Revvity Inc (RVTY) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to this PerkinElmer third 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 Sotherby. Please go ahead, sir.

Good morning, and welcome to the PerkinElmer third quarter 2004 earnings conference call. If you have not received a copy of our earnings press release, you may get one from visiting our website at www.perkinelmer.com, on the First Call network or from our toll-free investor hotline, 877-PKI-NYSE. 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 forwarding looking statements for purposes of the Safe Harbor provision 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 quarterly report Form 10-Q, all of which are 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 forward-looking statements as representing our views as of any date after today.

During 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 use during this call to the most directly comparable GAAP measure is available in our earnings press release issued yesterday evening, a copy of which is available in the investor corner section of our website, 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 pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Greg Summe.

Thank you, Dan. Good morning, everyone. Appreciate you taking the time to join us today to talk about our third-quarter 2004 results. With me also today is Rob Friel, our Chief Financial Officer. As typical, I will begin by reviewing the highlights of the quarter, and Rob will then talk in more detail on the financial results, we'll break for Q&A, and then close the call. In overall, we were very pleased to deliver another strong quarter that included double digit revenue growth, strong operating margin expansion, significant growth in earnings and excellent cash flow.

Our third-quarter revenue was $403 million, up 10% over Q3 of 2003. Our organic growth, which excludes the effects of foreign exchange fluctuations, was 8%. If you look at our business by end markets, our health science businesses, which account for about 70% of our revenue in the quarter, grew 6%; and our electronics and aerospace businesses, which represent the remaining 30% of revenue, in the quarter grew at 18%. The primary drivers are in our health science revenue growth were medical imaging and genetic screening; and nearly all applications in the electronics and aerospace markets grew strongly in the quarter.

Our EPS for the quarter was 19 cents on a GAAP basis and 23 cents excluding intangible amortization, which is up over 50% from third quarter of last year. This was at the higher end of the range of our guidance for our quarter and, exceeded by 2 cents the First Call consensus. During the quarter, we we're pleased with our GAAP operating margin expansion of 110 basis points. Our operating margin, excluding intangible amortization for the third quarter, was 12.4 percent. Our earnings growth was driven by higher volume on the strength of our new products, and continued operational productivity across the organization.

As part of the operational productivity we made progress against our site consolidation plan, as we merged our Torrance, California, site into Downers Grove, Illinois, to form our Automation and Liquid Handling Global Center of Excellence. We also closed our Norton, Ohio site during the quarter and have shifted that production to our Global Center of Excellence for Genetic Screening in Turku, Finland. Additionally, we closed a component plant called West Coast Optics, which we outsourced. These actions will strengthen R&D capabilities in these areas to more critical mass and provide productivity and manufacturing efficiencies, as well. Those plans have been underway for some time. They just culminated in the quarter.

And since we don't pull these types of restructuring costs out of the P&L, we absorb these costs in our results for the quarter. They show up as depressing our LAS operating margins in the quarter. Consequently, you can expect those operating margins to be higher in the fourth quarter. We were very pleased with our continued ability to generate strong cash flow, with our operating cash flow for the quarter at $47 million, up over 60% from Q3 of last year. Our balance sheet ended with $220 million in cash and $254 million of net debt at the end of the quarter, approximately a one to one ratio of our trailing 12 months EBITDA to net debt.

We continued our progress in establishing customer excellence as a key element of the culture here at PerkinElmer. During the quarter, we launched our Global Customer Excellence Training Program for employees, and we will have trained all of our employees -- all 10,000 of our employees -- by the end of the year. We're also implementing web-based tools and metrics across the organization to provide clear accountability for every aspect of the customer's relationship with PerkinElmer. And for 2005, every one of our employees will have a specific customer excellence goal in their performance objectives.

Our important new products -- on important new products and business wins we received FDA clearance on our NeoGram Tandem Mass Spect Assay kit. PerkinElmer now has the world's first Assay kit cleared by the FDA for use in the global standardization of metabolic screening with Tandem Mass Spectrometry. And this kit enables early detection and intervention in the screening of newborns, newborn children, and analyze more than 40 disease markers with a single blood sample. So prior to this kit receiving clearance from the FDA, all labs doing this type of work were using it off of unregulated or home brews.

PerkinElmer is a clear leader in newborn screening technology, and we believe this technology will help drive increased and standardized screening for newborns around the world. In the U.S., where all children are tested for at least one disorder, 92% of the states screen for 10 or fewer disorders, where the recently proclaimed standard of care is now 30. So we believe the states will step up to this new standard of care, providing enhanced screening for newborns.

