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Executives

David Francisco - Vice President of Investor Relations

Robert F. Friel - Chief Executive Officer

Michael L. Battles - Interim Chief Financial Officer

Analysts

Quintin Lai - Robert W. Baird & Co., Inc.

Derik De Bruin - UBS

Isaac Ro - Leerink Swann

Ross Muken - Deutsche Bank

Peter Lawson - Thomas Weisel Partners

PerkinElmer, Inc (PKI) Q4 2008 Earnings Call January 29, 2009 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2008 PerkinElmer Earnings Conference Call. (Operator instructions)

I would now like to turn the call over to Mr. Dave Francisco. You may proceed sir. Mr. Francisco, you may proceed.

David Francisco

Oh, great. Thank you very much. Good afternoon and welcome to the PerkinElmer Fourth Quarter 2008 earnings conference call. I’m Dave Francisco, Vice President of Investor Relations and Treasurer for PerkinElmer. With me on the call are Rob Friel, President and Chief Executive Officer and Mike Battles, Vice President and Interim Chief Financial Officer.

If you've not received a copy of our earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com or from our toll-free investor hotline at 1-877-PKI-NYSE. Please note this call is being webcast live and will be archived on our website until February 12, 2009.

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 President and Chief Executive Officer of PerkinElmer, Rob Friel.

Robert F. Friel

Thank you Dave. Good afternoon. I appreciate you joining us this afternoon for our Fourth Quarter earnings call. For today’s call, Mike and I will provide an overview of our Q4 results, provide commentary on some of our key end markets with their outlook for 2009. And then open up your questions.

Mike will get into the details on our fourth quarter, but overall we we’re very pleased with our performance in virtually every financial metric. In particular, I would like to highlight the strong operating margin improvement in Q4 of over 300 basis points. This was due to our productivity actions, lower operating expenses, and good buying leverage.

The results we released today closes at a very strong year for PerkinElmer. In 2008, we grew the business by 14% on a reported basis and 7% excluding the impact to foreign exchange and acquisitions. We expanded adjusted operating margins by 80 basis points. We adjusted earnings per share by 15% after absorbing 5% dilution to the ViaCell acquisition and free cash flows exceeded net income, continuing to strengthen our financial position.

In addition, we continue to focus to portfolio in several key end markets that have attractive long term growth characteristics. This strategy was further strengthened by our business realignment announced this quarter to focus our efforts on Human and Environmental Health. As previously announced, effective January 1st this year, we align the company’s operating structure under these two end markets.

PerkinElmer Human Health business represents 40% of our revenue and is comprised of the genetic screening, medical imaging and BioDiscovery businesses. This primarily focuses on developing screening and diagnostic tools and applications to fight disease earlier and provide medical insight more accurately as well as create critical new therapies more quickly.

The Environmental Health business represents 60% of our revenue and includes our analytical sciences, laboratory services, and illumination and detection business. It is focused on improving and protecting the surroundings of our environment in which we live through detection, lighting and analysis solutions. The Environmental Health business helps ensure our safety and security from the food we eat to consumer products we used, to the security of our surroundings.

Turning now to 2009 the outlook for macroeconomic conditions continues to be very challenging. As such, I’ll provide some commentary on key end markets and our expectations for 2009 as of today. However, please recognize that our visibility beyond the next several weeks is limited.

Within Human Health, we serve two end markets; Diagnostics, which represents 25% of our revenue and Research, which represents 15% of our revenue. Our Diagnostic business provides early detection for genetic disorders from pre-conception, early childhood, as well as medical imaging. We believe this market is very attractive long term attributes as it provides vastly improved outcomes and compelling economic payback. During 2008, our Diagnostic business grew in the mid-teens despite a very challenging Q4. However in 2009, our Diagnostic business are cycling (ph) up against some difficult comparisons as both medical imaging and genetic screening had significant growth in the first half of 2008. For example, our medical imaging business, with increased capacity coming on early in 2008 was able to work out outstanding backlog, thereby growing well in excess of market rates. Additionally, the impact of credit market dislocation on hospital budgets has limited near term demand for high end medical imaging systems.

Lastly, state funding constraints has limited the near term growth opportunities for our neonatal screening business in the U.S. As state labs defer the expansion of the number of test applied to each newborn as well as reduce safety stock levels of our reagents and consumables. Consequently, we anticipate that our diagnostic business will be flat plus or minus a couple percent in 2009 with the first quarter in the mid to high single digits.

Turning to the research area, here we provide a broad sweet (ph) of products including reagents, cellular analysis, lab automation and detection capabilities that are used to improve the drug discovery process. Our research business grew in mid-single digits in 2008. Our offering into the research market continues to benefit from recent new product introduction in the reagent area as well as the increased adaption of cellular imaging and analysis products. We’ve enhanced imaging software allowing this business to grow faster in the other line market.

