賽默飛世爾科技 (TMO) 2014 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2014 third-quarter earnings conference call.

(Operator Instructions)

I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President Investor Relations.

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 investor section of our website, ThermoFisher.com under the heading Webcasts and Presentations until November 21, 2014.

A copy of the press release of our 2014 third-quarter earnings and future expectations is also available on our website under the heading Financial Results.

So before we begin, let me be 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 the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Company's quarterly report on form 10-Q for the quarter ended June 28, 2014 under the caption Risk Factors, which is on file with the Securities and Exchange Commission, and also available in the investor section of our website under the heading SEC Filings.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.

Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

Also during this call we will 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 2014 earnings and future expectations, and also in the Investor section of our website under the heading Financial Information.

Also before we get started, one other item to note is that the commentary that we provide on today's call regarding the Company's 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 of the to Marc.

Thanks Ken, and good morning everyone.

Think of for joining us today for our Q3 earnings call.

I'm pleased to report that we had a strong quarter and we're on track to achieve a successful year.

Financially, we delivered good top-line growth and outstanding growth in adjusted EPS.

We continue to strengthen our position as the industry leader by innovating and gaining share in the markets we serve.

I'm also pleased to report that our integration of Life Technologies is progressing ahead of our expectations.

I'll cover more on these highlights more later in my remarks, but first let me start with the financials.

As you saw in our press release, our total revenue for the quarter grew 31% year over year.

Adjusted operating income was $915 million in Q3, and we expanded our adjusted operating margin by 250 basis points to 21.9%.

Turning to our adjusted EPS performance, we delivered another outstanding quarter with 32% growth in adjusted EPS to $1.71 per share.

Our team effectively leveraged our top-line growth and drove excellent productivity for the operational discipline of our PPI Business System.

This resulted in outstanding performance on the bottom line.

We also generated good cash flow in Q3.

We're continuing to use our strong cash flow to pay down debt, and we're on track to reach our target leverage by Q3 of 2015.

As we move into 2015 we intend to resume our strategy of disciplined capital deployment.

As you know, this is a combination of strengthening our strategic position through M&A and returning capital to our shareholders through buybacks and dividends.

I'll now turn to our four key end markets and give you some color on what we saw relative to our overall growth in the quarter.

At a high level, we delivered mid-single-digit growth in three of our end markets.

And similar to last quarter, academic and government grew in the low single digits.

Industrial and applied markets, our performance here was stronger in Q3 then in the first half of the year.

To give you a couple of the highlights, first we had good performance in our channel with some nice wins from industrial customers who are recognizing the benefits of our customer value proposition.

In addition, our chromatography business reported good growth.

In diagnostics and healthcare, we performed well again this quarter.

The dynamic in this end market was purely similar to what we saw in Q2.

Our clinical diagnostics businesses had another good quarter with continued strong sales of our biomarker tests.

And our growth in immunodiagnostics business was very strong, driven largely by demand for allergy tests.

In particular, our Vue Allergy test has been well received and is growing rapidly.

This is a test that we developed for our Japanese customer base and launched at the beginning of the year.

Turning to pharma and biotech we saw good growth from this customer set in the quarter, and our biopharma services business continues to perform well.

One recent development in this end market that we're excited about is our new partnership with longtime customers GSK and Pfizer.

We signed an agreement with them to develop a universal next-gen sequencing oncology test that could serve as a companion diagnostic for multiple drug programs.

The goal of the diagnostic is to enable a comprehensive set of analysis of multiple and relevant genetic markers using a single test.

With this information, cancer patients could potentially benefit from therapies that are much more targeted to their to their tumors' genetic profile.

In academic and government, conditions were very similar to Q2 with year-over-year improvement in North America offset by weakness in China.

So before I move onto the business highlights, let me give you some commentary from a geographic perspective.

At a high level, we haven't seen any significant changes in our key geographies since last quarter.

That said, I do want to make a comment on China.

Our growth in China in Q3 was in the low single digits, a little better than Q2 but below what we included in our previous guidance.

This was due to the slow release of funding by the Chinese government, which is impacting revenue.

The good news is that despite the conditions in China, we again delivered mid-single-digit growth for the Company overall.

This speaks to the advantages we have through our global geographic coverage, diverse end markets, and strength of our value proposition.

Let me now shift to highlight some of the exciting new products we launched in the quarter that strengthened our leadership position and creates new opportunities for us to gain market share.

As you know, innovation is a core element of our growth strategy and we've had a very strong year of new product introductions across our technology portfolio.

Early in Q3 we launched a breakthrough UHPLC system, the Thermo Scientific Vanquish.

This is a significant technology advancement because it solves two key issues for our customers and applied markets.

First, these customers need exceptional accuracy and precision as they separate out individual components in their samples.

And second, they need to run their analysis faster to improve productivity and manage the high volume of samples in their labs.

We also launched new active core columns that are specifically designed to optimize performance on the Vanquish system.

Of course Vanquish runs in our gold standard Chromeleon chromatography data system, making it a simple but highly effective tool for customers working in food safety, industrial, or biopharma labs.

In OSI science solutions business, an important part of the integration strategy is to accelerate growth by increasing the impact of new product launches.

