on the long-term prospects for strong growth in China. In the meantime, we haven't been standing still, we've been expanding our presence in other emerging markets like Southeast Asia, India and Brazil to gain additional momentum in these growth regions as well. And we also continue to optimize our footprint in the U.S. and Europe. You may recall that we expanded our Centers of Excellence in Lithuania and Germany earlier in 2014, and in Q4 we had the grand opening for our new Center of Excellence for Specialty Diagnostics in Fremont, California. I was there for the ribbon-cutting and I have to say the facility is quite impressive and a real showcase for production of immunoassays and diagnostic tests. I think our strong performance in 2014 shows that we've done a great job leveraging our global footprint to meet the needs of our customers and capture growth opportunities. The last point I want to make about our growth strategy is that our customer value proposition continues to get stronger as more customers in a range of industries relies on us to help them meet their growth objectives. We've been leveraging our value proposition in BioPharma with great success as you know and we also had some nice wins with industrial customers who are seeing the benefit of our depth of capabilities. One of the biggest highlights here in 2014 was the addition of Life Technologies. It further strengthened our ability to help our customers drive innovation and productivity and really positions us well to continue to gain share with our biotech, pharma and industrial customers. That's a good segue to the integration, clearly a major achievement for us in 2014. Our over-riding goal with the acquisition of Life Technologies is to combine our capabilities in a way that serves our customers best to drive growth, and we're off to a great start. As you know, in this phase of the integration, we've been focused on delivering the cost synergies, planning the revenue synergies and making sure that we set the business up for accelerated growth. In terms of the cost synergies, we achieved $150 million in cost synergies last year. As we've mentioned previously, that was faster than we originally outlined and we're well on track to deliver the $300 million of cost synergies in year three. Turning to the revenue synergies, we've been developing detailed plans since the close to realize the benefits of our combined capabilities. We're now implementing those plans and are starting to deliver revenue synergies this year. We're very confident in achieving our goal of $150 million of revenue synergies in year three which is 2016. Our team has done a lot of work here and it's exciting to see the plans start to materialize. For example in early January this year, we introduced about 14,000 SKUs from the former Life Technologies organization into our research channel in North America. Our sales reps are being trained to represent the expanded portfolio and the team is excited about the opportunities. Although it's early days, our customers have been responding very favorably. The final word I want to leave you with on the integration is that the Life Sciences Solutions business grew about 1% faster in 2014 than it had in the past three years. This is another indicator that the integration is off to a great start. Onto the last major achievement of the year, in terms of our balance sheet, 2014 was all about repaying debt. We generated strong cash flow and paid down $3.8 billion of debt in 2014 related to the acquisition of Life Technologies. That got us to a leverage ratio of about 3.6x by year-end. Given the pace of delevering and the confidence in our cash flows, we started deploying capital immediately in 2015. In fact, we bought back $500 million of our stock in the first few weeks of the year. We have many opportunities ahead to create shareholder value t6hr our proven strategy of effectively deploying capital. Let me now turn to our guidance for 2015. Pete will cover the details now on all of the assumptions for our revenue and earnings guidance, but I'd like to make a couple of comments. Our 2015 guidance reflects a number of factors. First, it takes into account our very strong underlying operating performance. It also includes the revenue synergies we expect to achieve as well as the continuation in the ramp-up of cost synergies. It factors in contributions below line from share repurchases we just completed and tax planning initiatives we are implementing. And as you are well aware, we're also operating in a very challenging FX environment. So when you sum it all up, we're initiating revenue guidance in the range of $16.80 billion to $17.0 billion in 2015, which is about flat with the last year and includes a 4.5% headwind from foreign currency. On the bottom line, our adjusted EPS assumes an 8 percentage point headwind from currency. So we're guiding to adjusted EPS of $7.22 to $7.40. This would result in 4% to 6% growth over our strong EPS performance in 2014. Before I turn the call over to Pete, let me leave you with a few takeaways. First, our team worked with amazing intensity on all fronts throughout 2014. Their efforts led to a very strong year and that puts us in an excellent position going into 2015. Second, in terms of our guidance for 2015, the unfavorable FX is masking our strong underlying operating performance in the short-term. We'll see how rates play out as the year unfolds and update our guidance accordingly. If rates deteriorate further, we'll determine how much we can offset. If they improve, we'll add the benefit to our revenue and earnings. So in summary, we will continue to execute well, deliver growth and set Thermo Fisher up for a very successful future. With that, I'll now like to turn the call over to Pete Wilver, our CFO. Pete?