Regarding the 2009 outlook, large pharmaceutical companies are expected to hold spending flat as screened projects continue. Whereas we believe academic and large biotech would be a source of some growth in instruments and reagents despite pressure on funding sources. As such, we expect the research market for us to continue to grow into low to mid-single digits throughout 2009. With Q1 being at the high end of the range, it is some weakness we experienced in Q1 of last year.

As I mentioned earlier in the Environmental Health area, we provide a number of applications and technologies that improved and protect the surroundings and environment in which we live. This business includes environmental safety and security as well as laboratory services markets. In environmental and safety and security markets, which represents 20% and 10% of our revenue respectively, we grew in the mid-single digit in 2008. We believed that the impact of current economic conditions on these businesses will be highly dependent on the specific application and end markets. Although we are clearly seeing the impact from the tight credit markets in currency movements negatively impacting demand. However, (inaudible) is unclear on whether food and consumer product safety and alternative to energy should offset some of the softness based on the quick account of these solutions. Overall, we believed the environmental and safety and security markets will be down in the low single digits throughout 2009, with the first quarter down a little more due to a strong growth in Q1 of 2008.

The industrial market will be severely impacted by a recession as it is experienced both capital and cost pressures. Fortunately, it only represents about 10% of our revenue, but we believe that this market will be down from the high single digits to the low double digits in 2009.

Lastly, our lab services business represents about 20% of our revenue and grew in the high single digit in 2008. This business continues to experienced strong growth in outsourcing from our customers. In addition, we are beginning to penetrate beyond our traditional customer base. Proof that our one source service business strategy is well aligned with customer needs to consolidate laboratory services, which further demonstrated by the continued growth of several one source programs including the expansion of our relationship with Merck. Although our experience to maintenance deferrals (ph) these should be offset by the increased drive towards further outsourcing. At this time, we do not believe the growth of the laboratory services business will be significantly impacted from current conditions. It should therefore continue to perform well, growing in the mid-single digits in 2009.

So to summarize, we believe the Human Health business will be about flat plus or minus a couple of percentage points, with the Environmental Health businesses being down low single digits for 2009.

Before I return the call over to Mike, I wanted to briefly touch on our key priorities for 2009. They will be to drive productivity as much and as hard as we can, holding cost and increasing efficiency in everything we do. In addition, we will also continue to invest in key growth areas that we believed create long term value. This balanced approach to investing in innovation, regional infrastructure in both on acquisitions, coupled with our continued strive for operational excellence cross-over businesses and territories will be the key to us continuing to play a critical role and actively creating better outcomes that helps improve the health and safety of people and the environment.

I would now like to turn the call over to Mike to talk in a little more bit detail about our Q4 financial results and our guidance for 2009.

Michael L. Battles

Thank you Rob and good afternoon everyone. I’m going to review our Q4 financial performance in more detail and discuss them and the key drivers of the performance. Then I’ll expound on Rob’s comments and provide guidance on our full year 2009 and outlook for Q1 before we open the call for questions.

Before I get into the details, I want to clarify that whenever I talked about a particular measure being up or down, I’m referring to an increase or decrease in that measure during the fourth quarter of 2008 compared to the fourth quarter of 2007. If then I’m using a non-GAAP measures those numbers that have been reconciled to comparable GAAP measures in the financial tables of the press release or posted on our website.

As Rob discussed earlier, Q4 was a solid quarter of financial performance to close out a very strong year for us. In the fourth quarter and for the year, we have growth in sales, earnings per share, and cash flow that were all at or ahead of our original guidance despite the rapidly deteriorating economic conditions that we experienced late in the year.

We ended the year for GAAP EPS at a $1.45, which is up 15% from the prior year. Let me review the Q4 financials in greater details. By segment, reported sales growth was 3% for LAS and 3% for Optoelectronics. Of the LAS sales growth, foreign exchange had an unfavorable impact of approximately 4% and acquisitions added approximately 3%. Of the Optoelectronic sales growth, foreign exchange had an unfavorable impact of approximately 1% and acquisitions at a less than a percent.

The remaining sales analysis is presented excluding the unfavorable impact of foreign exchange and the favorable impact of acquisitions. Starting with Life and Analytical Sciences, our BioDiscovery business continue its strong momentum in Q4 going high single digits. Growth in this business was broad-based with continued strength from our cellular imaging and lab automation products as well as great traction from our new products and services and our reagent portfolio, which has allowed us to gain share.

Laboratory services were mid-single digits in the quarter. Consistent with their applications, this business continue to perform well as the impact of customers deferring contract renewals is more than offset by increasing demand for outsourcing including an increased in levels demand for customers outside our traditional segments.

