賽默飛世爾科技 (TMO) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen.

My name is Carma and I will be your Coordinator for today.

Welcome to the Thermo Fisher Scientific third quarter 2010 earnings conference call.

I would now like to introduce our moderator for the call, Mr.

Kenneth Apicerno, Vice President Investor Relations.

Mr.

Apicerno, you may begin the call.

Good morning and thank you for joining us.

On the call with me today is Marc Casper, our President and Chief Executive Officer, and Pete Wilver, Senior Vice President and Chief Financial Officer.

Please note that this call is being webcast live and will be archived on the Investor section of our website under www.thermofisher.com under the heading Webcasts and Presentations until Friday, November 26, 2010.

A copy of the press release of our third quarter 2010 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 Form 10-Q for the quarter ended July 3, 2010, 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 of 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 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 2010 earnings and future expectations and also in the Investor section of our website under the heading Financial Results.

So, with that, I'll now turn the call over to Marc.

Thanks, Ken.

Good morning, everyone, and thank you for joining us for our 2010 third quarter earnings call.

We're very pleased to report excellent financial results highlighted by record third quarter EPS performance.

As I outlined earlier this year, we are intensely focused on achieving strong EPS growth and we successfully delivered on that goal again this quarter.

We are also pleased to announce that we are raising our EPS and revenue guidance for 2010.

Which we will discuss later during the call.

Let me begin by reviewing our Q3 results at a high level.

As you saw in our press release, adjusted earnings per share grew 15% to a record $0.90 versus $0.78 in the 2009 quarter.

I'd like to focus on the three key drivers of our EPS performance.

The first, top line revenue growth; the second, operating excellence; and the third, disciplined capital deployment.

So let me start with covering top line revenue growth.

Revenues for the third quarter increased 6% to $2.68 billion, compared with $2.53 billion in the 2009 quarter.

Our Analytical Technologies segment contributed significantly to our revenue growth in the quarter.

In our analytical instruments business, which you may recall had a solid first half, we saw even stronger revenue performance in Q3.

In addition, our clinical diagnostics and biosciences businesses continued to report strong growth.

In our Laboratory Products and Services segment, sales of equipment and consumables were strong across academic and government, biopharma, and industrial end markets.

I'll now turn to our second EPS growth driver which is operating excellence.

Let me start by saying how proud I am of our teams and how they delivered excellent operating performance in the quarter.

Their sharp focus on successfully executing on their plans let to solid Q3 results and positions us well to achieve our goals for the full year.

Our proven operating discipline also gives us the distinct advantage of being able to invest for the future.

As we outlined at the beginning of the year, our plans for 2010 included increasing our investment in both technology innovation and emerging markets.

In Q3 we ramped up our R&D spend by 30 basis points year-over-year, to expand our pipeline of exciting new technologies.

We also increased SG&A expense to continue to build our presence in emerging markets, particularly Asia.

One of the fruits of this investment is our new China technology center in Shanghai.

This resource is focused on developing products and technologies in China, for China.

In other words, specifically geared to the needs of our customers in that important marketplace.

It's important for me to note even with these significant investments we achieved 30 basis points of adjusted operating margin expansion during the quarter.

Our excellent operating results are tied largely to a culture of practical process improvement or PPI, which, as you know, is how Thermo Fisher increases productivity to better serve our customers around the world.

PPI and PPI Lean will continue to be important contributors to our operating results.

The R&D investment that I highlighted a moment ago demonstrates that Thermo Fisher is a company that is committed to innovation.

Let me give you a couple of recent examples.

As you saw in our press release, we introduced a substantially improved mass spectrometry based work flow for immunosuppressant analysis.

This work flow which includes our new test kits and new automated sampling handling technology is used in clinical research to closely monitor the levels of drugs in patients.

Very important for preventing harmful side effects or organ rejection after transplant, for instance.

In our specialty diagnostics business we had two significant product milestones.

One was the US FDA clearance of our new diagnostic test designed to screen for VRE.

This is an antibiotic resistant infection that is often transmitted in hospitals.

Basically we developed one of the first color-changing tests that allows healthcare workers to easily, and therefore more routinely, test for the presence of this infection.

The second product milestone was that of developing our new cryostat technology.

This is used by our customers in pathology laboratories to safely process tissues for cancer diagnosis.

And it was selected to be an R&D 100 award winner.

I'm also pleased to announce the formation of our scientific advisory board.

This new board consists of technology leaders within Thermo Fisher and representatives from some of the world's most premier centers of health, science and education.

Its primary purpose is to formalize the two-way exchange of technological information by bringing together some of the brightest minds in our industry.

The insight and distinct expertise of each member of our advisory board will be invaluable as we set a course for the innovation of new products and services that will meet the changing needs of our customers.

The third key contributor to our EPS growth is our ability to effectively deploy capital.

As you've heard me say before, we take a disciplined approach to capital deployment.

Since the beginning of the year we deployed approximately $1.2 billion in total, split almost equally on share repurchases and acquisitions.

Specifically we've invested $660 million to repurchase our stock and approximately $550 million on M&A.

With the current evaluation of Thermo Fisher stock we believe that reinvesting in ourselves is very attractive.

In September our board approved an additional $750 million of share repurchases on top of our existing authorization, bringing our total buy-back authorization to $1.5 billion since April of 2010.

In the third quarter alone we spent $475 million to repurchase 10.1 million of our shares.

At the end of the quarter we had approximately $840 million remaining under our buy-back authorizations.

