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Executives

Robert Friel – Chairman, Chief Executive Officer, and President

Frank “Andy” Wilson – Chief Financial Officer, Chief Accounting Officer and Sr. Vice President

David Francisco – Vice President of Investor Relations and Treasurer

Analysts

Ross Muken – Deutsche Bank

Quintin Lai – Robert W. Baird

Derik DeBruin – UBS

Jonathan Palmer – CLSA

PerkinElmer, Inc., (PKI) Q2 2010 Earnings Call August 5, 2010 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the PerkinElmer 2010 Quarter 1 earnings conference call. My name is Jonathan and I’ll be your operator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session a question and answer session towards the end of this conference. (Operator Instructions)

I’d now like to turn the call over to Mr. David Francisco.

David C. Francisco

Thank you. Good afternoon and welcome to the PerkinElmer first quarter 2010 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 this call is being webcast live and will be archived on our website until May 20, 2010.

Before we begin we need to 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 represents 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 and thank you for joining us today. Let me begin by saying that we are pleased by our first quarter financial performance. We started the year strong and believe that we are very well positioned strategically in attractive end markets and innovative technologies.

Our results on the top line exceeded our expectations, as many of the most challenged markets in the economic downturn returned to growth in the quarter. We are particularly pleased with these results given the difficult comparisons from the first quarter of 2009, including the impact of the extra selling days that we had in the first quarter last year.

Additionally we were able to significantly expand operating margins and generate strong growth in both adjusted earnings per share and cash flow. Amy will provide more details on the financial performance shortly. I would now like to share some of our first quarter highlights regarding progress on our key initiatives to increase the growth profile of the company and expand detection and prevention capabilities to advance human and environmental health.

Starting with human health, we recently announced our intent to acquire Signature Genomic deepening our commitment to the diagnostics market. Signature brings complimentary services to our existing diagnostics profile with cutting edge cytogenetic technology providing unmatched accuracy and comprehensive [vista] results.

In addition to complimenting our current business, Signature provides expansion opportunities in the diagnostic oncology with an offering that combines multiple key detection elements in a single assay. We launched our new backs-on-beads technology, a multi-plex diagnostic tool that can detect markers of multiple diseases from a single serum sample, to the European market this quarter with strong early receptivity resulting in key customer wins in large hospitals and labs.

Additionally we are piloting a new diagnostic technology program for detecting severe combined immunodeficiency disorder or SCIDS. A primary deficiency in the immune system that results in the onset of serious infections, even life threatening ones, within the first few months of life.

This pilot project for SCIDS screening provides significant opportunity going forward as it is expected to be the first edition to the next menu expansion of mandated newborn tests in U.S. markets.

In our research business we have seen continued strength from our region portfolio including increased demand for our AlphaWise technology due primarily to the migration to biologic-based drug discovery research.

We are finding that pre-clinical research laboratories are now standardizing their equipment around AlphaWise to aid in the detection of cardiovascular, cancer, diabetes, and neurological diseases.

In environmental health, we continue to address critical environmental health and consumer safety concerns with market driven innovation and response to increased global regulatory mandates and the identification of new contaminants.

In Asia [inaudible] regulatory enforcement has driven increased demand for environmental and food safety monitoring systems as this region migrates toward Western compliance standards. For instance, an effort to address food safety concerns in China, we are providing the government authority with more than 100 atomic absorption spectrometers for toxic-metal contamination testing.

In addition, we are seeing strong demand trends in other developing regions within Southeast Asia to impose the stricter quality [work] standards. In regard to our strategic initiative to expand our mass spec capabilities, I am pleased to report that we have finalized the purchase of the remaining interests of the joint venture.

Our continued commitment in innovation in this technology will provide our customers with solutions that support the analysis of component elements, trace elements, or contaminants in samples of interest leaning to improved products and applications to their end markets.

The new Nexion IC-PMS system recently launched at Pittcon advances this trace element analysis with three modes of operation within one instrument creating a highly efficient lab environment. Additionally we have partnered with Abbott in the area of pathogen detection through the incorporation of our time-of-flight Mas-Tec technology and Abbott’s Plex-ID Pathogen Detection system.

The Plex-ID system can rapidly and accurately identify pathogens, as well as alert health officials to new disease strains, help guard against bio terrorism, and help hospitals identify antibiotic resistant bacteria in their facilities.

In summary, we are pleased with our strong start to the year financially, as well as the progress made on our growth initiatives toward the advancement of human and environmental health. As mentioned, we are encouraged by the improving trends that we are seeing in our end markets as visibility slowly improves throughout our businesses.

Given this, we have decided to increase our guidance reflecting our revised estimates for the full year of mid-single digit, organic revenue growth and adjusted earnings per share in the range of $1.43 to $1.48.

I will now turn the call over to Andy to give more details on our Q1 performance and guidance.

Andy Wilson

Thank you, Rob. Good afternoon, everyone. I will now provide some additional color in our first quarter results. After my prepared remarks, we will open up the call for questions.

Before moving into the financial details, I would like to clarify that whenever I talk about a particular measure being up or down, I’m referring to an increase or decrease in that measure during the first quarter of 2010 compared to the first quarter of 2009.

As Rob mentioned earlier, we were pleased with our financial performance in the first quarter as we were able to deliver solid revenue, earnings and cash-flow growth over the prior year, particularly considering the extra selling days during the first quarter of 2009.

As discussed last year, the increased number of selling days in the baseline contributed to a couple of points of growth in the first quarter of 2009 and this growth had a disproportional impact on our service, reageant and consumable offerings.

Revenue for the first quarter increased 7% as compared to the same period last year. The favorable impact of foreign exchange was 4%. The favorable impact from acquisitions was 1%. Therefore, organic revenue increased by 2% versus the prior year. The remaining revenue analyses in my prepared remarks will be presented net of the favorable impact of foreign exchange and acquisitions.

By segment organic revenue increased by 2% and 3% in the human health and environmental health segments, respectfully. By geography organic revenue in the Americas was flat. Europe was up low-single digit and Asia grew at a low double-digit rate. Within the Asian region, organic revenue in China grew in the high teens. We experienced solid low double-digit growth in the emerging territories throughout southeast Asia.

From an in-market perspective, PerkinElmer’s human health segment represented approximately 41% of total revenue in the quarter. Within human health we served two in-markets diagnostics, which represented 24% of total revenue and research with represented 17% of total revenue. Organic revenue from our diagnostic’s business grew at a mid single-digit rate for the first quarter with our medical imaging business returning to positive growth after considerable contraction in 2009.