In Analytical Sciences, sales grew low single digit. This business executed well despite the strong headwind experienced in the quarter as industrial customers deferred purchases, a merging territory experienced currency devaluation and this business is (inaudible) up against the strong Q4 in the prior year. The end market demand will continue to see great opportunity for continued growth in food safety, consumer product safety, renewable energy and hydrocarbon processing.

Finally, genetic screening was at low single digit in the quarter. We could do to see good growth in ViaCell and prenatal screening without setting pressure from the neonatal business. As Rob mentioned, growth in neonatal screening has been impacted by funding constraints and improved inventory management as they last, which has had an unfavorable impact to the quarter.

In Optoelectronics, medical imaging grew low single digits. This business has been impacted by a pullback in our accrue capital expenditures for high end systems due primarily to budget constraints and a lack of access to acquire liquidity.

In Illumination, growth was in the mid-single digits, primarily due to strong demand for high performance Cermax and LED lighting applications. In centers, sales was up mid-single digits given by a strong growth derived from the last time buy lead to an expiring long-term optical centers’ contract partially offset by application in more economically sensitive areas.

Turning to gross margin, we saw about 90 basis points to gross margin expansion in Q4. This is driven primarily by the favorable impact of the ViaCell acquisition, favorable mixed and productivity gains.

Research and Development expenses were down by $1.8 million versus last year. Excluding the favorable impact to foreign exchange, research and development expenses as a percentage to sales were essentially flat as you can hear it drives a strong pipeline of innovative products, applications, and solutions.

Selling, general and administrative expenses decreased by $5.2 million versus prior year. Excluding the favorable impact to foreign exchange, SG&A expenses as a percentage to sales were especially flat year-on-year. This is driven by decreased in variable compensation and very tight cost controls offset by the impact of the ViaCell acquisition as that business carries a higher SG&A expense as a percentage to sales from the rest of our businesses.

GAAP Operating Profit was 14.5% of sales in Q4 of 2008 versus 10.3% in Q4 of 2007. On a non-GAAP basis, adjusted operating profit increased 320 basis points quarter-over-quarter to 18.1% of sales.

Looking at expenses below operating income, interest expense, net of interest income in Q4 of 2008 was $23.5 million as compared to net interest expense of $4.1 million in Q4 of 2007. In the fourth quarter, we incurred an expense of $17.7 million linked with discontinuance of industry hedge that was put in placed in conjunction with the ViaCell acquisition. The combination of the reduced need of capital and tight credit markets, lead us not enter to the long term debt application. Consequently, the hedge was discontinued in expense in the quarter.

Excluding this expense, net interest expense for Q4 2007 was up slightly from the prior year due to increased debt. Other income expense was $5.8 million in Q4 2008 as compared to $1.3 million in Q4 2007. Primarily lead to increased foreign exchange cost due to high volatility in the quarter.

GAAP EPS from continuing operations in Q4 of 2008 was $0.29 compared to $0.44 cents in Q4 2007. Adjusted EPS from continuing operations was $0.48 in Q4 2008 an increased of 15% over the prior year and within the range of our guidance for the quarter of $0.45 to $0.50.

In November 2008, the company announced that a portion of its Optoelectronic business was placed under strategic review. As a result of this review, we intended to divest these businesses, therefore the result of the operations of these businesses have been reported discontinued operations. Additionally, we’ve decided to exit certain product lines within the BioDiscovery business and we allocate resources to higher growth businesses. In Q4 2008, the impact of these discontinued operations noted above was an after tax expense of approximately $0.03, primarily lead to the write-off of inventory in the exited BioDiscovery product lines.

Turning to our balance sheet, we continue to maintain a very strong financial position. We finish Q4 with $330 million of net debt, which we defined as short and long term debt minus cash. We have excellent liquidity with a $179 million of cash in our balance sheet and approximately $290 million of undrawn availability under our revolving line of credit. We also have no mandatory maturities of debt until 2012 that leaves us in a strong financial position as we head in 2009.

Looking at the capital statement, during the fourth quarter of 2008, we generate operating cash flow from continuing operations of $93.8 million, which is an increase of 9% over the prior year. Our focus on working capital continues to yield results as we held our working capital turns flat year-on-year at 5.6 times in the quarter, despite extreme of pressures to extend terms due to current economic conditions.

In summary, we are very pleased with our financial performance for the quarter and the year, particularly in light of the slowing global economy and turmoil in the credit markets. Now let me outline our updated guidance for the full year of 2009 and Q1 2009.

As Rob mentioned, given the macroeconomic conditions and strong performance in 2008, we face difficult headwinds in all of our businesses in 2009. In particular, medical imaging, genetic screening and analytical sciences will be under pressure to grow revenue in the first half of 2009, giving a superior performance in 2008 and the top market condition to 2009.

