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PerkinElmer, Inc. (NYSE:PKI)

Q2 2009 Earnings Call

July 30, 2009 05:00 PM ET

Executives

David C. Francisco - Vice President, Investor Relations and Treasurer

Robert F. Friel - Chairman, President and Chief Executive Officer

Frank A. Wilson - Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Analysts

Ross Muken - Deutsche Bank

Jonathan Groberg - Merrill Lynch

Quintin Lai - Robert W. Baird

Isaac Ro - Leerink Swann Llc

Robert Hawkins - Stifel Nicolaus

Peter Lawson - Thomas Weisel Partners

Derik De Bruin - UBS

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2009 PerkinElmer Earnings Conference Call. My name is Michele. I will be your coordinator for today's conference. At this time all participants will be in a listen-only mode. We will conduct a question-and-answer and session towards the end of this conference. (Operator Instructions).

At this time I'd like to turn the call over to your host for today's conference, Mr. Dave Francisco. Please proceed, sir.

David C. Francisco

Thank you. Good afternoon and welcome to the PerkinElmer Second Quarter 2009 Earnings Conference Call. I am Dave Francisco Vice President of Investor Relations and Treasurer for PerkinElmer. 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 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 August 13, 2009.

Before we begin, we need to remind everyone of the Safe Harbor statements that we've 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 that we use non-GAAP financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly.

I'm now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel.

Robert F. Friel

Thank you, Dave. Good afternoon, I appreciate your joining us this afternoon for our second quarter 2009 earnings call. We are quite pleased with our financial performance in the second quarter and are encouraged by our ability to continue to execute successfully in this difficult economic environment.

While our revenue declined in the quarter, we are able to expand adjusted operating margins, generate very good cash flow and exceed our EPS guidance. In addition, we continue to introduce new products and expand into adjacent markets, both our product and service offerings.

During the second quarter, we launched our New BACS on Beads technology for targeted molecular carrier typing used in prenatal testing, announced the acquisition of Analytica of Branford, which further enhances our mass spectrometry capabilities and expanded our research range of offerings with new AlphaLISA panels and expanded GPCR cell lines.

We also increased our commitment to the Indian market with the opening of a new service training and logistics center in Mumbai. Across our entire portfolio, I believe we are striking the appropriate balance between implementing cost reduction actions while maintaining a focus on innovative solutions for our customers. While Andy will get into more detail about our financial results in the quarter I will walk through each of our major end markets.

Our Human Health business represented 43% of our revenue in the quarter and organic revenue contracted at a low single-digit rate. This business is primarily focused on developing screening and diagnostic tools and applications to fight disease earlier, provide medical insights more accurately and create critical new therapies more quickly.

Within Human Health we serve two end markets, Diagnostics and Research, which represented approximately 26% and 17% of our revenue respectively in the second quarter.

Our organic revenue from our Diagnostics business declined at a low single-digit rate in Q2, with screening growing at a mid single-digit rate and medical imaging down over 20%. The solid growth performance in our genetic screen business was driven by continued expansion of neonatal screening, particularly in Asia as well as strong growth in prenatal screening.

Our cord blood business grew at a mid single digit rate in the quarter. Despite some pressure of many state budgets, we anticipate that screening will continue to perform well in the second half of 2009.

In our Digital Imaging business high end, system orders continue to be deferred due to lack of financing and ongoing hospital constrain on capital expenditures. We continue to broaden our offerings with new OEM partnerships and non-medical applications to help offset the softness in our traditional medical application end markets. However due to the long lead time required for design into these systems, we do not expect to see much benefit from these efforts until 2010.

Looking ahead to the balance of 2009; we now expect this market to remain heavily constrained and believe our Diagnostic Imaging business will be down more in the second half of this year then it was in the first half.

Our research business provides a broad suite products, reagents and software designed to improve the drug discovery process. In the second quarter, our research business organic revenues declined in a mid single digit rate. We've seen the research market in Pharma spending stabilized. However, during the quarter, we did experience stimulus related order delays in the academic sector as many of our academic customers are redirecting their budgets in hopes of obtaining grant monies for larger instruments purchases.

For the remainder of year, we believe that the research market will provide solid mid-single digit growth as funding initiatives from various government stimulus packages are finalized and directed towards specific areas of research.

