Revvity Inc (RVTY) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to this PerkinElmer second-quarter 2005 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 second-quarter 2005 earnings conference call. If you have not received a copy of our earnings press release, you may get one from our website at PerkinElmer.com or from the First Call network or from our toll-free investor hotline, 877-PKI-NYSE. This call is being webcast today that you can access from our website, and we are providing a slide presentation accessible from the website to facilitate the discussion of our Q2 results. For your information, during the call, the pages on the webcast can be advanced from your computer as we proceed through the presentation.

Before we begin, we need to remind everyone of the Safe Harbor statements that we have outlined in the front of the Q2 earnings call presentation and also those in our SEC filings. We encourage you to read those Safe Harbor statements. Also, 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.

During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available in our earnings press release issued yesterday evening, and we have also provided reconciliation in the appendix to today's presentation on our website. 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 promptly.

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 discuss PerkinElmer's second-quarter 2005 results. With me today is Rob Friel, our Chief Financial Officer. I will begin by reviewing the highlights of the second quarter, then provide you with an update on our growth platforms and several new products. Rob will then talk in more detail on the financial results, we will break for questions and answers and then close the call. This call is being webcast, and we have provided slides this quarter, as well, to accompany the audio of the call. And so Rob and I will refer to those as we go through throughout our discussion. We have outlined some risk factors on page two of our webcast presentation, and I encourage you to read them and others included in our SEC filings.

Overall, we were very pleased by our results this quarter. Turning to page three of the slides, our GAAP earnings per share were $0.26, up 53% compared to $0.17 per share reported in the second quarter of last year. Our cash EPS was $0.24 and met the First Call consensus estimate, and was at the high end of our guidance of $0.23 to $0.24 for the quarter.

With our improved profitability and significant working capital progress, we're able to deliver 80 million of free cash flow, up 55% from Q2 of last year. Our free cash flow per share in Q2 was $0.61 a share, which was also up over 50% from Q2 of last year. Our strong cash flow was used to reduce $100 million of debt in Q2. We paid off all of our term loan and $30 million of our subordinated debt. Our net debt to total capital was under 10%, and our cash balance at the end of Q2 was $159 million. We have a very strong balance sheet, which enables us to continue funding our growth investments and make selective acquisitions to extend the product and technology breadth of our growth platforms.

Our second-quarter revenue was $426 million, up 3% year over year, with the effects of foreign exchange increasing revenue by 1% during the quarter. LAS revenue grew 5%. Optical Electronics grew 5%, and Fluid Sciences revenue decreased 6%. Our Health Science revenue, which is about 72% of our revenue for the quarter, grew 8% with Genetic Screening, Medical Imaging and Service all posting strong double-digit revenue growth. The solid performance of these and certain other businesses was offset by some of our Industrial Science businesses that are in cyclical downturns, like Semiconductor and Lithography were experiencing product transitions like Photo Flash, which is going through the analog film to digital imaging transition. And that resulted in our Industrial Science revenue being down 7% in Q2.

On page four, we highlight three of our key growth platforms -- Genetic Screening, Medical Imaging and Service. The Genetic Screening business continues to generate excellent growth, with a 21% increase in Q2. We are seeing strong momentum in the US on the increase in standardization of newborn screening, as the states continue the trend of mandating 30 tests as a standard of care for newborns. We have won some key states already, including California, that is now up and in clinical operation. We are also working with a significant number of other states to help them expand the clinical capability of their existing newborn screening programs.

We continue to invest in our global newborn screening initiatives with good progress in Russia, China and India. We were also pleased to announce during the quarter our collaboration with Waters, where we will be the exclusive distributor of their Tandem Mass Spectrometry platform for neonatal screening applications. This partnership will help speed the development and release of new products to further improve the health of newborns, lower health-care costs and save lives.

We are expanding more broadly in maternal health, and recently announced our collaboration with the University of Copenhagen for a new biomarker for prenatal risk assessment. ADAM12 is a second-trimester protein biomarker that has broad potential to detect complications in mother and fetus during pregnancy, such as intrauterine growth retardation and preeclampsia, which relates to the mother-baby blood circulation. The inclusion of ADAM12 with other biomarker in both the first and second trimester of pregnancy is expected to offer enhanced detection and reduce false positives, therefore decreasing the need for invasive diagnostic testing.

We were very pleased that our Medical Imaging business recorded 22% growth in the second quarter. Here, we continue to see excellent momentum in the end markets, where our x-ray panels are fueling advancements in both diagnostic and therapeutic applications. We launched several new products in this area, both in the system electronics and in the panel themselves, to enhance resolution and processing speed. We were pleased to extend our relationships with key OEMs such as Siemens and Accuray for their cancer treatment systems.