Consequently, we believed that in 2009, revenue excluding the impact of foreign exchange and acquisitions, will be flat to down mid-single digits. In the second half of 2008, our pension obligations increased as market forces substantially lowered our pension assets. These increased obligations will result in approximately $5 million, an additional pension expense in 2009 versus 2008. In addition, in 2009 due to mixed (inaudible) carrying a high rate of interest, we expect interest expense to be approximately $3 million higher than in 2008.

As we relate to 2009 EPS guidance, we believed productivity initiatives and tight cost controls will offset any volume shortfall in potential mixed issues. But will not offset the incremental pension and interest expense mentioned above nor the current impact of the strong dollar. As a result, we believed that our earnings will be down to mid-single to mid-teens for 2009 as compared to 2008 including the impact of stock options spent in both periods.

As Rob mentioned, the first quarter will be particularly challenging for revenue growth and we can truly believe we could be down to mid-single digits. This will result in non-GAAP earnings per share to be down low to high-teens as compared to Q1 2008 due to the higher pension expense in interest that as well as foreign exchange.

Before I’ll open the call to your questions, I would like to note that in 2009, we’ll be including stock options expense into our adjusted earnings per share calculations.

I’ll now like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Quintin Laid with Robert W. Baird. You may proceed.

Quintin Lai - Robert W. Baird & Co., Inc.

Hi, good afternoon. As you were looking through the performance in the fourth quarter, was it a steady deterioration and could you give us a little color about , now that we’re a few weeks into January, what you’re seeing now and is that what’s giving you the few weeks of visibility that you have right now?

Robert F. Friel

Quintin, this is Rob. I would say it really varies by business, because we are operating in a couple of different end markets. It would be tough to characterize everything about the same. I would say probably in the Analytical Sciences’ end market, it was probably more gradual as the quarter went along. I would say, in probably medical imaging, it was more dramatic of a drop-off. As we mentioned service hasn’t really seen much of an impact from this. BioDiscovery, as Mike mentioned have a good quarter, and I would say probably on the Illumination and Detection side, it was probably more gradual. So it depends a little bit on what end markets and business you’re talking about.

Quintin Lai - Robert W. Baird & Co., Inc.

As you look at the range of expectations that you said for organic revenue growth, Rob, do you think that you captured some of a bad case scenario? I know you can’t say worst case scenario, but –

Robert F. Friel

So, I would say right now, we think it’s realistic and I would say we’re not assuming any recovery in the back half of the year. I would say we’ve assumed in this forecast that economic conditions don’t change, meaning they don’t get any better, but I would say they don’t get significantly worse. And of course we provide ourselves, I think enough range around that, that gives us some latitude that things could maybe deteriorate a little bit, but not I would say a significant downturn. So, I think it’s fairly realistic and we try to put some ranges around that will give us latitude to see a little bit of softness, but not I would say a significant change from where we are right now.

Quintin Lai - Robert W. Baird & Co., Inc.

With respect to your operating expenses and you’re trying to mention the cost controls, are there any other leverage that you have at your disposal in the event that things get a little tougher or how should we think about - ?

Robert F. Friel

I would say, first of all, clearly when we look at what’s happening from a volume perspective, we’re going to take costs out that are volume related. I think that’s something and we have done that. We’ve done some actions for example in the medical imaging area because that is going to be a lower volume. So first of all, I think from a volume perspective, those cost, you know, those come out and we’ve done those and we’ll continue to do those. On the overhead side, we continue to look at areas on the administrative side to just improve efficiencies and drive the productivity and then we continue to push those as well and we’ve got some plans as we look forward here in 2009. The area that we've been a little reluctant and I think we'll continue to be reluctant on is the areas of research and selling and marketing and what I'd like to do is try and preserve those as best possible and I would say if conditions stay about where they are now or maybe even get a little bit lighter than that, I think I would like to hold on to those. Of course, if we see a significant drop off, we'd have to take a look at that.

Quintin Lai - Robert W. Baird & Co., Inc.

The last question -

Robert F. Friel

I would say this plan that we've got for 2009 still assumes that our spending in R&D and our sales force is fairly flat year-over-year.

Quintin Lai - Robert W. Baird & Co., Inc.

And then with respect to the discontinued ops, what was the revenue contribution in the fourth quarter and then as we look forward - I know that you had a $0.03 drag because of an inventory issue, but the revenues that are being discontinued, do they have a positive margin?

Robert F. Friel

So, first of all, as you probably know, in the reported revenue we showed, the discontinued revenue is out.

Quintin Lai - Robert W. Baird & Co., Inc.

Right.

Robert F. Friel

Those businesses do make money, so they do have positive margins. Mike talked about the fact that because of the discontinue - and mostly in the biodiscovery product lines - we had an inventory write off and that's what generated the loss, not the operations from the business.

Quintin Lai - Robert W. Baird & Co., Inc.

Okay, so could you give kind of a ballpark of how much is being discontinued and then kind of the rough margins?

