Revvity Inc (RVTY) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the 2007 third quarter PerkinElmer earnings conference call.

At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today's presentation. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's conference, Mr. Mike Lawless, Vice President, Investor Relations. Please proceed, sir.

Thank you. Good afternoon, and welcome to the PerkinElmer third quarter 2007 earnings conference call.

If you've not already received a copy of our earnings press release, you may get one from the Investor section of our Web site at www.perkinelmer.com or from our toll-free investor hotline at 1-877-pkinyse. Please note that this call is being webcast live and will be archived on our Web site until November 25, 2007.

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 as of any date after today.

During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use on this call to make directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non-GAAP financial measures during this call that are not reconciled to the GAAP in that attachment, we will provide reconciliations promptly.

I am now proud to introduce the Chairman and Chief Executive Officer of PerkinElmer, Greg Summe.

Thank you, Mike. Good afternoon, everyone. I appreciate you joining us to discuss our third quarter 2007 results.

Joining me on the call are Rob Friel, our President and Chief Operating Officer, and Jeff Capello, our Chief Financial Officer.

I will begin by reviewing the highlights of the quarter and our Optoelectronics business. Rob will follow with more perspective on Life and Analytical Sciences business, and Jeff will provide more detail on the financial results. After that, the three of us will be available for questions and then we'll close the call.

Overall, we are very pleased with our results in the third quarter. We had another strong quarter of double-digit revenue growth, 13%, which was both at Life and Analytical Sciences and Optoelectronics.

We achieved good operating margin expansion of 70 basis points. We continue to increase our investment in global marketing and also in R&D, which is up 14% year-to-date over last year.

We announced our plans to acquire ViaCell, a leader in stem cell processing and preservation. We expect to see this growth and profit momentum continue through the remainder of 2007 and beyond.

Our growth in the quarter was led by medical imaging, genetic screening, specialty lighting and laboratory service, all with strong double-digit growth. With our continued strong cash flow generation, we continue to retain excellent flexibility, both to fund growth and return capital to shareholders.

During to third quarter we brought back about 1.1 million shares of our stock and increased our capital expenditures, which are up about 23% year-to-date over last year, primarily as a result of the expansion of our Santa Clara medical imaging facility, which I'll speak to a little bit later on. We're also using some of our investment capability to acquire ViaCell, who is a leader in the processing and preservation of stem cells from umbilical cord blood for future medical use.

The addition of ViaCell will continue the expansion of our neonatal health capabilities and strengthen both our distribution capabilities to obstetric professionals as well as providing us a powerful direct marketing channel to perspective parents. The combination will help extend our leadership in serving the health of a mother and her baby. We anticipate completing a tender offer process in the fourth quarter.

Our other recent acquisitions continue to perform well. For example, NTD Labs had another excellent quarter, as demand continues to grow for first trimester screening driven by the increased adoption of free beta hCG. We own the intellectual rights to the use of free beta hCG and is increasingly recognized as the gold standard in prenatal screening.

Spectral Genomics also reported strong revenue growth in the quarter, as we see growing adoption of their karyotyping solution for chromosomal disorders. Lastly, Euroscreen showed very strong growth in the quarter driven by improved sales for its innovative acquorin-based cellular assay platform.

Overall, we remain very pleased with the progress of our recent acquisitions and our pipeline for bolt-on acquisitions is very active.

We recently announced that our environmental business has launched an innovative initiative called EcoAnalytix. Through EcoAnalytix, we have developed comprehensive application-based solutions to address pressing global challenges in three critical market segments: Food safety, water quality, and biofuel development.

This is a system approach that combines our high-performance analytical instruments with deep technical, application and regulatory support. We believe EcoAnalytix will help our customers address environmental concerns with proven and easy to implement solutions.

Turning to Optoelectronics, in the third quarter, our medical imaging business shipped a record number of flat panel digital x-ray detectors. Demand from both diagnostic and therapeutic customers remains very strong.

The expansion of our 80,000 square foot panel fabrication facility is complete and the additional production capacity will start to come online during early 2008. We expect that this multi-year $50 million capital initiative should enable us to satisfy customer demand through 2012.

Also in the quarter we began shipping our xenon-based flash modules for advanced camera phones. Xenon is being increasingly recognized as the critical technology for high-quality photography which will drive further increases in sales growth in the fourth quarter.

We have the world's leading capability in flash lighting and believe the opportunity for us in this marketplace is quite large. We expect strong adoption of new high-resolution camera phones led by the markets in Europe and Asia, where the market adoption rate is ahead of the U.S. market.

