Revvity Inc (RVTY) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the PerkinElmer 2016 third-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is be being recorded.

I would now like to turn the conference over to your host, Tommy Thomas, Vice President of Investor Relations. You may begin.

Thank you, Amber. Good afternoon and welcome to the PerkinElmer's third-quarter 2016 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 that this call is being webcast live and will be archived on our website until November 21, 2016.

Before we begin, we need to remind everyone of the Safe Harbor statement that we have outlined in our earnings press release, issued earlier this afternoon, and also those in our SEC filings. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future, even if our estimates change. So you should not rely on any of today's forward-looking statements as representing our views as of any date after today.

During this call we may 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 measure 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 statement in the 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. This afternoon I'd like to discuss our third-quarter financial results as well as give an update on the progress of our strategic priorities.

During the third quarter, we continued to drive strong operating margin expansion and EPS growth; however, our top-line performance was disappointing. Specifically, adjusted operating margins increased 190 basis points to 18.9% and adjusted EPS increased 13% to $0.68 per share over Q3 last year. While revenue was $548 million, representing a reported organic decline of 2% and flat when excluding the extra week in the comparable prior period.

Looking first at our end markets, we are seeing market conditions consistent with what we've experienced over the last several quarters. In the areas where we have it prioritized as attractive long-term growth opportunities, which include reproductive health, emerging diagnostics, food analysis and pharma services, we continue to see strong demands. However, in government and academic as well as industrial, environmental and medical imaging, end-market conditions continue to be challenging.

Relative to Q3, our revenue performance was negatively impacted by the additional week we had in third quarter last year as well as a more significant headwinds than expected in radio chemicals and our inherently more capital intensive businesses, including medical imaging and environmental health. While most of the headwinds are market related, we believe that our decision to de-prioritize certain slower growth segments of the portfolio is negatively impacting revenue growth in the short term.

Fortunately, from a profitability perspective, the significant traction we continue to generate on operational improvements more than offset this temporary revenue shortfall. In addition, because the areas we are focused on not only grow faster but also generate much better incremental profit flow-through, the Company will inherently become much more profitable as the portfolio continues to shift in the direction we have outlined. This is reinforced by both our Q3 results as well as our financial results through the first nine months.

Year to date, through the end of the third quarter, our growth areas of focus are averaging low double-digit organic growth with operating margins of greater than 25% and incremental profit flow-through in excess of 45%. Year to date, absolute revenue growth is $5 million or 2% organic growth, while adjusted operating income has increased $19 million, resulting in gross and adjusted operating margin increases of 100 and 110 basis points respectively and adjusted EPS growth of 12%. Furthermore, the margin in EPS growth has been achieved while we have increased our spending in research and development by 7% or 50 basis points as a percentage of revenue.

As we reflect on our third-quarter results, we are disappointed by the top-line performance but pleased to see the operational execution continuing to improve gross margins and the ongoing validation of the financial benefits from our portfolio realignment. We will continue to seek inorganic growth opportunities through bolt-on acquisitions and strategic partnerships that support our investments in these areas as well as review the composition of the portfolio and prune where appropriate, as we shift the portfolio to higher growth and profitability.

In addition to the inorganic moves, we continue accelerate this transition by fueling organic growth through increased R&D as well as other organic moves. In that regard, we announced a significant change in our organization at the end of September providing what we believe will be a more effective operating structure to facilitate this portfolio shift and better position PerkinElmer to strengthen our core product you offerings and better align with our customers' requirements.

As of the fourth quarter, Diagnostics is now a standalone segment, and we formed a new segment, Discovery & Analytical Solutions, or DAS. The DAS segment combines our former research and environmental health businesses. These new segments have now replaced our previous human health and environmental health segments.

Looking specifically at the diagnostic segment, we are have now fully consolidated our clinical business offerings, which are subject to regulatory oversight. We see significant growth opportunities across reproductive health, emerging markets and infectious disease markets as major macro trends generate over $2 trillion in healthcare spending each year.

Year to date, our Diagnostics business is growing about 10% organically, with our top-10 diagnostic customers growing about 20% over the last 12 months, as we continue to drive our reproductive health and emerging market diagnostic strategy. As we continue expanding our capabilities in these diagnostic areas, such as our Vanadis non-invasive pre-natal testing, currently in development and on schedule, we are confident in our ability to open up new opportunities for growth.

Additionally, as part of the recent reorganization, we formed an Applied Genomics group within Diagnostics by aligning our Company-wide genomics offerings to better serve the fast growing genomics market, particularly next-generation sequencing. Through this consolidation, we can now more effectively differentiate PerkinElmer as an integrated provider, helping customers with their preclinical and clinical applications. Ultimately, applied genomics will provide an enhanced sample-to-sequencer workflow proposition for NGS applications.

