Revvity Inc (RVTY) 2004 Q1 法說會逐字稿

Good day, everyone and welcome to this PerkinElmer first quarter 2004 earnings results 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. Sutherby. Please go ahead, sir.

Good morning and welcome to the PerkinElmer first quarter 2004 earnings conference call. If you have not received a copy of our earnings press release, you may obtain one by visiting our Web site at www.perkinelmer.com. On the First Call Network, or from our toll-free investor hot line, 1-877-PKINYSE.

Before we begin, we need to remind 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 other reports on file with the SEC. 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 not rely on any of today's forward-looking statements as representing our views as of any date after today.

To the extent we refer to non-GAAP financial measures during this call, we will provide reconciliations during the call of the non-GAAP financial measure, to the most directly comparable GAAP measure, or we will provide a reconciliation in the Investor Corner section of our website. I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Greg Summe.

Thank you, Dan. Good morning, everyone. I appreciate you taking the time to join us today to talk about PerkinElmer's first quarter 2004 results. With me also is Rob Friel, our Chief Financial Officer. I will begin by reviewing the highlights of the quarter.

Rob will then talk in more detail on the financial results and guidance for the second quarter. We will then break for Q&A. And close the call after that. You know overall, we were very pleased by our results this quarter as we continue to achieve our financial goals, we made good progress on our new products, and significant traction on our customer excellence initiative.

First some financial highlights, our first quarter EPS was 10 cents per share on a GAAP basis. 14 cents excluding intangibles. Amortization, this was at the high point of our range, of 6-10 GAAP or 10-14 without intangibles. And exceeded by a penny First Call estimates for the quarter.

Our revenue in the first quarter was 393 million, up 10%, year over year. As all three business units delivered revenue growth about. About half the revenue growth this quarter was due to the FX impact and the weakening dollar.

We saw strength in most of our inmarkets in the general tone of economic news has been fairly positive. In Life and Analytical Sciences we saw solid growth of 7% with revenue increases across all of the businesses including BioPharma and also saw growth across all product lines of instruments, reagents and service. Optoelectronics delivered 4% revenue growth with some weakness in our sensors end market that was offset by growth in digital imaging and specialty lighting.

We remain excited about the long term growth prospects of Opto as their technologies continue to shift in increasing number of end markets with excellent growth opportunities and I will touch on a few of those later. But they include medical imaging and consumer electronics. For our specialty lighting business like camera phones and digital projectors. Food Sciences had outstanding growth of 34% with strong growth in semiconductor and aerospace both on the OE and after-market side.

Overall we're seeing a good improvement in the industrial sectors which should provide strength as we continue into 2004. During the quarter we were pleased with our operating margin expansion of 160 basis points with expansion across all of the businesses. We achieved this operating leverage through higher revenue, continued focus on cross productivity, Six Sigma quality, and our supply chain management.

We also made significant progress on our customer excellence initiative which we launched at the beginning of 2004. Our focus here is to improve the customer's transaction experience and provide more value to that customers through more extensive application support. This has involved increasing training and resources and sales and service, upgrading our I.T.

systems, particularly in customer care, and adding more application depth in our product market and R&D teams. Our goal is excellence in all facets of our customer interactions, from quote, to order to shipment to service. And in providing more application focus solutions versus instruments and reagents as components. Our operating cash flow was also very strong for the quarter. And that allowed us to continue to strengthen our balance sheet.

We reduced our long term debt by $45 million. This brings our net debt to total capital to 20%. Our net debt ended at $339 million, down 137 million, from the first quarter of 2003.

And our cash position remains strong at 165 million dollars. On the growth front, we announced an expanded contract with AstraZeneca in the high throughput screening area, where we're testing AstraZeneca's compounds against a defined selection of G protein coupled receptors, a major area of disease targets under way. We also introduced an array of new products including: our spectrum spotlight, which is an imaging system that provides pharmaceutical development organizations with information about micro scale chemical variations in a very short period of time.

Our HyperDSCT which is our breakthrough thermoanalysis methods for characterization of materials. Some significant upgrades to our Class 500 gas chromagraphy system using our turbo matrix sampling and turbo mass analytical software. And our ELAN, upgrades to our ELAN ICP mass spec, the high speed ultra low trace chemical analysis system which has continued to do very well, particularly in the bioterrorism world. We announced last quarter you will recall a significant contract with the CDC.