During the quarter, we also introduced the Selux [PHONETIC] high-frequent screening cellular screening system. This features a patented fiberoptic imaging with integrated liquid handling for high through-put live cell inject and read applications, and enhances ion channel screening, which is an increasingly important drug discovery application. During the quarter ,we were awarded a $15 million contract with Alexis to supply Amorphous Silicon [PHONETIC] digital flat panel X-ray detectors for their portfolio of image guided radiation therapy products -- cancer treatments. Our technology has the highest contrast resolution and largest field of [INAUDIBLE] available in radiation oncology today.

We are going to drive innovation in our digital flat panel technology so that cancer patients worldwide can benefit from continuing advances in this oncology solution, and our aerobusiness Lockheed Martin to provide two critical subsystems for the joints common missile. The initial contract is for development and prototype work through the mid-2005. And over the life of this contract AND the production contract to follow, the sales could exceed $100 million for just domestic sales. Foreign military sales are also expected to be significant, maybe as large as the domestic sales.

Our operational momentum in the first nine months of 2004, coupled with a continued recovery of our key end markets, gives us the confidence to increase our earnings per share guidance for 2004. In July of this year, we raised our cash EPS guidance to 81 to 86 cents. We now expect our full year 2004 cash EPS to be in the range of 86 to 89 cents, which is our GAAP EPS, excluding the 15 cents per share related to the intangible amortization.

I'll now turn the call over to Rob Friel, who will discuss our financial details in greater detail, and then we'll move on to the questions. Rob?

Thank you, Greg, and good morning. This morning, I'll provide some details on our revenue, cost, cash flow for the third quarter. Then as we have done historically, I will discuss guidance and then open the call 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 am referring to an increase or decrease in that measure during the third quarter of 2004 compared to the third quarter of 2003, unless I say otherwise.

Turning first to revenue, our sales for the third quarter of 2004 was 403 million, up 10% from 366 million in Q3 of last year. As Greg has discussed our growth by end markets, I will review the revenue growth by business segment and geography. In Life and Analytical Sciences, revenue grew 4%; in optoelectronics, revenue was up 13%; and in fluid sciences, revenue grew 39%. Roughly 50% of our revenue is outside the U.S., so the effect of a weaker dollar relative to Q3 last year was to increase third quarter sales approximately 2%.

As a result, our revenue growth in Q3, excluding the effects of foreign currency fluctuations, was 8%. The foreign exchange impact on revenue by segment was 3% in LAS, 2% in optoelectronics, and less than a percent in fluid sciences. We experienced growth across all regions in the third quarter, with the Americas, which represented 52% of our revenue, experiencing the strongest growth at 14%. Revenue in Europe, which represented about 32% of our revenue for the quarter, was up about 7%, and Asian revenue, representing about 16% of our revenue, was up 4% for the quarter.

During Q3 '04, we continued to drive strong operating margin expansion, and our GAAP operating margin was 10.6%, up 110 basis points; and if you exclude intangible amortization, Q3 '04 operating margins was 12.4%. This marks the seventh consecutive quarter where we have reported at least a hundred basis-point improvement in operating margins. The Q3 operating margin expansion was driven by higher volume and cost productivity that was partially offset by increased R&D and the site closure costs that Greg discussed.

The costs associated with the three site closures were 2.5 million, which increased cost of sales, partially offset by a net gain on disposition of some of the excess equipment. This gain you can see separately identified on the income statement. These actions resulted in a headcount reduction of 130, and we expect a total estimated annual savings to be approximately $4 million. Gross margins were about 40% for the quarter, down from last year due largely to the one-time site closure costs and the higher fluid sciences revenue during Q3.

While the higher revenue percentage of fluid sciences suppresses our gross margins, it improves our operating margins due to the much lower R&D and SG&A associated with fluid sciences. Operating income from continued operations in Q3 of this year increased 23% to 43 million, from 35 million in Q3 of last year. R&D was about 5% of sales, the same level as Q3 of last year, while SG&A was down in dollars and as a percentage of sales, 2.5 million and 290 basis points, respectively, compared to Q3 '03.

In Q3 this year, we repaid another 15 million of our term loan that resulted in a non-cash charge of $345,000 for the extinguishes of debt relating to the write-off of a portion of the original issuance cost. Interest expense net of interest income in Q3 of this year was 8.8 million, down over 3 million from last year due to the significant debt reductions over the last 12 months. Since the end of Q3 of last year, we have paid down $95 million of debt.

Other income of $700,000 in Q3 is due to foreign currency gains, as well as some miscellaneous other items. The tax provision of 9.8 million for the third quarter of 2004 reflects an assumption for full year 2004 tax rate of 29%, which is lower than last year due to improved geographic mix of pretax earnings, but consistent with our guidance provided earlier this year. Q3 '04 net income from continued operations was 24.6 million, up 67% from Q3 '03, when net income from continuing operations was 14.8 million.

