Revvity Inc (RVTY) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 PerkinElmer earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Steve Delahunt. Please proceed, sir.

Thank you. Good afternoon and welcome to the PerkinElmer third quarter 2006 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 hot line, 877-pki-nyse.

Before we begin, we need to remind everyone of the Safe Harbor statement that we have outlined in our earnings press release issued earlier this afternoon and also those in our SEC filings. Any forward-looking statements made today 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 those non-GAAP financial measures replan to use during this call to the most directly comparable GAAP measures is available in our press release. 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'm now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Greg Summe.

Thank you, Steve. Good afternoon, everyone. I appreciate you joining us today to discuss our third quarter 2006 results. With me today is Rob Friel, our Vice Chairman and President of Life and Analytical Sciences; and Jeff Capello. our Chief Financial Officer. I will begin by reviewing the quarter with some highlights, and then an outlook for the optical electronics business. Rob will then provide a review of the life Jeff will provide more detail on the financial results. After that the three of us will be available for questions and then we will move to close the call.

Overall we are very pleased with our progress this quarter with both strong revenue and earnings per share growth while continuing to make significant investments in our growth platforms. Our GAAP earnings per share from continuing operations in the quarter were $0.23. Our cash earnings per share were $0.30, 25% over the same period in 2005, and better than our forecast of $0.27 to $0.29. Revenue in the quarter was 387 million up 7% on a year-over-year basis, 9% life and analytical sciences and 2% in optical electronics. Revenue increased by 3% due to foreign exchange and acquisitions and so it was 4% on an organic basis. We had very strong growth in genetic screening, medical imaging and services.

We continue to generate strong operating cash flow driven by our improved profitability and ongoing working capital progress. Operating cash flow from continuing operations in the quarter was 26 million up 42%. Our balance sheet remains strong as we finished the quarter in a net cash position while repurchasing the remaining 3.9 million shares left in our share repurchase authorization. Yesterday our Board of Directors approved the new share repurchase authorization of 10 million shares. Our first priority for the use of our cash continues to be acquisitions to support our growth and secondarily for share repurchase.

In the third quarter we maintained our commitment to increase investments in growth. Our research and development spending was up 14% and our capital expenditures were up 48% over the prior year. This quarter we launched a number of new products including the Clarus 600 series of gas chromatography instruments. The Clarus 600 delivers the fastest heat-up and cool-down cycles for a conventional gas chromatograph, short in cycle time, and consequently productivity, improves productivity for our customers. The Clarus 600 addresses the needs of wide range of gas chromatography and gas chromatography mass spec users including environmental, forensic, petrochem, and chemical. Within biopharma we're aggressively developing our portfolio of cellular screening, cellular signaling, and kinase research tools for drug discovery.

Our CellLux and LumiLux platforms have been well received and we just recently launched our next generation UltraView which is used for photokinetic live cell imaging and has a FRAP application, or fluorescence after photo bleaching.. We have also recently introduced a series of alpha screen cell based reagents and the JANUS cellular workstation, another addition to the JANUS product line. It is a fully automated liquid handling platform designed for cellular assays. Our JANUS platform is being very well received and continues its brisk double-digit growth.

We also announced the launch of two new multiplexing technologies used in genomic research. These two systems, one for gene expression and the other one an array CGH, are the first offerings resulting from our recent acquisition of Spectral Genomics and our licensing agreement with Luminex. These solutions accelerate the development and validation of genomic profiles and applications. Our service business continues its very strong growth with our one-source program. We recently won multiyear one-source contracts with just three customers that amount to over $10 million in annual service fees.

During the quarter we completed two acquisitions. We acquired NTD Labs, microtechnologies, which is a leader in prenatal risk assessment. We detailed that on the second quarter call. And Avalon Instruments is a provider of Raman spectroscopy systems. Avalon will expand and complement our molecular spectroscopy product portfolio through adding a family of innovative bench top dispersive Raman spectrometers. We have completed five acquisitions this year all having products and technologies that support our growth platforms.

Turning to optical electronics our imaging business grew double-digits in the quarter as we continue to make progress on expanding flat panel capacity. Detector shipments were up double digits year over year, and demand from both diagnostic and therapeutic customers remains very strong. We continue to invest in the expansion of our Santa Clara flat panel fabrication facility, which we expect to be doubled in size by the end of 2007. We continue to see significant demand for these products and are confident in continued double-digit growth for the foreseeable future.

