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PerkinElmer Inc. (NYSE:PKI)

Q3 2007 Earnings Call

October 25, 2007, 5:00 PM ET

Executives

Michael A. Lawless - VP of IR

Gregory L. Summe - Chairman and CEO

Robert F. Friel - President and COO

Jeffrey D. Capello - CFO

Analysts

Paul Knight - Thomas Weisel Partners

Derik De Bruin - UBS

John Goldberg - Merrill Lynch

Ross Muken - Deutsche Bank

John Sullivan - Lerrink Swann

Jason Weiss - Robert W. Baird

Craig Leighton - Lord Abbett

Vivek Qana - Civic Global Healthcare

Vito Menza - Sandler Capital

Operator

Good day ladies and gentlemen. Thank you for standing by and welcome to the 2007 third quarter PerkinElmer earnings conference call. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today’s presentation. [Operator Instructions].

I would now like to turn the presentation over to your host for today's conference Mr. Mike Lawless, Vice President, Investor Relations. Please proceed sir.

Michael A. Lawless - Vice President of Investor Relations

Thank you. Good afternoon and welcome to the PerkinElmer Third Quarter 2007 Earnings Conference Call. If you have not already 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 1877 PKI NYSE. Please note that this call is being webcast live and will be archived on our web site until November 25, 2007.

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 on this call to make directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non-GAAP financial measures during this call that are not reconciled to the GAAP in this attachment, we will provide reconciliations promptly.

I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Greg Summe.

Gregory L. Summe - Chairman and Chief Executive Officer

Thank you Mike. Good afternoon everyone. I appreciate you joining us to discuss our third quarter 2007 results. Joining me on the call are Rob Friel, our Present and Chief Operating Officer and Jeff Capello our Chief Financial Officer.

I will begin by reviewing the highlights of the quarter in our Optoelectronics business. Rob will follow with more perspective on Life and Analytical Sciences business and Jeff will provide more detail on the financial results. After that the three of us will be available for questions and then we'll close the call.

Overall, we're very pleased with our results in the third quarter. We had another strong quarter of double-digit revenue growth, 13%, which is both at Life and Analytical Sciences and Optoelectronics. We achieved good operating margin expansion of 70 basis points. We continue to increase our investment in global marketing and also in R&D, which is up 14% year-to-date over the last year.

We announced our plans to acquire ViaCell, a leader in stem cell processing and preservation. We expect to see this growth and profit momentum continue through the remainder of 2007 and beyond.

Our growth in the quarter was led by medical imaging, genetic screening, specialty lightning and laboratory service, all with strong double-digit growth. With our continued strong cash flow generation, we continue to retain excellent flexibility both the fund growth and returned capital to shareholders.

During the third quarter, we bought back about 1.1 million shares of our stock and increased our capital expenditures, which are up about 23% year-to-date over the last year, primarily as a result of the expansion of our Santa Clara medical imaging facility, which I'll speak to a little bit later on.

We are also using some of our investment capability to acquire ViaCell, who is a leader in the processing and preservation of stem cells from umbilical cord blood for future medical use.

The addition of ViaCell will continue the expansion of our neonatal health capabilities and strengthen both our distribution capabilities to obstetric professionals as well as providing us a powerful direct marketing channel

to prospective parents. The combination will help extend our leadership in serving the health of a mother and her baby. We anticipate completing a Tender Offer process in the fourth quarter.

Our other recent acquisitions continue to perform well. For example, NTD Labs had another excellent quarter, as demand continues to grow for first trimester screening driven by the increased adoption of free Beta hCG. We own the intellectual rights to the use of free Beta hCG and it is increasingly recognized as the gold standard in prenatal screening.

Spectral Genomics also reported strong revenue growth in the quarter, as we see growing adoption of their Karyotyping solution for chromosomal disorders. Lastly, Euroscreen showed very strong growth in the quarter driven by improved sales for its innovative corn-based saver assay platform.

Overall, we remain very pleased with the progress of our recent acquisitions, and our pipeline for bolt-on acquisitions is very active. We recently announced that our environmental business has launched an innovative initiative called Ecoanalytics. Through Ecoanalytics, we have developed comprehensive application-based solutions to address pressing global challenges in three critical market segments, food safety, water quality, and biofuel development. This is a system approach that combines our high performance analytical instruments with deep technical application and regulatory support. We believe Ecoanalytics will help our customers address environmental concerns with proven and easy to implement solutions.

Turning to Optoelectronics. In the third quarter, our medical imaging business shipped a record number of flat panel digital x-ray detectors. Demand from both diagnostic and therapeutic customers remains very strong. The expansion of our 80,000 square foot panel fabrication facility is complete and the additional production capacity will start to come online during early 2008. We expect that this multiyear $50 million capital initiative should enable us to satisfy customer demand through 2012.

Also in the quarter we began shipping our xenon based flash modules for advanced camera phones. Xenon has been increasingly recognized as the critical technology for high quality photography, which will drive further increases in sales growth in the fourth quarter. We have the world's leading capability in flash lighting and believe the opportunity for us in this marketplace is quite large. We expect strong adoption of new high-resolution camera phones led by the markets in Europe and Asia, where the market adoption rate is ahead of the US market.

Finally, I wanted to remind you that PerkinElmer will be holding an Analyst Meeting in New York City on Friday, November 2. We look forward to that event to discuss our strategy and market opportunities in more depth. I invite the members of the financial community to participate at the event and the general public to tune into our live webcast.