In genetic screening we launched a number of new products in the celiac area. And interesting shipped some of our most sophisticated newborn screening technology which is based on tandem mass spec, to Mexico, India and Korea, good and relatively untapped market. In Optoelectronics, we introduced the new combo flat panel, digital x-ray detector which is a combination of cardiac and angiography applications.

We also introduced a new 1.5 millimeter flash unit which will have a terrific application in the camera phones. For the remainder of 2004, we remain focused on our growth initiatives, particularly in genetic screening, tools for drug discovery, our one source service, medical imaging, and consumer electronics. Along with building our after-market position in aerospace and semi con. I will turn the call over to Rob who will talk about our financial results in greater detail.

Thank you, Greg and good morning. As Greg has just gave you some of the key highlights for the quarter I will now provide some details on our revenue, costs and cash flow for the first quarter. Then as we have done historically I will discuss guidance for next quarter and then open up the call to your questions. Before I get into specifics I want to clarify that whenever I talk about a particular measure being up our down, I'm referring to increase or decrease in that measure during the first quarter of 2004, compared to the first quarter of 2003 unless I indicate otherwise.

Turning first to revenue our sales for the first quarter of 2004 were 393 million. Up about 10% from 358 million in Q1 of last year. Roughly 50% of our revenue is outside the U.S. And the effect of a weaker dollar relative to Q1 2003 was to increase first quarter sales approximately 5%.

By segment, reported revenue growth was 7% in Life and Analytical Sciences, 4% in OptoElectronics and 34% in Fluid Sciences. The foreign exchange impact on revenue by segment was 6% in LAS, 3% in Optoelectronics, and 1% In Fluid Sciences. Geographically, revenue in the Americas represented about 52% of the Q1 '04 total. And was up 13% on a reported basis.

Revenue in Europe, which represented about 33% of our revenue for the quarter, was up about 10%, and Asia revenue representing about 15% of our revenue for the quarter, was roughly flat. Turning to costs, costs of sales remained roughly flat at 61% of sales, increasing to 242 million, compared to 219 million last year, on a 10% increase in revenue.

The benefits of higher revenue and productivity improvements over the last 12 months were offset by price pressure mostly in OptoElectronics. And the fact that lower margin Fluid Sciences products made up a larger portion of the revenue in the quarter versus last year. Research and development expenses were 21 million in the quarter, or approximately 5% of sales, roughly at the same dollar amount level as Q1 '03.

You will recall that as part of the Life and Analytical Sciences integration, we created several global centers of excellence to improve the efficiency of our research facilities, and enhance the intellectual property capabilities across the LAS organization. For Q1 '04, SG&A expenses were 96 million, down about 150 basis points as a percentage of revenue, to about 24%.

The impact of foreign currency increased reported SG&A expenses by about $5 million. Head count in the general and administrative functions is down significantly since the beginning of 2003. But we continue to invest in our customer interfacing functions. And as Greg just mentioned, have launched our customer excellence initiative that is focused on improving the customers' overall experience with PerkinElmer and making us the easiest supplier to do business with.

During the quarter, we had several one-time items that we have separately identified on the income statement. This includes the sale of real estate in which we recorded a gain of 400,000. In addition, we recorded a 1.2 million impairment charge relating to a small product line within OptoElectronics that we have decided to close.

We expect the closure to occur later in the year. Amortization of intangible assets was 7.1 million in the quarter, approximately flat with the first quarter of 2003. This is a noncash charge related to the intangible assets like trade names and core technology, from prior period acquisitions.

Operating income was 27.5 million for the first quarter of 2004, or 7% of revenue. Up about 40% from 19.3 million in Q1 '03 or 5.4% of revenues. Excluding amortization of intangibles, operating margin for Q1 '04 was 8.8%, up 140 basis points.

Continuing down the income statement to the nonoperating expenses, in Q1 '04, we repaid 40 million of our term loan, 45 million of our term loan. When we repay debt, we have to expense a proportionate share of the original issuance cost. For this quarter, this amounted to a 1.2 million charge and is characterized on the income statement as extinguishment of debt.

Interest income in the quarter was down 500,000 from last year because in Q1 of '03, we were receiving interest on cash held in escrow, to retire the convertible bond which was redeemed last year. Interest expense in Q1 of this year was 9.8 million, down significantly from Q1 '03, due to both the significant debt pay-down over the last 12 months, as well as the favorable renegotiation of the terms of some of our debt.