In the first quarter, organic revenue in our research business was flat as this business cycled up after a difficult comparison from the first quarter of 2009 growing low double-digit in the prior year. We did have [inaudible] demand in our reagent portfolio but this strength was offset by limited capital investment in our high-end instrumentation.

The environmental health business represented 59% of our total revenue in the first quarter. Within environmental health we served 4 end markets; laboratory services, environmental, safety and security, and industrial. Our lab services business represented approximately 20% total revenue in the first quarter and organic revenue grew at a low single-digit rate.

OneSource our customer-focused, multi-vendor offering maintained strong momentum proving another solid quarter of organic revenue growth. The environmental market represented approximately 17% of total revenue in the first quarter with organic revenue increasing at a mid single-digit rate.

As Rob mentioned, we saw strong growth in Asia due to increased demand and response to local regulatory requirements, primarily around water quality migrating to western compliance standards. Additionally we experienced continued strong demand for our renewable energy offering, particularly in the development of photovoltaic cells used in solar panels.

This growth was partially offset by continued capital constraints impacting some of our smaller customers. The safety and security market represented approximately 15% of total revenue in the first quarter with organic revenues increasing at a mid single-digit rate.

We continue to see improving growth opportunities in food and consumer safety testing as regulatory requirements around the world become more stringent and safety concerns extend to food additives and packaging materials. Additionally in the quarter, we saw continued strong demand for our thermal power sensors in response to the H1N1 virus.

Lastly, we are beginning to see signs of recovery in extra [inaudible] offerings related to fire protection and intrusion alarms as the housing market stabilizes. Industrial markets represented approximately 7% total revenue in the first quarter and organic revenues increased at a low single-digit rate.

We are encouraged to see these markets begin to stabilize and return to growth. We continue to see traction in chemical opportunities as well as materials prioritization primarily related to research on new materials.

Turning to our financial performance, adjusted operating margins were up 100 basis points in the quarter, primarily due to successful ongoing cost initiatives and volume leverage. GAAP operating profit was $39.4 million in the first quarter of 2010 versus $25.3 million in the first quarter of 2009. Adjusted operating profit was $55.6 million versus $48 million in the first quarter of 2009.

For the first quarter, we had an effective tax rate of 27.6% on a reported basis versus a previously communicated tax rate of 29% as we experienced a positive shift in the geographic mix of income. GAAP for EPS for continuing operations in the first quarter of 2010 was $0.22 compared to $0.13 in the first quarter of 2009. Adjusted EPS was $0.31 in the first quarter of 2010, up 19% from the prior year.

Regarding our weighted-average diluted share account, we had 117.9 million shares outstanding in the quarter, which was up substantially by approximately 1 million shares due to the issuance under existing stock compensation plans.

Turning to the balance sheet, we finished the first quarter with approximately $347 million net debt, which we defined as short and long-term debt minus cash. This reflects a decrease and adjusted net debt of approximately $66 million as compared to the prior year. At the end of the quarter, we had approximately $182 million of cash.

Looking at our cash flow performance for the quarter, operating cash flow from continuing operations was $52.1 million, this compared to $18 million in the first quarter of 2009. If you remember the call on the first of 2009, we reduced the amount drawn under our accounts receivable securization facility by $10 million resulting in an unfavorable impact to operating cash flow in the quarter.

The remaining year-over-year increase and operating cash flow was primarily attributable to solid working capital performance as well as the timing of tax payments. Working capital turns for the quarter improved slightly year-over-year.

In summary, we are pleased with our financial performance for the quarter, driving strong earnings growth and solid cash flow generation and we are encouraged by the trends we are seeing in our assertive markets.

Let me now discuss our 2010 guidance and provide some further detail. Regarding invested earnings per share, we incorporated 4 key elements into our full-year outlook. First, we now anticipate full-year revenues to grow organically at a mid single-digit rate versus our previously communicated low to mid single digit growth expectation with the second quarter growing mid-to-high single digits.

Second, given the traction that we experience in our modern expansion efforts in the first quarter, we are raising the low end of our forecasted improvement by 25 basis points and now expect adjusted operating margins to increase by 75 to 100 basis points for the full year.

Third, we expect our effective tax rate to be approximately 200 basis points lower than we previously communicated primarily due to more favorable geographic distribution of income and anticipated beneficial tax legislation.

Fourth, offsetting these upsides is a couple of pennies of expected dilution from the acquisition of Signature Genomics. Bringing all of these factors together, we now estimate our full adjusted earnings per share for 2010 to be in the range of $1.43 to $1.48 versus our previously communicated range of $1.35 to $1.42 with adjusted earnings per share for the second quarter expected to be in the range of $0.32 to $0.34.

Once again, we are pleased with our financial performance in the quarter. It is clearly a solid start to the year, particularly given the strong baseline for the first quarter of 2009.

That is the end of my prepared remarks. So now I would like to turn the call back over to Dave.

David Francisco

Thank you, Andy. Operator at this time, I would like to open the call to any questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ross Muken – Deutsche Bank

Ross Muken – Deutsche Bank

If we look at the human health business and obviously you had the tough days comp, which is probably more exacerbated than some of those consumable businesses. Are we able to tease out part of that impact to see what the current run rate is for some of the pieces that were probably most hit last year? Also, I guess, that probably is true on the service piece?

Robert F. Friel

Yes Ross. I would say on the human health side we probably would think that those businesses grew sort of in the mid single-digits if you are thinking about training business and the research business. As Andy mentioned, we did see pretty good growth out of the medical imaging business. I would say that is less impacted by the days. So I would say that probably didn’t have much of a material impact on that business but I think on the screening business and the research business. I would say that it is probably 4 or 5 percentage points.

Ross Muken – Deutsche Bank

As we look at the cyclical businesses, I mean we finally started to see some growth in environmental as well as in safety in security and industrial. If you sort of had to tease out in their late to early cycle type customers how big would the differentials and ordering patterns and revenue growth?

Robert F. Friel

Well you know I think clearly the growth is coming from the early cycle customers. I think the late cycle customers are probably going to be back half of 2010 is our sense right now. But having said that it’s fairly broad based across most of the industries that we play to. We’re seeing sequential growth in probably every market that we sell into.

Ross Muken – Deutsche Bank

And if you sort of to just quickly follow up on that characterize your business between early and late in those three segments what would be the split?

Robert F. Friel

You know I don’t know that I can give you a great split on that other than to say-

[crosstalk]

--it’s probably pretty evenly split quite frankly.

Operator

The next question comes from Peter Lawson – Thomas Weisel Partners.

Peter Lawson – Thomas Weisel Partners

Congratulations on a strong quarter and just if you can talk about the tone you’re seeing from the bio pharma..