I'll now turn the call over to Rob to provide more insight into our Life and Analytical Sciences business.

Robert F. Friel - President and Chief Operating Officer

Thank you Greg. This afternoon I'll briefly describe the market conditions in LAS' three key end markets, clinical diagnostics, drug discovery, and environmental and touch on our key priorities in each. Then I'll turn the call over to Jeff, who'll then discuss our financial results for the quarter in detail and our forecast for the remainder of the year.

Turning first to the diagnostic market, we continue to experience strong demand for both our prenatal and neonatal screening, as clinicians increasingly recognize the benefits of early risk assessment so that disorders can be predicted and treated as early as possible. We also saw nice growth in our CGH Array business for chromosomal analysis as we've now completed the move of the Spectral Genomics production to Turku where our other FDA cleared products are produced.

Our priorities continue to be focused on increasing the value we provide per birth, while at the same time capturing more births. For example, we are developing assay kits for the ADAM12 biochemical marker, which has broad potential in maternal screening for fetal chromosomal abnormalities and PP-13, a potential biomarker for identifying patients at risk for preeclampsia.

We also continue to invest in expanding our reach, which is why we are quite excited about the potential of adding ViaCell, as it expands our sales and marketing capability and adds another strong product offering, in addition to expanding our capabilities in stem cells, which is an exciting and growing market. In the drug discovery research area, we would characterize the overall market as stable and growing mid-single digits, but with any [ph] two companies representing wide deviations from the mean. Some of our customers are going through significant restructurings, including closing or consolidating screening centers, which negatively impacts us on the instrument side, but appears to be having favorable impact on our one-source service business. In addition, this focus on profitability is also increasing outsourcing activities, which is accelerating demand for our assay development service. Some of our customers are clearly expanding capacity in selective areas, particularly in cellular screening and imaging, which is helping the companies we recently acquired. This trend is also helping our reagent business, where our LANCE Ultra and SureFire technologies for biochemical and cell based Kinase assays are experiencing very good adoption.

In the GPCR area, this focus on cells is driving growth in our photo protein reagents and we are also seeing good growth in our AlphaLISA technology, which is an alternative to ELISA assays for preclinical biomarker detection. Going forward, our priorities in drug discovery will be to focus on cellular screening and imaging, emphasizing our ability to offer both the detection and reagent solution and continue to expand our service offering, with the goal of providing as comprehensive a service as possible.

In the environmental market, the overall conditions are very good, with particular pockets of strength in air and water monitoring, food safety and energy. Our priorities here will be to focus on application-based solutions around several key end markets. One example of this is the Ecoanalytics initiative that Greg mentioned. We introduced it last week in Beijing at the conference and exhibition of instrumental analysis. And as part of this initiative, we introduced a number of new products targeting the monitoring and detection of contaminants such as melamine, polyaromic hydrocarbons and trace metals like lead and mercury.

We've also recently expanded our very successful line of gas chromatography with the Clarus 400, which complements the 500 and 600 and is targeted at emerging markets. Over the coming quarters, we will be introducing additional products to specifically address some of the critical environmental challenges we now face.

So to summarize, we feel good about the trends across the markets we serve and more importantly we feel good about our own position within these markets, and believe we can continue to grow at least if not better than the underlying growth of the markets we serve.

Now let me turn the call over to Jeff.

Jeffrey D. Capello - Chief Financial Officer

Thank you Rob and good afternoon. This afternoon I'll provide some details on our revenue, cost and cash flow for the third quarter of 2007. Then I'll briefly discuss guidance for Q4 and full year 2007 before opening up the call to your questions.

Before I get into the specifics, I wanted to clarify that whenever I talk about a particular measure being up or down, I am referring to an increase or decrease in that measure during the third quarter of 2007 compared to the third quarter of 2006. And to the extent that I use any non-GAAP measures, those have been reconciled to the comparable GAAP measure in the appendix to the press release on our website.

Turning first to revenue, we finished the third quarter of 2007 with sales on a reported basis of $436 million, up 13% compared to $387 million in the third quarter of 2006. Changes in foreign exchange rates and acquisitions contributed approximately 400 basis points and 300 basis points respectively to the overall third quarter 2007 revenue growth.

By segment, revenue growth was 13% in both LAS and in Optoelectronics. Impact of foreign exchange and acquisitions each contributed 400 basis points to the growth of LAS, whereas the impact of foreign exchange contributed 300 basis points to Optoelectronics. The remaining revenue comparisons will be on a reported basis including the impact of foreign exchange and acquisitions.

Geographically, revenue in the Americas, which represented approximately 44% of our revenue for the quarter, was up in the high single-digits. Revenue in Europe, which represented about 37% of our revenue for the quarter, was up strong double-digits, and Asian revenue representing about 19% of our revenue for the quarter increased in the strong double-digits. Gross margins for the third quarter of 2007 were 41.1%, an increase of 80 basis points over 40.3% in the third quarter of 2006. Adjusted for the impact of stock option and amortization expenses, gross margins increased 80 basis points. Strong volume, favorable product mix and productivity more than offset the impact of inflation to drive the year-over-year gross margin improvements.

