Feb 2, 2011
Executives
Peter Wilver - Chief Financial Officer and Senior Vice President Kenneth Apicerno - Vice President of Investor Relations and Treasurer Marc Casper - Chief Executive Officer, President and Director
Analysts
Derik De Bruin - UBS Investment Bank Dan Leonard - First Analysis Ross Muken - Deutsche Bank AG Jonathan Groberg - Macquarie Research Peter Lawson - Mizuho Securities USA, Inc. Tycho Peterson - JP Morgan Chase & Co Daniel Leonard - First Analysis Quintin Lai - Robert W.
Baird & Co. Incorporated Paul Knight - Credit Agricole Securities (USA) Inc.
Marshall Urist - Morgan Stanley Isaac Ro - Goldman Sachs Group Inc. Valerie Dixon Jon Wood - Jefferies & Company, Inc.
Charles Butler - Barclays Capital
Operator
Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific Fourth Quarter 2010 Earnings Conference Call. I would like to introduce our moderator for the call, Mr.
Kenneth Apicerno, Vice President, Investor Relations. Mr.
Apicerno, you may begin the call.
Kenneth Apicerno
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 Investors section of our website, thermofisher.com, under the heading Webcasts and Presentations, until March 4, 2011. A copy of the press release of our fourth 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 October 2, 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 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 fourth quarter 2010 earnings and future expectations and also in the Investors section of our website under the heading Financial Results. So with that, I'll now turn the call over to Marc.
Marc Casper
Thanks, Ken. Good morning, everyone, and thank you for joining us for our recap of the 2010 fourth quarter and full year.
On the call, we also look forward to outlining our guidance for 2011. Let me start by saying that I'm pleased to tell you that we achieved our growth goals for the year.
We outlined our key objectives back in May at our Analyst Meeting, all in support of our primary goal, to accelerate EPS growth. As you saw in our press release, we delivered record adjusted EPS in 2010, exceeding the high end of our annual guidance by $0.04.
We executed well on our operating plans while continuing to make the strategic investments and technology development in emerging markets that we believe will contribute to an even stronger future for Thermo Fisher. This combination, in addition to our ability to deploy capital, gives us a competitive advantage and reinforces our position as the industry leader.
We expect to continue our trend of delivering excellent EPS growth, as you can see in our 2011 guidance, which I'll cover later in my remarks. Before I discuss our performance for the full year in more detail, let me touch on the highlights of the fourth quarter.
We reported record adjusted EPS in the quarter with a 10% increase to $1 per share. We generated good adjusted operating margin expansion coming in at 40 basis points improvement to 18.4%.
I'm also pleased to report that we had strong double-digit growth in Q4 in China and India. In fact, in the quarter, China became our third largest country in terms of revenue behind the U.S.
and Germany. We also saw continued strengthening of industrial markets in the quarter and delivered strong growth in applied markets such as environmental and food safety.
Turning to the year in a bit more detail, adjusted earnings per share grew 17% to a record $3.57, versus $3.05 in 2009. As I did last quarter, I'd like to focus on the three key drivers of our 2010 EPS performance.
One is top line revenue growth, the second is operational excellence and the third is disciplined capital deployment. So first, let me cover the top line revenue growth.
Revenues for the year grew 7% to $10.8 billion compared with $10.1 billion a year ago. In our Analytical Technologies segment, our Scientific and Process Instruments businesses benefited particularly from strength in applied markets and the global industrial recovery.
Our new products in molecular spectroscopy and handheld instruments really hit the mark with rapid adoption by our customers for QA/QC testing and security screening applications. I'll talk in a few moments about how the new food safety bill in the U.S.
and increased awareness globally should create further growth opportunities for us as a result of the need for better testing. Sales of our clinical diagnostic products within the segment remained strong throughout the year, including our biomarker test kits, which came with the B.R.A.H.M.S.
acquisition. In our Lab Products and Services segment, we had solid contributions from both our Equipment and Consumables businesses in 2010, highlighted by some key wins from major university customers.
One final comment on our revenue growth overall. It was nice to see strong contributions again this year from our largest customer accounts, which continue to grow faster than the company average.
We have demonstrated this level of performance at these accounts since the merger four years ago. Our approach here actually applies to a much broader set of customers.
So going forward, we'll talk more about the value proposition in that context. Our second EPS growth driver is operational excellence.
And that continues to give us the advantage of fully leveraging our revenue growth to deliver excellent bottom line results. Our teams were determined to achieve their goals in 2010 and their solid execution of our operating plans made it possible.
I'm extremely proud of their accomplishments, and let me give you a few highlights. First, we increased the use of PPI and PPI Lean tools to improve our processes and productivity and strengthen our global competitive position.
Second, continuing to rationalize our global footprint by completing a number of facility consolidations during the year, eight of which were factories. Last, carefully targeting our spending to make investments that will create the most value for our customers.
We increased our total R&D investment in 2010 by over $40 million or 20 basis points year-over-year to strengthen our leadership position and innovation. Our previous investments led to a number of successful thermoscientific product launches in 2010, including our TSQ Quantum XLS triple quad instrument for environmental and food safety analysis.
Our new benchtop GP 1-liter and 3-liter centerpiece platform for greatly improved laboratory productivity, which has done extremely well in helping us gain share. And we also introduced new Consumables and bioreagents for our biotech customers doing cell-based research.