Thanks, Marc. Good morning, everyone. As usual, I'll begin with an overview of our Q4 and full-year 2014 financial performance for the total Company, then provide some color on our four segments and conclude with a detailed review of our 2015 guidance. As a reminder, at the total Company level, we're reporting organic revenue growth using our standard methodology. That means we'll exclude the results of Life Technologies until we reach the one year anniversary date of the acquisition in early February this year. However for the Life Sciences Solutions segment, we're providing organic revenue growth on a pro forma basis, as if we had owned Life Technologies for all of 2013 and 2014, to give you some insight into the growth performance of that segment. So starting with our overall financial performance in the fourth quarter, we grew adjusted EPS by 39% to $1.99. For the full year, adjusted EPS was $6.96, up 28% from 2013. GAAP EPS was $1.49 in Q4, up 62% from $0.92 in the prior year's quarter, and $4.71 for the full year 2014, up 35% from 2013. As you saw in our press release this morning, starting with the top line, we delivered 6% organic revenue growth this quarter and our reported revenue increased 30% year-over-year. Q4 reported revenue includes 26% growth from acquisitions net of divestitures and a 3% headwind from foreign exchange. Please note that the components of the Q4 change in revenue did not sum due to rounding. For the full year, total revenue increased 29% year-over-year and organic revenue was 4%, slightly above the high-end of our most recent guidance as a result of our very strong results in Q4. Full-year reported revenue includes 25% growth from acquisitions net of divestitures and a slightly negative impact from FX. We strengthened our backlog in the quarter with bookings 2% higher than revenue. Looking at growth by geography, in the quarter North America grew in the high single digits and Europe grew in the mid-single digits. Asia Pacific grew low single digits with China growing mid-single digits. Rest of the world grew in the low single digits. For the full year, North America and Europe grew in the mid-single digits, Asia-Pacific and China grew at the same rates as Q4, and rest of world was essentially flat. Looking at our operational performance, Q4 adjusted operating income increased 48% and adjusted operating margin was 22.8%, up 280 basis points from Q4 last year. For the full year, adjusted operating income increased 45% and adjusted operating margin was 21.9%, up 240 basis points from 2013. Our adjusted operating margin expansion for the quarter and the full year benefited from the Life Technologies acquisition and achieving the related synergies. That said, we also continued to see strong contribution from our primary productivity levers, global sourcing, footprint optimization and our PPI Business System. We realized $13 million of benefit from our restructuring actions in Q4 and $49 million for the full year, and we realized $42 million of synergy benefits in Q4 and $115 million for the full year. We took advantage of our strong performance in Q4 to make additional strategic investments, primarily to strengthen our core technology platforms and commercial capabilities and accelerate growth. Moving onto the details of the P&L, total Company adjusted gross margin came in at 49% in Q4, up 470 basis points from the prior year. This was primarily due to the addition of Life Technologies along with solid productivity across our businesses. For the full year, adjusted gross margin was 48.8%, up 460 basis points from 2013. Adjusted SG&A in Q4 was 22.1% of revenue, which is 80 basis points unfavorable to 2013. Again, this was primarily a result of the acquisition and was partially offset by volume leverage and our cost synergy and productivity actions. For the full year, adjusted SG&A was 22.9%, 130 basis points unfavorable to 2013. Finally, R&D expense came in at 4.1% of revenue for both the quarter and full year, 110 basis points above last year. This increase reflects the impact of the relatively higher level of R&D investment in the Life Sciences Solutions segment. R&D as a percent of our manufacturing revenue for full year 2014 was 6.4%. Looking at our results below the line, net interest expense in Q4 was $107 million, up $45 million from last year. The increase was driven by interest on the debt we raised on fund the Life Technologies acquisition as well as the debt issuance we completed this past November to refinance maturities through the first half of 2015. Net interest expense for the full year was $432 million, an increase of $198 million from 2013. Adjusted other income for Q4 was $9 million, $10 million higher than Q4 2013, and for the full year it was $13 million, $9 million higher than last year, both driven primarily by non-operating foreign exchange gains. Our adjusted tax rate in the quarter was 13.2%, 270 basis points below last year, primarily as a result of acquisition tax planning and the U.S. R&D tax credit which was approved in Q4. Given late approval of the R&D credit, we recognized the entire full-year benefit in the fourth quarter. Our year-to-date rate was 14.5%, lower than our full-year guidance of 15%, as a result of the R&D tax credit. In terms of returning capital, we continued to pay our dividend and paid out $60 million in the quarter and $235 million for the year. Average diluted shares were 404.1 million in Q4, up 33 million or 9% from last year, primarily as a result of the shares we issued to partially fund the Life Technologies acquisition and to a much lesser extent option dilution. For the full year, average diluted shares were 402.3 million, up 36 million from 2013. Turning to cash flow and the balance sheet, cash flow from continuing operations for the year was $2.62 billion and free cash flow was $2.25 billion, after deducting $378 million of net capital expenditures. This is $50 million above our full-year guidance as a result of very strong cash flow performance in Q4. It's also up significantly from our