R&D expenses increased 12% to $27.7 million in the third quarter of 2007 from $24.8 million in the third quarter of 2006. Adjusting for the impact of stock option expensing and amortization, we kept R&D expense as a percentage of sales at 6.2% to fund the acceleration of activity around new product introductions and acquisitions. We expect our R&D investment will grow at a slower rate than sales in Q4 '07.

Selling, general and administrative expenses were $106.4 million in the third quarter of 2007, an increase of 12% compared to $94.7 million in the third quarter of 2006. Adjusted for stock option and amortization expenses, SG&A was also flat on a year-over-year basis at 24.5%. Volume leverage and cost controls were offset by the unfavorable impact of foreign exchange and acquisitions.

In the third quarter of 2007, we had a reversal of a reserve for $1.4 million for lease charges on a prior divestiture. GAAP operating income for the third quarter of 2007 was $45.8 million compared to $36.5 million in the third quarter of 2006. Excluding intangibles amortization and stock option expense, operating income in Q3 '07 was $58 million or 13.3% of sales, an increase of 70 basis points from Q3 '06 due to increased gross margin.

Looking at expenses below operating income, interest expense net of interest income in Q3 '07 was $3 million as compared to interest expense of $200,000 in Q3 '06 due to the increase in net debt over the last 12 months driven by our acquisitions and share repurchases, somewhat offset by strong cash generation. Other expense of $2.4 million is comprised of the cost of hedging or foreign currency balance sheet exposures, which increased year-over-year due to the weaker US dollar.

The tax provision of $9.5 million for the third quarter of 2007 reflects a rate of approximately 23.3% compared to 21.3% in the third quarter of '06, which included a benefit of $1.2 million, primarily related to the difference between the prior-year tax provision and the actual tax liability. We expect our tax rate to be approximately 24.5% or lower during the fourth quarter, depending on the distribution of actual income and other items. Net income from continuing operations was $31.1 million in Q3 '07, up from $28.9 million in Q3 '06. Weighted average diluted shares outstanding for the quarter were 119.5 million shares, reflecting the impact of our year-to-date repurchases. In Q3 '07, we repurchased 1.1 million shares outstanding under a 10-million share program approved by the Board in '05 leaving us with 2.9 million shares remaining in our approved program.

GAAP EPS from continuing operations was $0.26 in the quarter. Excluding intangibles amortization and stock option expense, adjusted EPS was $0.33 in Q3 '07, up 10% from Q3 '06 meeting first call consensus estimate adjusted for stock option expense in the high end of our forecasted range of $0.31 to $0.33.

Turning to our segment results, I will briefly describe our Q3 performance. In LAS, revenue for the third quarter was $319.3 million, up 13% over the third quarter of '06. On a GAAP basis, LAS operating profit for the third quarter of '07 was $29.3 million compared to $25.3 million for the third quarter of '06. Excluding the amortization of intangibles and stock option expense, LAS Q3 '07 operating margins were 12.7%, up from 12.2% in Q3 '06. Volume benefits, product mix and net productivity measures drove the operating margin improvement.

In Genetic Screening, which was about 16% of the LAS revenue in the quarter, revenue increased in the strong double digits. We continue to see excellent expansion in the neonatal screening, which grew double-digits driven by increased adoption of mandated tests such as our immunoreceptor tyrosine for cystic fibrosis in the US and international expansion in Russia.

Also, within the quarter, we made further strides in global expanding of our testing protocols in Latin America by reaching an agreement for a first analyte in both Mexico and Chile as well as completing the installation of our equipment in seven states and China. Prenatal screening also grew double digits during the quarter compared to Q3 '06, driven by the increased acceptance of our tests in Europe and the strong adoption of our NTD tests with its proprietary free Beta hCG marker, which generated strong double-digit growth.

Service, which represented about 26% of our LAS revenue in the quarter, grew high single digits, also contributing to its upward trajectory. We saw good growth in our base business, particularly in our noncontract global revenue in both Europe and Asia-Pacific driven by a recent investment. In addition, we continued to see very strong demand for our one-source multiyear service offerings in the areas of relocation and asset management programs.

The outlook for our service business remains very favorable, as our multiventure strategy continues to be well accepted in the market. In the environmental and chemical product lines, which represented about 25% of our LAS revenue in the quarter, revenue increased in the high single digits, driven by very good performance in our GC offering from our Clarus product line.

Sales and orders in China were again up double digit in the quarter, reflecting continued demand for the solutions to improve the analysis of air, food and water quality. Biopharma sales, which represented 34% of LAS revenue in the quarter increased in the mid single digits compared to the same period in '06. Within biopharma, certain businesses showed strong improvement in year-over-year revenue growth versus Q3 '06 driven by new product introductions. Specifically, reagent revenue grew in the high single digits. Our focus on increasing our high throughput reagent assays with new product introductions in both kinase and GPCR technology areas is beginning to gain traction.

In addition, increased adoption of our foreign technology from the Euroscreen acquisition is also driving growth for cells and membranes. Instrument revenue performance was not as strong due to challenge in year-over-year comparables in our JANUS liquid handling product, which was introduced a year ago as well as timing of orders and new product introductions.

In Optoelectronics, revenue for the quarter was $116.3 million, up 13% compared to the third quarter of '06, led by imaging and lighting businesses, which grew double-digit. Optoelectronics GAAP operating profit for the third quarter of '07 was $24.6 million or 21.1% of revenues. Excluding intangibles and amortization, stock option expense and lease charges, operating margins were 20.8%, which represents an increase of 30 basis points compared to the third quarter of '06, driven by volume leverage and product mix, offset by the impact of a weaker dollar. Within Optoelectronics, imaging revenue grew strong double digits during the quarter driven principally by strong demand in our Amorphous digital x-ray panels. We expect growth in our Amorphous business to continue on an upward trajectory during Q4 and into 2008.