In specialty lighting we continue to see very strong growth in our digital flash business which is helping to offset the decline of the film-based flash. This is the last quarter that the film-based business will have a material impact on specialty lighting revenue growth. In addition we continue to make progress on the production of flash modules. While the exact timing is hard to forecast we're confident it will develop into a significant market for us. We feel good about the accelerating growth momentum in our businesses and our investment to sustain that momentum. We're confident we'll be able to deliver our forecast for the year of $1.15 to $1.20 of cash earnings per share. I'll now turn the call over to Rob Friel who will discuss our outlook for life and analytical sciences. Rob?

Thank you, Greg. This afternoon I thought I would briefly describe the market trends we are seeing and comment on our priorities going forward. For the most part our end markets are as expected with no major changes. The macro economic enviro seems to be in good shape, and more importantly for our environmental and chemical business corporate profits and cash flow is strong. Our customers, which in this segment are mostly corporations, are purchasing new analytical instruments if they provide compelling return on investments, are in response to growth, or in some instances, due to regulatory changes. Our approach, therefore, is to continue to provide instrumentation that improves the operational efficiency to our customers and provide compelling ROIs. A good example is our our new Clarus product line that Greg mentioned. By significantly reducing the time between sample injection within an environmental lab the Clarus provides compelling financial payback to the lab operator. In some instance paying for itself in a matter of months.

In addition, we will continue to expand the technologies within environmental and chemical to be able to provide more solutions to the same set of customers. The Avalon acquisition is a good example as it brought Raman spectroscopy and expanded our molecular spectroscopy offerings. You will also see us continue to increase our resources in those markets in geographical regions that are growing fastest. Like environmental, China, and India.

In the biopharma area, we are experiencing continued strength in biotech. Within academia and research, we are seeing flat to slightly down budgets, and within large pharma research budgets continue to increase but with the spending being very targeted. From our perspective, large pharma spending is focused in two areas. The first is improving productivity. For example, we are seeing a number of our customers shifting from fluorescence technology to luminescence technology within screening to improve sensitivity, facilitate miniaturization, and provide less interference.

The other major trend in pharma spending is a real interest in tools that enable researchers to do things or provide information that previously was unavailable, particularly in the area of cellular analysis. Our response has been to introduce new products that address these trends. A couple of examples are the recently introduced JANUS cellular workstation, the CellLux and LumiLux and a new series of alpha screen cell based reagents. In the future you will continue to see us focus both our new products and our business development activities in these and several other key growth areas.

The genetic screening market continues strong and we continue to expand the number of countries where we provide screening solutions as well as increase the number of screens we test for. With the addition of NTD Labs and Spectral Genomics we have significantly expanded our capabilities in neonatal and prenatal. Our approach in neonatal will be to continue to drive adoption of the standard of care in the U.S. and increase awareness and accelerate adoption globally. In prenatal we continue to integrate NTD and Spectral Genomics into our expanded sales force and continue to look for new markers.

In service we continue to benefit from the outsourcing of lab repair and validation. The acquisitions of Biomatic and C&A are performing well. As we continue to win business and expand our capabilities, we are presented more opportunities. Our first priority in service is to continue to execute well on our recent one source win. In addition, we are expanding our capabilities geographically to benefit from the instrument growth in the PAC RIM. Looking across LAS we are improving the velocity and yield of our new products while continuing to improve our alignment with our customers' priorities.

In summary, within L.AS the external market conditions are pretty good. Through new product and business development we are regaining positive momentum in the marketplace and the organization continues to improve every day. Consequently, I am quite optimistic about our ability to continue to accelerate our growth rate. Now let me turn the call over to Jeff.

Thank you, Rob, and good afternoon. This afternoon I will provide some details on our revenue, costs, and cash flow for the third quarter 2006. Then I'll briefly discuss guidance for Q4 and full year 2006 before opening 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 third quarter 2006, compared to the third quarter of 2005. And to the extent that I use any non-GAAP measures those have been reconciled to the comparable GAAP measure in the appendix to the press release on our website. It is important to note that we have elected to apply the impact of FAS 123R, expensing of stock options, in our financial statements on a prospective basis beginning in Q1 '06. Therefore, the results of Q3 '06 and Q3 '05 are not comparable with the impact of stock option expense being a pretax charge of 3.1 million, or $0.02 per share.