Finally, I wanted to remind you that PerkinElmer will be holding an analyst meeting in New York City on Friday, November 2. We look forward to that event to discuss our strategy and market opportunities in more depth. I invite the members of the financial community to participate at the event and the general public to tune into our live webcast.

I'll now turn the call over to Rob to provide more insight into our Life and Analytical Sciences business.

Thank you, Greg.

This afternoon I'll briefly describe the market conditions in LAS' three key end markets: Clinical diagnostics, drug discovery, and environmental, and touch on our key priorities in each. Then I'll turn the call over to Jeff, who will then discuss our financial results for the quarter in detail and our forecast for the remainder of the year.

Turning first to the diagnostic market, we continue to experience strong demand for both our prenatal and neonatal screening, as clinicians increasingly recognize the benefits of early risk assessment so that disorders can be predicted and treated as early as possible. We also saw nice growth in our CGH array business for chromosomal analysis as we have now completed the move of the Spectral Genomics production to Turku, where our other FDA-cleared products are produced.

Our priorities continue to be focused on increasing the value we provide per birth, while at the same time capturing more births. For example, we are developing assay kits for the ADAM12 biochemical marker, which has broad potential in maternal screening for fetal chromosomal abnormalities, and PP13, a potential biomarker for identifying patients at risk for preeclampsia.

We also continue to invest in expanding our reach, which is why we are quite excited about the potential of adding ViaCell, as it expands our sales and marketing capability and adds another strong product offering, in addition to expanding our capabilities in stem cells, which is an exciting and growing market.

In the drug discovery research area, we would characterize the overall market as stable and growing mid single digits, but with any two companies representing wide deviations from the mean.

Some of our customers are going through significant restructurings, including closing or consolidating screening centers, which negatively impacts us on the instrument side, but appears to be having favorable impact on our one-source service business. In addition, this focus on profitability is also increasing outsourcing activities, which is accelerating demand for our assay development service.

Some of our customers are clearly expanding capacity in selective areas, particularly in cellular screening and imaging, which is helping the companies we recently acquired. This trend is also helping our reagent business, where our Lance Ultra and sure-fire technologies for biochemical and cell-based kinase assays are experiencing very good adoption.

In the GPCR area, this focus on cells is driving growth in our photoprotein reagents and we are also seeing good growth in our [alphalyzer] technology, which is an alternative to [aliza] assays for preclinical biomarker detection. Going forward, our priorities in drug discovery will be to focus on cellular screening and imaging, emphasizing our ability to offer both the detection and reagent solution and continue to expand our service offering with the goal of providing as comprehensive a service as possible.

In the environmental market, the overall conditions are very good, with particular pockets of strength in air and water monitoring, food safety and energy. Our priorities here will be to focus on application-based solutions around several key end markets.

One example of this is the EcoAnalytix initiative that Greg mentioned. We introduced it last week in Beijing at the Conference and Exhibition of Instrumental Analysis. And as part of this initiative, we introduced a number of new products targeting the monitoring and detection of contaminants, such as melamine, polyaromic hydrocarbons and trace metals like lead and mercury.

We have also recently expanded our very successful line of gas chromatography with the CLARUS 400, which compliments the 500 and 600 and is targeted at emerging markets. Over the coming quarters, we will be introducing additional products to specifically address some of the critical environmental challenges we now face.

So to summarize, we feel good about the trends across the markets we serve and more importantly we feel good about our own position within these markets, and believe we can continue to grow at least if not better than the underlying growth of the markets we serve.

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 of 2007. Then I'll briefly discuss guidance for Q4 and full-year 2007 before opening up the call to your questions.

Before I get into the specifics, I wanted to clarify that whenever I talk about a particular measure being up or down and referring to an increase or decrease in that measure during the third quarter of 2007 compared to the third quarter of 2006. 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 Web site.

Turning first to revenue, we finished the third quarter of 2007 with sales on a reported basis of $436 million, up 13% compared to $387 million in the third quarter of 2006. Changes in foreign exchange rates and acquisitions contributed approximately 400 and 300 basis points respectively to the overall third quarter 2007 revenue growth.

By segment, revenue growth was 13% in both LAS and in Optoelectronics. The impact of foreign exchange and acquisitions each contributed 400 basis points to the growth of LAS, whereas the impact of foreign exchange contributed 300 basis points to Optoelectronics. The remaining revenue comparisons will be on a reported basis including the impact of foreign exchange and acquisitions.

Geographically, revenue in the Americas, which represented approximately 44% of our revenue for the quarter was up in the high single digits. Revenue in Europe, which represented about 37% of our revenue for the quarter was up strong double digits, and Asian revenue, representing about 19% of our revenue for the quarter, increased in the strong double digits.