Q3 '04 GAAP EPS from continued operations increased to 19 cents from 12 cents from Q3 '03, up 58%. Excluding intangible amortization, our EPS was 23 cents in Q4, up 57% from 15 cents last year. During Q3, we closed down a small product line in optoelectronics that was subscale and not strategic to our longer term strategy within the business. The net impact after tax of discontinued operations was less than one penny per share.

If you now turn to the segment results, we have presented results for the third 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 third quarter was $244 million, up 4%. On a GAAP basis, LAS operating profit for the third quarter of 2004 was 18.9 million or 7.8% of sales. Excluding intangible amortization, LAS Q3 '04 operating profit was 25.5 million or 10.5% of sales.

The operating margins of LAS were down from Q3 last year, due primarily to the site closure costs mentioned previously, as well as a less favorable instrument reagent mix than one year ago. We expect that in Q4 of this year, LAS operating margins will again increase over Q4 '03 as they did both in Q1 and Q2 of this year.

Turning to revenue in LAS, we experienced good growth in three of the four business segments, with genetic screening, environmental chemical and service all growing at 8% or better. Genetic screening reported double-digit growth, up 11% as growth was strong both within the U.S. as well as outside. We believe we should benefit from continued increases in standardization in newborn screening, both here in the U.S. as well as other areas of the world, and expect our revenue growth in this area to continue to be 10% or higher going forward.

In the environmental and chemical product lines, which represented about 26% of our LAS revenue this quarter, Q3 '04 revenue was up 10%. Our average revenue growth for the past five quarters has been 10%, as we continue to see growing global demand for air and water monitoring and testing systems. Service, which represents about 22% of LAS revenue in Q3 '04, grew 8%, as we continued to see good traction on our one-source initiative, as this is delivering value to our customers, to improving their productivity in the labs while managing their complex technological and regulatory requirements.

BioPharma sales, which represented about 40% of LAS revenue in the quarter -- that includes drug discovery tools and pharmaceutical QAQC-- was down 3%. We're seeing growth in our [INAUDIBLE] business within BioPharma, while other areas like target identification, are experiencing soft demand. We believe this market recovers gradually as Pharma and Biotech will need to increase their overall investments in finding new drugs. The recently passed tax law could accelerate this recovery, as large amounts of cash are repatriated to the U.S., which may have been invested in specific areas, or at a minimum may relieve some of the pressures on Cap Ex spending.

Turning now to optoelectronics, revenue for the quarter was 99 million, up 13%. Optoelectronics GAAP operating profits for the third quarter of 2004 was $17.3 million, or 17.6% of revenues. Excluding intangible amortization, operating margin was 17.9%. The 400 basis point margin improvement was largely driven by the volume growth, which gives you a sense of the significant operating leverage we have in this business as revenue growth accelerates. Within optoelectronics, imaging revenue grew about 30% during the quarter. We continue to drive excellent growth from our digital X-ray technology into both diagnostic and therapeutic end markets, including radio therapy, as well as industrial applications such as nondestructive testing.

Specialty Lighting was down 8% compared to Q3 of last year, due mainly to lower photo flash sales into single use cameras, which offset growth in our Cermax Xenon light engine business. Our Cermax Xenon technology is increasingly being designed in by leading video projection companies to reveal RPTV front projection applications. In addition, this technology is doing well in surgical and diagnostic endoscopy, surgical head lamps and microscopic applications, and other applications that depend on bright white light for high quality and accurate color images.

With regard to the photo flash markets, we believe the end market growth potential for flash in digital cameras, coupled with the overall ramp-up of camera phones with PerkinElmer flash components, provides solid growth opportunities for the business that over time we believe should offset the end market demand declines for single use cameras. Sensors revenue was up 16%, driven by growth in our general industrial and military end markets. Our MIL/aero sensors provide unique solutions to generate, control and measure optical radiation and electrical power, and enable smart weaponry with state-of-the-art technology.

We also continue to drive improvements in a broad range of smart applications, including consumer electronics, printer, copier and safety and security systems. Turning now to fluid sciences, revenue was 61 million, up 39%. This revenue growth drove GAAP operating profit of 10.4 million or 17% of revenue, also up over 400 basis points due to the higher volume. Operating profit, excluding intangible amortization, was 10.6 million for the third quarter of 2004, or 17.3% of revenue.

During Q3 '04 within fluid sciences, the aerospace segment, which was about 53% of the revenue, was up 32%, with solid contributions from both our OEM business and repair and overhaul. The major OEMs continue to be bullish on the overall market outlook and aircraft production demand. Also, flight hours continue to grow in the high single digits, driving up growth potential for the aftermarket. The semiconductor business, which represented about 30% of fluid sciences' revenue in the quarter, was up 8.5 million or about 79%. Our strategy to drive growth in the aftermarket is gaining traction, which is intended to offset OE cyclicality and deliver relatively higher productivity than the overall semicon OE business.