Robert F. Friel

Well, so what we've said previously is the businesses that are being discontinued on an annual basis is about $90 million. I would say Q4 was down a little bit from the annual run rate. But, that would give you a rough idea of what the revenue was in 2008 and operating margins, Mike, I don't know, what would you say sort of low double digits?

Michael L. Battles

I'd say so, yeah.

Quintin Lai - Robert W. Baird & Co., Inc.

All right. Thank you very much.

Operator

And your next question comes from the line of Derik De Bruin with UBS. You may proceed.

Derik De Bruin - UBS

Hi, good afternoon.

Robert F. Friel

Good afternoon.

Derik De Bruin - UBS

So, are you planning on giving us a fully re-stated 2008 income statement, balance sheet for the business exit and stock options just to make it a little bit easier since - otherwise people's numbers are going to be all over the place in terms of trying to figure out what the comps are.

Robert F. Friel

Yes, we are planning on doing that.

Derik De Bruin - UBS

Okay. Great. Tonight? You guys were pretty conservative when you were kind of giving your third quarter - on the 3Q conference call, going into 4Q - you were kind of conservative. Clearly, the markets slowed dramatically there. What was the one thing that really kind of was the biggest surprise to you during the fourth quarter and what you've seen so far? Was there one particular market that you just saw decelerate more rapidly than the others, just a little bit more color on that?

Robert F. Friel

Well, I guess it depends what timeframe. I would say relative to October, no, because when I looked at the Q4 results, it came in pretty much what we had thought, maybe even a little bit better.

Derik De Bruin - UBS

Okay.

Robert F. Friel

So, I would say by the time we are in October, I would say we weren't really surprised of anything we saw in Q4. If you go back a couple of months, I would say the area that I've been somewhat surprised in is the drop in the medical imaging end market because I think if you would have went back over the summer, while we realized that there could be softness in there, I think we've been a little surprised at how quickly that has dropped.

Derik De Bruin - UBS

Okay and what would be your type of first signs of falling in something of that market; follow the credit markets, for example and just start to see when things are moving there? How do you judge when demand might pick up again?

Robert F. Friel

So, in most cases, it's in discussions with our customers and that business we're really a components supplier to the GE's and the Siemens and the Electras of the world so, we're in fairly constant discussion with them because there is a fairly significant lead time to make these panels, so we have a fairly on-going dialogue with regard to what they're seeing from their end market.

Now, of course, they can be surprised as well, but basically, what we're looking is for some information from our end market, from our OEM customers.

Derik De Bruin - UBS

When you start looking at the cash flow in 2009, do you expect still to see free cash flow above net income and do you have some CapEx guidance?

Robert F. Friel

Yes, I think we would still expect to see free cash flow above net income. CapEx, Mike, what would you say for 2009?

Michael L. Battles

Forty million, maybe.

Robert F. Friel

Yeah, probably forty, maybe a little lower.

Derik De Bruin - UBS

Okay and you guys were presenting down at the maternal medicine meeting and I've gotten a number of questions from clients just wanting to know what you think about some of the new, non-invasive diagnostics that are out there; any opinion on those as those relate to your genetic screening business?

Robert F. Friel

So, I think in the pre-natal area, our view is that it's really not competitive with what we do. It's more of a diagnostic test as compared to a screening test, which is what we do. So, I think our view is that it's more complimentary of what we do, not competitive.

Derik De Bruin - UBS

Okay and have you also seen a slowing in terms of the international markets, in terms of adoption of new screening?

Robert F. Friel

We have not. Actually, we talked a little bit about the slow down in the U.S. We have not experienced that outside the U.S. and I think fundamentally, because generally, outside the U.S. it's more federally government funded and we're not seeing the pull back in those areas as much as we're seeing in the U.S., where, as I think you know, is more state-funded. So, we continue to see good growth outside the U.S. and we still see interest from countries either adopting testing or increasing the number of tests they're doing.

Derik De Bruin - UBS

Okay and final question: how exposed are you to the Pfizer-Wyeth acquisition - just a question on that - how much exposure are you there?

Robert F. Friel

No, I don't think it's a big exposure for us. Either one of those customers are not huge, so I don't think that's going to have a major impact on our '09 guidance or results.

Derik De Bruin - UBS

Okay. Thanks a lot, guys. I'll get back in the queue.

Robert F. Friel

Okay.

Operator

And your next question comes from the line of Isaac Ro with Leerink Swann, you may proceed.

Isaac Ro - Leerink Swann

Hi, guys. Thanks for taking the questions.

Robert F. Friel

Hi.

Isaac Ro - Leerink Swann

First question is just on the genetic screening. Could you maybe give us a sense of where you are in the revenues there U.S. versus international at this point?

Robert F. Friel

So, if you look at the newborn or genetic screening?