Other income and expense includes a number of miscellaneous items with the largest being favorable currency movements in Q1 '04, relative to our balance sheet position. The tax provision of 5.2 million for the first quarter of 2004 reflects a tax rate of 29%, which is lower than last year's rate of 32.5. The lower tax rate is driven by the improved profitability of the company, specifically in the U.S.

We would expect our tax rate for the remainder of the year to be no higher than 29%. Net income from continuing operations for Q1 '04 was 128.8 million, 12.8 million, or 12 cents per share, up considerably from Q1 '03. Where net income from continuing operations was 3.3 million or 3 cents per share.

Total shares outstanding are up from Q1 '03 to almost 129 million, primarily due to the impact of our higher stock price, increasing the number of stock options that must be factored into our fully diluted shares outstanding. In Q1 '04, we recorded a gain net of tax of 500,000 but less than half a cent a share, primarily relating to the recovery of amounts pertaining to businesses previously disposed and treated as discontinued operations.

Total net income for Q1 '04 including continuing and discontinued ops was 13.3 million, also 10 cents a share. In the box at the bottom of the income statement, we have presented our EPS, excluding intangible amortizations. As you can see, Q1 '04 EPS from continuing operations, excluding intangible amortization, was 14 cents. Exceeding by a penny the First Call consensus estimate for the quarter, and at the high end of our previous guidance.

If you would now turn to the segment results, we presented results for the first quarter of 2004 compared to the comparable 2003 period. All the revenue growth that I will discuss is on a reported basis, and includes the impact of foreign exchange. In LAS, revenue in the first quarter was 249 million, up 7%.

On a GAAP basis, LAS operating profit for the first quarter, 2004, was $16 million, or 6.4% of sales, up 140 basis points, compared to Q1 '03, when operating profit was 11.6 million, or 5% of sales. Amortization expense was 6.6 million, and 6.5 million for Q1 '04, and Q1 '03 respectively. Excluding intangibles amortization, Q1 '04 operating profit was 22.6 million, or 9.1% as a percentage of revenue, up 130 basis points.

The improved operating margin was due mostly to lower cost structure, compared to last year, as a result of the benefits of the LAS integration. Instrument sales which represented about 48% of the sales for the quarter, were up about 8%. Most of our instrument platforms were up over Q1 of last year, with particular strength in high throughput screening and liquid handling.

Sales of reagents and consumables which make up about 31% of LAS's sales, grew 5% during the quarter. And service, which represents about 21% of LAS revenue in Q1 '04, grew 10% in Q1 with all regional territories contributing to the growth. Looking at our growth by product line, BioPharma sales which represents 44% of LAS's revenue in the quarter, and includes drug discovery and pharmaceutical QA and QC was up 5%.

As I mentioned, high throughput screening and liquid handling instruments did well in the quarter as well as our product offerings in Proteomics. In addition we are seeing good growth in the larger pharma and biotech customers where we have instituted our global account management structure. In the environmental and chemical product line which represented about 25% of our LAS revenue in the quarter, Q1 '04 revenue was up 7%.

Continued investment improvements for clean air and water both in the U.S. and overseas, is helping fuel our top line growth. In addition, several recently introduced products are driving market share gains. In genetic screening which is 10% of LAS's revenue in the quarter, revenue was up 11%, with strong growth continuing in the neonatal markets.

Greg just mentioned several of our new products here as well as our continued penetration in the developing world. Both of which should help us sustain good growth in this business. In Optoelectronics, revenue for the quarter was 87 million, up 4%. Optoelectronics GAAP operating profit for the first quarter of 2004 was 9.4 million, or 10.9% of revenues.

Compared to 8.7 million, or 10.4% in Q1 '03. Pricing concessions were more than offset by cost productivity actions. Within Optoelectronics, imaging grew 11%, on the strength of our medical and nonmedical digital imaging business. Specialty lighting was up slightly in the quarter, as strength in the industrial applications more than offset weakness in photo flash.

And in the sensor business, we saw flat revenue as several end markets experienced softness, offsetting growth in military and aerospace applications. Looking at Fluid Sciences, revenue was 57 million, up 34%. This revenue growth drove GAAP operating profit of 8.3 million, or 14.5% of revenue.

A significant improvement from Q1 '03 operating margins of 2.4 million or 5.5% of revenue. Operating profit excluding intangibles was 8.5 million for the quarter, or 14.8% of revenue. During Q1 '04, within Fluid Sciences, the aerospace segment which was about 56% of total revenue, was up roughly 18%, with solid contributions from both our OEM business, and repair and overhaul.