Specialty lighting grew in the double digits compared to Q3 of last year. We continue to see strong adoption of our flashtubes by many of the leading digital camera manufacturers. In addition, we shipped our first mobile flash module product this quarter under our previously announced design win. Our investments in the photo flash area are just beginning to show results, and we see a very strong outlook for this business going forward. Hence our revenue was up in the mid single digits in the quarter driven by our industrial sensor and photo diode product lines.

Now turning to the balance sheet and cash flow. During the third quarter of '07, we had GAAP operating cash flow of $24 million driven by improved profitability and flat working capital performance. We continue to invest in the business, spending $10.5 million in capital to fund our various growth initiatives. We finished the quarter with total cash of $161 million, and net debt of $86 million, which we define as total short and long-term debt net of cash. We expect to build off the strong momentum achieved so far in '07 and continue to drive strong revenue growth in Q4.

Excluding the impact of the anticipated ViaCell acquisition for the fourth quarter of 2007, we are forecasting double-digit revenue growth, including 400 basis points of foreign exchange and 300 basis points for acquisitions. In addition, we are forecasting GAAP earnings per share from continuing operations of between $0.36 and $0.38, with the impact of stock option expensing expected to be $0.01, and the impact of amortization, $0.06.

Excluding the impact of intangibles, amortization and stock option expense, we are forecasting cash earnings per share from continuing operations of between $0.43 and $0.45 for the fourth quarter of 2007, which will allow us to achieve our full-year EPS forecasted growth of low-to-double digits to mid teens. As mentioned during our call announced the ViaCell acquisition. We would expect this acquisition to be approximately $0.01 dilutive to EPS in the fourth quarter, and 200 basis points accretive to revenue growth in the fourth quarter assuming a mid-November close. We also expect the acquisition to be $0.03 to $0.05 dilutive in '08 and $0.01 to $0.02 accretive to 2009 on an adjusted basis.

I will now stop and open the call to your questions.

Question and Answer

Operator

[Operator Instructions] Your first question will come from the line of Paul Knight of Thomas Weisel Partners.

Paul Knight - Thomas Weisel Partners

Hi Greg.

Gregory L. Summe - Chairman and Chief Executive Officer

Hey Paul, how are you doing?

Paul Knight - Thomas Weisel Partners

Good. The Optoelectronics group had a great margin in the quarter. Can you talk about that and the sustainability of where Opto is right now?

Jeffrey D. Capello - Chief Financial Officer

Paul, it’s Jeff. So you know, the Optoelectronics business had a very strong quarter and from an operating margin perspective expanded their margins. I think it's driven by a couple of factors. One I think that business has done a great job of driving top line revenue growth while really watching their cost structure very carefully, so that's one driver. Another one is that the Amorphous business is a heavily fixed cost natured business, and we've had continued strong performance in growth of that business. The yields are coming up, and therefore as you drive more volume out of that facility, the fixed cost leverage is such that you get a lot of... a lot of incremental variable contribution margin coming out of that business. So, I think it's both the combination of strong revenue growth and good cost controls, coupled with good volume leverage out of the Amorphous facility that really drove that result.

Paul Knight - Thomas Weisel Partners

And at what... Rob, can you talk about Asia and specifically what portion of your growth is coming out of the India and China market right now on the LAS business?

Robert F. Friel - President and Chief Operating Officer

You know, the growth across LAS this quarter was pretty well balanced across the three regions. We saw good growth in the Americas and Europe and Asia, and so I would say in this particular quarter, there wasn't any disproportionate growth. We saw pretty uniform across... in fact, probably Europe was a little light, but Americas and Asia were both about the same.

Paul Knight - Thomas Weisel Partners

And then lastly, do you see anything in backlog or orders that would give you any visibility on the next six, nine months in terms of... we still have traction in the marketplace I guess is the short question?

Robert F. Friel - President and Chief Operating Officer

Yes, I would just say, I don't know about six to nine months, Paul, but I would say, you know, we haven't seen any inflexion point in the booking rate. So, we don't... at this point we don't see any change in the, you know, in the sort of sales growth outlook or the economy.

Paul Knight - Thomas Weisel Partners

Okay. Thanks.

Robert F. Friel - President and Chief Operating Officer

Yes, you're welcome.

Operator

And your next question will come from the line of Derik De Bruin of UBS. Please proceed.

Derik De Bruin - UBS

Hi. Nice quarter.

Robert F. Friel - President and Chief Operating Officer

Thanks.

Derik De Bruin - UBS

So, could you just give me a little bit more color on the below the line items, below the operating line items, just a little bit more about the FX impacts and it looks like you, you certainly blew away my margin expectations, but it looks like that those items were... the expenses were a little bit greater than what I was looking for, just give me a little bit more color, please.