The DAS segment, on the other hand, will be able to better coordinate how we serve our applications focused customers, especially within pharmaceutical and biotech services and food analysis, which we believe will be strong catalysts for future growth.

By changing you how we are organized, we are taking the next step in our evolution to drive improved customer focus, facilitate more value-added collaboration and deliver breakthrough innovations.

During the quarter, we also continued to advance our efforts to improve our operational efficiencies across the organization. While Andy will provide greater detail on the financials, we delivered stronger than expected gross margin improvement in the quarter. Increasingly, the integration of R&D and operations will become even more critical to how we deliver value for our customers as we more thoroughly synchronize the design and manufacturing of our products.

A key driver of our success is our implementation of Lean, as we continuously work to enhance our manufacturing, supply chain and business processes. Andy will share more details on the actions we've been taking, and we are already seeing early wins from our projects targeting quality, cost, capacity, cycle time and productivity. In the quarter we also were able to successfully leverage our SG&A spend to fund our increased research and development expenditures.

With regard to innovation, we continue to introduce you new products into the marketplace as offering truly differentiated solutions as an important component of our strategy. Based on our performance in the third quarter, we remain confident that our new product introductions this year will generate an incremental $40 million in revenue.

In addition, we continue to increase the importance of new products and innovation throughout the organization. During the third quarter we held our second annual innovation summit, which brought together over 175 of our top scientists, engineers and product managers with several key customers to facilitate collaboration and sharing of ideas. At this event, we also recognized 25 PerkinElmer associates who were responsible for securing two or more patents over the last 12 months.

The recent organizational changes announced at the end of the quarter should permit a more efficient use of our R&D spending as well as better enable us to prioritize our spending toward higher growth areas. These changes combined with our commitment to increase R&D spending as a percentage of sales should accelerate the increase of our vitality index over the next several years. As we approach the end of 2016, our ongoing operational improvements in the business should help mitigate the impact of softer near-term macroeconomic conditions.

Meanwhile, we will continue to direct both our organic and inorganic investments toward our four key strategic focus areas, shaping our Company into a faster organic grower with higher margins, stronger cash flow, and lower volatility. But given softer demand for analytical equipment, and as we work through the realignment of our portfolio, we remain cautious on the top line.

We are, therefore, forecasting low single-digit organic growth for the fourth quarter and adjusted EPS of $0.85 to $0.87. Assuming we achieve this guidance, our results for the full year would be organic growth of 2%, adjusted operating margin expansion of 90 basis points, and adjusted EPS growth of 8% to 9%.

I would now like to turn the call over to Andy.

Thanks, Rob, and good afternoon, everyone. I'll provide some additional color on end markets, a financial summary of our year-to-date and third-quarter results, as well as details around our fourth-quarter outlook.

As Rob mentioned, our third-quarter performance was mixed as revenues fell short of expectations. However, we continue to make very good progress towards improving our operational effectiveness, allowing us to deliver significantly better gross and operating margins along with strong adjusted earnings per share of $0.68, up 13% from the comparable period a year ago.

For the third quarter, adjusted revenues were $548 million, representing an organic revenue decline of approximately 2% from the same period a year ago, while year-to-date organic revenues are up approximately 2%.

Looking at our end markets for the third quarter, we continue to see broad-based strength in diagnostics, healthy pharma and biotech demand, lower than forecasted academic and government sales and essentially flat industrial revenues. We did see significant softness in environmental capital spend, particularly at the end of the quarter, as well as in medical imaging, which declined double digit.

Year to date, we've seen significant strength in our focus growth areas, as we saw better than expected low teens organic growth in food, double-digit organic growth in diagnostics, and low single digit organic growth in pharma and biotech, in line with our expectations.

In contrast to these strong performances, industrial, academic and government markets have been slower than expected, experiencing low single digit organic revenue declines with environmental experiencing a marked deceleration towards the latter part of September.

Medical imagining remains challenging and has underperformed versus our initial expectations entering 2016.

Looking at our third-quarter and year-to-date results by geography, emerging markets remained resilient with organic revenues growing high single digits in both the quarter and year to date, while developed markets softened, declining mid single digits in the quarter.

Strength in China and India continued with organic revenue growth greater than 20% and 10% respectively in the third quarter, with a similar performance year to date. We believe that our focus and continued investment into emerging market opportunities is a compelling strategy, and we are actively looking to increase our presence in those higher growth geographies.

As to our operating results, third-quarter adjusted gross margins expanded 170 basis points to 48.9%, while year to date adjusted gross margins expanded 100 basis points to 48.3%, driven by solid productivity gains and a positive mix from strong Diagnostics and Informatics growth, particularly in the current quarter.

We have broadly rolled out strategy deployment and Lean initiatives across the organization with the aim of making meaningful improvement and operational efficiencies and product quality. In addition, we have made incremental investments in Lean talent, assembling a global team of experts focused on teaching and implementing key principles and process improvement tools across all aspects of the Company.

