Revvity Inc (RVTY) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter PerkinElmer earnings conference call. My name is Philip, and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference 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 proceed, sir.

Thank you, Philip. Good afternoon, and welcome to PerkinElmer's third-quarter 2013 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 Please note, this call is being webcast live and will be archived on our website until November 13, 2013.

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 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 GAAP in that attachment, we will provide reconciliations promptly. I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel. Rob?

Thanks, Tommy. Good afternoon, and thank you for joining us today. I am pleased to report that PerkinElmer achieved very good performance in the third quarter. Despite a tough prior-period comparison, we were able to deliver organic revenue growth of 2%, which was at the high end of our guidance. Also during the quarter, we expanded adjusted operating margins by 30 basis points and grew adjusted earnings per share by 9%, to $0.49, $0.01 better than the top end of our guidance.

With regard to our end-market conditions, we did not experience a significant change from trends we saw in Q2. In the form of biotech research market, we continue to experience high single-digit growth, aided by our informatics and service offerings. In clinical screening and infectious disease, the markets grew mid-single digits, as birth rates in the US continue to grow low-single digits and demand remains strong in China. Both the environmental and safety and industrial markets grew low-single digits during the third quarter, while our academic market was down mid-single digits, as budget pressures continued to dampen demand.

Geographically, we saw a sequential improvement in the Americas, particularly in the environmental and research markets. However in Southeast Asia, growth is slowing as a result of delayed capital investments, into mostly the industrial end markets, as many countries, such as India, are facing currency devaluation. Despite this uneven macroeconomic environment, we made good progress in areas we could control, including delivery margin expansion and productivity gains during the quarter.

We successfully completed several manufacturing moves into Singapore and China, consolidated some of the legacy Caliper sites into a newly opened Center For Innovation, and ramped up the functionality of our customer relationship center in Krakow, Poland. As you recall, we took these actions to further simplify and rationalize our global manufacturing footprint, improve our R&D efficiencies, and reduce our back-office expenses.

In addition, we made good progress in our growth investments across our key end markets during the quarter. We significantly expanded our relationship with TIBCO for the Spotfire software product. A year after launching our successful collaboration, which brought the power of the Spotfire analytics platform to the global research community, our offering now positions PerkinElmer as the exclusive channel for Spotfire in clinical development in translational medicine. PerkinElmer is now a single provider of informatics and data visualization tools to all functions of life science companies. From early stage discovery, through development, sales, marketing, and manufacturing.

In diagnostics, we made good headway in expanding our offerings into niche areas and new markets. For example, we saw tangible demand and a very strong tender win rate for nucleic acid test screens from our Haoyuan acquisition in China. As a reminder, the Chinese government has announced that it will mandate these screens for blood testing starting in 2015.

In the food market, later this week at the International Dairy Show in Chicago, we will launch the DairyGuard milk powder analyzer. The first in our new food guard platform series that leverages our Frontier FT-IR and proprietary algorithms specifically developed for food suppliers and manufacturers. The DairyGuard will be the only system available that tests for unknown adulterants in milk powder to help customers avoid product-safety issues and protect their brand image. These investments in growth, combined with others we have discussed previously, plus the excellent momentum we are experiencing with many of our key customers, reinforces our confidence that we can return to mid-single-digit organic growth in 2014.

Turning to our outlook for the remainder of the year. We are forecasting that Q4 organic revenue growth will be similar to what we experienced in the third quarter. While revenue growth comparisons to last year become easier this quarter, we believe it is prudent to guide conservatively, given the current conditions in several of our markets, and the potential for some impact from the US government shutdown that may result in revenue shifting out of the quarter. Despite guiding to lower single-digit organic growth, we believe we can still deliver significant adjusted operating margin improvement in the quarter of greater than 50 basis points, given the positive impact of the productivity actions I previously discussed.

With regard to adjusted EPS guidance for the year, we are increasing the bottom end of our previous range by $0.01, to reflect the third-quarter beat, and reducing the top end of the range by $0.03 due to the revenue risks I have noted. This results in our full-year adjusted EPS guidance changing to $2.04 to $2.07, from our previous guidance of $2.03 to $2.10. I would now like to turn the call over to Andy to share more details on our results.

Thanks Rob, and good afternoon, everyone, and special good afternoon to everyone in Red Sox nation. Consistent with prior quarters, I will provide some additional color on our end markets, a financial summary of our third-quarter results, and details around our fourth-quarter guidance. Then, we will open up the call for questions.

As a Rob mentioned earlier, we were very encouraged by our performance in the third quarters, as both adjusted and organic revenue came in at the top end of our guidance range. Reported revenue increased by 3%, while adjusted revenue and organic revenue both increased by 2%. Adjusted revenue for the quarter was $525.1 million, as compared to $514.8 million in the third quarter of 2012. We experienced 4% organic revenue growth in our environmental health business, while our human health business was flat, primarily due to a difficult comparison to the same period last year.

Looking at our geographical results, organic revenue increased mid-single digits in the Americas, low-single digits in Asia, and declined low-single digits in Europe. We are, once again, pleased with our performance in China, as organic revenue increased low-double digits, despite our most difficult year-over-year comparison of more than 30%. We remain encouraged by the strength and resiliency of the demand for our key environmental and diagnostic offerings in China, which help address critical needs in that part of the world.

