Revvity Inc (RVTY) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2006 PerkinElmer earnings conference call. My name is Tim, and I will be your operator for today. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Steve Delahunt, Director of Treasury and Investor Relations. Please proceed.

Good afternoon and welcome to the PerkinElmer fourth-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 FirstCall network or from our toll-free investor hotline, 877-PKI-NYSE.

Before we begin, we need to remind everyone of the Safe Harbor statements 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 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. 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. With me is Rob Friel, our Vice Chairman and President of Life and Analytical Sciences, and Jeff Capello, our Chief Financial Officer.

I will begin with an overview of the quarter and our 2007 outlook. Rob will follow with more insight on the Life and Analytical Sciences business, and then Jeff will provide more specifics on the financial results. After that, we will take your questions and then close the call.

Overall we are very pleased with our results in the fourth quarter. Our revenue growth was strong. Our earnings came in on forecast. Our cash flow was excellent. We announced three acquisitions that helped build out our growth platforms, and most importantly, we have good growth momentum starting off in 2007.

Some of the highlights. Our cash earnings per share were $0.39, in line with our forecast range of $0.38 to $0.40, while our full-year cash earnings per share were up more than 20% over 2005. Revenue in the fourth quarter was $427 million, up 10% over prior year with 12% in Life and Analytical Sciences and 5% in Optoelectronics. Our revenue has increased by 3% due to foreign exchange and 2% on acquisitions. Our growth was broadly based this quarter, led by medical imaging, genetic screening, environmental and service. Our biopharmaceutical business also reported slightly positive growth, which continues its recovery trend toward becoming an attractive growth platform. We had modest growth in lighting and revenue weakness in sensors, although we expect lighting growth to be up in the first quarter, given the continuing rapid growth in digital cameras and camera phones.

We continue to generate very strong cash flow, $85 million of operating cash flow in this quarter, and this cash flow gives us terrific flexibility to invest in growth. In 2006 we bought back almost 9 million shares, funded seven acquisitions and increased our capital expenditures by 60%, which in 2006 capital was focused on spending for new reagent laboratories, along with the expansion of our medical imaging capacity. We ended the year in a net cash position and so retained excellent flexibility to fund growth and return capital to shareholders.

2006 was also a year where we significantly increased our internal investments in growth. We increased R&D spending by 14% from 5.9% of sales to 6.4% of sales or up 50 basis points. It was up by almost 30% in Q4, mostly due to the timing of some project investments.

We also invested more in sales and marketing, particularly in developing economies. For example, in the fourth quarter, we recently put in place native presidents of both India and China to support our growth initiatives. We are going to continue our strategy of building out our growth platforms through both internal and external investment. Our preferred approach on acquisitions is to buy small to medium-size businesses that are accretive to our revenue growth rate and accretive to our EPS in the near-term, preferably in a year.

In Q4 we announced three of these bolt-on acquisitions. Two of them, Evotec and Euroscreen, helped build out our cellular screening capabilities, and Triton, which extends our product range in thermal analysis. Evotec is a global leader in high content screening instrumentation, and Euroscreen has a strong product and intellectual property position and luminescent reagents in cell lines for GPCR screening. Triton has a line of dynamic mechanical analysis instruments that replaces products we formally sourced from Seiko Instruments.

Turning briefly to Optoelectronics, our Medical Imaging business grew double digits in the fourth quarter as demand from both diagnostic and therapeutic customers remains very strong. We continue to fund the expansion of our Santa Clara flat-panel facility and expect a doubling of that plant's capacity by early 2008. We are confident and continue double-digit revenue growth as our applications continue to expand.

In specialty lighting we continue to see very strong growth in our digital flash business, which in Q4 was partially offset by a decline in a couple other product lines. With the continued rapid growth in digital cameras and phones, we're confident lighting will be a good growth business for us in 2007.

Overall for 2007, we expect to grow our revenue in the high single, low double-digit range with non-GAAP EPS growing in the low double-digits to midteens.

In addition to our internal growth investments, we will continue to use our financial strength to acquire companies that further accelerate our growth and to periodically buy back shares.

I'm now going to turn the call over to Rob Friel who will provide more insight into our Life and Analytical Sciences business. Rob?

Thanks, Greg. We feel good about the continued progress we made in LAS in the fourth quarter as we delivered the second consecutive quarter of double-digit growth.

As I know Jeff will review the quantitative aspects of the quarter in detail, I wanted to briefly discuss the qualitative aspects of each of our businesses as we enter 2007.

Starting with genetic screening, I continue to be quite bullish. Both the neonatal and maternal health markets continue to grow as does our market position and capabilities. First of all, in neonatal screening the drive toward adoption of the standard of care in the US continues as those states that are not yet in compliance are coming under increasing pressure to adopt the standard and provide the 29 tests.

In Canada we recently added our second major province, adding the province of Alberta. In Europe we have recently started to see an uptake in interest in neonatal screening. The Netherlands began last year, and we are currently in discussions with a number of the larger countries in Europe.