Isaac Ro - Leerink Swann

Oh, I'm sorry, newborn.

Robert F. Friel

Newborn is about 65% in the U.S., about 35% outside.

Isaac Ro - Leerink Swann

Okay and while I'm at it, how about the other half, the genetics?

Robert F. Friel

Well, when you look at genetic screening, of course, ViaCell is exclusively U.S., so that's why I asked the question. You really almost got to pull ViaCell out because that's 100% U.S. and then the remainder of the business still sort of follows that pretty closely. It's sort of maybe 60/40 or two-thirds/ one-third.

Isaac Ro - Leerink Swann

Okay and then on the ViaCell, it sounded like you guys were still pretty positive, but am I right in assuming that this is typically an out-of-pocket expense for customers that want this service?

Robert F. Friel

It is. You're right in assuming. It is an out-of-pocket expense and it has continued to do quite well. In the fourth quarter and in fact, if you look at all 2008, it grew double-digits on the top line.

Isaac Ro - Leerink Swann

Okay and then just switching over to medical imaging, I think GE said they saw a 30% decline in new orders in the fourth quarter, so I think you mentioned the larger lead times and so forth, so I'm just trying to get a color here. Could you maybe give us a sense of customer concentration that you have in the business. Do you have anyone that's more than 20 o 25% of sales? And secondly, how long do you think those order slow downs among your customers kind of trickle down over to you guys on the supplier side?

Robert F. Friel

So, keep in mind when GE says that they're down 30% in their imaging business, it's a much broader portfolio of products than what we serve into, so it would be MRI and CRT and other types of things and we're just really focusing on - with them - the radiology end market, which is really sort of an orphus or x-ray based and also their vascular area. But, generally, and when you think about our medical imaging business, it's less than half going to GE and then in that, there's a split between radiology.

Actually, radiology is still doing quite well because that has a tend to be a lower price point. It's really the higher end instrumentation and systems that go into oncology and vascular that we're really seeing the slow down.

Isaac Ro - Leerink Swann

Okay and then just on the buyback, I know that you guys had announced a buyback last quarter that was pretty significant and I'm wondering how we should think about pacing throughout the year for that buyback?

Robert F. Friel

So, in the fourth quarter we bought a million shares back and then I think, as we've said, both buybacks and acquisitions are appropriate uses of the cash. I would say slight preference to do acquisitions, but I think we look to both.

Isaac Ro - Leerink Swann

Okay, and then if you guys -

Robert Friel

We had a 10 million authorization and we used a million of that.

Isaac Ro - Leerink Swann

Okay. Got it. And then lastly, on the dynamics you're seeing, big picture, in the health sciences business, you mentioned services are still pretty good, but you're seeing some pressure on the actual product side, so how should we think about margins going forward? Is there a potential that you get a little bit of negative leverage on the margins when you net out the growth and services versus pressure on the products?

Robert F. Friel

Yeah, I think that's right, particularly on the imaging side, which is, not only a profitable business, but a high fixed cost business. So, I think we will see a little pressure on gross margins because even if revenue was flat, the mix with medical imaging and genetic screening, being a little soft, particularly in the first half of the year, and some of the other businesses offsetting that, I think there is a natural poor mix there.

But, I would say as you sort of look through 2009, we believe that the productivity actions we're taking can offset most of the volume and the mix issues let's say from an operational perspective. The fundamental reason that our EPS is down, let's say, greater than our revenue, is, I would say, non-operating things. Mike alluded to them a little bit. We have a little higher interest expense. We have a little higher pension cost.

As you can imagine, the pension assets did not perform well in 2008 and so we're seeing a little bit of a higher charge there and then, of course, assuming the FX rate stays where it is, we do have a little bit of an FX headwind going into 2009. And the combination of those is really what's driving the EPS growth down greater than the revenue.

Isaac Ro - Leerink Swann

Got it. Last one, just to follow up on Derik's question on the restructured units, when might we see those numbers? Would that be in the queue or maybe when you report first quarter?

Robert F. Friel

Well, I think Derik's question on the before and afterward stock options, I think that we can do tonight or quickly. I think the question of the numbers without the discontinued, the details behind that will probably be in the queue.

Isaac Ro - Leerink Swann

Okay. Thank you.

Operator

And your next question comes from the line of Ross Muken from Deutsche Bank. You may proceed.

Ross Muken - Deutsche Bank

Good afternoon, guys.

Robert F. Friel

Good afternoon.

Ross Muken - Deutsche Bank

Could you remind me the average cost for a consumer in the ViaCell business for the storage of cord blood?

Robert F. Friel

It's about $1800.

Ross Muken - Deutsche Bank

I know you saw stability in the fourth quarter, but how do you think of that relative to unemployment around 10% and pressures across the consumer from what we're seeing and obviously, the equity and just general macro weakness?