The semiconductor business which represented about 28% of the revenue in the quarter, increased 87% from Q1 '03, as that market is coming off the longest down cycle in its history. Turning now to the balance sheet and cash flow, during the first quarter 2004 we generated 27 million of operating cash flow.

Free cash flow, which we define as operating cash flow less capital expenditures of 3 million, equaled 23 million in Q1 '04. This compares to Q1 '03 operating cash flow of 24 million, capital expenditures of 3 million, and free cash flow of 21. The largest contributors to the change in cash flow from last year are higher net income, and the timing of accruals, and tax payments, offset by higher cash interest payments, and increased working capital due to the higher revenue.

Working capital turns increased to 4.8, up 20% from 4.0 turns in Q1 of last year. This was achieved through better performance in receivables and inventories, with payables turns flat with Q1 of '03. We continue to delever the balance sheet in Q1, by repaying 45 million of our term loans, taking the balance down to 200 million at the end of Q1.

The lowered debt level coupled with increased profitability will allow us to step down the pricing of the term loan by 25 basis points commencing this quarter. Our total debt at the end of Q1 was 504 million, and cash and equivalents was 165 a million, so total debt less cash and equivalents was 339 million. We are very pleased that our debt to trailing 12-month EBITDA ratio is now below 2.3.

Lower than it was at the end of 2001. And our ratio of debt net of cash to EBITDA is now below 1.5. Now, let me briefly discuss our guidance for Q2 and then open the call for your questions. Based on the trends in our end markets currently, we expect revenue growth to be similar to Q1, in the range of 4-6% organic.

We expect Q2 '04 operating margins to expand 150 to 200 basis points over Q2 '03, and to encourage sequentially 2 to 250 basis points over Q1 of this year. This will put GAAP operating margins at roughly 9 to 9.5%, and after adjusting for intangible amortization, OP margins in the 11 to 11.5% range.

As a result of the lower level of debt driven by the debt reduction in Q1 '04, we believe interest and other expense will be around 10 to 11 million, for Q2, and the tax rate we are forecasting to remain at 29%. This would result in GAAP EPS in the 14-17 cent range, about double the Q2 '03 EPS from continuing operations. The estimated EPS impact of intangible amortization should be 4 cents in Q2 '04. With EPS excluding amortization forecasted to be in the 18-21 cents range. I will now open the call to your questions.

Thank you. 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 one on your touch-tone telephone. If are you using a speaker phone, we ask that you please make sure your mute function is turned off to allow your signal to reach our equipment. Once again that is star one for questions. We will pause just a moment to assemble our roster. And we will take our question from Larry Neibor, Robert Baird.

Good morning.

Good morning, Larry.

Thank you, good morning. What kind of pricing are you seeing in your markets going forward? There has been a lot of talk of the pricing environment is improving for manufacturers.

Well, I don't -- we haven't factored in any significant price increases. The one price point that Rob had referred to was in Optoelectronics, and that was relative to our GE contract, on a [more] factility which starts off as a price [deckerment] at the beginning and we make it up through yield improvements and volume as we go through the year. So you sort of start off a little bit in the hole and that puts some pressure on Opto's operating margins which will recover through the year, improve through the year.

Other than that, I would say we have sort of taken the assumption that pricing will remain relatively stable through the year. If that changes, then we will be happy to you know, take advantage of that. But that is kind of our planning assumption anyway, Larry.

And the second question is, obviously your gross margin was down a little bit from a year ago. Do you see the ability to show some leverage on your gross margin going through the year?

Yeah, think we do, Larry. I mean, you know, with the volume increases that we've seen, we obviously saw good gross margin in fluid, we saw some nice productivity improvements in Opto, but as Greg mentioned, we had some offset due to the pricing concessions made in the GE contract. We think that over time, Opto will continue to drive their gross margin improvement.

And I think LAS in Q1 had a little bit of an unfortunate mix from a gross margin perspective, but actually improves their operating margins in the fact that their service was a larger portion of their revenue. So if you think about service being a little bit lower on a gross margin perspective, but it gives you very nice operating margin. So I think over time, as the revenue expands, we continue to make improvements in our factory, we would expect to see higher gross margins, as we generally do through the year. So we expect to see sequential improvements in our gross margin.

And year over year improvements?

Yes.

Final question, is in the LAS segment, your organic growth was 1% in the quarter. Do you think that you will be able to see a faster rate of growth in that segment over the year?