In the developing countries, we sold our first Tandem Mass Spec instrument to a hospital in China in the fourth quarter and in India received our first order from a governmental body as PerkinElmer was the vendor selected to conduct the pilot screening program for the neonatal screening of PKU. In the maternal health area, we continue to be very pleased with our progress in prenatal screening and with our acquisition of NTD Labs. The recent announcement by the American College of Genetics to recommend non-invasive biochemistry tests to all women in the first trimester regardless of age should increase the demand for free beta as it is recognized as the superior market for first trimester screening.

In anticipation of the increase in demand, we are working on increasing the market availability of free beta and in discussions with a number of potential partners.

In addition to the increasing market demand for our existing products, I also feel we have a good pipeline of new products. As a number of you know, in 2006 we increased our R&D investment in this business and then as a result expect to introduce a number of exclusive tests in the first half of this year that should further solidify our position as the market leader.

Also, as a result of the anticipated growth, we are currently increasing capacity in our genetic screening facility, as well as building additional cleanroom space to accommodate the cytogenetics business we acquired from Spectral Genomics.

In the biopharma business, we continue to sharpen the focus around cellular sciences, tools and technologies. Over the last couple of months, we have introduced a number of new products, particularly reagents that target cell signaling pathways. One example is our AlphaScreen SureFire offering, which is the only reagent on the market that allows high throughput screening of cell-based kinase targets.

In addition, as Greg mentioned, we have acquired Evotec Technologies, which brings to us the market-leading high content imager and excellent software capability.

Euroscreen brings us an extended portfolio of receptor membranes for GPCR research, which combined with our existing portfolio we now give us the most extensive range of GPCR receptor membranes and cell lines on the market today.

Also, during the fourth quarter, we started offering a GNP compliant JANUS product for diagnostic application. The combination of the recently introduced new products and recent acquisitions, as well as a more focused product and end market strategy, should allow biopharma to move into sustainable positive growth this year.

In analytical sciences, similar to our other businesses, the increased investment both internally and externally has resulted in a number of new products. In October we discussed our new CLARUS 600, which is a new generation of gas chromatography instruments that have the fastest cycle time on the market. This quarter we added a GCMS version, which has sensitivity that allows us to do applications that cannot be done with any other GC on the market. The Avalon acquisition added Raman spectroscopy technology, and with the purchase of Triton, we now have a new offering in thermal analysis.

In addition, a number of our historical products, most notably ICP, are doing quite well, particularly in Asia as we continue to see increased investments in infrastructure. As a number of our new products get traction in the market, combined with the strong sales and distribution capability in Asia, we believe we can continue to grow at above market growth rates this year.

Service also enters 2007 in a very strong position. During 2006 we invested in expanding our capabilities and building out our multivendor infrastructure, and that has produced returns quickly as evidenced by our growth in Q4. In discussions with our customers, most are looking for a new model to improve the efficiency and service levels of their labs, and increasingly they seem to like our model, which utilizes on-site engineers.

Also during 2006, we added a dedicated sales force in the US and Europe to proactively identify prospects and market our service capabilities. Within our service business in 2007, we will also be focusing on expanding our business into PacRim and benefit from the increasing sale of instrumentation there.

Earlier this year we talked about achieving higher sustainable revenue growth through increasing our investments in R&D and sales and marketing, as well as focusing on higher growth markets. In the second half of 2006, LAS experienced higher dollar revenue growth than in any six-month period over the last four years.

As we enter 2007, I believe LAS is well-positioned to build off the progress in the second half of 2006 and increase revenue growth and expand operating margins.

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, cost and cash flow for the fourth quarter of 2006. Then I will briefly discuss guidance for full-year 2007 and Q1 2007 before opening 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 fourth quarter of 2006 compared to the fourth 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 perspective basis beginning in Q1 '06. Therefore, the results of Q4 '06 and Q4 '05 are not comparable with the impact of stock option expense being a pretax charge of $2.2 million or $0.01 per share.

Turning first to revenue, we finished the fourth quarter of 2006 with sales of $427 million, up 10% compared to $388 million in the fourth quarter of 2006. The estimated impact from foreign exchange and acquisitions increased sales by 300 and 200 basis points respectively. By segment revenue growth was 12% in LAS and 5% in Optoelectronics. LAS revenue growth was increased approximately 300 basis points from acquisitions and 300 basis points from foreign exchange, whereas foreign exchange increased Optoelectronics revenue by 200 basis points. The remaining revenue comparisons are presented on a reported basis, including the impact to foreign exchange and acquisitions.

Geographically revenue in the Americas, which represented approximately 43% of our revenue for the quarter, was up mid single digits. Revenue in Europe, which represented about 38% of our revenue for the quarter, was up double-digits, and Asian revenue, representing about 20% of our revenue for the quarter, increased in the strong double-digits. Continued double-digit performance in China and India drove very strong revenue performance in Asia.