Robert F. Friel

So, I would see in the bio pharma we continue to see good growth on the [inaudible] side. Some of that is new products or products offering but I think as we’ve felt in the past we continue to see increased use of the regions from an experimentation. We continue to see good growth on the service side. Other pharmaceuticals we saw good growth in one source continued in Q1.

I would say the area where there continues to be a reluctance to spend CapEx and we didn’t see much of a change to that in Q1 and [inaudible] you mentioned particularly on a high and instrumentation was actually down in the quarter for us so I would say regions and service looks good. CapEx continues to be constrained.

Peter Lawson – Thomas Weisel Partners

And then on the industrial businesses which end markets have really [inaudible]?

Robert F. Friel

So, for us we saw good growth on the environmental side. We saw good growth on the food safety side. I would spike those two out as probably the areas of the strongest strength in the quarter.

Andy Wilson

I would say we saw sequential improvement pretty much across all of our end markets.

Robert F. Friel

Yes, it was pretty broad based but I would say those are the areas where we experience the most significant improvement.

Operator

Your next question comes from Jon Groberg – Macquarie Capital.

Jon Groberg – Macquarie Capital

So, maybe you can just first start off on [inaudible] a little bit your operating margin expansion targets for the year. Is that mainly just driven by slightly better organic growth or is there anything else maybe you can discuss in terms of raising it?

Andy Wilson

I think we do see a little bit of leverage out of raising the bottom end of our growth expectation. But I think as we talked about over the last couple of quarters we’ve implemented or in the process of implementing even more cost initiatives that I think will continue to help us expand margins over the next several years.

So, I think we did see some good tracks in the first quarter so it gave us a bit of confidence that this was taking hold and so we did feel comfortable taking it up from the 50 to 100 to 75 to 100 so, I’d say it’s a little bit of a combination of both.

Jon Groberg – Macquarie Capital

Andy, just in the first quarter here I mean you’ve kind of talked about a kind of a multi-year opportunity in the first quarter what were some of the more significant areas that you made some [inaudible] in?

Andy Wilson

Well I think as we talked before we are spending a lot of time really looking at areas where PerkinElmer can add value at a corporate level so we saw some initial benefits out of our logistics. We’re starting to see some early opportunities within supply chain. So, I think it’s still early days but I think that those two were the primary drivers and so I think we should continue to see those levels of margin expansion going forward.

Jon Groberg – Macquarie Capital

Okay. And then if I can kind of talk the [inaudible] and I don’t know if you get around 40% of your sales from Europe. Can you maybe just discuss kind of current thinking with respect to if we are to continue to see a downward spiral in the Euro itself and maybe just kind of what was unique to what you said rather than to what most everyone else said was that Europe was actually up and the Americas was flat and that’s kind of different to what most of the other peers have been saying. So maybe just kind of talk about what you’re seeing in Europe?

Andy Wilson

You know we saw a slight growth in Europe and maybe it’s because of a different customer or product mix that we have. And I would see for Q2 we’ve got somewhere expectations may be even a little bit better than what we saw in Q1.

From a currency standpoint as you know while it impacts us on a top line we’re fairly well balanced from a distribution of cost and revenues so it shouldn’t have a significant impact on the bottom line. It had some, clearly, but not significant. So I would say we just have to wait and see. Obviously the last couple of days has been fairly dramatic so, we’ll just have to see what impact that has on the broader economy.

Operator

Your next question comes from the line of Quintin Lai – Robert W. Baird.

Quintin Lai – Robert W. Baird

Congratulations on a nice start to the year guys. As you look at the raised guidance for the year Rob, is that incremental contribution coming from both segments or do you think it’s coming from one segment more so than the other?

Robert F. Friel

No I think it’s fairly broad based. So, I would say it’s equally distributed between environmental human health and of course Andy also mentioned the fact that our tax rate is going back to where it was in sort of ’07/’08 time frame as our geographic distribution goes back to the split that we saw during that period of time. So, I would say it’s evenly split for around those, both businesses as well as some improvement in the tax rate.

Quintin Lai – Robert W. Baird

Super. And then what do you expect for your diagnostics business. Imaging is up. Can you provide a little update on how genetic screening and corporate banking went?

Robert F. Friel

So, genetic screening and [corbol] were sort of roughly flat some sort of low single sort of flat. And again I think that’s a little distorted because of those are two businesses that it’s dramatically impacted by the [inaudible] I mean it’s really sort of a flow business if you will.

I think the other thing to keep in mind that we did have a pretty good first quarter 2009. So, our expectations is when you look at the half those businesses will be mid to high single digits.

Operator

Your next question comes from the line of [Jeff Erris – Lyrics One].

[Jeff Erris – Lyrics One].

I guess just looking at the raised guidance and where we are today and over the last 2 months. What was your biggest surprise coming out of the fourth quarter called [inaudible] and how has your visibility changed as we’ve progressed through the year?

Robert F. Friel

I would say it’s the three things that Andy mentioned so clearly the revenue was stronger that we thought and so we’re taking our revenue [inaudible] up. I think that was attributed to it. The second thing was we seem to be getting good traction on some of the productivity actions we’ve put in place so clearly taking the margin side up as I mentioned before.

As we’re starting to return to a more I would say normalized income distribution geographically that was a contributor. So, I think all three of those of which we didn’t have great visibility in Q4. And so I would say those are the ones that are really driving our increased confidence and decision to take the [inaudible] up.

[Jeff Erris – Lyrics One].

I guess focusing more on the revenue guidance and moving it towards the higher end of what it was before. How the pacing throughout the quarter and it is more the more the cyclical industry is doing a little bit better as we got through the year?

Robert F. Friel

Well if you’re talking about specifically in the quarter I think the areas where we were pleasantly surprised was probably clinging on the [inaudible] imaging side. I think Q1 ’09 was actually not too bad of a quarter so we felt we’d actually be down. In the first quarter of 2010 as I mentioned that actually grew. And then I would say in some of the applied markets we saw a little stronger strength as we went through the quarter and then consequently gives us the confidence to take the revenue guidance up.

[Jeff Erris – Lyrics One].

And then just lastly real quick. The signature that you guys acquired did you guys are you given any financial information or are you willing to give revenue contribution expectations outside of $0.02 [inaudible]?

Robert F. Friel

So just to be clear we haven’t closed on it yet. We’ve announced that it’s probably going to close there in a couple of weeks and, but I mean just general financial parameters I think we did it’s about $20 million in revenue and it sort of breaks even.

Operator

Gentlemen your next question comes from the line of Derik De Bruin – UBS.

