Revvity Inc (RVTY) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2012 PerkinElmer earnings conference call. My name is Regina and I'll be your conference operator for today. At this time all participants are in a listen-only mode. Later we will be conducting a question-and-answer session.

(Operator Instructions)

Today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Tommy Thomas, Vice President of Investor Relations. Please go ahead.

Thanks, Regina. Good afternoon, and welcome to the PerkinElmer third-quarter 2012 earnings conference call. With me on the call are Rob Friel, Chairman and Chief Executive Officer, and Andy Wilson, Senior Vice President and Chief Financial Officer. If you have not received a copy of our earnings press release, you may get one from the investor section of our website at www.PerkinElmer.com, or from our toll-free investor hotline, 1-877-PKINYSE. Please note that this call is being webcast live and we will be archived on our website for two weeks from today. Before we begin, we need to remind you, 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 other 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 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 the attachment, we will provide reconciliations promptly.

I am now pleased to introduce the Chairman and Chief Executive of PerkinElmer, Rob Friel. Rob?

Thanks, Tommy. Good afternoon, and thank you all for joining us today. I'm pleased to report another excellent quarter for PerkinElmer, in which we continued to make strong progress against our strategic priorities and also delivered solid financial performance, exceeding our forecasted revenue growth and adjusted profitability. During the third quarter, our adjusted revenue grew 11% year-over-year, which represents the 10th quarter in a row that we have reported growth of 10% or higher. Organic growth for the quarter was 6%, and over the last 10 quarters, our organic growth has averaged over 7%. While Andy will get into specific details of the organic revenue growth, I would like to mention a couple of the key drivers of this strong performance. Our Human Health business experienced 10% organic growth, with both our diagnostic and research businesses benefiting from strong demand in emerging markets, especially in Asia. In particular, our newborn screening, medical image, and infectious disease-testing all experienced double-digit growth in the quarter.

In our Environmental Health business, the majority of our growth came from the service business and the sales environmental analysis products into emerging markets. Our adjusted operating margins increased another 60 basis points in the third quarter, after funding our plan spending increases on several initiatives to simplify our global manufacturing footprint, reduce our administrative costs, and expand our capabilities into the emerging markets. Marking this 10th quarter of consecutive double-digit adjusted revenue growth, I wanted to take a moment to give my perspective on why I think we've been able to continue delivering consistent and differentiated growth, despite a choppy macroeconomic environment. When signs began appearing in late 2008 that uncertain times might be on the horizon, we made a conscious decision to not back away from our long-term vision of the Company's portfolio, geographic focus areas and critical mission. As a result, over the last three years, we have made important investments in every aspect of our business through acquisitions, acceleration of R&D spending and operational improvement initiatives.

Ultimately, our performance over this period is an incredible tribute to the dedication and the excellence of our people. Internally, our culture is now one where we all are deeply motivated by advancing our mission of improving the health and safety of people in the environment, and energized by the positive difference that is being made. The strength of our organization, our steadfast commitment to growth, and our operational excellence have been critically important to advancing our mission, as our growth and increased profitability enables us to invest in new innovations and capabilities to solve our customers' needs. In the past year, we have increased our spending in research and development by over $20 million to bolster our innovation efforts. And since the beginning of 2009, we have increased R&D spending by over $40 million, which represents approximately 10% of our increase in revenue during that time. This increased R&D spending has resulted in a strong pipeline of new products and services that have been major contributors to our strong organic growth over the last several quarters.

In addition to higher R&D spending, we also continued to make significant investments to accelerate operational improvements and expand our capabilities to better serve our customers. For example, in the third quarter, we opened our new Shanghai headquarters, which quadruples our footprint in this critical location and features three new state-of-the-art centers dedicated to developing application solutions to address the needs of our growing Chinese customer base. In addition, our new diagnostics R&D and manufacturing facility outside Shanghai in Taichung has received a manufacturing certification from the SFDA. This site has now begun production of high-quality diagnostic reagents and testing instruments for the rapidly growing emerging markets. During the quarter, we broke ground on a new global personalized health center of excellence in Hopkinton, Massachusetts, establishing a centralized location that brings together some of our best minds to focus on solving critical needs for our research customers. We also opened a new customer relationship center in Krakow, Poland, to position PerkinElmer to capitalize on the rapid growth and business potential that we see in Eastern Europe, while enabling us the leverage to recent economic competitiveness.

And finally, we have accelerated our progress in realigning our manufacturing assets to improve efficiencies and to better reflect our changing geographic distribution of revenue. During the third quarter, we also began a number of new initiatives that will continue to fuel our growth. I thought I would give you an example of these initiatives in each of our three key end-markets. In diagnostics, we partnered with one of our customers to establish a lab-in-a-lab to provide realtime PCR assays to help diagnose SCIDS in newborns. SCIDS is a terrible disease that attacks the immune system and can make children extremely vulnerable to infectious disease. However, with new advances in recent years, children with SCIDS can now be successfully treated, and screening for this disease has begun in several US states. In the research area, we announced a strategic relationship with TIBCO for exclusive licensing rights of its Spotfire data visualization and discovery software. Spotfire and our other informatics offerings are critical solutions for our customers as they harness and extract value from the big data they are producing with exponential speed.