Turning first to revenue we finished the third quarter 2006 with sales on a reported basis of 387 million, up 7% compared to 360 million in the third quarter of 2005. On an organic basis, which for the purposes of this call excludes the impact of foreign exchange and acquisitions, Q3 2006 revenue increased 4%. By segment, revenue growth was 9% in LAS and 2% in optoelectronics. On an organic basis LAS revenue growth was 5% and optoelectronics was 1%. Geographically revenue in the Americas which represented approximately 46% of our revenue for the quarter was up mid single digits organically. Revenue in Europe which represented about 36% of our revenue for the quarter was also up mid single digits organically. And Asian revenue representing about 18% of our revenue for the quarter increased in the low single digits. Continued double-digit performance in China and India was somewhat offset by transition issues in Japan impacting our Asia region growth.

Gross margins for the third quarter 2006 were 40.3%, a decline of 140 basis points over 41.7% in the third quarter of 2005. Adjusted for the impact of stock options and amortization expenses gross margins declined 130 basis points. Strong volume and favorable product mix across both our businesses contributed to strong gross margins in Q3 '05 creating a difficult year-over-year comparison for Q3 '06. In addition, gross margins were affected by commodity costs, product mix, and foreign exchange. On a sequential basis gross margins adjusted for the impact of stock options and amortization expense increased 20 basis points from Q2 '06 to Q3 '06 and are expected to increase sequentially in Q4 '06.

R&D expenses increased 14% to 24.8 million in the third quarter of 2006 from 21.7 in the third quarter of 2005. Adjusting for the impact of stock option expensing and amortization, we increased R&D expense as a percentage of sales by 20 basis points to fund the acceleration of activity around new product introduction. As discussed our pipeline of new products is beginning to generate results and is expected to further increase growth in Q4 '06 and into 2007. We remain committed to increasing R&D spending in Q4 and into 2007 on a year-over-year basis.

Selling, general, and administrative expenses were 24.5% in the third quarter of 2006, up from 24.4% in the third quarter of 2005. Adjusted for stock option and amortization expenses SG&A decreased 80 basis points. The decline in selling and general and administrative was primarily driven by productivity initiatives and geographic mix of revenue across all entities slightly offset by the impact of the acquisitions. GAAP operating income for the third quarter of 2006 was 36.5 million compared to 41.2 million in the third quarter of 2005. Excluding intangibles, amortization and stock option expense operating income in Q3 2006 was 48.6% or 12.6% sales, down 80 basis points from Q3 2005 due to increased R&D and gross margin declines more than offsetting lower relative SG&A spending.

Looking at expenses below operating income, interest expense net of interest income in Q3 2006 was 200,000 as compared to interest expense of 6.4 million in Q3 2005 due to significant debt reductions over the last 12 months and continued strong cash generation. Within the quarter we had net gains on investments of 980,000 compared to net gains of 400,000 from Q3 '05. Other expense of 500,000 is comprised of the cost of hedging our foreign currency balance sheet exposures. The tax provision of 7.8 million for the quarter, third quarter 2006 reflects a rate of approximately 21.3% which includes a net benefit of 1.2 million primarily related to the difference between the prior year tax provision and the actual tax liability. We expect our tax rate to be approximately 24.5% or lower during the fourth quarter depending on the distribution of actual income and other items.

Net income from continuing operations was 28.9 million in Q3 2006 up from 26.5 million in Q3 2005. Weighted average diluted shares outstanding for the quarter were 125.2 million shares reflecting the impact of our year to date repurchases. During the quarter we repurchased the remaining 3.9 million shares outstanding on our 10 million share repurchase program approved by the Board in 2005. As noted by Greg our Board has authorized a new 10 million share repurchase program. GAAP EPS from continuing operations was $0.23 in the quarter, excluding intangibles and amortization and stock option expense adjusted EPS was $0.30 in Q2 '06 up 25% from Q3, 2005, exceeding the First Call consensus estimate adjusted for stock option expense and exceeding our forecasted range of $0.27 to $0.29.

Turning to our segment results I will briefly describe Q3 performance. In LAS revenue in the third quarter was 283.5 million up 9% over the third quarter of 2005. On a GAAP business LAS operating profit for the third quarter of 2006 was 25.3 million compared to 26.7 million for the third quarter of 2005. Excluding the amortization of intangibles and stock option expense LAS Q2 2006 operating margins were 12.2% down from 12.8% in Q3 2005. In addition to a challenging comparison period commodity inflation and product mix somewhat offset by the impact of productivity initiatives drove the operating margin results.