Robert F. Friel

I think this is a question that we sort of thought about for the last couple quarters because I think when we think about the impact or what sort of a recessionary environment would on PerkinElmer. We've gone through and most of the business, we can characterize pretty well either because we can look at a prior recession.

Of course, with ViaCell, we can't because it's a relatively new business.

Ross Muken - Deutsche Bank

Yeah.

Robert F. Friel

And I think that the question is always one argument is what you're suggesting which is when there's more pressure on consumers, either because of unemployment or just general economics, does this become one of those discretionary expenses that they don't do?

The flipside of that argument is this is a business that is not very well penetrated and where it is penetrated, it has a tendency to be at sort of the higher-income families. And so, generally, when we look at the families that are participating in cord blood storage, their combined salaries are normally six figures and above.

And so I believe what's happening is those people are less impacted by what we're seeing. Now, over time, it may creep into that strata as well, but I think that's what we're seeing right now is because it's not that significantly penetrated across the consumer base and it's really sort of at the higher income levels. I believe that's why we're still continuing to see decent growth.

Ross Muken - Deutsche Bank

I appreciate it and then on the research business, you're looking for sort of flat growth in screening. When you talk about that, is that inclusive of the automation business as well and then as you think about that piece, given the retrenchment, particularly at PhRMA, and the facility closures we're seeing, is it a mix of some of your newer cellular applications offsetting some of the old, traditional, high through foot screenings so on a net basis it's flat?

Robert F. Friel

Yeah, right. I think that's exactly what's happening. I think the shift into cellular, I think the shift — both from a reagent as well as instrumentation side. I think the other thing is we've been able to take some of our screening instruments that classically went into pharmaceutical and biotech and take them down into the academic markets where we are seeing some growth and we believe, will see some growth potentially with some NIH funding.

And so, it's a combination of moving into the cellular imaging side or cellular analysis side and better penetration in the academic markets and it's offsetting sort of flat to down in large PhRMA.

Ross Muken - Deutsche Bank

Okay and then lastly, on the safety piece, particularly the commentary around the industrial end markets, I think you said sort of down mid to high single digits, remind me again of the core end customer base there because that sort of seems relative to some of the capital equipment guidance numbers we've gotten from a lot of the traditional industrial customers a bit optimistic so, I just want to get a sense for the mix there and how you came to that.

Robert F. Friel

So, let me straighten out the classification. So, the food safety is in what we would call safety and security.

Ross Muken - Deutsche Bank

Right.

Robert F. Friel

And I think that's going to be down sort of like mid-single. When I go into pure industrial, I think what I said there was sort of high-single, low-double.

Ross Muken - Deutsche Bank

Okay.

Robert F. Friel

So, I think what I'll call the pure industrial side, I think they are going into some pretty tough headwinds because they're getting both the credit and the cost reduction. And so I think that's going to be, like I said, high-single, low-double and those are the end markets that are semi-conductor, general industrial, like oil analysis, oil and gas, those types of things. And I think they will have a difficult time.

Ross Muken - Deutsche Bank

And this is only sub 10% of the business?

Robert F. Friel

It's about 10% of our revenue.

Ross Muken - Deutsche Bank

And that's with food or without food?

Robert F. Friel

That's without food.

Ross Muken - Deutsche Bank

Okay, that's what I thought. All right, I appreciate it, guys. Thanks very much.

Robert F. Friel

All right.

Operator

And your next question comes from the line of Peter Lawson with Thomas Weisel Partners. You may proceed.

Peter Lawson - Thomas Weisel Partners

Well, just continuing on the theme of the industrial business, are there any plans that divest that and what's the rationale for keeping it within the franchise?

Robert F. Friel

Well, the answer is no because it's really a separate business. It really is where we have existing products that are going into let's say either food and environmental and we can in addition, sell them into the industrial end markets. So, there's really no core products that are going necessarily into industrial.

For example, it might be an ICMMS that's being sold into an environmental lab that we can also sell into a semi-conductor for analysis of incoming raw materials.

Peter Lawson - Thomas Weisel Partners

And it's easy to transfer the sales force to a different end market?

Robert F. Friel

Yeah, because it's really sold on the technology. Now, I think as we move more and more to application based, we'll sort of sort that out, but fundamentally, what they're doing is selling the product features and the technology.

Peter Lawson - Thomas Weisel Partners

And then, Rob, I may have missed it, but the divestitures in the biodiscovery, what were those businesses, the sizes and the potential contribution in EPS.

Robert F. Friel

Yeah, they were fundamentally around proteomics and genomics. There were some scanners and the ray scan and those types of things, which is a market that we've sort moved away from and, as I mentioned before, we're really trying to focus in probably three key areas in the biodiscovery area, which is on the cellular analysis side, on the really sort of biochemical screening and then the sort of detection and automation.