Our Service business was up 11% in the second quarter, as we continued to deliver value to our customers through improving their productivity and uptime in the labs while managing their technological and regulatory requirements. We see the continued trend of large pharma consolidating suppliers, which will continue to fuel our growth opportunities.

We were also very pleased to launch this quarter the industry's broadest scientific eLearning offering. eLearning provides organizations with a cost-effective approach to training employees and improve productivity. As a fully Web-enabled learning solution, eLearning offers a visually appealing and interactive learning experience that includes tutorials, demos and instructor-led training. And it's scalable from 1 to 1,000 employees and customizable to match individual skill sets. eLearning is the latest addition to our extensive service portfolio and another example of our commitment to services, an integral aspect of our ongoing business strategy.

On page five, I highlight two new products we launched this quarter to accelerate growth in our Biopharma business. We launched an important new cell-based assay and ultrahigh throughput screening, our new Lance cyclic AMP assay. This is a proprietary assay providing excellent sensitivity and precision and is easy to automate. The assay provides a world-leading solution when integrated with our high-end plate readers such as our ViewLux that you see pictured here. Also on page five is a picture of our new Janus automation and liquid handling workstation. This is the first in a new family of scalable modular liquid handling instruments and provides integrated capabilities within one workstation. For example, this instrument has dual interchangeable modular heads, easily interfaces with our detection instruments and fits on a benchtop. Also our WinPREP application software provides excellent flexibility without time-intensive programming complexity. We are very pleased with the early customer acceptance here.

In summary, on page six, we feel good about our EPS cash flow and key platform growth. Our balance sheet is strong, and gives us the capability to make selective acquisitions to extend our technology and product capabilities in our growth platforms. We feel good about our progress through Q2, and are confident about our ability to deliver our commitments for the year.

I'm not going to turn the call over to Rob Friel, who will discuss our Q2 result in greater detail. Rob?

Thank you, Greg, and good morning. This morning I will provide some details on our revenue, costs and cash flow for the second quarter of 2005. Then I will provide some guidance on the second half of 2005 and then open up 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 second quarter of 2005 compared to the second quarter of 2004. Also, to the extent that I use any non-GAAP measures, these have been reconciled to the comparable GAAP measure in the appendixes presentation on our website.

Turning first to revenue, as Greg mentioned, we reported revenue in Q2 of 426 million, up 3% from 412 million. By segment, reported revenue growth was 5% in Optoelectronics, 5% in Life and Analytical Sciences and a decline of 6% in Fluid Sciences. Contributing to this growth was the effect of a weaker dollar in Q2 of 2005 relative to Q2 of 2004, which we believe increased second-quarter sales by approximately 1%.

If you would now turn to slide seven, you can see on the left of the slide that in the Americas, revenue represented about 48% of total revenue in the quarter and was flat on a reported basis. Revenue in Europe, which represented about 37% of our revenue for the quarter, was up about 10%. And Asian revenue, representing about 15% of our revenue for the quarter, was down 1%.

To better understand the variations in our revenue growth in some of our products and markets, on the right side of slide seven, I've split some of our revenue for the quarter into three categories. The growth platforms, that Greg mentioned previously, represented about 29% of our revenue for the quarter and on average grew 16%. At the other end, our three businesses -- Semicon, Fluid Testing and Flash Lighting -- which only represented 35% of our revenue in the quarter or 8% but contracted 29%. The remaining core, which is about 63% of our revenue this quarter, grew roughly 4%. Therefore, if you exclude the 8% of the revenue from the Semicon and other businesses on this slide, the remaining 92% of the portfolio grew 8% in the quarter. Consequently, for the vast majority of our product lines, we are experiencing nice topline growth.

Our operating income from continuing operations on a GAAP basis was $28 million in the quarter, which included restructuring charges of 15 million. And we also had 7 million of intangible amortization in the quarter. Excluding the restructuring charges and intangible amortization, our Q2 operating profit was 50 million or 11.8% of revenue, up from 47.8 million from Q2 of last year.

If you would turn to slide eight, you can see we had good operating profit expansion in LAS, where their Q2 adjusted operating profit increased 16% to 33.2 million from 28.7 million in Q2 of last year. And Opto also drew good operating profit growth, delivering 16.2 million in Q2 '05, up 9% from 14.8 million in Q2 of 2004. Offsetting this was operating profit contraction in Fluid Sciences, due to both soft Semicon and Fluid Testing end markets, as well as significant raw material increases that they could not pass on.

On the right side of this slide, I have highlighted that our gross margin for the quarter was 40%, down slightly, 20 basis points in Q2, from Q2 of last year, due to the gross margin contraction in Fluid Sciences. Excluding Fluid Sciences gross margin contraction, gross margin would have increased 40 basis points in Q2.

We continued to increase our R&D spending in the quarter, and have increased it 6% over last year or about 1.4 million. In addition, Q2 SG&A as a percentage of sales in the quarter was down 60 basis points.