Gross margins for the fourth quarter of 2006 were 41.9%, a decline of 60 basis points over 42.5% in the fourth quarter of 2005. Adjusted for the impact to stock option and amortization expenses, gross margins declined 50 basis points. Stronger growth in our service businesses and slightly unfavorable revenue mix, coupled with favorable prior year benefits from a fire in one of our sites, offset significant operational improvements in our (indiscernible) facility to reduce gross margins on a year-over-year basis.

R&D expenses increased 29% to $27.1 million in the fourth quarter of 2006 from $21 million in the fourth quarter of 2005. Adjusting for the impact of stock option expensing and amortization, we increased R&D expense as a percentage of sales by 80 basis points to fund the acceleration of activity around new product introductions. This increase was higher than planned due to the acceleration of certain key programs. Our increased investment in new products is beginning to generate results and is expected to further increase growth in 2007.

Selling, general and administrative expenses were 23.3% in the fourth quarter of 2006, up from 22.7% in the fourth quarter of 2005. Adjusted for the stock option and amortization expenses, SG&A decreased 10 basis points. The decrease in SG&A was primarily driven by fixed cost leverage on higher sales, somewhat offset by growth initiatives in higher growth end markets and the impact of acquisitions.

During the quarter we realized a gain of $3.4 million from the reversal of a restructuring charge due to the favorable settlement of a lease termination. Offsetting this gain was an impairment charge of $3.3 million, principally related to a facility that was impacted by the fire which is expected to be sold at a loss.

In addition, in the prior year, we had a $1.4 million net gain from the settlement of the fire at one of our facilities. GAAP operating income for the fourth quarter of 2006 was $53.2 million compared to $49.4 million in the fourth quarter of 2005. Excluding intangible amortization and stock option expense, operating income in Q4 of '06 was $64 million or 15% of sales, down 160 basis points from Q4 of 2005 due to increased investments in R&D and SG&A, the gross margin decline cited above and the benefits of the fire settlement in the prior year.

Looking at expenses below operating income, interest expense net of interest income in Q4 of 2006 was $700,000 as compared to net interest expense of $3.3 million in Q4 2005 due to the significant debt reductions over the last 12 months and continued strong cash generation.

In the prior year, we incurred a charge of $49 million related primarily to the repurchase of the remaining portion of our senior subordinated notes. The tax provision of $10 million for the fourth quarter of 2006 reflects a rate of approximately 19.5%, principally reflecting the benefit of the recently approved retroactive R&D tax credit and the settlement of tax issues. This rate was slightly lower than Q4 2005 due to timing of the R&D tax credit re-enactment. We expect our tax rate to be approximately 24.5% or lower during 2007, depending on the distribution of actual income and other items.

Net income from continuing operations was $41.1 million in Q4 of 2006, up from a loss of $6.1 million in Q4 of 2005. GAAP EPS from continuing operations was $0.33 in the quarter. Excluding intangibles amortization and stock option expense, adjusted EPS was $0.39 in Q4 of 2006, meeting both the FirstCall consensus estimate adjusted for stock option expense and our forecasted range of $0.38 to $0.40.

In the fourth quarter of 2005, we recognized $1.47 per share gain, principally from the sales of our fluid testing and Aerospace divisions of Fluid Sciences. GAAP earnings per share was 34% in the fourth quarter and 2006 compared to $1.45 in the fourth quarter of 2005, principally due to the gain on these divestitures.

Weighted average diluted shares outstanding for the quarter were 123.8 million shares, reflecting the impact of our year-to-date repurchases. As noted in our Q3 '06 conference call, our Board of Directors has authorized a new 10 million share repurchase program, which we expect to begin to execute in 2007.

Turning to our segment results, I will briefly describe our Q4 performance. In LAS revenue for the fourth quarter was $320.6 million, up 12% over the fourth quarter 2005. On a GAAP basis, LAS operating profit for the fourth quarter of 2006 was $40.9 million compared to $45.9 million for the fourth quarter of 2005. Excluding the amortization of intangibles, stock option expense and restructuring net of impairment, LAS Q4 operating margins were 16%, down from 19% in Q4 of 2005. The favorable impact of a settlement on a fire in the prior year, coupled with revenue mix, impact of acquisitions and increased operating expenses, drove the operating margin result.

(inaudible) screening, which was about 14% of LAS revenue in the quarter, revenue increased strong double-digits. We continued to see excellent expansion in neonatal screening, which grew strong double-digits driven by the new wins in both 2006 both in the U.S. and in international markets. The recent decision of the province of Alberta in Canada to adopt our test yet further confirms the acceptance of our testing programs.

Prenatal screening also grew double-digits during the current quarter compared to Q4 2005, driven by increased acceptance of our tests throughout Europe.

Our recent acquisition of NTD Macri continues to generate strong double-digit organic growth, resulting from higher demand for first trimester risk assessment. The recent ACOG endorsement of first trimester risk testing for all pregnant women over 20 versus those over 35 further validates the opportunity for growth in this key market.