prior year cash flow, primarily as a result of increased operating earnings from the acquisition as well as the standalone business. This increase was partially offset by acquisition related interest expense and cash payments tied to the acquisition and related divestitures. We ended the quarter with $1.35 billion in cash and investments, up $800 million sequentially from Q3. This increase was driven by free cash flow in the quarter and the November debt issuance I mentioned earlier, partially offset by incremental paydown of our term loan. Our total debt at the end of Q4 was $14.6 billion, up $100 million from Q3 and our leverage ratio at the end of the quarter was 3.6x total debt-to-adjusted EBITDA. As Marc mentioned, we spent $500 million in the first few weeks of January on share buybacks, and given our 2015 financial guidance and that we've resumed capital deployment early in the year, we now expect to achieve our target leverage ratio of 2.5x to 3x by the end of 2015. So let me wrap-up my comments on the total Company with my usual update on our performance in terms of return on invested capital. Our trailing 12 months adjusted ROIC in Q4 2014 was 9.5%, up 20 basis points from Q3. This shows that we're delivering increased returns across the business which are offsetting the short term dilution of adding another quarter of the Life Technologies investment into the average invested capital base. So with that, now I'll walk you through the performance of our four business segments. Starting with the Life Sciences Solutions segment, in Q4 total revenue grew to $1.19 billion from $192 million in the prior year, primarily as a result of the Life Technologies acquisition net of the divestitures. On a pro forma basis, assuming Life Technologies was owned in both periods, organic revenue grew 7%. In the quarter we saw a strong growth in our bio production, qPCR, cell biology and next-generation sequencing businesses. Overall, we benefited from year-end spending by our pharma and biotech customers as well as government customers in the U.S. and Europe. For the year, reported revenue grew to $4.2 billion, with pro forma organic growth of slightly above 3.5%, driven by strong performance in the fourth quarter. Q4 adjusted operating income for Life Sciences Solutions increased significantly, primarily as a result of the acquisition and achieving the related synergies, with adjusted operating margin up 660 basis points to 30.8%. For all of 2014, adjusted operating margin was 29%, 520 basis points higher than the prior year. In the Analytical Instruments segment, reported revenue grew 2% in Q4 and organic revenue grew 5%. We had strong growth in our life sciences mass spec, chromatography and services businesses in the quarter. For the year, reported revenue growth was 3% and organic growth was 4%. Q4 adjusted operating income in Analytical Instruments stayed flat to the prior year and adjusted operating margin was 20.2%, down 30 basis points. In this segment, we delivered very strong productivity that was more than offset by strategic growth investments along with unfavorable foreign exchange and business mix. For all of 2014, adjusted operating income increased 4% and adjusted operating margin was 17.9%, 20 basis points higher than 2013. Turning to the Specialty Diagnostics segment, in Q4 total revenue grew 4% and organic growth was very strong again at 7%. We continued to deliver strong growth across much of the portfolio. As Marc mentioned, our ImmunoDiagnostics business had a very strong quarter and growth in our Transplant Diagnostics and biomarkers business were robust as well. Our healthcare channel also had a strong finish to the year, in part driven by sales of seasonal products. For the full year, both reported and organic revenue grew 5%. Adjusted operating income in the segment increased 6% in Q4 and adjusted operating margin was 27.1%, up 70 basis points from the prior year. In the segment, we had strong pull-through on the organic growth, strong productivity and a positive benefit from FX, partially offset by strategic growth investments. For the full year, adjusted operating income increased 6% and adjusted operating margin was 27.4%, up 30 basis points from 2013. In the Laboratory Products and Services segment, Q4 reported revenue grew 2% and organic revenue grew 8%. Our Research and Safety Channel showed particular strength benefiting from continued improvement in U.S. academic and government markets and year-end spending by our BioPharma and industrial customers. For the full year, reported revenue grew 3% and organic revenue grew 5%. Adjusted operating income in Laboratory Products and Services was flat for the quarter and adjusted operating margin was 14.5%, down 40 basis points driven by unfavorable business mix and the Cole-Parmer divestiture, partially offset by solid productivity and favorable price. For the full year 2014, adjusted operating income increased 2% and adjusted operating margin was 14.9%, down 10 basis points from the prior year. So with that, I'd like to review the details of our 2015 guidance. As Marc mentioned, we're initiating a 2015 adjusted EPS guidance range of $7.22 to $7.40, which represents growth of 4% to 6% over our 2014 EPS of $6.96. In terms of revenue, our guidance range is $16.80 billion to $17.00 billion, which is about flat with our reported revenue of $16.89 billion in 2014. As Marc mentioned, we're seeing an unprecedented negative impact on both the top and bottom line as a result of the recent strengthening of the U.S. dollar versus our major foreign currencies. As always, we're focused on our reported numbers, but I thought I'd give you a bit more color on FX to give you some perspective on how it's impacting our guidance. Foreign currency is reducing our adjusted EPS growth by $0.58 or 8%. So if you were to look at our 2015 guidance on an FX neutral basis, adjusted EPS would be growing 12% to 14%, which represents very strong underlying operating performance. On the top line, FX is lowering our revenue by about 4.5%, so our FX