Yeah, I think we would see -- expect to see that increasing as the year goes on. I men our expectation is that the organic growth of LAS gets up into this sort of four to five percent range I think by the latter part of the year.

And your forecast is based on what economic assumption?

I would say a generally improving economy, but not significantly improving.

Thank you.

You're welcome.

We will take our next question from John Harmon, Needham & Company.

Good morning, John.

Hi, good morning. A couple of questions. I guess looking at Fluid Sciences, since it has been declining for at least a year, what is your level of confidence that it has really turned the corner? And what's the seasonal behavior of the business? Now that it is back on a growth trajectory?

Yeah, I will start and ask Rob to jump in on this, but you know, Fluid Sciences has been -- had the unfortunate circumstance of being in a sort of cyclical low in both of is end markets which is semicon which has been in a three-year plus recession. And in aerospace which has been the -- you know, the aftermath of the 9/11 incident, has gone into a cyclical low. Both of those are recovering. So throughout the rest of the year, we expect that to continue.

I mean aerospace is coming back, as flying hours improve. In semicon, it is kind of a capital equipment overhang, I mean the consumption of semiconductors has continued to increase every year, but as you know in that business, capital equipment comes in big chunks. So it has been depressed for kind of a longer period than ever historically seen in that industry. And so we expect that to continue to recover throughout the year.

Okay. Thank you. I was wondering if you could talk a little bit about the seasonality in the Optoelectronics business. It is down in the first quarter. Is that driven by instrument like spending patterns?

You mean it was down sequentially.

Down sequentially, I apologize.

Year over year. Yeah. And I think you see in both in Optoelectronics, and LAS to a large extent, very strong Q4s and then Q1 is usually down. So I think that is generally what we see from a cyclical perspective. And we would expect Q2 to be up sequentially over Q1, and up year over year as I mentioned previously.

Okay. Thank you. And secondly, in Opto, you talked about some consumer exposure. Is is a meaningful amount yet? And where -- you know what kind of percentage of revenue could it get to?

Well, you know, Opto has historically had a consumer exposure through its photography business. The largest producer of photographic flash in the world. So whether its single use cameras or digital still cameras or conventional cameras, the sort of outside growing edge of consumer electronics exposure there for us is one in the camera phone. There was a recent article in "Business Week", you know, just describing the growth of that, which they expect camera phones to hit, you know, kind of 150 million range this year, and increasingly flash will be part of that.

Flash comes in as the resolution of the camera phones goes up. So as you move into the one mega pixel up to kind of the 3 mega pixel area, you need more energy in order to have a good picture. And so we see flash increasingly becoming a part of that market and we are doing a lot of developments I'd say with some 10 manufacturers out there today, you know, to get those products up and running.

The second part of consumer electronics exposure is in the digital projector. And digital projectors have historically been a mercury lamp world. And increasingly see see that moving to xenon, more of a specialty light, where it's whiter, brighter, better color rendition. And that is really our specialty which is in the short arc xenon lamps. And so we see that coming into both digital projectors and increasingly these digital rear projection televisions.

So I would say today not a huge percentage of revenue in those applications but ones we see with significant growth over the next couple of years, with sort of camera phones, leading that growth edge relative to the digital projectors.

Okay. But it couldn't be say 10% of Opto revenues, exiting the year, nothing that big at this point?

I don't have an estimate off the top of my head, but I would doubt it.

Okay. Thank you very much.

Thanks.

We will go next to Paul Knight, Thomas Weisel Partners.

Good morning, Paul.

Hi, Greg. What's going on in Asia, you went direct in China, I guess, what, third quarter, and how are those markets working?

You know, we went direct in China, we have been building our capabilities there. I think the China growth has been terrific, it has been solid, and you know, kind of mid to high teens range for us, we feel very good about that. We're just going to announce here shortly that we're going direct in India. And so I think that is an exciting move for us as well. We've had terrific growth out of that region.

We also have good growth out of Southeast Asia. And Japan has been a good market for us. So I think across the board, you know, kind of led by the most rapid growth being in China, and then followed up by increasingly India. Is turning out to be a good, you know, a good driver for us. Paul, China was up about 17% over Q1 '03. So we've seen nice growth there.

What's your exposure to Japan?

About 8% of our revenue.

And what's China now?

Still relatively small. I would say 50 million a year, in that type of range.