In the quarter, we launched the Attune Acoustic Focusing Flow Cytometer, which offers life science researchers both high sensitivity and high throughput for cell analysis.

I was out with our team in Eugene, Oregon in August and it was great to see their excitement around this new generation technology.

Attune is designed to provide multiple capabilities in a single instrument, providing a cost-effective and versatile solution for customer applications ranging from biomarker discovery to cancer research.

I also want to highlight several examples in the quarter that illustrate how we're supporting a growing trend that we've talked about a lot, the convergence of life science tools and diagnostics.

At AACC, the leading expo in North America for clinical customers, we showcased our expanded diagnostic offering of specialty assays, analytical instruments, and genetic analysis technologies.

We featured our ImmunoCAP and EliA test for allergy and autoimmunity testing, as well as assays for drugs of abuse and transplant monitoring.

For the first time we launched new analytical instruments and software that are now listed with the FDA as Class I medical devices for clinical use, The Prelude MD HPLC, the Endura MD mass spectrometer, and the ClinQuan MD software.

In our next-gen sequencing portfolio, we showcased our ion torrent PGM and recently-launched Ion Chef sample prep system, although at the time both instruments were intended for research use only.

Since then however, we introduced the Ion PGM DX system in both the US and Europe for clinical use.

The PGM DX will enable our clinical customers to more easily develop and implement new next-gen sequencing diagnostic assays in their laboratories.

This means they will be able to simultaneously screen hundreds of genes from patient samples with a rapid turnaround time required in a clinical setting.

All of these new products are great examples of how we fulfill our mission, which is to enable our customers to make the world healthier, cleaner, and safer.

Another example of this is our involvement in the Ebola crisis.

We're helping our customers, whether they are in government agencies, hospitals or industry, to get the products they need to contain this global threat.

We're providing a steady supply of necessary reagents to public health labs, here in the US and globally, that are screening to positively identify Ebola in patients who show symptoms.

These reagents are used in combination with two independent Ebola assays developed by the CDC and the DOD.

Both have received emergency use authorization.

We also have more than 400 of our applied Biosystems 7500 fast DX QPCR platforms in labs around the world that a been authorized to run these tests.

Before I turn to our guidance, let me give you a quick update on the Life Technologies integration.

Our teams continue to make excellent progress implementing their plans, and the revenue growth of our Life Science Solutions business is right in line with our acquisition assumptions.

Last quarter you'll recall that we increased our expected synergies for 2014 to $100 million from the $85 million we announced when we closed the deal.

I am pleased to say that we now expect to deliver a little more than $100 million by the end of the year after accelerating some cost synergy actions.

We also remain confident in our overall adjusted operating income synergy target of $350 million for year three, which we highlighted at our May analyst meeting.

Turning now to our annual guidance.

As you saw in our press release, we've updated our revenue and adjusted EPS guidance, primarily on the recent unfavorable changes in FX.

We now expect revenue to be in the range of $16.74 billion to $16.82 billion, which leads to 28% growth over 2013.

This let us to tighten our adjusted EPS range to $6.87 to $6.95 for a 27% to 28% growth in 2014.

The key point I want to make here is that despite the FX headwinds, we maintain the midpoint of our adjusted EPS range.

Before I turn the call over to Pete, let me leave you with a few thoughts about where we are at this point in the year.

In terms of our top-line growth while certain emerging markets have been weaker than expected, we've delivered solid growth for the Company overall.

The Life Technologies integration continues to progress very smoothly.

Finally, our strong financial performance over the past nine months and our intense focus on driving operational improvements are keeping us on track to achieve our adjusted EPS goal for the year.

All of these achievements create a solid foundation for a strong 2015.

With that, I will now hand the call over to Pete Wilver, our CFO.

Pete?

Thanks, Marc.

Good morning, everyone.

As usual.

I'll begin with an overview of our total Company Q3 financial performance, then provide some color on our four segments, and conclude with a detailed review of our updated 2014 guidance.

As a reminder, at the total Company level we're reporting organic revenue growth using our standard methodology.

That moment means we'll exclude the results of Life Technologies until we reach the one-year anniversary date of the acquisition in early 2015.

However, as we've mentioned before, for the Life Sciences Solutions segment we are 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.

Additionally, our results exclude Cole-Parmer from the date of the divestiture, August 15, consistent with our previous guidance.

So starting with our overall financial performance, we grew adjusted EPS by 32% to $1.71.

GAAP EPS was $1.17 in Q3, up 36% from $0.86 in the prior year.

Looking at the top line we delivered 4% organic revenue growth this quarter, and total revenue increased 31% year over year.

Q3 reported revenue includes 27 points of growth from acquisitions net of divestitures and an immaterial impact from foreign exchange.

We strengthened our backlog slightly in the quarter with bookings a bit higher than revenue.

By geography North America grew in the mid-single digits and Europe grew in the high single digits.

Asia-Pacific grew in the low single digits with China also growing the low single digits, as Marc mentioned.

Rest of the world was mixed, but in aggregate declined in the low single digits.

Looking at our operational performance, Q3 adjusted operating income increased 48% and adjusted operating margin was 21.9%, up 250 basis points from Q3 last year.