Turning to emerging markets, I've already highlighted our strong results in Asia Pacific during the quarter and the year. We continue to invest to expand in this important growth market.
Our new China Technology Center, which we opened in August is up and running, and we are well on our way to developing the products geared for the local market. With our broad offerings, our prospects in the region continue to grow, as China's economic focus evolves, from infrastructure to environment to consumer safety to life sciences research.
In 2011, we expect to build our presence in other emerging global markets as well, such as in South America. We plan to expand our commercial operations in Brazil, for example, which is now the eighth largest economy in the world.
Even with these significant investments in R&D and global expansion, we achieved a 12% increase in adjusted operating income year-over-year for 80 basis points of adjusted operating margin expansion. Our third key contributor to EPS growth, effective capital deployment, continues to provide us with multiple avenues for creating shareholder value.
In 2010, we deployed a total of $1.6 billion on share buybacks and complementary acquisitions. We significantly stepped up our share buyback program during the year.
In fact, we invested just over $1 billion to repurchase nearly 21 million shares. In the fourth quarter alone, we spent $350 million to repurchase almost 7 million of our shares.
At the end of the year, we had $488 million remaining under our existing buyback authorization. We also deployed $600 million to complete 11 acquisitions in 2010.
These acquisitions added complementary technologies and expanded our presence in attractive markets. As you know, in December, we announced our agreement to acquire Dionex for $2.1 billion.
It's been over a month since we talked about it, so let me remind you of our rationale for this exciting transaction. Dionex is a leading provider of chromatography systems with a very strong track record of technology innovation.
By combining their ion and liquid chromatography capabilities with our existing chromatography offering, we will create an industry-leading chromatography portfolio for our customers. Of course, this will benefit our leading position in mass spectrometry as well and vice versa.
The technology combination, alone, creates a compelling value proposition. What makes it even more so, is that it strengthens our presence in highly attractive markets.
We stand to benefit from Dionex's extensive customer base in applied markets such as environmental, food safety and other industrial sectors. And with more than 35% of their revenues in Asia/Pacific and other emerging geographies, Dionex fits perfectly with our strategy of expansion in these high-growth regions.
I just visited Sunnyvale a couple of weeks ago to meet with the Dionex employees and management. There's certainly a lot of excitement and enthusiasm about becoming part of Thermo Fisher.
I'm pleased to report that the integration planning is well underway. As you know, we cleared U.S.
antitrust in early January. In Europe, we're seeking to transfer jurisdiction to the European Commission rather than having to file for regulatory approvals in multiple countries.
The timeline in Europe will likely take the closing into early Q2. 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.
I'd like to now highlight a key growth theme within the company as I did in Q3. The intent here is to demonstrate how our ongoing investments lead to new growth opportunities for Thermo Fisher by collectively driving our revenue growth, leveraging our unique depth of capabilities across the company and fulfilling our mission, which is to enable our customers to make the world healthier, cleaner and safer.
Last quarter, I talked about moving advanced technologies from the lab to the line and to the field. Today, I want to highlight our opportunities in food safety testing.
In light of the new legislation that we passed a month ago in the U.S. This is good news for Thermo Fisher because it will increase the need for testing in an already attractive food safety market.
Not only in the U.S., but worldwide. The Food Safety Modernization Act is a step forward in restoring public confidence in the integrity of our food supply.
Essentially, it replaces doubt and uncertainty with accountability and testing protocols to ensure that our food, whether domestic or imported, is safe. The median impact us twofold.
First, it authorizes the Food and Drug Administration to increase monitoring and auditing processes, access records of food producers and recall tainted products. Second, it enables the FDA to establish procedures to protect our food supplies from terrorists and reduce the likelihood of intentional tampering.
So what does this mean for us? It means that we can strengthen our position in this growing market by helping our customers comply with the new rules.
Thousands of U.S.-based of food production plants registered with the FDA will be required to develop methods to rapidly and effectively track and trace contaminated food to its point of origin. We could help these producers avoid recalls that hurt their profitability and put their brands at risk.
Our Analytical Instruments business stands to benefit most from the new law, mainly our leading mass spec systems and our chromatography offerings, which will be significantly enhanced by the acquisition of Dionex. More specifically, our turbo flow technologies enable food testing labs to improve productivity by lowering the cost per sample analyzed.
We are currently working with the FDA to use this technique to screen for hundreds of pesticide residues simultaneously. We have also developed non-targeted screening methods using our extract high-resolution benchtop mass spectrometer.
This system brings the power of mass analysis to a price point that enables efficiency in routine analysis. In addition, there will likely be an increase in the use of our hand-held analytical instruments for authenticating packaged food.
And new laboratory standards for accreditation will require more robust quality systems, which will present opportunities for our leading LIMS software platform. Tracing the origin of food from the farm to the table will produce enormous amounts of data.
An automated system for data storage and retrieval will become the standard rather than the exception in many existing labs and production facilities. Finally, new microbiology kits and methods will be required for the testing of pathogens in food, creating opportunities for us there as well.
With large percentages of the U.S. food supply being imported, there'll, no doubt, be a carryover benefit in other global markets such as Europe, Japan and China.
As you know, we opened our food safety response center in Germany in April 2010, and we'll continue to use this new resource to develop testing methods in response to food crises around the world. This is a great example of the growth opportunity that we can capitalize on as a result of our leadership position from a technology perspective as well as our market presence around the world.