Looking at organic revenue growth by product category, recurring revenue, which includes reagents, consumables, and service, grew high-single digits in the quarter, primarily as the result of continued strength in our OneSource laboratory service business, and the success of our informatics offerings. Organic revenue for our instrument and component offerings was down mid-single digit in the quarter, primarily the result of prior-year comparison headwinds in our medical imaging business.

From an end-market perspective, our human health business represented approximately 56% of reported revenue in the quarter. We serve two end markets in human health -- diagnostics, which represented 27% of reported revenue, and research, which represented 29% of reported revenue. Organic revenue from our diagnostics business declined low-single digits during the third quarter, primarily impacted by the previously mentioned decline in our medical imaging business. Excluding medical imaging, our diagnostics business grew mid-single digits in the quarter.

We continue to benefit from positive US birth rates and the expansion of our newborn screening solutions in key regions outside the US. We are particularly pleased with our Sym-Bio infectious disease diagnostic offerings in China, once again, delivering organic revenue growth in the mid teens, as well as the ongoing newborn screening uptake in Asia, which saw organic revenue growth of more than 30%. As we forecasted in our last earnings call, our medical imaging business faced significant headwinds in the quarter, with organic revenues declining high teens, a result of customer ordering patterns and high-teens comparisons versus the same period last year.

We did have, or continue to see, good acceptance of our CMOS offering in the marketplace, as evidenced by two new industrial product design wins for non-destructive testing applications. For the quarter, CMOS organic revenue grew by more than 20%. Our research business delivered low-single-digit organic revenue growth in the third quarter, versus the comparable period in 2012. Despite ongoing funding challenges, we experienced solid demand in our in-vivo business, as well as in our informatics offerings, which were notable standouts in the quarter, particularly in the US.

During the quarter, as Rob mentioned, we completed the construction of our new Center For Innovation, located in Hopkinton, Massachusetts. The recent opening of this state-of-the-art facility represents the culmination of our manufacturing and R&D consolidation activities, which began in 2012. This initiative has resulted in the closure of five facilities, and has afforded us the opportunity to better leverage our manufacturing operations, as well as more effectively focus our R&D efforts across the Company.

Moving to environmental health, which represent -- the business represented 44% of reported revenue in the third quarter. We serve three end markets -- laboratory services, which represented 19% of reported revenue; environmental and safety, which represented 17% of reported revenue; and industrial, which represented 8% of reported revenue. During the quarter, we experienced mid-single-digit organic revenue growth in our laboratory service business, and low-single-digit organic revenue growth in both our industrial and our environmental and safety businesses.

We are pleased with the organic revenue growth in the third quarter, and while customers continue to be cautious with their capital spending, we continue to be encouraged by strong order demand in China. We experienced another solid quarter of organic revenue growth in our laboratory services business, as we help our lab customers better manage their critical laboratory assets and related data needs. Our OneSource business saw robust revenue growth, driven by an expansion of services within several major pharmaceutical companies during the quarter.

Turning to our margin performance in the period, adjusted gross margins were 47.4%, as compared to 48.3% in the third quarter of 2012. While currency was a headwind in the quarter, the decline in gross margin is primarily due to three factors. First, we incurred one-time costs related to the closure of two additional facilities we highlighted in Q2, in conjunction with the establishment of our Center of Innovation. As mentioned earlier, this effort is now largely complete, and we expect gross margin savings in the fourth quarter as a result. Second, within informatics, we deployed investments, supporting our rollout of Spotfire into a number of new channels. Third, we continue to face product-mix headwinds and modest pricing pressures in our environmental business, primarily focused in emerging markets.

Adjusted operating margins in the third quarter were 15.5%, as compared to 15.2% in the comparable period a year ago. Restructuring efforts and operating expense controls enabled us to offset the lower adjusted gross margins just mentioned. By segment, adjusted operating margins in our human health business increased approximately 80 basis points to 22.4%, as compared to 21.6% in the third quarter of 2012. The increase was primarily the result of positive product mix and operating expense controls. In our environmental health business, adjusted operating margins declined approximately 60 basis points, to 10.6%, as compared to 11.2% in the third quarter of 2012. This decrease was the result of price and product-mix headwinds just mentioned.

GAAP operating income from continuing operations was $57.2 million in the third quarter of 2013, versus $43.2 million in the same period a year ago. GAAP earnings per share from continuing operations in the third quarter of 2013 was $0.36, compared to $0.25 in the third quarter of last year. Adjusted earnings per share was $0.49 in the third quarter 2013, $0.02 above the midpoint of our guidance range. On a non-GAAP basis, our adjusted tax rate was approximately 19%.

Turning to the balance sheet, we finished the third quarter with approximately $900 million of debt and approximately $130 million of cash. We exited the quarter with a debt-to-adjusted-EBITDA ratio of 2.4 times and a net-debt-to-adjusted-EBITDA ratio of 2.1 times. Looking at our cash flow performance year to date, adjusted operating cash flow from continuing operations was $161.8 million, up 8%, as compared to $150.3 million in 2012. Adjusted operating cash flows are expected to continue to improve in Q4, primarily the result of lower working capital needs.