As a result, we're starting to see early successes as we more efficiently manage operating costs, which is reflected in lower scrap and warranty expenses year to date as well as the creation of additional capacity within our manufacturing operations. This incremental capacity has afforded us the opportunity to bring in house a number of previously outsourced manufacturing activities, reducing overall product cost and thereby contributing to incremental gross margin expansion.

We see this momentum building in the coming months and years, as we expand these efforts across all of our manufacturing and service operations, giving us increased confidence in our ability to meet our long-term goal of expanding gross margin by more than 300 basis points by 2020.

Moving to our operating expense, we continue to leverage SG&A and reinvest in R&D. Third-quarter adjusted SG&A was down 90 basis points, with R&D approximately 50 basis points higher than same-period last year. The extra week in the third quarter of 2015 was comprised of a full week of incremental expenses coupled with more modest revenue growth, and this had a positive impact on our year-over-year operating results.

Year to date, adjusted SG&A is down 50 basis points driven by prior restructuring activities and indirect spend initiatives, while incremental R&D investments are focused on new product development, primarily within reproductive health. Overall, we were very encouraged by our strong third-quarter and year-to-date operational performance as we expanded adjusted operating margins by approximately 190 and 110 basis points respectively.

Turning to the balance sheet. We finished the quarter with net debt of approximately $800 million and a net debt to adjusted EBITDA ratio of 1.8 times. We feel we have significant flexibility to create further shareholder value through M&A; we are actively looking to close on transactions in the coming quarters.

Our operating cash flow generate remains strong with year-to-date operating cash flow of approximately $200 million as compared to $160 million in the same period last year. We're beginning to see improvements in our working capital performance driven by system enhancements, which are facilitating our collection efforts as well as our Lean initiatives, which are helping to lower our global inventory requirements.

Turning to our segment results for the third quarter, human health organic revenue was essentially flat with environmental health declining 5% as compared to the same period a year ago. On a year-to-date basis, human health organic revenue was up 3% with environmental health flat as compared to the same period last year.

This will be the last quarter we will be reporting our operating segments in this format. For the fourth quarter of 2016, we will report our segment results as Diagnostics and Discovery & Analytical Solutions, or DAS, and we expect to have restated results posted to our website ahead of our fourth-quarter analyst conference call.

From an end-market perspective, our human health business represented approximately 62% of adjusted revenue for the third quarter of 2016, with Diagnostics representing approximately 29% of adjusted revenue and life sciences solutions representing approximately 33% of adjusted revenue.

As I mentioned earlier, we had strong and broad-based demand across our Diagnostics portfolio, which resulted in high single-digit organic revenue growth in the third quarter. All of our Diagnostics franchises continue to experience healthy growth, led by Haoyuan blood screening, which grew over 50% in the quarter. We also saw strong demand for our new India lab services and forecast demand to continue.

As Rob mentioned, our top-10 Diagnostics customers in both developed and emerging markets continue to rely on PerkinElmer for their critical needs with sales over the last 12 months growing over 20%, further validating our reproductive and emerging market strategies.

Organic revenue in our life science solutions business declined low single digits in the quarter, primarily due to the impact of the extra week in had the comparable period last year, which disproportionately impacted our one-source service offering. We experienced modest growth in academic and government end markets in the third quarter as pharma and biotech markets remained resilient after adjusting for the extra week.

Moving to our environmental health business, which represented approximately 38% of our adjusted revenue, organic revenues declined 5% for the third quarter of 2016. During the quarter we introduced new products at analytica China. This region continues to be a standout for analytical equipment demand. However, slower than expected results in the US and Europe more than offset this strength.

Looking ahead to the fourth quarter of 2016, we believe that our focus on continued operational improvements can help us weather the current slower growth environment. We continue to expect to see solid growth in our Diagnostics business, partially offset by slower than forecasted academic and government demand as well as somewhat softer economic conditions in developed markets. As a result, we are slightly widening our fourth-quarter revenue guidance to a range of $610 million to $620 million, representing low single-digit organic revenue growth and adjusted earnings per share guidance to a range of $0.85 to $0.87.

This concludes my prepared remarks. Amber, at this time we'd like to open up the call for questions.

(Operator Instructions)

Jonathan Groberg, UBS.

Great. Thanks a million. Rob, can you talk -- I know in your more recent comments you obviously had highlighted that you saw some weakness in Europe. From your comments here didn't sound as much as you were calling things out geographically. It sounded like you were talking a little bit more around your growth businesses versus your non-growth businesses. Can you maybe just talk a little bit how the quarter you saw develop, and if there's anything kind of geographic that stood out to you on the top line?

Sure. I would say first of all, as the quarter played out -- and I think Andy mentioned this a little bit in his prepared remarks -- sitting here in the second week in September, we were tracking pretty well to what we would ship historically during a quarter.