neutral reported growth guidance would be 4% to 5%. Moving on to the details of our guidance, acquisitions net of divestitures are expected to contribute about 50 basis points to our reported revenue growth in 2015. On an organic basis, our revenue range assumes an organic growth midpoint of about 4%, which includes Life Technologies after February 3, the one year anniversary of the close date. The midpoint of our 2015 organic revenue growth guidance is essentially the same as our 2014 organic growth when calculated on a pro forma basis including Life Technologies. We're not expecting any significant changes in our growth assumptions by end market compared to 2014. And that being said, there is a slight mix shift by end market as a result of including Life Sciences Solutions in our 2015 organic growth calculation from February onward. As a result, we're expecting slightly slower growth in pharma and biotech in the mid to high single digits and slightly stronger growth in academic and government although still in the low single digits. We expect growth in diagnostics and healthcare as well as industrial and applied to be consistent with 2014 at around the Company average. For the Life Sciences Solutions segment, we expect pro forma organic growth of 3% to 4% for 2015. Compared to 2014, growth in this segment will benefit from revenue synergies but will face a more difficult growth comparison and some dilution from the divestitures. Consistent with past practice, our guidance assumes current foreign currency exchange rates and we haven't attempted to forecast future changes in rates. Our guidance also does not include any future acquisitions or divestitures. Turning to adjusted operating margin, we're expecting around 50 to 70 basis points of expansion year-over-year. In terms of pull-through on the FX revenue headwind, we're expecting a substantial unfavorable impact on the bottom line totaling $275 million or about 37% average margin and 70 basis points of adjusted operating margin dilution. This is being driven primarily by the weakening of the euro and Japanese yen. With the addition of Life Technologies, the euro now pulls through to our adjusted operating income at a little more than 35% and the yen is consistent with prior years at 60% pull-through. So if you were to look at our 2015 guidance on an FX neutral basis, our margin expansion would be very strong at 120 to 140 basis points. We're aggressively managing our cost base and driving top line actions to offset as much of the FX headwind as possible without damaging our future growth prospects. We're also managing the FX impact with below the line actions such as share buybacks, further optimizing our debt structure and initiating additional tax planning strategies. In total, we expect our productivity drivers to yield about 260 basis points of adjusted operating margin expansion. Similar to last year, we expect to deliver productivity from our PPI Business System, our global sourcing initiatives including low-cost region sourcing and manufacturing, our footprint optimization actions and we're assuming about $115 million of incremental cost synergy benefit in 2015, and that will realize about $60 million of revenue synergies with around $20 million of adjusted operating income benefit. This puts us well on track to achieve our year three goal of $350 million of combined cost and revenue synergies. These benefits will be somewhat offset by select strategic investments to continue to drive growth primarily in emerging markets and also to enhance our customer experience. Moving below line, we expect net interest expense to be in the range of $375 million to $385 million, about $50 million lower than 2014. The decrease is primarily as a result of continuing to pay down our term loan along with settling our 2015 maturities, a portion of which will be financed with our November 2014 bond issuance. We're expecting our adjusted income tax rate to be about 14%, down slightly from 14.5% in 2014. In this projection, we're assuming that the R&D tax credit will be approved again in 2015 or that we'll do some incremental tax planning above our base assumptions to replace it. In terms of capital deployment, we're assuming that we'll return approximately $240 million of capital to shareholders this year through dividends and $500 million through share buybacks which as I mentioned we completed earlier this month. This leaves about $400 million remaining on our current share buyback authorization. Full-year average diluted shares are estimated to be in the range of 403 million to 404 million, up slightly from 2014, and we're expecting net capital expenditures to be in the range of $435 million to $450 million. Finally, in terms of full year 2015 free cash flow, we're expecting about $2.6 billion, up $350 million compared to 2014. As a final note on guidance, I thought it'd be helpful to give you some insight into what we're expecting for Q1 2015, because Q1 last year included only a partial quarter of the Life Technologies acquisition and that resulted in higher than normal margin due to the timing of revenue and expenses throughout the quarter. We're expecting Q1 2015 reported revenue growth of 1% to 3%, and organic revenue growth of 2% to 4%. In terms of Q1 earnings, we're expecting adjusted EPS growth of 2% to 6% and adjusted operating margin expansion of about 15 basis points. In addition, we expect our interest expense and tax rate to be higher in Q1 than the average for the year as a result of the phasing of paying down debt and implementing tax planning throughout the year. As always, in interpreting our revenue and adjusted EPS guidance ranges, you should focus on the midpoint as our most likely view of how we see things playing out. Results above or below the midpoint will depend on the relative strength of our markets as well as FX fluctuations during the year. In summary, we delivered a strong finish to the year which positions us well to achieve our financial goals for 2015. With that, I'll turn the call back over to Ken.