Our adjusted operating margin expansion for the quarter was driven primarily by the Life Technologies acquisition and achieving the related synergies.

That said, we also continue to see strong contribution from our primary productivity levers, global sourcing, site consolidations, and our PPI Business System.

We had margin expansion from FX in the third quarter, but we expect FX to be dilutive to our margin in the fourth quarter due to the significant strengthening of the dollar versus our major currencies at the end of Q3 and into early Q4.

We realized $33 million of synergy benefits in Q3 and $73 million year to date.

This puts us on track to slightly exceed the $100 million of cost synergies we were targeting for full-year 2014.

During the quarter we continued to make strategic investments, primarily to strengthen our core technology platforms and commercial capabilities to accelerate growth.

Moving onto the details of the P&L, total Company adjusted gross margin came in at 49.1% in Q3, up 510 basis points from the prior year.

This was primarily due to the addition of Life Technologies, along with solid productivity across our businesses.

Adjusted SG&A in Q3 was 22.9% of revenue, which is 130 basis points unfavorable to 2013 quarter.

Again, this is primarily a result of the acquisition, and was partially offset by volume leverage and our synergy and productivity actions.

Finally, R&D expense came in at 4.2% of revenue for the quarter, 120 basis points above the prior year.

This reflects the impact of the relatively higher level of R&D investment in the Life Sciences Solutions segment.

R&D as a percentage of our manufacturing revenue in Q3 was 6.6%.

Looking at our results below the line, net interest expense in Q3 was $106 million, up $49 million from last year, driven by the interest on the debt we raised to fund the Life Technologies acquisition.

Adjusted other income for Q3 was $2 million, slightly higher than Q3 last year.

Our adjusted tax rate in the quarter was 14.8%, 50 basis points below last year, primarily as a result of our acquisition tax planning.

Our year-to-date rate was 15%, in line with our full-year outlook of about 15%.

In terms of returning capital, we paid out $60 million in dividends to our shareholders in the quarter.

Average diluted shares were 403.7 million in Q3, up 36 million, or 10%, 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.

Turning to cash flow and the balance sheet.

Cash flow from continuing operations for the first nine months of the year was $1.67 billion, and free cash flow was $1.42 billion after deducting $250 million of net capital expenditures.

This is up significantly from our prior-year cash flow, primarily as a result of increased operating earnings from the acquisition and standalone business, partially offset by acquisition-related interest expense and cash payments tied to the acquisition and related divestitures.

We ended the quarter with $544 million in cash and investments, down $62 million sequentially from Q2.

We used the Cole-Parmer proceeds and cash generated in the quarter, along with surplus cash on the balance sheet, to pay down short-term debt during the quarter.

As a result, our total debt at the end of Q3 was $14.5 billion, down $1.1 billion from Q2.

Our leverage ratio at the end of the quarter was 3.9 times total debt to adjusted EBITDA.

And we remain on track to achieve our target leverage ratio of 2.5 to 3 times in Q3 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 the third quarter of 2014 was 9.3%, flat to Q2.

This is a good result, as increased returns across the business offset the short-term dilution of adding another quarter of the Life Technologies investment into the average invested capital base.

So with that, now I will walk you through the performance of our four business segments.

Starting with the Life Sciences Solutions segment, in Q3 total revenue grew to $1.07 billion from $167 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 for the entire quarter in both periods, organic revenue grew 3% to the second quarter in a row.

In the quarter we saw strong growth in our bio production, next-generation sequencing, and cell biology businesses.

And we also saw a good growth in our applied markets, including human identification and animal food and environmental.

Q3 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 530 basis points to 28.6%.

In the Analytical Instrument segment both reported and organic revenue grew 3%.

In the quarter we had very strong growth in our chromatography and instrument services businesses, which was partially offset by the weakness in China, very similar to last quarter.

Q3 adjusted operating income in Analytical Instruments increased 5%, and adjusted operating margin was 17.5%, up 40 basis points.

We delivered very strong productivity and saw positive contribution from FX that were partially offset by strategic growth investments and unfavorable business mix.

Turning to the Specialty Diagnostics segment, in Q3 total revenue grew 7% and organic growth was very strong again at 6%.

We continue to deliver strong growth across much of the portfolio.

As Marc mentioned, our immunodiagnostics business had a strong quarter, and growth in our clinical diagnostics business was notable as well.

Adjusted operating income in the segment increased 10% in Q3, and adjusted operating margin was 27.6%, up 70 basis points from the prior year.

In the segment we had strong pull-through on the organic growth, good productivity, and a positive benefit from FX, partially offset by strategic growth investments.

In the Laboratory Products and Services segment, Q3 reported revenue grew 2% and organic revenue grew 4%.

Our biopharma services business continued to have good performance.

The segment also benefited from continued improvement in our US academic and government end market, as well as an increased impact of our customer value proposition in industrial markets.

Adjusted operating income in Laboratory Products and Services grew 1% for the quarter, and adjusted operating margin was 15.1%, down 30 basis points, driven by unfavorable business mix and the Cole-Parmer divestiture, partially offset by strong productivity.

So with that, I'd like to review the details of our updated full-year 2014 guidance.