If you would now turn to the balance sheet and cash flow, during the third quarter of 2004, we generated $47 million of operating cash flow, up 62% over Q3 of last year. Free cash flow, which we define as operating cash flow less capital expenditures of 4 million, equaled 42 million in Q3 '04. This compares to Q3 '03 operating cash flow of 29 million, capital expenditures of about 3 million, and free cash flow of 26 million. During the first nine months, the company has generated operating cash flow of 130 million and free cash flow of 117 million. Increased net income, reduced restructuring outlays, improved working capital performance and the timing of certain accruals drove the improved cash flow performance during the third quarter.

During the quarter, we were able to reduce accounts receivable and hold inventory roughly flat. Despite growing revenue 10%, increasing working capital turns by half a turn to 4.9 from 4.4 turns in Q3 of last year. We continued to deliver the balance sheet in Q3 by repaying 15 million of our term loan, taking the balance down to 170 million at the end of the quarter. Our total debt at the end of Q3 was 474 million, and cash and equivalents was 220 million, so total debt less cash and equivalents was 254 million. Total debt net of cash and equivalents as a percentage of total capital was 15% at the end of Q3 '04; and you may have recently seen Moody's has upgraded the credit outlook of the company from stable to positive.

In addition, we recently filed a 8-K disclosing some recent changes made to our credit agreement to relax several of the covenants and provide increased flexibility to continue to reduce the cost of our capital structure. With regard to the recently passed tax legislation, we are awaiting regulations to be issued by the IRS before year end, which will provide further clarification of some of the provisions of the new law. However, at this point, it appears that the law will provide us a significant opportunity to both repatriate excess cash overseas and leverage our foreign operations. The impact will be to allow us to improve our balance sheet, provide additional funds for increasing R&D, as well as potentially lower our tax rate going forward.

I look forward to further updating you on this when we report our fourth-quarter results. Now let me briefly discuss our full year 2004 guidance and then open the call for your questions. As Greg discussed, we're raising our full year 2004 EPS guidance, excluding the impact of intangible amortization, to 86 to 89 cents, which is up from our previous guidance of 81 to 86 cents per share. The estimated EPS impact of intangible amortization should be 15 cents for the full year 2004.

This represents the second time this year we raised our guidance, and we have now raised our guidance 10% since the beginning of this year. At the end of the third quarter, our EPS excluding intangible amortization was 58 cents. Therefore, our guidance for Q4 is 28 to 31 cents, excluding tangible amortization, or 25 to 28 cents for GAAP EPS. We are forecasting revenue growth for Q4 of 6 to 8%, and expect Q4 '04 operating margins to again expand about a hundred basis points over Q4 '03, driven mostly by the higher volumes. We're forecasting GAAP operating margins for Q4 of about 14 and 15%, and operating margins, excluding tangibles, of between 15 to 16%.

We also have increased our free cash flow forecast for the full year 2004 to exceed $160 million, which would equate to roughly $1.25 for each share outstanding. In closing, we feel terrific about our financial results this quarter; and longer term, our breadth of growth opportunities and focus on continual operational improvement should allow us to continue to deliver good revenue growth, significant EPS growth through both operating margin expansion and lower interest, and excellent free cash flow. I would now like to open the call to your questions.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 to ask a question. We'll pause for just a moment. And we'll take our first question from John Harmon of Needham & Company.

Hello, good morning.

Good morning, John.

I apologize if I missed it. I was wondering if you could just regroup your revenue growth by the new classifications you've been mentioning in your investor presentations? In other words, defense aerospace and consumer and so on?

Yeah, this is Rob. As we mentioned in the press release, the electronics and aerospace was up 18% on a reported basis in the quarter, and if you look at the -- actually through the year they've been sort of averaging, you know, sort of 12 to 19% through the year. And the health sciences was 6% in the quarter;and again, if you look at through the year they've been sort of ranging in the 6 to 8% so we continue to see nice growth in both segments.

Okay, I'm sorry, in consumer, did you break that out please?

The -- well, the electronics and aerospace, the total group was up 18%.

Okay.

Consumer electronics -- if your question is specifically with consumer electronics was up?

Yes, please. If you have it.

Yeah, will, the consumer electronics in the quarter was up I would say, you know, low to mid-single digits.

Okay. And that decline in the camera module business, is that just slumpiness, or is it seasonality, or what do you think is causing that?