If you would now turn to slide nine, I show some of the items in Q2 going from GAAP operating income from continuing operations to GAAP net income including the effects of discontinued operations. The first item is debt extinguishment of roughly 6 million, which is a cost associated with reducing our debt in Q2 by $100 million. It is made up basically of two pieces. The first piece is associated with a non-cash charge relating to the write-off of the remaining original issuance cost, since we have now paid off our term loan in total. The second piece is the premium we had to pay to retire 30 million of the subordinated note, which you may recall has a coupon of almost 9%. So, given our strong cash flow, we have decided to retire some of this debt.

Our interest expense net of interest income was just under $7.4 million, down from 9 million last year. And also during Q2, we recognized a gain of about $5 million from the sale of our minority interest in Agencourt.

Our pretax income for Q2 was 20 million and, as previously disclosed on our Form 8-K, we recorded a $20 million tax benefit related to certain audits for the years 1999 to 2002 which we recently closed. The provision for income taxes in Q2 excluding this benefit was $5 million or an effective rate of 28%, in line with our previous guidance.

The net result of these items was GAAP net income from continuing operations of 34 million in Q2, up 54% from GAAP net income of 22 in Q2 of last year. This 34 million translates to EPS from continuing operations of $0.26. During Q2, we made the decision to close our Fiber Optics Testing business, and we have therefore classified that as a discontinued operation. The effect of closing this business was to record a loss of 5 million after tax or $0.04 per share. The net result of income from continuing operations and discontinued operations for Q2 was 29 million of GAAP net income or $0.22 per share, up from $0.16 last year.

Since we had a number of special items in Q2, on slide ten I have provided a walk from reported net income and reported EPS to our adjusted EPS and earnings. We have also provided a reconciliation of these items in the box at the bottom of our income statement attached to the press release.

Starting on the left side of the slide, our Q2 GAAP reporting net income from continuing operations, as I mentioned, was 34 million or $0.26 per share from continuing operations.

The restructuring charge in Q2 was 15 million pretax or $0.09 per share. The restructuring actions involved headcount reductions of about 200 people. In addition, we increased prior restructuring reserve for lease costs, as we have been unable to sublease the properties as economically as originally thought. The severance costs were approximately 9 million, and the increase in the lease reserve totaled 6 million. Some of the reductions in the headcounts will be added back in growth areas, particularly in Asia and our Service business. However, the net impact will provide semicriminal cost savings to us this year.

Continuing on this walk on the slide, consistent with prior quarters, intangible amortization was about 7 million or 5 million after tax or $0.04 per share.

Lastly, you can see that the tax benefit of 20 million was about $0.15 per share. The 20 million tax benefit is net of an additional provision for the repatriation of cash from overseas. As you may recall, in Q4 of last year, we provided the cost of repatriating roughly 170 million of cash. With the current additional provision, we have now provided costs to repatriate up to 325 million from our overseas operations.

In summary, the tax benefit and restructuring charges on a net basis increased Q2 2005 earnings by $0.06 per share. Intangible amortization decreased earnings by $0.04, as I mentioned. The net effect of these items was an increase to earnings of $0.02. Thus, if you exclude these, the increase relative to the $0.26 GAAP, our adjusted EPS is $0.24, which met the Thompson First Call estimate and was at the high end our original guidance.

Turning now to slide 11, I will discuss some revenue and operating highlights by our business segments. 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 second quarter was 271 million, up 5%. Excluding restructuring and intangible amortization, LAS operating profit for the second quarter of 2005 was 33 million or 12.3% of sales, up 120 basis points. You can see on the right side of the slide some of the details of how the businesses did within LAS. In Genetic Screening, which was about 12% of LAS revenue in the quarter, revenue was up 21% as we continued to see good growth in both neonatal and prenatal screening. Our Biopharma business, which represented 39% of LAS revenue in Q2, continues to experience sluggish end markets, and sales were down 3% in the quarter.

Greg mentioned our strength in Service, which represented about 23% of our LAS revenue in Q2 '05 and grew 11% as we continued to see nice traction in the OneSource. We continue to be very pleased with the performance of the Service business, as our customers increasingly see the value proposition where we provide solutions to increase productivity, reduce complexity and realize cost savings.

In the environmental and chemical product lines, which represented about 26% of our LAS revenue in the quarter, revenue was up 6%. Domestically, we continue to see good fundamental end markets, with funding for bioterrorism in clean air and water initiatives fueling growth opportunities. And in non-US regions, we also continue to see nice growth in areas such as China and India, as those countries grow their economies and implement infrastructure around clean air and water.