In genetic screening which is about 15% of LAS revenue in the quarter organic revenue increased very strong double digits. We continue to see excellent expansion in neonatal screening which is grew strong double digits driven by the continued adoption of our tandem aspect platform in both the U.S. and international markets. Prenatal screening also grew strong double digits during the current quarter compared to Q3 2005 driven by increased acceptance of our tests in Europe and the acquisition of NTD [Macry] which generated strong double-digit organic growth in the quarter resulting from higher demand for first trimester risk assessments.

Service, which represented about 24% of our LAS revenue in the quarter grew high single digits organically also continuing its upward trajectory. We saw good growth in our base business, a positive impact from our recent acquisitions, and continued strong demand from our one source multi year service offerings. The outlook for our service business remains very favorable as our multivendor strategy continues to be very well accepted in the market.

In the environmental and chemical product lines which represented about 26% of our LAS revenue in the quarter organic revenue increased mid single digits driven by very good performance in both our ICP and GC product line. Orders in both China and India were up double digits in the quarter, reflecting continued demand for solutions to improve air, food, and water quality in emerging market.

Biopharma sales which represented 35% of LAS revenue in the quarter were flat on a reported basis and down low single digits organically compared to the same period 2005. Within biopharma certain businesses showed strong improvement in year-over-year revenue growth versus Q3 2005 driven by new product introductions; specifically, revenue in our automation and liquid handling product lines grew strong double digits for the third quarter in a row. Customer market acceptance for our new JANUS platform continues to be very strong across all segments confirming the need for a modular and flexible liquid handling platform. Our non radioactive reagent portfolio grew double digits in the quarter driven by our [LANs] and luminescence product line. Offsetting these improvements was the decline of our radioactive reagents and instrument products as customers continued to transition away from RAD products.

Overall we continue to see good progress in the portfolio transition within biopharma and expect that progress to continue in the fourth quarter 2006. In optoelectronics revenue for the quarter was 103.4 million up 1% organically compared to the third quarter 2005 led by our imaging business which grew double digits offsetting revenue declines in our specialty lighting business. Optoelectronics GAAP operating profit for the third quarter of 2006 was 20.1 million or 19.4% of revenues. Excluding intangibles, amortization, and stock option expense operating margins were 20.5% which represents a decrease of 70 basis points compared to the third quarter 2005, driven by a strong comparable from the prior year as well as product mix and increasing investment partially offset by productivity gains.

Within Optoelectronics imaging revenue grew double digits driven principally by strong demand in our amorphous digital X-ray panels. As mentioned, we continued to make good progress in adding additional capacity, and improving yields in our fab which helped drive imaging growth in the quarter. The fab expansion remains on schedule and we expect growth in our amorphous business to continue on an upward trajectory during Q4 and into 2007. Sensor revenue was up low single digits in the quarter, driven by our industrial sensor and photo diode product lines. Specialty lighting was down high single digits compared to Q3 last year due to declines in the single use flash and other product lines partially offset by strong growth in digital camera flash units. As I mentioned in July's call, Q3 2006 represents the last quarter of difficult comparables for our single-use flash product line. We see continuing growth from our digital flash business and are confident that we will begin to realize positive impact from opportunities in the mobile phone camera module markets.

Now, turning to the balance sheet and cash flow during third quarter 2006 we had GAAP operating cash flow of 26 million. This amount includes tax payments of 800,000 relating to the gains recorded in 2005 on the divestiture of food sciences businesses. Adjusting for this one-time payment, operating cash flow for the third quarter 2006 was 26.8 million which represents an increase of 45% over the prior year. Our focus on working capital continues to pay dividends as we had a 0.2 times turns improvement year over year in our working capital. In particular we made strong progress in accounts receivable where we drove the DSO down three days year-over-year to 60 days sales outstanding.

As Greg mentioned, our continued generation of strong cash flow coupled with a solid balance sheet allowed us to make further progress on multiple initiatives. In addition to the acquisitions discussed earlier we increased our rate of investment spending 10 million in capital expenditures, up from 7 million last year and increased R&D spending by 20 points over the same period in 2005. We finished the quarter with total cash of 207 million and net cash which we define as total cash, less short and long-term debt of approximately 5 million. The balance sheet strength and cash flow generation provided us with the ability to make two strategic acquisitions in the quarter, repurchase 3.9 million shares and continues to provide the Company with tremendous flexibility as we look to further expand our growth platforms and return value to our shareholders.