Michael L. Battles

There's only about six or seven million of revenue for the year for those divested product lines.

Robert F. Friel

Yeah, it's a relatively small piece.

Peter Lawson - Thomas Weisel Partners

And it's corporate average margins?

Michael L. Battles

I'd say a little less than that. I'd say a little less than that.

Peter Lawson - Thomas Weisel Partners

And then, just finally, what's driving the expectation of growth in that biotech and NIH market for you?

Robert F. Friel

In the biodiscovery area or specifically, biotech?

Peter Lawson - Thomas Weisel Partners

In biotech and NIH market. You kind of said that —

Robert F. Friel

Well, I think on the biotech side, we are seeing some good opportunities there to continue to get our reagents and our imaging equipment into that and I would make a distinction between large biotech and small biotech. I think clearly, the small biotechs are having problems from a funding perspective but, I think on the larger biotech side we are seeing some opportunities to grow there.

And I think in the academics areas, we are starting to see some increased discussions and maybe driven by the anticipation of getting some funding from the government stimulus package.

Peter Lawson - Thomas Weisel Partners

Okay. Thank you so much.

Operator

(Operator Instructions). And we do have a follow-up question from Quintin Lai with Robert W. Baird. You may proceed.

Quintin Lai - Robert W. Baird & Co., Inc.

Thanks for taking my follow-up. Going back to the ViaCell, considering that you can only harvest the cord blood at the birth of the child, it's not really discretionary because there's no chance to go back and do it again is it?

Robert F. Friel

Well, that's true. You only have one shot to do it. I just meant from a discretionary, from a spending perspective.

Michael L. Battles

From a decision-making perspective.

Robert F. Friel

From a decision-making perspective, but you're right. If you don't do it at the birth, you sort of lose that opportunity.

Quintin Lai - Robert W. Baird & Co., Inc.

Right. With respect to the sell of your discontinued operations, given the macroeconomic backdrop, do you think that maybe the window of opportunity is kind of closed now and if so, if you could do it all over again, that $90 million, by my rough calculations, is about $0.06 of EPS that went away.

Robert F. Friel

So, you mean, would we have put in discontinued?

Quintin Lai - Robert W. Baird & Co., Inc.

Exactly.

Robert F. Friel

So, first of all, so I would say, is this a great time to be selling assets? No. I think it would have been a better time maybe 12 or 18 months ago. Having said that though, I think the important thing we wanted to do was get focused on this environmental and human health because I think that was an important initiative we wanted to get across the company and reorganize the company and quite frankly, those businesses didn't fit.

I still think it is saleable. I still think it's a fairly attractive asset or are attractive assets and I think we have people interested in them. Will we maximize the value for them in this environment? Probably not.

Quintin Lai - Robert W. Baird & Co., Inc.

Thank you.

Operator

And you have an additional follow up question from Derik De Bruin with UBS. You may proceed.

Derik De Bruin - UBS

Hi, I have a follow up, I guess. If you do manage to sell the assets, what's your - when you sold the food sciences business, you went in and paid down debt and bought back shares. That is similar use of cash if you don manage to sell these assets?

Robert F. Friel

Yes, I think that's right and just for clarification, we have not assumed any proceeds in the 2009 forecast. Not that it would be that significant, but we've assumed in our 2000 plan that we don't get those proceeds.

Derik De Bruin - UBS

And what's your assumption for buybacks in the year? Share buybacks.

Robert F. Friel

From what perspective?

Derik De Bruin - UBS

In 2009. Is your EPS guidance, is that kind of your lever for the wiggle room in terms of —

Robert F. Friel

Yeah, our 2009 guidance assumes shares are flat.

Derik De Bruin - UBS

Oh, okay.

Robert F. Friel

And as you know, we always have some leakage on stock programs, so we assume that we would keep those flat.

Michael L. Battles

We ended the year about 115.8 shares outstanding.

Derik De Bruin - UBS

Okay. Great and the pro forma EPS number all the way in, including options is a buck 39 for 2008 correct?

Robert Friel

Yes.

Derik De Bruin - UBS

Okay, just making sure, so all right, thanks.

Operator

And there are no additional questions at this time. I'd now like to turn the call back over to Mr. Dave Francisco for closing remarks. You may proceed, sir.

David Francisco

So, we're pleased with our performance in 2008 as we talked about, but clearly, it's a much more difficult global economic environment and where I believe strong operational execution and a relentless focus on our customers will be the key to doing well.

We believe we have the operating disciplines, the technical competencies, the financial strength and probably most importantly, the organization to exit the current environment much stronger than how we entered and we look forward to updating you in April on our progress in the first quarter.

This call is now adjourned and have a great evening.

Operator

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

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Source: PerkinElmer Inc. Q4 2008 Earnings Call Transcript
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