Service, which represented about 24% of our LAS revenue in Q4 '06, grew strong double-digits, also continuing its upward trajectory. We saw good growth in our base business, a positive impact from our recent acquisitions and continued strong demand for our OneSource multiyear service offerings. Within the quarter we won five new OneSource contracts and are working on a full pipeline of other deals, further validating our strategy of providing multivendor services.

In the environmental and chemical product lines, which represented about 26% of our LAS revenue in the quarter, revenue increased double-digits, driven by very strong performance in both our ICP and GC product lines. Strength in GC was driven by the introduction of our new CLARUS 600 platform, which is being very well-received by the marketplace.

In addition, sales 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 the emerging markets.

biopharma sales, which represented 35% of LAS revenue in the quarter, increased in the low single digits compared to the same period in 2005. Within biopharma, certain businesses showed strong improvement in year-over-year revenue growth versus Q4 of 2005, driven by new product introductions. Within drug discovery business, our JANUS platform within automation and liquid handling continues to be very well-received, growing double-digits in the quarter. Our research and development investment in nonradioactive high throughput reagents is also beginning to show returns as we grew double-digits within several of our GPCR kinase product lines.

Our molecular spectroscopy or [Pharma QACT] business also performed very well, growing in the mid single digits. Overall we continue to see good progress in the portfolio transition within biopharma and expect that progress to continue in 2007.

In Optoelectronics revenue for the quarter was $106.3 million, up 5% compared to the fourth quarter of 2005, led by our imaging business which grew double-digits. Optoelectronics GAAP operating profit for the quarter of 2006 was $19.8 million or 18.6% of revenues. Excluding intangible amortization of stock option expense and restructuring reversals, operating margins were 19.2%, which represents an increase of 160 basis points compared to the fourth quarter of 2005, principally driven by the combination of strong operational performance and prior capacity issues in our amorphous business.

Within Optoelectronics, imaging revenue grew strong double-digits during the quarter, driven principally by strong demand and operational performance in our amorphous digital x-ray panels. We continue to make good progress in adding additional capacity and improving yields, delivering strong double-digit increases in factory output. The fab expansion remains on schedule, and we expect continued strong growth in our amorphous business.

Sensor revenue was down low single digits in the quarter. Revenue growth in photodiodes and thermopiles were offset by contraction in military sensors as we transition to new programs.

Specialty lighting increased in the low single digits compared to Q4 of last year, marking the end of a difficult comparison in specialty flash as the market transitions away from single use cameras. The combined photoflash business, including single use, digital and camera phones, grew double-digits as the newer technologies continue to see strong penetration of our leading flash technology into digital and camera phones. We see continuing growth from our digital flash business and are confident that we will begin to realize a positive impact from opportunities in the mobile phone camera module market in the near future.

Now turning to the balance sheet and cash flow. During the fourth quarter of 2006, we had GAAP operating cash flow of $85 million. Our focus on working capital continues to pay dividends as we achieve working capital turns of 5.7 times in the fourth quarter. In particular, we made strong progress in Accounts Receivable where we drove DSO down two days year-over-year to 57 days sales outstanding. Our continued generation of strong cash flow, coupled with a solid balance sheet, allowed us to make further progress in multiple initiatives.

In addition to the acquisitions discussed earlier, we increased our rate of investment, spending $13.5 million in capital expenditures up from $11.8 million last year and increased R&D spending by 90 basis points over the same period in 2005. We finished the quarter with total cash of $191 million and net cash, which we define as total cash less short and long-term debt, of approximately $38 million, up from $5 million in Q3 '06. The balance sheet strength and cash flow generation provided us with the ability to fund three strategic acquisitions in the quarter and continues to provide the Company with tremendous flexibility as we look to further expand our growth platforms and return value to our shareholders.

Now turning to next year, I will briefly discuss 2007 guidance. We expect to be able to build off the strong momentum achieved in the second half of 2006 as we look forward to 2007. Revenue growth is expected to be in the high single digits to low double-digits, driven by strength in our end markets, new product introductions and business development initiatives. We are forecasting operating margins to expand 50 to 75 basis points. This would translate into total cash EPS growth in the low double-digits to midteens for the year.

In addition, we expect to Q1 '07 cash EPS of $0.23 to $0.25 per share, which excludes a $0.01 per share of option expensing and $0.06 per share of amortization expense.

I will now stop and open the call to your questions.

(OPERATOR INSTRUCTIONS). Quintin Lai, Robert W. Baird.

With respect to kind of -- by the way, congratulations on a very nice quarter and seeing the turnaround in a lot of your different segments. As we look at the biopharma business, could you dive a little bit deeper here and tell us about are we now past the I guess the declines in the radiation business? And then a little bit of update on some of your bigger ticket items like CellLux and LumiLux?