In addition, we believe cellular imaging and cell-based reagents will be areas of increased investment by both our academic and biopharma customers. Environmental Health business represented 57% of our revenue in the second quarter and organic revenue contracted at a low double-digit rate. This business provides a number of applications and technologies that improve and protect the surroundings and environment in which we live and addresses the laboratory services, environmental, safety and security and industrial markets.

Our lab services business represented approximately 21% of our revenue and organic revenue grew at a low single-digit rate in the quarter. This business continue to be driven by very strong growth in our multi-vendor one source offering, where we once again added a number of new programs in the quarter. This growth was partially offset by maintenance deferrals and lower pull through service related to instrument sales such as qualification and training.

We believe the laboratory service business should continue to perform well for the remainder of 2009, as large customers move to suppliers that support all aspects of their business and the growing need for instrument qualification to restrict their regulatory requirements.

The environmental market represented approximately 18% of our revenue in the quarter and organic revenue contracted approximately 20%, Private environmental testing labs continue to be constrained by tight capital budgets. This constraint appears to be most acute with our smaller customers, who continue to have difficulty accessing credit, causing them to extend the life of their existing equipment.

An area of offsetting growth however is the production and analysis of renewal energy development in both UV-Vis technologies and LED products. As we look to the second half we're assuming our customers will continue their cautionary bias. However, longer-term we believe regulatory requirements for lower detection limits on new and existing contaminants as well as the identification of new contaminants will drive demand for our product offerings.

Safety and security represented 10% of our revenue in the quarter and organic revenue declined at a high single digit rate during the second quarter. Consumer safety laboratories are beginning to ramp up their testing capabilities in preparation for new consumer safety regulations requiring lower detection limits, which are expected to go into effect in August.

While food safety laboratories in developed regions are tightening their budgets for traditional technologies and being very selective in their capital investments, increased regulations in developing regions are driving strong growth, particularly in China. Our components offerings primarily used in fire intrusion alarms continue to be negatively impacted due to the decline in commercial and residential constructions.

Moving to the second half, we anticipate that construction related spending will continue to be impacted by recessionary pressures, but food and consumers safety will provide some offsetting demand in key technologies. Industrial market represent approximately 8% of our revenues in the quarter and organic revenue declined over 20%. These markets which principally include polymers, chemical, petrochemical and semiconductor end markets continue to be severely impacted by weak industrial spending.

We continue to see a sharp decline in traditional chemical and semiconductor markets as CapEx spending remains limited. We expect that due to economic conditions and cautious consumer spending, industrial purchasing will continue to be down significantly through the remainder of 2009.

Before I turn the call over to Andy, I would like to discuss our adjusted earnings per share guidance for the full year. During the first half of this year, the majority of our businesses performed as expected or in some cases better than forecasted at the beginning of the year.

Our Medical Imaging business is experiencing greater contraction than expected. As I mentioned previously we now believe that it'll decline more in the back half of the year than the first. In addition, due to a shift in the geographic distribution of our income we currently believe that our tax rate will up significantly over 2008 and our 2009 plan. Consequently we do not think it is appropriate to maintain the higher end of our original guidance for adjusted EPS and are narrowing our full year guidance to $1.18 to $1.24 from a $1.18 to $1.32.

I will now turn the call over to Andy.

Frank A. Wilson

Thanks, Rob and good afternoon everyone. I'll now provide some additional color on our second quarter financial performance as well as provide guidance for both the third quarter and the full year. After my prepared remarks we'll then open up the call for questions.

Before moving to the financial details I'd want to clarify that whatever I talked about particular measure being up or down I am referring to an increase or decrease in that measure during the second quarter of 2009 compared to second quarter of 2008.

To the extent I use any non-GAAP measures, those measure have been reconciled to the comparable GAAP measure and the financial table of the press release have been posted on our website.

As Rob mentioned earlier, we executed well in the second quarter, showing a solid earnings and cash flow performance despite that top line changes we experienced in a very difficult global economy. Revenue for the quarter was down 14%. The unfavorable impact of foreign exchange was 6%, the favorable impact of acquisitions was 1% therefore our organic revenue was down 9% versus the prior year.

The remaining revenue analysis in my prepared remarks will be presented excluding the unfavorable impact of foreign exchange and the favorable impact of acquisitions.