As you saw in our press release, we're updating our guidance to reflect our strong year-to-date performance at the impact of the recent unfavorable currency fluctuations.

Starting with revenue, with one quarter to go we're tightening the range by $40 million and lowering the midpoint by $140 million.

This change is solely a result of the unfavorable FX impact of current rates on total Company revenue for the remainder of the year.

This leads to a new full-year 2014 revenue guidance range of $16.74 billion to $16.82 billion, which represents year-over-year growth of 28%.

On an organic basis, we're still expecting standalone organic growth for full-year 2014 of 3% to 4%, no change from our previous guidance.

As I mentioned earlier, our total Company organic growth does not include the results of Life Technologies.

For the Life Sciences solutions segment, we still expect pro forma organic growth of 2% to 3% for full-year 2014, also unchanged from our previous guidance.

In terms of FX, assuming recent rates, the year-over-year foreign currency impact on our standalone revenue for the full-year has gone from a 50 basis points positive in our previous guidance to about 25 basis points negative in our current guidance.

We're experiencing a similar unfavorable impact due to the change in FX rates on our Life Sciences Solutions revenue, although this is reflected as acquisition revenues rather than FX in our organic growth calculation.

In terms of margin pull-through on total FX revenue, we're now expecting a minimal positive impact for the full year, down considerably from our previous guidance.

Although we've seen a margin benefit from FX year to date, we're assuming a fairly significant negative impact in the fourth quarter, due to the recent change in rates.

Consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates, and our guidance does not include any future acquisitions or divestitures.

Moving to adjusted EPS, as you saw in our press release we're maintaining the midpoint and tightening the range consistent with the revenue range, and reflecting our strong financial results year to date.

This leads to a new full-year 2014 adjusted EPS guidance range of $6.87 to $6.95.

This represents growth of 27% to 28% over our 2013 earnings per share of $5.42.

As I mentioned earlier, although we have a significant unfavorable earnings impact from FX compared to our previous guidance which results in about a $0.07 of adjusted EPS headwind, we are not change in the midpoint of our adjusted EPS guidance.

We expect to offset the FX headwind with the combination of incremental productivity and accelerated acquisition cost synergies, along with about $0.01 of below the line benefit.

Turning to adjusted operating margin, we're expecting roughly 250 basis points of expansion to about 22%, at the higher end of our previous guidance.

Moving below the line, we're expecting net interest expense to be in the range of $425 million to $435 million, consistent with our previous guidance.

And as I mentioned earlier, we're still expecting our adjusted income tax rate to be about 15%, consistent with our previous guidance.

In terms of capital deployment, we're still assuming that we will return approximately $240 million of capital to shareholders this year through dividends, and we're also assuming that we will continue to use the bulk of our free cash flow to pay down short-term debt.

Full-year average diluted shares are estimated to be in the range of 402 million to 403 million, up about 10% from 2013, and consistent with our previous guidance.

We're expecting net capital expenditures to be in the range of $410 million to $430 million, down about the $50 million from our previous guidance, based on actively managing our project spend as well as identifying some duplicate investments as we get further into the integration.

Finally, in terms of our full-year 2014 free cash flow, we are maintaining our previous guidance of about $2.2 billion.

We've made good progress on cash flow year to date, but as I mentioned on last quarter's call, we will need to perform very well in Q4 to offset the cash tax headwind created by the one-time gain we realized from the Cole-Parmer divestiture.

As always, in interpreting our full-year revenue and adjusted EPS guidance ranges, you should focus on the midpoint as our most likely view of how we see the year playing out.

Results above or below the midpoint will depend on the relative strength of our markets during Q4.

So in summary, we delivered a strong quarter which positions us well to achieve our financial goals for the year.

With that, I'll turn the call back over to Ken.

Thanks, Pete.

Melissa, we are ready to open it up for Q&A.

(Operator Instructions)

Your first question comes from the line of Ross Muken from ISI Group.

Good morning, gentlemen.

Good morning, Ross.

A lot of callers so thank you.

Can you give us a little bit of understanding of the trending geographic base in sort of the Europe business, as well as sort of Asia-Pac, and I guess more specifically China, as we pace through the quarter, and how it's matched up to the degree you can dig down on the bookings line?

There's obviously a lot of macro concern in both of those regions.

We're just trying to get a feel for which parts of your business are showing sort of strength or more stability, and which parts you are much more concerned about it those geographic areas.

So Ross, thanks for the questions.

So let's start out with Europe.

And you've heard us talk many times in the past.

We see Europe as a low single-digit market from a growth outlook.

We said that consistently.

Our team is executing extremely well in Europe.

We actually delivered high single-digit growth in the quarter.

Our diagnostics businesses, which have reasonable exposure to the European market, particularly immunodiagnostics and clinical diagnostics, have large presence there.

They're both doing extremely well.

Our biopharma services businesses did very well in Europe.

Team is executing well.

And while we don't think that's going to be a high single-digit growth, really on a long-term basis, team is doing great.

So that's positive.

Asia-Pacific, really the story in Asia-Pacific is really around China, which is the way you reflect in your question.

When I think about what's going on in China, we delivered low single-digit growth in the quarter, which actually is little better than what we had in Q2, but it was below the expectations that we had we thought about last quarter.