Thanks, Pete. Melissa, we're ready to open it up for Q&A.

[Operator Instructions] In order to allow everyone in the queue an opportunity to address the Thermo Fisher management staff, I would like to ask that you limit your time on the call to one or two questions. If you have additional questions, please return to the queue and pose your question in turn. Your first question comes from the line of Derik de Bruin from Bank of America Merrill Lynch. Your line is open.

Wow, first question for a change. So just one quick one and then just one other one, so Pete, you're a day less in Q1 this year by your calendar, is that my correct calculation on that?

Yes, it's one less day in Q1 and then we pick up the day again in Q4.

Okay, just making sure that that's there. And I guess on China, can you just sort of – I mean a couple of your competitors made some noise about seeing at least a little bit of improvement or seeing some potential pickup, I mean what's embedded into your organic revenue growth guidance for China this year?

In terms of China, looking back at last year, mid-single digit growth in the quarter, mid-single digit growth for the full-year, bookings growth was stronger at high single-digit, so we built a little bit of backlog. From our perspective, we're assuming in the guidance that market conditions are going to be very similar in 2015 to 2014, and obviously when we hit an inflection point for accelerated growth and we'll obviously communicate it, but there's not a huge amount of transparency right now into when the government is going to step up spending. So based on the fact that 2015 has an easier comparison versus what we've had last year, that should hopefully be a conservative assumption on China.

Your next question comes from the line of Ross Muken from Evercore ISI. Your line is open.

On the quarter, in and of itself, I mean you had, and a couple of other businesses had their best sprint of the year from a growth perspective, if you sort of look under the hood and examine where the greatest deltas were in the Q at least relative to your expectations, ex maybe one-off things like flu, where do you feel like the core performance really inflected and it was sort of a market or share or kind of underlying dynamic, because I think the numbers across the board in some of the pieces were a lot there than certainly we were looking for?

So, Ross, the team across our businesses and across the globe performed very well, and the 6% organic growth, the strength in each of our business segments really was a highlight. Very nice to see the Life Sciences Solutions business had very strong growth in the quarter, delivered a very nice year overall with about 3.5% growth on the full-year which is about 1 point better than what it had been growing the prior year. So that's a real positive. But we saw good performance in our channel businesses, both in Specialty Diagnostics and in the Research and Safety one within Lab Products and Services, and generally a great year with our mass spec and chroma business as well, so really strong across the board.

And obviously relative to 2015, very difficult environment, you sort of noted sort of unprecedented from an FX perspective, so as you sort of saw rates shift in the last several weeks, what are the sorts of discussions you have internally in terms of whether it's prudent to do something more aggressive on the cost side or push up synergy capture, I mean it's obviously a hard thing to judge and the magnitude of the moves have been kind of again more volatile than we would have thought, so as you think about sort of the potential offsets or how you plan out the rest of the year because you've never been shy doing things into a year, what are the key things we should look for to figure out if maybe we see further offsetting items that come later in Q2 or Q3 or beyond?

