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Executives

Dave Francisco – IR

Rob Friel – Chairman, President and CEO

Andy Wilson – SVP, CFO and Chief Accounting Officer

Analysts

Jeff [ph] –Leerink Swann

Quintin Lai – Robert W. Baird

Rob Hawkins – Stifel Nicolaus

Eric [ph] – Thomas Weisel Partners

Derik De Bruin – UBS

Jon Groberg – Macquarie

PerkinElmer, Inc. (PKI) Q4 2009 Earnings Call Transcript February 4, 2009 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the quarter four 2009 PerkinElmer earnings conference call. My name is Jeff and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will facilitate a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Dave Francisco. Please proceed, Mr. Francisco.

Dave Francisco

Thank you. Good afternoon and welcome to the PerkinElmer fourth quarter 2009 earnings conference call. I’m 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 that this call is being webcast live and will be archived on our website until February 18th, 2010.

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.

Please note that references made to continuing operations in our earnings press release issued earlier today and during this call includes the reintegration of our Photonics business, representing a portion of our specialty lighting business that we discontinued in the fourth quarter of 2008. The photoflash business remains in discontinued operations.

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

Rob Friel

Thank you, Dave. Good evening and welcome to our fourth quarter earnings call. I’d like to begin the call by saying how pleased we are with our performance in the quarter which capped a solid year for PerkinElmer. In a moment, Andy will go into more detail on our financial results. But first let me provide you with an overview of the fourth quarter.

Turning first to the financials, we continue to see sequential top line improvement across the Company and solid profitability and cash flow performance. Both our revenue and EPS were ahead of our expectations as we experienced improvement in all of our end markets and benefited from our robust pipeline of products, introducing almost as many new products in 2009 than we did in the previous two years combined. In addition, our solid financial performance in the fourth quarter, we also made significant strides in driving growth opportunities in attractive end markets, investing in innovative technologies and continuing to expand our global footprint.

In Human Health, during the quarter, we expanded new born screening in China through our recent SYM-BIO acquisition and also advanced adoption and capacity of first trimester pre-natal screening, setting up national labs in New Zealand, the Philippines, Vietnam, and Malaysia. We leveraged our genetic screening technology in the child health with the launch of our new Steroid Profiling Kit, which is the first commercially available kit designed to help diagnose hormonal imbalances in endocrinal based diseases.

During the quarter, NTD Labs joined the Aetna Network, becoming the first exclusive provider of a first trimester Down Syndrome screening protocol using the free-Beta hCG biomarker.

We also made excellent progress with our continued investment in diagnostic and research technologies. In diagnostics, we launched the only first trimester test available for early onset Preeclampsia in Europe and Asia-Pacific. And with our new DELFIA Xpress kit, PerkinElmer is well-positioned in the early onset market, reducing the risks, disabilities, and expense caused by the condition.

In the research markets, we are having early success with expanding beyond traditional high throughput screening of drug compounds into the rapidly growing biologics market. Our innovative AlphaLISA "no wash" reagent technology, which is comprised of a series of advanced assays has now been expanded to 140 kits to aid in the detection of cancer, diabetes, neurological, and other critical diseases states. In addition, we entered into strategy alliance with Corning to advance the development of next generation label-free technologies, which will provide researchers with deeper insights into biomolecular and cellular interactions through direct observation. We also launched our enhanced Inspire Multilabel Readers with luminescence for enabling broader access to improve primary and stem cell research.

In the quarter, we also addressed critical environmental, food, and consumer safety concerns, and continue to partner with our customers to help them meet new, more stringent detections requirements as a result of new regulations. In Europe, we launched new phthalate detection solutions, which were developed specifically to ensure compliance with new laws. In Greater China, we grew our partnership with the Beijing Food Safety Monitoring Center. As the Center significantly increased its food monitoring geographical reach. We also expanded our service partnership with the Taiwan EPA Air Monitoring Division as they expanded to 12 sites.