So I would say we are not behind the climbs in radiation radioactive business. I think that is going to continue. I would say I think we can do better there, and I think our goal there is to try and get that to flat. But I think what you are seeing is we are overdriving some of the other areas to sort of help offset that. So I think in the cellular screening area in particular, as Steve mentioned like the CellLux I think, we're fairly bullish about that in '07. I think clearly that is where the market is going. I mentioned the fact that we have been able to introduce a fair amount of reagents focused on self-signaling. We are starting to see some good traction around that. And I think the EnVision still does quite well in the high throughput screening area.

So I think there's still some puts and takes within the business, and as we continue to focus into some of the higher growth areas, I think we're fairly bullish on the prospects of getting that to sort of positive growth for all of '07.

So if you think about it, it is kind of bimodal. Right? So you have a portion of the portfolio that has very good growth and then a portion of the portfolio where the radioactive isotope portions were. We think we can take some actions to kind of mitigate the natural market decline in there, and at the average overall, we continue to average it up as the high-growth portion continues to get larger and larger relative to the other.

In the quarter you had mentioned that product mix was part of the reason for some of the gross margin issue year-over-year decline. Could you point to a little bit more specifically of which products you saw that were a little bit lower than on the margin side?

Within the quarter, we really had exceptional performance, particularly in our service business. It did very well within the service business and then specifically in one of the acquisitions we did within service, and that tends to be slightly lower gross margin than the average gross margin with lower operating expenses. So it tends to do pretty well on an operating margin basis. So we had slightly more service revenue and slightly less revenue from a couple of areas within reagents and then within genetic screening that tend to have higher gross margins. So this tends to be fairly lumpy at times, so it is not no issue in terms of the run-rate or the outlook of the business. It is just timing of when orders drop.

Okay. And then last question and then I will jump back into the queue. The guidance that you gave for next year of 50 to 75 basis points of operating margin improvement, considering the return to very nice topline growth, I guess we should imply that you are going to continue to ramp on your R&D investment? And if so, should we be looking mainly toward like the clinical diagnostic place where you are going to be introducing new tests?

I think what you will see, I think we have a very strong outlook in terms of the growth of the business. We will continue to take R&D up probably in proportion to the growth of the business. So, as a percentage of total revenue, it will probably go up marginally.

Having said that, the topline is going to grow kind of double-digits, so you can expect almost double-digit growth out of R&D. So that kind of answers the first part of your question. Where the R&D will be directed, yes, in fact, it will be focused around the higher growth product lines such as in genetics screening, in kind of maternal and prenatal and then some of the cellular sciences areas Rob talked about within reagents and kinases and GPCRs and some of the cellular instruments where we're starting to see pretty good progress.

Paul Knight, Thomas Weisel Partners.

You did three deals in the fourth quarter?

Yes.

What impact does that have or did have on 4Q earnings? Was it --?

There were I would say three announced, but actually the deals essentially closed in the first two weeks of January. So I would say no impact in Q4.

Okay. No dilution or etc.?

No, nothing.

How easy is it to plug these deals into your existing operation?

Well, I think it is quite easy. So if you go back and think about part of what is behind this strategy, I would say is a couple -- the acquisition strategy is a couple of points. One, we have a number of growth platforms that we believe can be larger and have better growth. So we're looking for either technologies to add to broaden the line or product lines that extend the capability within, so we can provide a more complete solution. So that is what sort of sets us on this target.

The other thing is most of these deals, in fact, really all eight of the acquisitions we announced in '06 were negotiated deals. So none of them were on auctions. A number of them were carve-outs of other businesses. So while it takes a fair amount of work to identify these product lines or technologies and to structure them in that way, we think we get much better value in terms of what we are acquiring because they are not public options in that sense. And they tend to be product lines that are fairly easy or capabilities that are fairly easy to bolt-on and enough size so you can pace these out. So if you think about all the growth platforms, the acquisitions they really -- there was a couple of them in biopharma. There is a couple of them in our environmental business. There were a couple of them in genetic screening. There were a couple of them in service.

So we really have the bandwidth I think to absorb a fair amount because of the distribution of the activity, just a couple in each businesses and the size. So they essentially bolt-on to our systems and everything else, and we are not taking a lot of cost synergies out of these. These are really designed around growth. So that also makes the integration task a little bit easier. So these are companies that we are buying to grow. We provide distribution, we provide technology, we provide a range of capabilities to help accelerate their growth.

Ross Muken, Deutsche Bank.

It's actually [Mike] in for Ross. Congratulations on a strong quarter. One thing that kept coming through was the emphasis you guys had on the strength in the genetics screening area, both on the neonatal and the prenatal areas. Can you talk a little bit about the competitive landscape there and whether you see the strength being something that you continue to grow and achieve the same growth you had this quarter?

I will start off. So I think in the neonatal area we still feel we have got a very strong competitive position there, and as we have said in the past, I think most of the competition comes from homebrews, particularly in the US. So I think there I feel very good about our competitive position.