We also continued to put our capital in acquisitions.

The most recent example of acquisition of Fermentas for $260 million, which we completed in late July.

To remind you, Fermentas provided a broad range of technologies for high quality molecular and cellular biology research to enhance Thermo Fisher's existing genomics portfolio.

The Fermentas transaction, combined with our earlier acquisition of Finnzymes, and the launch of our new QPCR assays also strengthens our depth of capabilities in the high growth market for PCR-based testing.

I'm pleased to report that the acquisitions we've made in the last 12 months are exceeding our expectations.

Although not part of our organic growth calculation just yet, these businesses are growing faster than the Company average and we expect them to be good contributors to our growth and profitability going forward.

You'll see us to continue to create shareholder value in this way.

So we're focused on accelerating our long-term growth and strengthening our industry leadership by deploying our cash flow and by putting our balance sheet to work.

Now I'll switch gears a little to highlight through a couple of examples one of our key growth themes within the Company.

These themes are important because they collectively drive our revenue growth, they underscore our unique depth of capabilities and they illustrate how we fulfill our Company's mission to enable our customers to make the world healthier, cleaner and safer.

Last quarter I talked about the great progress we're making to expand in emerging markets, specifically China.

Today I want to talk about our capabilities in moving advanced technologies from the lab to the line and to the field.

Specifically I'll give you three examples from our laboratory equipment and analytical instruments' businesses.

First, let's look at a part of our lab equipment business that you might not know much about.

Chillers and temperature-control devices.

We're a leader in this technology and our Thermo Scientific chillers are found in laboratories around the world.

As background, our most advanced chillers can maintain temperature to within 1/1,000th of a degree.

That is important because maintaining a constant temperature is a key factor in ensuring the reproducibility of certain experiments.

Through our ongoing technology developments, the applications for temperature control are increasingly moving out of the laboratory and into new applications.

One example is a California based manufacturer who is working on developing a DNA sequencer.

Precise temperature control is critical to DNA sequencing because the unwinding and reformation of the DNA strands happen at specific temperatures.

The customer called on us to help with the challenge.

Working closely with them to apply our temperature control expertise, we were able to not only meet this need, but also introduce a whole new line of chillers that are now sold throughout the world.

This kind of partnering innovation is actually quite common for us and typically opens the door to even greater opportunities.

Another example that you're probably familiar with is our offering of Thermo Scientific hand-held technologies within our analytical instruments business.

Through both new product development and complementary acquisitions, such as Ahura Scientific, we continue to translate lab proven analytical technologies into hand-held instruments for a range of new applications in the field.

You'll find our XRF Robbins spectroscopy and near infrared instruments used in a broad range of applications including pharmaceutical quality control, detection of counterfeit drugs, consumer product screening, airport security, and miner safety, to name a few.

The third example to carry out this theme is also from our analytical instruments business.

Today gas chromatography is a standard process control instrument.

But we have often heard from our customers in the chemical and steel industries that they need faster, more sensitive and more cost effective GC technology.

Interestingly, this need also extends to the biotech industry where these instruments are used in the fermentation process.

Based on our industry-leading mass spec capability, we recently introduced a new product called Prima PRO which is a next generation mass spec analyzer for industrial markets.

The Prima PRO provides lower cost of ownership, lower capital cost, while improving process control for many applications that were traditionally based on GC analysis.

To sum it all up, this important theme in our Company, lab to line to field, covers many applications that allows us to drive incremental growth.

With industrial and markets clearly improving, we see this as a terrific opportunity well into the future.

So this is one theme that illustrates for you how our Company's position for growth.

I plan to highlight one top-level message like this every quarter to give you a better sense of the range of opportunities we are capitalizing on at Thermo Fisher.

Before I conclude, let me spend a moment on our annual guidance which you saw in our press release.

Pete will go into more detail during his remarks, but at a high level I can tell you that we're pleased to raise both our adjusted EPS and revenue guidance.

We are raising our adjusted EPS guidance for 2010 to a new range of $3.47 to $3.53, which would result in 14% to 16% EPS growth over 2009.

This will be driven by top line growth, strong operating execution and productivity improvements, as well as the benefits of our continued strategy of effectively deploying our capital.

We are also raising our 2010 revenue guidance to a new range of $10.72 billion to $10.80 billion.

This would result in 6% to 7% overall revenue growth over 2009.

We have a strong nine months behind us with higher stop top and bottom line expectations than when we started the year.

Before I hand the call over to Pete, let me summarize by saying that we're on track to deliver a great 2010.

I am proud of how well our teams are executing on their plans.

We expect good top line growth, our markets are continuing to show improvement over 2009, and we continue to effectively deploy capital to create shareholder value.

In total, this positions us well to achieve our 2010 financial goals.

Now I'll turn the call over to our CFO, Pete Wilver.

Pete?

Thanks, Marc.

Good morning, everyone.

As Marc highlighted we delivered another strong quarter with 15% growth in our adjusted earnings per share to a third quarter record of $0.90 compared to $0.78 last year.

GAAP EPS in Q3 was $0.66, up 25% from $0.53 in the prior year's quarter primarily as a result of our improved operating performance.

Moving on to our top line performance, we reported a 6% increase in revenues year-over-year to $2.68 billion.

Acquisitions contributed 3% to the growth and the unfavorable effect of currency translation lowered revenues by 1% resulting in 4% organic growth.

In the quarter, the Biosite transition and unfavorable flu comps that we've previously discussed, negatively affected our organic growth by over two percentage points.