And in the environmental market, we are collaborating to embed our ultra sensitive air analyzers into air monitoring systems to detect the existence and concentrations of potentially toxic compounds. These activities, as well as many others, are what inspire us and also give us the conviction to once again raise our adjusted revenue and adjusted EPS guidance for the year. We are still in a challenging economic environment. Fortunately, we have been able to do well, due to our long-term commitment to serving our customers, strength in several key end-markets, our differentiated product offerings, and an organization that is focused on making a safer, healthier planet.

I would now like to turn the call over to Andy, who will provide more details on our financial performance in the quarter, and full year guidance.

Thanks Rob, and good afternoon. Consistent with prior quarters, I will provide some additional color on our end-markets, as well as a financial summary of third-quarter results. And then we will, as usual, open it up for questions.

As Rob mentioned, we were pleased with our performance in the third quarter, delivering another solid quarter of organic revenue growth. Reported revenue for the third quarter increased 13%, while adjusted revenue for the third quarter increased by 11% to $514.8 million, as compared to the third quarter of 2011. Organic revenue for the quarter increased 6% as compared to the same period a year ago. Adjusted earnings per share for the third quarter was $0.45, driven by stronger top line growth, partially offset by productivity and growth investments deployed in the quarter. By segment, organic revenue increased by 10% and 3% in our Human Health and Environmental Health segments, respectively, versus the same period last year. By geography, organic revenue in both the Americas and Europe grew at a low single-digit rate, while Asia grew by more than 20%.

We continued to experience strong demand from emerging territories, with organic revenue growth in the BRIC countries up greater than 20%, despite a growth comparison of more than 20% in the prior period. I'd also like to note that the majority of our businesses in emerging territories, specifically the BRIC countries, and especially China, continue to experience strong demand, reflecting the strength of PerkinElmer's brand and product portfolio, as well as the attractiveness of the verticals we serve. Looking at organic revenue by product category, recurring revenue, which includes reagents, consumables and service, grew mid-single digits in the quarter, while instruments and components grew at a low double-digit rate when compared to the third quarter of 2011, primarily a result of strong demand in Human Health. From an end-market perspective, PerkinElmer's Human Health segment represented approximately 50% of total revenue in the quarter. We serve two end-markets in Human Health -- diagnostics, which represented 28% of total revenue; and research, which represented 22% of total revenue. Organic revenue from our diagnostics business increased low double-digits during the quarter, with notable contributions from both our screening and medical image businesses.

In our screening business, we continued to experience solid demand across most major segments of the portfolio. This business is continuing to benefit from the stabilization of US birth rates and the expansion of our prenatal, newborn and infectious disease screening solutions in key regions outside the US. We are extremely pleased with our sales uptake in China, and feel that we are well-positioned from a geographic and end-customer perspective to continue driving strong organic sales in the region.

Our medical imaging business continued to see broad-based organic growth across all key technologies and applications in the period, with particular strength in traditional medical diagnostic imaging offerings. We continue to be pleased with the acceptance of our CMOS imaging technology, which provides us access into new verticals, including mammography, dental and orthopedics. Organic revenue in our research business rebounded from the second quarter, growing in the high-single digits in the quarter, the result of strength in automation, high-content screening, imaging and liquid handling capabilities, as well as somewhat easier year-over-year comparisons.

Moving to Environmental Health, which represented 50% of total revenue in the third quarter, we served three end-markets -- laboratory services, which represented 25% of total revenue; environmental and safety, which represented 18% of total revenue; and industrial, which represented 7% of total revenue. During the quarter, we experienced high single-digit organic growth in the laboratory services business, low single-digit growth in the environmental and safety segment, and a low single-digit decline in organic revenue growth for the industrial segment. We remain pleased with the performance of our Environmental Health business in China, where organic revenue once again grew by more than 20%, benefiting from our market-leading environmental product applications. In addition, we continue to see good acceptance of our laboratory service informatics offerings as we help our lab customers better manage their critical laboratory assets and related data needs.

Now looking at our margin performance in the period. Adjusted operating margins expanded approximately 60 basis points in the third quarter to 15.2%, while adjusted operating income increased 16% in the quarter, to $78.3 million. We were pleased with our adjusted operating margin improvement in the quarter, particularly given the growth in productivity investments made during quarter, as well as a difficult year-over-year comparison, resulting from the impact of a significantly higher stock price on our stock-based compensation expense. By segment, adjusted operating margins in our Human Health business for the quarter were 22%, representing an increase of approximately 180 basis points, as compared to the third quarter of 2011. The combination of volume leverage, favorable mix, and productivity gains contributed to this strong performance. Our Environmental Health segment delivered adjusted operating margins of 12%, representing a decrease to approximately 30 basis points. This decline was within expectations, and was primarily due to the growth in productivity investments just mentioned.

GAAP operating income from continuing operations was $43.2 million in the third quarter of 2012, versus $36.1 million for the same period a year ago. Our GAAP tax rate for the third quarter was approximately 8%. And on a non-GAAP basis, our adjusted tax rate was approximately 22%, which is slightly lower than our previous guidance communicated in August. We now expect our non-GAAP tax rate for the fourth quarter to be approximately 22%. GAAP earnings per share from continuing operations in the third quarter of 2012 was $0.25. Adjusted EPS was $0.45 in the third quarter of 2012, exceeding the midpoint of our guidance range for the quarter of $0.42 to $0.44, and a 5% improvement over the same period last year. I want to point out that our third-quarter 2012 EPS results include approximately $0.02 per share of incremental interest costs, related to the terming out of our variable debt in the fourth quarter of 2011, in excess of the funding requirements needed to fund the Caliper acquisition. Our weighted average diluted share count for the third quarter of 2012 was approximately 115 million shares, and our ending-share count was approximately 114.2 million shares.