Jeffrey D. Capello - Chief Financial Officer

Sure, Derik, it's Jeff. So, there were two main items that kind of drove the below the line increase in expenses. The first was interest. We've obviously spent a little money in the last 12 months on both acquisitions, share repurchases, and have kind of swung from kind of, from kind of a net-net cash position to a net debt position, so piece of the increase year-over-year is the increase in interest to reflect the fact we bought companies and we've repurchased shares. So, that's one component of the increase below the line. The second increase is the movement in foreign exchange markets. We are a global company operating in many different jurisdictions and we've got a balance sheet where we've got exposures to different currencies, and what you saw happen was there was a fairly noticeable move in many of the currencies, the yen, the euro and the Canadian dollar specifically, relative to the US dollar and what that does when you translate the balance sheet is, it throws an expense off down below the line, translation expense, which runs through the other expense line. However, there is a corresponding expense, or benefit rather, that goes through above the line. So it neutralizes itself out, but there is a disproportionate [inaudible] that occurs down below the line from an accounting perspective.

Derik De Bruin - UBS

That's helpful. And I guess when you... can you give me a bit more color in terms of the specialty lighting business, specifically just some color in terms of how much the flash model, how much of the flash model is part of Optoelectronics? A little bit more color on the contribution from the Xenon flash?

Gregory L. Summe - Chairman and Chief Executive Officer

Yes, I would say… Derik, this is Greg. I'm not sure I caught the full part of the question. It was a little hard to hear, but if it was about how much did flash modules contribute to the growth in Opto, I would say it was a modest contribution this quarter, as we had sort of forecasted that we would see the main impact of that in the sort of fourth quarter on, but what it did do was successfully establish production capability, production runs, customer acceptance, and sort of initial, call it product flows. So, I would say modest impact this quarter, more significant impact next quarter from a numbers standpoint, but significant impact this quarter from sort of proving out the concept, getting established, getting the supply chains up and running and getting the initial production runs on through the whole system.

Derik De Bruin - UBS

Great, and I guess just one other question. Could you just talk about… I guess curious about the reception you've had towards the ViaCell deal and I guess, has anything changed since you've announced it in terms of...?

Gregory L. Summe - Chairman and Chief Executive Officer

No, I think the reception has been very good. You know, I think folks understand the fit, both from expanding the product set within, within neonatal and the linkage between screening and therapeutic actions, using the stem cells. So, it's a nice sort of closed loop process there. People also understand the synergy, both current and future on the distribution channel, both into the obstetrics professional with the field sales organization, and the direct to consumer marketing, which is an area that we haven't had before this period of time and it brings a significant capability in that area. And so that's both a synergy with where we are today and continues, I would say, to build out our selling distribution platform for expansion with other products in the future as well.

Derik De Bruin - UBS

Okay. And could you just give us a little color about some of the other products you're talking about, what's in the pipeline for neonatal?

Gregory L. Summe - Chairman and Chief Executive Officer

I would say for... without getting into too much, if you look at neonatal, it's just a matter of continued… both degrees… it has continued to expand out the number of tests. And I think Jeff spiked a couple of those out this quarter that we've recently added, but I think continue to expand that menu and then outside the US of course very importantly continue to ramp up the geographic penetration, but also in the prenatal space as well. So, you can think about it this way. If you think about the OB/GYN channel and you think about the full breadth of product that goes through the OB/GYN channel, all those are potential candidates, continue to expand into the future, so if you will kind of a horizontal consolidation around that channel.

Derik De Bruin - UBS

Okay, great. Thank you very much.

Gregory L. Summe - Chairman and Chief Executive Officer

You're welcome.

Operator

And your next question will come from the line of John Goldberg of Merrill Lynch.

Gregory L. Summe - Chairman and Chief Executive Officer

Hi, John.

John Goldberg – Merrill Lynch

Good afternoon. Thanks for taking the call.

Gregory L. Summe - Chairman and Chief Executive Officer

Yes.

John Goldberg - Merrill Lynch

First question I had is, you continue to talk about strength in the digital x-ray, medical imaging panels and I was just curious, how does the DRA, the Deficit Reduction Act, you hear companies like GE and Phillips saying it's really impacting their sales of some of their imaging products. How does that work its way down to your business?

Gregory L. Summe - Chairman and Chief Executive Officer

So John, it's Greg. The DRA hasn't impacted the digital x-ray business. The DRA is principally applied to outplacement imaging centers, which have been sort of CAT scan, MRI and PET and the digital x-ray tends to take place in the hospitals itself. So, there hasn't been any impact. Although there's been a significant impact in the US on those other modalities, there hasn't been any impact in the digital x-ray. And that's... so we would say no impact to us from that legislation.

John Goldberg - Merrill Lynch

Okay, great. Thanks for clarifying that. And then I had one other question. If I remember from your 10-K a bit ago, I think I remember reading that you guys actually did have some off balance sheet financings, securitize your receivables. Is that, is that still the case, or is that.. have you stopped doing that?

Jeffrey D. Capello - Chief Financial Officer

Yes, John, this is Jeff. So, we have a receivables securitization facility that we've used, that we drew down back in 2002, about a $45 million facility, so a smaller facility and it's backstopping into receivables. And so that facility is out there. We renew it every year. We've got pretty good reassurances from the financial… financial partner that will be unaffected by what's happening now in the credit market. So, we don't see any risk to that in the foreseeable future.

John Goldberg - Merrill Lynch

Okay. That was my, that was my... obviously the route that I was going there.

Gregory L. Summe - Chairman and Chief Executive Officer

Yes, and of course, John, you know, we always have the capability to move that to a different instrument. If we do, we have tended to keep it there just because the pricing on it is so attractive.