Turning to our Q4 2013 guidance, as Rob mentioned, there continues to be headwinds across many of our end markets, and as a result of these headwinds, we believe it is prudent and appropriate to be conservative in our outlook. There are two specific areas that I would like to discuss further. First, we are forecasting a softer performance in certain emerging markets, where we experienced a modest slowing in the third quarter this year. We believe recent currency fluctuations in certain geographies, including India and Southeast Asia, have dampened capital spending in these regions, and we believe these markets will continue to moderate.

Secondly, a large majority of our highly sensitive instruments are shipped overseas and require the issuance of government export licenses. As the recent government shutdown has directly impacted this area, we are currently waiting for the government to work through this backlog, but expect the delay to have an impact on fourth-quarter revenues. We also expect the total revenue impact of these initiatives to be in a range of $10 million to $12 million in the fourth quarter. As a result, we expect adjusted revenue for the fourth quarter to be in the range of $582 million $592 million, which assumes low-single-digit organic revenue growth.

Regarding adjusted operating margins, despite the impact from the revenue headwinds mentioned above, we estimate adjusted operating margins will improve in the range of 60 to 80 basis points for the fourth quarter. Our Q4 and full-year adjusted tax rate is expected to be 21%, and our weighted average diluted share count for the year is assumed to be approximately 113 million shares. We expect interest and other expense to be approximately $12.5 million in the fourth quarter. Based on these assumptions, we now expect our Q4 adjusted earnings per share to be in the range of $0.68 to $0.71.

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

(Operator Instructions)

Bill Quirk, Piper Jaffray.

It's Dave Clair in for Bill. The first one for me, it sounds like the in-vivo business is going pretty well for you guys. What is behind the growth there, and what is your outlook going forward?

As you point out, in vivo grew probably mid-single digits in the quarter, and going back to the first quarter of this year, where there were some delays in the ordering pattern there, we think we are catching up in Q2 and Q3. We sold very strong growth in the US, and I think that was -- we are starting to see some of the funds that had been tied up in sequestration being released. Like I said, we saw very strong growth in the US, and I think that is what is driving some of the growth in this quarter. Fundamentally, I think this is a good product, and I think it is an attractive market. And, I think we continue to believe that this is a product that probably grows high-single digits once we get through some of the issues with the sequestration.

Can you give us an update on the AxION iQT launch? How is that going? Is that hitting internal expectations?

We continue to be very excited about the iQT offering as well as the longer-term opportunities. We see the leverage of the platform, it continues to garner a lot of interest, and we remain encouraged by the current interest levels from both customers and KOLs. We've purposefully have a little bit of a minor delay, due to, attributable to some supplier issues, and have used that time to build out our application support for several key market segments that have been identified based on customer feedback. The delay will have a minimal impact on our Q4 revenue, but again, because of the some supplier issues, it has been pushed back a short period of time.

Ross Muken, ISI Group.

On the panel business, the weakness was expected, right, you guys highlighted the last call. Maybe my memory serves me poorly, but I thought we were supposed to get -- I thought that was more of a timing issue than something related to demand. So, as we look at the 4Q assumption, do we get some of that back? Is that a 2014 revenue line now? I am just trying to get a sense for the sequential --?

Specifically, in the Q3, it was really a year-over-year comp issue. I think we talked about this before, based on some ordering patterns, our customers ordered a lot of panels in 2012. As we think about Q4, now, we think this business returns to probably mid-single-digit growth, and as we go out into 2014, we think that level may be even a little better than that. It returns to a more normal growth rate, where we think it is a mid- to high-single-digit growth business. But again, Q3 was driven more by ordering patterns in 2012 that caused the decline or drove a lot of the decline in Q3.

I guess just mathematically, by that going from a high-teens decliner to growth, that's got a pretty upward impact on organic. I am trying to see what the delta is. The comp, consequentially, is not tougher, so I am just trying to get a sense for how much conservatism you are putting into the revenue forecast based on all the uncertainty. I know you called out some of the delays, it is just the first time we have heard of that. I'm trying to figure out how much is you assuming stuff doesn't get shipped because you do not have the export licenses, plus some of the shutdown on the consumable side, plus anything else in the emerging markets, versus some of this we are getting back. I'm just try to tease out --?

I would say, relative to our original forecast of Q4, about half of that is attributable to, and again this is -- we are trying to estimate this based on the backlog that is at the government export license right now, but we think that could be half of the issue. And, we think the other half is potentially just some slowing in the selective emerging markets, as Andy talked to. It is really just a couple of areas in Southeast Asia, where we believe that you have seen a fairly dramatic devaluation of their currency, and at least, we are seeing some impact there in the industrial end markets.

Again, probably $5 million there, and probably $5 million potential risk associated with the government licenses. Again, you had not heard about it before because it has never been an issue. This is something that generally works well, but I think because of the shutdown of the government, we are stacking up against a relatively tight time frame to get this stuff out.

That's appreciated. Maybe for Andy, on the margins, you have done quite well relative to what has been a tough top line or tougher than an average year. How does the progression we have had so far this year -- how does it make you think about your multi-year targets? Do you still feel good about where that is? Is it more top-line dependent now? I'm trying to get a sense for if you -- have you back-solved with costs for your multi-year plan, or maybe the revenue outlook puts a little bit of a question mark next to it?