By segment, organic revenue declined by 4% and 13% in Human Health and Environmental Health respectively. On a regional basis, organic revenue in the Americas declined at the high single-digit rate. Europe declined low double-digits and Asia declined mid single-digits. Within Asia we saw robust growth in China offset by continued pressure in a number of other emerging territories. But many of our markets remain challenging.

Adjusted gross margin expanded to 60 basis points in the second quarter, driven by favorable impact of mix as we experienced relatively good performance from our higher margin product offerings. In addition, we have managed our direct labor cost through restructuring actions taken in the first quarter and driven strong productivity gains through aggressive supply chain actions.

Adjusted research and development expenses were 25.1 million or approximately 6% of sales in the quarter as we continue to fund the development of innovative new products applications and solutions. Adjusted selling, general and administrative expenses decreased by 18.1 million versus the prior year.

SG&A expenses were up as a percentage of sales by approximately 30 basis points as compared to the second quarter of 2008 of which foreign exchange contributed 20 basis points. Successful cost initiatives and lower compensations costs in the quarter were offset by higher pension expense and the funding of strategic investments in our higher growth geographies.

GAAP operating profit was 37.9 million in the second quarter of 2009 versus 44.7 million in the second quarter of 2008. On a non-GAAP basis, adjusted operating profit was 52.2 million versus 59.6 million in the second quarter of 2008 which as a percentage of sales represents an increase of 20 basis points year-over-year to 12%.

Interest expense, net of interest income for the second quarter was 4.1 million as compared to 4.9 million in the second quarter of 2008. This decrease was primarily due to lower interest rates on outstanding debt balances. In the quarter we had an effective tax rate of 32% on a reported basis which was approximately 650 basis points higher than the prior year.

This increase is due to year-over-year shift in the geographic mix of income as our businesses that are experiencing the most significant economic pressure generally have manufacturing facilities in advantageous tax jurisdictions. Although we expect our tax rate to normalize as the economy recovers, the effective tax rate for the second quarter 2009 resulted in the unfavorable impact in the quarter of $0.02 per share over the prior year.

GAAP EPS from continued operations in the second quarter of 2009 was $0.20 compared to $0.25 in the second quarter of 2008. Adjusted EPS from continuing operations was $0.28 in the second quarter of 2009, down 15% from the prior year. This is above our guidance range for the second quarter of 25 to $0.27 and ahead of our stock consensus estimates of $0.27.

Regarding share count, we had 116.3 million average diluted outstanding shares in the quarter, which was essentially flat sequentially.

Turning to balance sheet, we continue to maintain a very strong financial position. We finished the second quarter with approximately 373 million of net debt, which we define as short and long-term debt minus cash. This reflects a sequential reduction in net debt of 9 million in addition to the 30 million of reduced outstanding borrowing related to termination of our account receivable securitization program. We made the decision to terminate this program in the second quarter, as we believe we have sufficient liquidity available from the existing sources which were at significantly lower borrowing cost.

At the end of the quarter, we had approximately 151 million of cash and approximately 260 million of un-drawn availability under our revolving on credit with no mandatory maturities due until 2012.

Looking at the cash flow statement in the second quarter of 2009, operating cash flow from continuing operations was 39.4 million as compared to 71.9 million in the second quarter of 2008. As we previously mentioned our second quarter 2009 performance was impacted by the termination of our account receivable securitization program which reduced operating cash flow by $30 million.

As discussed in the first quarter call, while this is essentially a financing transaction, accounting standards requires us to treat the net changes in the program as operating cash flows. Therefore our adjusted operating cash flow from continuing operations was 69.4 million in second quarter of 2009 representing a modest decline of 3% over the same period last year.

Working capital returns were essentially flat year-over-year. Our continued focus on working capital has minimized the impact of the external pressures on commercial terms due to current economic conditions.

In summary we're pleased with our financial performance for the quarter, particularly in light of a very difficult global economy. Let me provide further detail on our guidance. Despite exceeding expectations for the first half of 2009, we feel as prudent to moderate our full year guidance range due to a number of factors.