So that's a great question. So the way the team has thought about it is the following, which is Company is performing extraordinarily well operationally, good momentum with our customers, and when we looked at the FX headwind, the way the team has responded, is signed up for a more aggressive operating plan, right. So you look at it, the midpoint of our guidance at organic growth of 4% is stronger than the last few years. When you look at the underlying margin assumptions, EPS assumptions, with only $0.5 billion of capital deployment, you're seeing very strong fundamental actions. Some businesses took incremental cost actions, some businesses signed up for more growth, and basically we have a great team of people around the world, we discuss it business by business and so what's the best way to maximize our performance. So that's to look at how we're dealing with the situation right now at this moment in time. Looking forward, if rates improve, we're just going to let that flow to the bottom line and just raise the guidance. If rates deteriorate, then what the team is going to do is try to offset as much as we can without damaging obviously the Company for the long-term. So it's not a plus or minus, we're only – it moves evenly if the world gets more difficult, we'll offset what we can do, and if the world gets better that all goes to the bottom line. So that's how we're thinking about it.

I guess you probably never imagined a year where you'd have as strong a core growth as you're having, it would only drop down to 5% earnings growth.

The way I look at it is, we have managed through lots of different environments and we exit every one of these periods a stronger, more competitive industry leader, and I view the FX changes as an opportunity for Thermo Fisher to plough through this and come out as an incredibly strong company with great financial performance, and we'll look back at this period, whether it's one month, six months or a couple of years in terms of this type of environment, and I think our shareholders and certainly our customers will say, wow, Thermo Fisher distinguished itself once again. So that's how we're thinking about it, we'll be super-aggressive in managing the business.

Alright, thanks Marc.

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

So just want to ask a quick question on the LPS business, just trying to get a sense of the extent to which you felt like market share or mix might have been part of the strong performance?

So in the LPS segment, we have more exposure to the academic and government customer base there and that obviously had strong year-end spend both in Europe and the U.S., so that helped us from an end market perspective. And our Research Channel business, Research and Safety Channel business is doing great, it's performing well and I think it continues to gain market share. So it's a combination of those two events.

Got it. And then, in the forensics business, that's obviously been a really nice business for you guys over the years, both prior to the Life acquisition and since. Looking ahead, it seems like there's a little new competition coming on the marketplace. What's your plan to sort of defend your turf there and maybe try and expand the market to a sustained, a healthy growth rate?

In terms of forensics, we're the industry leader globally, we have a great position between our Sanger sequencing and some customers are starting to look at NGS and we play a role there as well. So we're leveraging our installed base and decades long relationships with these customers to make sure that they're getting what they need. It's a conservative customer base and we're well-positioned there. We work with a variety of governmental agencies as well to help them expand the market and create new opportunities for forensics testing, we're right in the midst of that, and that rewards us with good market share.

Your next question comes from the line of Tycho Peterson from J.P. Morgan. Your line is open.

Nice quarter. Maybe just kind of going back to the prior questions on some of the offsets for FX, and maybe for Pete, I'm wondering if you could talk about whether any of the tax strategies that you alluded to could have an impact this year. And then on the repo, I assume you'll complete the remaining 400 million. That sounds like that wasn't embedded in guidance, but beyond that, should we assume that buybacks are a bit more of a priority than bolt-on or larger M&A in this environment?

Let me do the capital deployment one and then Pete will cover the other part. In terms of capital deployment, our assumption in the guidance is to have $1 billion. That we completed. In terms of the balance of how we think about the year, we'll continue to look at bolt-on M&A and where it makes sense we have a good pipeline, so we'll look at that. And then obviously as the year unfolds, we'll determine whether it makes sense to do additional share buybacks or not. So right now, what's embedded in the guidance is what we've done and then we'll update you in the future quarters about how we're going to deploy capital.

Then on the tax rate, so Tycho, we've baked in a significant amount of tax planning actions into our guidance, and as I said we've included the R&D tax credit, so that's worth about $20 million. It hasn't been approved yet but it's been approved the last number of years. So we decided to put it into our guidance this time around. So if that doesn't happen for some reason, then we would actually have to come up with $20 million of incremental tax planning in order to offset it, which we feel confident that we can do, but that's the way it's set up in our guidance.

Then in terms of some of the assumptions by segment or customer base embedded in guidance, you talked about mid-single-digit to high single digit growth in pharma biotech. Can you maybe just talk about the momentum there, is this largely from some of the larger global accounts? And then on academic, low single digit seems like a reasonable starting point. I think there are some discussions and do you see you could see a more meaningful bump than has been proposed to the NIH, so any intel you can share from what you're hearing out of DC on the budget?