Before I wrap up, let me summarize our annual guidance for 2011, which you saw on our press release. Pete will go into more details over his remarks, including the key assumptions we're factoring in, but I'll review them at a high level.
We expect to achieve a range of $4 to $4.10 in adjusted EPS for 2011. This would be 12% to 15% growth over our excellent results in 2010.
I want to point out that this does not yet include the anticipated accretion from our acquisition of Dionex. We expect to achieve 2011 revenues for the full year in the range of $11.33 billion to $11.45 billion.
This would lead to 5% to 6% revenue growth over 2010. Before I hand the call over to Pete, let me summarize my remarks this morning with a few key points.
We successfully executed our plans to deliver a strong 2010. We remain focused on accelerating our adjusted EPS growth.
We are well-positioned to deliver on our growth goals for 2011. Now I'll turn the call over to Pete Wilver.
Pete?
Peter Wilver
Thanks, Marc. Good morning, everyone.
As Marc said, we're pleased to report another quarter of strong adjusted earnings per share, with 10% year-over-year growth to a fourth quarter record of $1, compared to $0.91 last year. For the full year, adjusted EPS was a record $3.57, up 17% from $3.05 last year.
GAAP EPS in Q4 was $0.75, up 15% from $0.65 in the prior year's quarter. And GAAP EPS for the full year was $2.53, up 26% from $2.01 last year.
Moving onto our top-line performance. Q4 reported revenue decreased 2% year-over-year to $2.78 billion.
In the quarter, we picked up a 2% benefit from acquisitions and foreign exchange was a negative 1%, resulting in a 3% decline organically. Excluding the flu, Biosite and calendar headwinds that we highlighted on our last quarter's call, our Q4 organic growth was positive 3%, consistent with our expectations.
Full year reported revenues increased 7% year-over-year to $10.79 billion. For the year, we added 2.5% from acquisitions and FX was essentially flat, so organic revenues grew more than 4%.
Excluding flu and Biosite for the full year, organic revenue growth was 6%. We continue to strengthen our backlog with bookings exceeding revenues by 1% in both the quarter and the full year.
Moving on to the segments. In Analytical Technologies, Q4 revenues grew 4% on a reported basis and 2% organically.
We saw a strong growth in our Specialty Diagnostics businesses, including our Biomarker business in the quarter. In our Instruments businesses, especially those serving industrial and applied markets continued to deliver strong year-over-year growth.
For the full year, Analytical Technologies grew 11% on a reported basis and 6% organically. Turning to the Laboratory Products and Services segment, Q4 revenues declined 6% on a reported basis and 5% organically.
In the quarter, we say strong growth in our laboratory equipment offset by a decline in consumables related to flu, Biosite and the calendar. For the full year, revenues in Laboratory Products and Services grew 4% on both the reported and organic basis.
By geography, in Q4, we saw a high-single digit organic growth in Asia Pacific, with both China and India going over 20%. North America and Europe so a mid single-digit declines compared to the prior year.
And rest of the world grew in the low-double digits from a relatively small base. For the full year, North America grew in the mid-single digits, Europe in the low-single digits, Asia Pac near 10%, and the rest of the world in the mid-teens.
Turning to adjusted operating income. We had strong bottom line results with Q4 adjusted operating income of $511 million, up slightly compared to the prior year on lower revenue.
Adjusting operating margin was 18.4%, up 40 basis points from 18% in the year-ago quarter. The year-over-year margin expansion was driven by strong cost productivity from our practical process improvement, global sourcing and restructuring initiatives.
And we continued to see nice accretion in the quarter from our recent acquisitions. These gains were partially offset by the investments we're making in R&D and commercial resources to support growth, primarily in Asia.
For the full year, adjusted operating margin increased to 17.8%, up 80 basis points year-over-year and at the high-end we gave at our Analyst Meeting back in May. This is a significant achievement given the level of investments we funded this year to position the company for future growth.
By segment, Q4 adjusted operating income in Analytical Technologies increased by 6% year-over-year. Adjusted operating margin was 22.2%, up 40 basis points versus 21.8% last year, driven by strong cost productivity and slightly higher pricing.
For the full year, Analytical Technologies' adjusted operating margin increased 110 basis points to 21.3%. Turning to our Laboratory Products and Services segment, Q4 adjusted operating income decreased by 5% year-over-year.
Adjusted operating margin was 14.2%, up 10 basis points on the year-ago quarter with strong cost productivity more than offsetting growth investments and lower revenues. For the full year, Laboratory Products and Services' adjusted operating margin increased 20 basis points to 13.9%.
Moving onto the details of the P&L. Total company adjusted gross margin was 43.2% in Q4, up 170 basis points from the year-ago quarter.
This robust margin expansion was primarily driven by strong cost productivity and the positive impact of our recent acquisitions. For the full year, adjusted gross margin was 42.5%, up 140 basis points from 41.1% in the prior year.
Adjusted SG&A in Q4 was 22% of revenue, of 90 basis points from the year-ago quarter. For the full year, it was 22.1%, an increase of 40 basis points primarily as a result of the strategic growth investments and acquisitions.
R&D expense was 2.8% of revenue in Q4, up 40 basis points from last year. For the full year, it was 2.7%, an increase of 20 basis points or $40 million, reflecting our commitment to invest in technology development to expand our new product pipeline for future growth.
