Revvity Inc (RVTY) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to the PerkinElmer third quarter 2003 Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to the Vice President of Investor Relations and corporate communications, Mr. Daniel J. Sotherby. Please go ahead sir.

Good morning and welcome to the PerkinElmer third quarter 2003 Earnings Conference Call. If you've not received a copy of our earnings press release, you may get one from visiting our web site at www.perkinelmer.com, on the first call network or from our toll free investor hotline, 1-877-PKINYSE.

Before we begin, we need to reminds everyone of the following Safe Harbor statements. 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 or events may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our earnings press release filed today and in our most recently filed annual report on Form 10-K and in our most recently filed quarterly report on Form 10-Q, all of which are on file with the S.E.C.

In addition, any forward-looking statements represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future, even if our estimates change. So, you should to the rely on any of today's forward-looking statements as representing our views as of any date afternoon today. Duration this call we will be referring to non-GAAP financial measures, these non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of many of the non-GAAP financial measures we will us during the call to the most directly comparable GAAP measures is available in our earnings press release issued today -- yesterday evening, a copy of which is available in the investor corner section of our website, www.PerkinElmer.com under the heading Releases. To the extent we use non-GAAP financial measures during this call that are not reconciled to GAAP in that press release, we will provide reconciliations during the call.

I am now please to announce the Chairman and Chief Executive Officer of PerkinElmer, Greg Summe.

Thank you, Dan. Good morning, everyone.

Appreciate your taking the time to join us today to talk about PerkinElmer's third quarter results. With me also is Rob Freil, our Chief Financial Officer. I'll begin by reviewing some of the highlights of the third quarter. Rob will then talk in more detail about the financial results. We'll break for Q&A and then close the call.

Overall, we were very pleased by our results this quarter as we continue to meet or exceed our financial commitments through improving our cost structure, our operating processes and introducing new products. Our third quarter EPS was 11 cents on a GAAP basis and 15 cents excluding intangible amortization. This was at the high end of our range that we had given for the quarter of 8 to 11 cents on GAAP and exceeds the first call consensus by one cent.

Our third quarter net income from continuing operations increased 45% year-over-year, and our total net income for the third quarter doubled compared to third quarter of last year. Our third quarter revenue was 367, just up slightly over prior year. We had growth of 4% optical electronics and 1% in life and analytical sciences, and that was offset by a 10% decline in fluid sciences revenue, principally driven by the semiconductor marketplace. We saw pockets of improvement in the quarter. We also experienced an increased order book on larger instruments, which had been the segment that had been the weakest for us over the past several quarters. During the quarter we were please Washington, D.C. our gross margin expansion of 150 basis points year-over-year, and very significant operating margin expansion as our GAAP operating margins doubled during the quarter from 4.6% to 9.2, and our -- excluding intangible amortization, our operating margins went from 6.5 percent to 11.2%. On that basis all the SBUs delivered double-digit operate are margins. We achieved these results through aggressive cost productivity. Our gra is down $10 million quarter over quarter and down $40 million for the first nine months of this year. Due to the been fits from our life and analytical sciences integration along with our other global productivity initiatives. All the business units of SG&A reductions through Q3 year-over-year. Our operating cash flow was strong at 29 million for the quarter and 71 million for the first nine months of 2003. Our working capital management through our cash cycle come precious program, or C kind, as we call it, continues to be a top priority. You'll recall that 50% of all management bonuses are tied to cash flow performance. While Rob will provide additional details on the call, our strong cash flow enabled up to continue debt reductions during the third quarter. We retire our convertible debt of some $157 million this quarter as planned, and our gross debt was reduced by 177 million compared to Q2 of in year. Throughout Q3 we are pleased that we have already achieved the upper end of our range of 2003 targeted debt reduction of 50 million for the year. Our balance sheet is much stronger than a year ago. Our net debt to total capital at the end of Q3 was 125%, and we have over -- with over $140 million of cash on the balance sheet. Integration of life and analytical sciences is nearly complete and running ahead of plan. We expect to exceed the high ends of our 2003 cost reduction goal of $25 million, and we also expect to exceed our 2004 annualized savings target of $45 million by the end of 2004. The life and analytical sciences team is jelling well and now focusing more on growing business as opposed to just continuing all of the integration. As we look back to a year ago, and it was just literally a year ago this time when we announced the integration. We can't imagine the two units being separate. Our customer impact is strong -- and we believe this will drive refuse knew synergies going forth. We continue to accelerate our new product introductions. We launched seven biomolecular screening products this quarter. We also received our first order for our new -- and in electronics we continue to drive innovation with design and wins in the biomedical specialty lighting [inaudible] and sensor markets. Alsop -- for camera phones into the marketplace, so that product is now out and shipping in the Japanese marketplace, and we expect that to be more widely used around the world over the next few months. We believe this is the start of a more energetic flash technology replaying whata's used today, and that's LEDs. Strong partnerships result in a key business win in a new business area during the quarter. We were selected to supply rigid pneumatic deducting joints to the Boeing military programs, including the F-15 and the Apache helicopter. The multi-year agreement running through the 2006 complements our exist existing agreement for the supply of these joints to all current production commercial airplane plane programs for Boeing. Fluid sciences also continues to pursue growth through after market opportunities with very strong partnerships on the OEM side. Looking ahead to the fourth quarter, our priorities remain focused, we're continuing to accelerate new products, providing a superior customer experience as we feel both of those two are a big driver of growths in this difficult economy, and improving our operating leverage through both cost reduction and process improvements and, of course, continuing to drive strong cash flow. We believe we can deliver the high end of our original 2003 EPS guidance range of 37 to 42 cents on a GAAP basis or 52 to 58 cents excluding the 15 cents a share of intangible amortization. I'm going to now turn the call over to Rob who will discuss our financial results in greater detail, and then we'll move on to questions. Rob?