What we saw in China was a slow release of funds across the markets.

And we think that's being driven by the government, both in how they've reorganized the food safety administration as well as their focus on transparency and cracking down on corruption.

The approval times to get funds released is definitely extended significantly.

From a longer-term perspective, we continue to remain very positive on China.

Our strategy is unchanged.

So we have a tremendous advantage of scale, a great team, and we're very well aligned with the Chinese priorities, which is clean water, safe food, better environment, expanding healthcare capabilities.

So long term is good.

But short term has been quite uncertain.

So I sum it up this way.

Revenue growth has been mid-single digits through the first nine months is what it has averaged out to be.

Bookings has been stronger than that.

So customer activity remains high.

But funds are slow to release, and as we look at the fourth quarter in the uncertain environment what we are assuming is a wider range of outcome, somewhere from low to mid-single-digit growth in the fourth quarter.

Thanks.

And maybe just talking to kind of the performance overall in the quarter, I mean I looking at the market right now.

It looks like people are kind of implying that this was sort of a disappointing result.

We took it as more as in line.

As you think about your execution year to date, how the quarterly EPS has paced and how that's tracked versus your original expectations, how would you characterize today's result?

And it seems like overall 4% organic growth for a choppy macro is a pretty good outcome.

I'd be curious how you think about that as well relative to peers?

Yes.

So when I look at where we are at nine months year to date, or in Q3, clearly from the beginning of the year China is slower then I think what anybody would have anticipated if we're sitting here in January.

And we are right on track to deliver the organic growth outlook that we did.

So North America has gotten better and the team has executed very well.

So I feel good about that to say we're right in track for 3% to 4% organic growth for the full year.

I'm also very pleased with the organic growth rates of our Life Sciences Solutions segment, which is doing better than it had done for several years in the past.

And I don't get excited about 2% to 3% growth in terms of our outlook, but it is one thing to say it and another thing to actually do it, and the team has done a good job of delivering that range of growth.

So I feel good about that.

Our primary metric is adjusted EPS.

And we are doing an excellent job of delivering strong earnings growth.

That's a combination of the synergies, a combination of a smooth integration, and the power of our PPI Business System.

And when I look at the outlook, when I think about having a $0.07 headwind because of change in FX rates at the end of September and into October, and the Company's ability to offset that fully at the midpoint of our guidance, I think it gives you a sense of the power of the execution model, and really a sense of SOP for a very strong 2015.

That's the high level.

Our job is to power through the challenges.

And what we do is to explain what's going on, but at the end of the day we're going to put up good results, and we put up good earnings growth in Q3.

Great.

Thanks, guys.

Thanks, Ross.

Your next question comes from the line of Tycho Peterson from JP Morgan.

Thanks, guys.

Just following up on the guidance.

Can you maybe talk about what is stronger to offset China being weaker than anticipated for the fourth quarter?

Are there aspects where you're feeling a little bit more incrementally positive at the year end?

If you look at it geographically, North America we're expecting to be a bit stronger than when we had given the guidance a quarter ago.

And when you think of it from an end-market perspective, industrial and applied and healthcare and diagnostics will be a little bit stronger than what we would of said three months ago.

Okay.

That's helpful.

And that thinking little bit about the capital deployment priorities, heading into next year as you are at a point where you can start to at least think about deploying a little more capital, can you maybe talk about the M&A pipeline and how your thinking about opportunities there?

Should we think about bolt-ons or potentially larger deals?

Tycho, thanks for the question.

First on the capital deployment side of the equation.

We pay down over $1 billion in debt in the quarter.

We are on track to hit our target leverage ratio in Q3 of next year.

I think based on how well the integration is going and based on us delivering on the cash flows that we expected to deliver, we feel confident and comfortable as we move into 2015 to once again start our disciplined capital deployment strategies.

So we don't feel required to wait until Q3 when we actually achieve the target leverage ratio, but actually sometime earlier in the year be able to begin executing it.

In terms of the M&A pipeline, there is always a pipeline of activity that we look on and there's always a steady stream of bolt-ons that we would and have been evaluating.

So the team has been active, and I would expect over time you would see us to do some things.

The reality is, as you know from the many years of covering the Company, is we don't assume any M&A is going to happen.

We just assume that we will have a good pipeline, and if we like the fit of a deal and how it helps our customers, and if it gives us the returns that we want, then we will go ahead and execute against it.

So not much is changed from that dynamic.

At the last one, there was some noise lately around the Connecticut software platform.

Can you maybe talk about how important that is in the grand scheme of things, and next steps and the degree to which you could ultimately be liable, if at all, for drugs that have been approved?

Yes, so thanks for the question.

In terms of Connecticut, a tiny product line.

I had to look it up.

Over the last 10 years in total we sold about $1 million worth of the product.

So it's in the infinitesimal side.

We take the issue very seriously, obviously.

The team is conducting a very thorough internal review.

In terms of the potential impact, in the US it seems to be a non-issue as the FDA has stated clearly that it independently analyzes the bioequivalence data in their generic drug approval process.

So that doesn't seem to be an issue, and we're right now going through and confirming what the processes are in Europe in particular to understand that better.

That is where we are with Connecticut.