I think within that, there is -- within the photography business there's a digital to analog conversion -- or analog digital conversion going on -- and so what we have seen year-to-date, John, is a significant decline in the film base photography systems. And, you know, the digital systems are still ramping up. So, you know, if when you think about it from a transition standpoint, you sort of -- you know, the film declines quickly and then the digital for variety reasons, which I could explain, ramps up over time more in the '05 and '06 time period. Having said that we think that the film base is kind of flattened out to a -- called a more sustainable level, and so when we look at that piece we just kind of see it kind of increasing from here; so we have absorbed the decline in that business with these overall growth rates, and you know, going forward, the digital ramps up. Part of that's driven by the digital requirement of mobile phones, and as the image complexity goes up, you know, the CC's, if you will, or the CMOS imager, gets over the 1 1/2 or 2 pixel region, it has a requirement for flash. So that's kind of a second half of '05 ramp-up.

Okay. Thank you. And seeing optoelectronics, you said before that Sony is selling projection TVs with your flash lamps in Japan. Is that because they release products in their domestic market first before they release them in other countries, or is that some --

It [INAUDIBLE] -- it's not the flash lamp. It's what we call the Cermax. It's a Xenon with a special high-intensity, kind of a Xenon lamp; and, yes, it's released -- it's being released in the higher end products first. So quality is their top end product line, and the historically, they start with that in Japan and then roll it out worldwide, and then that technology flows from the -- you know, they call it the specialty product line, down into their higher volume product lines.

Okay. Thank you. And just one final one, please. I don't want to get ahead of ourselves here, but you've been generating quite healthy free cash. Any ideas what you might do with it once you get to the point where you've reduced quite a bit of your debt?

Yeah, I think maybe Rob can comment on this, as well. You know, we look at -- we look at the cash generation and we see an ability to sustain terrific cash flow going forward, and so I think our priorities have been to reduce the debt, because some of it is, you know, it sort of improves our interest structure and the strength of our capital. And then I think beyond that, the rankings are kind of some business opportunities that we're looking at in our pipeline, and then ultimately perhaps even in share buy-backs. Rob, any comments you want to make to that?

Yeah, I would say, you know, referencing back to the amendment we made to our credit agreement, that did increase our flexibility, as Greg alluded to, to both increase the size of the acquisitions that we're able to do as well as increase the amount of share repurchases that we could do, if in fact we wanted to do that. So I think as you mentioned, we generate a lot of cash flow, and we've recently increased the flexibility by which -- what we can do with that.

Great, thank you very much.

You're welcome.

Thank you. And we'll take our next question from Paul Knight of Thomas Weisel Partners.

Hey, Greg. The life and analytical science group, you know, the growth has kind of been there off and on this year, and better than last year. But it's kind of inconsistent. Where we with that business or market right now?

Yeah, you know, Paul, when you break LAS apart, you know, into the four segments, service has been consistent grower -- we'll call that in the high single digits. Genetic screening is a consistent growth r-- call that in the double digit range; and environmental chemical has been a consistent grower in kind of high single to low double digit range. And so those continue on. Really, the big challenge has been in the biopharmaceutical segment, which has had -- is experiencing I would say an uneven recovery. The pharmaceutical companies are wrestling with kind of spending patterns -- Rob alluded to that, that maybe the cash repatriation loosens up their capital constraints a little bit -- but I think the pharmaceutical companies have been wrestling with the recipe, if you will, in R&D. So, you know, a couple ways to look at it. One is, when does this market recover, because we're confident it does. I mean, without an increased flow in new products out of the pipeline of the Pharma companies, their market values are threatened; and so clearly, that's going to be a -- continue to be a top priority for them, so we're clear that it does. On the other hand, we sort of turn around and say, you know, we've got some time to work through that; and I think working through it means, you know, sort of continuing to improve positioning of our products in the applications that are working well in the BioPharma. And that's been more -- that's been sort of less on the research and discovery side and more on the development spending side, and I talked about Selux [PHONETIC] we induced, which is a step in that direction, and a number of other products we're kind of -- we're moving in that pattern. So we expect, I'll call it continuing overall gradual recovering of the marketplace; and you know, to get beyond that, you really have to have more in the development side of the equation to see any growth rate in a shorter period of time. Yet on the other hand, we feel comfortable about our ability to achieve our goals with that kind of growth outlook in BioPharma.

And the other question, Greg, would be on the Asian growth. Can you talk about that, and were you impacted by the new budget authority [INAUDIBLE] China?

The Asian growth within LAS was terrific. I mean, so that's our highest growth region in the world clearly, and it's both in China and it's outside of China. We saw the Japan slowdown really going back to the first quarter, and we actually see a ramping up in Japan at this point, so we think they've worked through a lot of those issues, and so we see that coming back up. The reason Rob referred to the overall Asian sales down, really goes back to John Harmon's question, which is on the photography business, and so the flash -- the flash lighting for photography all goes into the Asian market. And that's where the cameras are manufactured and assembled. So as that volume tailed off significantly through this year, that just shows up -- that's what drives that Asian revenue component down. So that's really isolated to that one -- it's really to the analog to digital conversion and in the photography business.

Thanks.

Everything else is up strongly.