And then the other question I have is the consolidated -- the consolidation of the Life and Analytical Groups, the instrumentation PerkinElmer with the rest, the LAS business, where are you now with that, Greg?

I think that integration is complete. We have a number of projects under way within Life and Analytical that make the structure more efficient. So for example, within Europe, we are going through a, you know, a successive stage of integration, to collapse legal entities down, to move the more common customer care systems and some things. But I think those are really outside of what I will call the basic integration. The integration is done, there are a number of improvement, productivity, quality, sort of customer excellence projects under way but I think the integration is complete.

The -- okay. The other is, was the LAS business improving as the quarter ended? Or was it kind of start well and end well?

Well, the LAS business always has a strong -- you know, it is not linear in revenue. You know, and it finishes strong at the end of the quarter. Just given the way the dynamics of that business work, particularly in the instrumentation side. So it is kind of hard to say that, but I would say, you know, just naturally, in the first quarter, Paul, January always starts off weak and the quarter finishes strong. So it is a little hard for me to ferret out of that. But we're really pleased with where the business ended up in the quarter.

Thank you very much.

You're welcome.

Once again ladies and gentleme that is star one for questions or if you have a follow up question. We will go next to [Darrel Party], Merrill Lynch.

Good morning, [Darrel].

Good morning, guys. Hello?

Good morning, [Darrel]. Yeah.

You know, with your net debt to cap, down at 20% now, you know, you have -- you are under-levered what are your plans for use of cash going forward?

Well, I think, you know, for us we are going to continue to emphasize good cash flow generation because we just feel that is a great metric, and rhythm to drive the business on. Now, you know, I think we will be more, you know, we will be looking to use more of it on the business development acquisition side, going forward. And continueing to strengthen the balance sheet. So whether we use it in a short term or not, we will see, it will depend on the opportunities out there.

But I think increasingly, you know, we certainly feel like we have that option, that flexibility out there. But we're going to continue to sort of drive good cash flow. And we think that is an important hallmark to a well-run business. And we -- you know, I guess the short answer to your question is, we will end up doing more on the business development side going forward.

Okay. So we can see a mix of paying down debt and potentially some acquisitions going forward?

I think so. Yeah.

Okay. On the Asia front, you said China was up 18%, but I thought I understood that in the commentary that Asia was flat. So what markets were down?

The fundamental market that was driving the softness in Asia was the photo flash market as I talked about in the Optoelectronics commentary and that is largely in Japan. China is up. India is up. A lot of the developing areas are doing well. But Japan was actually down largely driven by the photo flash business. And the photo flash is a little bit seasonal, a little bit cyclical. I mean so it tends to come and go a little bit.

Okay. And in aerospace, you guys are the only ones I've heard that are saying that OEMs are seeing good order growth on the OEM side. Were there some bigger customer wins or contracts that you guys got during the quarter?

Yeah, look I think aerospace and semicon is a mix of market and a mix of share gains for us. Over the past three years, even though the markets have been done, we've continued to win good platforms, I think we're on good platforms going forward, both commercial and military. And we've continued to forward integrate with a number of our big engine customers, particularly where we've taken on more of their business. And helped them consolidate their supply base. So I think it has been a mix of share gains, and market recovery for us.

Okay. Great. And last question, in BioPharma, it sounded like drug discovery was growing and QA QC was flat. Can you quantify that or give us more color?

Drug discovery was actually up and QA, QC was dually down a little bit.

It was? On an organic basis.

It was. And part of that was we had a very strong quarter Q1 '03 in QA QC so some of that is difficult comparisons year over year quite frankly. Because we don't see QA, QC falling off as we go through the year.

Great thank you very much.

And we will take a follow-up question from Larry Neibor, Robert Baird.

Thanks. Greg, you mentioned that you are seeing all of your end markets strengthening. But then you also said that the year started off weak and the quarter finished strong. Is that the normal seasonal pattern for the quarter? Or what metrics are you using to --

Yeah, I would say it is a normal seasonal pattern particularly for the first quarter. The fourth quarter's our strongest and so in some of our businesses you have -- you know, people are trying to finish out their budgets. There is always kind of a rush, capital equipment at the end which is why the fourth quarters are always the strongest so then you get a little bit of a -- you get a little bit of a pause or a vacuum, you know, in the early phase of January.