We were pleased with the continued uptake of our latest Environmental Health innovations such as our proprietary Swafer technology in the environmental market and our Viper Differential Scanning Calorimeter system for materials characterization, as well as the advancement of hyphenated technologies in the pharmaceutical and academic labs. For example, the new DSC-Raman system combines the strength of our thermal analysis with Raman spectroscopy to provide greater insights into material changes at a molecular level.

We also shipped our first single quad mass spec to Gilson who we are collaborating with as part of our long term strategy to expand our mass spec offerings to key global market segments.

So the fourth quarter brought to close the year where global economic conditions created a significant headwind but one that I feel good about our performance. First of all, we expanded adjusted gross margins by 50 basis points despite a decline in revenue of approximately $150 million as compared to the prior year, which was a bigger drop than we expected. In addition, we were able to generate adjusted earnings per share $0.02 above the mid-point of our original full year guidance provided in January of 2009, which also included approximately $0.04 of dilution from a higher-than-expected tax rate.

Our strategy of deploying a balanced approach, of effectively managing costs, and continuing to invest in innovative technologies has served us well, enabling us to exceed our goals and to exit 2009 as a much stronger company financially and better positioned strategically.

As we begin 2010, our focus will be in three areas, first, to increase the growth profile of the company through expanding our global footprint, aggressively increasing our reach through partnerships, collaborations, and acquisitions, and leveraging our technology and capabilities into adjacent markets.

Second, continuing to invest in and introducing new innovative technologies for better detection and prevention in Human and Environmental Health. And, third, achieving good financial returns through strong cash flows and maintaining a focused approach on driving operating margin improvement.

Before turning the call over to Andy, let me briefly discuss our financial outlook for 2010. At this time we believe the worst is behind us, but the recovery will be modest and slow to develop. As such we expect to accelerate our rate of growth for both revenue and adjusted earnings per share as economic conditions improve and we cycle up against somewhat easier comparisons as we progress through the year.

For the full year, we expect organic revenue to increase at a low-to-mid-single digit rate and adjusted earnings per share to be in a range of $1.35 to $1.42.

I would now like to turn the call over to Andy to give more details on our Q4 performance and 2010 guidance.

Andy Wilson

Thanks, Rob, and good afternoon everyone. I will now provide some additional color on our fourth quarter results and after my prepared remarks, we’ll open up the call for questions.

Before moving into the financial details, I would like to clarify that whenever I talked about a particular measure being up or down, I am referring to an increase or decrease net measured during the fourth quarter of 2009 compared to the fourth quarter of 2008.

As rob mentioned earlier, we are pleased with our financial performance in the fourth quarter and for the full year as we were able to deliver a solid earnings and cash flow performance. Revenue for the fourth quarter was flat as compared to the same period last year. The favorable impact of foreign exchange was 4% and the favorable impact from acquisitions was 1%. Therefore, organic revenue was down 5% versus the prior year.

The remaining analyses in my prepared remarks will be presented net of the favorable impact of foreign exchange and acquisitions. By segment, organic revenue declined by 5% and 6% in the Human Health and Environmental Health segments, respectively. By geography, organic revenue in the Americas declined at a high-single digit rate and organic revenue in Europe declined low-double digit. Although we experienced sequential improvement in Europe, the Americas and Europe continue to be impacted by economic challenges as well as delays in the release of stimulus monies.

Organic revenue in Asia grew double digits with all major product lines contributing to the growth. Within the Asia region, organic revenue in China and India both grew well above 20%.

From an end market perspective, PerkinElmer’s Human Health segment represented approximately 39% of total revenue in the quarter. Within Human Health, we serve two end markets, diagnostics, which represented 21% of total revenue, and research, which represented 18% of total revenue. Organic revenue from our diagnostics business declined at a mid-single digit rate in the fourth quarter as continued strength in our genetics screening business was offset by double digit declines in our medical imaging business. Organic revenue in genetic screening grew at a mid-single digit rate in the quarter, driven by continued strength of our natal, the neonatal, and prenatal screening systems.

Organic revenue in our medical imaging business was down approximately 30% in the quarter. However, we experienced sequential improvement across all served markets. With demand trends improving on the base business and solid traction on new OEM relationships, we anticipate continued sequential improvement and organic revenue growth for the full year 2010.