Thank you, Greg, and good morning. This morning I'll provide some details on the financial results for our third quarter of 2003, discuss guidance for '04 and then open open the call up to your questions.

Before I get into the specifics, I want to clarify that whenever I talk about a particular measure being up or down, I'm referring to an increase or decrease in that measure during the third quarter of 2003 compared to the third quarter of 2002 unless I indicate otherwise. If you would now turn to the income statement, sales for the third quarter of 2003 were $367 million, up from $366 million in Q3 of last year. As has been the case year to date, revenue growth in Optoelectronics was offset by declines in fluid sciences. With life and analytical science also basically flat overall, but with different growth dynamics amongst the underlying businesses. I will review this in more detail within my discussions of the operating units.

With the dollar weaker over the last 12 months, primarily against the Euro, the translation of our foreign currency denominate I have revenue had the impact of increasing sales during the quarter by approximately 4% and also increasing the reported dollar amount of our non-U.S. expenses. As a result, the net effect of our foreign exchange on earnings in the quarter was less than a penny a share. Geographically Asia, which represents about 18% of our revenue, was the region that experienced the greatest growth during the third quarter with revenue increasing about 14% on a reported basis. Europe, which was about 32% of our revenue, was up 6% in Q3, and revenue from the Americas, representing about half of the revenue for the quarter, was down 7%. Cost of sales for the third quarter was 214.5 million and gross margin was 152.5 million or 41.6% of sales. Gross margin as a percentage of sales increased 150 basis points and increased 110 basis points from Q2 of this year.

With each of our three segments experiencing gross margin expansion of over 100 basis points sequentially from Q2 this year to Q3. Improved factory performance and cost productivity drove some of this benefit. However, we are also being more selective in our price discounting and walking away from some low margin or unprofitable businesses. Consequently, we believe that in a number of our markets we're experiencing positive price effects compared to Q3 '02. And while this pricing strategy marginally reduced the top line, it had a favorable overall impact on profitability during the quarter.

Research and development expenses were $20.1 million in the third quarter of 2003, or approximately 5.5% of sales. Roughly flat compared to the third quarter of 2002. We continue to believe this is the right blended level of R&D for PerkinElmer with a higher percentage being spent in life and analytical sciences and Optoelectronics and a lower percentage in fluid sciences.

In addition, all our new product development is focused on customer applications as opposed to technology. In those markets would believe to be the most attractive. Greg gave you a sense of some of our most exciting new products in the key areas where we continue to focus the 20 million or so a quarter we spend in research and development. For Q3 '03 SG&A expenses were $99 million, down $11 million. And as a percentage of revenue, SG&A was 27% in Q3 of this year, representing a reduction of approximately 300 basis points.