And just to follow up on that, our Asian sales within LAS was up 11%.

Okay. Thanks.

Thank you. We'll take our next question from Larry Neibor from Robert W. Baird.

Good morning, Larry.

Good morning, Greg. Thank you. Could you give us some flavor as to the ongoing growth potential for your fluid science business? It's shown huge growth.

Yeah. Let me start -- I'll start on that and maybe Rob wants to finish up with the specifics about it, but I'll talk about kind of qualitatively what our outlook is there. First of all, aerospace, which is the predominant portion of that business -- you know, call it roughly 70% -- aerospace, we think, has a lot of runway ahead of it. I mean, the aerospace market is driven by the revenue passenger miles. It's a little bit conflicting, because you know, when you pick up the paper, you see that Delta may go bankrupt and so forth; but the truth of the matter is, there's a lot more people flying a lot more miles than there have been in the past. So I think the projection this year that revenue passenger miles will be up about 12%. That's not a sustainable level in a sense, but you know, it is sustainable and has been for decades in the 5% to 6%. That's the biggest driver of our aerospace business, because revenue passenger miles means airplanes in the air; airplanes in the air means they're consuming parts; and parts are what we provide. So we look at it, it's a long cycle business and we think it's got a lot of good head room in it and you know, so that's -- you know, call it -- I'll come back to the number -- but let's say the overall business probably will be in the eight to tennish percent range. Semicon, as you know -- the semicon equipment piece is more cyclical, and we think it's still got a fair amount of runway ahead of it. There's a fair a discussion -- that customer -- or that companies that make the chips themselves have a bit of an inventory [INAUDIBLE] and they're working that off. We think that's true, and that probably takes a quarter or two to work off. On the other hand, we don't see the general level of demand going down. We see it sort of sustaining itself. So as we look out -- as we look out into the '05 region and beyond, I mean, I think our expectations for the fluid for the year is to probably to be in the eight and tennish percent range. Rob, any specifics on that?

Yeah -- no, I think that's right. As you know, Larry, we'll probably come out with' 05 guidance a little later, but I think we're -- our expectations is fluid, you know, probably stays around 10% next year.

And that's due to mainly getting more into the aftermarket space or in the OEM space?

No, I think it's still both. Even in the OE space -- even in the OE space -- both Boeing and Airbus, you know, have projected 10% increases in their aircraft build for next year. So I think you see it there. Clearly, our priority -- to your point -- is to build the air -- is to build the aftermarket -- aftermarket presence -- and particularly in the semiconductor business, because the semiconductor aftermarket is actually a very consistent business business. It's the capital equipment side of semiconductor that's volatile, as people bring capacity on in big chunks. So they bring it on, absorb it, bring it on, absorb it, and you get into that cycle. So our priority within aerospace clearly -- I mean within semicon -- is clearly the really -- and all of resources are going into putting the aftermarket price -- smooth that out a little bit. But within the aerospace side, we see both elements growing.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your touch-tone telephone. We'll pause for just another moment. We have another question from Paul Knight of Thomas Weisel Partners.

Greg, can you talk about facility closures, what's been done in the quarter; but also where you are in the future? I mean, how many facilities do you have today, you know, what do you think will change in terms of your efficiencies in the future?

Yeah. You know, Paul, in terms of the facilities, part of this was driven, you know, sort of I'll call it the last elements of the LAS integration. Particularly the ones that we talked about this quarter. So I think that really kind of finishes it up. So we don't have a lot of significant facility closures in the plan -- in the plan going forward. So I guess we look at it today from a, you know, from a cost productivity standpoint as more of a continuous productivity through systems investments, and there will be, you know, there can be some efficiency consolidations, but not a -- but we don't have a significant agenda of factory closures around that. I think it's really more about driving the productivity and efficiency within those sites. So really, those three were the last of the major ones we were -- we had targeted through the integration process.

And, you know, Paul, as we think about productivity on the manufacturing side, as you know, we've been fairly active in moving our production into Asia to access lower costs. I think the area that has lagged a little bit is the transfer of the supply base into Asia; and our approach has been to move our internal manufacturing first and not to move the supply base at the same time, because we thought that would be too disruptive. So I think the opportunity on a manufacturing cost productivity going forward is going to be probably largely more geared toward the supply base, where we continue to shift that to be consistent with what we've done in the manufacturing side; and our expectation is to be able to drive some savings on that side as compared to significant manufacturing consolidation.

And then on the other line, the below the line item cost, primarily I guess that's interest income and obviously the trend downward there. What do you plan to do with interest and debt paydowns here, Rob?