Again, just to remind everyone, particularly on the instrument side, it has a tendency to be fairly back-end loaded where the service and the reagents -- let's say our diagnostic business -- is more consistent through the quarter, but clearly the instrument business is back-end loaded.

Again, probably second week in September, we were sort of tracking maybe even a tad better than what we had historically seen to get to the 2% growth that we had guided to. I would say the last couple weeks of September we saw, particularly on the capital side, a fairly amount of deferrals or push backs, push outs. I would say we've seen that in the past, but normally there was the ability either to pull things in or to readjust and still achieve our revenue number.

Unfortunately, we were unable to do that in the last couple weeks of the September, so the real shortfall was on the capital side of things. Our sense is, in talking to some of our customers, is there was a real interest in delaying capital purchases unless it was absolutely necessary, so whether it was capacity or replacement. We did get a sense that there was some deferral in the back part of September.

To your point on the geographic side, we saw that clearly in most all developed markets. The one area that continued to spend through the entire quarter was China. As Andy mentioned, China was up over 20%, and we saw that fairly broad based. But I would say outside of China we did see capital intensive side of the business definitely suffer here as we got into the latter part of September.

Then just sticking with the top line for a second more, I think you said your four growth initiatives were up double digits. If I'm remembering correctly, I think that's maybe around $1 billion or so of sales. That means that the other parts of your business -- actually, a little over 50%, would have had to have been down double digits. You're talking about maybe accelerating some of your corporate development initiatives. How do you handicap where you are in the cycle, when the right time to sell some of these businesses might be versus trying to improve? I guess I'm trying to think about your -- you seem to be a bit more vocal on the capital deployment side and pruning the portfolio side. So I'm just curious how you're thinking about the timing of those actions.

That's a good question. Let me just clarify one thing. The 10% growth that you referenced on the growth businesses are really year to date. The growth business, while they did grow, were probably more in the mid- to high-single digits. Again, every aspect of our portfolio was impacted by the additional week over last year. That's why to some extent we're trying to look at this over a little longer period, sort of year-to-date numbers because I think the Q3 is clearly distorted because of the extra week last year.

I think directionally your comment is correct, where obviously the growth side of the business is doing very well and we continue to have challenges on the core part of the portfolio. To some extent that was one of the reasons we moved to the reorganization. We talked about the benefits of having the clinical business and the more application businesses together. I think it does drive collaboration, and it allows us to serve our pharmaceutical and food companies -- customers a little bit better.

The other aspect of it is when research and environmental was separate, it was a little harder to be more aggressive on pruning some of the product lines because as those businesses were separate, we became in a little bit of a sub scale in areas like front end and some of the other areas. I think one of the things that this reorganization does, I believe, is allows us to get a little bit more aggressive on the pruning side, in addition to the other benefits of the collaboration, the R&D, the manufacturing scale and serving our customers.

The other thing, obviously, is we want to make sure as we prune the portfolio that we've got a great foundation to build upon, and so it was important for us to get the organizational structure right. It was important to get our operating execution right, so that, again, as we make the portfolio move, that we're not as disruptive to the bottom line.

We recognize as we makes these portfolio moves that we will disrupt the top line, but we're trying to do, as best we can, to maintain the margin expansion and the EPS growth that we've talked about. Therefore, it was important to make sure that the flow or the way that this was staged was to make sure that we had the organization, the operation execution, and then we could start to be more aggressive on the pruning of the portfolio.

Okay. Thanks. Could I just -- one last one if I can sneak it in. Rob, do you mind just -- I think maybe it's a nomenclature thing maybe to some degree, but I think what you said around environment -- can you remind us what you include in environmental? Because some firms, when they talk about industrial versus environmental, I think not everyone's talking about the same thing. You mentioned your food business was strong. Could you maybe clarify when you talk about environmental being weak (multiple speakers)?

I think that's fair. We do split food from environmental and from industrial. When we talk about environmental, we're talking about something in about 10% of our revenue and it's largely in air, water, and soil. That's how we would define environmental.

Whereas food, because as that's become a big area of focus for us, we've separated that. Then we have industrial would be the other areas which would be more for us: petrochemical, fine chemical and those types of areas.

Thanks, Rob.

Steve Beuchaw, Morgan Stanley.

Thanks for taking the questions. Just as we take some of the commentary and try to put it all into context, it would be really helpful if you could speak to the businesses excluding instrumentation. Do you have a view on what consumables growth, maybe consumables and other repeatable business growth was in the third quarter and how that compared to the first half?

The consumable business grew. Services was sort of flat to up a little bit, and of course services is probably the business that's most impacted by the week. Of course, that gets distorted a little bit as the consumable business. And the instrument business was down sort of mid-single digits.

Okay.

Again, really more of a capital intensive area, and of course if you look at the areas outside of Diagnostics, then you can imagine the instruments was down even greater than that.