Moving below the line. Our Q4 net interest expense decreased $10 million year-over-year to $16 million, driven by lower interest expense as a result of our debt refinancing initiatives.
Adjusted other income was a gain of $1 million, up $3 million from last year. Our adjusted tax rate in the quarter was 19.6%, down 40 basis points from last year and down 190 basis points from our previous guidance, primarily as a result of the U.S.
R&D tax credit being extended in December. For the full year, our adjusted tax rate was 20.7%, up 70 basis points from 2009, primarily as a result of higher income at marginal rates.
As Marc mentioned, we used $350 million of our cash to buy back 6.9 million shares during the quarter. And for the full year, we spent slightly more than $1 billion on buybacks against our total authorization of $1.5 billion.
So we have $488 million less to spend in our current authorization. Average diluted shares were $399 million in the quarter, down $23 million or 6% from last year, reflecting the benefit of our 2010 share buyback program as well as the redemption of $325 million of our convertible debt earlier in the year.
For the full year, average diluted shares were $409 million, down $13 million or 3% from 2009. We continued to maintain a strong balance sheet and deliver solid cash flow performance this quarter.
Full-year free cash flow from continuing ops was $1.24 billion after deducting net capital expenditures of $255 million. As expected, this was down about $200 million from 2009, primarily as a result of incremental investment and working capital to support higher revenues and higher capital expenditures partially offset by higher earnings.
We ended the quarter with $926 million in cash and investments, down $13 million from Q3 as free cash flow in the quarter was offset by cash use for share buybacks and acquisitions closed during the quarter. Our total debt was $2.14 billion, down slightly from Q3.
With regard to working capital, we saw a good sequential improvement this quarter. Accounts receivable days sales outstanding were 49 days, down 3 days sequentially from the previous quarter, and inventory days of supply were 67 days, also down 3 days from Q3.
Moving on to our guidance for 2011. We're initiating adjusted EPS guidance of $4 to $4.10, which represents 12% to 15% growth over our 2010 adjusted EPS of $3.57.
In terms of revenue, we expect to achieve 2011 revenues in the range of $11.33 billion to $11.45 billion, which represents growth of 5% to 6% compared to our 2010 reported revenues of $10.79 billion. This guidance includes about 0.75% growth from completed acquisitions, and it excludes the pending acquisition of Dionex, as well as any other potential future acquisitions or divestitures.
It also presumes present foreign currency exchange rates, which would have a favorable impact of about 0.75% on our revenue growth. Consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates.
On an organic basis, the midpoint of our revenue guidance represents about 4% growth. Keep in mind that we still have about a percentage point of revenue headwind this year as a result of the Biosite and Japan stimulus revenues we received last year.
Both of these occurred in the first half of the year, with the Japan stimulus only affecting Q1. So when you look at the year from a revenue growth perspective, Q1 has a tough comparison, and we expect organic revenues to be essentially flat.
For the rest of the year, we should be in the mid-single digit range with accelerating growth as the year progresses. To give you a little more detail on our earnings guidance, we're expecting adjusted operating margin expansion of 50 to 80 basis points compared to 2010.
Positive contributors to our margin expansion will be: Pull-through on organic revenue growth at marginal rates; PPI and PPI Lean, as well as low cost region manufacturing; global sourcing including low-cost region sourcing; the full year benefit of our restructuring actions in 2010, as well as incremental actions in 2011; and moderate price increases comparable to the environment we experienced in 2010. These benefits will be somewhat offset by: Salary increases and other inflation; and the full year impact or run rate of the investments we made in 2010 in a few key strategic areas to strengthen our depth of capabilities and drive future growth; in R&D, to accelerate long-term growth, primarily in our a Mass Spectrometry, Specialty Diagnostics and Biosciences businesses; in selling and marketing, primarily in emerging markets, but also to drive our new product launches; and in information technology, primarily related to e-business.
Moving below the line, we're expecting net interest expense to be about flat year-over-year. Our adjusted income tax rate is forecasted to be in the range of 21% to 22%, up slightly from 20.7% in 2010, primarily as a result of higher income and marginal rates.
And full year average diluted shares are estimated to be in the range of $390 million to $395 million, down 4% to 5% from 2010, which it seems that we'll use the remaining $488 million of our current share buyback authorization through its expiration on September 8, 2011. Finally, we expect free cash flow to be in the range of $1.3 billion to $1.4 billion after deducting net capital expenditures of $280 million to $310 million.
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 2011 playing out. Results above or below the midpoint will depend on the relative strength of our markets during the year.
So in summary, 2010 was a great year for us, operationally and financially. We successfully delivered our plan and met or exceeded our targets for the year.
I believe we're well-positioned to achieve our growth goals in 2011 and I'm excited about our prospects for the long term. With that, I'll turn the call over to the operator for Q&A.
Operator
[Operator Instructions] The first question will come from the line of John Groberg, Macquarie.
Jonathan Groberg - Macquarie Research
Marc, would you mind, obviously in this quarter, there's a lot of noise though with the fewer number of days and some things that you've characterized pretty well, and as you go into next year, Pete has outlined some of the headwinds. Could you just kind of step back and talk, I guess, about just kind of the end markets and kind of compare them how you're seeing them, I guess, today, you have the balance.
Then Marc, as you discussed, I do know if you want to talk about them from that perspective. And then maybe kind of your view as you enter into 2011 how you envision these markets performing in 2011 as well?