We expect to continue to build off the strong momentum achieved in Q3 2006 and drive higher revenue growth in Q4. For the fourth quarter 2006 we are forecasting GAAP earnings per share from continuing operations of between $0.32 and $0.34 with the impact of stock option expensing expected to be $0.01 and the impact of amortization $0.05. Excluding the impact of intangibles amortization of stock option expense we are forecasting cash earnings per share from continuing operations of between $0.38 and $0.40 per share for the fourth quarter 2006 which will allow us to achieve our annual cash earnings per share forecast of $1.15 to $1.20. I will now open the call to your questions.

[OPERATOR INSTRUCTIONS] Your first question from the line of Ross Muken from Deutsche Bank.

This is actually Mike Turner calling in for Ross.

Okay.

Good job on the quarter. Just a quick question here. Coming back to the RAD reagents I know that last quarter you had seen some difficulty there and you said that people are still continuing to move away from them. Is that something that at some point you say that if this doesn't do anything for us maybe we should move another direction or is that something that, given that it still has a decent contribution to the Company that's something that you would want to hold on to and continue to try and make a better part of the business?

Mike this is Greg. So I think in RAD reagents, the market itself has been in decline. There are a number of things we can do and will do in that business to help mitigate that. It does contribute decently in the business and we think at some point it flattens out. So our intention is to work around that business in terms of bringing up the growth rate of the biopharmaceutical business.

Okay. Great. Thanks, guys. I appreciate it.

You're welcome.

Your next question comes from the line of Jason Weiss with Robert W. Baird.

Good afternoon. Thanks for taking my question.

Hi, Jason.

Hi. I'm wondering if you could talk a little bit about the competitive landscape you see on the digital imaging and how you can be confident that the double-digit growth will continue as you expand your capacity?

I mean, on the competitive landscape, I would say -- let me just sort of come at it this way, which is that the end market is experiencing very robust demand for this, not only in the diagnostics world but in the therapeutic, the radiotherapy world and so forth. Then also beginning I would say in the industrial, nondestructive testing. The industry itself is in very tight supply, with being able to provide the detectors because of the explosive growth going on now on the medical side. So really we haven't been able to spend much time or effort, if you will, in developing some of the other markets outside of medical. So our confidence is really predicated on the basis that we see very strong demand in medical. We see that demand continuing, and we see strong demand in outside of medical in those applications in their very early days.

Great. And just a follow-up to the previous question. With regard to the RAD business, you said you see it flattening out at some point. Is that point foreseeable right now?

Well, we haven't made a forecast on that. I would just say we're doing a couple things there. We're investing in a few areas and some product lines. We're looking at some product shifts within it, and we're looking at some services within there. So we're looking at a variety of mechanisms to kind of mitigate that and hopefully stem the tide there. But, no, we don't have a forecast for you in terms of timing.

Great. Thank you for take my question.

You're welcome.

Your next question comes from the line of John Harmon with Needham and Company.

Good afternoon, or good evening. I was wondering what the -- according to the way you plan things, the time lag is between boosting R&D spending and when you actually see results. I think it was late last year you talked about increasing R&D spending this year, and you were talking about seeing some things end of this calendar year. Is that roughly right, or--?

It's a gradual approach, John, as you know, and I think we're already seeing benefits from increasing our R&D spending. It's the investments both internal, if you will, and showing up in the R&D line but it's also external in some of the acquisitions we have made you can think about has really capitalized R&D because of the types of businesses that we bought. For example, Agilix, which is a reagent for mass tagging, was a technology acquisition. There were no products with it. We have done a lot of work and are introducing the products, just introduced the products here in the fourth quarter. So we expect to see yield out of that investment as we go forward into 2007. So I would say we're beginning to see some yield off of that, and we expect that to continue. So it's kind of a gradual ramp-up as we look forward. Rob, any other comments you would like to make on this or?

No, but I think that's right. I think it's a question of just continuing to sort of boot-strap up and get more products out there. I would say the other thing in addition to increasing the R&D, we've shifted our R&D a little bit, at least in LAS to focus a little bit more on reagents and hopefully we'll see a little quicker cycle time with regard to getting the new products out. So with a little bit heavier emphasis on reagents, less so on the instrument.

Great. Thank you very much.

You're welcome.

Your next question comes from the line of Derik DeBruin with UBS.