Yeah, as was pointed out earlier, right now we're starting to generate a significant amount of cash on the balance sheet combined with what we think is a great opportunity to both bring back the cash from overseas, as well as leverage our foreign operations. So we could be in a situation where we could have a very large amount of cash in the U.S. come the first quarter. And our expectation -- or I guess our plans are to prioritize that and to sort of continue to take down the debt, as well as hopefully be able to close some nice business development opportunities -- you know, either some product line extensions or some technology acquisitions -- to continue to move into some of the spaces that Greg alluded to --say more on the development side versus the discovery side -- or maybe to increase some of our opportunities in the genetic screening area, et cetera. So I would say it's going to be more balance. If you look at '04 as more of a debt paydown -- I think if you look at '05, it's going to be a combination of debt paydown and hopefully some product line and technology acquisitions.

Okay, thanks.

Thank you. We'll take our next question from Vivek Kashna [PHONETIC] of Argus Partners.

Good morning, Vivek.

Good morning. I just wanted to get some color on the instrument sales into Pharma. Maybe Rob said it, but I missed. Was that -- what have been the trends there in the last couple of quarters, and do you see any improvement in that going forward, or what do you see there? You know, in the high -- like in the high through-put screening and that end market.

Yeah, I think, you know, similar to what Greg talked about before, I mean, what we've seen is it's sort of fits and starts. So I would say Q1 was soft -- Q2, actually, was fairly strong. We saw nice growth, particularly on the higher end high through-put screening, whether it was Viewlux [PHONETIC] or Envision, was rather strong in Q2. I would say Q3 was back to sort of being sort of comparable to Q1; so I think it is still a little lumpy, and I think we're still searching for what I would say a trend. That's why I was sort of alluding to the fact that maybe this new tax law with -- with the possibility to bring back a significant amount of cash -- and we'll see what types of restrictions are put on the use of that cash. It may at a minimum loosen up some of the purse strings on the Cap Ex, and may at least on the other side of it require them to spend that, whether it's in R&D or some other capital equipment purchases, so. But I would say it's still a little lumpy. Like I said, Q2 looked good. Q3 was soft.

Thank you.

You're welcome.

And we'll take our next question from John Sullivan of Investment Banks.

Morning, John.

Hey, guys. Couple of quick questions. First of all, congratulations on continued delivering in the quarter using your cash flow. What is the right capital structure for this company in your opinion? What's the right debt of cash as a percentage of total capital -- or net debt as a percentage of total capital?

You know, I think the right debt-to-capital is probably actually higher than where it is right now. I mean, I think I would probably be comfortable in sort of the mid-20s. I think probably a more important metric we look at is really sort of a debt-to-EBITDA, and I think we'd be comfortable with sort of a two-to-one type of level. I think our hope would be to get back up to investment grade, you know, maybe sort of a triple-b level, but I don't think there's any expectation to take that into the single-a or double-a area. So I think those are the types of credit statistics that we would sort of look to drive toward.

Okay. I appreciate that. Let me ask you this. Regarding possible repatriated dollars coming back on to your balance sheet -- and I know that the devil's in the details regarding these rules -- but if you have more latitude in using those repatriated dollars, would you necessarily seek to increase R&D spending? That is to say, do you have R&D projects today that you feel like you'd like to expand, but you're not expanding because of financial constrains?

Well, you know, I think there's -- you know, I think there's always an opportunity to expand the R&D on the increment -- and you can think about R&D two ways. You can think about it as organic -- that is, your internal spend -- and you can think about it on the business development side -- that is, the capitalized R&D. And you know, I think we look at it both ways. So in that respect, you know, I just -- I would say it just increases our flexibility to go after it, and I think as we continue to drive, you know, operating productivity, that also increases our flexibility, particularly on the intently side. So I would say just say, you know, particularly from a business development standpoint, you know, capitalized R&D. It certainly makes that easier.

I appreciate that. And then lastly, you folks have had some good success shifting some manufacturing to lower operating cost jurisdictions. How far through that process do you feel like you are? Do you -- are there further benefits that you can achieve from those sort of activities?

There are, and I think, you know, as Rob pointed out earlier, we see the most significant part as being on the supply chain; and particularly if you look in, you know, for example, in the Life and Analytical Sciences business, the actual manufacturing within that business is only a small -- you know, the actual final assembly and test is only a small part of the total product cost, and a lot more is wrapped up into the subcontractors who provide the subsystems or the components that go into it. So increasingly, we want to make sure that that part of the supply chain is based in low cost environments.

Are those decisions a function of finding sufficient quality among vendors in those markets? Is that still the primary issue? Or is it other issues?

I think it's a combination of, you know, the quantity of the infrastructure in those environments, as you pointed out. It's also -- it's also a function of, I'll call it the engineering work required to resource new vendors. And so certainly on new products, we're very aggressive on it, and it's just sort of a pacing item on older products as to whether it's a good return on your R&D spend for the requalifications required.

Sure, thank you very much.

You're welcome.