Turning to the balance sheet, we finished the third quarter with approximately $930 million of debt and approximately $171 million of cash. We continue to make progress in our de-levering efforts, as we exited the quarter with a debt-to-adjusted EBITDA ratio of 2.3 times, and a net debt-to-adjusted EBITDA ratio of 1.9 times. Looking at our cash flow performance, year-to-date operating cash flow from the continuing operations was $113.8 million, as it compared to $151.5 million in the comparable period of 2011. Operating cash flow performance in the quarter was affected by restructuring payments, higher working capital needs, including incremental needs related to the previously announced manufacturing moves to Singapore and China, and royalty payments related to Spotfire licensing.

Overall, we were pleased with our performance in the third quarter, which represented a continuation of the momentum we experienced in the first-half of the year. Looking at our performance for the first nine months of 2012 -- organic revenues increased over 5%; adjusted operating margins expanded by approximately 150 basis points to 15.8%; and adjusted earnings per share grew to $1.41, a 17% improvement over the comparable period last year.

Now I would like to discuss our fourth-quarter 2012 guidance in a bit more detail. But before I do, I want to remind everyone of our performance in the fourth quarter of 2011. As you may recall, we experienced a particularly strong finish last year, due to the timing of the Caliper acquisition and the strong year-end demand across most of the portfolio. In fact, roughly two-thirds of our businesses experienced double-digit growth in the fourth quarter of 2011, which resulted in adjusted operating margin expansion of 250 basis points, and adjusted EPS growth of 38%. Consequently, this performance creates a very challenging year-over-year comparison. Despite this challenge, we still believe we can grow revenue organically, expand operating margins and grow our earnings per share in the fourth quarter of 2012.

As the fourth-quarter guidance, we now expect fourth-quarter adjusted revenue to be in the range of $570 million to $580 million, with foreign currency headwinds of approximately 1% based on current exchange rates, and organic revenue in the range of 2% to 4%. Regarding adjusted operating margins, we expect modest margin expansion in the fourth quarter, due to very difficult comparisons related to the Caliper [stub] period in the fourth quarter of 2011, as well as the ongoing growth in productivity investments we mentioned previously. Based on these assumptions, we expect adjusted earnings per share for the fourth quarter of 2012 to be in the range of $0.64 to $0.66. And for the full-year, we are raising our adjusted EPS guidance from a range of $2 to $2.05, to a new range of $2.05 to $2.07.

This concludes my prepared remarks. Operator, at this time we would like to open up the call for questions.

Certainly.

(Operator Instructions)

Paul Knight with CLSA.

Hello, this is Brian [Kip] on behalf of Paul. Thanks for taking the questions. Just to start off, how has Pharma performed as end-market? Has it been stable for you all? Worse or improving?

Sure. I would say what we saw in Pharma was actually, you know -- as Andy mentioned, we saw our research business up high single-digits. It was driven to a large extent by growth in Asia. I would say we continue to see softness in the Americas, Europe was I think in low-mid single-digit growth. But we really saw the strength in Asia and, in our case, the strength was much stronger in Instruments than Reagents. So I would say a little bit better than what we have seen, but again the majority of the strength coming from Asia.

Okay. Just an additional question. We saw -- it looks like a 400 BPS fall in adjusted environmental op margin. You guys alluded to that a little bit. Can you give any more color on that? And just any specific Analytical Instruments that were better or worse in the quarter?

Well, that's two questions. I'll answer the first part, maybe Rob can answer the second part. This is Andy. In the quarter, we had talked about deploying some investments. And these really center around the movement of some of our manufacturing operations to China and Singapore. And those expenses hit gross margin in the quarter and were predominantly within Environmental Health.

In addition, there were also some costs related to our shared service consolidation. We are now up and running with our shared service center. And so both Environmental and Human Health were impacted by those costs. So the combination of those two, plus some of the Instrument revenue and the mix towards Instruments, really contributed to that performance in the quarter.

But I would say overall the performance of Environmental I think came in actually pretty much what we thought. And then when we look back at the end-markets, environmental analysis was actually strong, mid single-digit growth. Again predominantly outside the US. Services did well in the quarter. And the only area where we saw a little bit weakness, and particularly toward the end of the quarter, was clearly on the Industrial side. Which, as Andy mentioned, is less than 10% of our revenue.

Thank you very much.

Jon Groberg with Macquarie. Mr. Groberg, your line is open.

Well, we'll go ahead and take a question then from the line of Ross Mucen with ISI.

Good afternoon gentlemen. So, on Asia, I mean, are you surprised with the success you've had there? I mean, obviously we have seen all the data on some of the challenges, particularly in China and even in other parts of Southeast Asia. And so, I know it's more on the healthcare side. I mean, can you tease out between the three segments that are key there -- Life Sciences, Environmental and Industrial -- what you saw in some of those key countries?

You know, Ross, actually we saw pretty good growth across all three of the end-markets. I was just there a couple weeks ago. And you continue to see a lot of emphasis and investment by the Chinese government, first of all in improving the access to healthcare for all the citizens there. So we see a significant amount of investment there. We saw growth both on the newborn side as well as the infectious disease, very strong growth.