Gross margins for the third quarter of 2007 were 41.1%, an increase of 80 basis points over 40.3% in the third quarter of 2006. Adjusted for the impact of stock option and amortization expenses, gross margins increased 80 basis points. Strong volume, favorable product mix and productivity more than offset the impact of inflation to drive the year-over-year gross margin improvements.

R&D expenses increase 12% to $27.7 million in the third quarter of 2007 from $24.8 million in the third quarter of 2006. Adjusting for the impact of stock option expensing and amortization, we kept R&D expense as a percentage of sales at 6.2% to fund the acceleration of activity around new product introductions and acquisitions. We expect our R&D investment will grow at a slower rate than sales in Q4 '07.

Selling, general and administrative expenses were $106.4 million in the third quarter of 2007, an increase of 12% compared to $94.7 million in the third quarter of 2006. Adjusted for stock option and amortization expenses, SG&A was also flat on a year-over-year basis at 24.5%.

Volume leverage and cost controls were offset by the unfavorable impact of foreign exchange and acquisitions. In the third quarter of 2007, we had a reversal of a reserve for $1.4 million for lease charges on a prior divestiture.

GAAP operating income for the third quarter of 2007 was $45.8 million compared to $36.5 million in the third quarter of 2006. Excluding intangibles, amortization and stock option expense, operating income in Q3 '07 was $58 million, or 13.3% of sales, an increase of 70 basis points from Q3 '06 due to increased gross margin.

Looking at expenses below our operating income, interest expense net of interest income in Q3 '07 was $3 million as compared to interest expense of $200,000 in Q3 '06 due to the increase in net debt over the last 12 months driven by our acquisitions and share repurchases, somewhat offset by strong cash generation. Other expense of $2.4 million is comprised of the cost of hedging our foreign currency balance sheet exposures, which increased year-over-year due to the weaker U.S. dollar.

The tax provision of $9.5 million for the third quarter of 2007 reflects a rate of approximately 23.3% compared to 21.3% in the third quarter of '06, which included a 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 $31.1 million in Q3 '07, up from $28.9 million in Q3 '06.

Weighted average diluted shares outstanding for the quarter were 119.5 million shares, reflecting the impact of our year-to-date repurchases. In Q3 '07 we repurchased 1.1 million shares outstanding under our 10 million share program approved by the board in '05 leaving us with 2.9 million shares remaining in our approved program.

GAAP EPS from continuing operations was $0.26 in the quarter. Excluding intangibles, amortization and stock option expense, adjusted EPS was $0.33 in Q3 '07, up 10% from Q3 '06 meeting First Call consensus estimate adjusted for stock option expense, in the high end of our forecasted range of $0.31 to $0.33.

Turning to our segment results, I will briefly describe our Q3 performance. In LAS, revenue for the third quarter was $319.3 million, up 13% over the third quarter of '06. On a GAAP basis, LAS operating profit for the third quarter of '07 was $29.3 million compared to $25.3 million for the third quarter of '06.

Excluding the amortization of intangibles and stock option expense, LAS Q3 '07 operating margins were 12.7%, up from 12.2% in Q3 '06. Volume benefits, product mix and net productivity measures drove the operating margin improvement.

In genetics screening, which was about 16% of the LAS revenue in the quarter, revenue increased in the strong double digits. We continue to see excellent expansion in neonatal screening, which grew double digits driven by increased adoption of mandated tests such as our amino receptive trypsin for cystic fibrosis in the U.S. and international expansion in Russia.

Also within the quarter we made further strides in globally expanding our testing protocols in Latin America by reaching an agreement for a first (inaudible) light in both Mexico and Chile, as well as completing the installation of our equipment in seven states in China. Prenatal screening also grew double digits during the quarter compared to Q3 '06 driven by the increased acceptance of our tests in Europe and the strong adoption of our NTD tests with its proprietary free beta hCG marker, which generated strong double-digit growth.

Service, which represented about 26% of our LAS revenue in the quarter, grew high single digits also contributing its upward trajectory. We saw good growth in our base business, particularly in our noncontract global revenue in both Europe and Asia-Pacific driven by our recent investments.

In addition, we continued to see very strong demand for our one-source multi-year service offerings in the areas of relocation and asset management programs. The outlook for our service business remains very favorable, as our multi-venture strategy continues to be well accepted in the market.

In the environmental and chemical product lines, which represented about 25% of our LAS revenue in the quarter, revenue increased in the high single digits driven by very good performance in our GC offering from our CLARUS product line. Sales and orders in China were again up double-digit in the quarter, reflecting continued demand for the solutions to improve the analysis of air, food and water quality.