In the fourth quarter, organic revenue in our research business declined at a low-single digit rate as the business cycled up against a difficult comparison from the fourth quarter of 2008. Consistent with our experience in the third quarter, demand for reagents and low end instrumentation was fueled by customers’ continuing need to spend on basic research. However, this growth was more than offset by softness in high end instrument demand, a result of stimulus related delays.

The Environmental Health business represented 61% of our total revenues in the fourth quarter. within the Environmental Health business we serve four end markets, laboratory services, environmental, safety and security, and industrial. Our lab services business represented approximately 20% of our total revenue in the fourth quarter and organic revenue grew at a high-single digit rate. OneSource, our customer-focused multi-vendor offering was the key contributor to this growth in the quarter and delivered a very strong performance for the year. In addition to OneSource, we continue to be encouraged by improving demand trends in our traditional service offerings, which we believe were indicative of improving economic confidence at customer labs.

The Environmental market represented approximately 17% of total revenue in the fourth quarter with organic revenue declining low-double digit. We were encouraged by continued sequential improvement in the quarter. However, constrained capital spending in this customer segment continues to dampen demand. Offsetting this decline was the strong growth in China, a result of the stimulus – impact of stimulus monies, and, as Rob state earlier, key wins for our air monitoring solutions.

Additionally, on a global basis, we continue to see strength in the development, production, and usage of renewable energy technologies, driving demand across a broad array of our analytical technology offerings.

The safety and security market represented approximately 13% of total revenues in the fourth quarter with organic revenues declining at a high-single-digit rate. In this segment, as Rob mentioned, we achieved key food safety wins with government agencies in China, and the new regulations in Food and consumer safety recently adopted in the U.S. will continue to drive strong demand in these key markets.

Additionally in the quarter, we saw strong follow-on demand for our thermal-powered sensors in response to the H1N1 virus. Offsetting this growth is the continued weak demand in fire detection and intrusion alarms and the very difficult comparison in the defense related business related to a lifetime buy of optical sensors in 2008.

Our industrial markets represented approximately 11% of total revenue in the fourth quarter and organic revenue declined high teens. These markets, which include chemicals, semiconductor, and petroleum refining, experienced a significant sequential improvement in the rate of decline. We are pleased to see a continued stabilization in these markets and are encouraged by our customers beginning to rebuild capacity.

Turning to our financial performance, adjusted gross margin was down 10 basis points in the fourth quarter as benefits of our cost containment actions were offset by unfavorable product mix in the period. Adjusted research and development expenses were $27.1 million or 5.4% of revenue in the quarter, up 40 basis points from the prior year. We have increased our rate of investment in innovative technologies throughout the year despite the difficult economic environment to fuel future growth in our existing end markets as well as attractive adjacent markets.

Adjusted selling, general, and administrative expenses increased by $7.7 million versus the prior year of which approximately $4 million was attributable to foreign exchange and the remainder due primarily to selling and marketing investments and higher variable based compensation.

Adjusted SG&A expenses were up as a percentage of sales by approximately 160 basis points as compared to the fourth quarter of 2008, as cost containment initiatives were offset by the aforementioned items.

GAAP operating profit was $58 million in the fourth quarter of 2009 versus $72.1 million in the fourth quarter of 2008. On a non-GAAP basis, adjusted operating profit was $74.6 million versus $85.8 million in the fourth quarter of 2008, which as a percentage of sales represented a decline of 220 basis points year-over-year to 15%.

Interest expense, net of interest income for the fourth quarter was $3.9 million as compared to $23.5 million in the fourth quarter of 2008. This decrease was primarily due to a one-time expense in the fourth quarter of 2008 of $17.7 million related to the acquisition of ViaCell. Excluding this one-time expense, the remaining reduction in net interest expense is primarily attributable to lower interest rates on outstanding debt balances.

Other income was $800 million in the quarter as compared to an expense of $5.8 million in the fourth quarter of 2008. The expense in the prior year was primarily related to increased foreign exchange cost due to high exchange rate volatility in the fourth quarter of 2008.