Derik De Bruin – UBS

You know you had a $0.04 contribution from FX on the top line. What was the bottom line impact? I guess as the Euro moves around is there like a rule of thumb we can use for the company by every 1% move in currencies impacts the EPS by ‘x’ amount?

Robert F. Friel

Generally just based on our distribution where our revenue expenses. The impact EPS has been [inaudible]

Andy Wilson

It was less than a £0.01 this quarter just to give you a perspective. Maybe like £0.05 or something like that so not significant. It’s a little hard Derik because obviously it depends a little bit on what currencies move whether it’s Euro or Yan or etc. But generally it hasn’t been a dramatic impact either way from a bottom line perspective. Like I said in this case which was a fairly big move on the top line of 4%. It was about £0.05.

Derik De Bruin – UBS

And I guess just looking at the news today I mean one of your big competitors in the prenatal market is looking at exploring options for that business. Can you just talk about what your share is in the prenatal screening business and where you are in terms of developing technologies [inaudible] invasive. Applications [inaudible] for prenatal screening.

Robert F. Friel

I’ll talk about the first question. I’d rather not want to talk about the second, but other than to say we’re doing a lot of work in that area.

But I would say when you think about 4 million births in the US. We’re doing probably about 450 thousand. Now of course not all those necessarily are getting trained for prenatal, but I would say you’re probably talking about 50% or 60% of births getting some kind of prenatal screening. So, we’ve probably got 25%, 30% market share.

Derik De Bruin – UBS

And I guess where are we in the marker built in. Have most States gone to standard set or is there still some States that’s still got [inaudible] I think…

Robert F. Friel

I think when you look the US every State right now does at least 20 or greater. And you the Standard of Care is 29. But I would say we’re effectively there from the standpoint of States doing the Standard of Care. That’s why I sort of pointed out the [inaudible] test because we think that’s going to be probably the next addition to the Standard of Care. Maybe we’re a year away from this but I think we’ll start to see some increases to the Standard of Care taking the menu up.

But if you look at the US right now all the States are like I said doing at least 20.

Derik De Bruin – UBS

Great. And then just one final question, well actually two questions. Has there been any surprises in the services business just given some of the consolidation issues going on pharma and also from that perspective are you starting to see or pharma accounts starting to reorder replacement equipment?

Robert F. Friel

So I would the first question which is that we’ve seen much change in service I would say no. We continue to see fairly robust interest and the sort of one source model or the outsource you know the maintenance of the lab so that continues to go I would say unabated.

On the other area it’s a little difficult as you know to characterize all pharma. It varies significantly by customer. I would say we’ve seen some instances of it but it’s still fairly rare at least for our products we’re not seeing a significant pick up in CapEx orders from an instrumentation perspective.

Operator

Your next question comes from the line of Robert Hawkins - Stifel Nicolaus.

Robert Hawkins – Stifel Nicolaus

Can you explain a little bit on the [inaudible] launch and give us a sense of timing and magnitude of launch and this is part of the longer term I guess amino screening process. Can you go over how you envision that rolling out over the next few years?

Robert F. Friel

Actually it’s right now in sort of a test phase in one State and we expect that will probably take a couple of quarters. Generally what you’ll see is if it gets adopted in one State it seems to catch on and as I said our expectation is probably in 2011. We would like to see this added to the Standard of Care menu.

From a revenue potential if it gets added to a menu it’s probably $20 million to $25 million just to give you a sort of calibrate [inaudible] perspective.

Robert Hawkins – Stifel Nicolaus

And as you talk about this as a component of this I think you mentioned something like 50 some other test. Is this a quarter, a tenth, and is that, you said 2011, so is that one year and then 2012 is another piece of this? I am trying to…

Robert F. Freil

I think you will see, as we go out, more [inaudible] layered on [inaudible] is one we talked about. I think also the next panel will be around sort of LSDs. So I think as you go out, you will continue to add on to the panels. Our view is that eventually, you will go from 29 to close to 50.

Andy Wilson

The European growth demand. Is most of that screening and diagnostics so therefore this [inaudible] is less [inaudible] so currency is going to be less of an impact? On that area of diagnostic, whether it is European or U.S., there has been a 2% to 4% drop in birthrates kind of worldwide. Does that make much of an impact or is there just so much of the adoption [inaudible] that still has to happen that you don’t even see it?

Robert F. Freil

So in your first question, the European growth that we saw was sort of broad-based. We do have a big screening business in Europe, but our other businesses also saw growth in Europe as well. Your second point is while we have seen a reduced birthrate in the U.S., I do not believe we are seeing a reduced birthrate globally. In fact, I think global birthrates are actually up.

Robert Hawkins - Stifel Nicolaus

Just one final piece to clarify on that. Is it enough to, say, bring the division’s growth rate down a couple hundred basis points on that type of drop from [inaudible] standpoint, or is it something you do not even really see?

Robert F. Freil

I do not know that we would see it. I mean, on the margin, it might have a minor impact specifically on a newborn’s screening business. Of course, that is not a huge piece of the total company. So I think the fact that birthrates come down in the U.S. [inaudible] a couple points, I do not think you would see it in the PerkinElmer number.

Operator

Your next question comes from Tony Butler – Barclays Capital.

Tony Butler – Barclays Capital

Rob, your comment about imaging was very encouraging, though I am trying to rectify that with what I understood GE to say that given the imaging budget [inaudible] that they saw, they claim that may not last. So I’m curious what your outlook may be for diagnostic imaging for the full year, but most importantly, what kind of visibility do you have? Do you have visibility for the full year or is it just simply on a quarter-to-quarter basis?

Robert F. Freil

First of all, when GE talks about their imaging business, it includes much more modalities than what we sell into it and I think we have talked about it before. We basically provide them x-ray panels and, of course, they have numerous other modalities. So it’s a little difficult sometimes to triangulate what they say with what we are seeing. The other point I would make is, you know, GE is less than 50% of our business now in medical imaging so, again, while it has a significant impact, there are a lot of other important customers that are impacting our growth rates as well.

But having said that, I would say with the visibility that we have is bookings in place and we can probably look out with pretty good confidence one quarter and I would say increasing confidence in at least 6 months. So that’s what we are sort of basing it on. But you’re right. This thing could turn based on what happens with hospital budgets but based on the bookings in place we see now, I think we feel confident that this business will experience positive growth in 2010.

Tony Butler – Barclays Capital

Really helpful, thank you. One additional question from a geographic perspective. Some other peers of yours have had really good quarters out of Japan. I don’t think I heard Japan being a stellar growth opportunity for you. Am I incorrect?

Robert F. Freil

Japan was an improvement for us relative to 2009, but it’s not a huge piece of business for us. But it was positive, I recall, [inaudible] single digits.