As Rob mentioned while we continue to see stabilization and solid growth across much of the portfolio including our screening research and service markets we now believe the economic challenges we face in Medical Imaging and industrial end markets will be more protracted than originally anticipated. Ongoing capital spending constrains in these markets continues to negatively impact demand.

For the second half of 2009 we did not see a significant in these factors and therefore we expect organic revenue to decline in the high single-digit in the third quarter and the mid to high single-digit in the fourth quarter. As a result, we now expect our full year organic revenue performance to be at the low end of our original 2009 guidance range or down mid single-digits.

Mitigating much of the top line decline as an expected favorable sales mix and improved foreign currency environment and a reduction in labor cost due to additional head count reductions, already completed during the third quarter. Additionally we expect our distribution of income to be generally consistent with the second quarter through the remainder of the year and therefore we are estimating our effective tax rate to be approximately 30% in the second half of 2009, representing additional head winds for the balance of year earnings guidance.

Bringing all these factors together we're narrowing our full year adjusted earnings per share guidance range for 2009 from $1.18 to $1.32 to a new range of $1.18 to $1.24. Adjusted earnings per share for the third quarter is expected to be in the range of $0.25 to $0.27.

In conclusion we're pleased with our financial performance in the first half of 2009. As Rob mentioned, our employees have executed extremely well in a very challenging environment. As an organization we've maintained a strong focus on the priorities we set at the beginning of the year and have performed well against those objectives. As we mentioned, we remain focused in the long-term, we've maintained that focus throughout this economic downturn.

We fully expect that based on this commitment we will emerge a stronger company as the economy recovers. And now I'll turn the call over to Dave.

David C. Francisco

We would like to open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Ross Muken with Deutsche Bank. Please proceed.

Ross Muken - Deutsche Bank

Good afternoon.

Robert Friel

Good afternoon Ross.

Ross Muken - Deutsche Bank

As we look at sort of the top-line I wanted to dig into a few things so as we look at sort of the sequential progression now, I understand on the industrial side where in, on the panel have sort of we saw that deterioration there that's fairly consistent with what we seen with other companies and some of other business units whether it's research or diagnostics end of services we saw a relatively drastic deceleration Q-over-Q has that made you think at all differently about sort of how the days impact affected you in Q1 and in turn when we will have sort of reversal in Q4 or was there something else going on in some of these business units. I know you noted some of the maintenance part of services, but some of the kits and some of the other consumable pieces that cause kind of a relatively drastic kind of flip?

Robert Friel

Yes let me take them sort of one at a time. So I think in the service instance, it was probably the days benefit in Q1, I think we sort of mentioned than in Q1 we thought 11% was probably high and we thought it was probably a mid to may be high single digit growth otherwise. And that's pretty much what we saw in Q2. And just to remind you this doesn't slip for us in Q4. So this is not a situation where we put days in Q1 and it reverses in Q4.

Ross Muken - Deutsche Bank

Right, you have one day left.

Robert Friel

We just have extra days because we are on a fiscal calendar. But then we saw -- I think services, the performance here is been fairly consistent. And I think if you look at Q1 growth versus Q2 growth it's probably just the extra couple of days we had. In the case of biodiscovery, it was really more of a I would say it was two factors. One, it was a function of Q1 and Q2 '08. And I think we tried to mention last quarter. I don't know whether we were sort of specific as our people understood as well. But if you looked at Q1 '08, we were down 7% in Bio-discovery and we grew low double-digit.

So, we had a significant improvement and that was a big driver to the fact that we were flat in Q1. If you look at Q2 of '08 Bio-discovery grew 8%. And so in 2008 we went from minus 7 to plus 8 from Q1 to Q2.

And we suspected that was going to be an issue and that's why we guided in Q2 to sort of mid down mid single, I think we're sort of guiding to sort of down 5%. Now having said that I think Bio-discovery was a little lower than we thought, fundamentally because we believe some of our academic customers did delay some instrument purchases to in order to qualify them under the stimulus package.

So, I would say Bio-discovery was little lower than we thought but not significantly. And in fact if you look at the business by instrument and reagents and service you see the consumer reagents and service actually up low single-digits and you look then the instrument businesses is down quite significantly, sort of down single-digit. And so my sense is in Bio-discovery what you will see is a return to more positive growth in the back half, even though having said that we some difficult comparisons as well. I believe in the third quarter of '08, bio-discovery was up mid teens. So I think it's really more of a function of looking at what happens in '08.