Through the first nine months of 2003 SG&A expenses were down nearly $41 million, or about 12% compared to the first nine months of 2002. We believe we're on track to reduce SG&A by over $50 million in 2003 compared to 2002. As we have discussed in the past, the single largest contributor to the lower SG&A in 2003 has been the LAS integration that provided the opportunity to centralize and rationalize a number of administrative functions. We now believe that we will exceed the upper range of the 25 million of benefits we had previously estimated for this year.

The SG&A expenses in all three of the SBUs have each been reduced by over 250 basis points year-over-year. As across the company we have been very aggressive in driving efficiencies during the general, administrative and selling functions. At the same time we have been continuing to invest in those areas that will allow us to serve our customers better.

For example, in LAS and Opto we have redesigned our website to be more customer friendly and improve access to product and customer information. In LAS we conducted seminars for over a thousand of our customers in China and continue to increase our investment in customer care. And in fluid sciences we are selectively investing in marketing resources in areas outside our core aerospace and semiconductor markets to pursue potential growth. And you will see us continuing to invest in the technology and capabilities necessary to become the easiest supplier to do business with, thus improving our customers' experience with PerkinElmer. During the quarter we had a small net restructuring charge of 179,000 that is due to a recent change in accounting guidance around restructuring.

Under FASB 146, whenever an employee is severed in the period of time between notice of celebration and termination date it exceeds 60 days, you are now required to expense the severance payment over the future service period. Previously this amount would have charged to a restructuring reserve. Also during the quarter we had two small transactions involving the previous sale of a business and the write-down of an equity investment. The 369,000 gain you see in the operating income relates to a residual gain from the sale of a product line. This was more than offset by a $500,000 write-off of an equity investment which is included in the interest and other expense line of our income statement.

Continuing down the income statement, amortization of intangible assets was 7 million in the quarter, approximately flat with the third quarter of 2002. This is a non-cash charge related to intangible assets like trade names and core technology that are attributable mostly to the Packard Bioscience acquisition concluded in November of 2001. Operating income from continuing operations was 33.9 million for the third quarter of 2003, or 9.2% of revenue, up from 6.7 million or 4.6% of revenues. Excluding the amortization of intangibles, operating margin for the third quarter this year was 11.2%, up from the 6.5%.

Unlike previous quarters this year when operating margin improvement came from mostly lower SG&A expenses, the significant expansion in operating margin during the third quarter is from both gross margin expansion as well as SG&A reductions. Interest and other expenses for Q3 '03 was 13.3 million compared to 11.5 million for Q3 of last year. Included in the 13.3 million is net interest expense of 12 million, 400,000 of expense associated with the write-off of previously capitalized don't cost due to the early retirement of 20 million of our term debt and the 500,000 write-off for an equity investment mentioned previously.

Included in last year's interest and other was 2.3 million of one-time costs associated with with potential divestiture-related activities. You should also note that in Q3 of last year we had a 6.8 million gain from our purchase at a discount of a portion of the convertible debt. I will discuss our debt position in more detail during the discussion of cash flow and the balance sheet. The tax provision of 6.5 million for the third quarter of 2003 reflects a full year tax rate of 32%, roughly in line with our guidance.

Net income from continuing operations for Q3 '03 was 14.1 million, up about 45%. During the quarter we had 138,000 of net income associated with the recovery of some assets from a previously discontinued business, resulting in total net income of 14.3 million or .11 per share on a GAAP basis, which was up over 80%. In the box at the bottom of the income statement, we have presented our EPS excluding intangible amortizations. We use this measure to evaluate and forecast corporate performance and believe it is meaningful to investors. This is also the methodology used by our analysts and by First Call.

As you can see, EPS excluding intangible amortization was .15, a penny better than our first call consensus estimate for Q3.

I will now discuss the exciting results for the quarter in more detail. If you turn to the segment results, we have presented segment results for the third quarter of 2003 compared to the same period of 2002 and the first nine months of 2003 compared to the comparable 2002 period. In LAS revenue in the third quarter of 2003 was $235 million, up 1%. On a GAAP basis LAS operating profit for the third quarter of 2003 was $21.3 million, up from the 9.6 million. As a percentage of sales, operating margin was 9.1% for Q3 '03, up 500 basis points.

Both quarters included about 6.5 million of intangible amortization. Including that, Q3 operating profit was 27.8 million or 11.8% of revenue. The improved operating margin was due to significantly lower operating costs, largely as a result of reducing head count by almost 500 people since the end of Q3 last year. In addition, better pricing year-over-year as discussed earlier and slightly better product mix also contributed to the 500 basis point operating margin expansion during Q3.