Tony Butler – Barclays Capital

Last question. Your sort of long-term guidance is $3 billion. I’m just curious if you could speculate a little bit as to what area would be [inaudible] being environmental even quite frankly within [inaudible] diagnostics. Which area would you think outperforms the most? Could you characterize one particular area over another?

Robert F. Freil

Hopefully they all outperform. But I think diagnostics probably has a greater opportunity at least just from a macrotrend perspective, so I would think that’s one that if I had to pick one, I would say probably the diagnostics area.

Operator

That was our final question. I would like to hand the call back to Mr. Robert Freil, CEO for closing remarks.

Robert F. Freil

I thank you for your questions. So going forward, we will continue to focus on three key areas: first, to increase the growth profile of the company; second, to continue to invest in new and innovative technologies for better detection and prevention in human and environmental health; and third, to continue to achieve good financial returns through strong cash flow and a focused approach on driving operating margin improvement. I look forward to updating you on our progress against these priorities during our second quarter earnings call. Thank you for participation in today’s call and continued interest in PerkinElmer. Have a great day.

Operator

Ladies and gentlemen, thank you for your participation. The conference is now ended. You may now disconnect. Good day.

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Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2010 PerkinElmer earnings conference call. My name is Stacey and I’ll be your conference moderator for today. (Operator instructions.) As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. Dave Francisco. Please proceed.

David Francisco

Thank you, Stacey. Good afternoon and welcome to the PerkinElmer Q2 2010 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’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 August 19th, 2010.

Before we begin we need to remind everyone of the safe harbor statements 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 that we use any 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 Friel

Thanks, Dave. Good afternoon and thank you for joining us for the PerkinElmer Q2 2010 earnings call. This afternoon I will briefly cover three topics: our financial performance in the Q2, the trends we are seeing in our end markets, and describe some of the progress we have made in advancing our strategic priorities.

Turning first to our financial results we were quite pleased with our performance as we generated strong revenue growth of 14% and also expanded adjusted operating margins over 120 basis points. This resulted in adjusted EPS of $0.38 which represents a significant growth over our adjusted earnings per share in the Q2 of last year.

Regarding our top line performance in the quarter we saw broad based growth across all our businesses and geographies. The more resilient elements of our business, such as diagnostic screening, reagents, and service, continued to build off the strength we have seen in the last few quarters and performed well in the period. In addition, the end markets that were hit hard last year are experiencing strong growth and benefiting from both the economic recovery and easier comps.

In Human Health, our businesses continue to benefit from global health trends driving the need for earlier and more accurate diagnostic and therapeutic solutions in both the developed and the developing regions of the world. In our Diagnostic businesses, newborn screenings experienced modest growth in the US and European markets with much stronger growth outside the US and Europe although volumes are small relative to the base business.

We believe our launch of the SCIDs pilot is an encouraging sign for adoption of the next set of mandated tests in the US market, and we continue to see significant opportunity in developing markets that are expanding their newborn screening policies. The growth prospects in prenatal continue to be very exciting, however growth this quarter was negatively impacted by the startup of a large program in Q2 of last year.

Additionally the acquisition of SYM-BIO in September of last year added infectious disease screening to our portfolio and with the recent completion of our new manufacturing and R&D facility near Shanghai we now have a regional hub of scientific excellence. This expanded footprint provides a base to leverage our position within China as well as capture our share of the Chinese government’s commitment to broader access to diagnostic services in the region.

Our Medical Imaging business is benefiting from the recovery in spending due to pent-up demand for diagnostic capital equipment in hospitals around the world. Additionally, we experienced strong growth from our efforts to expand panel usage beyond our well-established medical applications into industrial imaging needs to diversify our customer base and grow in these adjacencies. We’ve good visibility into demand patterns in this business and see strong growth for the balance of the year, as the film to digital conversion resumes for x-ray technologies.

In the research market of our Human Health business major pharmaceutical consolidations and site closures are continuing to challenge capital purchases, which are negatively impacting our high through-put screening and automation products. Offsetting this is increasing reagent spend amongst this customer segment and solid growth in the academic sector, as we are seeing clinically relevant research migrating to academic institutions. In addition, as some of this work is moving to lower cost reasons we had some key wins in Southeast Asia, as researchers turn to our leading imaging and detection technologies such as Operetta® and ViewLux to further advance research in stem cells, yeast molecular biology, and preclinical evaluations of potential diagnostics and therapeutics.

I’m also pleased to note that earlier this year we announced the acquisition of VisEn, an in vivo molecular cellular imaging technology company located in Bedford, Massachusetts. This acquisition broadens our imaging and reagent profiles through the addition of proprietary chemistries in the emerging and fast-growing space of translational biomarker reagents. VisEn deepens our commitment to the drug discovery process by moving downstream into preclinical research, thereby enabling safer and more effective drugs brought to market faster. It also increases our offerings to academic research in areas such as cancer and cardiovascular disease.

In Environmental Health the rapid rate of industrialization and globalization continues to put pressures on the environment and food supply chain. This is resulting in an increased number of unregulated contaminants and a growing need for standards regulation and analytical testing. Consequently, our analytical sciences offerings are seeing good growth as global testing demands continue to increase in volume and level of specificity. Our application expertise and tailored solutions support these growing needs in both the developed and emerging regions of the world.

As an example, we’re seeing strong market demand for our new products for safety-related applications within food such as our Flexar UHPLC and our single-quad and Time of Flight mass spec systems. In addition we have had several key wins in China and Southeast Asia for both environmental monitoring and food safety applications with large governmental customers. These customers are turning to us for necessary regulatory compliance knowledge as well as the technology and solutions required to meet their needs.

Our sensor components also experienced strong, broad based demand with particular strength in safety and security, and in the industrial markets we are seeing a recovery as customers in this segment are rebuilding capacity after an extended period of limited capital investments. We experienced strong organic revenue growth in this end market, which include manufacturers of fine chemicals, polymers, and semiconductor components.

Lastly in our service business, OneSource® continues to grow significantly by increasing the scope of its offering within its major pharmaceutical accounts. This customized solution provides customers with the ability to drive overall laboratory productivity and reduce costs into the lab’s utilization of assets and the corresponding workflow. Additionally, as a result of the integration of our lab services business with our analytical sciences business we are seeing increasing pull through opportunities for our instrumentation through this channel.

As we look to the back half of the year we expect the level of organic revenue growth that we’ve experienced in the first half to continue into the second half. And unlike the first half, where the growth in Environmental Health was stronger than in Human Health, we expect our growth in the second half will be more balanced with both businesses growing high single digits.