I think in the prenatal area because by nature I think it's a larger market, I think it is a little bit more competitive, but I think when we look at our position and our technology and where we are really focusing our efforts, I think we feel pretty good. I mentioned the ACOGs that came out and really talked about the benefits of first trimester screening, and of course, that is where NTD has a very good marker and what we believe is probably the best marker out there. And so I think we continue to feel good about our market position and our technology to continue to drive the growth. And by the way, these markets are growing pretty well. That helps as well.

You know, I would just add, the diagnostics business has a little longer time constant to it, of course, in the research business. So I think it is a bit -- you get a little bit more warning in terms of runs on your product line. And I would say new technologies while interesting, don't always win the day because of the economics, the clinical acceptance and I will call it the inertia around established diagnostic tests. So everything Rob said and what we do is sort of look at that. We also have -- are spending a fair amount of money on R&D looking at new technologies that can come into the market, but I would say even when we find them, it is always a number of years before we can get them to market or we think other people get to market. So we have reasonable visibility into it.

That sounds great. Just one other question. Again, you mentioned in addition to that strength the strength of the environmental initiatives you guys have undertaken. Can you give us a little update on those and on anymore that you have kind of going forward in terms of trying to continue to keep this growth going?

Well, I think it is going to be fundamentally around continuing to add to technology and capability because we have we believe a very good distribution and sales capability, and we call on a large aggressive customer, so the more the technology and new products we can put into that. And, in fact, let me give you an example of the benefits of new products. So while we introduced a new GC 600, it simulated a fair demand for our GC 500. So I think, as we can get more products into the sales force, I think we will see growth there.

I think the other initiative has got to be around where the growth areas are. So there will be both graphic, so clearly in Asia, and also application-based. So there is clearly some applications around whether it is energy or security or environmental that will look to sort of tailor a lot of our products and our technologies to try and take advantage of the growth veins in some of the more attractive areas.

The only thing I would add to that would be we discussed at the midpoint of this year taking up our SG&A expenditure, particularly in some of those emerging market areas, places like India and China, so that we had kind of adequate if not a good amount of resources to deal with those opportunities. That is, in fact, what we're doing.

Derek DeBruin, UBS.

This was kind of a strange question, but I am trying to get at the Legacy biopharma business. I guess what percentage is what you would consider Legacy or the foregoing business as a percentage of sales now versus what it was a year ago? I'm trying to get an idea for how much that has been diluted by some of your other businesses if you follow what I'm saying.

We don't break it out exactly, but I would say that the percentage really has not shifted much over the past year. And what has shifted is our ability to grow -- I would say our ability to sort of improve the selling performance of the Legacy business, but particularly our ability to accelerate the growth of some of the other newer areas that we are in.

I think we have also been going through a process of weeding out some of the product lines. In fact, when we looked at that business, we said, you know, gee, we are just in too many of these product areas, and subsequently we think we are subscale, particularly in some of the areas in genomics and a few other areas. And so we have had an active program in place to sort of eliminate those into kind of double and triple up in the cellular sciences area and the biochemical screening area, more on the reagent side, you know, in addition to looking at sort of selling the distribution initiatives to mitigate some of the radioisotope areas.

So I think it is really the balance of those initiatives, and really some of the acquisitions we have done have not shown up yet in the revenue mix. When you think about Evotec and Euroscreen, they are really 2007 events. So I don't think that the percentage has shifted a lot. It is just that the growth profile among the two sides has changed.

That is helpful color. What are you looking at, Jeff, in terms of the operating cash flow and the CapEx for 2007?

So operating cash flow would be at or in excess of the cash net income of the business, consistent with the guidance we gave last year. So it will improve this year. And then I would say CapEx is going to be at or slightly below the rate it was this year, which was about $45 million.

Great. Okay. And I guess how aggressively will you buy back shares? Opportunistically or what?

I think it is an opportunistic. Our first priority is to build out our growth platforms because we think we can create a lot of value among where those are. And to the extent that we have excess capital, we will use it selectively or opportunistically to buy back shares. One of the benefits of our business is that we do generate strong cash flow, and so I expect we will have capability to do some of that at the same time we do the acquisitions.

Okay. And just one final question. Can you talk a little bit about the maternal screening, the NTD business that you acquired? How does this test relate to I guess what are the new ACOG requirements, how likely are those to be put in place and I guess what is the competition in this overall area?

So, as you may know, it used to be that the recommended screening for call it biochemical tests was a woman 35 years or older. And what [ACOG] has come out and said first of all I don't think age is really relevant, and so, therefore, they are saying all women they are recommending screening. And so just to give you a perspective, that probably increases 4X the amount -- if you look of the amount of women sort of 35 versus post 35, there is a sort of four to 1 factor.

Now having said that, there were clearly some women that were younger than 35 that were getting screened anyway. But anyway, so the first thing it does is it dramatically increases the market. The second thing that came out is that there was, let's say, in the community some discussion and debate about whether it was appropriate to do first trimester or second trimester. They came out and said we would recommend first trimester.

Within first trimester, there is fundamentally two types of tests, and I think there is pretty good support and evidence that free beta is by far the best test there.