Thank you, and congrats on the quarter.

Thanks.

You next question is from the line of Derik de Bruin from Bank of America Merrill Lynch.

Hi, good morning.

Good morning, Derik.

Hey, Pete, just so we have a little bit of basis, and as people -- as we start thinking about 2015, could you just give us what you think at today's rates the FX hit would be on 2015, just to help us a little bit calibrate our model?

So it's a little early for us to comment on 2015, but obviously we will provide a complete guidance as we normally do in January on our Q4 earnings call.

That said, if today's rates were to hold over the course of next year, that would clearly be a revenue and earnings headwind compared to where we are today.

In terms of the magnitude, we will get into that when we provide detailed guidance in January.

Okay.

You -- the Lab Products and Services business has been remarkably strong the last couple of years, and you've been pushing about 4% organic revenue growth, it's been averaging.

And a lot of that has been driven by the biopharma services business.

What are some broader thoughts on the LPS business?

Does it sort of stay at that rate, does it normalize more back to the 3% range going forward?

I'm curious in terms of the stability in that business.

Yes.

So when you look at the Lab Products and Services business, it is the heart of our [strive in] productivity for our customers, which is why the business has continued to do well and has a bright outlook.

Effectively, the combination of our channel, which allows customers to manage the huge complexity of life science tools in their research labs, the biopharma services business, which drives significant productivity, and the R&D process and the clinical trials logistics outsourcing, and our very large base of equipment and consumables that are used every -- in every day and every laboratory help our customers make the right choice on those products means that what we do here is very relevant.

Team's executed very well.

We've had a good base of customers continuing to take advantage of our capabilities, and we've delivered good growth.

Whether it will be 3% or 4% in any given quarter, it's hard to predict, but -- exactly -- but I do feel good about the growth prospects for the business, Derik.

Thank you very much.

I'll get back in the queue.

Hey Derik, one other just clarification on your question about FX.

As I mentioned in my comments, we have only been reporting the FX revenue and impact related to standalone this year, but obviously going into 2015 some of what we've been referring to in one big lump as acquisition will be FX.

You have to take into account the impact of FX on the Life Sciences Solutions revenue as well.

So the number will be, just as a starting point, be bigger in terms of revenue (multiple speakers) US dollar.

Right.

I know Life had a lot more euro exposure, certainly, on their margins.

And that's what I was getting at, just a little bit of magnitude on the impact.

As well as yen.

Got you.

Okay, thanks.

We'll make sure we bridge that very carefully when we get into January.

Thanks.

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

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

So I guess two somewhat related questions.

The first is really on Life Tech synergies.

Recognizing the update you provided indicates that you guys are tracking a smidge ahead of plan, based on prior Thermo deals and recognizing, I think a lot of us thought there were a lot of inefficiencies within Life Tech.

I think it's fair to assert that the expectations in the investment community were a little bit higher for upside relative to your synergy targets.

You guys seem pretty happy with this.

And I guess what I'm wondering is, if part of this is because you think you are on the cusp of an acceleration in the pace of synergies?

And I make this point largely because as you talked about you maintained EPS guidance for the year in spite of some pretty now intense FX headwinds heading into Q4 and without China coming back.

I mean, you've essentially raised underlying EPS guidance for the year by $0.07, even factoring in FX.

And you guys did acknowledge that you do expect deal synergies to be part of this.

So I'm just wondering if you think you are on the cusp of really accelerating the pace of deal synergies associated with the Life deal?

So Doug, a few things.

We have been obviously tracking ahead of the synergies, both in the first year and in the longer term, right.

So from the first year, we've actually increased it three or four times.

One of the things that we really don't like to do is actually is that, and it almost sounds cute, that we're raising it and doing it by X million each quarter.

That isn't the way we like it, first of all for the simple reason that it affects our colleagues.

And therefore I actually don't like the dynamic of talking too much about it, but rather whether we are on track to achieve our broader goals.

I think given the magnitude of the FX headwinds, we clearly as a team have been driving productivity hard across the entire business, of which every business is focused on, and not -- it's the Life Science Solutions business as well.

So yes, we are accelerating the synergies, and we're also accelerating cost reduction across the Company because that's the right thing to do in terms of the environment that we are living in.

So that's how I think about it.

I feel excellent about the 350, and what I can say is, is that we never stop looking for synergies, both on the revenue and the cost side.

And while we don't use that language inside the Company today, we're still getting benefits from the combination of Thermo and Fisher which happened seven years ago.

We don't call it a synergy, but we talk about it as our customer value proposition.

We talk about it as our strength in emerging markets.

And we'll constantly look for upsides.

Okay.

Thanks for that, Marc.

And Pete, I want to take a more direct shot at following up on Derik's FX question.

We, obviously none of us want to predict where rates are going, but if we look at current levels, would you disagree that FX looks like about a 2% headwind at the top line?

And I guess that's the first part.

The second part would be, should we be thinking this flows through at a similar rate to what we've done in the past, or is it drastically different because of the Life deal, as you started to talk about?

And then I guess the third part to this would be, keeping in mind that you did talk about essentially powering through $0.07 of incremental headwinds in Q4, how should we think about your ability to power through even more intense headwinds at the FX line next year?