Then just looking at the margins, were there any concentrated cost actions taken in the quarter, given the environment that we should contemplate as we think about the sustainability of margin expansion? Thanks much.

Sure. Steve, this is Andy. We had two things. We obviously had very strong gross margin and we had very good SG&A leverage. On the gross margin side, we are seeing an acceleration, and maybe slightly faster than we had forecasted going into the quarter, of our lean initiatives. Of the upside we saw in the quarter versus our guidance, about a third of that was due to productivity gains. Then the rest of that was really more mix, where we saw high growth in our Diagnostics and Informatics franchises.

On the SG&A side, a lot of it was around our indirect spend initiatives. We did want to go in with a bit of cushion, so we did accelerate some of our cost controls in the quarter. I think that we'll continue to do that. We also had some favorabilities given the comparison last year with the five weeks -- the extra week of costs, but that was probably less so.

I think we'll continue to have that as a lever, and I think that was really the primary reason we saw the upside to our forecast despite the top-line decline.

Dan Arias, Citigroup.

Rob, what's your outlook for the medical imaging business at this point? Is that a down double-digit business for the year? How far are you thinking you might be from a trough at this point?

I think Andy mentioned it was down double digits in the third quarter. We're not forecasting that it continues at that rate. I think it sort of improves a little bit here in the fourth quarter, probably still be down mid to high single digits is where our current forecast.

The whole key for that business is to continue to get some new products out into the marketplace. We've got a new cassette product that we're getting out. Then continue to diversify away from some of the end markets that are challenged. I would say specifically the radiology end market. So getting more into some of the industrial applications and some of the other areas that we are seeing some growth.

Our forecast right now for Q4 would be more mid to high single digits. Again, that would put them down for the year in that range of sort of high single digits.

Okay. On the newborn screening business, specifically in India. If we look ahead to 2017 revenues, do you think that you can start to benefit from tests per birth going up there, once we get through the pilot programs? Or as we think about next year, should we think about that being a 28 (sic) contributor and not necessarily something that fall into the 2017 time frame? Thanks.

Newborn screening continues to do very well for us. It had a strong Q3, and if you look at year to date it continues to do quite well. The growth drivers are both in the developed areas, to your point, Dan, where we continue to expand the menu. We continue to see nice traction there. As well as the emerging markets, particularly China continues to see very nice growth. We're seeing growth both in the birth rate, which is up fairly significantly during 2016, as well as the expansion of the menu in China.

As we've talked in the past, we continue to see opportunities in other emerging areas to expand it. I think we continue to feel like the newborn screening area should be a high single digit grower going into 2017 and beyond.

Tycho Peterson, JPMorgan.

Thanks. Rob, can you provide a little more color on the environmental drop off? I know you said it was US and Europe, but any additional color? Across the portfolio, did you see any improvement in trends in October?

I would say the environmental shortfall was, again, going back to my comment, was everywhere other than China. China we continue to see good investment in the air, soil and water. Outside of China, it was fairly broad based. It was both in the US. It was Europe. It was down fairly significantly.

I think some of that might be a little bit of product positioning for us, where we had scheduled to get some new products out and while they got out, they got out late. Clearly, environmental was -- in the developed areas -- a headwind for us in the third quarter.

With regard to October trends, I would say we saw October trends improve up from the back half of September but still concerning to the point where, again, given the significant miss on the top line in Q3, we just thought it was prudent to be conservative here as we guide on the top line for Q4. A little bit of improvement in October, but not I would say significant.

On guidance, can you help reconcile the fact you beat this quarter on EPS at the midpoint of the EPS for next quarter was down by $0.04? Are you baking in some extra --?

I think it's a function of the concern on the revenue. I think we still feel like we can do a good job on the operating margin, but, again, because we guided conservatively on the revenue side, we just thought that that EPS guidance was the prudent. The other piece of it -- the difference between, sequentially, between the third and the fourth quarter is the mix. Within the fourth quarter, we're going to see more of an impact from environmental health than we had in the third quarter, where we saw very strong Diagnostics and Informatics revenue.

Derik de Bruin, Bank of America.

As you think about pruning the portfolio, given the strong margin expansion that you've seen there, can we assume that anything that you prune will be basically neutral to EPS?

Well, I think that's what we're -- we're trying to get the portfolio in a position from a margin expansion perspective that the pruning of the portfolio will be minimally impactful on the EPS. I think it's probably difficult to say that it wouldn't have any impact. Now, if we turn around and say we take the proceeds and use it exclusively to buy back shares, that's a possible way to do that. Right now, it will be challenging to say by selling a business and reducing a revenue, that it would not have any impact on EPS.

The share buyback was my next question, in terms of what are your plans? It sounds like you're looking for more M&A opportunities. Could you talk a little about the buyback plan, what's the share count implications for the year?