Ross, I think we have always said that in order to achieve our four-year goals, we really needed mid-single-digit organic growth. So, I think when we don't get that it makes it much more difficult. As I step back and look at what we have done to date, I think we have made great progress on the initiatives we have talked about over the last several years. I think, certainly, the last several quarters. We maybe have been a little bit late with the Center of Innovation in Hopkinton, but it is now up and running, and I think we are going to start to see good savings from that. I think Project Rabbit continues to ramp as we try to get supply chain savings. This is our name for the movement of the manufacturing over to Asia.

Then, on the operating expense side, we should be completely moved into Krakow by the end of this year, so we will have all of our European back-office operations, basically, domiciled now in Krakow. So, there's a number of savings opportunities that are now getting close to or are already completed. I think, structurally, we're going to have a very good position. I think we still need that organic growth to drive significant leverage on that, but I feel very good about where we are today with those initiatives.

Paul Knight, Janney Capital Markets.

Hello, Rob, could you point to, was it chromatography, spectroscopy, what and end markets as well, on the environmental health side, does a continued be, what, a shallow recovery and weak, or what exactly was it?

Paul, actually when you look at it from a technology perspective, the 4% growth in the third quarter, it was fairly broad based. Whether it was chromatography, MAT CAR, or inorganic, we saw similar levels of growth, call it low- to mid-single-digit growth across the entire product portfolio, so we were pleased to see that. Andy mentioned the fact that OneSource continued to do well. If you look at it geographically, what you see is, good growth in the Americas, again, mid-single digits; a slight decline in Europe, low-single digits; and continued strong penetration in China. In the environmental area, China, again, was north of 20%.

Then, on the facility consolidation, could you go over that again? You said it is five facilities, I think it was less than that when you spoke to it a year ago or so. Did it start just recently, or at the beginning of the quarter? When was the exact timing you expect to see benefit from that?

Our initial plan was to consolidate three facilities, one of them in Canada, two of those in the West Coast, into Hopkinton. And then, in Q2, particularly post-Q1, when we saw revenue growth lower than we anticipated, we made the decision to put two additional facilities into Hopkinton, and again, Andy alluded to the little bit of pressure on the gross margin in this quarter getting that completed. Those are now done.

Last week, we actually kicked off the opening of the Hopkinton center, and as Andy said, it is a world-class facility and we are quite excited about it. Our expectation is we will start to see benefits in Q4. It is, to some extent, why you are seeing, or at least we are forecasting, greater than 50 basis points of operating margin expansion despite guiding to low-single-digit growth. Some of those productivity savings that we have been talking about over the last couple of quarters, we expect to start seeing in Q4, and obviously as we get into 2014.

Doug Schenkel, Cowen and Company.

My first question is -- and I apologize if I missed this in your prepared remarks. Did you talk about growth of Japan, and specifically, how stimulus is impacting your performance in that geography? And, how should we think about the outlook from here related to stimulus?

We didn't talk about Japan specifically, but Japan in the quarter grew, across the Company, low-single digits. I think it was around 3%. I think we are starting to see some benefit from the stimulus, but it is not a significant driver to the growth at this point. We hope, as we get, probably, into 2014 is where we will hope to see more of an impact for that. I would say our expectation continues to be in low- to mid-single digits, maybe increasing a little bit as we get into 2014, as we get, as I said, some of the benefits of participating in the additional funding being provided by the government. Since Q1, we have continued to see sequential improvement in Japan, and I think that will continue for the next couple of quarters.

Great, that's helpful. During the quarter, Merck announced plans to rationalize some of their R&D efforts. I believe Merck is a customer of yours. I can see where this would be potentially a threat to revenues. I can also see where this would be a really good opportunity for you to go in and work with them as they work through this process. Can you help us understand how we should think about either this announcement, specifically, or more broadly, whether things like this are really a threat or really an opportunity for you?

I would say, first of all, whenever one of our customers or a group of companies announces a restructuring, it can be difficult for a number of constituents. However, as you point out, if you think the logic and the rationale for these types of announcements, it is all around becoming more efficient in how they run their R&D facilities, and that really plays into the strategy of, not only OneSource, but our emphasis in informatics. As you point out, while specific to certain customers, there may be some minor impacts, but quite frankly, that is offset by other outsourcing opportunities around relocation, scientific services, and asset management more than offsets that.

When we think about the opportunity to penetrate more pharmaceutical companies with our OneSource and informatics offerings, we think this provides a tremendous opportunity. We talked about the fact that OneSource had a nice growth in Q3. So, the dialogue, now, around driving productivity in the pharma and biotech markets, being somewhat necessitated by the restructuring actions, is really driving great demand. Again, not only for OneSource, but as our informatics capabilities are being deployed into OneSource to enable customers to better understand the capital purchases they need to make and the utilization of their assets within their labs, I think it is going to create a great opportunity to further penetrate, what we think is probably a $1.5 billion to $2 billion market opportunity, where we are just scratching the surface right now.

Amit Bhalla, Citigroup.

This is [Nick Nolan] in for Amit today. First off, could you talk a little bit about trends in emerging markets? It seems, coming into the quarter, you were a little bit more cautious on the emerging markets in the second half, and it seems like the emerging market performance is pretty good in the quarter, but you did cite some moving parts there. What is going to lead to the slowdown? Is China not going to be as strong, also, to offset some of these other EM government regulation concerns?