Ross Muken - Deutsche Bank

Okay. And now on that panels business, obviously that's been a market, that's relatively volatile for some time and it has been deteriorating, so maybe you built out capacity, 24 months ago. We ramped up. Now we are going through a bit of an industry contraction. I realize the top line is going to be constrained. How should we think about that relative to the margin profile and what that's going to do to sort of constraining some expansion across the segment?

Robert Friel

Well, I think it puts a lot of pressure on us in the back half. I think, very frankly in the first half the business did a good job of taking the cost out as much as they could. To offset what we saw was probably about a 20% decline in the first half and they did a nice job of holding their margins in there. I think and as I mentioned we're going to see probably another step down here in the back half. It's going to be much harder to take the cost out than we did in the first half. So I think it will have an impact on our margins. And that's probably one of the bigger contributors to the fact that in the back half of the year, we do not expect to see margin expansion while in the first half we're able to, despite the revenue decline.

Ross Muken - Deutsche Bank

Okay. And then lastly on the tax rate, it's a pretty big delta from what the original expectation was. So sort of what happened, was it in the planning process, I mean was there something that drastically changed in Q2 from a mix perspective, I'm just trying to understand.

Robert Friel

Yeah I think in fact if we look at the first half we saw some of it in Q1 but it was confirmed in Q2. So, I think probably the easiest way to think about it this is we probably got 40% of our income, that is generated in tax advantaged areas, in most cases this is the far east. And that has now gone through instead of being 40% of our income, being more like 30% of our income. Because while our income has been about the same, it shifted from businesses that do their production in Asia to businesses that don't do their production in Asia.

So that 10% shift, if you look at the tax rate differential between where we have sort of advantages rates, it's about 20 points. So it's driving our tax rate 200 basis points relative to the plan. And if you look year-over-year its even more than that.

Ross Muken - Deutsche Bank

But I guess just relative to what you saw in Q1, while that adjustment wasn't done that, I guess it's just because if you got to confirm the Q2 and now you have to adjust back half?

Robert Friel

That's right. And then also keep in mind we were flat in Q1 and down nine in Q2. And along that further segregation of revenue within business is like analytical instruments and elimination and detection and quite frankly that's where a lot of the production occurs in the tax advantaged areas.

Ross Muken - Deutsche Bank

Okay, great. Thank you, Rob.

Robert Friel

Thank you.

Operator

And our next question comes from the line of Jon Groberg. Please proceed.

Jonathan Groberg - Merrill Lynch

Hi, good afternoon thanks for taking my call.

Robert Friel

Good afternoon.

Jonathan Groberg - Merrill Lynch

Hey Rob, if I look at the guidance, just kind of walk through from the EPS through the end of the year, it looks like, are you expecting to take maybe some more restructuring charges or those just the ones you took in the first half or is there any more restructuring given kind of...

Robert Friel

We've done some things already in Q3, that will flow through, but that's not reflected in the sort of adjusted guidance.

Jonathan Groberg - Merrill Lynch

There was just an adjustment for restructuring charges. So that's not in the guidance, so you maybe even being a little bit more aggressive on the restructuring. Is that what you are saying?

Robert Friel

Not clear what your question was here maybe on relative to...

Jonathan Groberg - Merrill Lynch

Relative to the guidance that you provided in your press release, are you planning any more -- is there opportunity for are you planning any more restructuring?

Robert Friel

No, not more then what we've done already. As I mentioned we've done some early this quarter. But that's factored into the guidance.

Jonathan Groberg - Merrill Lynch

Okay, that was what I was after and then if you look at -- it sounded like you remained fairly positive still on the Bio-cell business but that was hanging in there okay?

Robert Friel

I think that's right. I think we looked at actually for the first half we still did double-digit, down a little bit in Q2 relative to Q1 but we're still a double-digit growth rate.

Jonathan Groberg - Merrill Lynch

You said mid single-digits in the second quarter?

Robert Friel

Mid single in the second, right.

Jonathan Groberg - Merrill Lynch

Now if you grow mid single-digits for that, I know there was a potential for lot of gross margin leverage in that particular business if you could walk through, does it change, is your assumption is there kind of mid single-digits or that you kind of...