On the research side, we continued as I mentioned, to see strong traction there. And I think a lot of that's coming from the multinationals that continue to build capability in that part of the world. And similarly, we saw good growth on the environmental side, as I think they recognize is that is going to continue to be a big barrier to their continued industrialization. And so they're investing money in cleaning up the environment. So I would say across the board we saw continued growth throughout China.

And in general, on the P&L, I mean, you guys have just been really killing it all year. You know, you outperformed peers on organic, you've done well on the margin. The one thing we haven't seen from you guys in a bit has been on the capital deployment side. There we have been mainly focused obviously on debt pay down. Andy, where are we getting with the leverage? You know, do we feel like you guys could be back in market buying stock at some point? Is that the focus? You know, is M&A still more on the radar? Where are we with that part of the equation?

Well, I think if you look at our debt to EBITDA as we exited the third quarter, we are essentially where we were before the Caliper acquisition. So I think we're in a pretty good spot from a leverage perspective. I think we continue to evaluate opportunities more -- on the M&A side, more from a bolt-on perspective. And we also are socializing the opportunity to buy back some shares. We had indicated before we would like to take out some of the float -- or, some of the creep that's come into the stock. So I think the opportunity to do that has increased, just given our de-leveraging. I think we have been very active on the M&A side. So I think it will be something probably moving into '13. There could be something small between now and then.

Yes, Ross what I would say is -- and I think we mentioned this. In the early part of the year, we took some time to focus internally on making sure we got the integration of the acquisitions because, as you know, we were quite active in '11. And we also wanted to bring the debt burden down a little bit. I would say probably in the last couple months we've ramped up the M&A activity and we've started to fill the pipeline. And I wouldn't be surprised to see a couple bolt-on deals here possibly getting done in the next couple quarters.

I think the only thing I'd add to that, Ross, is our authorization for a buyback expired in October and it was renewed for another two years.

Great. And congrats, guys, again.

Dan Leonard with Leerink Swann.

Thank you. A question on the investments you're making to leverage the business. How should we think about the timing of when you are going to harvest those investments? You mentioned you're already up and running with the shared service organization. Does that mean those investments are now going to decline? And we're going to see growth in the fourth quarter or beginning of '13? Or just, pacing of that?

Yes. You know, when I said we were up and running with our shared service center in Poland, we have established the shared service center. We are making the investments now. Those investments will continue through early part of the second quarter. So we'll start to see some savings from that really in the second half of next year.

I think on the facility move, I think you're also looking at a '13, maybe a little early in the year, but a 2013 situation, where we'll start to see some of those savings come through the numbers. But there's still some more investments that I just want to be sure that that's clear. That we will continuing to be making some investments, probably up through the second quarter of 2013.

Okay, that's very helpful. And then my follow up question, Rob and Andy. Are you managing the business any differently in front of the uncertainty around the fiscal cliff in the US? And if you are, in what fashion?

You know, I don't think so. I mean, I think when we look at the -- at least first, we start with sequestration. I think we've talked about this in the past. You know, the impact to us is relatively small. I think what we have said is, when you look at NIH, it's probably 5% or less of our revenue. So obviously we're conscious of it. But we're not seeing really any significant impact or pullback at this point.

Having said that, I don't know that I would attribute to the fiscal cliff, but clearly we continue to manage it in light of a fairly uncertain global economic environment. So I don't know if I'd call out either the fiscal cliff or the sequestration as an issue, but I think we are conscious of some real uncertainty. So whether it's Europe, whether it's some of the concerns in emerging markets, as well as some of the issues we see here in the US. I think we have been conscious of growth opportunities as we get into '13 here.

Okay, thank you.

Zarak Khurshid with Wedbush Securities.

Yes, Zarak Khurshid at Wedbush. Thanks for taking the question, guys. Good afternoon. I guess so much for our landing in China. Dovetailing on that prior question, can you just talk about, strategically, would you say you're pushing or investing more aggressively into that region more than you originally anticipated, say six months ago? And then, as you look further out, what are the fears for that region around competition or knock-off products or patent infringement and things like that?

I would say, the answer to your first question is, we continue to accelerate our investments in that part of the world. Because we continue to be encouraged by, as I mentioned before, the opportunities across all our end-markets. So I think the answer to the question is yes. And I talked a little bit about the investment in both real estate from the standpoint of a much larger headquarter facility. We're putting a global software development there. We're adding application laboratories there. We're expanding manufacturing and R&D capacity there. And I would say while it's mostly for China, we also see it as an opportunity to leverage that into other emerging markets because, obviously the beneficial cost position.

I would say the biggest concern or barrier we see there, quite frankly, is management talent. As we continue to expand, as we continue to put much more capability there, it's really having the management capability to absorb the additional capacity. And so we're spending a lot of time. We've -- as part of this additional investment into our headquarters, we actually put as part of that a developmental and learning center that we now have in our China headquarters facility. And like I said, that's the area we're spending a lot of time on. From a patent infringement and those type of things, we are not as concerned about that. And we have some actually R&D capabilities in China that we continue to expand upon.

Great, thanks for that color. And then just as a follow up. On the free cash-flow side of things, can you just talk a little bit about the Spotfire license? Should we expect that to continue? And where do you think the run rate is for, say, maybe this year or next year?