First of all, to clarify, we continue to see good growth in emerging markets, generally speaking, specifically in China did well and Brazil did well. I think our comments were really talking about a subset of those countries, particularly where there has been, at least our belief, is being influenced by currency devaluations. I think a good example, is India, where the rupee is down double digits over the last couple of quarters. And of course, as a local company, buying product that is dollar-based, that is dramatically increasing the price of those products.

We are seeing in Southeast Asia, and in India, specifically, slowing demand where historically that has been a solid mid-teens grower, and that is moderating into mid- to high-single digits. That is what we are teeing up as a little concerning -- 1 point does not make a trend. But, as we go into Q4, we are concerned that we are not going to see a moderation of the currency pressure, and therefore, that is going to continue to put pressure on capital purchases. Like I said, particularly in the industrial markets where there is some more flexibility in deferring them. There's purchases for maybe one or two quarters. We don't think this is necessarily a longer-term trend, but it is something that we have identified. Again, to reinforce, in places like China and Brazil, we continue to see very good strength.

When you think about 2014 and you're confident you can get back up to mid-single-digit growth, what are the businesses that you look at to see the inflection point that is going to get the overall Company to get back into the mid-single digits? Is it a turnaround in the industrial business? Where is the focus points to where the business is going to turn?

I would say when we talk about mid-single-digit growth for 2014, the assumption is that the fundamental end markets are not going to change significantly. What's going to make the difference to it to a large [sense] is either comps in our business, and in particular, we talk about medical imaging. So, when I was discussing with Ross earlier, if you look at 2012, we had very strong growth in medical imaging, clearly greater than the market. In hindsight, there was really probably some ordering patterns that our customer maybe built some inventory, and we had to burn that off in 2013.

Medical imaging will probably not to grow in 2013, and going into 2014, we think we will have that inventory burned off, and you will see normal market growth of mid- to high-single digits. So, that is an indication where it is more unique to our business rather than market. Then, I think the other areas are largely driven by new product introductions, or fundamental changes in the businesses, that we think should allow us to get to more of a mid-single-digit organic growth.

Dan Arias, UBS.

Rob, can you elaborate a bit on Europe? How did the orders pace through the quarter, and I guess, given where you left off in September, what are you thinking for 4Q there? I think comps get a little bit easier year over year?

When we look, and I would say this is true not only of Europe, but we didn't see a significant change in ordering patterns, really, through the quarter relative to, let's say, previous periods. Consequently, our view is that Europe in Q4 looks probably fairly similar to Q3, and for us it was slightly down, down low-single digits, so that is our assumption. In fact, when we look at Q4, generally, from a geographic perspective, our assumption is it really looks very similar to Q3. So, Europe down slightly, Americas in the low- to mid-single digits, and Asia probably more mid-single digits.

When we think about your assumption that the end-market conditions next year are unchanged, should we think about the natural improvement in the business that you would get just from macroeconomic conditions being slightly better on, say, a GDP view, as serving as an offset to something on the human health side, or would be upside to where your expectations are?

I would say, right now, if there was a better GDP growth in 2014, I think that probably would be more -- I would think that more of upside than I would as offsetting concerns in other parts of the business.

Brandon Couillard, Jefferies.

Andy, could you quantify the three factors that contributed to the gross margin pressure in the third quarter? And then, as we look into the fourth-quarter margin ramp, what are some of the puts and takes between mix, restructuring, and otherwise, that gives you confidence in the uptick sequentially?

Of the three items, I would say the first two I mentioned, which is really around investments as we opened up the Center of Innovation. The second one, the informatics, I would say that is probably about a little less than half of the impact. I would say the remainder of that would have been the margin headwinds, the mix headwinds, in environmental health. That is the way that I would split it.

If you look at the fourth quarter, we are going to start to see an improvement in the gross margins because we have now completed the Hopkinton transition. We also have completed, as I spoke before, the transition to Asia, which provides us with some saving, also on the margin side, as we optimize our supply chain. Then, there was some minor restructuring that will also help us in the fourth quarter. I see there could be some continued pressures within environment health, but I think we'll be able to offset some of those -- one, by not having to spend in the fourth quarter, but two, we're starting to realize the savings of those initiatives that we have completed.

On the cash flow front, pretty nice progress on the DSO side, but still only about 70% free cash flow conversion. How should we think about that metric as we look out into 2014? Was there also a divestiture benefit in the investing cash flow line as well?

There was, it was small. It was a divestiture in an Asian facility, but it was single digit, $1.5 million. The way to look at cash flow, going forward, is certainly in the last two or three quarters, we have seen a buildup of inventory. As we have started to do consolidation activities around the manufacturing facilities, we have had to have duplicative levels of inventory. I think you'll start to see those bleed down in the fourth quarter. I think you also start to see those improve as we get through the year.

On the DSO side and the receivables side, that continues to be a challenge. We have made good progress against our aging, but we have a lot of customers that are putting additional pressure on stretching those receivables out, so we continue to have to manage that. I think, all in, we should start to see more of a normalization of that working capital, and I think that will eventually end up allowing us to get closer to that one-to-one conversion of net income to free cash flow. But, we have a ways to go to get there.

Tycho Peterson, JPMorgan.

Rob, I want to go back to the comments you made earlier on OneSource. It sounds like you are getting good traction there. Can you talk to the degree that this is going deeper with existing customers, or are these competitive wins? And then, to what degree are you bundling informatics? You called that out as a decent opportunity, so I'm just wondering how --?