Turning to Optoelectronics, revenue for the quarter was 98 million, up 5%. Optoelectronics operating profit for Q2 '05 excluding restructuring and intangible amortization was 16 million or 16.4% of revenue, up 60 basis points over Q2 of last year. Within Optoelectronics, total Imaging revenue was about 31% of total Opto revenue for the quarter, and grew about 13%, driven by the Medical Imaging Greg mentioned earlier. Partially offsetting this growth of the Medical Imaging has been reductions in sales of CCDs to several military applications, due to contract expirations. In Medical Imaging, the end markets continue to be very strong, and we expect in Q3 potential demand to exceed capacity. So we are taking the opportunity now to invest in assets to increase our capacity, to ensure that over the long term we can meet the growing demand in these exciting end markets.

Specialty Lighting revenue was about 34% of total Opto revenue for the quarter, and was up 4% compared to Q2 of last year, due mainly to lower Photo Flash sales in single-use cameras that partially offset the growth in our Cermax Xenon light engine business and of our acquisition, Elcos. We continue to manage through the end-market challenges and transitions in Flash Lighting, as end market demand for single-use cameras continues to decline as well as the recycling of flash modules increases.

Sensors revenue was about 34% of Opto revenue for Q2 and was up 11%, driven by growth in our general industrial as well as safety and security end markets.

Finally, the Lithography business in Opto, which, of course, services the Semicon market, was down almost 80% in the quarter.

Turning to Fluid Sciences, Q2 revenue was 56 million, down about 6%. Fluid Sciences operating profit for Q2 of 2005, excluding the restructuring and intangible amortization, was 7 million or 11.8% of revenue, down 390 basis points over Q2 of last year. During the quarter, the Aerospace segment, which was about 61% of Fluid Sciences revenue, was up 6% with solid contributions from both our OEM business and repair and overhaul. We continue to see robust build plans forecasted for major OEMs such as Boeing and Airbus, and we continue to invest in the aftermarket, where flight hours have been up in the high single digits, fueling growth opportunities here.

The Semiconductor business, which represented about 23% of Fluid Sciences revenue in the quarter, was down 29% compared to Q2 of '04, as the end market continues to be soft in Semicon. And Power Gen and Fluid Testing, which represented about 16% of Fluid Sciences revenue, was down 2% as growth in Power Generation was offset by declines in Fluid Testing.

On slide 12, I would like to discuss our cash flow and debt reductions for the quarter. At the top of the slide, you can see our free cash flow during the quarter was $80 million, which on a per-share basis is $0.61 per share, up 55% over the free cash flow of 52 million in Q2 of last year. We continue to make excellent progress on working capital, with our turns during Q2 increasing 0.3 from 4.9 to 5.2. At the bottom of the slide, you can see that our debt reduction was $100 million, and on the right side you can see that our net debt is now 115 million, down significantly from the end of Q1 of this year.

Turning now to slide 13, I have provided a summary of our financial results for the first six months of 2005. Of course, this shows good progress over the first half of last year. You can see that our revenue for the six months ending Q2 '05 was 841 million, up 5% over the same period of last year. LAS was up nicely during the six-month period, up 6%, while Opto also showed good growth through the first half, up 8%. Growth in these two segments was partially offset by a decline in Fluid Science revenue for the first six months. And Fluid was down 6%.

Continuing on this slide, you can see that our first-half gross margin has expanded 70 basis points, tracking nicely to our forecast of 100 basis points for 2005. Our operating margin for the first six months of 2005 was 11.1%, excluding restructuring intangibles, and was up 40 basis points over the first six months of last year. On the right side, you can see that the LAS operating percentage was up 140 basis points, Opto increased 60 basis points and Fluid Sciences' OP margin has contracted 300 basis points, due mostly to the lower Semicon revenue. Adjusted EPS is up 16% over last year, and we continue to generate strong cash flow, up over (ph) last year and significantly greater than our adjusted net income.

On slide 14, you can see our second-half 2005 forecast. Our forecast for the revenue for the second half is to grow at 5 to 6%. You can see the segment detail to the right of these estimates, with LAS forecasting 5 to 7% growth in the second half of 2005, Opto also growing in this range of 5 to 7%. And we are forecasting Fluid Sciences to be down 2 to 3%, again caused by the soft Semiconductor end markets.

We feel that the momentum through the first half of 2005, the revenue growth and the restructuring actions that we have taken will allow us to drive 100 to 120 basis point operating margin expansion in the second half of 2005, thereby delivering EPS growth in the high teens and, again, free cash flow greater than net income.

Turning to slide 15, this shows what the full-year results would be, assuming we achieved the second-half projections on slide 14. The results would be revenue growth in mid-single digits, even with significant declines in Semicon, operating margin expansion of 100 basis points and adjusted EPS of $1.07 to $1.10. In addition, due to the strong cash flow that we have generated in the first half, we have increased our free cash flow forecast for the full year from 165 million to 180 million or roughly $1.40 per share.