Just give us a sense as to how you actually see these markets, currently, despite a lot of these pluses and minuses that are coming in to your specific results?
Marc Casper
Sure. John, as you look at the end markets, let me start with Industrial, and that's clearly a great story.
We're seeing the benefit of the gradually improving market throughout the year, and we saw very strong growth in the quarter and for the full year. Organic growth in industrial is well above the company average.
For us, we're seeing increased demand for more QA/QC products broadly, particularly benefiting from nice new product launches that we've had in molecular spectroscopy and portable instrumentation to meet the needs of our customers in the industrial applications. Healthcare, which is where you're going to have the most noise in the numbers.
If you normalize that for flu and Biosite, growth was in line with the company average, and we continue to do well with our healthcare customers. We're very pleased with how our Clinical Diagnostics business is performing.
We're very excited about the performance of B.R.A.H.M.S., which we closed in October of 2009. That business' outlook is very bright and it clearly is -- it was a very good acquisition for us.
Obviously, the comps are going to get easier for us in 2011 in Healthcare as we don't have the H1N1 comparison and Biosite will go away in the second half. Academic and Government, pretty consistent throughout the year.
We had some very good wins in lab equipment, as our customers are taking advantage of the very broad range of capabilities we have there, so we've done some equipping out of large, new laboratories at major universities. That's been really positive.
Probably the only thing I would mention as a reminder is that in the Academic and Government segment, in Q1 of 2010, we had a $50 million set of orders from Japan, in terms of stimulus funds, which will make that a tough comparison. But other than that, we see Academic and Government being pretty stable and consistent.
In terms of Biopharma, that was similar throughout the year. Our bioprocess production products continue to do very well, as we're seeing a meaningful transition from a kind of stainless steel manufacturing to a sterile manufacturing environment.
That's good for our Media and Disposable Plastics business in particular.
Jonathan Groberg - Macquarie Research
On revenues, again, for next year, to you Marc, but just to make certain, the acquisitions, the 0.75%, the ones I see primarily for next year are a noble way of prosing-on Fermentas in loan because you're not including Dionex, and all of those, all in, are going to be about 0.75%, is that what you said in terms of 2011?
Marc Casper
The specific list is out on our website on our reconciliation package, but yes, the 0.75% is the past acquisitions and divestitures.
Operator
And the next question will come from the line of Ross Muken, Deutsche Bank.
Ross Muken - Deutsche Bank AG
So in terms of the operating margin line, it looks like you had some pretty good pull through in the quarter despite obviously in the headwinds you've had on the top line. I know, Pete, you gave some commentary as we head into next year.
What are the biggest, sort of, puts and takes in terms of the ability to get sort of leverage in line with what we've seen historically from the business in sort of the 50 to 100 basis points area? Is it maybe some potential pressures on the raw material side?
Is it the salary increases? Where do we have the biggest variability in terms of where we could be better or worse in that range?
Peter Wilver
Well, the biggest variability really comes from the top line. The productivity initiatives that we drive, that is something that we're doing no matter what's going on in the economy.
So we're driving that and that generates around 2% or 200 basis points of margin expansion year-over-year, and that offsets the inflation that we see in the investments that we're making. And then the rest really comes down to pull through on organic growth.
Certainly, if we saw differences in the top line, the investments are, at some level, discretionary, obviously, so we could manage that. But primarily, the productivity is offsetting inflation in investments.
Marc Casper
Ross, we're in a good rhythm with the operating margin expansion. If you look at it this year, we increased margins by 80 basis points and still allowed us to significantly increase R&D and Asian expansion.
You look at next year's guidance range, were at 50 to 80 basis points of margin expansion again and we feel good about the momentum we have there.
Ross Muken - Deutsche Bank AG
And in terms of the Dionex acquisition, where are we in terms of what your current sort of preferences in terms of how to finance that deal in terms of how you -- given the favorable depth markets, how you're thinking about kind of the capital structure on a go-forward basis?
Peter Wilver
Ross, we haven't really changed our view on the financing. We said we would fund it with debt and the interest cost would be something in the range of 3% to 3.5%.
Those assumptions are still consistent. We, most likely, will prefund the acquisition just to make sure that we lock into the current favorable rates.
Ross Muken - Deutsche Bank AG
So just in terms of your comments on the interest expense and for the guidance, I mean, that's not inclusive of the potential financing of that to occur at some point in the first part of the year?
Peter Wilver
No, it does include the assumption that we'll prefund the acquisition.
Operator
The next question will come from the line of Dan Leonard, Leerink Swann.
Daniel Leonard - First Analysis
I want to better understand your thinking on the top line forecast for 2011. So it looks like you're expecting, even when you back out all of the temporary gymnastics from both 2010 and 2011, that you're expecting some softening of the organic growth rate in 2011 from 2010 levels.
I guess, can you guide me through your thinking behind that expectation at the midpoint?
Marc Casper
We don't think too much about these gymnastics, Dan. But we're trying to make this as clear as possible.
If you look at 2010, and you just take out flu and Biosite, which is noise in the system, we grew 6%, in terms of organic growth. When you look at 2011, the midpoint of our guidance when you take out the headwind is 5%, so there's a 1 point Delta.
What's the 1 point Delta? It's just comparisons, right?
If you look at it, the 6% was versus a negative 3%, which was the 2009 numbers. The 5% growth is versus really the positive momentum we had in 2010.