Biopharma sales, which represented 34% of LAS revenue in the quarter increased in the mid single digits compared to the same period in '06. Within biopharma certain businesses showed strong improvement in year-over-year revenue growth versus Q3 '06 driven by new product introductions. Specifically, reagent revenue grew in the high single digits.

Our focus on increasing our high throughput screening reagent assays with new product introductions in both the kinase and GPCR technology areas is beginning to gain traction. In addition, increased adoption of our foreign technology from the Euroscreen acquisition is also driving growth for our cells and membranes.

Instrument revenue performance was not as strong, due to challenging year-over-year comparables in our JANUS liquid handling product, which was introduced a year ago, as well as timing of orders and new product introductions.

In Optoelectronics, revenue for the quarter was $116.3 million, up 13% compared to the third quarter of '06, led by imaging and lighting businesses, which grew double digits. Optoelectronics GAAP operating profit for the third quarter of '07 was $24.6 million, or 21.1% of revenues.

Excluding intangibles and amortization, stock option expense and lease charges, operating margins were 20.8%, which represents an increase of 30 basis points compared to the third quarter of '06, driven by volume leverage and product mix, offset by the impact of a weaker dollar.

Within Optoelectronics, imaging revenue grew strong double digits during the quarter driven principally by strong demand in our Amorphous digital x-ray panels. We expect growth in our Amorphous business to continue on an upward trajectory during Q4 and into 2008.

Specialty lighting grew in the double digits compared to Q3 of last year. We continue to see strong adoption of our flashtubes by many of the leading digital camera manufacturers.

In addition, we shipped our first mobile flash module product this quarter under a previously announced design win. Our investment in the photo flash area are just beginning to show results, and we see a very strong outlook for this business going forward. [Hence our] revenue was up in the mid single digits in the quarter driven by our industrial sensor and photo diode product lines.

Now turning to the balance sheet and cash flow. During the third quarter of '07 we had GAAP operating cash flow of $24 million, driven by improved profitability and flat working capital performance. We continue to invest in the business spending $10.5 million in capital to fund our various growth initiatives.

We finished the quarter with total cash of $161 million and net debt of $86 million, which we define as total short and long-term debt net of cash. We expect to build off the strong momentum achieved so far in '07 and continue to drive strong revenue growth in Q4.

Excluding the impact of the anticipated ViaCell acquisition for the fourth quarter 2007 we are forecasting double-digit revenue growth, including 400 basis points of foreign exchange and 300 basis points for acquisitions. In addition, we are forecasting GAAP earnings per share from continuing operations of between $0.36 and $0.38, with the impact of stock option expensing expected to be a penny, and the impact of amortization, $0.06.

Excluding the impact of intangibles, amortization and stock option expense, we are forecasting cash earnings per share from continuing operations of between $0.43 and $0.45 for the fourth quarter of 2007, which will allow us to achieve our full-year EPS forecasted growth of low to double digits to mid teens.

As mentioned during our call to announce the ViaCell acquisition, we would expect this acquisition to be approximately $0.01 dilutive to EPS in the fourth quarter, and 200 basis points accretive to revenue growth in the fourth quarter assuming a mid-November close. We also expect the acquisition to be $0.03 to $0.05 dilutive in '08 and $0.01 to $0.02 accretive to 2009 on an adjusted basis.

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

(OPERATOR INSTRUCTIONS) Your first question will come from the line of Paul Knight of Thomas Weisel Partners.

Hi, Greg.

Hey, Paul, how are you doing?

Good. The Optoelectronic group had a great margin in the quarter. Can you talk about, you know, that and the sustainability of where Opto is right now?

So, Paul, it's Jeff.

So you know, the Optoelectronics business had a very strong quarter and from an operating margin perspective expanded their margins. I think it's driven by a couple factors. One, I think that business has done a great job of driving top line revenue growth while really watching their cost structure very carefully, so that's one driver.

Another one is that the Amorphous business is a heavily fixed cost natured business and we've had continued strong performance in growth of that business. The yields are coming up, and therefore as you drive more volume out of that facility, the fixed cost leverage is such that you get a lot of incremental variable contribution margin coming out of that business.

So I think it's both the combination of strong revenue growth and good cost controls coupled with good volume leverage out of the Amorphous facility that really drove that result.

And at what, Rob, can you talk about Asia and specifically what portion of your growth is coming out of the India and China market right now on the LAS business?