So I think we sort of get two benefits out of this. One is we get the benefit in that it opens up the market and that there will be more women screened, and then I think also the fact that they are recommending you go in the first trimester. That also leads I would say the screening to free beta more than the other types of tests out there.

And I don't know just how close you are to the ACOG's perspective, but this screening, which is done first trimester, is really to narrow the pool down. And so then if people are found to be out of spec, if you will, they then would go to a second trimester invasive test. But it is done, and so it is a biochemical done in conjunction with an ultrasound that measures the thickness at the base of the spinal column. And so when you stack these two markers together, both the ultrasound and the biochemical screen, you get a very high predictive value to it. And since the ACOGs looked at that and said, look, there is very little risk of false positives. It is non-invasive. It is not that expensive. Therefore, we think from a public health standpoint it makes sense to do screening across the entire population.

Okay. And just one final question. I guess is there a chance that you could be potentially divesting the sensors business sometime in the near future?

We don't have any plans to divest any businesses at this point. I would say I mean I think sensors has some excellent growth prospects. One of the things that has hurt it this year has been that they have some military programs in there, and a couple of those have kind of come off cycle. So if you peel it back, you see it is a little bit once again kind of a bimodal distribution where there is some excellent growth on some of the biomed and industrial applications. And they have got kind of a drag on some of the military programs. So we expect over time that profile will improve.

John Sullivan, Leerink Swann.

Can you talk a little bit about your footprint in China and India? Can you talk about perhaps maybe how many employees you have on the ground in those countries and what sort of maybe facility footprint you have or what kind of activities you undertake in those countries directly?

In China we have been operating in China for decades and partly because of the footprint we have established through our Optoelectronics business. So we have north of 1000 people in China and have for a long time. So we do manufacturing, we do sales marketing and distribution service.

India is a sales, marketing and service application support. So there our employees measure in the hundreds, and there is a number of offices around the country.

Would you see adding plant capacity or line capacity in that part of the world as a priority over the next few years, or how do you think about that?

I think we do a fair amount of sourcing out of China, less out of India. You know, we have a fairly large manufacturing footprint in Asia-Pacific. I mean we manufactured in Indonesia, Singapore, Philippines and China. So we have a lot of experience over there, principally led by the Optoelectronics business, but certainly we do some of our Life and Analytical Sciences manufacturing out of Singapore.

We continue to look at China as another manufacturing site. I think we will continue to look at it from that perspective. But we have the ability really at least from our view you lead this with the sourcing in the supply chain. You get your most leverage out of that side of the equation.

Okay. And then just to follow-up in this same area, when you think about component sourcing from this part of the world, how broad can you be? To what level of -- how -- what range of components can you source from this part of the world these days? Can you source highly engineered components that are integrated into your most sophisticated analytical instrumentation?

I think it is clearly coming up all the time, and maybe some of the optical engines are a little bit difficult. Really the bigger pacing item is that when you look at sourcing on new products, I think you can do a lot. When you look at sourcing of existing products, you then are forced to go through a redesign cycle and so forth, which consumes a lot of resources and often given the quantities involved in a product line, it does not justify itself.

So to get to the more sophisticated items, you tend to work with a supplier from the initiation of the project. But I think on products going forward, you can reach a pretty high percent. I mean I think it continues to go up every year. So we don't really see that as too big of a barrier going forward.

Okay, thanks. And then my last question, you have had success making acquisitions you wanted to make in 2006, eight of them by your count. Can you talk about the internal resources that you devote to integrating acquired assets?

I would say we devote a significant number of resources both on identifying the companies, working through the structures, and I think mapping the integration and planning the integration. So each of these deals that we have done has taken some six months or longer in order to get them structured, particularly the carve-outs. So through that process, you end up doing a lot of very detailed integration planning. So we track the integration projects and the process very closely afterwards.

So it makes a big difference when you think about integration as to what the type of acquisition is. So if you have an acquisition that brings the unique capability and is designed and you are buying it for growth, it is fairly easy. If you're looking at an acquisition that brings a redundant capability and it is a cost reduction exercise that you are consolidating share, it's done a lot more work. Because then you have got to go in and you have got to sort of rationalize the resources of your existing business and the new business and there is a lot of disruption.

So, as long as they are kind of growth-based unique technology assets, it is really about taking that asset and growing it and nurturing it and enabling it to pull resources from you, right -- provide better selling and marketing distribution, provide additional technology, provide manufacturing expertise, those types of things to kind of nourish it. And so that makes it easier on the people and on the culture and everything on the acquisition.

Jon Groberg, Merrill Lynch.

Two questions. One is just on the topline guidance. I'm just looking at 2006. Organically if you strip out acquisitions and currency, it looks like for the year it maybe grew around 3.5%, and you're guiding to high single digits, mid double digits. I'm just wondering what is embedded in that expectation on your end?