Hi, Derik.

Thanks for taking the question. First question I have is regarding the biopharma business. You indicated that in the conference call that the biotech is picking up well. Can you comment on your interaction with [Exolocan] and how is that trend going forward? And second of all, if you can comment on the overall business in the genetics screening and, if you can see that the -- comment on the suspendibility issues going forward as well. Thanks.

Let me start with the second question first and make sure I understood it. On genetic screening you said sustainability?

In terms of drivers and geographically and also neonatal volume versus--?

Why don't I take that one. I'll turn it the over to Rob, maybe to comment on the pharmaceutical marketplace. So genetic screening has a number of components to it. It has the neonatal testing, it has the prenatal testing and it has the maternal health. What we see going on in neonatal testing is that there is an increasing standard of care around the world. Particularly in the developed countries like the United States, where you see an ever escalating standard of care. The standard of care is now 29 tests. Everybody's not there. We expect to see that standard of care continue to move up within it. So a source of growth is in a developed world is really bringing all the screening up to that level.

Once you get outside the United States, most countries only screen a proportion of the children born. And we see that changing significantly. For example, there are recent movements underway in India, there are recent movements underway in the Philippines, there's a lot of investment underway in China, and so in developing country, there's an increasing amount of attention paid to getting a screening process in place. And so it won't be done at the same standard of care as the United States. It will -- it is beginning to get established and get roots even in the developing world because the cost/benefit payback is significant. These tests aren't that expensive to administer and they can prevent, in many cases easily prevent, some kind of catastrophic handicaps that comes out of missing these causes. So as we look around -- and that's just the neonatal side. As we look around at the neonatal we see continued expansion around the world, geographically and the number of tests going up. Prenatal is earlier days, it's less developed in the neonatal from that standpoint and we're working on a strategy of providing a much more extensive battery of tests in the first trimester screening. A lot of the prenatal today is done on high-risk in the second trimester, and the movement afoot is really to move that into first trimester when it's much more effective diagnosis for people.

How much is the U.S. revenues coming from the genetic screening versus the ex-U.S.?

We don't break that out specifically but it's less than half.

Thank you.

Could I ask to you repeat the question with regard to the--?

Yes, regarding the biopharma. Just I wanted to get some colors regarding the CapEx spending trends from the big pharma, you comment on the biotech continue to doing well, and academic flattish. What is the biotech -- biopharma -- big pharma doing in terms of their CapEx spending and budget spend?

I would say from our perspective we see the large pharma spending actually increasing, but as I mentioned it seems to be very focused. So as you compare it to a couple years ago where I would say it was fairly broad-based spending across the board, I believe the spending is there, but it's very focused, and it's focused fundamentally in two areas. One is there's obviously a lot of pressure on improving the productivity in the lab. So the example I gave was, they're looking at going to more luminescence because it allows them to miniaturize the reagents and therefore improve the productivity, improve the sensitivity, and, of course, because it's not looking at refracting light it's much more sensitive. That's an example.

The other area I think that they're focused on, is to the extent that we can provide tools to them that enables them to do things that otherwise couldn't do. So whether it's provide additional information, or look at different classes of diseases, or even look at different modalities of screening. So this is -- a good example here would be a lot of the large pharmas are moving more into the cellular analysis side of cellular screening. So we think those areas we're seeing fairly robust interest in spending as compared to sort of across the board. So it appears to be much more targeted.

Okay. And then last question I have is regarding the tax rate. Can you tell me now why the tax rate in the third quarter is relatively low compared to the prior quarters?

The tax rate for the third quarter of 2006 is impacted by a $1.2 million item which was basically the difference between what we had accrued for taxes at the end of the year and the tax return. So every year you've got to true your books up to where you actually end up paying in your taxes, and it was a benefit of $1.2 million.

Thank you.

Your next question comes from the line of John Sullivan with Leerink Swann.

Hi, John.

Hey, guys. Good evening. Can you just comment a little bit more broadly on something? You guys have a pretty unique technology and franchise in medical imaging, in panels for medical imaging. How far penetrated do you feel like that digitization of x-ray has gone to date? And when you look past digital x-ray, are there any other opportunities that you look at for that unique franchise and expertise that you guys have in these panels?