You know, the growth across LAS this quarter was pretty well balanced across the three regions. We saw good growth in the Americas and Europe and Asia, and so I would say in this particular quarter there wasn't any disproportionate growth. We saw it pretty uniform across, in fact, probably Europe was a little light, but Americas and Asia were both about the same.

And then lastly, do you see anything in backlog or orders that would give you any visibility on the next six, nine months in terms of -- we still have traction in the marketplace I guess is the short question.

Yes, I would just say, I don't know about six to nine months, Paul, but I would say, you know, we haven't seen any inflection point in the booking rate, so we don't, at this point we don't see any change in the, you know, in the sort of sales growth outlook, or the economy.

Okay. Thanks.

Yes, you're welcome.

And your next question will come from the line of Derik De Bruin of UBS. Please proceed.

Hi. Nice quarter.

Thank you.

Thanks.

So could you give me a little bit more color on the below the line items, below the operating line items, just a little bit more about the FX impact there? It looks like you, you certainly blew away my margin expectations but it looks like that those items were -- the expenses were a little bit greater than what I was looking for. Just give me a little bit more color, please.

Sure, Derik, it's Jeff.

So there were two main items that kind of drove the below the line increase in expenses. The first was interest. You know, we've obviously spent a little money in the last 12 months on both acquisitions, share repurchases, and have kind of swung from kind of a net cash position to a net debt position, so pace of the increase year-over-year is the increase in interest to reflect the fact we bought companies and we've repurchased shares. So that's one component of the increase below the line.

The second increase is the movement in foreign exchange markets. We are a global company operating in many different jurisdictions and we've got a balance sheet where we've got exposures to different currencies, and what you saw happen was there was a fairly noticeable move in many of the currencies, the yen, the euro and the Canadian dollar specifically, relative to the U.S. dollar and what that does when you translate the balance sheet is it throws an expense off down below the line, translation expense, which runs through the other expense line.

However, there is a corresponding expense, or benefit, rather, that goes through above the line. So it neutralizes itself out, but there is a disproportion amount that occurs down below the line from a accounting perspective.

That's helpful.

And I guess when you -- I guess a little bit more color in terms of the specialty lighting business, specifically just some color in terms of how much of the flash model is part of Optoelectronics? A little bit more color on the contribution from the Xenon flash.

Yes, I would say, Derek, this is Greg.

I'm not sure I caught the full part of the question. It was a little hard to hear, but if it was about how much did flash modules contribute to the growth in Opto, I would say it was a modest contribution this quarter, as we had sort of forecasted that we would see the main impact of that in the sort of fourth quarter on. But what it did do was successfully establish production capability, production runs, customer acceptance and, you know, sort of initial, call it, product flows.

So I would say modest impact this quarter, more significant impact next quarter from a numbers standpoint, but significant impact this quarter from sort of proving out the concept, getting established, getting the supply chains up and running and getting the, you know, initial production runs on through the whole system.

Great. And I guess just one other question.

Could you just talk about, I guess, curious about the reception you've had towards the ViaCell deal and has anything changed since you've announce it in terms of (inaudible)?

No, I think the reception has been very good. You know, I think folks understand the fit, both from expanding the product set within neonatal and the linkage between screening and therapeutic actions using the stem cells, so it's a nice sort of closed loop process there.

People also understand the synergy both current and future on the distribution channel, both into the obstetrics professional with the field sales organization, and the direct to consumer marketing which is an area that we haven't had before this period of time and it brings a significant capability in that area. And so that's both a synergy with where we are today and continues, I would say, to build out our selling distribution platform for expansion with other products in the future as well.

Okay. And could you just give us a little color about some of the other products you're talking about? What's in the pipeline for neonatal?

You know, I would say for, without getting it too much, I think you look at neonatal it's just a matter of continued both agrees, right, to continue to expand out the number of tests. And I think Jeff's [spiked] a couple of those out this quarter that we recently added, but I think continue to expand that menu and then outside the U.S., of course, very importantly continue to ramp up the geographic penetration. But also, you know, in the prenatal space as well.

So you can think about it this way. If you think about the OB/GYN channel and you think about the full breadth of product that goes through the OB/GYN channel, all those are potential candidates that continue to expand into the future, so if you will, kind of a horizontal consolidation around that channel.

Okay. Great. Thank you very much.

You're welcome.

And your next question will come from the line of Jon Groberg of Merrill Lynch.

Hi, Jon.

Good afternoon. Thanks for taking the call.

Yes.

First question I had is you continue to talk about strength in the digital x-ray, medical imaging panels and I was just curious, how does the DRA, this Deficit Reduction Act that you hear companies like GE and Phillips saying it's really impacting their sales of some their imaging products. How does that work its way down to your business?

So Jon, it's Greg.