Based on this organic revenues outlook we’ve increased our adjusted EPS guidance to $1.49 to $1.54. And while the results and momentum for the first six months are clearly influencing our decision to increase our guidance, more importantly is the progress we have made against our strategic priorities of increasing the growth profile of the company through leveraging adjacent markets and geographic expansion as well as establishing a framework to drive higher profitability.

As we look ahead we believe that our end markets possess attractive long-term growth profiles and we are very well positioned to continue to benefit from these trends. Now let me turn the call over to Andy, who will walk through our financial performance in more detail.

Frank “Andy” Wilson

Thanks, Rob, and good afternoon, everyone. I’ll now provide some additional details about our Q2 results and after my prepared remarks we’ll open it up for questions. Before moving into the financial details I’d like to clarify that whenever I talk about a particular measure being up or down I’m referring to an increase or decrease in that measure during the Q2 2010 compared to the Q2 2009.

As Rob mentioned earlier we are pleased with our financial performance in the Q2, delivering strong revenue and earnings growth over the prior year as well as strong cash flow in the period. Revenue for the Q2 increased 14% as compared to the same period last year. The unfavorable impact of foreign exchange was 2% and the favorable impact from acquisitions was 2%, therefore organic revenue increased by 14% versus the prior year.

The remaining revenue analyses in my prepared remarks will be presented net of the unfavorable impact of foreign exchange and the favorable impact of acquisitions. By segment, organic revenue increased by 6% and 19% in the Human Health and Environmental Health segments respectively. By geography, organic revenue in the Americas was up mid-teens, Europe was up high single digits and Asia grew at a high teens rate. Within the Asian region, organic revenue in China grew over 20%.

From an in market perspective PerkinElmer’s Human Health segment represented approximately 40% of total revenue in the quarter. Within Human Health we served two end markets: Diagnostics, which represented 24% of total revenue; and Research, which represented 16% of total revenue. Organic revenue from our Diagnostics business grew at a mid single-digit rate in the Q2 with our Medical Imaging business delivering another strong quarter, due in part to the expansion of our panel offering into industrial applications.

In the Q2 organic revenue in our Research business increased at a mid single-digit rate. We are encouraged by the strengths we are experiencing in academia, driven by a robust demand for our high-end Operetta® cellular imaging systems and our low-end EnSpireTM plate readers, as well as the corresponding pull through of our alpha reagent portfolio. As Rob mentioned, this strength was partially offset by continued pressure on capital spending, principally within pharma.

The Environmental Health business represented 60% of our total revenue in the Q2. Within the Environmental Health business we served four end markets: Laboratory Services, Environmental, Safety and Security, and Industrial. Our Lab Services business represented approximately 21% of our total revenue in the Q2 and organic revenue grew in the mid-teens. OneSource, our comprehensive, multi-vendor offering, continued its momentum, delivering significant organic revenue growth in the quarter as the business continues to expand the scope of its service offerings.

The Environmental market represented approximately 19% of total revenue in the quarter with organic revenue increasing in the high teens. Continued expansion of environmental testing regulations and pent-up demand due to weak capital spending amongst labs in the prior year were the primary contributors to this performance. Our inorganic portfolio continues to gain broad market acceptance, particularly in the area of toxic metal detection in the analysis of water. Additionally we saw strong growth in China driven by the impact of the continued SEPA regulatory enforcement measures, particularly related to contaminate analysis of the region’s main rivers and air pollutant analysis in its larger cities.

The Safety and Security market represented approximately 12% of total revenues in the Q2 with organic revenues increasing in the high teens. As Rob mentioned, we experienced strong growth in the quarter from our new Flexar UHPLC as well as our single-quad and Time of Flight match spec systems for safety related applications within food, pharma, and neutraceuticals. Also within the quarter we saw a continued strong demand for our thermopile sensors despite a difficult year-over-year comparison driven by the response to the H1N1 virus in the prior year.

Our Industrial markets represented approximately 9% of total revenues in the Q2 and organic revenues increased by over 20%. We were particularly pleased to see increased demand from many of our chemical and petrochemical customers, which we believe is a sign of renewed capacity expansion, a result of both the cyclical recovery and an extended period of delayed capital investment.

Turning to our financial performance, adjusted operating margin was up 120 basis points in the Q2, due primarily to volume leverage and productivity, offset by unfavorable mix in the period. GAAP operating profit was $42.6 million in the quarter versus $38.2 million in the Q2 of 2009. Adjusted operating profit in the quarter was $65.8 million versus $52.5 million in the same period a year ago.

For the Q2 we had a GAAP tax rate of 15.8% versus a previously communicated tax rate of 27%. The lower rate is primarily the result of the tax treatment associated with our acquisition of the remaining 50% interest in MDS Sciex, which was consummated earlier this year. On a non-GAAP basis our adjusted tax rate was 26.3%, which was approximately 70 basis points better than we anticipated and a result of the geographic mix of profits.

GAAP EPS from continuing operations in the Q2 of 2010 was $0.46 compared to $0.20 in the Q2 of 2009. Adjusted EPS was $0.38 in the Q2, up 36% from the prior year; and our weighted average diluted share count was approximately 118,300,000 shares.

Turning to the balance sheet we finished the Q2 with approximately $405 million of net debt which we define as short- and long-term debt minus cash. This reflects an increase in adjusted net debt of approximately $26 million as compared to year end. At the end of the quarter we had approximately $216 million of cash.

Looking at our cash flow performance for the quarter, operating cash flow from continued operations was $69 million as compared to $40.2 million in the Q2 of 2009. As you may recall in the Q2 of 2009 we terminated our accounts receivable securitization facility and repaid the outstanding balance of $30 million. This resulted in an unfavorable impact to operating cash flow in the Q2 of last year. Working capital turns improved by approximately ½ turn on a year-over-year basis.

In summary we’re pleased with our financial performance for the quarter, driving strong revenue and earnings growth as well as solid cash flow generation. Before I discuss the details of our financial guidance let me just highlight a few additional items in the quarter.

First, our margin improvement initiatives continued to gain momentum, though we are clearly in the early innings of this multi-year project. Our efforts to date to streamline our logistics processes had a positive impact on our gross margin performance in the quarter, helping to offset a somewhat negative shift in product mix. We also undertook additional restructuring actions to further align our cost structure with our long-term profitability goals. These actions were targeted primarily at side consolidation and general costs rationalization.

Second, we booked two gains in the quarter, one related to the acquisition of the remaining 50% of the MDS Sciex joint venture, and the other related to an asset sale completed in the period. Lastly, I’m pleased to report that we completed the divestiture of our Flash business during the quarter.