I would say when you think about the growth we have seen, it is really a little bit about both. It is continuing to do more with our existing customers, but we have had a couple of nice wins, here, in the first couple quarters of the year. That puts a little pressure on gross margins as well. Andy didn't talk about that. But, when we win a OneSource contract, there's obviously some investments up front to do that. Obviously, that improves the profitability going forward. I think we have had some nice wins. I would say not as much penetration outside of pharma, up to this point, and I think that provides another opportunity. We continue to see opportunity there, but I would say we're not getting as much traction there.

With regard to the informatics business and the deployment into OneSource, we have got a number of sites where we are doing that, but that is still probably a relatively small percentage of revenue. We think it is a nice opportunity for us, and it provides a significant differentiation. And, when you talk to the customers as to why they chose, or choose PerkinElmer in a lot of these competitive situations, I think the capability to bundle informatics and our historical OneSource capability is a big factor.

If we think about the labs business, you guys just launched the pre-eclampsia screening test, can you talk about how you think that opportunity? And then, further menu build out, is there bundling opportunity? Can you talk to the investments there?

I think as we look at our screening business, whether it is newborn or prenatal, we continue to see that as a good growth opportunity, and it is both penetrating new markets, but continuing to build out the menu. I would say the menu expansion, as well as the penetration of additional, whether it is countries or reaching more children, is all contributed to our view that this is an area of the business that I think can, over a long period of time, grow mid- to high-single digits. In any given period, it may be driven by penetration into countries or markets, or it may be driven by menu expansion.

One last one on imaging, and actually on in-vivo imaging, so for Caliper, can you talk about how that business -- you had a nice recovery last quarter after the March quarter issues. Can you talk to whether that business is back on track and the outlook there?

It grew mid-single digits in the third quarter, so again, this has been a little bit less than what we have seen historically, and I think sequestration continues to have an impact on dampening some of the demand there. But, I think we continue to feel very good about that business. As we go into 2014, we think that will be a big contributor to getting to that mid-single-digit organic growth we talked about.

Zarak Khurshid, Wedbush Securities.

The developments with Haoyuan sound pretty interesting. Can you provide a little color on the broader opportunity there and timing around the Chinese mandate and tenders and other opportunities in Asia?

As you pointed out, we were -- we feel good about that. There were seven tenders in the last quarter, and we won five of those. We feel good about our win rate. I would say the revenue ramp up has not been as significant as we would like because some of the locations in China are late in funding it. As you may know, the Chinese government mandates nucleic acid testing for blood screening by beginning of 2015, so there is still some time to ramp up.

We feel good about our win rate. We think this provides a significant market growth opportunity for us, but I would say the revenue is still in the single-million-dollar range. It will start to ramp in 2014, but I think you will see the real growth occur in the 2015 time frame.

The DairyGuard opportunity sounds pretty interesting to us. Can you talk about the selling process there, in terms of -- are these the current customers that you are already selling into? And, how does that business look in terms of a razor-razorblade model and overall opportunity?

We have a good food business today. It continues to do well. And, think of this as a new product offering. I think in a lot of these end markets, it is all around getting innovation into the marketplace that allows our customers to be able to find things that they couldn't see before, or again, sensitivity, speed, accuracy and those types of things.

We are excited about the opportunity, as I mentioned, this is utilizing our FT-IR capability, combined with some significant capabilities that we have around algorithms. We think it is exciting market for us. We do think this is a unique offering in the marketplace, from the perspective of, there is not an analyzer today, out in the marketplace, that can look at powdered milk for pollutants or adulterants. It is early days, like I said, it is going to be introduced at the dairy show, here, on Friday, but we feel good about it. We have a channel into food already, and so this will be largely through our direct channel into the food industry.

Derik De Bruin, Bank of America.

One housekeeping question, top-line FX impact you are looking for in Q4?

It will be a little less than 100 basis points, which is similar to what it was last year.

There has been some chatter coming out of China about potentially relaxing the one-child policy. Have you heard anything on that recently? Obviously, it will be a positive to your business if that were to happen.

I would say we have heard the same chatter that you have, but we don't have any more definitive information as to when that might be relaxed. Like you said, there's a lot of discussion around that. Obviously, that would be a positive for the business. We think, probably, over time, it will probably take a couple of years to ramp up, but it could lead to a $20 million to $25 million increase in revenue for us over multiple years.

You mentioned something about some pricing pressure in the environmental markets, if I heard you correctly. Was that local vendors, or is that the usual suspects just being a little bit more aggressive in emerging markets?

I would say probably more of the latter. Where you see it more aggressively is in government tenders.

Got you. One final question, a lot of noise recently in the bio-informatics space, a lot of acquisitions, obviously, a big push on it. What is going on with Spotfire and Geospiza? Are you -- you talk about a little bit about how you're -- are you winning any new contracts, what is going on in terms of the growth rate -- still a little bit curious on how to model that business?

First of all, I think the noise in that area hopefully validates that it's attractive, so we feel good about that. As I think about our approach, it is really targeted at really a higher-level integration of information. We are quite excited about the Spotfire clinical deal, and when we combine that with our previous capabilities -- think of our approach as really building a platform for the interface of research in clinical, so really more focused on translation opportunities, and of course, that leverages our knowledge, not only in the research area, but our experience in diagnostics. We are more of a platform play across research and clinical, versus a specialized play on a particular technology, so maybe that helps you differentiate that.