So going forward, there is roughly 300 basis points of acquisition impact and approximately 100 basis points of FX impact as we sit today with the FX rates.

Thanks. And then the second question I think is probably for Rob. I'm just trying to understand on the genetic screening side of the business, I know you mentioned kind of the standard 29 tests that a lot of states at least within the United States are starting to mandate. But I assume some mandate less, and as you go to other countries, they will mandate different numbers of tests. What impact does it have, if any, to the results of that business as additional tests are added to the platform?

So to some extent it depends what type of test it is. So, for example, when we went to see if it is included in sort of the Tandem Mass Spec offering, it is incremental revenue, but it is not significant. However, in some cases, they may be a separate immunoassay, and there is a separate charge for that. So it is a little difficult to sort of generalize. So to a large extent, it depends on the type of test and how the indication is determined.

So just from a pricing standpoint, I understand. So for the standard, you said it is 29 tests. Is that sold as kind of a complete package to the different laboratories to whom you are selling?

No, there is a set within that 29 that is standard, but that 29 also has some individual tests associated with it.

Vishal Saluja, Seligman.

For Jeff, I just want to understand with all the acquisitions that you have done this year are they collectively accretive in '07?

I would say they are breakeven to mildly accretive for '07.

Okay.

And, as we have talked about kind of the acquisitions, some of these smaller acquisitions take a while to drive the revenue and carry the cost infrastructure. So they kind of builds as we hit kind of the tail-end of the year.

Okay. Makes sense. And then what is implied in your guidance for growth for biopharma in '07?

We are not anticipating any remarkable recovery, so we're kind of anticipating a slight increase in biopharma kind of building off the fourth quarter. So it is a fairly conservative outlook in that marketplace, if you will.

Okay. Very modestly positive then?

Yes.

Okay. And can you just give us some sense -- we don't have much appreciation for the isotope business -- but when do you think that that starts to flatten out and not be a drag on overall revenue growth there?

So, as we mentioned earlier, we have got a number of things we're looking at in initiatives to try and get some additional growth in there. But I would say it is probably not in '07. I think probably '07 we're still assuming a declining business for us, and we will have to see what kind of progress we make on some of these initiatives to see if we can get it sort of flat. Like I said, if we could get it to flat, I think it would do good things to the biopharma business. So that is our goal, but I would say it is not our plan in '07.

Okay. Great. Just one final question for Jeff. If I look at your goals for '07, high single digit to low double digit on online, 50 to 80 basis point improvement on the operating margins and I look at a share count that has also gone down by about 4 or 5%, so essentially accretive to EPS, why then does the EPS grow only by low double digits?

Just help me with the financial map because I'm missing a link there.

Yes, well, I think what you see is we continue to believe that investing in the business as it relates to R&D and the SG&A is the right thing to do to drive that growth and even to drive it further. So based on the revenue growth guidance we have given, there is still kind of a higher amount of spend as it kind of comes in on a relative basis as it relates -- (multiple speakers).

But you committed to 50 to 80 basis point margin improvement. Doesn't that already take into account your accelerated spend, or should we say that that is flexible?

Well, I think it is flexible, but I think it does contemplate that. But the math just kind of works out that that 50 to 75 basis points, that is the type of EPS expansion you get.

Okay. We can take it off-line. Thank you.

(OPERATOR INSTRUCTIONS). Paul Knight, Thomas Weisel Partners.

Jeff, there's a lot of accruals in the quarter. Is it the nature of that to be occurring in Q4 or what is going on there?

There was a couple of things. One, we put a deposit down on a business. So I think that kind of bumped up one side of the balance sheet as it relates to on the asset side. But I guess more specifically on the accruals there are timing-wise bonuses and year-end accruals that kind of tip up at the back half of the quarter. I guess that would be my first reaction.

Okay. Thank you.

John Sullivan, Leerink Swann.

Jeff, I just wanted to understand a few minutes ago regarding 2007 revenue guidance, you had said you were assuming 300 basis points worth of acquired growth in 2007 in your guidance. Does that 300 basis points come from already made acquisitions, or are you assuming acquisitions going forward as well?

That assumes acquisitions done to date, John, but certainly we would look to kind of add to that number with some second acquisitions throughout the year. But it does not reflect any additional ones.

Okay. Thanks. And then last question. I know that you see growth opportunities that you are responding to in operating expense growth. But, at the same time, are there ongoing cost control programs at the Company for 2007?

Absolutely. I think we're very operationally focused, and I think those operating expenses that are going up are in very targeted areas, whether they be in emerging markets where the growth rates are higher than average or select product areas in genetic screening or cellular sciences or imaging or where the end markets or opportunities are better than average.

There are no further questions in queue at this time. I would like turn the call back over to Mr. Summe for closing remarks.

Thank you, operator. Well, thanks, everyone, for your participation and interest in PerkinElmer. As you can tell, we entered 2007 well-positioned to accelerate the growth of our business and we believe to deliver significant shareholder value.

This call is adjourned. Have a great evening. Thanks, again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.