Robert Friel

Yeah, I think that's right for the back half and to your point is we can still get good margin expansion there just -- and I think I mentioned as first quarter by itself is now at a higher operating margin level than the corporate average.

Jonathan Groberg - Merrill Lynch

So if you even if that slowed down a little, you still are going to continue to get that leverage?

Robert Friel

Yes.

Jonathan Groberg - Merrill Lynch

Okay. And then can you just talk lastly about on the actual new needle screening I know that was maybe a concern given state budgets but it seems like you're feeling a little bit better about that, can you maybe just tell us about that?

Robert Friel

Yeah, I think that did okay in the quarter and was sort of like mid-single was a new born screening and I think as we get into the latter part of the year, I think that's going to return to sort of a high single low digit growth.

Jonathan Groberg - Merrill Lynch

And then the confidence, what is -- I just remember before you're saying you're little worried about budgets and so what gives you the confidence in that?

Robert Friel

Yeah. I think we're starting to see some of that lighting up a little. And if you recall, I mentioned toward the end of year there was some destocking of reagents that was going on. I think we're through that cycle. And we're also seeing some good growth in Asia than I mentioned, I mean both China and Korea, granted although relatively low base or we’re up over 20% and we're starting to see opportunity to expand in that region in the world.

Jonathan Groberg - Merrill Lynch

Okay. And then last question any business that you want to try and sell, any progress there, what's kind of outlook with those businesses?

Robert Friel

No, I think they continue well. We've got a couple of people looking at them. And my expectation is we should be able to close something by the end of the year.

Jonathan Groberg - Merrill Lynch

Okay. Thanks a lot.

Robert Friel

Okay. Thank you.

Operator

And our next question comes from the line of Quintin Lai of Robert W. Baird. Please proceed.

Quintin Lai - Robert W. Baird

Hi, good afternoon.

Robert Friel

Good afternoon.

Quintin Lai - Robert W. Baird

When looking at how use up the outlook for the back half of the year. So on the industrial side, you kind of mentioned that you're not expecting much on the chemical side. When that business starts to come back, is there a lag effect for your equipment, so I guess, we have to wait for visibility for that before we then begin to see visibility for a return for you guys?

Robert Friel

I think so my own view is the longer that the sort of delayed capital expenditures occur, the more rapid increase should be because as you know these are -- these things do sort of either wear out or become technologically obsolete. So we can't sort of defer forever here.

Quintin Lai - Robert W. Baird

Okay.

Robert Friel

But I think that's I would say that's both on the instrument side as well as the component side

Quintin Lai - Robert W. Baird

And then with respect to your expectations in the back half for food, safety and water; there are several initiatives like tomorrow there is going to be a special BNDC for food safety. What are you're expectations and as you set your expectations, does that bake into any some of these new initiatives that are being circulated on the whole?

Robert Friel

Yes, so I would say generally speaking and you probably get the sense we've got fairly modest expectation for the back half of the year. And while you can sort a see a line of information in the media that would suggest that the back half is going to be stronger, in fact I saw I think in NewsWeek that said the recession is over.

I would our underlying data, our orders and our leads would not sort of suggest that right now. Granted, I don't know if anybody's visibility is great. But so I guess our position is sort of rooting for the media but sort of planning based on the data that we're looking at.

Quintin Lai - Robert W. Baird

All right. Then...

Robert Friel

And so we're being fairly I would say maybe conservative but maybe realistic on the back half. I'm not assuming much pick-up in either the industrial markets, clearly not the medical imaging markets and probably not significantly on the environmental markets.

Quintin Lai - Robert W. Baird

All right. Superb. And then finally, just would love to get your thoughts as much as you can share on consolidation given the news earlier this week about agile in variance?

Robert Friel

Yes, so I would say first of all, I know its part not appropriate to come on sort of a pending transaction. But I would say generally when you think about sort of the analytical instrument industry, you really compete there I would say on level of service, quality of product offering and probably application knowledge and I would say we feel pretty good about our position in those areas. And I will just sort of leave it at that.

Quintin Lai - Robert W. Baird

All right. Thanks.

Operator

And our next question comes from the line of Isaac Ro with Leerink Swann. Please proceed.

Isaac Ro - Leerink Swann Llc

Hi. Thank you for taking the question.