Excluding these two items our organic growth would have been above 6%.

Our results in Q3 continued our trend of strong growth across our portfolio, with instruments and equipment as well as services, growing in the high single-digits.

Sales of consumables were significantly affected by flu and Biosite but still grew in the low single-digits.

Bookings in the quarter were essentially in line with revenues.

By segment, Analytical Technologies Q3 revenues grew 14% on a reported basis and 8% organically.

This quarter we saw especially strong growth in our mass spec, clinical diagnostics and biosciences businesses.

And our instruments business serving industrial markets delivered strong year-over-year growth reflecting the improvement we're seeing in those markets.

Our microbiology business, however, was dilutive to growth due to the tough year-over-year comparison with unusually high H1N1 related flu sales in 2009.

In the Laboratory Products and Services segment, Q3 revenues grew 1% on a reported basis and 2% organically.

In the quarter, we saw a strong growth in laboratory equipment and consumables, partially offset by flu and Biosite.

By geography, our three major regions, North America, Europe and Asia-Pacific, all grew organically at about the Company average.

Bookings were much stronger than revenues in the Asia PAC region, particularly in China and end India where we had double-digit growth.

The rest of the world grew in the mid 20s from a relatively small base, driven by South America and the Middle East.

We also had solid results at the bottom line with Q3 adjusted operating income increasing 8% year-over-year to $471 million.

Adjusted operating margin was 17.6%, up 30 basis points from 17.3% in the year ago quarter.

The year-over-year margin expansion was driven by pull-through on organic volume growth at marginal rates and strong cost productivity driven by our global sourcing, practical process improvement and restructuring initiatives.

We also saw nice accretion in the quarter from our recent acquisitions.

These gains were partially offset by strategic growth investments, as Marc highlighted, in R&D and commercial resources to support growth, primarily in Asia.

By segment, Q3 adjusted operating income in Analytical Technologies increased by 23% year-over-year.

Adjusted operating margin was 21.5%, up 160 basis points versus 19.9% last year, driven by strong pull-through on organic volume growth.

Q3 adjusted operating income in Laboratory Products and Services decreased by 6% year-over-year.

Adjusted operating margin was 13.4%, down 100 basis points versus 14.4% in the 2009 quarter.

In this segment, solid productivity was more than offset by increased year-over-year strategic growth investments and some unfavorable geographic and product mix.

Moving on to the details of the P&L, total Company adjusted gross margin was 42.2% in Q3, up 100 basis points from the year ago quarter.

This increase was driven by pull-through on organic revenue growth, cost productivity and accretion from our recent acquisitions.

Adjusted SG&A was 22% of revenue in Q3, up 50 basis points from 21.5% in the year ago quarter, driven by strategic growth investments.

R&D expense was 2.7% of revenue in Q3, up $11 million or 30 basis points from last year, reflecting our commitment to increased investment in technology development to expand our new product pipeline for future growth.

Moving below the line, our Q3 adjusted net interest expense decreased $11 million year-over-year to $16 million.

Driven by lower interest expense mainly as a result of our debt refinancing initiatives.

We also had higher year-over-year interest income due to slightly higher interest rates earned on our cash balances.

Adjusted other income was a gain of $2 million, up $1 million from last year.

Our adjusted tax rate for the quarter was 20.4%, up 40 basis points from Q3 2009 and down 110 basis points from Q2.

Our Q3 rate is down from our previous forecast, as a result of some specific tax planning benefits that were realized in the quarter.

Our new full-year adjusted tax rate forecast is 21.2%, which represents our previous estimate of 21.5%, adjusted for the Q3 specific items.

This forecast may improve somewhat depending on whether or not the US R&D tax credit is extended.

With regard to the new US tax legislation that was approved earlier in the third quarter, the detailed regulations have not yet been issued so we don't know exactly how they will affect us.

However, we're not forecasting any impact on our 2010 tax rate and we don't expect our 2011 tax rate to be materially outside the assumption we gave you at our May analysts meeting which was 22% to 23%.

As Marc mentioned, we used $475 million of our cash to buy back 10.1 million shares during the quarter.

Year-to-date through the end of the quarter, we spent $663 million on buy-backs against our total authorization of $1.5 billion, so we have $837 million left to spend on our current authorizations through September 8, 2011.

Average diluted shares were 404 million in the quarter, down 16 million from last year, reflecting the benefit of our 2010 share buy-back program, as well as the redemption of a significant portion of our convertible debt.

We continue to maintain a strong balance sheet and we're pleased to report that our cash flow performance accelerated this quarter.

Q3 year-to-date free cash flow from continuing operations was $891 million after deducting net capital expenditures of $169 million.

We ended the quarter with $939 million in cash and investments, down $377 million from Q2, as free cash flow in the quarter was more than offset by cash used for share buy-backs and the Fermentas acquisition.

Our total debt was $2.16 billion, up slightly from Q2.

With regard to working capital, we continue to have good year-over-year performance.

Accounts receivable days sales outstanding were 52 days, down one day from the prior year.

And inventory days of supply were 70 days, also down one day from 2009.

Moving on to our 2010 guidance, we're raising our previous adjusted EPS guidance and tightening the range resulting in a $0.05 increase to the midpoint.

Specifically, we're increasing our adjusted EPS guidance to a new range of $3.47 to $3.53, from our previous change of $3.40 to $3.50.

This new range represents 14% to 16% growth compared to our 2009 adjusted EPS of $3.05.