So in pharma and biotech, obviously had a very strong year in 2014, high single digit growth in the quarter and the year. As we look to this coming year, there were some mid to high single digits simply because we have the Life Technologies included in the end market calculation. So that just makes it a bit of a broader base but we focus on gaining share. Academic and government, right now the funding level in the NIH is modest growth. There's a lot of dialog going on about increased opportunities but that hasn't yet obviously translated. Obviously there was a little bit of a mention in the State of the Union and Dr. Collins, the Head of the NIH, has been out actively talking to the industry and the constituents about opportunities to make investments there. So we'll see how that plays out, if it gets even stronger than what we anticipated at this point.

Okay. And then just lastly, if we think about the strong dollar, any chance you would maybe accelerate some international investments? I know you're moving some manufacturing to Singapore. Are there other opportunities to maybe benefit from the strong dollar in terms of your manufacturing footprint?

It's a good question. So in terms of manufacturing, one of the things that we're doing, we're moving more of our production of reagents to our Lithuanian site which is both low-cost and obviously we'll benefit from the exchange rates. Over time, we'll increase sort of the natural hedge in our business by increasing our manufacturing footprint in Europe by selecting our lowest cost facility to do that. So we've got a very substantial presence in Lithuania and continue to expand that out.

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

My first question is on M&A. So the Life deal was completed about a year ago, you're in a position to get the debt-to-EBITDA ratio down to 2.5x this year, could you just give us a refresher on your M&A criteria including size parameters, maximum leverage parameters and ROIC targets and over what period? And related to this, is it fair to conclude that while it would be tough to do anything in Life Sciences Solutions given ongoing Life Tech integration efforts, that sizeable deals that have overlap with other business units are fair game if they make sense?

Great question. So given that we haven't done, after doing very large transactions we had a quieter year, it's a good opportunity to refresh everyone on our M&A approach, right, and it's obviously been fine-tuned over 15 years and we have a great track record here. The strategy is around, acquisitions have to strengthen the Company strategically. It has to be well understood and appreciated by our customers and it clearly has to create shareholder value as measured by return on invested capital. Our hurdle rate has remained the same over very long periods of time which is an 8.5% cost of capital is what we assume, it is the hurdle rate, meaning that we're targeting double-digit returns or better when we deploy capital internally or externally. In terms of areas of focus for M&A, it would cut across our higher tech portions of our portfolio, Life Sciences Solutions, Specialty Diagnostics, Analytical Instruments. And in terms of the scale of deals, we don't have any size constraints, although the way I think about it is, over the last 10, 15 years, we've done two large deals and we've done, I don't know, 75 to 100 bolt-ons, right. So the predominance of what we do is bolt-ons and in any given year you should expect us to look at some smaller transactions, and then once every few years when the stars line up sometimes larger things happen. In terms of the target leverage ratios, we like to operate day to day in the 2.5x to 3x. We're willing to spike up to about 4.5x. So we have plenty of capacity at any point in time if we want to deploy capital on something that clearly creates shareholder value, and occasionally those larger opportunities present themselves, but I think you should expect us to be doing bolt-on acquisitions as based on where the number of companies really are in terms of opportunities.

And the last part of the question on a bit by segment, is it right to assume that LSS is probably not ready for something big but other areas might be if the opportunity presents itself?

I mean generally the LSS – I mean not generally, specifically, the LSS team is doing an incredible job of managing the business, the team is nailing it. Is it likely that we'll have very large transaction there? No, I think it's a little likely here event, but I'm very confident in the team, but I would say we're really focused on running what we have, and where things to create shareholder value and strengthen the Company, we'll look at them.

Okay. And then I guess my second question is really on the pharmaceutical end market. It clearly sounds like momentum has continued there for not just you but others in the group. For Thermo specifically, you guys have been pretty strong in this end market for a while and that's a function of not just recent cross-group trends but also new products and really your ability to package products across different verticals. Could you talk about two things, one is, how you're feeling about your ability to continue to pick up share the way you have over the last few years via your portfolio approach, and I guess the second part of it is, how should we think about visibility on sustainability? Q4 for example was really, really strong. Is there any risk of that there is some pull-forward of spend that might lead to a moderation in growth at least in the first half of the year and how do you factor that into guidance? Thank you.