Yes, I mean specific to the Spotfire license, the way that transaction was established was in a large extent a prepaid license agreement. And so there will be continued payments for the next couple of years. And as we continue to distribute that and sell that product, we'll work off that prepayment.

Can you quantify it?

I would say we're not really, at this point, talking about it. It's not a significant amount of money. But we're not really talking about the agreement with our partner, not to get into the specifics of the financial arrangement.

Got it, thank you.

Jon Wood with Jefferies.

Hey, good afternoon. So Andy, appreciate some of the color on cash-flow, but third quarter is particularly weak. Can you guys still do about 100% of adjusted net income? Or is that too much of a stretch at this point?

You know, I would say our performance year-to-date is in line with what we expected. I think given the investments we're making with some of these initiatives, some of them requiring capital investments and restructuring investments, it's going to be tough to get to 100%. I mean, I think we'll have a very strong performance in the fourth quarter, both in working capital and free cash-flow as we start to normalize some of the working capital because of manufacturing moves. But we are consciously spending on these initiatives. So I would say this year, it may be a little short of that. But I think our long-term goal is to always be north of 100%.

So Jon, one of the things -- and you probably have an appreciation of this -- as we move some of our manufacturing facilities, we're clearly building some excess inventory to give us some leeway there as we train people in other areas. So some of that's going to clearly carry over into the early part of 2013. That additional investment in inventory, while we think it's appropriate, while we continue to make these moves, probably is going to make it difficult for us to achieve what we've historically been able to do, which is to match our free cash-flow with our net income.

Okay, very good, understood. The follow-up -- can you call out how the Caliper business did on the top line, as well as any comments on cost rationalization or where you are in the actual integration there?

You know, the Caliper business continues to perform very well. We're ahead of the model from a profitability and accretion perspective. Quite frankly, it's really becoming quite difficult to track the revenue because we're at the point now where we've even got to the point where we are substituting products. So in the liquid handling the Janus for the Zephyr, and FMT versus the Spectrum. So it's not really that meaningful anymore. But I would tell you that, again, they're doing well. Relative to the organic growth calculations for PerkinElmer, they added slightly. But I would call it less than 30 basis points.

Okay, great, very good. Thanks, Rob.

Isaac Ro with Goldman Sachs.

Good afternoon, guys, thanks for taking the question. I had two, one on diagnostics and the other one on margins. On diagnostics, could you maybe just give us some color on the overall volume environment and your sense of birth rates? How that's driving the business both domestically and abroad?

So in the US, based on our numbers, we would say birth rates are up about 1% over the last 12 months. So obviously not having the headwind that we've had over the last couple years is obviously driving some nice growth there. And outside the US, while birth rates have been positive, what's really driving the growth much higher is option. For example, we saw in the quarter, as we do in every quarter, we continue to add additional countries or regions. So we saw some winds in Europe, parts of Germany, Norway and Italy we added -- and of course, we continue to see strong expansion in Middle East and, particularly as I mentioned before, in China. So outside the US was clearly much stronger, but we also saw good growth in the US as well, because of back to a positive birth rate.

Daniel Brennan with Morgan Stanley.

Hello guys, thanks for taking the question. Maybe the first question would just be more on the economy and end-markets. Maybe an update on the pacing of demand. You know, as we exited the quarter looking to Q4, I didn't hear in your guidance for Q4 -- cited very tough comps, but still generating good growth. But didn't really hear anything too much about the economy. Most other companies are at least referencing conditions. Are you seeing any impact? Is there -- you know, Instruments also growing greater than Reagents was interesting. Would love to get your take there. Thanks.

Yes, I wouldn't suggest that we're immune to what's happening in the overall global economy. But I would say, because I think some of our end-markets are more resilient than some of the others, we are not being as impacted. I would say as the third quarter played out, the Industrial end-markets -- clearly we saw some softening there as we got into the later part of Q3. Other than that -- and as we said that's less than 10% -- other than that, I would say our end-markets were fairly consistent through the quarter. So I would say a little softening on the Industrial side. Other than that, fairly consistent.

Okay, great. And then maybe on the screening business. Andy gave an interesting conversation at our conference about China and the number of tests that are being there today and what the opportunity is. So I would love to hear your thoughts on maybe within China, where you guys are today, and maybe where you envisioned maybe on a test basis growing that up. What's the opportunity as you look out a few years and what would -- how would that translate into a growth impact? Thank you.

Well, I would -- you know in China, specifically, the opportunity number one is on the newborn side. And obviously, they have a lot of births there, in the 15 million to 16 million births per year. Currently, depending on where you are in China, it's anywhere from two to four tests. And as you probably know, in the US right now the standard of care is 29. So there's a significant opportunity to continue to expand not only the number of children that are tested, but also the amount of tests. So we're excited about that opportunity.

Then also on the diagnostic side, where -- largely what we are doing there is infectious disease for Hepatitis B, C, and HIV are our larger tests. We're seeing a nice opportunity there, particularly this year. Because what you've seen is, for surgeries now that are done in China, they're now requiring five tests for various infectious disease. And that's driving a lot of our growth. So we continue to see a nice runway to continue to expand diagnostic tests, particularly in the verticals that we serve within China.

Great, thanks a lot.

Doug Schenkel with Callen & Company.