Robert Friel

Hi Isaac.

Isaac Ro - Leerink Swann Llc

First one on medical imaging, the initial proposals for CMS reimbursement suggested that we might feel little more pressure on reimbursement for various medical imaging applications.

So I'm wondering is a low environment may be heading to next year, based on your assumptions for that business and are you looking for sort of any changes there that might impact demand for your products relative to just -- CapEx pressures?

Robert Friel

I would say at this point, we are focused probably year on the next six months and may be the early part of 2010 from sort of production loading perspective and I would say that's not really been factored into yet, quite frankly because we are not at the stage now, we are sort of thinking about how we would lower the fab for 2010. And obviously that will be a consideration.

I would say right now as I mentioned it just seems that the demand generally for the imaging instrumentation is down quite significantly and I think it's a combination of pressure on hospital budgets and the continued lack of financing available.

So it's probably -- those issues are probably a little bit outside our planning horizon, right now.

Isaac Ro - Leerink Swann Llc

Fair enough. Okay, and then if we just switch over to the one-source services business, if I remember correctly you guys had a huge second quarter '08 there. So is it fair to say that lower growth rate, I think you said, mid to low single-digits, I believe was down a function of a tough comp and could we may be see a better a restoration in the growth rate there for the back half?

Robert Friel

Yeah, I think that's fair. I mean I think across the company, if you recall, we were 10% organic in Q2 of '08 and there is a number of businesses that did quite well. So I think that's clearly have some impact on our Q2 and I think we would expect service to be up a little stronger in the back half.

Isaac Ro - Leerink Swann Llc

Great. Okay. And then if I think you might have in any of these comments that made some cost reductions here initially in the quarter and I think you said that we could see flat sequential operating expenses, is that what you said?

Frank Wilson

Yeah, that is correct.

Isaac Ro - Leerink Swann Llc

Okay. Those were all my questions, I appreciate it.

Robert Friel

All right. Thank you.

Operator

And our next question comes from the line of Derik De Bruin with UBS. Please Proceed.

Derik De Bruin - UBS

Hey, good afternoon.

Robert Friel

Hi Derik.

Derik De Bruin - UBS

Hey. So going to the services business, I means did if I remember correctly and I'm not going to be wouldn't you -- did you guys have like a pretty big contract we're sharing and are you expecting any -- have you fully encountered for the big pharma consolidations with your outlook?

Robert Friel

Yeah, actually we think at least the pharma consolidation that occurred so far is actually been -- will be helpful to us. And so I think if anything we think to move towards consolidation is placed well into service business, not only from one source perspective but as you recall about a year and half ago, we invested in sort of relocation and recalibration company.

And so we're not only giving, we think growth from the standpoint of as these companies consolidate, they're looking to do more this type of work, but also the actual consolidation of the spaces actually providing growth for us.

Derik De Bruin - UBS

Right, I got it but do you have -- have you received words from the consolidating companies that they are going to continue on the contract?

Robert Friel

Yes.

Derik De Bruin - UBS

Okay. That's what I was going for, thanks. So what's your estimate for these FX impact in the second half in Q3, Q4?

Robert Friel

For the bottom line?

Derik De Bruin - UBS

Topline.

Robert Friel

I think topline, we're assuming that FX pretty is much, where it is in the second quarter.

Derik De Bruin - UBS

Right.

Frank Wilson

It's a dominimous impact on the bottom line.

Derik De Bruin - UBS

Right.

Robert Friel

Of a ten year less.

Derik De Bruin - UBS

Yes, so that's what with that ten about down, in Q3 and like plus one in Q4?

Robert Friel

Yeah.

Derik De Bruin - UBS

All right. And I guess result of some of the restructuring and some of the discontinued operations I mean you've seen some really good gross margin improvement. I guess you ended last year with about 45% gross margin. Is that -- you're expecting that margin to hold in there for the full year?

Robert Friel

Yes, I believe for the back half, we should be able to hold that margin.

Derik De Bruin - UBS

And what was the contribution, the annual sales for the businesses you've acquired?

Robert Friel

About 1%.

Derik De Bruin - UBS

For the -- I mean I'm sorry in total of the trailing 12 months numbers so I can factor it into the forward look?