Slide 16, which is my final slide, shows our Q3 2005 guidance, which assumes revenue growth of about 5 to 7%, as well as EPS excluding intangibles of between $0.26 and $0.27, up from $0.23 reported in Q3 of 2004. With the estimated impact of intangibles of $0.04 per share, GAAP EPS is forecasted to be in the range of $0.22 to $0.23.

Now, I would like to open the call to your questions.

(OPERATOR INSTRUCTIONS). Darryl Pardi, Merrill Lynch.

Rob, just quickly, could you walk through the FX impact for the three segments, or at least for LAS and Opto?

LAS was 2, Opto was 1 and Fluid was 0.

Biopharma is -- there are a lot of different products within that. Can you just give us a sense for or give some more color on what is happening across the portfolio -- reagents, high-throughput screening, liquid handling and some of the QA/QC products?

Well, we saw -- I will start it, and then Rob can jump in. But I think in the quarter, we didn't see a major difference in the Biopharma market from where it has been over the past -- frankly, the past couple years. We think it has been fairly consistent in that. You get some moving in and out in any particular quarter. Instruments was a little weaker than we anticipated in this quarter, and we see some of that coming back in the third quarter and beyond. Some of that just sort of moves, ebbs and flows along a little bit. We didn't see a lot of weakness, as you know, in the first quarter, when others did. So I think we look at that marketplace and say it's about the same where it has been, and it really gets stimulated ultimately by the introduction of new products in some of the more rapid-growing areas within the marketplace.

Any other color you want to provide on that, Rob?

I would say just from an end-market perspective, we did see growth in academic, and we saw contraction in the Biopharma area. And I think, as Greg said, that is fairly consistent with what we have seen over the last couple quarters.

R&D growth -- you have grown R&D spending about 10% through the first half of the year. What would your outlook at this point, then, for the full year?

I think probably it would be in that number, probably a 10% growth year over year. And I think we are going to model that saying -- depending on what type of revenue growth and what kind of profitability we see in Fluid in the back half.

And just lastly, with respect to the debt reduction, it should reduce your interest expense by around 5% annually, correct? Because there's the 8 7/8 (ph) interest expense on that debt?

Yes. So if you're just talking about the subordinated note, we took 30 million of that out, and so we think about that as a 9% savings year over year. Now, of course, we were learning something on that cash, say 2 or 3%. So we're probably saving 6 percentage points on $30 million or 1 million 8, on that piece in and of itself.

What about the remaining 70?

The 70 -- our term loan was costing us LIBOR plus 200, and so if you think about it, we're probably investing our cash at around LIBOR. So it probably saved us about 200 basis points on that piece.

Paul Knight, Thomas Weisel Partners.

Greg, can you talk about two items? First, talk about -- you are guiding to acceleration in the second half of the year. Is it because some parts of the businesses shrank enough, or is at the fact that you have got the digital imaging and the diagnostics businesses at critical mass?

The second question is, where are you headed with M&A and also divestitures? What do you see in that area? And I will let you go from there.

I think it's -- in the growth in the back half, I think it's both of your points. So if you take a business like Semicon, which is at -- we will call it a cyclical low, we see the outlook as one that strengthens from here out. If you take the other one that was weak, which is Photo Flash, that's also at a low point. And that is going through the film to digital transition. So we think that continues to ramp as we go forward from here.

So I think the negatives get better, in those product lines. And as we look across our growth platforms, we expect those to continue and those to continue to build some critical mass around them. So I think, as we look at the growth going forward, I think you have got the cyclical low -- coming off sort of cyclical lows on a couple of the industrial segments, for a variety of reasons, and some strengthening outlook on the growth platform. They continue to get larger and build more mass. And I think we also continue to get new products out there, and feel a little bit more bullish about our ability to drive growth off of that.

On the M&A and divestiture side, our priority falls really around building out the -- I'll call it the technology and the product breadth of our growth platforms. And so that is -- so we're concentrating on that part. On divestitures or potential divestitures side, we also look at each of our businesses and have over an extended period of time, as you're aware, look at their fit and look at where do they make sense, given our strategy and our investing priorities. But we don't really ever comment on those things, on either side, until we have certainty around a potential transaction.

On your comment about you think you might have a cyclical low in some of those businesses, what do you use to judge that? Do you have a backlog number you are looking at? What makes you comfortable that that is better in the future?

I don't have a specific -- we do look at backlogs, although in Semi, those backlogs are very short timeframes. So I don't know that they are that indicative. It's really more kind of what happens with the end customer base in that business. So I think, as you see the semiconductor companies themselves, which have started to improve, they ultimately drive the demand through the capital equipment marketplace, which is where we participate. So we look at sort of the historical curves of these things, and then we also look at the end customer. And that gives us a little bit longer -- it's a surrogate, if you will, for long backlogs, because it's a fairly short leadtime business.