Hello, good afternoon. Just a first clean-up question. Could you increase the pace of restructuring this quarter to compensate for the fact that you delayed some of the productivity spend investment that you had planned originally in Q2? If I remember correctly, your operating margin benefited by about 80 BPS due to those delays. So I'm just wondering whether there was a full catch-up this quarter, and what's the right way to think about the pacing of further investment heading into Q4?

I think, from a restructuring perspective, there was a fairly small impact. From an overall productivity and growth initiative perspective, that really is being spread over two quarters. So we saw about 50% of that in the third quarter. We'll see the other 50% in the fourth quarter.

Okay. Yes, really what I was trying to get at is, were margins almost artificially in a way, depressed this quarter? Because you delayed some of that spend from Q2 into Q3.

Yes, I mean, if you look at our ROA margin expansion to 60 basis points about 80 of that -- on top of that we had about 80 basis points of margin contraction due to our investments in the quarter. And there was also, as I mentioned in my prepared remarks, a fairly significant comparison on our stock base compensation due to the change in stock price. So those two items were the two significant spike-outs that I would mention. And combined would have said we were up about 150 basis points.

Okay, that's helpful. And sorry to beat a dead horse on the Environmental Health, specifically, the Industrial sub segment. But you know, Environmental Health did come up a little bit light of Street consensus. I'm just curious, relative to your internal plan, was this also the case? And if you came up a little bit lighter than planned here, was it truly all Industrial? And if so, is it fair conclude that there were really no changes in competitive or pricing dynamics?

You know, actually, as I alluded to before, Environmental came in about what we thought. You know, we probably would have pegged that in Q3 about 3% to 4%. If you look back in Q3 of '11, it did have a fairly difficult comparison, particularly on the Instrument side. We saw very strong growth on the Instrument side in Q3 of last year. So we knew we were cycling up against that. So maybe Industrial was a little bit lighter than we thought. I would say overall it was probably about down mid single-digits. But when you look at the rest of the business, on the Instrument side, we saw good growth and as I mentioned, Service was up mid to high single-digits.

Okay, that's great. Thanks, Rob. Thanks Andy.

Tycho Peterson with JPMorgan.

Hello guys, this is Romesh in for Tycho, thank you for taking my question. And congrats on the quarter. It looks like, excluding Caliper -- and obviously, you mentioned that the research or the Life Sciences business is merging with Caliper quite nicely now. But it looks like some of the other legacy research businesses, the radio chemical business perhaps, the high throughput screening, those businesses may have done better or at least stabilized a little bit. Can you talk just about how those trend in the quarter?

Yes, I think that's fair. I mean, when you look at high single-digits for the research business, clearly -- I will call it the historical PerkinElmer businesses -- have done better in Q3 than they have done over the last couple quarters. Again, it's getting a little hard to parcel that out as precisely as we've had historically. But I would say a couple drivers to that. One is, they did have some fairly easy comparisons. They were actually down low single-digits in Q3 of '11. I would say that's one thing.

Second is, I mean, whenever you are dealing in the research, particularly with high-end instruments, you are going to have some timing fall in and out of a quarter. And clearly we were a little short in Q2. I think we recovered some of that in Q3. And then the other factor is, we are seeing a benefit from the PerkinElmer Instruments of having the Caliper product in our tool chest, if you will. And as we go out there, we can talk about some of the exciting products for Caliper, as well as some of the excitings for PerkinElmer. I think we are getting some ancillary benefit of a pull-through on the historical PerkinElmer products.

And then, just a follow up, guys, on the software business and the Informatics. I guess, how you're approaching integrating Geospiza and maybe CambridgeSoft into the Life Sciences business, and how PKI Informatics is going to work, I guess, under the [Stalvey] Environmental Health umbrella?

So what we are in the process of doing is taking a lot of the -- virtually all the Informatics and Geospiza and merging it with the research. And that's something that we're in the process of now. So probably going into 2013, we think it makes a lot more sense to have the Informatics business more aligned with the Caliper and the research businesses. So I think you'll see that coming out into '13.

Okay, thank you, guys.

Derik De Bruin with Bank of America Merrill Lynch.

Hello, good afternoon. A lot of my questions have been answered, so I'm just going to fish around the edges here. So when you look at your mix of business geographically -- and also your manufacturing, I guess. You know, where do you see the business from a -- particularly from an emerging market, non US, non Europe standpoint? Now and say three years from now? And I guess, how much of your manufacturing footprint are you going to be able to move over as well? I am just trying to get a sense of how much more opportunity there is in those markets for you.

Well, I think from a revenue perspective, we talked about emerging markets being around 28%. And, given the growth differential we're seeing now, and I think would continue for some period of time. In addition to our investment priorities, I could clearly see that get to mid 30%s over the next couple years. From a manufacturing perspective, we're clearly underweighted in the Asian region right now. So that's why we've embarked on this initiative, to move a lot more of the production there. And again, not -- primarily driven by cost.

Really it's trying to get better alignment between where our manufacturing is and where our customer base is. And so I think we've got a fair amount of opportunity. We've, like I said, embarked on a couple of these now, where we'd like to be fairly better aligned. So if we've got 35% of our revenue there, at least 30% of our manufacturing is coming out of there. And that's really the intention. So we have a road map right now over the next couple years that will be better matched between our revenue profile and our manufacturing cost profile.