John, I think in the lifetime of that industry, the penetration is very low. And if you think about the way it it started off, as this component technology does, it's fairly expensive in terms of cost per unit initially when it comes out. And, therefore, it has gotten started in some of the very high value applications. So tier 1 hospitals, major radiology centers and tier 1 hospitals with very expensive machines and very expensive installations. The trend is -- and this is just in the diagnostic side, not the therapeutic side, the radiotherapy side. So just on the diagnostics, the trend then, over time, is to continue to move that into lower priced, less sophisticated, and I'll call it the mobile marketplace. And in many case the mobile marketplace is not -- it sort of avoids the need for customers to have large dedicated fixed installations. So the difference in cost between a fixed and a mobile can actually be very significant because of the facilities implications. So that's going to be the market going forward, and that market is just really beginning, and ultimately will be a much larger market than the fixed markets out there today.

Then you have the therapeutic marketplace which is the radiotherapy. Radiotherapy is a rapidly growing area within oncology treatments. Then you extend beyond that and other medical. The veterinarian and the dental and then you go beyond that into the industrial. And so the industrial has fairly sophisticated technical performance requirements but also requirements for lower cost per unit. So what happens is as the volumes go up in terms of production your cost per unit goes down, and you're able to open up additional applications, not unlike how, if you think -- have followed the Pentium microprocessor growth, it sort of, as cost per bip goes down more applications open up. So we think that's how it continues to grow. And keeps growing for quite some period of time.

Thanks very much, Greg.

You're welcome.

Your next question comes from the line of Paul Knight with Thomas Weisel Partners.

Hi, Paul.

Hi, Greg. Congratulations on the quarter.

Thank you.

The opto division, first of all, you said the flash -- the film-based flash products, does that business go to zero now, or why do you say that that comps over now in the September Q?

Yes. And I would say it doesn't go to zero but it [Inaudible] has approached a very small number, which is to say I think there will always be some business in there, but it's a very low number. So even if that number went away it wouldn't have a significant impact. Whereas in this quarter it's a negative bogey of 2% growth off those top lines just coming out of the box.

Does your flash cell phone product ship in Q4? Has it already started to ship?

Well, the flash -- the most successful flash camera phone out there today is the Sony Ericsson. It's the K-800i. Which is, maybe you saw some of their releases. It's doing terrific, particularly in Europe. We supply all the flash lamps for that. What we're looking at is with a number of different applications out there, not just supplying the flash lamps, which we're very successful at today and we see a lot of growth just in that part, but then moving into the flash modules for a range of applications. So it's a number of companies in that space, and it's not a question of if, it's just a question of when in terms of the timing, and really it's a new business for us because we're moving up the value chain, if you will in terms of more complete modules versus components.

And then on the life science side, Greg, I think the world kind of knows -- or knows that kinase and the cellular screening markets are strong. When do you think you started to gain traction in that market? Is it just this year? And are you taking share, you think now?

Paul this is Rob. I think it's relatively new for us. I would say the beginning of this year. We have added some people to our reagent business and I think that's helping us a lot so I think we are starting to get good traction in those particular areas. I would say probably over the last quarter or two.

What's -- what is doing -- what product line is performing this kinase screening? Is it the JANUS product line? Or is it all of them?

I would say it's a variety of the components go into it. So certainly JANUS, JANUS hits as you know, a wide range of applications. Then we have the CellLux, LumiLux, and then we have a range of reagents and keep introducing that out and in some cases you can use the EnVision. So I think it's really sort of developing the application around some of our existing products, and some of the new products that we spiked out, coming out, really just sort of concentrating on the application support and the reagents around the application.

And then lastly, on the genetic screening business, where are you -- where are we with the state rollout of these mandated -- or not mandated, guided additional tests?

I don't have sort of a percent completion by number of babies born for you, Paul, but I would say that the rollout is proceeding. Texas recently won. They're in the process of coming up to speed on this. If you look at it statistically 85% of the states still don't get to the full standard. So we think that will continue along, and we also think there's been a lot of discussion and the politicians are weighing on this mix, Senator Clinton, for example, is now a champion of enhanced and improving the standard of care as well. In newborn screening, so we think it will continue on in the U.S. for some time.

I think that's it. Thanks.

Good. All right. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Vishal Saluja with Seligman.

Hi, thanks for taking my question. I just want a quick clarification on Q4. You obviously did a good job with accelerating revenue growth from the first half. What should be our expectation for Q4? I think originally you had guided to mid to high -- or 5 to 7% type growth rate. Is that still -- is that still valid?