Thank you.

So in terms of total revenues, so if you're looking at the $17 billion number, it is less than 2%, somewhere in the range of 1.5% would probably be a better number.

I don't have the exact calculation in front of me.

I

n terms of pull-through, it's more than what it was for standalone Thermo Fisher historically, which was generally at the average pull-through of the Company because, as you say, when we add Life Technologies they have much more revenue in foreign currency, primarily the euro and yen, than they have cost.

So we're exposed a little bit more there.

In terms of our ability to power through and offset the whole thing in 2015, it's of a scale that makes that very difficult.

Obviously when we go through our planning process, we will be looking at that and determining what leverage we have to pull in terms of incremental restructuring, accelerating synergies, just incremental productivity on all the normal things that we do, PPI Business System, global sourcing, the whole mix of what we have to attack those types of things.

So as I said before, we will give you a full view in January on what our plan is, but it's a big impact to offset completely.

Okay.

Thanks, Pete.

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

Good morning guys.

Thanks.

If you could talk a little bit about the pricing environment.

I'd be interested specifically in your comments around pricing and LPS and analytical technology.

Yes.

So in terms of pricing environment, very similar to what we've seen over the last few quarters.

Price is slightly positive in terms of the environment.

In terms of the Lab Products and Services, I would say pretty similar to the average of the Company.

And in terms of Analytical Instruments, generally pricing has been okay.

We have such differentiation in most of our product lines and such a high level of vitality where we don't even -- price is just function of the new products in a way, it's less so, and then in the very competitive segments of -- in the areas like maybe commodity materials, maybe pricing is a little bit more challenged.

But again, positive price overall.

Great.

And maybe in the LSS segment, could you talk a little bit more about the initiatives you have in place to continue to accelerate the organic growth profile versus what we saw before the acquisition?

And then maybe secondly for Pete, could you talk a little bit about how we should think about incremental margin opportunities across the various segments?

I would assume it's highest, at least in the short term, for LSS, given the synergies.

But just over a longer-term period, incremental margins by segment would be an interesting general conversation to have.

So in terms of what the team is executing on the growth side of the equation within Life Science Solutions, first of all independent, if the companies were independent, the newest opportunity is the revenue synergies, right?

The revenue synergies leverage our presence in emerging markets, they leverage our corporate accounts and customer value proposition, and the strong e-business capabilities for the two companies.

There's significant revenue synergies that start to generate next year and accelerate over time.

So that's one.

Then in the base business, excluding kind of revenue synergies within Life Science Solutions, we are focused on improving the impact of innovation.

That is clearly a big emphasis of the team.

The Attune launch is a good example.

We have efforts to accelerate growth in QPCR, some interesting things we are working on in the human identification area in forensics.

So there's a number of things in the large installed base of very technically excellent products that we're working on, really picking up the growth rate.

And then of course next-gen sequencing is part of that as well, and getting that business, which is actually growing quite well, to continue to strengthen this position and drive growth as well.

And then in terms of margins, just at a very high level, as you said, Life Sciences Solutions is going to benefit the most from synergies, but of course they have regular margin expansion in productivity goals, like all the other businesses.

Analytical Instruments would probably be second in terms of year-over-year margin expansion, just based on the fact that obviously it is all self-manufactured products, and it's lower than the average margin for the Company.

Specialty Diagnostics next, because it's all self-manufactured products as well, except for the healthcare channel, and the margin is relatively high.

So it's a little bit harder to get margin expansion.

And then in Laboratory Products and Services we have the impact of the channel.

So it's a little bit more difficult to expand margins year over year there.

Got it.

Thanks so much, guys.

Your next question is from the line of Steve Bouchaw from Morgan Stanley.

Hi.

Good morning, and thanks for taking the questions.

Good morning.

I'd like to spend just a bit more time on China.

Maybe a couple there.

One, Marc, when you see the recovery in China, where do you think it shows up, what segments of the end market?

And as you think about how the business there grows in 2015, assuming that budgets start flowing again later in the year, could we see a period of accelerated growth with easy comps, or do we remain in a somewhat slower growth environment, albeit potentially better than what we've seen in 2014?

In terms of where we have the most exposure to China, you would see it in our Analytical Instrument segment in terms of our presence there.

That would be the beneficiary -- the biggest beneficiary.

In terms of 2015, obviously the comparison is going to be much easier next year versus the comparison we had next year.

So that's a positive factor.

It's still uncertain to know when the flow of funds is going to pick up.

So that one I have less visibility to.

And so that will be something we'll have to see.

Okay, thanks for that.

And then one on instruments.

The commentary coming out of ASMS was very positive.

The commentary on Vanquish has been optimistic.

If you look at that business and how it's trending, if you could do this excluding the drag from China, can you talk about whether you are seeing any organic pick-up there as a function of the new product flow this year, and if not, how do you think that might emerge going forward?

Thanks again.

Some new products in mass spec are doing very well.

So I feel good about that.

We had a very strong American Society of Mass Spectrometry show.

Chromatography business is doing well.

I look at the nine months year to date in those businesses, I feel good about the performance.

In that segment we have a large industrial exposure with our chemical analysis business, particularly around mining and commodity materials, which continues to be quite weak.