The DRA hasn't impacted the digital x-ray business. The DRA is principally applied to outplacement imaging centers which have been sort of CAT scan, MRI and PET, and the digital x-ray tends to take place in the hospitals itself, so there hasn't been any impact, although there's been a significant impact in the U.S. on those other modalities, there hasn't been any impact in the digital x-ray. And that's, so we would say no impact to us from that legislation.

Okay. Great. Thanks for clarifying that.

Okay.

And then I had one other question.

If I remember from your 10-K a bit ago, I think I remember reading that you guys actually did have some off balance sheet financings, securitize your receivables. Is that still the case, or is that -- have you stopped doing that?

Yes, so, Jon, this is Jeff.

So we have a receivables securitization facility that we've used and that we drew down on back in 2002, about a $45 million facility, so a smaller facility and it's backstopped against our receivables. And so that facility is out there. We renew it every year.

We've got pretty good reassurances from the financial partner that that will be unaffected by what's happening now in the credit market. So we don't see any risk to that in the foreseeable future.

Okay. That was my, obviously, the route that I was going there.

Yes, and of course, Jon, you know, we always have the capability to move that to a different instrument. If we do, we've tended to keep it there just because the pricing on it is so attractive.

Right. And you're still getting I assume, attractive pricing, even in these markets on them.

Yes, that's correct.

And then last clarification. On the FX issue, just so that I make sure I understood it correctly. I mean, if you had not been hedging as you had some of those items that you discussed, your margins perhaps would have looked slightly worse, but you wouldn't have had the other expense at the bottom and even in those kind of offset each other. I just want to make sure I was understanding correctly.

Yes, that's more or less correct.

Great. Thanks a million.

Okay.

And your next question is from the line of Ross Muken of Deutsche Bank.

Hi, guys. Mike in for Ross.

You mentioned earlier you talked about the acquisition pipeline being pretty robust and given that you spent a lot of money on ViaCell and the neonatal area, is that an area that you'll continue to look to add on from acquisition standpoint, or are there other areas that you're looking to?

No, I think we're, we will continue to add on into our genetic screening business, both the neonatal, prenatal and then also the maternal health area are priority areas for us, along with a number of others. So not exclusively in that space, but as you can see from our past history, but certainly an area that we think is still fairly fragmented, and we believe the synergies are pretty compelling through, I would call it, shared mind with the clinicians and the selling and service and support infrastructure around the world and, frankly, our reputation.

So we think there's an opportunity to continue to create value by broadening out that, you know, that set of products and services.

Absolutely makes sense. And then in terms of the size you're targeting, is it more the smaller bolt-on acquisitions, or is it something a little more sizable such as another ViaCell-type acquisition?

This is Rob.

I would say our first preference is to do the smaller bolt-ons and taking advantage of bringing them into our distribution, sales and service capability. I would say that's our first priority.

Okay. Great. I think the rest of my questions already got answered. So thank you, guys.

And your next question is from the line of John Sullivan of Leerink Swann.

Hi, guys. Good afternoon.

Hi, John.

A couple of quick ones.

Just first of all, can you give us a sense of what percentage of your total revenues are recurring these days including service and warranty and spare parts and traditional consumables? And can you also give us a sense of based on mix shift, where that number might go maybe in a year, if you're so inclined?

And then if you continue to implement your own plan, do you want to push more toward consumable revenues, and where do you think that PerkinElmer can get to in terms of recurring revenues as a portion of total business?

Hi, John. This is Jeff.

The recurring revenue piece, which is typically comprised of kind of our reagents business, our genetic screening business, the service business, and the contractual business we have under the Amorphous medical imaging piece is roughly 50% of the business, so it's a fairly healthy piece. It's definitely an area, most of those areas, genetic screening, medical imaging and the other areas are areas of interest from an investment perspective, R&D, acquisition and Cap Ex.

We look to kind of continue to drive those up and would look -- there's a fair percentage of the ViaCell business that's recurring with the renewable fee that's paid every year to store the blood sample. So we look to continue to drive that percentage up as we continue to grow the business, certainly.

Okay. Thanks very much for that.

And then shifting gears. Regarding environmental, can you just give a sense of the products that you have in environmental that are, that kind of lead your business as far as you're concerned and kind of how they line up with them? Is air and water monitoring the best opportunity for you now in environmental, and if it is, just broadly can you speak about the products that you think are kind of your leaders in that area?

John, so this is Rob.

So I would say it's air and water, it's food safety I think is a key area we're looking to continue to have a significant position. I think in the biofuel area is another area that we think we've got significant capabilities.