For the fourth quarter of 2009, we had an effective tax rate of 28.8% on a reported basis versus a previously communicated tax rate of 31% as we experienced a positive shift in geographic mix of income as well as the timing of favorable tax settlements.

GAAP EPS from continuing operations in the fourth quarter of 2009 was $0.33 compared to $0.29 in the fourth quarter of 2008 while adjusted EPS was $0.43 in the fourth quarter of 2009, down 7% from the same period a year ago.

Regarding the weighted average diluted share count, we had 116.9 million shares outstanding in the quarter, which was essentially flat sequentially.

Turning to the balance sheet, we finished the fourth quarter with approximately $379 million of net debt, which we define as short and long term debt minus cash. Adjusted net debt, which excludes the impact of the termination of our accounts receivables securitization program in the second quarter of 2009 increased approximately $9 million as compared to the prior year as we were able to utilize our strong operating cash flows to fund our strategic acquisition throughout the year.

At the end of the quarter, we had approximately $180 million of cash and approximately $230 million of undrawn availability under our revolving line of credit with no mandatory maturities due until 2012.

Looking at our cash flow performance for the quarter, operating cash flow from continuing operations was $64.2 million as compared to $93.4 million in the fourth quarter of 2008. This decrease is primarily attributable to timing of payments for restructuring and compensation expenses. For the full year 2009, we generated $198.3 million of adjusted operating cash flow as compared to $214.5 million in 2008. Working capital turns were essentially flat year-over-year.

In summary, we are pleased with our financial performance for the quarter and for the full year. Let me now reiterate our 2010 guidance and provide some further detail. As Rob mentioned, we expect economic conditions to gradually improve throughout 2010. These underlying economic assumptions coupled with easier comparisons will allow us to accelerate our revenue and earnings growth as we progress through the year.

Organic revenue performance in the fourth quarter of 2009 was down 1% as compared to the first quarter of 2008, a performance due in part to the extra days reflected in the first quarter of 2009. Therefore we expect the first quarter to be our most difficult organic growth comparison. Overall, we expect to see continued growth in the markets that have been fairly resilient in the economic downturn specifically screening, lab services, and food and consumer safety testing. Within our research business we expect continued steady performances from our reagents and low-end instrumentation offering and we now expect to see the impact of stimulus related growth in our high end instrumentation beginning in the second quarter.

As mentioned previously, we are encouraged by demand trends in our medical imaging business and we anticipate that this business will be able to deliver organic revenue growth by the end of 2010. The environmental and industrial markets are expected to continue to improve sequentially as our customers deploy capital to meet growing economic activity.

So, to reiterate what Rob shared earlier, we expect organic growth in the low-to-mid-single digit range for the full year and expect the first quarter of 2010 to be essentially flat including the impact of the extra days in the first quarter of 2009.

Regarding adjusted operating margins, given the expected leverage from anticipated revenue growth and other productivity gains, we expect operating margins to expand in the range of 50 to 100 basis points in 2010. Additionally, we expect our geographic distribution of income in 2010 to reduce our effective tax rate, and therefore we are estimating our effective tax rate to be approximately 29%.

Bringing all these factors together, we estimate our full year adjusted earnings per share for 2010 to be in the range of $1.35 to $1.42 with adjusted earnings per share for the first quarter to be in the range of $0.27 to $0.29.

Once again, we are pleased with our performance in the quarter and for the year. The organization executed very well delivering on the financial commitments set up beginning of the year for revenue, adjusted earnings per share, and operating cash flow.

So that’s the end of the prepared remarks. I’d now like to turn the call over to Dave.

Dave Francisco

Thanks, Andy. Operator, at this time, we’d like to open the call to questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Isaac Ro with Leerink Swann. Please proceed.

Jeff – Leerink Swann

Hey guys, this is Jeff in for Isaac, thanks for taking the question.

Rob Friel

Hey Jeff.

Jeff – Leerink Swann

Hey. I was wondering if you can talk a little about the medical imaging business, I remember coming out of 3Q you thought the back half of the year was going to be worse than the first half. Now you are kind of seeing improvements to go through – I mean GE put up some decent numbers. What are you guys seeing there that’s making you a little bit more confident and I mean you said (inaudible) growth for organic business for the year or just to grow at some point organically throughout the year.