Now let me discuss our 2010 guidance and provide some further detail. As Rob mentioned earlier we continue to see positive trends in many of our served markets, and we now expect organic revenue growth to grow in the high single-digit range for the full year and expect the Q3 of 2010 to grow at high single digits as well.

Regarding adjusted earnings per share, the restructuring actions taken in the Q2 will provide some benefit in the back half of the year but will be offset by additional costs to integrate recent acquisitions, such as VisEn. As a result we now estimate our full year adjusted earnings per share for 2010 to be in the range of $1.49 to $1.54 versus our previous guidance of $1.43 to $1.48, which represents year-over-year growth in the range of 17% to 21%. Additionally, we estimate our adjusted earnings per share for the Q3 to be in the range of $0.33 to $0.35.

Once again we’re pleased with our financial performance in the quarter as well as the progress we’ve made on our strategic initiatives. This concludes my prepared remarks. I’ll now turn the call back over to Dave.

David Francisco

Thanks, Andy. And Stacey, at this time we’d like to open up the call to questions, please.

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) And please stand by for your first question. And your first question comes from the line of Ross Muken with Deutsche Bank. Please proceed.

Ross Muken – Deutsche Bank

Good afternoon, guys, and congratulations on a phenomenal quarter.

Robert Friel

Thank you.

Ross Muken – Deutsche Bank

You know, as you look across some of your more cyclical businesses and you think about kind of how they’ve developed in terms of the recovery and the type of order activity you’ve seen now coming into the Q3… In terms of the magnitude of the snap back, I know there were some relatively favorable comps in a few of these businesses from last year but still a better follow through than we’ve seen in a lot of other places. As you think about what’s driving it and if you could sort of tease out maybe specific end markets where you’ve seen more substantial kind of snap back than we would have thought, you know, any sort of color on that would be helpful.

Robert Friel

So what I would say, when you look on the Environmental side as you said, we’ve seen good growth there. I think part of that is clearly the recovery. I think part of it also is that during 2009 I think we talked about this at the time – we continued to invest in the businesses and our view was it was not going to be a long-term downturn. And so consequently we invested throughout 2009 and consequently I think we you know, when it snapped back we were in a very good position to take share.

So I think that’s what we’re seeing in the Q2 and you know, early indications for the Q3 is that’s continuing. And that’s really given us the confidence to talk about high single-digit growth for the remainder of the year.

Ross Muken – Deutsche Bank

And you know, so the second part of my question, from an end market perspective is there a certain customer base you feel like you’re leveraged to where you saw more substantial order pickup or revenue pickup than one would have expected? And what pieces of the business, if there are any, do you feel like you’re not seeing an acceleration in?

Robert Friel

You know with the growth we’ve seen, it’s been pretty broad based even within the geographies. Andy talked a little bit about that. I mean I don’t know that I would spike out any particular area. I mean when we looked across the board, you know, food, water, we talked about some of the safety and security applications – it’s been pretty broad based. So I don’t know that I would spike out any one in particular. I think it’s, and even from a geographic perspective our US markets were up mid-teens, and Asia was up a little bit more than that. But I don’t know, Andy – anything you would spike out?

Frank “Andy” Wilson

No, I think it was very broad based. I mean I think that was, as I went through my remarks I talked about everything being up. I think, you know if you look at some of the businesses that were down fairly significantly last year, there could have been a little bit of a pent-up demand. So I think that contributed to part of the very significant organic growth we saw in the Q3. But I think the order pen-ins we’re seeing now seem to support the high single-digit growth rate for the second half.

Ross Muken – Deutsche Bank

Right. And you know, as we think about kind of contribution margin, maybe more so on the Environmental business, we had a pretty sequential, large sequential pickup in revenues but the EBIDTA was slightly above kind of Q1 levels relative to the revenues. Is it more of a mix shift in terms of some of the industrial spectroscopy instrumentation or process instrumentation where it’s just lower margins so it sort of skews the mix? What was sort of the driving factor?

Robert Friel

Yeah, I think that’s right. I think you see that in the gross margins, that because the Environmental area, which has a tendency to have lower gross margins, with that being up some 19% and the Human Health side not being up as strong that does provide a little bit of a negative mix. The offset to that on the operating side, though, is they have a tendency to carry a little bit lower operating expenses; and the other thing is, interesting enough is that mix actually helps us on the tax rate because what we find is those businesses have a tendency to be produced in the areas that drive a lower tax rate. So though we get a little bit of a negative mix on the operating side we actually make up a good portion of that on the tax rate.

Ross Muken – Deutsche Bank

And just finally you know, you’ve done a real nice job on a lot of these nice technology- and business expansion tuck-ins on the M&A front. How would you sort of characterize the environment that you’re seeing now in terms of deal flow and valuation? Markets have obviously been a bit volatile and that’s not always easy, but you’ve been able to consistently have a deal or so a quarter of consequence. How are you feeling about the pipeline?

Robert Friel

I think we still feel good about the pipeline. I would say though probably in the last couple quarters we’ve seen increased competition in the number of the deals. But I would say I think you know, the whole key as you pointed out is to have a robust pipeline. And I think we feel good with the pipeline going forward and we continue to feel good about our ability to do these deals on a continual basis and just sort of bolt them on to the portfolio.

Ross Muken – Deutsche Bank

Great. And congrats again on the great quarter.

Robert Friel

Thanks, Ross.

Operator

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

Quintin Lai – Robert W. Baird

Hi, good afternoon. We’d like to offer our congrats as well.

Robert Friel

Thanks.

Quintin Lai – Robert W. Baird

You know, reporting here at the tail end of the reporting season, your other peers have talked about, some of them have talked about Europe – some saw slowing. It looked like it was a pretty solid quarter for you and based on your guidance it looks like the outlook is good. I guess give a little, could you give us a little more color on what you’re seeing in Europe and maybe the split between government and non government spending?

Robert Friel

So our European business was up high single digits but it trailed the other regions but still pretty good growth. So I would say what we’re seeing from a government perspective is probably a little bit of slowing on the Diagnostic side of our business as I think there is a little bit of a hesitation and concern about budgets. But I think on the commercial side we continue to see pretty good growth.

I talked a little bit about the Medical Imaging uptake and I think a lot of that goes into Europe and I think that’s driving some of our European growth. So I would say probably on the government side it is a little slower but on the non government side we’re seeing good growth.

Quintin Lai – Robert W. Baird

Great. And then with respect to China, another real strong quarter of demand in China – where do you think that the Chinese are with respect to build out of some of their things, like environmental and safety monitoring?

Robert Friel

I would say generally I think across China we’re still in the very early innings of what I think will be fairly long-term robust growth here. And so I guess I would say, you know, as I said before just early innings and a lot more to do and a lot more to go. I mean whether that’s on the Environmental side, whether that’s on the Diagnostic side, or whether that’s on the bio-pharma side.