I think as we said in the past, our preference would be to continue to add bolt-on acquisitions to the portfolio. Having said that, our share buyback would be determined on basically how we see the size of the realistic acquisition opportunities and sort of availability. To the extent that we think there are some realistic opportunities to improve the portfolio, I think that would be our preference. To the extent that we don't see those or that the size of those are such that we can do both, then we would buy back share. I think we've done that in the past, and we'll continue to do that in the future.

If you're looking at share count for this year, we're going to be similar to where we were in the third quarter, about 110 million shares for the year.

Doug Schenkel, Cowen and Company.

My first question is a bit of a follow-up to Derik's last question. Andy, in your prepared remarks you did indicate that you are actively looking at acquisitions that could of close in the coming quarters. Could you just refresh your M&A parameters when it comes to size of deal, growth profile, willingness to take on dilution? I'll pause there.

Sure. First and foremost, it has to fit the strategic framework of the Company. We also then look at the -- from a financial perspective, returns. We still look for greater than our cost-of-capital returns on deals we've made. We've been fortunate enough to generate those types of returns on the deals that we've undertaken. I think the ones that we think we could close in the coming months will fit that criteria. From an accretion dilution perspective, it's highly unlikely we would do a dilutive deal, especially in today's market. I think we really look more at our ability to generate those return on invested capital numbers.

Okay. Thank you for that. One other question. Would you be willing to disclose what licensing and royalty revenue was in the quarter, and how does that compare to the last couple of quarters? Thank you.

In the third quarter of this year it was essentially zero. As far as our expectations going into the fourth quarter, it's going to be minimal. As far as incremental, we obviously get revenues periodically through the year, but as far as significant incremental changes, no. We did talk you about last year in the fourth quarter we did have some incremental licensing revenue in the quarter. We don't expect something like that to repeat.

Bill Quirk, Piper Jaffray.

First question, Rob, you mentioned softer several times in your prepared comments, and then also talking about the realignment being -- or enabling you guys to prune some of the businesses faster. Can you help us think a little about the framework in terms of transition with some organic products coming through the pipeline? Recognizing you don't have a perfect crystal ball around pruning, but is this something that we should be expecting to see here soon as the fourth quarter? Is this more 2017, continuing on to 2018? Just trying to get a framework. Thanks.

I would say with regard to inorganic moves, whether it's selling or buying, it's hard to predict the timing on those because obviously it's not something that's totally within our control. I would say that's one aspect of it.

I would say the other aspect of it is, as we think about making moves, and again, this would be either buying or selling, we want to make sure that Andy's point. That obviously makes strategic sense, but also we want to make sure that we're optimizing the return for shareholders. When we think about that optimization, we want to make sure that it's both on a pretax and an after-tax basis. Sometimes that requires transactions that take a little longer than I think we would all like. I would say, again, that speaks a little bit to the timing of it.

I would say could we see something here in the fourth quarter? We could. But if not, we'll probably see something in the early 2017 time frame. Again, it's hard to put specific timing around those because it's not things that are totally within our control.

Understood. Then just two quick ones from me on the product side. With respect to blood screening, where are we in China right now with the full transition to screening their entire blood supply with NAT? Secondly, the sample to answer workflow for sequencing, when might that be available? Thanks.

On the blood screening we continue to do very well there. The Chinese government has instituted the mandatory blood screening this year, and so we're seeing a nice ramp-up there. We continue to see strong growth, so that business continues to operate well.

If you recall, in the fourth quarter of 2015 we had a lot of instrument placements and we're now seeing the revenue flow from that, so that business continues to do quite well. We continue to feel good about our opportunities to expand there.

The sample to sequencer is -- I would say we have components of that today, but there's a couple areas we think we've got to develop and add to. To give you a time frame, it's probably into the mid to late 2017 time frame.

Steve Willoughby, Cleveland Research.

Thanks for taking my questions. I just had a couple for you. First, Andy, was wondering if you could -- was there any impact from like incentive comp here in the third quarter? Just thinking as you accrue incentive comp in the first half, was anything reversed here in the third quarter that benefited SG&A?

No, there was nothing reversed.

Okay. Perfect. Secondly, Rob, you made a comment about $40 million of revenue from new products. What time frame were you thinking that new products would generate that revenue? Is that a 2017 event or --?

We came out in the beginning of 2016 and said we were looking to add $40 million of incremental revenue from new products. What I was commenting is based on what we're seeing through nine months, we feel like we're going to be on track to achieve that. It was just reconfirmation of the fact that we think we'll be able to add $40 million as a result of new products that were launched in the past 12 months.

Bryan Brokmeier, Cantor Fitzgerald.

How has OneSource performed? Is there any anticipation of a benefit from grouping that business back with the environmental business?