Great, that's actually very helpful. When you look at the -- sticking with the China theme, when you look at the infectious disease testing that you're doing there, what's the basis of your platform? And I guess, who are you running into from a competition standpoint? You know, are you running into the GemPros of the world, for example? What's just the lay of land there?

So, our assays are fundamentally around Fluorescence or Time-resolved Fluorescence, is the technology. We're generally targeted the tier 2 hospitals. And so that's where we're getting good inroads, because we provide a cost structure based on China, but bring technology and brand associated with a multinational. And so we can price the products a little bit above locals and under the classical international companies. And that's what's allowing us to take a lot of share.

Okay. And one final question, speaking on the competition. We've obviously seen a lot of changes in some of your traditional businesses and chemical testing, environmental, as you have seen obviously varying going and Bruker gained [a little bit of] expansion. What's the pricing environment going on in that space? Are things fairly still rational?

Well, I think they're rational. But they're tight from the standpoint of -- a lot of people, if you're talking specifically around the Analytical Instruments base, you know there is more supply than demand. Particularly as we see the Industrial end-markets starting to look like slowing, I think that's only going to get worse. So I think it is a difficult pricing environment. But I would say people are still rational, but it is -- I would say price discounting is accelerating.

Okay, thank you very much.

Dan Harris with UBS.

Yes, thanks very much for the questions. Andy, I'm not sure if I missed it, but can you parse out Instrument growth or decline, specifically, for Environmental and Human Health?

I didn't give that break out. I mean, overall, Instruments are up 10%, and I would say the Human Health Instruments were high single and Environmental were low single. And most of the growth in the Environmental Health Instruments were in emerging territories.

Okay. And then on the emerging territories, and China specifically, just given the way that you're talking about investments and expenditures there. Do you think that margins stay above the corporate average for the foreseeable future? Or does that gap start to close and come down to the mean over time?

I'm sorry, could you repeat the question? I didn't quite understand the first part of it.

Just looking at the margins in China and the way that you're investing there and how that looks relative to the corporate average.

Well, they've been in line with the corporate average. And if anything, they've actually been improving. We obviously have lower gross margins, but have a lower cost base as well. So they've been in line. I think over time with some of the manufacturing moves and some of the infrastructure moves, I think we will see China margins ahead of Company average.

Okay. I guess one last one. I think you get this question pretty consistently. But on OneSource, what are the pricing and market share change dynamics looking like in that part of the business?

Say that again? Sorry, I missed the beginning of that question.

In the OneSource business, I am just curious about pricing and market share changes. Obviously you have a big competitor that seems like they're doing well. But clearly it's doing well for you, as well. So I'm just trying to understand the business a little better, the market a little better.

Yes, I mean, think the dynamics in this environment right now is similar, as I mentioned on the Analytical Instruments, is an aggressive pricing environment. And we've got a very good position with a lot of our customers. And so I think we feel good about our capabilities there. But I think there is continued pricing composition there, particularly across some of the bigger contracts that are up for bid. Fortunately, because in a lot of cases we're the incumbent, I think we understand the opportunities there. And I think feel we're in a very good position to be able to identify where we can take efficiencies and work with and partner with our customers to drive those savings where we both benefit.

Got it, thanks a lot.

Bryan Brokmeier with Maxis Group.

Hi, thanks for taking my questions. Can you quantify or provide some qualitative comments on the benefit that your microfluidics business is realizing from the recent ion proton commercialization?

Yes, Brian, this is Kevin Hrusovsky. We're actually continuing to make great headway on all aspects of our microfluidics, relative to sample prep. We actually have had, in the last two quarters, continued build-out of our platforms, both from a sample prep and quality control. And we've made a diagnostic to Life and to Illumina, as well as some of the newer entrants. We are feeling pretty good that will only help. So the more traction they get, we do believe it's going to be a positive for our business.

Any way to estimate for every new sequencer -- every new desktop sequencer that is sold out on the market, you get maybe 20% of those or 40% of the new placements?

Yes. We've got some algorithms that we built basically to try to test the market. But it's too early for us to be able to know how we're going to secure that. But we do think it's going to be north of 10%. But we're just -- at this point it's premature.

Okay. And then on the Environmental side of the business, did you see any material benefit in the quarter, Rob? Did you see any material benefit in the quarter from the Chinese food labeling law that takes effect on January 1? And do you expect to see any material improvement in the fourth quarter?

Yes, I would say that's something we've seen for the last couple quarters. You know, this new regulation where they've got to put nutritional labeling on their food now, is something that's driven our growth probably since Q2 of this year. So I think clearly we're seeing a benefit in China as a result of those new regulations.

Okay, great, thanks a lot.

Peter Lawson with Mizuho Securities.

This softening you saw in the Industrial business. Is that continuing for Q4?

Say it again, Peter? I'm sorry, I missed the --

Sorry. That softening in the Industrials business. Has that continued into Q4?

You mean the -- yes, I think we have seen that continue from an Industrial perspective. As I said, it was -- we started to see it mid Q3, and I would say it continues here in Q4. So our assumption in our guidance is that the Industrial markets will be soft and in fact, will probably be down year-over-year from a revenue perspective.

And have you made any changes in the sales force around that business? Is it that concerning?

You know, I wouldn't say we're at the point now where we're adjusting our sales force. And again, a lot of our sales force is based on technology to some extent. So we look for other markets to focus some of the products in. But at this point we're not making changes to our sales force.

Got you. And then, were there any pricing pressures across the various business lines during the quarter?