Looking at the revenue of LAS, we mentioned in July that we were experiencing strong instrument bookings in the latter part of June, and we continue to experience that in selected segments during Q3. For the total LAS business, instrument sales, which represent about 45% of the sales for the quarter, were down 3%. If you recall in Q2 of this year instrument sales were down 13% compared to Q2 2002. This quarter, as in Q2, we saw growth in instrument sales with an environmental, chemical and the Pharma QA and QC.

However, this quarter we also experienced growth in plate readers for the first time this year, particularly our view lux ultra high two foot screening instrument is gaining market share in the drug discovery market. Offsetting this growth was continued sales contraction in liquid handling. While down year over year, sales of liquid handling instruments were down less than they were in Q2. Sales of our reagents and consumables, which make up 33% of LAS's sales, continued to grow during Q3 and were up 5%. However, this would have been higher if not for our genetic screening reagent sales being down compared to Q3 2002 due to certain large customer order patterns and the timing of certain shipments.

Service, which represents about 22% of our LAS revenue, grew. We were pleased with the continuing moment up of the service business that we have branded as one source as our customers increasingly see the potential for vendor consolidation, thereby reducing complexity and realizing cost savings. During the quarter One Source was awarded the Frost and Sulliver customer enhancement award. That was a great external confirmation that we are on the right track.

Looking at our growth by product lines, sales of our biopharma business, which represents 44% of our revenue in the quarter within LAS, and includes drug discovery and pharmaceutical QA and QC, but excludes the service revenue that associated with those products was down just 3% comparing favorably to Q2's year-over-year decline of 16%.

As I mentioned previously, we are experiencing a nice pickup in our high two foot screening business and should be able to maintain this momentum with the introduction of some new products like our new alpha envision that has the ability to do alpha screens. In addition, we're seeing a renewed interest by some of the large a pharma customers. The growth in screening was more than offset by reductions compared to Q3 last year in liquid handling and radial chemicals. In the environmental and chemical products lines, which represent about 25% of our LAS revenue in the quarter, Q3 '03 revenue was up 9%, reflecting the fourth successive quarter of such growth.

In Q2 environmental and chemical was up 6% compared to Q2 2002. Strong atomic absorption ICP and grass chromatography revenues during the quarter drove the comparative increase as both U.S. and international governments continue to provide budgetary funds to improve air, water and overall environmental quality around address bioterrorism concerns. In addition, a number of our new products, including our analyst 200, Elan 9,000 ICPMS and our diamond DSC are doing well in the market.

In genetic screening, which is 10% of LAS's revenue in the quarter, Q3 '03 revenue was down 11% due to the timing of certain customer orders in Q3 '03 versus the same period last year and the retiming of shipments. In Q2 of this year genetic screening grew 20% and we believe this business will return to double-digit growth in Q4 '03 compared to Q4 last year and continue to track the double-digit growth for the full year compared to last year. We believe the underlying market continues to look very attractive. In fact, during the fourth quarter Europe is requiring all screening reagents to bear a certificate of safety which should negatively impact [inaudible] which are our largest competitors. Also during Q3, we received our first tandem mass spec order for India, and we continue to aggressively pursue growth areas there, as well as China and other areas of the PAC Rim.

Turning to Optoelectronics, revenue was up $88 million, up 4%. The GAAP operating profit for the third quarter of 2003 was $10.9 million or 12.3% of revenues, up from operating profit of $6.2 million or 7.3% of revenues. Both period included intangible amortization of about 300,000. Excluding intangible amortization, operating profit during Q3 was 11.2 million or 12.7% of revenue. This 500 basis point expansion in operating margin quarter over quarter was driven by higher gross margins due to the increased volume, improved factory performance and the lower SG&A quarter over quarter. The revenue growth in Optoelectronics in Q3 this year was driven by the biomedical ongoing business, which represented about 30% of their business this quarter and which grew about 21%. We continue to see growth in both diagnostic and radio therapy digital x-ray business as well as our non-medical applications. In specialty lighting, which was roughly 40% of Opto's revenue 24 quarter, sales grew 13% with significant contributions from photo flash and photonics. Our sensors business have represented about 30% of the Q3 revenue, was down about 8% due to some difficult comparisons with last year and market softness in a few industrial applications. Within Optoelectronics, we continue to make progress in integrating our strong portfolio of technology into OEM customer-focused applications, resulting in a large number of design and wins. We continue to focus our efforts on opportunities in several attractive end markets, such as smart sensors, digital video protection and digital photography.