The primary drivers of the increased adjusted EPS guidance are higher revenues, increased capital deployment through share buy-backs and a slightly lower tax rate.

In terms of revenue, we're also raising our guidance to a new range of $10.72 billion to $10.80 billion, up from our range from $10.60 billion to $10.75 billion.

This narrow range results in an $85 million increase to the midpoint of our previous guidance and represents growth of 6% to 7% compared to our 2009 revenues of $10.11 billion.

The primary drivers of the revenue guidance increase are improved foreign currency translation and slightly better than expected organic growth in Q3.

In terms of full-year organic revenues, our current guidance translates to growth of 4% to 5%.

As I've mentioned before, we expect flu and Biosite to negatively impact our full year revenue growth by over 1%.

Excluding these two items our full year organic growth would be solidly in the range of 5% to 6%.

As a reminder, Q1 had four more days than the prior year and Q4 will have four less days.

So in terms of our Q4 organic growth, when you combine the calendar impact with the flu and Biosite headwinds, our Q4 reported growth will take a hit of about 6 percentage points resulting in reported organic growth of negative 3% to negative 1%.

If you adjust out these headwinds, our organic growth guidance for Q4 would be positive 3% to positive 5%.

As usual, our guidance does not include any significant assumptions with regard to future uses of capital other than our previously announced share buy back authorizations, which we expect to utilize over the remaining months of the authorization.

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 rest of 2010 playing out.

Results above or below the midpoint will depend primarily on the relative strength of our markets for the remainder of the year.

So to wrap it up, we delivered another strong quarter and are pleased to see continued positive momentum across the Company.

After consistently delivering three quarters of strong operating performance, we're well positioned to achieve our full year 2010 financial goals.

With that, I will turn the call over to the Operator for Q&A.

(Operator Instructions).

And the first question comes from the line of Ross Muken from Deutsche Bank, please proceed.

Good morning, guys, and congrats on a great quarter.

Last quarter we left off with a number of moving parts and from an end market perspective we had a little bit of, I would say, noise in some of the specific pieces.

As we look at the numbers here they're quite good across the board.

As we look sequentially, where do you think the biggest deltas were in terms of either end market or product group, however way you want to cut it, in terms of improvement, or any meaningful change from what we saw previously?

So, Ross, maybe what I'll do here is just give you a recap of what we saw in the end markets and then I'll provide some color on what happened quarter-over-quarter.

So let me start with pharma and biotech.

From that set of customers we continue to grow our share with the biopharma customers, and that's really driven by our compelling value proposition.

In the quarter, we had really strong performance in our bioprocess production business where our single-use technologies and media are benefiting from the trend of more biologically based drugs.

In that customer set, really, share gain continues for us.

Academic and government, really good momentum for us with our biosciences business.

Stimulus was good for us in the quarter.

We captured about $15 million of stimulus in the quarter.

So we're getting good growth out of academic and government customers, as well.

In terms of industrial and applied markets, we are definitely seeing the positive impact of the improving economy across our businesses.

And in the quarter really nice strength in our instrument businesses, and in important applied markets such as food and water quality.

And these markets are really driving broad based strength.

So continued improving economy for us in industrial.

Healthcare for us, great momentum in clinical diagnostics.

We're delivering excellent results there, where we're a leading reagent supplier, and that will get even better for us as the Brahms business is not yet in the organic growth calculations.

So that is a business doing very well in healthcare.

Healthcare, the one thing is that a reminder, which is flu and Biosite affects those customer base, and when you take that out, just to get a sense of what is happening, actually that business, healthcare as a customer set, is growing right at the historical rates and right at the Company average.

So there is some specific headwinds that are temporary in healthcare but all four of our customer sets did well in the quarter.

I appreciate the color there.

Maybe just quickly on the capital deployment front, you guys have done a good job this year in terms of balancing between M&A and share repurchase, the stock continues to be inexpensive, you spent quite a bit in the quarter on the repo side.

As you think about the M&A landscape now, financing is still relatively cheap, what kind of deal activity are we seeing or level of availability both in the public and private market, or any kind of commentary you can give on what you're seeing there?

There's a good pipeline of M&A that we're looking at.

We always have a deep pipeline and I think the important thing is, I think, it's pretty clear we're very disciplined.

We're doing deals that we're excited about.

We built three platforms over the past year in terms of in specialty diagnostics, biosciences and handhelds.

And when we see the right ones we'll do them.

And if we don't like the economics and shareholder value creation, obviously we'll pass on those we're not comfortable with.

But a good pipeline of M&A.

Thanks again and congrats.

Thanks Ross.

The next question comes from the line of Amit Bhalla, from Citi, please proceed.

Hi, good morning.

I wanted to ask you a couple of questions -- two questions, actually.

First on Lab Products.

Is there a way for you to talk about the impact from the weak flu season and weak patient or doctor visits, and how that's impacting the Lab Products business right now?

Specifically the Laboratory Products and Services segment was impacted by about 3% on the top line from the flu and Biosite comparisons in the prior year.

So if you adjust the 2% organic growth by the 3%, they would actually have been reporting 5% organic growth in the quarter.

The flu season is still weak right now, so I'm taking Biosite and flu from last year out of the way, but doc visits are also still down.

Are you seeing that impact in your business right now also?

Our business has been quite strong in growing at historical levels.

I think part of it is that our clinical diagnostics business is is really gaining share.