Holidays, you know, sort of people finished off the end of the programs, and it kind of ramps up from that. So it is just a little bit harder to tell, you know, on the growth. I mean I think the best way to say it is just to look year over year, the growth is up so we see the same pattern within the space of a quarter but the quarter was clearly stronger than it was a year ago and we attribute that to sort of gradual strengthening of the economy, with some cyclical recovery, you know, in semicon and aerospace on top of that providing kind of a tail wind.

And what was the growth of industrial instruments versus drug discovery instruments?

I don't know. I'm going to look to Rob here just because I don't know that we break that out. That we break it out that way. Yeah, we either break it out instrument or reagents or we break it by the individual, you know, BioPharma environmental and chemical. But I don't know if I can give you a number there.

Environmental chemical is probably the best proxy.

Yeah, so environmental and chemical is up 7%. And BioPharma was up 5 in total. Now they each have a little bit of a mix between [inaudible] and reagents. My sense is probably the industrial side was maybe a little bit better but I don't know. I mean we did see growth as I mentioned in our high throughput screening instruments. And for the first time in a number of quarters we saw a nice growth in liquid handling instruments. Which is great to see because that's been down for us for a number of quarters so we're fairly optimistic with that business.

I would say Larry in general as we look across the whole corporation, you know, industrial has clearly been improving, and I think think BioPharma has been in a slight lag through the industrial recovery.

Okay. And finally, any comment on your annual guidance that you gave at the end of the fourth quarter conference call?

Just that we feel -- still feel very comfortable with that guidance. I think, you know, obviously by beating the first quarter by a little bit, we're running a little ahead of that. I would say we probably feel more comfortable at the higher end of the range. But I think it is a little early in the quarter to take it up and I guess my only comment was be assured we will not be constrained by our guidance.

Okay. Thanks.

You're welcome.

And we will take a follow-up from [Darrel Party], Merrill Lynch.

Yeah, just thinking about R&D and capex, you guys had indicated on your reported fourth quarter results that we should expect to see investments in both of those go up. You know, they seem to go down a bit year over year. Just wondering what we should expect for the rest of the year?

Well I think really what you saw is that the R&D spending and the capex spending in dollar terms were the same as they were -- as they were the prior years. We do expect both to continue to grow as we go through the year. Maybe Rob will give you some updated perspective on capex, but I think in the R&D point, you know, we continue to look at opportunities, we are continuing to kind of look at increasing the investment, as we go through the year. So I expect those two to hold, whether they are the same as what we projected before, I don't know, in terms of the absolute amounts. But both of those will, we expect, increase going through the year.

Okay. On an absolute dollar basis for R&D?

Yes. And cap ex.

Yup. Okay. Sorry. I forgot my other question. Might as well jump back in the queue.

We will take a follow-up from Knight for Thomas Weisel Partners.

It is actually Ross for Paul.

Okay.

Just want wanted to follow-up on what you said before about going direct to India.

Yeah.

What kind of work have you done in trying to estimate the market size, potential market size for instrumentation there? And is there a specific product line that will be sold? Or is there kind of going to be across the board in terms of what the direct sales force is going to concentrate on?

India is going to be across the board. You know, India has -- and when I talk about direct, I'm talking about the Life and Analytical Sciences business. In India we see a couple of good growth markets. One there's a whole in drug discovery in pharma QA, QC business. They are doing a lot of generics and other specialized pharmaceuticals, so that is growing very nicely within India.

They also have a fairly significant chemical infrastructure. I think there is increasing emphasis on environmental as well. In addition, of course, there is a huge number of babies born each year in India. And so on the genetic screening side, we see that as just a terrific growth opportunity.

There also happen to be a fair number of heriditary diseases that are disabling, you know, for infants in India. And cause a lot of mental retardation for example. And so we think it is a terrific market for the genetic screening. So I would say the short answer is we it across the board. Would he have gone to market in India in the past through a series of distributors, so we had four our five different distributors depending on different product lines.

Really more of a legacy came about through different acquisitions. And you know, we are going direct with a partner who is our largest partner over there. And you know, and I think we will put something out as a press release here fairly shortly. But we are going direct with them and it is exciting, the market has grown nicely for us and we think it has a lot of potential. And the economy, the general economy is picking up in India.

Great. And just on the acquisition front, how do you guys kind of characterize what is available out there in terms of public or private companies? And you know, should we expect to see activity from you guys over the next six to nine months as you continue to delever the balance sheet?

Yeah, I think that is reasonable. And you know, it kind of comes back to what do we think are the best growth opportunities for us in terms of what are we targeting. I mean in most cases, you know, we're looking for product line or technology extensions. In some cases we're looking at industry consolidations.