Andy alluded to this in his comments, we continue to see nice growth in informatics. We continue to get good traction with, particularly, the large pharma In particular, we had a user group meeting, here, a couple of weeks ago, where we had, what we call, the executive customer advisory board, it is attended by the top-15 global pharmaceutical companies. They continue to embrace our strategy on this translation opportunity in medicine. We continue to be quite excited about it. We think it can grow double digits for the foreseeable future from a top-line perspective. Obviously, this is a business that has very nice operating margins associated with it.

Isaac Ro, Goldman Sachs.

On the newborn business, just wondering if you will put a little more color on the trends you saw this quarter, geographically? Any notable tenders on the horizon as well, outside the US, that we should be aware of?

The US we get helped by the growth [in births] -- for us, it looks like it is about a 2% number, low-single digits. We saw some nice growth in South America. And, I think Andy mentioned the fact that, in China, we continue to see good adoption there, so very strong growth in APAC. We did not see as much growth in the EMEA region, and I think some of that was some delay in spending. We did get some push out. We had mentioned a number of years ago that we had put some big installations into the Middle East, and some of the disruption there, I think, has delayed some investments. From a geographic perspective, Europe, down slightly; Americas, call it, mid-single digits; South America and APAC, very strong growth, north of 20%.

A follow up on the Caliber franchise, if we look across the NGS landscape, a lot of the major players there have made some interesting technology acquisitions in sample prep. You guys have, obviously, had a pretty good track record in playing around the edges there pretty successfully. Just wondering if you could talk a little bit about the long-term philosophy that you have regarding new product development and how you plan to participate in the continued growth of sequencing as we look towards 2014 and beyond?

I think it is similar to what we have talked about in the past where we think there is real value opportunity in the sequencing workflow to be in the front end -- in the automation and sample prep, and we will continue to innovate there. It is an area where we continue to make significant investments. We hope to come out with some products, hopefully in 2014, that will continue to advance innovation in that area.

Also, in the backend, in the informatics area, and leveraging what we are doing with Geospiza, and now using some of the capabilities with Spotfire. I think our strategy will continue to be in those focused areas, and as you are pointing that out, we think that is a nice growth are, and I think we are well positioned in those two spaces.

Daniel Brennan, Morgan Stanley.

I wanted to figure out, maybe on the fourth-quarter guidance, I know you called out the $10 million to $12 million are one-timers. If we strip those out, can you give us a high-level view, how would you characterize the demand environment for your businesses in the fourth quarter? Are we -- things stable, maybe weakening a bit, improving a bit, how would you think about it from a high level?

You know what, I think it is stable, as I have alluded to. With the exception of medical imaging, which is really a year-over-year comp issue, so we are looking to see some improvement there. I think, order trends and I talked about even toward the latter part of Q3, I think are fairly stable here. We have got some concerns, as we voiced in this $10 million, but other than that, we feel pretty good about the demand profile in the market.

Andy, to the extent the environment remains muted possibly, we don't get this industrial recovery that PMIs are suggesting or it doesn't translate into increased demand. We get to 2014, and the top line hasn't recovered to the extent you hoped for, how much of the margin expansion is in your control, given the discrete actions you have already taken? And, how much is dependent upon top line, such that, let's say you grow 3% next year -- can you frame a little bit of the margin sensitivity towards maybe a 3% growth and a 6% growth, or however you want to phrase it to give us a sense of how much is in your control?

Maybe, I'll take it to even a more draconian level, and say, if we really are volume neutral, going forward, we have a certain amount of savings that should generate about 100 basis points of margin expansion. As we start to look out at the top line starting to improve, I think if we get to that 5% to 6% mid-single-digit level that we hope to in 2014, we have some fairly significant leverage, not only on the gross margin line, but even more significantly on the operating margin line. I think we've, in the past, when we have been at those levels and we have been able to do, certainly, well north of 100, in some cases north of 150. I think we're in a much better position today, so I think if we can get to those types of revenue numbers, we should see some fairly robust margin expansion.

One more on the acquisition strategy, I know you have discussed how, given the business is optimized, you feel you have the right piece of the puzzle, but now you are looking to do some tuck-ins, here, incrementally. I just want to go back to the Thermo Life deal and check in with you guys now. I think guys have discussed in the past your OneSource business, which is critical and growing nicely, is sticky, given some of the informatics businesses you can put on that. Stepping back, I would love to get your take of the acquisition strategy going forward from here, whether directly addressing Thermo Life, or just how you think about opportunities as they come up? Thanks.

I think you characterized it well from the standpoint of, we feel good about the portfolio, but always looking for opportunities to improve it. I think, right now, our approach is continue to look at bolt-ons, and look in those areas where we can continue to be differentiated in our offering. I think one of the reasons, I mentioned before, that we have been successful in OneSource is when we combine it with deploying the informatics capability, that starts to really differentiate us in the marketplace. That is the area that we want to focus on.

Obviously, the imaging area is an area that we like, both from a growth perspective and our internal capabilities. Our emerging diagnostic capabilities are ones that we think we can continue to build and work off of the terrific channel we have there. Again, it is going to be probably focused in those areas where we both have good market positions, today, but also see nice growth prospects, and continue to differentiate us from other competitors.