We are a very high market share provider of immunoassays and basically a number of the large OEM companies have been outsourcing more of their business to us and driving more of our products.

So that business is doing well.

We have great quality.

So we haven't seen the effects of things that other companies have talked about.

Our end demand has been strong.

And then just a follow-up, in looking at next year, can you just talk about your comfort with low to mid-teens earnings guidance as we stand today and what kind of impact the changing foreign exchange landscape would have on revenues and earnings for next year.

Thanks.

If you think about 2011 at this point in the year, we continue to be comfortable with 2011 operating assumptions that we outlined for you back in May at the analysts meeting.

And we'll provide all of the details on our next earnings call in the first week of February in terms of guidance, but the operating assumptions that we laid out, we feel good about.

Okay.

Thanks.

And then in terms of FX, it is hard to predict, obviously, what the FX rates will be by the time we get to the end of the year, but versus the numbers that we talked about, back in May, we're probably in the range of something north of $100 million on the top line in terms of incremental FX if we stay at where we are today, and that pulls through at about our average margin, so about $20 million of margin or $0.04 to $0.05 on the bottom line.

Perfect.

Thanks.

Next question comes from the line of Jon Groberg, from Macquarie, please proceed.

Hi, thanks for taking the questions.

Could you maybe dive in a little bit more into the Lab Products and Services, the margin?

I know you mentioned a number of strategic investments, I think particularly in Asia, but maybe just talk a little bit more about where you're investing the money and this kind of margin decline there?

Sure.

I'll do the where we're investing and Pete may cover a little more commentary.

In terms of investments, we are investing significantly in emerging markets to expand out our presence.

Obviously, with Lab Products being a little bit more than half the Company's revenue, as we expand in these new markets, they're going to pick up about half of the costs because we have a Company-wide commercial strategy.

So expansions in China, expansions in Brazil, and so forth, around the world, are part of the expense.

And we have some interesting investments that we're making on the IT front to strengthen our web capabilities for our customers that is a good growth driver and ultimately an efficiency play down the road.

Those are probably the biggest costs that we're investing in.

That covers it, Jon.

Okay.

And then, if you can, Pete, just so I'm clear, when you're talking about Biosite, is that pure Biosite when you do the adjustment, or is that also reflecting the other supplier that you brought in to try and offset some of that?

Is that a net number or is that just a gross number with Biosite, just so I'm clear?

No, that's the net number, so we're offsetting the incremental revenues that we picked up from the new supplier, in those adjustments.

Okay.

Great.

Thanks.

Congratulations.

Thank you.

Next question comes from the line of Marshall Urist from Morgan Stanley, please proceed.

Hey, guys, good morning, thanks for taking the questions.

First one, Marc, you just made a comment about the analytical instruments business doing even better sequentially.

I would love to get a better sense of exactly what is driving that, what is doing better, and is that something that you see being sustainable over the next several quarters?

Marshall, thanks for the question.

In terms of what is getting better, we're seeing the effects of the improving industrial economy.

That's clear.

And that impacts a broad range of our instruments.

In our process and environmental instruments, where they're more heavily biased towards industrial customers obviously we're seeing accelerating growth.

But in our largest business, which is scientific instruments in the lab, you are seeing great strength in spectroscopy tools, great strength across mass spec.

Industrial customers are spending more money on instrumentation right now.

It is really very, very positive.

Great, thanks.

And then just one more follow-up on the LPS investments, as you think historically as you make these kind of investments, will we start to see leverage on these investments?

Is that a 2011 dynamic?

What is the time frame we should be thinking there?

Yes, and I've said this a number of times, we increased some expenditure rates in terms of taking a lower overall margin expansion for this full year, but our expectation is not to ramp up on this level, but rather get leverage going forward.

So 2010 was a put some more money into commercial, put some more money into R&D, and then we get the benefits as the Company continues to drive strong revenue growth, those investments get leveraged over that bigger base.

So we're very clear on what the investment strategy is.

And involves great opportunities in '10 that we're taking advantage of.

Great.

Thanks.

(Operator Instructions).

And next question comes from the line of Doug Schenkel from Cowen and Company.

Please proceed.

Hi, good morning.

You guys are the second company this week to talk about strong media sales to biopharma.

I think we also heard from a couple of players that mass spec sales have been picking up in pharma.

Recognizing that you guys have been a share gainer in this market for a bit of a while now, separate from that are you actually seeing that demand dynamics in biopharma are actually improving?

Yes.

When you look at the quarter for us, we had good performance in our biopharma customers, and if I look at it, it is not dramatically different than what we've seen earlier in the year, but our performance is good, and clearly our bioprocess production has done well.

Obviously we've had great momentum for long, long periods of time in mass spec.

So that's a customer base that is growing where we would expect it to grow.

Ok, and then the M&A in the quarter, I think you guys mentioned that that is tracking ahead of plan, certainly ahead of what I had in my model.

I think you did about $80 million in M&A related revenue in the quarter.

I know that's going to turn into organic, but essentially, as we think about that number, is that a run rate number that we should be using, $80 million-plus per quarter growing at a rate that's above the corporate average as we look ahead?

Is that the right way to think about the deals that you have done this year and how we think about those moving forward?

It is obviously hard for us to predict going forward what the acquisitions will be, but I would say this quarter we picked up 3% from acquisitions and divestitures, that's on the high end of what we would generally see in a quarter, so it is more in the range of 2%.

Of course, we don't target that number, and again it depends on what acquisitions we actually complete.