OneSource continues to perform well. I think if you look through the year, it's up high single digits, so it continues to do well. Q3 again, because of this one week impact, wasn't as strong for OneSource but, again, when you look at year to date it continues to do very well. We do think that service in general will benefit by regrouping research and environmental back, because if you recall a couple years ago we split it apart. I think it has caused an issue relative to some of the areas where we don't have the density, quite frankly, and I think by putting it back together that is one of the benefits we think we'll get from the new organization.

Okay. In terms of the new product revenues, I thought -- I don't know if I have these numbers correctly, but I thought that you had indicated that you had $35 million in revenues in the front half of the year. If that's correct, does that mean that you're only generating another $5 million in the back half of the year from new product?

I tell you, I don't recall that. I recall having a discussion around $35 million in 2016 and saying we were growing -- I mean 2015 and growing it to $40 million. We'll just have to go back and circle back and get that.

All right. Yes, I thought it was $18 million in the first quarter and $17 million in the second quarter, but -- okay. Thanks.

Isaac Ro, Goldman Sachs.

Thanks. Maybe just a follow-up on the new product question. Just curious if you can quantify how much contribution, either on absolute dollar or a percentage terms, you expect in fourth quarter organic growth?

I think it's been running in the sort of $10 million to $12 million a quarter, to tell you the truth. I would assume it's going to be similar to that in the fourth quarter.

Okay. That's helpful. Thank you. Just a follow-up on capital allocation. If we just look back the last you few years you guys have been pretty opportunistic on buying back stock when you had a good chance. Given your earlier comments on the M&As aspect, wondering if we get to some point in the first quarter and you aren't able to close a deal that you want, is it possible that we might see some use of your cash to buy back stock?

Isaac, this is Andy. We obviously look at the tradeoffs between M&A and buybacks as well as the timing. If we see some of these slowing, I think we're going to generate some pretty strong cash flow. I could see us taking some shares out of the system if the M&A doesn't come as quickly as we'd like.

Paul Knight, Janney Montgomery.

Hey, Rob, on the reorg with the split of diagnostics, and can you talk to, specifically, the analytical instrument business? I know you've always enjoyed a pretty top position in the world, but what do you want to accomplish with analytical manufacturing, distribution, what are your thoughts there?

I think to your point, we want to continue to be a top player in that. I think PerkinElmer's got a good brand in analytical instruments. I think the opportunity we see of putting it together with the research is, in a couple end markets, I think we'll be able to hopefully drive better coordination, particularly in the pharmaceutical area, where we go call on those customers on a research drug discovery area. We think we can get some leverage. I think the servicing we talked about, I think specifically in food where we have some assets. Again, we're in the research area but are also in the historical environmental area.

I think we should be able to continue to try and be at that preeminent position, particularly in the areas of inorganic, materials characterization and thermal. Those are the areas where I think we've got a strong position, and hopefully we'll continue to maintain that and grow it.

On the China business for diagnostics, it's been obviously a success story there. What are plans on that? Also, what are you -- are you seeing that market pick up with the release of the five year plan in March? I mean, can you talk to the dynamics following the release of the plan and what you want to do next in that market?

I would say we've continued to see very strong growth in China. I don't know that I could sort of attribute anything to the release of the five year plan. I would say where we've seen it a little bit more is on the research side in areas like this precision medicine initiative and an increased focus on food. They've come out with some new regulations on food where they're looking at the entire food chain. I would say there I think we have seen a little bit of an inflection, probably a positive.

Diagnostics has been strong, continues to be strong there, and I think we're well positioned in several facets. We talked about newborn; that continues to do well. We continue to see very strong growth on the prenatal or the maternal-fetal side. Of course, we mentioned blood banking and then of course our infectious disease area. Across those businesses, I think we feel good about it.

One of the areas where we're focused on is we are seeing increased pressure on local manufacturing of products. I would say to a large extent we're in a good position there, but we just want to make sure we continue to have the majority, if not all, of our diagnostic products manufactured locally. That's a big focus for us, to make sure as it becomes more challenging both from government tenders as well as local competition that we've got a strong capability to produce everything and fundamentally design everything in China.

Jack Meehan, Barclays.

I wanted to follow up on the capital equipment commentary and just dig in. Do you think any of the softness was simply timing related, and how does that roll into the fourth quarter guidance you gave?

We do believe some of it is timing. It's hard to determine at this point how much of it was. I would say at this point a lot of the information we have is sort of more anecdotal. You hear people talk about are they deferring things until after the election or particularly academic or government budgets on hold a little bit.

We're sort of anxious to see whether that in fact happens, but probably some of it was deferred spending until a little bit more certainty from whether it's a geopolitical or economic condition. Because we do believe some of these things that were sort of pushed off will be needed or required at some point, again, whether it's for capacity expansion or just replacement.

Got it. There's been a little bit more noise on the academic government side this quarter. Is it more nuanced within that either by product categories or academic versus government? Just any additional color would be great. Thanks.