Thank you. As a final reminder, if you would like to ask a question, please press star 1 on your touchtone telephone, and we'll pause for just another moment. And we'll take our next question from John Harmon from Needham & Company.

Hello, again. A couple questions on the genetic screenings business. I was wondering if you could give us the split between U.S. and international revenues? And if you know of kind of a weighted average number of tests done in the U.S. states. Certainly there's been a lot of political movement in that area. For example, New York said we're going to go from 11 tests to 21 at the end of the year to 44 next year. I was wondering if you have some idea of what that weighted average could be next year?

Hey, John, this is Rob. I don't have the specific numbers in front of me on the genetic screening split this quarter, but I would say generally, they run about 50% in the U.S. and 50% outside, as a general resume. My sense is that's probably the trend we saw this quarter.

And, you know, on -- once again, we don't have a weighted average number of tests, but I would say I think 90% of the states do about 10 or fewer, and you know, the new standard is up over 30, so we think that's a significant -- we think that's a significant opportunity.

I think you said before that this recommendation was nonbinding. Is it -- do you feel that most of the states will go to 30?

Yeah, yes, we do. You know, a little bit behind the recommendation, it's an advisory commission to the Secretary of HHS, Tommy Thompson. And, you know, it's got a tremendous amount of visibility on it. Now the federal government is not in a position of mandating this to be done, because this is controlled by the states. However, the federal government who is -- who is making this recommendation has the ability to influence funding to the states. So you can think about it a little bit like the speed -- speed limit, you know, which they can't mandate to the states -- but they tie it to your funding for roads, so effectively they do. So we think that there'll be tremendous pressure -- not just from the government, but from -- you know, from the population in the states. There's a huge amount of awareness -- it's sort of, every day there's articles in the paper -- Wall Street Journal, New York Times, and the Today Show creating visability. And really, it is also a, incredible cost benefit ratio. I mean, you know, so let's call it for $100 to the patient, you know, they can get a screen of 40 different conditions. So it's got, you know, some very life-threatening conditions. So it's got a terrific cost benefit ratio. Great, thank you.

You're welcome.

And we have a follow-up question from John Sullivan of Investment Bank.

Hey, guys. With respect to the this genetic test issue and the new product, can you just kind of chit chat about, for a lab that seeks to adopt the new product, both the instrument and the consumables, is the business model a traditional diagnostic like business model where the -- where you don't charge for the instruments up front, but you -- but it gets worked through in the cost to the consumable over time?

We provide a variety of options to our customers. I mean, we provide the instruments, we provide the reagents -- and importantly, we provide the integration software -- it's a product called Specimen Gate [PHONETIC] that provides a custody chain and helps provide the analytics around the results. And so that's a very important part of having terrific -- you know, terrific controls around data, which is around the which is extremely important in this area. And we can -- you can do one of many models. I would say the predominant of our customers, though, elect the model that you cited, which is what we would reagent rental, and where we go in and provide the instrumentation and the software and then we get reimbursed through the stream of reagent consumption.

Thanks so much.

You're welcome.

Thank you. We'll move on to Steven Solomon of Infinium.

Hello, thank you for taking the call. I just wanted to see if we could grab a couple of numbers that you normally give that I missed. Can you, for LAS, give the breakdown of instruments versus consumables, and give us growth numbers on optoelectronics -- again, if you could give the breakdown of revenue amongst imaging, specialty lighting and sensor; and then finally, for the three segments, if you could give the FX impact on the three segments?

Okay. For the first one, LAS instruments was about 50% of the split this quarter -- sort been running about that. It's actually sort of in the 47, 48% range. That was up 7%; and then reagents and service, which was the remaining split, which we'll call it 51, 52%, was up about 2.

And these are reported numbers. And your question on opto was the split between imaging, lighting and sensors?

Yes, that's right.

Yeah, actually this year -- or this quarter -- they came in pretty equivalent. Imaging was around a third. Lighting was a third and sensors was a third; and then -- roughly speaking, they were pretty equal this quarter.

And the last part was the FX impact by segment?

Yeah, I think I mentioned that earlier. It was three in LAS, it was two in opto and it was less than a percent in fluid.

Thank you very much for that.

You're welcome.

Thank you. And it appears we have no more questions at this time. I'd now like to turn the call back over to Greg Summe for any closing remarks.

Great. Well look, thanks, everyone, for your questions. As we talked about today, we feel good about the progress in the third quarter and our first nine months of the year, and momentum it generates for the remainder of the year. As we continue to improve our operational execution and introduce new products into our growth applications, we're confident of our ability to grow earnings and cash flow, and we believe this will translate in increased value for our customers, employees and shareholders. So thanks for your time today and your interest in PerkinElmer. This call is adjourned. Have a great day.

This does conclude today's conference. We thank you all for your participation, and have a great day.