Yes, well, we talked about that a little bit earlier. Where I would say clearly in the Environmental area on the Instrument side we continue to see fairly severe discounting going on, relative to the competition. So I think that's an area we see a lot of pricing. Outside of that, I would say in the Human Health area, where I think products are much more differentiated, less so.

Got you. Thank you so much.

While we have a brief moment, one thing I'd like to add just to clarify. Because I know this is going to come out in print. But the question around Instruments, total PKI was up high single-digit, Environmental Health was up low-single, and Human Health was up low-double. I just wanted to clarify because I think my comments before didn't make a lot of sense.

Steve Willoughby with Cleveland Research.

Hello, guys, thanks for taking my call. I was just wondering on China, you know it sounds like a lot of the growth there was driven by Instruments. I was just wondering what your thoughts were on the sustainability of that going forward. And you know, if anything was one-time or anything like that this quarter?

Well, I would say if you look at the growth in China, it was really across the board, both Instruments and Reagents. So we saw it on the Instrument side. I would say when you look in research, it was largely on the Instrument side. But clearly when you go into diagnostics, that's largely a Reagent business anyway. And when you go in the Environmental side, it was a little bit of both, on Service as well as the Instrument. So it is fairly broad-based from both Instruments and Reagents.

With regard to your question do we see it as sustainable, we do. I think we continue to feel very good about our position there, our product offerings and organization in China. So we continue to expect that China will continue to provide good growth for us.

Okay. And then one other thing was, with acquisitions adding 18 points to your Human Health business, were there any acquisitions in there other than Caliper? Because just doing the math, it seems like Caliper probably didn't grow that much. Is that correct?

Well, the answer to your question is, it was only Caliper is in the acquisition number.

All the Informatics acquisitions anniversaried in the second quarter.

Okay. So it was just Caliper. Thanks so much.

Jeff Elliott with Robert W Baird.

Yes, thanks for the question, guys. I was hoping a get a little bit more color on the strength in traditional medical imaging that you called out. And just a follow-up on the manufacturing moves. Could we see the effect on the tax rate as we expand overseas perhaps?

Yes, I think you could. I mean, as we put more and more of our profitability outside the US, clearly we have a lower tax rate in Asia than we do in both Europe and the US. So I think it does provide some downward pressure on the tax rate. With regard to the medical imaging, we actually saw nice growth really across all aspects of the business. So radiology, both oncology, and I think Andy spiked that in particular.

While it's small numbers, our new entry into CMOS with our Dexel acquisition actually saw very strong growth. Andy also mentioned, it gets us into a couple other end-markets we're quite pleased about. So in the medical imaging area, we actually saw nice growth across all of our end-market applications.

Okay. And I know you have the Investor Day coming up in December. I'm just curious, any early highlights you can share with us?

I think we're still trying to finalize those plans. Nothing's been set in stone. So we'll have to get back to you on both dates and content.

Okay, thank you.

Jon Groberg with Macquarie.

Hello, guys. Can you hear me this time?

Hello Jon, how are you?

Good, sorry about the other. I learned my lesson there, had it on mute. So just following up on what you said Andy, was going to be my question. Human Health's Instruments grew low double-digits. But --

They were low single-digit. Oh, I'm sorry, Human Health was low double-digit.

It was low double-digit. I think I got you. Right?

You did.

So, but -- and you already talked about the decrementals and Environmental. But I guess my question is, it seems -- you know, normally we think about if Instruments grow faster than consumables, that actually is a negative mix on margins. But your Human Health is where you saw obviously some good margin expansion. So if you could just maybe talk about what happened with mix? Was that just that imaging strength? Or is there something else going on in Human Health?

Well, I think we saw pretty good performance across the board. I don't know if there was anything in particular I'd spike out on mix.

I would say the other thing is, when you look at particularly the research area, you don't see as much disparity on the margins. I think, classically, the big disparity we see between Reagents and Instruments is more on the diagnostic side. Where in a lot of cases you are placing the Instruments and then getting the Reagents. When you look more on the research side, there's -- I mean, clearly Reagents are still more profitable, but there is a much closer match there between what the gross margins are. And so consequently, a lot of the Instrument growth was driven by the research side. Therefore, I don't think it was as detrimental on our gross margins as you might think.

All right. It seemed like -- it just seemed fairly interesting. Then one more on Human Health, as you look out to '13. Are you guys anticipating any impacts from the medical device tax? I know a lot of your diagnostic stuff is overseas in China, and so I am just curious what your --

Right. I mean, our calculation right now says it's a relatively minor impact for us. Again, because a lot of our business is outside the US. I would say it's right now less than $5 million, is the impact. But we continue to try and understand some of the issues that regulations are still yet to be forthcoming on.

Okay, thanks.

Isaac Ro with Goldman Sachs.

Hello, thanks guys. You know what, my question, whatever it was, was answered. So I'm all set.

Great, thank you. All right, so with that let me wrap it up. First of all, let me thank all of you for your participation and continued interest in PerkinElmer. As we look to close out another strong year, I just feel great about our future. Because of our ability to grow, and most importantly, our dedication to making a lasting difference in the world. I think we've got a great organization, and I'm quite excited about the future of PerkinElmer. So thank you all for joining us, and have a great evening.

Ladies and gentlemen, thank you so much for your participation today. This does conclude the presentation and you may now disconnect. Have a great day.