Turning to fluid sciences, revenue was 44 million, down 10%. However, despite lower revenue, fluid sciences' GAAP operating profit for the third quarter of 2003 increased to 5.6 million or 12.8% of revenues, an improvement of 160 basis points. Q3 '03 and Q3 '02 operating profit included intangible amortization of about 200,000. Excluding intangible amortization, operating profit during Q3 was 5.8 million or 13.3% of revenue for the period. Increased production in Asia as well as lower SG&A expenses were the reasons for the improved operating margins quarter over quarter.

Within fluid sciences, the aerospace segment, which was 56% of total revenue, was down 3%. The semiconductor business, which represents 24% of the revenue in the quarter, was down 27% with the remaining 20% of the revenue from power generation, fluid testing and other markets down 1%. Within fluid sciences we continue to move production to Asia to allow us to lower our costs and be more attractive to our customers as they look to outsource more and consolidate their supply base.

In addition, we are increasing our penetration of the after market business both within aerospace and semiconductors given the down turn in the OEM side. Furthermore, during the softness in our end markets, we have continued to invest in our engineering resources, programs and applications in close collaboration with our OEM customers, which has allowed us to gain share over the past two years. We believe these strategies should allow us to continue to drive increased profitability in fluid sciences, even in current difficult market conditions.

Consistent with the last several quarters, we have attached a cash flow statement and balance sheet. Turning to the cash flow page, you see that during the third quarter this year we generated 28.7 million of operating cash flow. Free cash flow, which we define operating cash flow less capital expenditures of 3 million, equaled 25.7 million in the quarter. Included in operating cash flow this quarter is a $10 million benefit due to an increased sale of receivables under our accounts receivable securitization program. This program is an opportunity we expect to continue to maximize as it provides our least expensive source of fundings.

Also during the quarter we made our first semi-annual interest payment on our senior subordinated notes of 13 million with the next payment in January of next year. Working capital turns in the quarter were flat with Q2 of in year, but .7 turns better than this time last year, as we continue to improve our operating processes to allow us to operate with less working capital. Since the beginning of this year we have generated 62 million through working capital improvement. Precash flow year to date through Q3 2003 was 78.4 million, representing 89.6 million in operating cash flow, less 11.2 million in capital expenditures. This is a significant increase from the first three quarters of last year where free cash flow was 23.7 million, representing 55.5 million in operating cash flow minus 31.8 million in capital expenditures.

In addition to higher net income, the major contributors to the improved cash flow compared to last year were reductions in restructuring payments of 13 million and a $20 million reduction in capital spending.

In the financing activities portion of the cash flow, you will note that during the quarter we used our cash in escrow from a refinancing last year to retire the remaining portion of the convertible bond. The operating cash flow generated in the quarter was used to pay off 20 million of the term loan and pay our quarterly dividend of roughly $9 million. We have now paid off 50 million of the term loan through the first nine months of the year. With the retirements of the convertible and reduction of the term loan, our total debt on the balance sheet is 569 million and our cash balance is 141 million. As you can see on the accompanying balance sheet, our stockholders' equity at the end of September was approximately 1.3 billion, leaving us at a gross debt to total capital equity ratio of 30%. Gross debt net of the 141 million as a percentage of total capital is slightly below 25%.

Now turning to the remainder of the year and our guidance for Q4, we continue to believe we are seeing some pockets of improving market conditions and are taking the appropriate actions to invest and staff those areas accordingly. However, at the same time we will continue to improve our operating processes, reduce our costs and insure we can deliver our financial commitments assuming modest revenue growth.

Therefore, our guidance for the fourth quarter this year will remain fairly consistent with prior quarters this year. We are forecasting revenue for the company to be up low single digits. Operating margins should again expands nicely compared to Q4 last year, up approximately 350 to 450 basis points when you exclude last year's restructuring to about 11 to 12% on a GAAP basis or 13 to 14% excluding intangible amortization. This would result in GAAP EPS in the .17 to .21 range. And since estimated EPS impact of intangible amortization will only be .03 in Q4, EPS excluding amortization would be in the .20 to .24 range.