But you know, within lIfe and Analytical Sciences we have a very broad global footprint, we have a broad range. So we're not really looking to fix sort of the geographic side of it or some of the other pieces of it. But we are looking at adding technology and cellular sciences and other areas like that for example. Within service we're going continue to expand that capability. Medical imaging we like that marketplace a lot. So I think it is just, you know, in some of those areas we have kind of target initiatives under way looking at particular capabilities.

Great. Thanks, Greg.

You're welcome.

And we will take a question from [Meveck Connor], Vargas Partners.

Good morning [Meveck].

I just had a question in terms of the pickup liquid handling, spending discovery and proteomics and in the liquid handling, are you seeing just a general pickup in discovery spending in pharma biotech? And also are you see new lab construction that is driving the liquid handling pickup? Or is that just, you know, a new replacement or upgrade cycle?

You know, it is -- I'm not sure I have another granularity to give you insight in all those questions [Meveck]. I would say, you know, within drug discovery, there has been a postponement, if you will, of a fair amount of capital spending over the past couple years. And so I think mostly on liquid handling we are probably seeing a recovery of that. There are some new labs going in, sure.

You know, Novartis for one has got a massive investment under way here in Boston and a few others. And I think that is a little bit of it. But I think it is just sort of a, you know, a sort of a postponement, if you will, of capex in the past, it's kind of catching up, and people are getting budgets to go back and try to, you know, upgrade, upgrade their instrumentation.

Great. And so -- I mean I know you mentioned sensors. Is any end market that is -- that hasn't yet recovered but seems like dragging the overall growth of the company?

Well, I would say the only area that probably hurt us the most in sensors was this whole security area. You know, we have historically provided a lot into the security and detection businesses. You know, explosion detection and so forth through diode arrays and other types of technologies. And you know, that market took off after 9/11, and I think it has come back down.

So -- but sensors is an application driven business where you get on at the beginning of a program, it is a slow ramp and then it sort of takes over. So we feel good about a lot of applications under way. It is just a matter of time before they reach a program potential.

Thank you.

You're welcome.

We will take a follow-up question from John Harmon, Needham & Company.

John.

Hi, just a couple of balance sheet type questions. Previously, you said you had expected to rebate 15 to 20 million of debt per quarter but yet you paid back 45 million. Was there something opportunistic there? Or are you stepping up your level of debt repayment? And secondly, are you still on track with your prior guidance of free cash flow of what was it, 110 to 130 million this year?

I think one of the things that was opportunistic for us is we were able to bring some cash back overseas at let's say no or very low effective residual U.S. tax. So we took advantage of that to really pay down the additional debt. As far as our free cash flow, we feel we're still on track to reach those numbers. And of course, we feel good about that.

And I would say our commitment for debt, I think, you know, will continue to be as Greg alluded to, you know, we set out a target there, the 220 million a quarter, and I think we will monitor that against what other opportunities we have. I would say the last portion was that we also -- and we mentioned in Q4, we had an opportunity to step down the pricing on the term loan.

And in order to do that, we had to be below, you know, an EBITDA or debt to EBITDA ratio, and we wanted to ensure that we hit that this quarter. That was one of the other reasons we took a little bit more debt down. And in fact, would he did, as I mentioned, so we will step down the pricing on the term loan by 25 basis points.

And then these -- my understanding is these notes you have, where you're paying 8 7/8%, there's some issues, you just can't repurchase them easily for so those might stick around a while?

Well, they're trading fairly well in the market right now. So I think the issue is buying them in, they would be quite expensive. I think they're trading at 115. The think the issue is more just an economic issue. Does it make sense to redeem them. And we can't call them. Until five years after we issued them. So we can't call them until the end of '07.

But we have swapped some of them out for floating rates.

Right we have swapped some of them and we have swapped fix to floating to at least try to reduce some of the interest cost on a going forward basis.

All right. Thank you.

You're welcome.

And Mr. Summe, we have no further questions at this time. I would like to turn the conference back over to you for any additional or closing remarks.

Okay. Thank you. And thank everyone for their questions. You know, as we talked about today, we feel very good about our progress in Q1. And our forward momentum. And we believe this will translate in increased value for our customers, employee, and shareholders. I want to thank you for your time today and your interest in PerkinElmer. This call is adjourned. Have a great day.

That that does conclude today's conference call. We thank you for your participation. You may disconnect at this time.