And lastly, what do you think you peak, your normalized growth rate, really is on the top line, with the portfolio that you have now?

I think it's around the -- as we look at it, I would say with the portfolio or actions under way, we feel that is around kind of a 7 to 8% range, somewhere in there.

Dan Madianco (ph), Morgan Stanley.

Just a quick follow-up on that question, on the divestitures. I'm looking at your guys' company, and you are having this phenomenal growth in Life Sciences and some of the higher-end stuff. And in the other part of the businesses you have outlined is kind of dragging you guys back. Can you give us any sense of a timeline when those businesses are going to be gone, if they are going to be gone? Because I think in my mind that's going to really improve the profile of the Company.

And then, secondly, Life Sciences business you guys are saying is fairly flat for the year. Could we see some acceleration beyond 0% growth in the third or fourth quarter? And would it take to get that going?

Just coming back to the questions about -- if you look back at our history since 1998, we have done a fair amount in terms of changing the portfolio of both divestitures and acquisitions. And we continue to sort of challenge that in each and every area. As we look at some of these businesses, even if they are at a low point, we do see fairly bright prospects and have pretty good management teams in place to manage through that. So we have not made any definitive decisions on anything relative to that, but we will post you when we do.

Now, when you said the LAS growth, the LAS business has grown through the year. And I will refer you over to Rob in the second. I think what we're talking about is the Biopharma segment within the LAS, and we see that sort of slowly kind of ramping up in growth. But our expectation in all of our planning for this year had that business in at 0%. And so that has not been wildly different from where we started the year, in terms of our expectation.

But let me get Rob to comment a little bit on some of those numbers.

Just to review the numbers, as I mentioned, LAS through six months has got a reported growth of about 6%. And think of FX in sort of the 2% range, in that area. So, as Greg said, it is showing sort of mid-single growth. And we have got a couple of areas that are growing very nicely. So, obviously, Genetic Screening was up over 20% this quarter, Service has been consistently in high-single/low-double digits. And I think the Environmental side also continues to be sort of high single digits. So I think the real issue is Biopharma, and if we can get that moving up from sort of flat to low to mid-single digits, I think it can have a dramatic impact on the overall growth of the business.

I'm sorry -- (indiscernible) in Biopharma. I guess, what will it take for that business to start growing again?

Well, I think some of it is market and some of it is internally. And Greg mentioned a couple new products that we got out in the market, particularly in the liquid handling area, where we have been, I would say, investing in the last 12 months. We're excited about some new products there, so I think it's going to take some new products, some new applications in the market as well as, hopefully, Pharma now starts to spend a little bit more on CapEx. I think clearly they have been spending in R&D, but I think their capital expenditure side has been down. So we have had a little bit of an impact on our instrument installations. And so I think it has got to be a combination of a little bit of market and also it's getting some new products and new applications out into our customers.

And these new products -- this is higher-margin kind of stuff, or the margin pretty much in line?

One of the areas we're particularly focusing on is in the reagent area, as you probably know. It is higher-margin, so I think the intention here is as we come out with new products that they would have higher gross margins than the products that they are replacing.

John Harmon, Needham & Company.

I don't know if I'm splitting hairs here, but it looks like the growth rate of your Genetic Screening business ticked up in Q2. Is that just noise, or did some states get on board with the 30 test level?

John, I would say it's more of a little bit lump,y in terms of when contracts kick in, when they don't. These contracts take a while to develop, as you know. First you to have to win the contract, then you have to do the installation, then you have to do the qualifying kind of runs that are associated with it. So I think it's just a little bit more lumpiness. We expect Genetic Screening, and it has been for a number of years, to be a strong double-digit grower. And it will go up and down any one quarter to the next.

Having said that, we think the outlook for Genetic Screening has never been better, in that sense, in that there is a kind of increasing momentum around this adoption of a standard of care. So I would say it goes up and down a little bit around an increasing trend line, so we think that continues on.

The other area we're increasingly excited about is continuing to expand our prenatal offering, which I referred to before, in the maternal health area. And that is also an area that is doing pretty well. It's an area that we historically have been addressing really outside of the United States, but increasingly are intent on deepening our presence in the US in that area, as well. And it fits very well with the whole neonatal. And for us, I will call it a much more broad sort of maternal health perspective, the maternal and the fetus health, in this process.

And secondly, I believe you said you expect to be capacity-constrained on digital imaging in the third quarter. How did that happen? Did your big customer increase his order rate, or was it additional customers?

A little context on that. We think we will be capacity-constrained in the third quarter. We will not be in the fourth quarter. So part of this is just the way capacity comes on in that business. There are some pretty sophisticated tools called CVG tools, which are the chemical vapor deposition tools, and they cost in the -- call it a $5 or $6 million range. And they have about a year and a half to two year leadtime on them, not only to get the instrumentation and get it in, but then to get it qualified. And so there is a fairly long qualification process.