So it's a much harder comparison. We're effectively saying that we're going to grow at the same rate.
So we're actually getting increasingly bullish in terms of what the end markets look like and what the world holds.
Dan Leonard - First Analysis
Marc, you mentioned that you're broadening your approach you've taken with your top accounts to more accounts. What does that mean?
Peter Wilver
What that means is, we have, over the last four years, consistently grown with our large accounts, faster than the company average. We've learned a lot about how to do standardization programs, how to utilize our very deep set of capabilities.
We're going to be using those capabilities for a broader set of customers going forward. We've experimented with a number of things over the years.
And as I talk about performance in 2011, I'll be talking more broadly, not just about top customers, but how we're doing in the marketplaces and gaining market share.
Operator
And the next question will come from the line of Amit Bhalla, Citi.
Valerie Dixon
This is Valerie Dixon actually in for Amit. I was wondering if you could dive a little deeper into your Pharma end markets.
Have you seen any consistency You said that you're working with the FDA on some sort of testing guidelines. What do you expect in terms of implementation of the food safety bill and the timeline for you guys to finalize some of your familiar discussions with the FDA and perhaps when do you expect to see some revenue contribution from your handheld instruments and other instruments that would serve that market?
Marc Casper
When you look at the implementation guidelines that are in effect, it's typically about an 18-month window that food producers have to be getting in compliance. So that means that you'll likely see some benefit late this year and into 2012 in terms of timeframe for when would you would expect to see an incremental opportunity from food safety beyond the strong momentum that exist in those markets today.
Valerie Dixon
In the North America region, what would you expect to have happen to return this region to growth?
Marc Casper
In terms of North America, obviously the business grew during the course of the year and we're seeing the benefits of a recovering economy. In a particular quarter, you're going to have flu and Biosite are North American, that's [indiscernible] 100% where that happened, so the comparison makes North America have the headwind, but that's not anything I'd read into.
North America is doing fine.
Operator
And the next question comes from the line of Marshall Urist, Morgan Stanley.
Marshall Urist - Morgan Stanley
First one, just for Pete on gross margin in 2011. How much improvement should we be looking for next year and maybe some of the major, major drivers there and beyond the top line, that could make things a little bit better, a little bit worse?
Peter Wilver
In terms of gross margin, if you look at the midpoint of our guidance, I gave 50 to 80 basis points as the margin expansion for EBITDA. So the midpoint is around 65 or so basis points.
The way that splits out is about 100 basis points of gross margin expansion, so comparable to what we did in 2010, and then probably about 20 basis points of dilution in SG&A. Again, I mentioned the run rate of the expenditures that we put in place in 2010 and about 15 basis points in R&D.
So that's how it splits out to the three categories. The key drivers in gross margin expansion, as I mentioned, are really PPI, PPI Lean, low-cost region manufacturing, global sourcing, low-cost region sourcing and restructuring, all the things that we normally do to drive our productivity.
So a lot of those benefits fall into the gross margin category.
Marshall Urist - Morgan Stanley
And then just one other one for me. I know you referred to kind of the organic growth picture improving over the year.
So given kind of where you stand today and looking at what you're seeing on the industrial end markets, and obviously, some of the other major geographies, where would you expect to sort of to be exiting the year? Would that be kind of over the second half, should we be thinking more on par sort of in this fixed range with 2010?
Peter Wilver
You're talking about the quarterly phasing of organic growth?
Marshall Urist - Morgan Stanley
Exactly. So if things are getting better over the year, kind of where should we expect to be finishing or where should we expect to be by the second half?
Peter Wilver
I would say the second half would be in the higher end of the mid-single digits to the lower end of high-single digits.
Operator
And the next question will come from the line of Paul Knight, CLSA.
Paul Knight - Credit Agricole Securities (USA) Inc.
Marc, you ever wish you were in gene sequencing instrumentation?
Marc Casper
Only in the sense of the weather is better in Florida where the conference is than it is in the Northeast. But no, to really answer the question, I'm very comfortable with our portfolio.
Clearly, gene sequencing, there's a lot of activity going on, but it's a pretty crowded field and it's one that we benefit by being a supplier to most of those companies. We supply reagents, we supply technology and we're happy with our position.
Paul Knight - Credit Agricole Securities (USA) Inc.
When you see all the genomes that will be done this year, what's your read through? Is it significant enough on the products you provide that it adds to growth and I guess this activity continues in the years ahead?
Marc Casper
Yes. I mean, we get a little bit of a benefit from the expansion of sequencing, from the way we participate in that market.
Paul Knight - Credit Agricole Securities (USA) Inc.
Did you talk about geographies and growth?
Marc Casper
We did. And Pete, if you want us to rehash, we can go through the...
Peter Wilver
Are you talking about forward look or backward look?
Paul Knight - Credit Agricole Securities (USA) Inc.
Just the quarter, Pete.
Charles Butler - Barclays Capital
In terms of the quarter, it's Asia Pac in the high-single digits and then North America and Europe in mid-single digit declines, because of the calendar and flu and Biosite, as Marc mentioned. For the full year, which is probably a better way to look at it, North America in the mid-single digits, Europe in the low-single digits and Asia Pac around 10%.
Operator
And the next question will come from the line of Tycho Peterson, JPMorgan.