As Greg mentioned, if we were to achieve this performance in Q4, this would put us at the upper end the range of our 2003 guidance, which was .37 to .43 on a GAAP EPS basis, or .52 to .58, excluding intangible amortization up .15 per share.

I would now like to open the call to your questions.

Today's question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star 1 if you have a question. We will pause for just a moment .

We'll take our first question today from Larry Neibor with Robert Baird.

Good morning and thank you.

Good morning, Larry.

When -- what type of economic environment would be required for you to show organic sales growth on a consistent basis, and when do you expect to achieve that?

Well, you know, I think rather than talk about an overall economic environment, it really probably is more depend end in some key end markets. Clearly on the biopharm area, probably our largest markets. And we are seeing some recovery there. I think continued improve there I think would move LAS to a more significant growth level. And then I think clearly we're being impacted by a fairly significant decline year-over-year on the semiconductor side. So, I think if you saw semiconductor and aerospace pick up and an improved biopharma environments, I think clearly we would be positive on an organic basis, because I think if you look at the other segments within the organization, particularly on the imaging side and the lighting side, and of course, our service business, that continues to grow very nicely.

Right. So, in terms of what you've accomplished so far, what would you estimate your peak margins to be?

Well, I think as we think about a little longer term, and I guess we look at this both internally and where can we continue to get better as well as the end markets we operate in and sort of what kind of operating margins can be sustained in those industries, I don't think there's any reason why we shouldn't over the next couple of years be able to get to sorts of a mid to high teen operating margin across the company. As I mentioned, I think on a GAAP basis in Q4 we'll probably be at the 11 to 12% range. And so, I think we can continue to build off that and I think over the next couple years get into the mid to high teens.

Thank you very much.

You're welcome.

We'll move on to Darryl Party with Merrill Lynch.

Good morning, guys.

Good morning.

Is it possible to get the local currency growth rates for the three segments?

Yes. Let me give you the -- the impact of foreign exchange by segment, as I mentioned it was about 4% overall for the company. In LAS it was about 4%. In Opto it was about 3, 3.5, and Fluid really doesn't get impacted by foreign exchange. You know, maybe a percent, a little less than that.

Okay. And then on fluid sciences, the most significant OP margin improvement sequentially, you know, its modest growths sequentially but significant uptick in operating profit, you touched on moving production to Asia and lower SG&A. But was there anything in particular that happened in the quarter that contributed to that?

No. I mean, I would say there were a number of actions taken in the first and second quarters, you know, given the lower revenue outlook that paid off in the third quarter. But they were really cost productivity actions around sizing of the factories and the organization.

Okay.

But I -- I'm not aware of any one-time --

I would say the only thing that helps us a little bit, as I mentioned, aerospace wasn't down as much as it had when been earlier in the year. So, there was a little bit of mix benefit in that. Our aerospace business is probably a little more profitable than our semiconductor business, a little help from the industry mix there.

Okay. Great. And on the silicon technology, you mentioned continued growth in medical imaging. Is that just for the relationship with GE, or are you making headway with other -- other OEMs?

No, it's both GE and non-GE business. Both are continuing to do very well. So, in GE it's the high end medical diagnostics, and the non-GE part it's the therapeutic side, the cancer treatments, and it's also the non-destructive testing application outside GE. But both of those segments continue to grow well.

Great. Thanks. I'll get back in the queue.

Okay.

We'll take our next question from John Harmon with Needham & company.

Good morning. My first question is the service growth rate ticked down a little on the quarter. Is that related to the change in overall revenue, or is it just lumpy by nature?

I think it's just lumpy by nature. We have set a goal here of 6% growth from the year, which is up from prior years. and I think we feel good about the momentum, we feel very good about the response from the customers for this initiative, where clearly service is becoming more important, not less. We feel good about our abilities with our global footprint to really affect this and have a differentiated offering. So, I think it just is sort of timing and lumpiness of the order and sales patterns. Thank you.

Speaking of lumpiness, the fluid sciences revenue ticked up sequentially for the first time in several quarters. Does this feel like the bottom, or is it also lumpy?