Rob Friel

So I would say we are seeing improvements probably across all the end markets in medical imaging and clearly there has been some recovery in the capital expenditure in hospitals and so I would say we will see growth for 2010. It probably won't occur at the sort of the middle of the year though and I think we will grow for the full year but we probably won't see positive growth in this business still probably the middle of the year. Part of that is because we do have a difficult comparison in Q1 and as we talked about it before, it was more of a function of how our ordering and contract patterns work so that the – our customers, it was difficult for them to take their orders down in Q109 as rapidly as what’s happening in the market. So we are still I would say artificially high in Q1 of ’09 and we are going to cycle up against that. But we do think we will return to positive growth probably around the middle of the year and we do think we’ll see positive growth for the full year in medical imaging for 2010.

Jeff – Leerink Swann

Alright thanks, and switching gears real quick, you talked about how China was kind of a bright spot not only in food safety but Environmental and quality as well. Can you talk about like how big of a portion of the sales you guys have over there and what types of investments you are doing? I mean you talked about investments, you mean mostly Greenfield or are you guys going to do some Brownfield as well?

Rob Friel

So, China for us actually exceeded $100 million in 2009. So, call it 5% of our revenue and it’s a little bit of both. As you know, we made the acquisition of SYM-BIO at the end of last year and they were in the process of building a fairly significant increase to their manufacturing capacity and so that’s coming up online. We’ll probably have that operational by the second quarter. So, we are investing not only in real estate but also in people, increasing our capabilities there from a leadership and an employee perspective and we are starting to put more and more R&D investments into China as well. So, across the board we’ll put fairly significant investments in that part of the world.

Jeff – Leerink Swann

Alright, thanks a lot guys.

Operator

Our next question comes from the line of Quintin Lai with Robert W. Baird. Please proceed.

Quintin Lai – Robert W. Baird

Alright, good afternoon. Nice quarter.

Rob Friel

Good afternoon. Thank you.

Quintin Lai – Robert W. Baird

Hey, Rob, would you – when looking at the kind of the pacing of demand as you went into the fourth quarter, did you see anything – was it steady all the way through or – we’ve heard some people say that December got kind of slow for Europe. Well what did you see?

Rob Friel

Well, I would say it differs a little bit by end market, but I would say probably on the Environmental and Industrial side we saw increasing demand as the quarter went on. I would say in the area of research, it was fairly steady and if anything we saw a little bit of a dip off on reagents actually at the end of the quarter, but we think that may have been some timing and also because some labs, particularly on the reagent side may have shut down between Christmas and New Year’s. As I mentioned before, I think on the medical imaging side, we’ve seen continued improvement through the quarter there. So I think it varies a little bit, but I would say overall, the bias has been to an improving trend during the fourth quarter in a majority of the end markets.

Quintin Lai – Robert W. Baird

And then with respect to the high end instrumentation and kind of the visibility of maybe a pickup in Q2, is it just because the orders are now starting to come in that you feel that way or – give us a little color on that?

Rob Friel

Yes, I think that’s probably the reason, and again I don’t – I wouldn’t suggest it’s robust growth, but I think clearly things have improved. We did see improved order patternings [ph] as I mentioned towards the end of the fourth quarter and they seem to be continuing in January as well. So, we feel a little bit better about the recovery occurring in those end markets. But as I said it’s – I wouldn’t say it’s robust, but it’s clearly going in the right direction.

Quintin Lai – Robert W. Baird

And then with respect to your guidance of 2010 I mean mid-low-to-mid-single digit organic and 50 to 100 bps of operating margin improvement, on the chance that organic revenue growth may be accelerates a little higher than that, how much extra leverage do you think that you might be able to get or are you – would you take the opportunity to may be further investment in some other areas.