So in terms of the continuation of the ability to gain share, the leverage of our value proposition, highly, highly confident, we have gotten only better, right. We have more experience, more case studies, more customers willing to do referrals and even more capabilities with the addition of Life Technologies to our portfolio. So we're doing well and we have lots of opportunity to continue to drive that, we're expanding the number of accounts we're focused on and generally I feel great about it. In terms of visibility, I have pretty good visibility into the end market. I mean it bounces around a little bit quarter to quarter. In terms of – the easiest way to answer is more how to think about the year, alright, if we're saying – we are saying, the 4% organic growth is the midpoint of the guidance for the full-year for the Company, we have a little lower organic growth in Q1, as Pete mentioned in his opening comments, and we expect the second half of the year to be slightly stronger than the first half of the year on an organic basis. So that is a comment on all the end markets as opposed to a comment specifically on pharma, Doug.

Your next question comes from the line of Steve Beuchaw from Morgan Stanley. Your line is open.

Marc, I wanted to follow-up on a comment you made in your prepared remarks about academic spending trends. It's clearly embedded in the overall outlook and you've referenced a couple of points where academic was particularly solid at the end of the year. I wonder if you could point us to where over the course of 2015 you think there's the most opportunity for improvement, not so much in terms of execution but in terms of the end market specifically in academic and government.

So, Steve, as we look at 2015, we're expecting low single digits but a little bit better than the low single digits we delivered in 2014. We're expecting the U.S. to be slightly stronger because the customer base has more visibility to the budgets now and that allows them to spend. So that should play out exactly as we thought on the academic and government, which was weaker spending in the first half of the year, stronger spending in the second. We expect this year the environment to be stable and modest growth, so U.S. a little better. We think Europe will be a little bit more muted just given the economic environment there, but still a little better in aggregate across the globe.

And then a broader question on seasonality in the model, I mean when we look at 2013 and again in 2014, in both years we were surprised a bit to the upside on organic growth, and we can point to different factors in each year, but I wonder is it possible that we're getting into a world where the business is a little bit more seasonal where the fourth quarter does trend a little bit stronger than it might have on a relative basis as compared to prior years and we should think about that in terms of how we model the second half of 2015?

In terms of overall activity, the fourth quarter is by far the strongest because you've had some factors change over the last few years. One is the way healthcare utilization patterns have operated with low activity in the beginning of the year and then it ramps. So in terms of absolute dollars, Q4 is very strong. In terms of the organic growth, it shouldn't affect things, right. Organic growth in that respect shouldn't be affected by that change. What is happened, at least as we look back at the last couple of years in the fourth quarter is, the economic environment has been pretty stable and customers have been willing to release year-end funds. In both years, it was always at the beginning of those years some uncertainty, could the world be bad, and at the end of the year the world played out okay and people released money. So I think there's a bit of a people holding back until the end of the year, a little bit of caution, and then if things look okay then they release funds. So I think that's going on a little bit.

Thanks so much.

Melissa, we have time for just one more.

Your last question comes from the line of Steve Willoughby from Cleveland Research. Your line is open.

Really just two things. First I guess, Pete, as it relates to your guidance for 2015 looking at operating margins, I know you broke out the negative impact from FX. Could you maybe also help us think about the 50 to 70 basis points you guys are guiding to operating margin expansion in 2015, what is the makeup of that expansion, is there any incremental benefit from Life, gross margins versus leveraging other expenses?

Sure. So just in terms of the split between the elements of the P&L, if you take the midpoint, of 60 basis points about 30 comes from gross margin and about 30 comes from SG&A, and we expect to hold the R&D percent of revenue pretty much flat year-over-year. And then in terms of how it breaks out between the different elements, FX and price/volume mix, so price/volume mix is about 50 basis points. As I mentioned earlier, foreign exchange is a 70 basis point dilution. There's about 10 basis points net between the acquisition and divestiture. So that represents the divestitures related to the acquisition as well as the Cole-Parmer divestiture, and then just picking up one month of Life Technologies that we didn't get last year. Productivity, about 190 basis points; synergy, 70 basis points; inflation, negative 90; and then about 100 basis points of investments. That's a pretty similar profile to what we've seen in prior years with the exception of obviously the foreign exchange dilution is very significant. So other than that, it's pretty much a normal year.

Okay, thanks so much for that. And then just secondly, in terms of the revenue synergies Marc alluded to, you guys are starting to do some of that in 2015. I might have missed it, but did you give a number of what you're factoring in for revenue synergies in 2015 in your guidance?

Yes, I did. It's 60 million in revenue and we're assuming about 20 million EBITDA pull-through on that.

Great. So let me thank everyone. We're going to wrap-up the call. Obviously we're pleased to deliver an outstanding quarter, a great year in 2014. We're looking forward to build on that momentum, have a really strong 2015, and of course thanks for the support to Thermo Fisher Scientific and we look forward to updating you on our progress next quarter. Thanks everyone.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.