So I would say those are the three initially that from an environmental perspective that we're going after and we think we look at our -- and it's not just the technology or the instrument, it's the application know how, it's the software, it's really the SOPs that are all wrapped around that and that's really the whole initiative, this EcoAnalytix is to really deliver this solution approach. Those are the key areas.

Is this -- do you see this as more of a regulation-driven opportunity for you or is it more kind of self-governing as corporations get to be more efficient? Is it generally, are we looking for worldwide regulation or are we looking for just kind of more corporate profits?

I think a couple of years ago, it was probably more regulation-driven. I think now it's really being driven by whether it's the consumer or the individual companies. And I think that's really what's driving it right now.

So whether it's in, you know, China's going to have to be able to monitor their food better in order to continue be able to export or whether it's the toys and et cetera. So I think there's are a number of things that are really driven by the companies themselves or ultimately the consumer, so I don't think this is going to be determined by regulation.

Okay. Last question, Rob, regarding this.

Is this run as a discreet business area for you, or does this get, does this gets spread around several different functional areas?

Well, the EcoAnalytix is part of the environmental business which is a separate and distinct business.

Okay. Thanks very much.

You're welcome.

And your next question is from Jason Weiss of Robert W. Baird.

Hi. Could you characterize the growth in your genetic screen business in terms of how much has been from new customers versus new tests at the existing customers?

No, we don't -- Jason, we don't break that out. I would say that the dynamics of the business is a -- it's a cumulative builder and that there is very little to no churn in the customer base. And so unlike other businesses where new customers -- existing programs are winding down, new programs are coming on, in that business it's really driven by births and, you know, and the adoption of technology to treat those births, and so the business, you know, sort of -- it just continues to build and build and build, and we almost never, very, very seldom ever have a customer that actually decreases.

Would it be fair to say, I know there's a slide you've shown frequently of the opportunity in existing geographies, and I guess is more of your effort placed on broadening those relationships rather than reaching new geographies?

I would say, maybe try to answer it this way which is that both the existing geographies and the new geographies are important. The sales come more quickly with the existing geographies because they have the systems in, they have the protocols in place, they have the customers or the patients there and so it's a matter of them expanding their service menus, and in new geographies it's more of a startup. So you got to get the whole platform in and in place.

But both are, you know, both are very important elements to us so I don't know that we place more attention on one versus the other. I'd say in any given quarter, probably the existing customer base has a bigger contribution, of course, than the new customer base.

And then one last question. The ViaCell acquisition, will that be classified as part of genetic screening?

Yes, it is, so it's part of that business.

Okay. Great.

It'll be run as a separate unit within that business.

Terrific. Thank you for taking my questions.

You're welcome.

(OPERATOR INSTRUCTIONS) Your next question will come from the line of Brett [Cusanelli] of RCB.

Hi.

Hi, Brett.

Question on your -- hi, on your positioning on your quality screening and you named a few categories such as the melamine and biofuel, heavy metals and, I guess, just kind of an overview of the competitive positioning there would be great. And I know you mentioned Asia as well and China and maybe if your positioning's any different there than worldwide. Thanks.

Do you mean from a competitive position where we stand from a market share?

Yes, yes, that would be great.

Or who the other competitors are?

I'm sorry?

Or who the other competitors are, or what our individual shares are in those areas?

Kind of these emerging categories and how you see, you know, maybe who your players are there that you're competing against and market share, and, you know, they're kind of nichier markets if we're talking melamine or biofuels, you know, fairly new category.

So I think as you look at our competitors in this area, they have a tendency to be what I would call the normal analytical instrument provider, so whether it's thermo or agilen or varian or maybe even [waters] on the thermal analysis side, I think the one thing that we're doing, which I think is a little novel, though, is we're trying to move from supplying products and technologies to providing these applications or solutions. And so I think that's the differentiator.

So we're not going to go in and sort of here's an atomic absorption instrument. We're actually going with an instrument that is designed for a specific application, and as I mentioned before, there'll be specific SOPs and the instrument will be designed specifically around whether it's testing for melamine or whether it's a PH analyzer, et cetera. So I think that's the differentiation that we're sort of bringing to the market.

Okay. That's helpful. Thank you.

You're welcome.

And your next question will come from Craig Leighton of Lord Abbett.

Yes, hi, guys. Just two quick real questions.

Firstly, I'm just wondering if you could comment on your forecast for the Optoelectronics expected fourth quarter growth, that segment?

Oh, hi, Greg, it's Jeff.

Hi, Jeff.

So I think we would assume that both businesses, LAS and Opto, would have strong double-digit growth for the fourth quarter.