John Goldberg - Merrill Lynch

Right, and you're still getting I assume, attractive pricing, even in these markets on them.

Jeffrey D. Capello - Chief Financial Officer

Yes that's is correct.

John Goldberg - Merrill Lynch

And then last clarification. On the FX this year, just to make sure I understood it correctly, you had not been hedging as you had some of those items that you discussed. Your margins perhaps would have looked slightly worse, but you wouldn't have had the other expense at the bottom and those kind of offset each other. I just want to make sure I was understanding correctly.

Gregory L. Summe - Chairman and Chief Executive Officer

Yes, that's more or less correct.

John Goldberg - Merrill Lynch

Great. Thanks a million.

Gregory L. Summe - Chairman and Chief Executive Officer

Okay.

Operator

And your next question is from the line of Ross Muken of Deutsche Bank.

Ross Muken - Deutsche Bank

Hi guys. Mike and for Ross. You've mentioned earlier... you talked about the acquisition pipeline being pretty robust, and given that you'd spent a lot of money on the neonatal area, is that an area that you'll continue to look to add on from acquisition standpoint, or are there other areas that you're looking to?

Gregory L. Summe - Chairman and Chief Executive Officer

No, I think we're, we will continue to add on into our genetic screening business, both the neonatal, prenatal and then also the maternal health area, are priority areas for us, along with a number of others. So, not exclusively in that space, but as you can see from our past history, but certainly an area that we think is still fairly fragmented, and we believe the synergies are pretty compelling through I would call a shared mind with the clinicians and the selling and service and support infrastructure around the world, and frankly our reputation. So we think there's a, you know, there's an opportunity to continue to create value by broadening out that, you know, that set of products and services.

Ross Muken - Deutsche Bank

Absolutely makes sense. And then in terms of the size you're targeting, is it more the smaller bolt-on acquisitions, or is it something a little more sizable such as another ViaCell-type acquisition?

Robert F. Friel - President and Chief Operating Officer

This is Rob, I would say our first preference is to do the smaller bolt-ons and taking advantage of bringing them into our distribution sales and service capability. I would say that's our first priority.

Ross Muken - Deutsche Bank

Okay, great. I think the rest of my questions already got answered. So thank you guys.

Gregory L. Summe - Chairman and Chief Executive Officer

Okay.

Operator

And your next question is from the line of John Sullivan of Leerink Swann.

John Sullivan - Leerink Swann

Hi guys, good afternoon.

Gregory L. Summe - Chairman and Chief Executive Officer

Hi John.

John Sullivan - Leerink Swann

A couple of quick ones. Just first of all, can you give us a sense of what percentage of your total revenues are recurring these days, including service and warranty and spare parts and traditional consumables? And can you also give us a sense of… based on mix shift, where that number might go, maybe in a year, if you're so inclined? And then if you continue to implement your own plan, do you want to push more toward consumable revenues, and where do you think that PerkinElmer can get to in terms of recurring revenues as a portion of total business?

Jeffrey D. Capello - Chief Financial Officer

John, this is Jeff. The recurring revenue piece, which is typically comprised of kind of our reagents business, our genetic screening business, the service business, and the contractual business we have under the Amorphous medical imaging piece is roughly 50% of the business, so it's a fairly healthy piece. It's definitely an area... most of those areas, genetic screening, medical imaging and the other areas are areas of interest from an investment perspective, R&D, acquisition, and CapEx. So, we look to kind of continue to drive those up and would look… there's a fair percentage of the ViaCell business that's recurring with the renewable fee that's paid every year to store the blood sample. So, we look to continue to drive that percentage up as we continue to grow the business, certainly.

John Sullivan - Leerink Swann

Okay. Thanks very much for that. And then shifting gears, regarding environmental, can you just give a sense of the products that you have in environmental that are, that kind of lead your business as far as you're concerned and kind of how they line up with them? Is air and water monitoring the best opportunity for you now in environmental, and if it is, just broadly can you speak about the products that you think are kind of your leaders in that area?

Robert F. Friel - President and Chief Operating Officer

John, this is Rob. So, I would say it's air and water, it's food safety I think is a key area we're looking to continue to have a significant position. I think in the biofuel area… is another area that we think we've got significant capabilities. So, I would say those are the three… initially that from an environmental perspective that we're going after and we think, we look at our... and it's not just the technology or the instrument, it's the application, know-now, it's the software, it's really the SOPs that are all wrapped around that and that's really the whole initiative, the Ecoanalytics is to really deliver this solution approach. Those are the key areas.

John Sullivan - Leerink Swann

Is this... do you see this as more of a regulation-driven opportunity for you, or is it, or is it more kind of self-governing, as corporations get to be more efficient? Is it generally... are we looking for worldwide regulation or are we looking for just kind of more corporate profits?

Robert F. Friel - President and Chief Operating Officer

I think a couple of years ago, it was probably more regulation-driven. I think now it's really being driven by whether it's the consumer or the individual companies. And I think that's really what's driving you right now. China is going to have to be able to monitor their food better in order to continue to be able to export or whether it's the toys and etcetera. So, I think there are a number of things that are really driven by the companies themselves or ultimately the consumer, so I don't think this is going to be determined by regulation.

John Sullivan - Leerink Swann

Okay. Last question, Rob, regarding this. Is this run as a discreet business area for you, or does this get… does this get spread around several different functional areas?