So I think the demand has continued to move up on us as we have gone through this period of time, and we will get those capacity constraints solved. But it's going to put us under a little bit of pressure in the third quarter.

Could you see meaningful revenues in the fourth quarter from either the camera phone flash units or the TV backlights?

Well, our video projection business, which is going in the TV, actually had a very good quarter. Most of that was coming out of -- I'll call it the business projection side of the market. We have a lot of interest with a broad number of TV producers, and I would say led by Sony, who has really been the forefront of this. And they are taking it down into lower-end products, as you know. It has always been at the very top end of their product range. So, long story short, we see some ramp-up in the fourth quarter and then much more significantly in 2006.

Finally, just one quick housekeeping thing. Normally, you give a breakdown of LAS revenues between instruments, regions, consumables and services.

Well, Service, we mentioned, was 11%. Instruments was up 3. Reagents was flat.

Barbara Rosenthal (ph), Loeb Partners.

I just wanted clarification on something. There seems to be a slight restatement of last year's results, particularly as it relates to the Optoelectronics group. And I was just wondering if that relates to that reclassification from the sale of the business to discontinued. Because last year, it looks like revenues are now down about 600,000 from what you reported in the second quarter of '04. And, more importantly, the operating margin then, after the amortization, was 14%. And now you're saying it's just 15.8% adjusted. I was wondering if you could just clarify that?

Yes, you are right. That's what it is. It's the movement of the discontinued business, which is our fiber-optic testing business, down below continuing ops. So we take it out of the current quarter. We also go back and take it out of the prior quarter, so that you're looking at apples to apples.

So it had that much effect on the operating margins?

It did.

Quintin Lai, Robert W. Baird.

Rob, with respect to your second-half revenue forecast, does that take into account the strengthening of the US dollar, and especially with negative FX in Q4?

What we have done is we have assumed in the back half that reported and organic are effectively the same. So that is the assumption we have made. So the one way to think about that is that is also consistent with organic growth. So if the FX rate moves relative to where we are now -- or, I should say, were it has been in the back half of last year -- then the reported rate will move accordingly, but not the organic rate.

And then, with respect to Genetic Screening, you seem to be gaining a lot of market share and mind share with respect to proteomic-based screening. Any updates on kind of your strategy on maybe entering the nucleic-acid-based screening? And would you do that maybe on a go-alone basis or a partnership similar to what you've done with Waters?

We certainly have a lot of discussions underway on that with our customers, and a fair amount of evaluation going underway on the technical side. So we have not, but I would say from a marketplace standpoint we have not seen a significant demand for that at this point. We expect there will be some play in that going forward, and we expect to be part of that play.

I would say, when you think about the customers from the neonatal testing standpoint, the technology is one aspect of it, but they are really very, very concerned about the integrity of the complete system, from the sample to their ability to process that sample, custody (ph) control, automation, cost per test, validity of the test. And so those things tend to set up a little bit of a time constant, if you will, around the adoption of some of these new technologies. But, having said that, we are certainly looking at that in depth and have a number of areas in there. And I expect we will do it with a range of partners.

John Sullivan, Leerink Swann.

A couple of quick questions. First of all, regarding the lab equipment and lab equipment services business, the OneSource business, there are several companies that are chasing this business and have been. Can you talk about is this business relatively price competitive? And what are the nature of the contracts? Are they multi-year contracts over multi-sites?

There is a wide variety of things in the service business, John. If you sort of start with it, we have a very large installed base of instrumentation. We cover a very broad range of applications. And our OneSource business was really targeted on expanding outside of the normal maintenance and repair and evaluated services -- so validation, consulting, training, et cetera -- and also in the third-party repairs. So there are certainly a number of examples where the pharmas and other organizations are now beginning to outsource complete sites to people like us, where we would take on third-party repairs and, in some cases, multi-sites.

That's still a fairly small percentage of the total revenue, but it is a growing edge. I think you can look back on our success over the past two and a half years since we formed this up, where we have been posting pretty close to double-digit growth throughout.

And on the margin side, the operating margins are good. The gross margins are low because it's a service business and there is no R&D or other things loaded into it, but the operating margins on the business are good.

Anything you want to add, Rob, on that?

Yes.

Is it a request-for-proposal type business generally, or not really?

It's a mix of that. With the multi-sites or multi-vendor, it tends to be a little bit of a request-for-proposal. But there are -- I would say a limited number of companies that have the ability to respond, credibly respond, to the breadth of instrumentation and services required.