Okay. You don't see Opto starting to show differential growth and really accelerate away from your LAS business?

Well, it'll have strong growth. I think there's no question that Opto is well positioned to have a very strong fourth quarter.

Okay. Terrific.

And then also just within the biosegment segment you've highlighted the very strong trends within your cellular products that you're looking to build up, and I'm just wondering if you might give a comment on this quarter and then, you know, the outlook as you've added some new products there?

Well, as I mentioned, I think that's the way we believe a lot of the customers are moving into the cellular screening and cellular imaging, so we're fairly optimistic about, particularly on the reagent side, I mentioned a number of new products that we've come out fairly recently and we're seeing a good adoption of those.

I would say, clearly, on the reagent side, things are improving, particularly in GPCRs and kinase. As you know, that probably makes up 70, 75% of the drug targets anyway. And so that's where we're seeing particularly strong growth.

You spend some time optimizing your product portfolio there, bringing some new stuff in and taking some other products out and I'm just wondering if you're looking for real acceleration in that, you know, 10 to 12% of the business, if, you know, if this is 20-plus percent [grower].

I think when you look within the drug discovery, I think there's pieces of that business that are seeing good acceleration. Keep in mind that a good part of the biopharma business is still in the radioactive areas, so whether it's radionucleatide or radioactive detectors, and I think that's a market that continues to be challenged from a growth perspective.

So if you were to sort of look at parts of the biopharma business, I think you would see the acceleration you're talking about, but it gets reduced to some extent because of the drag from the radionucleatide and the radioactive detectors.

Okay.

Just lastly, are you starting to see the benefits of the Evotec-PerkinElmer combination? I guess I'm just trying to understand what the 2008 might look like with the Evotec product line within the LAS distribution.

Right. Yes, I think we are. I think we're seeing Evotec had a terrific product. They didn't have a very significant distribution or sales capability and so it's taken some time to get our people trained on that product and I think we are starting to see some good traction in that product.

One of the things we need to do, though, is take the price down of the Opera, and so we've got an R&D project to significantly take costs and make that a lower priced model and I think then, I think you'll see some significant growth.

Great. Thanks.

You're welcome.

And your next question is from Vivek Qana of Civic Global Healthcare.

Hi. Good evening.

I just wondering if you could give the organic growth for the Life and Analytical Segment? I missed that.

It was 5%.

Okay. Great. Thanks.

You're welcome.

And your last question will come from the line of Vito Menza of Sandler Capital.

Hi, guys. Great quarter.

Just a question on operating cash flow. The nine months versus last year's nine months really looks great. Was this three months kind of just a catch-up in working capital type of thing?

You know, Vito, it's Jeff. No, I don't think it was a catch up. I think we've -- the strong cash flow's being driven by a couple things.

One, a year ago, we had taxes that we paid out on the divestiture of the fluid sciences business at the very end of '05, and those payments, those tax payments didn't get made until the first quarter of '06.

Okay.

So when you look at a comparable basis you got to take the $43-odd million of operating cash flow for year-to-date Q3 '06 and add in the almost $60 million of taxes and then you get more of a comparable basis.

Understand.

But when you make that adjustment, it's still up, and it's up because of the improvement in the profitability of the business combined with pretty good management of working capital. Working capital management is a big point of focus for us.

Got it. That helps.

And just lastly, I know you touched on the 4X hedges that you guys do below the line. Just want to understand it. You know, should we be adding back that $2.3 million, you know, and tag the EBIT number for it or is there a more disproportion national hit below the line as we kind of look at it year-over-year?

Well, you could kind of net the two of them out and I think this quarter was a rather unusual quarter because we had pretty big movements between the beginning of the quarter and the end of the quarter in some of these currencies, so this is one of the larger quarters we've had from a 4X perspective.

So it's really volatility of 4X that causes the other line to be bigger than the draw?

That's right.

Got it.

And typically we've run anywhere around $1million, so $2.2 million is a fairly high number and hopefully we wouldn't expect to see that kind of continue going forward. Otherwise, the foreign exchange traders are going to be pretty busy I would think.

Right, exactly. Tell Bernanke stop cutting. All right. Thank you.

You're welcome.

That will conclude the question-and-answer session. I would like to turn the call back over to management for closing comments.

All right. Thank you, operator. Thanks, everyone, for your participation and interest in PerkinElmer.

We are pleased with our third quarter and believe we're well positioned to sustain the growth of our business throughout the remainder of 2007 and beyond.

This call is adjourned. Have a great evening.

Ladies and gentlemen, thank you for your participation in today's call. This concludes the presentation. You may now disconnect. Have a wonderful day.