Robert F. Friel - President and Chief Operating Officer

Well, the Ecoanalytics is part of the environmental business, which is a separate and distinct business.

John Sullivan - Leerink Swann

Okay. Thanks very much.

Robert F. Friel - President and Chief Operating Officer

You're welcome.

Operator

And your next question is from Jason Weiss of Robert W. Baird.

Jason Weiss – Robert W. Baird

Hi, could you characterize the growth in your genetic screen business in terms of how much has been from new customers versus new tests at existing customers?

Gregory L. Summe - Chairman and Chief Executive Officer

No, we don't… Jason, we don't break that out. I would say that the dynamics of the business is… it's a cumulative builder and that there is very little to no churn in the customer base, and so unlike other businesses where new... existing programs are winding down, new programs are coming on, and that business is truly driven by births and the adoption of technology to treat those births, and so the business sort of... it just continues to build and build and build, and we almost never, very, very seldom ever have a customer that actually decreases.

Jason Weiss - Robert W. Baird

Okay. Would it be fair to say... I know there's a slide you've shown frequently of the opportunity in existing geographies, and I guess is more of your effort placed on broadening those relationships rather than reaching new geographies? Could you...

Gregory L. Summe - Chairman and Chief Executive Officer

No. I would say… maybe try to answer it this way, which is that both the existing geographies and the new geographies are important. The sales come more quickly with the existing geographies, because they've the systems in, they've the protocols in place, they've the customers or the patients there, and so it's a matter of them expanding their service menus. And in new geographies, it's more of a startup. So, you got to get the whole platform in and in place. But both are very important elements, you know, to us. I don't know whether we place more attention on one versus the other. I would say in any given quarter, probably the existing customer base has a bigger contribution, of course, than the new customer base.

Jason Weiss - Robert W. Baird

And then one last question, the ViaCell acquisition, will that be classified as part of genetic screening?

Gregory L. Summe - Chairman and Chief Executive Officer

Yes it is. So, it is part of that business.

Jason Weiss - Robert W. Baird

Okay. Great.

Gregory L. Summe - Chairman and Chief Executive Officer

They will be run as a separate unit within that business.

Jason Weiss - Robert W. Baird

Terrific. Thank you for taking my questions.

Gregory L. Summe - Chairman and Chief Executive Officer

You're welcome.

Operator

[Operator Instructions]. Your next question comes from the line of [inaudible]

Unidentified Analyst

Hi. Just a question on your positioning on your quality screening, and you named a few categories such as the melamine and biofuel, heavy metals and just… I guess kind of an overview of the competitive positioning there would be great? I know you mentioned Asia as well and China maybe, if your positioning is any different there than worldwide? Thanks.

Gregory L. Summe - Chairman and Chief Executive Officer

Do you mean from a competitive position where we stand from a market share?

Unidentified Analyst

Yes. That would be great.

Gregory L. Summe - Chairman and Chief Executive Officer

Or who the other competitors are?

Unidentified Analyst

I'm sorry.

Gregory L. Summe - Chairman and Chief Executive Officer

Or who the other competitors are or what our individual shares are in those areas?

Unidentified Analyst

Yes. Kind of these emerging categories and how you see, maybe who your players are there you're competing against in market share, that kind of mid-tier markets if we're talking melamine or biofuels as a fairly new category and just...

Gregory L. Summe - Chairman and Chief Executive Officer

So, I think as you look at our competitors in this area, they have the tendency to be what we call the normal analytical instrument providers. So, whether it is Thermo or Agilent or Varian or maybe even [inaudible] on the thermoanalysis side. I think the one thing that we are doing which I think is a little novel though is we are trying to move from supplying products and technologies to providing these applications or solutions. And so I think that is the differentiator. So, we are not going to go into sort of a hearsay atomic absorption instrument. We are actually going with an instrument that is designed for a specific application. And as I mentioned before, there'll be specific SOPs and the instrument will be designed specifically around whether it’s testing for Melamine or whether it is a PAH analyzer etcetera. So, I think that is the differentiation that we are sort of bringing to the market.

Unidentified Analyst

Okay. That is helpful. Thank you.

Gregory L. Summe - Chairman and Chief Executive Officer

You're welcome.

Operator

And your next question will come from Craig Leighton of Lord Abbett.

Craig Leighton - Lord Abbett

Hi, guys.

Gregory L. Summe - Chairman and Chief Executive Officer

How are you doing?

Craig Leighton - Lord Abbett

Just two questions. Firstly I am just wondering if you could comment on your forecast for the Optoelectronics' expected fourth quarters growth as a segment?

Jeffrey D. Capello - Chief Financial Officer

Hi Craig. It's Jeff. So, I think we've assumed that both businesses LAS and Opto would have a strong double-digit for the fourth quarter.

Craig Leighton - Lord Abbett

Okay. You don't see Opto starting to show differential growth and really accelerate away from your LAS business?

Jeffrey D. Capello - Chief Financial Officer

It will have strong growth. I think there is no question that Opto is well positioned to have a very strong fourth quarter.

Craig Leighton - Lord Abbett

Okay. Terrific. And then also just within the biopharma segment. You highlighted the very strong trends within your cellular products that you are looking to build up, and I am just wondering if you might give a comment on this quarter and then the outlook as you've added some new products there?