Yes, this is Jeff, I think as we began this year we always expected kind of growth to kind of accelerate as we moved through the year and the expectation was that the third would be much higher than the first two quarters, and I think we achieved that. As we have discussed, we've got a number of new products coming on line, that have come on line recently, or will come on line. So we see pretty good momentum and we see kind of a step up from the growth that we have experienced in the third quarter, and frankly, good momentum heading into 2007. So we feel pretty good about the growth outlook for the fourth quarter.

Okay. And you're not reconsidering that given that biopharma, you're guiding to be flattish and it came in a little bit light?

No, I think the biopharma -- I think we have been fairly conservative in our estimates of what biopharma can do. So I think we feel pretty good about that.

Then also, can you just comment on the rate of buyback from here? You've been really aggressive this year in terms of the share buyback, and going forward, how should we think of that?

Well, I think the way you should think about that, and I think Greg laid it out pretty clearly at the beginning, I think our first priority is in growing the business and we have got a lot of infrastructure in around the world to bring more technology to market so we are very active and continue to be very active in acquiring new technology to help us expand the business. So that will be the first priority. And we'll kind of keep an eye on the share repurchase program as we move through next year.

Look, we have a commitment to having a balanced balance sheet, if you will, and making sure that the money is hard at work. We are seeing a significant number of opportunities on the business development side. We have done five acquisitions year to date. None of them are overly large but we think they're all very helpful in terms of strengthening the technology or the product range within our growth platforms. And so as long as we see good opportunities on that front, we -- that will be our first priorities. To the extent that those opportunities slow down or to the extent that our cash exceeds that requirement, then we'll have some pacing out of share repurchases.

Okay. I just have a couple of more clarifications.

Sure.

First on the ramp-up in R&D spend, obviously some of that came through this quarter, and what I'm trying to understand is on a go-forward basis for the next 12 to 18 months, how committed are you to earnings leverage? By that, I mean being able to give us double-digit EPS growth off of a mid to high single-digit top-line growth?

I mean, I think our commitment is to deliver double-digit earnings growth. Our commitment also is to be able to increase the organic growth rate of the portfolio. And so it's really striking a balance. So we're not proposing any radical changes in our metrics, in the percent of sales, but we are looking at sort of continuing to be able to afford to increase our investment in growth internally, and, of course, supplemented by the external.

So you will increase overall R&D spend but not at the expense of delivering double-digit growth?

That is our intention, correct.

Okay. And in terms of the guidance, last year did you a call in December. Have you all made a decision as to how you're going to proceed this year?

I don't know that we've made a complete decision on it, but our instincts are to do the call in January when we release fourth quarter, and the basis for that is really, I think, it enables us to be more specific, if you will on the guidance for the year.

Got it. Thanks a lot.

You're welcome.

Your next question comes from the line of Vasavi Vittal with Atlantic Securities.

I had a quick question on gross margins. You mentioned the decrease in gross margins this quarter was mainly because of commodity price increases, is that right?

Well, no, I think the gross margin comparison year-over-year was a difficult one in the sense if you step back and look at the gross margins that we achieved back in the third quarter of '05, there are, on a relative basis, it's one -- it was one of our stronger periods. I would say primarily we were up against a pretty difficult comparison from a gross margin perspective, and secondarily, commodity prices and mix somewhat kind of made it another difficult comparison. Having said that, we did increase our gross margin sequentially from the third quarter of '06 off the second quarter of '06, and certainly expect the gross margins to continue to improve as we move our way through the year.

And the improvement should come on the back of increasing reagents business, or?

It will be a function of volume of the business, which is always kind of the highest in the fourth quarter. It will be a function of mix as we do move more reagents, more reagents will be introduced, our screening business is growing, and frankly, some of the acquisitions that we're doing will hopefully bring a little bit more in terms of margin, as we move our way into this year and into next year, frankly.

Thank you.

You're welcome.

At this time there are no further questions in queue. I would like to turn the presentation over to Mr. Gregory Summe for closing remarks.

Thank you, operator. Thanks, everyone for your questions. We had a very strong quarter with revenue increasing 7%, EPS up 25%. Most importantly while making significant investments in our key growth platforms. We have good momentum and are well positioned for a strong Q4 and 2007. Thank you for your time today and your interest in PerkinElmer. This call is adjourned. Have a great evening. Operator, we'll close the call.

Ladies and gentlemen, I would like to thank you for your participation in today's presentation. This now concludes the conference. You may all disconnect, and have a wonderful day.