Steve Willoughby, Cleveland Research.

A couple of quick ones -- one, I was wondering if you could tell us how much of your total revenue comes from places like India and Southeast Asia, or maybe just emerging markets minus China, or something like that?

This is Andy. Our total emerging market exposure is around 28%, and I would say China is around 11%, 12% of that, and the rest is pretty widely distributed. In total, it is a little north of 25% of our total revenue.

India, specifically, is around 2% to 3%, and if you look at Southeast Asia, as a whole, it probably adds another 6%-ish. Southeast Asia and India would be something south of 10%.

On your guidance, I guess for the fourth quarter, for the full year, I understand the $10 million to $12 million of revenue impact -- is that the main driver to the top end of your EPS guidance coming down? Is that the right way to think about it because I also saw you're saying your effective tax rate is also going to come down 1% as well -- I'm just trying to think about what the moving pieces are there?

I think that is the major driver to coming off the top end because I think we felt that in order to get the top end of our guidance previously, we would have had to been closer to the top end of the revenue guidance. I think because of some of the things we talked about before, we think it is, right now, prudent to guide down, and consequently, if we are not going to get to the top end of the revenue, it is unrealistic to think we would get to the top end of the EPS.

Final thing, there was an article in the press, a week or so ago, talking about some air quality monitoring business that you have won in China. I was wondering if you could provide any more color or timing or size on that?

That is a partnership we have with the China State Environmental Protection Administration, and it is really a partnership with them to help set the air quality standards, as well as test for heavy medical particles in the air. To me, it sort of speaks to the terrific relationship and capabilities we have, broadly in emerging markets, but specifically, in China.

I would say for the next couple of quarters, I wouldn't think of it as a huge revenue driver, but I think, again, it is the relationships we build with the government agencies. As we come out with more innovation and new products, I think it opens up the opportunity to grow fairly significantly, and as you know, China is dedicating a significant amount of resources to improve their air quality. We are quite excited about it, but I would say for the next couple of quarters, that is not going to be a significant revenue contributor.

Dan Leonard, Leerink Swann.

Just wanted to clarify, did gross margin in the quarter, did it come in line with your internal plan, or was there some variance from plan?

It was down slightly from plan, partly because of some of the mix shift that we saw in environmental health. We had not forecasted that level of mix and mix headwinds.

When Andy talked about the three factors, clearly, the informatics investment was in our plan, and post the Q2 announcement to move those other two facilities in, we suspected there would be a little bit of additional cost through our cost of sales line. I think the mix, and to some extent the pricing pressure, was a little bit more than we thought.

I think the last item is, we had really hoped to complete the Hopkinton move at the beginning of the third quarter. We really didn't open the facility until the beginning of the fourth quarter, so the savings we had hoped to get are still there, they are just pushed out a quarter.

Finally, can you give us an update on how a couple of your important growth drivers for 2014 are tracking? Maybe something around the order book for the iQT, and also, the cell-free fetal DNA?

I mentioned a little bit before that we continue to see good receptivity in the marketplace, as we talk to potential customers and KOLs. But, because of a specific supplier issue around one of the components, the actual shipment of the product will not occur until the first quarter of 2014. Again, minimal impact in Q4, and we really don't think it is going to have a significant impact in 2014 as well. Again, based on early indications we feel good about that.

We continue to make nice progress on our contracting with regard to NIPT. I think, now, we're up over 160 million covered lives. Again, we feel good about the growth opportunities, but that will also be more of a 2014 growth driver. Some revenue this year, but relatively small.

You said the supply issue is not going to impact you, on iQT, that is not going to impact you in 2014?

No, we don't think -- minimal, but not much of a big impact.

Okay, great. Thank you --

It's a supplier issue, yes.

Eric Criscuolo, Mizuho.

On the facility relocations, specifically, the international relocations, does that have any positive effect on the tax rate going forward?

We do have an opportunity with Singapore to leverage our tax planning, so there is potentially a modest benefit from that. I think it really -- the bigger fluctuations around the tax rate, really, are around where our operating income is domiciled. So, it's difficult to say or pinpoint how much it is going to be. It is somewhat of a tailwind, and as we move through 2014, we will probably update you on that progress.

I would say, by moving the manufacturing out, it does put some downward pressure on the tax rate.

On the informatics, the bio-informatics businesses that you have, do they have similar margin profiles to the typical software industry margins?

It depends a little bit on what part of the software business. So, I would say the electronic notebook business, I would say yes. The Spotfire is a little lower because -- think of that as a licensing agreement, so still very good margins, but because we are paying some licensing to TIBCO for that, there's lower margins associated with the Spotfire business, as compared to the electronic notebook business.

Ladies and gentlemen, this will conclude the question-and-answer portion of today's call. I would now like to turn the call back over to Rob Friel for closing remarks.

First of all, thank you for your questions. In summary, I am pleased with how the Company is executing on balancing growth investments, while being responsive to global economic conditions. Again, just to reinforce, I remain confident we have created a really great foundation to deliver long-term value to our shareholders, while helping customers solve critical challenges in both human and environmental health. Thank you for your continued interest in PerkinElmer, and have a great evening.

Ladies and gentleman, that will concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.