Rob Friel

I think we need to do a little bit of both. I think on the incremental side, I think it would create a fair amount of operating margin leverage as we took cost out in 2009. Some of that was volume related, but I think some that will be sort of systemic and improve our cost position. So I think we would get very good leverage on any incremental revenue growth beyond our forecast. Having said that, while we clearly (inaudible) through the bottom line we see opportunities to invest and the way we’ve tried to build our 2010 operating plan is with sort of gaited [ph] view of investments. So as we see the growth I think we’ve – hopefully have been conservative from a top line forecast and to the extent that we see higher growth, some of that will flow through, but some of that will clearly be invested back in the opportunities we see to continue to expand identities, adjacencies we talked about and also to drive innovative new products into the marketplace.

Quintin Lai – Robert W. Baird

Alright. Hey thanks.

Rob Friel

Yes.

Operator

Our next question comes from the line of Rob Hawkins with Stifel Nicolaus. Please proceed.

Rob Hawkins – Stifel Nicolaus

Thank you for taking the call.

Rob Friel

Hi.

Rob Hawkins – Stifel Nicolaus

May be just to follow on the last piece, in terms of the acquisition front, in how you characterized your pipeline right now and what sellers’ attitude are with related to price and on that gaited view there has been some pickup in semiconductors, may be even in clinical, is it – are you at a point now where you think you feel comfortable may be even expanding into the industrial and some of these segments real faster on the Environmental side?

Rob Friel

So, on the first question, I think our acquisition pipeline we feel good about. It’s a – you’ve got to look at a lot and already got a couple done, so I think it’s a pretty robust pipeline. I would say seller evaluations, I don’t know that they have changed significantly over the last couple of quarters and I think it’s always – if you are looking at good properties you are going to have to pay good prices. So, I would say there hasn’t been a significant change there. As far as increasing our investments into the industrial area, I think what we are trying to do is be more and more focused in those end markets and those application where we see the highest growth prospects. So, I think if we saw higher revenue and we wanted to do some more investments I would say the industrial area would probably not be an area of significant focus for us. We’ll probably be in some of these areas like the food safety, like the Environmental area. I think we’d probably see the investment before some of the industrial areas.

Rob Hawkins – Stifel Nicolaus

Okay. And then on imaging I am just curious your senior report flow picking up but in January or now are you seeing any loss in momentum because of some of the uncertainty around legislation per se with physician fees how performed?

Rob Friel

You know we have – I mean it’s – I mean obviously it’s very early to see if that change as a result of say healthcare reform not passing, but I would say we haven’t at this point where we continue to sort of keep a close eye on that, but we continue to see pretty good ordering patterns improving in the medical imaging business.

Rob Hawkins – Stifel Nicolaus

Okay great. Thanks. I will jump off in the queue.

Rob Friel

Okay.

Operator

Our next question comes from the line of Peter Lawson with Thomas Weisel Partners. Please proceed.

Eric – Thomas Weisel Partners

Good afternoon. This is actually Eric [ph] filling in for Peter. On the imaging business is there a certain amount of lag time that you guys see between say a General Electric saying that their demand is improving any time and that actually really starts to impact your or their orders from you significantly?

Rob Friel

There is a little bit of lag between – obviously when they start taking up their orders and then obviously to the extent that they see the revenue and we see the revenue, but presumably to the extent that their revenue is doing well, we’ll see a little bit of lag to that, but not that lag to that, but not that significant.

Eric – Thomas Weisel Partners

Okay. And then on the environmental testing, is there – are the labs out there are they kind of reaching a point where they really need to upgrade instruments in order to operate their business efficiently or is there room for them to still maintain say a piece of equipment, one, two, three years more and still be able to operate at a level that’s okay for them.

Rob Friel

Well you know it obviously it depends a lot by the individual lab, but I would say it really gets down to buying. I mean I would say from – if their volume increases fairly significantly, I think that’s really what’s going to drive the demand, the volume through the lab. Most of the labs I think – they are not in an obsolescence issue relative to the instruments. It’s really more of a volume driven need for the increased capital.

Eric – Thomas Weisel Partners

Okay great. And then a final question on the diagnostic business. Is there anything on the horizon whether in the U.S. or outside the U.S. that would drive an uptick in demand, are there new assays or new provisions that will be tested for or anything like that in the – legislation wise?