But I would say the 3% is more on the high end.

I'm sorry, I actually meant given the acquisitions that you've actually done at this point seem to be tracking ahead of plan.

Is this the type of growth we should expect from these businesses as they roll into the organic number next year?

You should assume on that base of business that those businesses are going to be growing faster than the Company average.

The three platforms, which are the absolute vast majority of the revenue, are all very attractive end markets, and we've added a lot of value to those businesses in terms of being able to drive revenue synergies.

So those are going to be good growers for us.

I think you've done the math right in terms of what the size of the businesses are, and then you can just factor in above average growth rates for them.

Okay.

Thank you.

The next question comes from the line of Dan Leonard from LS, please proceed.

Hi, thank you.

A little bit on that last question.

I know it is early days, but, Marc, can you talk about revenue synergies you've been able to drive from your qPCR businesses?

When you think about what we've done in qPCR, and you look at it, it is a business that has one player with very high share.

We have a channel and relationships with all of those customers, because they buy enormous volumes of product from us, not even just the company or the research lab, but actually the individuals that are using those products are our customers.

What we decided is to develop some of our own products and you have seen us actually launch some specific reagents in the field.

We bought Finnzymes which brought an interesting instrument technology.

We bought Fermentas, which expands out our offering.

So we have a clear view that leveraging our channel strength we're able to put together, both organically and inorganically, a nice position to pick up share in that market.

So it is not huge today but we think it will be a nice growth opportunity for us down the road.

Okay.

Thank you.

And then my follow-up question , you mentioned you're gaining share in diagnostics based on some OEM business with larger manufacturers.

What's the value proposition, and what's really behind that share gain?

Is it a lower cost, or is there something special that you guys could do that isn't as easy for other folks to

I think we have two aspects of those relationships.

One is that we have a lot of proprietary content, meaning that it is our capability that is exclusively ours and we effectively, if they want to have that product on their analyzers, they have to come to us.

We built such a large business over time that way, that they have actually given us some of their own content and said you guys are a world class manufacturer, great quality, great on-time delivery, we're shutting down plants, not ours but our customers, and we're going to move our volume to you because not only do we want your proprietary technology, but we'll even give you some of our own to manufacture for us.

We're just doing a great job with it and it is a great customer service, great relationships and it basically means you find our reagents in every clinical diagnostic central lab, because we have great share with all of the major OEM players.

Okay.

Thank you.

The next question comes from the line of Quintin Lai from Robert W.

Baird, please proceed.

Good morning.

Congratulations on a nice quarter.

Marc, looking at the scientific board that you just formed, it looks like a lot of emphasis on cell biologists, oncologists and pathologists.

Is that suggestive of your long-term R&D plans?

And maybe talk to a little bit about what you envision for that board.

Yes, so when you look at the Company, there isn't somebody in mass spec that isn't interacting with us or knows about us or we have access to.

Right, I mean the Company has got this incredible aura around it in mass spectrometry.

We also have incredibly strong businesses, one of the largest in cancer diagnostics with our anatomical pathology business.

We have a huge presence in terms of dealing with our genomics customers with a broad range of capabilities.

But the Company is a little less known for those two things.

And we put a heavier weighting on our scientific advisory board, getting the best minds in the field to interact with us.

We'll learn from it but it sends a signal to the broader customer base of our commitment to building out our capabilities there.

Super.

And then, Pete, just as we look out to 2011, and forecasting that, any days issues that we need to be thinking about when modeling the quarters?

I'm very happy to say no.

All right.

Thank you.

The next question comes from the line of Jon Wood from Jefferies, please proceed.

Thanks a lot.

Marc, on the industrial market side, clearly the later cycle franchises, like yours, are still accelerating, but the rate of improvement and capacity utilization metrics has slowed quite a bit recently.

So my question is, how much longer is there this catch-up investment phase in the industrial markets?

When do those markets start to basically track GDP again?

There are, obviously, macro economists that are probably better equipped to get the best answer.

Our read is just looking at the way bookings are shaping up in those parts of the business, that we're going to continue to see acceleration of that business.

The trend is we're seeing order rates increasing there, so we're not seeing signs of a slow-down.

It is very hard to know when the inflection point goes in the opposite direction.

We're not seeing any leading indicators in that part of the business, or see a slowdown.

And our short cycle businesses are continuing to strengthen.

So things like hand-helds, which are not big capital decisions for customers, those businesses are just doing incredibly well.

So we're not seeing the signs.

We read all the information, we pay attention to it.

But right now we're seeing the benefits of an improving economy.

Great.

Good color.

Pete, can you just provide some clarity around the top 20 trend in the quarter?

Yes, in terms of top 20, they continue to grow at above the average growth rate for us, so we continue to do well there.

Okay.

Thanks a lot.

The next question comes from the line of Tycho Peterson from JPMorgan, please proceed.

Hey, good morning.

First question with regards to the incremental investments you're making here on the SG&A line, it looks like you've now had about four quarters between $580 million and 600 million.

Is this a good run rate to model going forward or should we assume that there is a period of investment here in Asia that will maybe wear off a little bit in the next couple of years?

Yes, I would say we have been ramping up these investments throughout the year and the investments will continue to ramp up in Q4.

Mostly because we've put people in -- this is mostly people.

We put people in throughout the third quarter, so we'll get the full impact of those investments in the fourth quarter.

But as Marc said earlier, we're not expecting to continue this ramp.

It's more invest this year and then maintain that higher-level of spending in 2011 and leverage that against higher revenues.