Frank “Andy” Wilson

I think you probably know, I mean as you look at China the regulations they’re putting in place are very similar to the regulations that they’re putting in place in the US and Europe. And again, being early days there’s a lot of runway there.

Quintin Lai – Robert W. Baird

Thank you for that. And then just a quick question on guidance, Andy – what are you expecting for the full year tax rate on a pro forma basis?

Frank “Andy” Wilson

The GAAP tax rate – 27%.

Quintin Lai – Robert W. Baird

And then for the pro forma tax rate to get to your $1.49# to $1.54?

Frank “Andy” Wilson

That’s the 27. The GAAP tax rate is $0.26.

Quintin Lai – Robert W. Baird

Okay. Alright, thank you.

Operator

Your next question comes from the line of Derik DeBruin with UBS. Please proceed.

Derik DeBruin – UBS

Hi, good afternoon.

Robert Friel

Good afternoon.

Derik DeBruin – UBS

I guess you got rid of your Flash business or you divested that. Could you just give us a bit more detail on that? And I guess are you still looking to divest other things in the portfolio?

Robert Friel

So the Flash business as Andy said we completed it in the Q2. We actually sold it at a light gain. I think we probably got something around 1x revenue.

Derik DeBruin – UBS

Okay.

Robert Friel

And given the growth prospects in the business we thought that was good. I would say at this point right now there’s nothing we’re actively looking at to sell but of course we’re always questioning and challenging the portfolio.

Derik DeBruin – UBS

Okay. As the markets are rebounding are you seeing any pressure from pricing, particularly in the analytical instrumentation business? And just going back to the gross margin question, I would have thought it would have been a little bit stronger this quarter, just given the volumes there. I’m just wondering if, you said it was mix but it was also some sort of pricing element in there?

Robert Friel

Well, I would say generally speaking we almost always see pricing pressure in the analytical instrument space. And so I would say that’s an area that comes under fairly constant pricing pressure. Now in some of the other areas of our business, you know, we get some positive price. But I would say the areas where we continue to run up against pricing pressure is the analytical instrument space, we talked about in the past the Medical Imaging – obviously as the volume goes up there we contractually give pricing concessions there.

So I don’t think price was a significant impact on the gross margins in this quarter because to balance that, it might have been slightly negative but not significantly. The biggest contributor to the flat gross margins on the higher volume was the mix. As I sort of mentioned previously, when you have Environmental going up 19% and Human Health only going up around 6%, the percentage swing is putting pressure on the gross margins.

Derik DeBruin – UBS

And talking about Human Health, on the Diagnostics side, so you’re claiming US and Europe I would say a little bit softer or coming up against some kind of good growth in the developing markets. What’s your split between developing countries for that business and the established market?

Robert Friel

It’s still probably less than 15% of the total business so it’s still relatively small. And that’s, you know, really the goal here is to get that to a bigger percentage of the business.

Derik DeBruin – UBS

Okay. And are you still seeing good demand on the cord blood side?

Robert Friel

We are. Cord blood grew sort of mid-single digits in the quarter and it continues to perform well.

Derik DeBruin – UBS

Okay. And I think that does it for me. I’ll get back in the queue. Thanks.

Robert Friel

Okay. Thanks.

Operator

(Operator instructions.) Your next question comes from the line of Paul Knight with CLSA. Please proceed.

Jonathan Palmer – CLSA

Hi guys, it’s Jonathan Palmer in for Paul Knight. First, I just wanted to follow up on one of Quintin’s questions regarding China. With the center now open where, how big is that market now and where do you see it maybe one to three years out?

Robert Friel

Well, the total Diagnostic market in China is I think $1.8 billion. Now obviously we don’t serve that entire market, but I think for our adjustable market it’s probably in the couple hundred million dollar range so we see a lot of runway. Our business in China in the Diagnostic area is less than $50 million. Now on the Environmental side I think it’s a much larger market, but specifically on the Diagnostic side I think there’s a huge runway for us relative to our addressable market.

And of course the other thing that we’re looking at is to sort of maybe expand about further from what we do today. So today we do a lot of newborn prenatal and we’re starting to move into infectious disease, and I think there’s opportunities even to go into some other areas to expand our addressable markets because we have I think a very good capability there in China.

Jonathan Palmer – CLSA

And then how big is the Perkins business in China today?

Robert Friel

It’s about $130 million in revenue.

Jonathan Palmer – CLSA

Great, thanks. And then one quick follow-up here: With all this bio-pharma consolidation, where are we relative to that in terms of the research division? And I guess how do you see that trend playing out with service as well?

Robert Friel

So I would say on the instruments side it’s pretty pressured as I mentioned, but when you look at our research business, if you just isolate the instruments that go into bio-pharma it’s a relatively small piece of the business. Much larger are the reagents piece of our business, and then increasingly a larger piece of our business is going into academic research as we mentioned earlier; that we saw very good growth there.

So it’s hard to tell when we come out of the pharma consolidation but like I said that was, we had a difficult quarter there and I think it’s going to be at least for the next couple quarters. But our strategy around that is to focus in on the reagent side, focus more on the academic side and then of course the service area, which continues to grow very strong. Because despite the consolidation I think they’re still looking to outsource a lot of that work because of some of the benefits they see in the productivity side.

Jonathan Palmer – CLSA

Great. Thanks for taking my questions.

Operator

And we have a follow-up question from the line of Derik DeBruin with UBS. Please proceed.

Derik DeBruin – UBS

Hey. More on the gross margin, just a question. Do you expect the same type of mix issues to persist into Q3 and into Q4? I mean Q4 you’d normally have a pretty big quarter just because of the volume growth. Can you just give us a little bit of color on the margin, gross margin trends you’re expecting?

Frank “Andy” Wilson

We should see year-over-year gross margin improvement in the Q3 and Q4. I mean, again, we had 19% organic growth in Environmental and we’re saying those are both going to be more high single digits, so that mix is going to shift a little bit. I think we’ll see some of that improvement flow through.

Derik DeBruin – UBS

Great, thanks.

Operator

And at this time I’d like to turn the presentation back over to Mr. Rob Friel for closing remarks.

Robert Friel

Well thank you for your questions. In summary we’re obviously pleased with the progress we made this quarter. We continue to increase the growth profile of the company as I mentioned through geographic expansion, leveraging our market adjacencies and investing in innovative technologies and service.

I look forward to discussing our progress against these priorities during our Q3 earnings call. Thank you for your participation in today’s call and continued interest in PerkinElmer. Have a great day.

Operator

We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

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