Rob Friel

Well you know I would say there is always continued new products and new assays we are coming out with, we mentioned the (inaudible) health and a number of other areas and the prenatal area. But I would say we really look at that as sort of continuing product (inaudible) into the marketplace to continue to achieve the growth rates that we’ve seen in that business. So, I don’t see anything right now that’s really a step function change in the amount of screening that’s been done. We do believe that probably in two years we may see a step up in the recommended number of tests for a new born trainee [ph] going from sort of around 30 now probably stepping up to probably close to 50, but we probably think that’s 2011 timeframe.

Eric – Thomas Weisel Partners

Now, would you be prepared for that step up or do you have to kind of develop those assays–?

Rob Friel

No, no, we will be prepared for those step ups.

Eric – Thomas Weisel Partners

Okay, great. Thank you very much.

Rob Friel

Okay.

Operator

(Operator instructions) Our next question comes from the line of Derik De Bruin with UBS. Please proceed, sir.

Derik De Bruin – UBS

Hey, good afternoon.

Rob Friel

Good afternoon.

Derik De Bruin – UBS

Just for some housekeeping, you said you’ve reintegrated part of the business you had put into to ops and obviously that looked like it had about a $5 million or so impact relative to what the base was for the prior quarter – for the prior year quarter. Can you say what you put back in and also what’s the right revenue base that we should model off of for Q1, Q2, Q3, and Q4 or Q3 just to make sure that – otherwise we are going off – if the numbers are going to be higher for that, I just want to make sure that we are all – everyone is modeling correctly.

Rob Friel

Right okay. Do you have those numbers right there, Andy.

Andy Wilson

This is Andy. The impact year-over-year was about $0.02. It was about $7 million of revenue as a negative impact year-over-year. I think going forward, we assume from an EPS perspective it’s going to be fairly neutral, may be slightly positive, but I would say modeling at that neutral level is probably the best way to go.

Derik De Bruin – UBS

Okay. I just was saying that – okay, what is the – I mean do you have the Q1 number, just as a starting point? Is it about similar like a level – similar like about $5 million difference?

Rob Friel

But, we actually put the history on the website today – with all the details there.

Derik De Bruin – UBS

Then I will shut up and I don’t have it. That’s pretty much irrelevant then. Okay. I guess just what’s your biggest I think – what do you see the biggest challenge in terms of potential pitfalls on the quarter or potential for (inaudible) of how the year rolls out? I mean obviously we think there is a lot of opportunities in terms of things rebounding I guess how is the biggest thing (inaudible) just the ramp (inaudible) or is there something else out there?

Rob Friel

Yes, I think – no I think that’s right. I mean as we think about 2010 based on I would say the visibility and the order patterns we are seeing, it looks like the first half will trend pretty well. I think there is at least some concern that when we get into the back half of 2010 there is clearly some risk that we could sort of dip back down if you start to remove some of this government support I will call it globally. And so I think we are little cautious about that relative to the back half and I would say that’s the biggest risk I see out there right now for 2010.

Derik De Bruin – UBS

So, when you were at the – let’s say one of my competitors’ conferences earlier in January, you had put up some long term operating margin targets.

Rob Friel

Yes.

Derik De Bruin – UBS

Could you just talk about that type of outlook for the Company, it’s like a 400 basis point op margin expansion if I was correct in saying that and I guess what are the kind of drivers of getting to that level of improvement.

Rob Friel

Yes, I will start and let Andy sort of pick up on that because that’s some – he’s been spending a lot of time I would say in the last couple of weeks. But, obviously the operating margin expansion it’s got to come first of all from some volume leverage, but more than that, we are looking at our cost structure across the Company and I would describe PerkinElmer as if you look at historically, I think we did a lot of things within the businesses to improve the cost structure in trying to be very efficient, but we haven’t done historically a lot I would say across the Company because it was ran I would say more as separate businesses as an integrated company and I think as we look at some opportunities across the Company whether it’s back office types of things, whether it’s sourcing, whether it’s things we do, and some of the various functions that we think there is some opportunities to drive incremental cost reductions. So those are just some of the things I think that we are looking at over the next couple of years. But I don’t know, Andy you want to be a little more specific–?