And let me put it this way. The sites are very sensitive to the quality of service that they get. They are not indifferent to what the uptime looks like, or they are not indifferent to whether there is really the quality or the capability to repair a broad range of manufacturers' instrumentation because, of course, if they get downtime, the savings they got in service get quickly wiped out. And so it tends to be both single and multi-year contracts. The bigger and more complex it is, the longer the contract tends to be. Otherwise, we get into a lot of contract renewals, where they are one-year contracts on kind of a regular renewal basis.

Regarding the gross margin line at Perkin, is there more streamlining of physical capacity that might impact the gross margin line? And then, separately, is there more relocating of major manufacturing capacity to lower-cost geographies that might affect the gross margin line?

I think that certainly that is part of it, and that will continue to be a lever that we work on for a very long time. I think you sort of never arrive on that front. I think the other part of the gross margin line is to continue to work on the mix that you have -- mix between instrumentation and reagents, for example -- and also, then, the mix within product lines. So we continue to look at the competitiveness of certain product lines and weed those out, and invest in new product lines. So I think that's probably a more important lever over the period of time, but certainly we're looking at and continue to do a lot in low-cost sourcing, both the on the material sourcing side and on the manufacturing itself.

Steven Salamon, Infinium Capital.

Just wondering if I could follow on a couple of those things that John brought up. Can you talk about roughly what percentage of your direct costs come from Asia at this point?

And the second question is to do with the OneSource offering of the services and revenue. Is it possible to give us a sense of the end market breakdown -- for instance, Life Sciences versus Industrial? And also to give a sense of the breakdown between what I guess you would call traditional services versus, say, asset management or the e-training services that you're offering? I don't know if there's any other categories you would break the Service into in terms of the types of revenue.

We don't break the service revenue down to that level of granularity. I would say that some of the higher value-added services are a small portion of the revenue. Call it less than 10%, at this time, but they are more rapidly growing than the rest of the Service -- in the rest of the Service business. I think clearly, when you think about it, the Service business is not growing at 10%, yet we are growing at 11. I mean, the Service business is probably growing in middle-single digits, as an overall demand level from the customer. And then, spiking up that is the mix of higher value-added services. It's our ability to consolidate out -- I will call it some third-party, some smaller third-party vendors. And it is a little bit of a mix of taking on some internal Service that is now being outsourced. And so that is what drives the overall Service level up, but we don't really break it down by zip code of customer, if you will, at this point.

On the direct costs out of Asia, I don't know that I have a precise -- I don't have a precise number, let me rephrase that -- on our direct costs out of Asia. If you look at -- and by that, I don't know if maybe you're talking about the manufacturing side. Across our businesses, Optoelectronics has been very heavy in Asia for a long time, where they have done kind of the leading part of their manufacturing. LAS business does manufacturing in Asia, particularly out of the Singapore region. But we are increasingly doing our sourcing out of there, and the Fluid Sciences business has been ramping up its capabilities in the (indiscernible). So it has been a growing edge for all three. I don't know that I have a percentage. Let me just turn to Rob and see whether he cares to put a broad estimate on it or not.

I don't know. I think, as far as sourcing, it's probably in the 20 to 25% range. And I think from a manufacturing content, it varies widely by the businesses which, as Greg said, for Opto I think it's fairly significant, maybe as high as 50, whereas I think in fluid and LAS it's much lower than that.

So maybe a third, overall, manufacturing from Asia?

Yes, that may be high.

High, I would say. Yes. I mean, I think if the point is, is there is a significant opportunity there, I think the answer is yes, there is.

Eric Biddle (ph), Merrill Lynch.

I just wanted to find out what your plans are with the remaining, I guess, 270 million of the bonds, considering that -- I think the bonds were 8 7/8 (ph).

Well, I think, as our cash flow continues to come in very strong, I think we will get opportunities that potentially take pieces of that out, if it makes economic sense. I think, in this instance, we were able to get the 30 million chunk out of it at a pretty good price, and something that made net PD (ph) positive to us. And I think, to the extent we can do that opportunistically in the market, we will look to do that.

Dan Madianco, Morgan Stanley.

The question has been answered.

Darryl Pardi, Merrill Lynch.

What would the capital requirements be to expand your digital imaging capacity?

I'm trying to put that in the context. Let's call it $5 million -- $5 to $6 million a year kind of range is what we're looking at, where we have been running.

Some of that has already been spent in the first half, so that is not incremental to the back half. That is contained in our CapEx forecast.

And those are consistent with the level of investments that you made in 2004?

Yes. And for a number of years in that business; I think it has been consistent there.

There are no further questions at this time. I would like to turn the conference back over to Mr. Greg Summe for any additional or closing remarks.

Thank you, operator, and thank you, everyone, for your questions. We feel good about our progress through the second quarter, and are optimistic about our prospects for the balance of 2005 and confident in our ability to deliver our commitments. So I want to thank you for your time today and your interest in PerkinElmer. This call is adjourned. Have a great day. Thank you, operator.

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.