And then with regards to Asia, I think in your comments, Pete, you talked about all geographies growing at the corporate average.

Subsequently you said double-digit growth in China and India.

But as we think about Asia going forward, is there an opportunity to grow that above the corporate growth rate, or are there areas that are weighing down the overall average there?

Tycho, when you look going forward with Asia, we see that as going to be the fastest growing geography for us.

Obviously you have very different dynamics by country, China, India versus Japan and India, and so forth.

But the whole region we still see as an above average growth for us.

The bookings momentum there is obviously very strong and encouraging as a leading indicator for what the future holds.

Okay.

And then just one last one on the stepped up R&D.

You highlighted some of the diagnostic products that have come out of that effort.

Can you talk to some of the investments you're making in other areas or how we should think about new products emerging from the stepped up R&D investment outside of the diagnostic business?

I think what you got a sense in the call in my prepared remarks is I wanted to try to provide some clarity on businesses that are important growth drivers that we don't talk as much about.

Our instrument business is well understood, so I spent more time talking about lab to line and talked more about diagnostics.

We have increased our R&D in biosciences, we have increased R&D in our scientific instruments, as well.

You'll see new applications and new technologies in mass spec coming out.

You'll see more reagents on biosciences coming out that we think are good growth opportunities for the Company going forward.

So it's not just in the ones I mentioned, but I think you'll see nice benefits in our growth from R&D.

Okay.

Thank you.

The next question comes from the line of Isaac Ro from Goldman Sachs, please proceed.

Hey guys, good morning, thanks for taking the questions.

First, could you maybe comment a little bit on the pricing environment that you're seeing for equipment, and maybe comment if you see any discernible differences between high end products like your mass spectrometers and maybe the lower end products?

In terms of the pricing environment, Isaac, at the beginning of the year, we said typically in a year where you're coming in the beginning of a recovery, that you get lower than average price increases.

We handicapped the year as an assumption of 1% to 1.5%.

When you look at it for the first nine months, we're just under the 1%.

So we're pretty much right where we thought it would play out.

In terms of the various competitive dynamics, the highest end instrument pricing has been strong.

In the areas that there's more competitors, obviously, there is more price intensity.

But it is pretty much playing out as we expect coming in at the lower end of the range that we articulated at the beginning of the year.

Great.

And then just maybe secondly, understanding that it is an uncertain political environment, but just as we look at NIH funding growth, can you maybe share with us any thoughts you have on your assumptions for NIH funding over the next couple of years, and how that might contrast with your outlook for funding in the EU region?

Yes.

When we are thinking about NIH funding, holding aside that there will be a little bit of stimulus that falls into '11, probably not a lot , but a little bit, we're assuming pretty flat budgets.

As opposed to some of the US government cutting budgets and departments, we look at NIH being relatively stable, is our basic assumption.

When you look at EU, academic funding, we view that as country-specific.

Obviously, UK is going to be relatively stable and we'll probably see some growth in some of the other

Got it.

Great, thanks very much.

The next question comes from the line of Paul Knight from CLSA, please proceed.

Hi, Marc.

Can you talk about pharmaceutical demand in Europe in the quarter?

And then, Pete, the tax rate, what do you expect that to be in the future?

And is it trending down or where is the trend on that tax rate?

So, in terms of the pharma demand by geography, I can answer the question more of what are we seeing in the geography of Europe than in all of the specific sub segments.

In Europe, we had a good quarter in terms of growth.

It grew at the Company average.

The strongest customer set in Europe was industrial for us.

And I haven't studied it by each and every customer type, but as I looked at it, we had growth at the rates of the Company average and industrial, was a little bit faster than the average.

And in terms of the tax rate, as I mentioned, back in May we talked about a tax rate in the range of 22% to 23% for 2011.

That's a slight increase from where we had previously forecast 2010 to be, with the primary difference being as we make more income, it tends to come in at marginal rates, so just the weighted average tends to go up as we make more money.

The other new nuance that's obviously happened since May is the new tax legislation, and at this point we don't know specifically how that is going to impact us, but we don't feel we're going to be outside of the range of what we talked about in May, which was that 22% to 23%.

And if that legislation goes to the tax credit, that would benefit you through how long?

All of next year?

It's actually a detriment to us, but we believe that we have some tax planning initiatives to help mitigate the impact of the change.

Okay.

Thanks.

I'm sorry, were you talking about the R&D tax credit?

Yes.

Oh ok, the R&D tax credit, it depends on how they approve it but generally they only do it for one year, so right now it would only impact us for 2010.

If it gets extended in 2011, obviously we would see a similar benefit.

Okay.

Thanks.

The next question comes from the line of Tony Butler from Barclays Capital.

Please proceed.

Thanks very much.

Staying with the topic of pricing, are there any shortages of components, source components, that you've witnessed, and moreover, is there any inflation to price on any source components?

And the second question to op margins in the LPS business, I recognize they're down 100 basis points year-over-year, they're down sequentially by 80.

And while Biosite and perhaps flu could be components, the question is, what might one think about a normalized run rate of op margins in that business, and would you care to provide any aspirational goals for op margins on LPS?

Thanks very much.

First of all, in terms of the shortages, no, we're not seeing any shortages from our suppliers.

We have a good supply base, we're an important customer.

So we haven't had any supply interruptions to our business, Tony.

When you look at Laboratory Products and Services operating performance, it is really comparable to ATS.