Andy Wilson

That’s right. I think we’ve got several groups that are focused on specific areas that are kind of corporate related whether it’s – as Rob mentioned – whether it’s around low-cost sourcing, whether it’s around back office consolidation which are service opportunities, channel efficiencies within selling organization, there is a team focused on each one of those and we are looking at this kind of over the long term so we can develop some significant but consistent and sustainable long term margin improvement. So I think if you look at the 13 to 17 and we are successful in all these initiatives, I would be disappointed if we didn’t work better than that, but I think that’s a – the 17% is a reasonable target at this point.

Derik De Bruin – UBS

Great, thanks.

Operator

Our next question comes from the line of Jon Groberg with Macquarie. Please proceed.

Jon Groberg – Macquarie

Thanks for taking the call. Rob, as you think about 2010, where are you investing in your business?

Rob Friel

So, I would say we are focused a lot on sort of improving the growth profile of the Company and so as I mentioned before we are putting some additional cost into the technology side of things and as you saw in 2009, we stepped that up as a percentage of sales. I think clearly the global footprint in the emerging areas are areas that we want to continue to invest in and SYM-BIO was a good example of that. And I would say from an end market perspective, while we like all of our end markets, I think clearly the diagnostics side is probably the area that will probably get some disproportionate side of our investment dollars just because I think we like the characteristics of that end market better.

Jon Groberg – Macquarie

And there are you talking primarily as to about R&D or even on kind of more of the kind of the commercial structure?

Rob Friel

Probably not commercial structure other than through an acquisition other than building, because I think we are pretty comfortable with the commercial structure and our distribution capability today, so I would say it would be R&D but also it would be licensing, acquisitions, what I would call inorganic opportunities as well as investing in the Company.

Jon Groberg – Macquarie

And are you taking – we’ve heard a lot of companies talking about making major investments again in kind of ERPs to improve efficiencies, is that something on the horizon for you or what you guys–?

Rob Friel

Yes, I mean that’s – we’ve been doing that for at least the last 12 months, but we continue to invest in the infrastructure of the Company and we – in 2009 we did actually what technical upgrade of our SAP platform and we are putting on some additional modules and other things to really sort of drive the efficiency across the Company.

Jon Groberg – Macquarie

And where might you have incremental hires in 2010?

Rob Friel

I think the incremental hires will probably come in the R&D side and probably in the selling and marketing area.

Jon Groberg – Macquarie

Okay.

Rob Friel

That will be the area of focus.

Jon Groberg – Macquarie

And then just big part of kind of the proposition that you laid out as a few people have asked on the margin expansion, if you think about just as a year, outside of volume, kind of what would get you the more the 100 basis point expansion versus 50 basis point or is that pretty much all just wherever revenue comes in for the year.

Rob Friel

It’s volume but it’s also mix. A big driver of our – at least our gross margin is what the mix looks like because clearly if it’s more on the reagent side, that really drives it higher. So I think it’s a combination of volume and mix. If we are talking specifically about 2010 may be some of these plans that Andy talks about we start to see some benefit toward the end of the year, but I don’t know that that will be a big driver to 2010.

Jon Groberg – Macquarie

Okay. Great, thanks a lot.

Rob Friel

Okay, thanks.

Operator

Ladies and gentlemen, that concludes the Q&A portion of this call. I’d now like to turn the call over to Mr. Rob Friel for closing remarks.

Operator

Okay, thanks Jeff, and thank you for your questions. So, in summary, PerkinElmer, I believe, has innovative technologies to global scale and probably most importantly to people to play a real critical role in improving the health and safety of people and the environment through our focus on providing better detection and therefore prevention of environmental contaminated disease. We feel confident that our focus on driving growth opportunities in the attractive end markets, investing in innovative technologies, and generating attractive financials will provide a good return to our shareholders. I thank you for your participation today. This now concludes today’s call. Have a great day.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. And have a wonderful day.

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Source: PerkinElmer, Inc. Q4 2009 Earnings Call Transcript
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