Robert Friel

Say that again.

Derik De Bruin - UBS

I just wanted to how big the businesses worth that you acquired? They are about a percentage sales in the quarter; I just wanted to know what that was on an annual basis?

Frank Wilson

Derik, this is Andy, I'll circle back you and get you that number. I don't have it in front of me.

Derik De Bruin - UBS

Thanks.

Robert Friel

Okay.

Operator

And our next question comes from the line of Robert Hawkins with Stifel Nicolaus. Please proceed.

Robert Hawkins - Stifel Nicolaus

Hi. Good afternoon.

Robert Friel

Good afternoon.

Robert Hawkins - Stifel Nicolaus

I guess can we go little bit more into the high end instruments and where you guys are seeing some demand. What you guys experience on either side, on either the environmental or the health side is being kind of must have piece of equipment for folks in the downturn?

Robert Friel

I would say the area in the bio-discovery that we continue to do quite well is on the imaging side. So the operations may continue to do quite well. And then we came out with a new product in January, which sort of a lower priced offer, which we call upper headed, that's doing quite well.

So I would say those are the areas, actually even some of our products in the very sort of high throughout screening area, the ViewLux's and some of the higher-ends are also saw some decent demand. So I would say that's on the bio-discovery side.

On the environmental side, it appears actually enough that the demand is for the higher-end more sensitive instruments. And that's we are seeing, at least what we are seeing higher growth in those areas.

So the ICPM’Ss those types of things that are sort of provide you more sensitivity.

Robert Hawkins - Stifel Nicolaus

And are you guys seeing anything I mean there has been a lot of talk obviously about stimulus related to the health side of research and IAH. There is another $40 billion that's running to the Department of Energy that seems to fall over into bunch of other areas, are any of those dollars showing up in any other discussions among your sales force?

Robert Friel

I think a little of that in the alternative energy areas, we're seeing some discussions around that area. But I wouldn't say a significant dollars for us yet, but there are some discussions around that area.

Robert Hawkins - Stifel Nicolaus

And timing related to that, is that something that's more of a 2010?

Robert Friel

I think so. I think its 2010, maybe a little bit in the tailend end of this year but mostly in 2010.

Robert Hawkins - Stifel Nicolaus

All right. Thanks. I'll jump back in the queue.

Robert Friel

Okay.

Operator

And our next question comes from the line of Peter Lawson with Thomas Weisel Partners, please proceed.

Peter Lawson - Thomas Weisel Partners

Rob, I just wonder if I can continue the question on that stimulus trend, have you seen any benefit from the Chinese stimulus trend and any hospital build outs in China?

Robert Friel

Yeah, I think we have closings and benefits from the Chinese stimulus plans. I don't know if Andy will mention it but our China business was up fairly significantly in the quarter close to 20% and clearly that is being the stimulus money is causing some of that.

Peter Lawson - Thomas Weisel Partners

And then just on the dependent industry consolidation, how do you think that's going to change your strategy in anyway or what's going to happen to pricing in the industry.

Robert Friel

I sort of mentioned it before I don't know at this point whether it necessarily has a significant impact on our strategy because like I said I think its really on sort of application knowledge quality product and service and I think that's really at the end of day, it really what drives the buying decision from the customer.

And I think in the short-term, people can make some pricing decisions but over the long-term, I think they are really looking for the level of service and the application knowledge and really the continued relationship that you have. I think that's increasingly becoming more and more important.

Peter Lawson - Thomas Weisel Partners

Thank you. And then just a question for Andy, the impact on the bottom line from FX or any benefits from hedging this quarter?

Frank Wilson

For the quarter, there was basically no impact from either.

Peter Lawson - Thomas Weisel Partners

Okay. Thank you so much.

Operator

(Operator Instructions). And there are no further questions in queue at this time.

Robert Friel

Okay, great. Thank you. So as we did in the first half, we'll continue to manage the current economic environment through focusing on cash flow, driving our consumer and agent service and trying to contain really all the non-customer related cost while continue investing in innovation in high growth areas.

Really trying to remain committed to a balanced approach for providing the opportunity to build even stronger company, one that’s targeted on not only high growth rates but improving the help and safety of people in the environment. So thank you for joining us today. This concludes today's call. And then have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And everyone have a great day.

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