Tycho Peterson - JP Morgan Chase & Co
I just want to follow up on your comments earlier-on on Pharma. The news out of Pfizer yesterday wasn't so positive on R&D talking about $1 billion to $2 billion in cost cuts.
Can you just talk a little bit about what your dialogue is like with Pharma now? And do you have to kind of step up your initiatives here?
In the past, you had also talked about a more strategic deal with Lilly. So are you seeing interest also in kind of a longer-term, more strategic deals from Pharma as they look to consolidate the channel?
Marc Casper
Yes, I mean, obviously, when a customer segment is going to change, one could view it as negative or positive, for us it's positive. We are so much larger than anybody else with these customers.
We have better access. We have more capabilities.
Our adoptive capabilities here is incredible. So we help our customers meet those challenges.
And as companies are going through those changes, we're working with them to meet their goals. And we have a number of examples where we have active dialogue about helping them meet meaningful productivity goals.
And for us, we're very well-equipped to help them do that, and that's a share gain opportunity for us that we're focused on capitalizing on.
Tycho Peterson - JP Morgan Chase & Co
So then as we think about your broader portfolio, obviously, there's been some discussion about Athena and Lancaster labs. Can you just talk either on that type of divestitures, specifically, or how you look at opportunities to trim the portfolio?
Marc Casper
In terms of a theme and Lancaster, we really don't comment on speculation in the press. So I'm going to leave that one aside.
And that's just consistent with all of our policies on speculation. In terms of more divestitures and how we think about it, we periodically review the portfolio to make sure that we have the best portfolio and that we're creating shareholder value by owning the various things that we own.
And every once and while, we'll sell something that's small where we think it's better owned by somebody else. But we have a good managing process with our good businesses.
Tycho Peterson - JP Morgan Chase & Co
On capital deployment, post Dionex, can you talk about potentially your willingness to do another deal, what kind of ROIC targets you'll be looking at and how you could look to lever up if needed beyond closing Dionex deal?
Marc Casper
So in terms of the capital deployment strategy, it's going to continue to be a blend of return of capital through buybacks as well as acquisitions, provided they meet our criteria, which has strengthened the strategic position of the company, enhancing our offering from a customer perspective and clearly, creating shareholder value so that we have ROIC's well above our cost of capital, in that metric. Dionex, as I've mentioned in the past, really just is part of one division within one of our groups.
So from a management bandwidth perspective, we have plenty of bandwidth if the right acquisitions were available that met our criteria. So if we see one that we feel good about, it will do them.
And if there's one that if we don't see a pipeline at that point in the year, we won't. And obviously 2010 was a really good year in terms of M&A.
There's lots of good activity and we'll continue to look for the right opportunities.
Operator
And the next question will come from the line of Doug Schenkel, Cowen and Company.
Unidentified Analyst
This is [indiscernible] for Doug. Just quickly on pricing in the quarter, just asking how things are trending both in Instruments and Consumables and any market commentary is helpful.
And then, similarly, looking through 2011, what you're expectations are?
Marc Casper
So pricing in the fourth quarter was pretty similar to the third quarter: Consumable, stronger; instruments, a little bit more competitive. For the full year, for the company, we had just under 1% price.
For 2011, were looking and anticipating very similar market conditions to 2010.
Unidentified Analyst
You guys talked a little bit earlier this year about opening an office in Brazil and ROW had a nice growth this quarter. When we think of emerging markets outside of China, maybe just some commentary on and expectations there.
And is that going to become, I guess, a bigger part of the business going forward?
Marc Casper
When you look at where we're focused, we've been building out our Asian presence pretty dramatically, and that's China, India. China is our biggest priority, then India.
A number of the other Asian countries, Korea, Singapore, Malaysia are three examples where we've been building our presence. In terms of outside of that, probably Brazil is the only other one that's significant in terms of opportunity.
The economy's obviously very strong. There's a big focus on alternative energy sources.
When you're doing alternative energy production, typically, you're a large consumer of instrumentation, which is good for us. So there's not a long list of other countries you'll see us talking about in terms of emerging markets, but I think Brazil, at this point, merits inclusion with that group.
Operator
And the next question will come from the line of Jon Wood, Jefferies & Company.
Jon Wood - Jefferies & Company, Inc.
Pete, could you quantify the flu and Biosite impacts. You separate them for the fourth quarter?
Peter Wilver
Flu was about negative $20 million and Biosite about negative $35 million when you offset it against the alternative supplier.
Jon Wood - Jefferies & Company, Inc.
That's a net number, $35 million?
Peter Wilver
Yes, net $35 million. So a total of about $55 million of headwind.
Jon Wood - Jefferies & Company, Inc.
And then the calendar was between 4% and 5%? Is that right?
Peter Wilver
It's around 4%. It's difficult to get that exact number, but it's about 4%.
Jon Wood - Jefferies & Company, Inc.
And then the next one is if you look at 2011 and you net out Japan, so I know that $50 million. But is there a net effect from stimulus on the business in '11 versus '10 when you take out the effects of Japan?
Peter Wilver
Yes, it's still a little bit additional decline above the $50 million of Japan. The reason we're calling out Japan is because it's $50 million in one quarter, so it's a pretty significant impact.
Overall, stimulus is down more than the $50 million, but we are assuming that we'll make that up with other orders.
Operator
And the next question will come from the line of Isaac Ro, Goldman Sachs.
Isaac Ro - Goldman Sachs Group Inc.