So I think that's somewhat reflected in the numbers.

If you take the other angle, you say outside of China how is our chrome and mass spec business is doing?

It is doing quite well.

So I feel good about -- that's a different lens to think about it, it is doing quite well.

Thanks Marc.

You are welcome.

Your next question comes from the line of Steve Willoughby from Cleveland Research.

Good morning.

Thanks for taking my call.

I just wondering if you could provide any thoughts you have regarding the competitive environment now with your acquisition of Life Tech.

Obviously there have been some other large moves recently.

Just wondering if you could provide what your thoughts are on the competitive environment, and if there any impacts from [Simoldedge] being acquired now on Thermo Fisher?

Yes.

In a consolidating industry, we've been driving the consolidation and that trend continues.

So that is something that we've been anticipating for a long period of time.

It's taken a while for the industry to consolidate.

And we expect that it will continue to do so.

There is a huge advantage of scale, and there is a huge advantage of depth of capabilities, and we have a big, big head start as the industry leader in terms of executing against it.

And we keep looking to strengthen our portfolio and do a great job serving our customers.

And we do that.

We feel we're very well-positioned to grow our market share and strengthen our industry leadership position.

So that's how I would see right now.

Okay.

Then just a little bit more of the nearer-term question.

A year ago it seemed like the fourth quarter for many companies in the industry benefited from a year-end budget flush to varying degrees, and consequently you have a little bit more difficult comps in the fourth quarter.

Based on my math, it looks like your guidance implies roughly applies 3% to 5%, 5.5% organic growth in the fourth quarter.

I'm just wondering what your thoughts are on how you're going to be able to overcome the more difficult comps here in the fourth quarter versus what you've been experiencing so far this year?

Yes.

So in terms of the guidance for the fourth quarter, if you work your way through the math, which obviously you're doing real quick real time, it's about 2% to 4% organic growth in the quarter.

That's the range, which would -- then when you do all the math put you at the 3% to 4% for the Company for the full year.

So that's what's implied in the guidance.

Okay.

Thanks very much.

You're welcome.

Your next question comes from the line of Jeff Elliott from Robert W. Baird.

Good morning, guys.

Thanks for the questions.

Pete, first one for you.

On FX, you mentioned that the $0.07 incremental headwind.

Is that just on the standalone Thermo business, or does that include the Life portion as well?

No, that includes the Life portion as well.

Okay, so all-in number there.

And then Marc, you've given some color on mass spec.

Can you talk just about the high-end business, not just the new instruments, but overall high-end mass spec?

What is the competitive environment there now?

Q Exactive, the Fusion doing great.

Strong bookings from revenues.

So we feel good about our position in terms of how we're doing at the high end.

We continue to bring out a steady stream of new products, and they're very well received in the marketplace.

Okay.

Thanks, guys.

Welcome.

Melissa, we have time for just one more.

Your last question comes from the line of Dan Arias from Citigroup.

Hi.

Good morning, guys.

Thank you.

Marc, on the academic markets, can you give a little bit more color on the extent to which the improvement that you noted there was there a year-over-year affect on an easier compare, whether you're really seeing some material spending pick-up there?

Just hope to get a better feel for what the federally funded folks are doing.

Yes.

Academic and government, Q3 was incredibly similar to Q2.

So the North American environment, or the US environment, was positive, and the last two quarters, was much better than the many previous quarters.

So you saw, as we had thought early in the year, that funding would flow through the system.

It is.

It's not robust, but it's clearly is growing, which is very good.

The offset has been China, but the net of it is still low single-digit growth.

So I feel good that all four of the end markets are back to a positive growth environment.

Okay, great.

And then on China, if I could touch on one additional point.

Last quarter you mentioned that even though the environment was difficult, you felt good about not seeing order cancellations.

Fair to say that that's still the case this quarter, and when the team looks out the next quarter or two, that they feel good about what's in the book staying in the book?

The environment continues to be consistent with that, and the team's focused on turning those bookings into revenue.

Very good.

Thanks.

Thank you.

Let me wrap up with a few thoughts, the first of which is 2015.

We'll get into the guidance process as we normally do in January, but let me make a couple of comments because they kind were re choppy in the way all the questions came out.

The first of which is, if we were fast-forwarding to the FX environment that we are in at this moment in time, sure that would be a headwind.

We're going to have some positives, which is synergies will continue to ramp up.

We're going to have revenue synergies starting to flow, and we will be returning to capital deployment.

The way that we will always judge the Company is when we're sitting across with any of the members of the investment community, are we managing the Company extremely well in whatever the environment is?

And if we can answer that question and the investor would say, yes you're managing the Company extremely well, then that is going really going to be the output of the financial goals we have for the year.

So I feel like we'll get into all the details of it, and we will use the best information we have back in -- or in January to articulate that.

From the perspective on the quarter that we just finished, we're happy.

We delivered a strong quarter.

It puts us in an excellent position to achieve the growth goals that we had set out for the year, and we're excited about doing that and setting ourselves up a strong 2015.

And of course, thank you for all the support of Thermo Fisher, and we look forward to coming back to you at the beginning of the year and reporting on our progress.

This concludes today's conference call.

You may now disconnect.