They are investing as a percentage of revenue at the same level, essentially, as Analytical Technologies, but obviously in the quarter they're getting hit harder by the flu and Biosite headwinds.

And obviously they don't get the same pull-through on incremental revenues that the Analytical Technologies business gets.

So those factors are really causing the decline.

So in the end it is really the investments as it's compared to the incremental pull-through on revenues between the two segments.

In terms of going forward, going into Q4, with certainly expect sequential margin improvement in both segments regardless of the investment level that we're going to have.

And I don't believe we've talked really going forward long-term about margins by the segments, but certainly for the Company we're looking at 50 to 100 basis points of margin expansion a year and nothing has really changed in those assumptions since we talked about it back in May.

Thank you for that.

Marc, just back on sourcing, are prices being added or have you seen inflation in pricing to you on components?

On things that have value-add, so components, the answer is no, we've had very stable pricing.

We've seen some commodity price increases, not large at all.

And our global sourcing efforts have more than materialized, so this has not been a negative factor.

Very normal environment.

Steel was up for a little bit.

You read in the papers today, it is going back down.

So inflation has been pretty much under check.

And we're pretty sophisticated on anybody who has any value-add to what they supply to us in terms of being able to control any types of price increases passed on to us.

Thanks very much.

Next question comes from the line of Sung Ji Nam from Gleacher.

Hi, thanks for taking the question.

Just quickly, for your mass spec business I was just curious as to if you have a sense of what the baseline growth expectation might be for next year?

Is it mid-single-digits, or high single-digits?

We really don't give the expectations down at the product line level, but it gets blended into the Company rates.

But it's clearly going to grow at above the Company's average rate.

It is a great market.

We have leading technology, leading position, great suite of new introductions made coming out.

We're doing well on mass spec and I'm excited about our prospects.

Great.

And then going back to the stimulus, the impact you had this quarter of $50 million, was it largely US-based?

In this quarter it was US.

Sorry?

In this quarter it was US based.

And just going forward, do you have any insight into other potential stimulus programs out there that might be meaningful?

When we gave the original $100 million to $200 million of guidance on stimulus at the beginning of '09, we're right in the range of that, at $140-something million at this point in time.

See some continuation.

The only big unknown, which would be a potential positive, but it is hard to tell, is Japan has just outlined a high-level big stimulus program.

But it hasn't yet got to what does it mean for our industry.

So that's a potential positive out there, but too early to tell.

Okay.

Great.

Thank you.

Operator, we have time for just one more.

And the final question comes from the line of Derik De Bruin from UBS, please proceed.

Good morning.

Just a little bit of clarity on modelling.

When you look at the Q4, I assume that the extra days will have a bigger impact on the LPS business than on the Analytical Technologies business, for modeling purposes, just given the consumable mix.

Yes, that's true.

Oh, ok, that's good.

On the AT, what are you guys getting any feeling in terms of potential for budget flush this year?

There wasn't much of one last year.

Are you getting a sense there might be a little bit of relief spending in the industry?

Derik, that one is hard to call.

So we're assuming a normal year-end, is the way to characterize it.

We didn't bake into it an assumption a budget flush.

So if it doesn't happen it's not going to be an adverse.

And if customers loosen up at the end of the year that would obviously be an incremental positive.

So I don't see a lot of downside from that.

We looked at normal activity.

Right.

Great.

So just I will give you one softball throw-away question, but we'll do that.

You guys are a huge player in the air quality monitoring market, and if I recall correctly, you had a good launch initially with your mercury monitoring and that got stymied by the last administration.

Clearly regulations around the world on monitoring and also certainly for mercury and other things have picked up.

And clearly, also, some of the industrial rebound is also tied to air monitoring.

Is there still upside from just the continuation of the mercury monitoring program?

And how are you looking at this market in terms of just the impact of environmental regulation on the business?

We like new environmental regulations.

That's good news for our business.

Every time China, the US, India, puts another restriction on things, from an emissions standpoint, that is good, given our very strong market position.

So we had lots of growth that came out of mercury.

We got high-share regulations changed, that slowed it down.

The technology is relevant.

We're pretty confident you'll actually see a reemergence of that technology in some other countries over time.

Any time we have greenhouse gas monitoring requirements, even if it's just regulated by the EPA, not even if it's driven by the Senate, that would use our monitors to drive growth.

And I think you'll start hearing from us -- we've talked a little bit about it -- but I think you'll hear from us in the next quarter or two talking about some minor safety applications of those technologies, where we have some incredible capabilities in particulate monitoring that we think is a very nice growth opportunity going into '11 and '12 for us.

There are a lot of good things on the air quality front.

That's, in a certain respect, a later cycle business and therefore I think good news to come down the road.

Just want to clarify this, if I recall correctly, you guys do have an overwhelming share in that general market?

We have a very, very high share in the US, a very, very high share in China, and a good global presence, yes.

Thanks very much.

You're welcome.

So let me close, saying we had excellent results in Q3 on the heels of a very strong first half and that gives us an even more positive outlook for the full year.

It is evidenced by our increased EPS and revenue guidance.

So we feel that we're not only well positioned to achieve our 2010 goals but we're also confident in our ability to sustain growth into 2011.

I look forward to reporting out the year-end results in February, as well as our guidance for the coming year.

Thanks for joining us on the call and for your ongoing support for Thermo Fisher Scientific.

Thanks, everyone.

Ladies and gentlemen, this now concludes your call.

You may now disconnect.

Have a wonderful day.