I think we feel, and I'll ask Rob to jump in on this, as well, but we feel that certainly the semi con market is at its bottom. And there's some potential promise of recovery. Although we had a premature recovery last year in the thirds and fourth quarter, but then it fell back off. But I think if you look at the waiver fabulizations, those have been climbing and ultimately stimulate spending on equipment. And I think in the aerospace market the same way. Post-9/11 it went down, it continued to go down. So, I think if you look at the OEM builds, they're beginning to be a little more optimistic about '04. And I think if you look at the flight hours, the revenue passenger models, those have been coming up. So, I think there is activities, low level activity in aerospace is increasing. It's not an overnight flip and it won't come up as rapidly as the semicons recovery does just give than the nature of it. But we think both of those markets have been kind of bouncing along the bottom.

Thank you. And finally, you said that your cost reduction is ahead of plan this year and next year, as well. Does being ahead this year reduce the incremental gain you can realize next year, or does it just shift what you can achieve next year? In other words, --

No, I think it's additive. I don't think it's a shift from here. I think it's just additive because it builds on a sort of consecutive basis.

All right. Okay. Thank you. I'll get back in the queue.

Once again, press star 1 if you have a question. We'll move on to Paul Knight with Thomas Weisel Partners.

Hi, guys.

Hi, Paul.

On the screening market, are customers demanding more assays in addition to the hardware products, meaning is your reagent business coming much more into play when you put out these -- when you go into screening bids and the market? Is

Well, its's -- I mean, you know, the reagent side of it is over 90% of the revenue. And, you know, the growth -- once you get these things established, then you continue to expand the number of assays being used within that. And the tandem spec technology opens up a much broader range -- it's much higher sensitivity, so it opens up a much broader range of assays. And that's on the genetic screening side. On the HTS side, and I'm not sure which one of those two you're coming at, but --

HTS, Greg.

HTS. Okay. I mean, I don't know. I think we have seen some recovery in the instrument side, on the higher owned instruments, and I think as they come in, of course, they -- you know, some of that's replacement, some of it's capability expansion. And I think on the expansion side clearly it continues to generate more demand, more demand for the screening assays.

Yeah, we all hope that the screening market produces some hits, we hope. But what do you hear about? Are they getting more hits on -- are the customers getting more hits on their screening, Greg? What is's your sense of that, or is it too early yet?

You know, I would just say it from this standpoint: I don't see anybody reducing the amount of screening that they're doing. I think everybody is -- you know, still by far the bulk of the expenditures go into the preclinical and clinical stages, as you know. So, the only way to reduce that is just to have better product coming into that stage. And therefore, I think as we see companies around, you know, they are continuing to invest in screening, they're continuing to make the screening more intelligent, more sophisticated. And so, I think that is a direction. There is no tendency toward reducing the amount of screening done, but I would say the increasing amount of screening and they're trying to get more intelligence out of the screening.

What is's your head count in Asia relative to your total employee base, and what percent of manufacturing is in Asia, as whole?

Well, head count, I'll just say roughly is about 35 to 40% of our head count, you know, because we have a lot of large manufacturing operations over there, particular will in the optical electronics business. As a percent of manufacturing, a sort of value in manufacturing, I don't have that on the top of my head. But we'll have to get back to you on that.

Thank you.

You're welcome.

We'll take a follow-up question from Larry Neibor with Robert W. Baird.

Thank you. With the Americas being 50% of your business and the part of your business that's down right now, I think, Rob, you said it was down 7% on the quarter, could you give us some idea of what your order flow or backlog is for your Americas business and what we can expect over the next couple quarters?

I would just say for the quarter, and of course, it varies a little bit by business. But in the case of LAS, our orders and sales in Q3 were basically about equal. Now, we went into Q3 with a fair amount of backlog, so we go into Q4, we sort of carry that over into Q4. But I would say our orders and our sales were basically flat in LAS. And in fluid, I would say they're picking up a little bit, and also in Opto.

In the Americas?

Yes.

Thank you.

You're welcome.

And there are no more questions at this time. We'll turn the conference over to Mr. Greg Summe for any additional closing remarks.

Okay. Look, as I mentioned in my earlier comments, we feel very good about our progress in the third quarter and are optimistic about our prospects through the remainder of the year. Our actions in 2003 we believe position the company well, and we'll translate an enhanced customer and shareholder value in 2004 and beyond. So, I want to thank you for your time today and your interest in PerkinElmer. This call is adjourned. Have a great day.

That concludes today's conference call. We thank you for your participation, and have a nice day.