Marc, can you maybe address sort of your general outlook on hospital base trends in 2011 when we kind of normalize for the flu and Biosite? And specifically, are you seeing any notable changes in underlying patient volumes in the parts of your business that have exposure there?
And as we look into 2011, any kind of a recovery here that would impact your business?
Marc Casper
So when you look at the healthcare customers, which is primarily our Clinical Diagnostics business. Once you normalize for flu and the Biosite transition, we see that as a mid-single digit growing business.
We didn't see any significant effect from patient volume on the downside. So if that happened for other companies, I don't think it's going to be a big factor one way or another for us in 2011.
We're looking at pretty stable trends in our healthcare customer base.
Isaac Ro - Goldman Sachs Group Inc.
And maybe just secondly on the outlook for China. Is there any reason at saying that there would be tough comps in that region this year in the environmental testing business.
Just given the Shanghai World Expo last year and some of the strength you've seen in the last couple of years, any reason to think that might change?
Marc Casper
When we look at our detailed plan for China, we feel good about the outlook for 2011. So obviously, you get some big orders in different parts of the business, but there's a good pipeline of other big orders going forward.
So I feel like it will be okay in terms of our outlook there.
Operator
And the next question will come from the line of Quintin Lai, Robert W. Baird.
Quintin Lai - Robert W. Baird & Co. Incorporated
Any impact from the recent snowstorms, in terms of shipping phase to watch out for? And then second, some more broad-lined industrial companies have talked about, are they seeing any impact in inflation and cost of goods?
And are you seeing anything on your side? Historically, I remember it hasn't been a big factor, but I just figured I'd ask just to see what you're seeing given the chatter that we've heard throughout this earnings season?
Marc Casper
First, on inflation, we're not seeing a big impact in our ability to offset any inflationary pressures. Our track record is good here, so we feel comfortable with the inflationary environment from a cost management perspective.
From a snowstorm perspective, that's obviously not a positive. At this point, we're nothing seeing it being significant.
It's obviously been an unusual first four weeks of the year if you leave in the Northeast, as certainly kids are spending a lot of time at home. That hasn't helped, but it's very early in the quarter.
So I'm not worried about it at this point.
Operator
And the next question will come from the line of Derik De Bruin, UBS.
Derik De Bruin - UBS Investment Bank
So just to clarify. On the interest expense line, so if I understood your discussion with Ross, you're taking a hit on the interest expense by prefunding the Dionex deal and that's the Delta for basically being flat year-over-year.
Correct?
Peter Wilver
That's correct.
Derik De Bruin - UBS Investment Bank
That's the biggest difference in my model.
Marc Casper
It's just the timing. You can't wait until the last second to close.
You have to have the money in advance. So you're going to be out in front of it a little bit, Derik.
Derik De Bruin - UBS Investment Bank
And I guess, when you kind of look at some of the potential synergy opportunities for, particularly, with Dionex. I mean, could you talk a little bit about where they might have a benefit in terms of being more exposed on those markets than you?
I mean although Thermo has a big catalog, you're still not as well-penetrated in some places as they could be. So just talk about it, what do you get from them when they're exploiting their distribution network.
Marc Casper
So really if you think about where we benefit from their presence is they have a very strong presence in environmental labs, right? So effectively, every environmental lab is going to have outlying chromatograph.
And 30% of environmental labs are going to have a Thermo Scientific ICP. So there's 65% of those labs -- and by the way, every environmental lab has an ICP.
So there's just some natural -- you've got a new customers set that you're going to be able to call on and over time, show our exquisite technology to those customers. That's a very obvious example.
On the flip side, we're down. It's just going to benefit us, obviously, we have a huge penetration into all of the HPLC customers.
They have great technology in HPLC and we'll be able to leverage that presence to help expand our HPLC business.
Derik De Bruin - UBS Investment Bank
What's your outlook on what's going on in Washington right now?
Marc Casper
So, NIH seems to be relatively protected. We're not obviously expecting a robust funding environment, but not big changes in '11 versus '10, that's how we're seeing it.
Operator
And that question will come from the line of Peter Lawson, Mizuho Securities.
Peter Lawson - Mizuho Securities USA, Inc.
Peter, I may have missed this, your outlook on gross margins. What was it for 2011?
And was there any one-time effect in 4Q?
Peter Wilver
The outlook for gross margins was about 100 basis points of margin expansion and there's not really any one-time effects in Q4 in gross margin.
Peter Lawson - Mizuho Securities USA, Inc.
And then regarding the new markets. Are there any new products we should be thinking about for, say, food safety or China or India?
Marc Casper
In terms of product launches. I mean, we're very excited about the ASMS Conference in the middle of the year for mass spectrometry.
We expect it to be another great year for us. We're always launching new products all the time, so across the broad product portfolio, you're not going to go a month without something exciting.
But I think ASMS will be a really great year for us, in terms of product launches. So let me just make a quick closing comment.
First, thanks for joining us. 2010 was a great year, financially and operationally, and our performance positions us well to achieve our goals for 2011.
Our industry leadership, coupled with our unique combination of growth investments, operational excellence and a strong balance sheet gives us many opportunities for creating shareholder value. Thanks again for joining us today and I look forward to updating you on our progress in subsequent calls.
Operator
Ladies and gentlemen, thank you again for your participation. This does conclude today's conference.
You may now disconnect and have a great day.