Gregory L. Summe - Chairman and Chief Executive Officer

As I mentioned, I think that is the way we believe a lot of the customers are moving into the cellular screening and cellular imaging. So, we are fairly optimistic about, particularly on the reagent side, and I mentioned a number of new products that we have come up fairly recently, and we are seeing a good adoption of those. So, I would say clearly on the reagent side, things are improving, particularly in GPCRs and [inaudible]. And as you know that probably makes up 70%, 75% of the drug targets anyway. And so that is where we are seeing particularly strong growth.

Craig Leighton - Lord Abbett

You spend some time optimizing your product portfolio there, bring some new stuff in and get... taking some other products out and I am just wondering if you are looking for real acceleration in that 10% to 12% of the business, if this is a 20 plus percent or...

Gregory L. Summe - Chairman and Chief Executive Officer

I think when you look within the drug discovery. I think there are pieces of that business that are seeing good acceleration. Keep in mind that a good part of the biopharma business is still in the radioactive area. So, whether it is

radionucleotides or radioactive detectors and I think that is a market that continues to be challenged from a growth perspective. So, if you were to sort of look at parts of the biopharma business, I think you would see the acceleration you are talking about. But it gets reduced to some extent because of the drag from the radionucleotides and the radioactive detectors.

Craig Leighton - Lord Abbett

Okay. Just lastly are you starting to see the benefits of the Evotec PerkinElmer combination. I guess I am just trying to understand what 2008 might look like with the Evotec product line within the LAS distribution?

Gregory L. Summe - Chairman and Chief Executive Officer

Right. Yes, I think we are seeing the Evotec had a terrific product. They didn't have a very significant distribution and sales capability, and so it has taken some time to get our people trained on that product. And I think we are starting to see some good traction in that product. One of the things we need to do though is take the price down of the Opera, and so we have got an R&D project that significantly takes costs and make that a lower priced model. And then I think you'll see some significant growth.

Craig Leighton - Lord Abbett

Great. Thanks.

Gregory L. Summe - Chairman and Chief Executive Officer

You're welcome.

Operator

And your next question is from Vivek Qana [ph] of Civic Global Healthcare.

Vivek Qana – Civic Global Healthcare

Hi good evening. I'm just wondering if you could give the organic growth for the license analytical segment? I missed that.

Gregory L. Summe - Chairman and Chief Executive Officer

It was 5%.

Vivek Qana - Civic Global Healthcare

Okay, great. Thanks.

Gregory L. Summe - Chairman and Chief Executive Officer

You're welcome.

Operator

And your last question will come from the line of Vito Menza of Sandler Capital.

Vito Menza – Sandler Capital

Hi, guys, great quarter. Just a question on operating cash flow, the nine months versus last year's nine months really looks great. Was this three months kind of just the catch-up in working capital type of thing?

Jeffrey D. Capello - Chief Financial Officer

It's Jeff. I don't think it was a catch-up. I think the strong cash flow is being driven by a couple of things. One, a year ago we had taxes that we paid out on the divesture of the food sciences business at the very end of '05, and those payments, those tax payments didn't get made until the first quarter of '06.

Vito Menza - Sandler Capital

Okay.

Jeffrey D. Capello - Chief Financial Officer

So, when you look at a comparable basis, you've got to take the $43 odd million of operating cash flow for year-to-date at Q3 '06 and add in the sum of $60 million of taxes. Then you get more of a comparable basis.

Vito Menza - Sandler Capital

Understood.

Jeffrey D. Capello - Chief Financial Officer

But when you make that adjustment, it's still up and it's up because of the improvement in the profitability of the business combined with pretty good management of working capital. I mean working capital management is a big point of focus for us.

Vito Menza - Sandler Capital

Now, got it. That helps. And just lastly on the... I know you touched on the forex hedges that you guys do below the lines. Just want to understand it, you know, is it... should we be adding back that $2.3 million and tag the EBIT number for, or is there more of a disproportionate hit below the line as we kind of look at it year-over-year?

Jeffrey D. Capello - Chief Financial Officer

Well, you could kind of net the two of them out. And I think this quarter was a rather unusual quarter, because we had pretty big movements between the beginning of the quarter and the end of the quarter in some of these currencies. So, this is one of the larger quarters we had from a forex perspective.

Vito Menza - Sandler Capital

[inaudible] closes the other line to be bigger then?

Jeffrey D. Capello - Chief Financial Officer

That is right.

Vito Menza - Sandler Capital

Got it.

Jeffrey D. Capello - Chief Financial Officer

And typically we've run anywhere around a $1 million. So, $2.2 million is a fairly high number and hopefully we wouldn't expect to see that kind of continue going forward. Otherwise foreign exchange period is going to be pretty busy I would think.

Vito Menza - Sandler Capital

Exactly. [inaudible]. All right. Thank you.

Gregory L. Summe - Chairman and Chief Executive Officer

You're welcome.

Operator

And that will conclude the question-and-answer session. I would like to turn the call back over to management for closing comments.

Gregory L. Summe - Chairman and Chief Executive Officer

All right, thank you operator. Thanks everyone for your participation and interest in PerkinElmer. We are pleased with our third quarter and believe we're well positioned to sustain the growth of our business throughout the remainder of 2007 and beyond. This call is adjourned. Have a great evening.

Operator

Ladies and gentlemen, thank you for your participation in today's call. This concludes the presentation, you may now disconnect, have a wonderful day.

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Source: PerkinElmer Inc. Q3 2007 Earnings Call Transcript
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