For us it's probably more on the academic side than it is government. We can tell you, the area we see it probably most acutely is in our imaging area. For example, I think you saw virtually no S10s grants over the last 90 days. We clearly have seen a slower funding environment on the academic side, and we saw, like I said, again, mostly in the research area.

Katherine Ramsey, Robert W. Baird.

This is actually Emily on for Katherine. Turning towards newborn screening, how many tests per birth are you seeing right now in China, India and the US? How have birth rates been trending in comparison to last year?

Okay. In the case of China, it's starting to vary fairly significantly. I would say if you looked back maybe a year or two ago, it was either two or four. We are starting to see certain areas like, particularly around Shanghai and couple large cities, start to implement mass spec. We have seen a ramp-up in almost sort of a bifurcation.

Still out in the west continue to see in the two to four area, but on the east and particularly in the large cities, are you starting to see menus now get up to15 to 20. I would say on average in China right now we're probably six or seven. There is sort a movement into higher menus.

In the US right now the standard of care is 29, as you may know. We're probably, on average, in the states in the low 40s.

If you look in India right now, we're only testing right now -- we've got four pilot programs. Two of those pilot programs have moved into actual full-fledged programs, and to the most extent most of those four, they're in the four to six range as far as menu.

It varies a fair amount. Obviously, the US is by far the highest number.

Okay. Thanks. The birth rates in comparison to last year?

The birth rates, I would say globally it looks relatively flat. I would say similar in the US for us. Earlier in the year we were seeing a little bit of a sort of a positive trend on rates; we've seen that come down a little bit now. I would say that's flat.

China's very strong. China's probably mid-teens, growth rate. When our people in China dissect that, we think probably about 10% of that or 10 points of that is because of the change in the zodiac sign. We think probably 5 percentage points is because of the second child.

Matt Mishan, Capital Markets.

Hey, guys, this is actually Aubrey on for Matt. Can you hear me okay?

Sure. Yes.

Great. Thanks for taking the questions. You mentioned in the prepared remarks that the decision to de-prioritize certain areas of the portfolio is also slowing sales growth a little bit faster than you expected on your last guidance update. Could you maybe just parse out how much of that impacted the third quarter and your guidance going forward versus a change in end market demand?

To determine that precisely is hard, but we believe it's having an impact because as we have announced some of these changes, we have seen -- for example, in the sales organization or some product management, we have seen a little bit of turnover, not probably unexpected. We're back-filling with individuals that I would say are more consistent with the strategy. We think some of that disruption is having an impact. I would say probably more in the sales organization of product management. I don't think I can give you exact number, but when we look at -- clearly, environmental health we think that had an impact.

Got it. Then I just wanted to touch on free cash flow. Are you reiterating your guidance for $300 million? If so, what gives you confidence that you're going to see inflection in fourth quarter?

If you look at last year, our most significant quarter, the fourth quarter -- for us to hit the $300 million, it's going to require some he very significant working capital improvement, given the slightly lower earnings. I think the team is basically been tasked with still delivering the $300 million. I will say it's going to be a bit harder, but that is our goal.

If we can do somewhat similar to what we did a year ago, we should be very close. We are not coming off of it at this point. It's just becoming a little bit harder. Really, that's overcoming a fairly weak first quarter of this year. Again, we're sticking with the $300 million, but it's becoming more challenging.

Brandon Couillard, Jefferies.

Thanks. Rob, just a quick question on the pharma business. I know you noted it was up low single digits in the period. Any chance you could parse out that the deviation in mix between equipment and instrumentation and then the software and service components, which I imagine were much more stable in the period, any change in the end markets? Then I've got one follow-up for Andy.

Sure. Okay. If you look at as you said software Informatics saw good growth in the quarter. Service grew but not what you would normally expect, in the high single digits, I think because of the week, one less week year over year but [stuff] still grew. We saw pressure mostly, again, on the capital equipment side, so where there was any sort of plate readers. I mentioned the fact that imaging was down a little bit on the academic side. On the high-content side, we continue to see growth. Of course, radio chemicals was a drag.

Thanks. Andy, one for you. In terms of the EPS bridge for the year, is there anything specific that contributes to the higher purchase accounting adjustment in terms of the bridge between GAAP and non-GAAP EPS for the year? It looks like (multiple speakers).

The majority is basically the amortization. We have that. That should be detailed in our reconciliations within the press release, but if you can't find it let me know and I'll get that to you. It should be in our documents that are on our website.

I am showing no further questions at this time. I would now like to turn the conference back to Rob Friel.

Great. First of all thank you for your questions. In closing, let me just say we continue to feel good about our long-term opportunities to deliver value to our customers and shareholders as we work to accelerate growth while most importantly advancing our mission of innovating for a healthier world. Thank you again for your interest in PerkinElmer and have a great evening.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.