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Executives

Tommy J. Thomas

Robert F. Friel - Chairman, Chief Executive Officer, President and Member of Finance Committee

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

Kevin Hrusovsky

Analysts

Jonathan P. Groberg - Macquarie Research

Daniel L. Leonard - Leerink Swann LLC, Research Division

Ross Muken - ISI Group Inc., Research Division

Daniel Brennan - Morgan Stanley, Research Division

Daniel Arias - UBS Investment Bank, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

Bryan Brokmeier - Maxim Group LLC, Research Division

Derik De Bruin - BofA Merrill Lynch, Research Division

Zarak Khurshid - Wedbush Securities Inc., Research Division

Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division

Steve Willoughby - Cleveland Research Company

PerkinElmer (PKI) Q2 2012 Earnings Call August 2, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 PerkinElmer Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And with that, I would now like to turn the conference over to your host for today, Mr. Tommy Thomas, Vice President of Investor Relations. Please go ahead, sir.

Tommy J. Thomas

Thank you, Keith. Good afternoon, and welcome to PerkinElmer's Second Quarter 2012 Earnings Conference Call. 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 your 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 in 1 (877) PKI-NYSE. Please note, this call is being webcast live and will be archived in our website until August 16, 2012.

Before we start, we need to remind everyone of the Safe Harbor Statement that we have outlined in our earnings press release, issued earlier this afternoon and also those in our SEC filings. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future, even if our estimates change. So you should not rely on any of today's forward-looking statements as representing our views as of any date after today.

During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non-GAAP financial measures during this call, but are not reconciled to GAAP in the attachment, we will provide reconciliations promptly.

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

Robert F. Friel

Thanks, Tommy. Good afternoon, and thank you for joining us today. Once again, we are reporting another excellent quarter, in which we delivered solid financial results while making excellent progress against our strategic priorities.

During the second quarter, our adjusted revenue grew 10% year-over-year, adjusted operating margins expanded 240 basis points. We generated excellent cash flow and adjusted earnings per share increased 23%, which exceeded both our guidance and consensus.

We continue to be extremely pleased with how we are improving both operating efficiencies and profitability of the company, while also delivering very strong top line growth. Our ability to deliver this impressive financial performance, particularly in light of the current difficult macroeconomic conditions, is due to several factors.

First of all, we serve many end markets that are less economically sensitive. In addition, within these markets, we provide products that are critical to our customers. Whether it is assisting in the screening of newborns, helping improve the productivity of labs or keeping drinking water safe, our products continue to be sought after even in an unstable, global financial situation, as global interest in both human and environmental health continues to grow.

And with our recent acquisitions, we have further bolstered this advantage by expanding our capabilities in the areas of informatics, molecular analysis, imaging and sample prep, positioning us well to address both current and future needs of the global human and environmental communities.

The second factor is our significant global reach and capabilities, particularly in emerging markets. As many of our products are instrumental to expanding health care services and improving environmental conditions, we continue to experience strong demand for many of our products in these areas of the world where there is a focus on developing fundamental, environmental and health care needs. I'm especially pleased that our sales into the emerging markets now represents approximately 28% of our total sales, and were responsible for over half of the company's total organic growth during the second quarter.

For example, our China business, once again, showed strong growth with organic revenues increasing more than 20%, and with adjusted operating margins greater than the corporate average. China continues to be an important contributor to both our revenue and earnings growth.

In particular, our Chinese diagnostic business continues to gain traction with both new and existing customers, adding approximately 40 new customers in the quarter as the country increases its efforts to help combat infectious diseases, such as hepatitis and HIV. What's important to note here is that we saw a double-digit sequential organic growth and feel that we're still only in the early stages of a very big opportunity. A major part of China's 12 5-year plan is focused on improving both human and environmental health, and we believe that we are well-prepared to capitalize on this trend.

A third contributing factor is our ability to provide innovations into the marketplace by leveraging our strong detection, imaging and software technologies with our extensive application knowledge. In the first half of the year, new products introduced in the last 3 years represented 22% of our total revenue and 32% of our product revenue, which excludes our revenue from service.

During the second quarter, we introduced a revolutionary technology that enables any sample form, whether it is gas, liquid or solid, to be introduced into a mass spectrometer with minimal sample prep.

Our spectrum CT, which combines optical imaging and 3D x-ray, is enabling researchers to pursue unique strategies in oncology research. In the informatics area, we introduced the Ensemble platform, which enables real-time control and automation of laboratory processes, helping laboratories to decrease errors and speed the delivery of results, as well as the Asset Genius, which provides customers with the critical information they need to make informed decisions on lab asset deployment.

Also, during the quarter, we launched our new OneSource Scientific IT service, which leverages the strength of our service expertise and informatics capabilities. Customers, such as Merck Resource Laboratories, are now turning to Perkinelmer for this new and unique service to substantially improve the efficiencies and supportability of their lab technology and overall lab environment.

The fourth, and most important, factor is our people. We would not be as well-positioned as we are today without the hard work, passion and outstanding contributions of our 7,200 employees who, everyday, are committed to driving our growth, innovation and mission to improve the health and safety of people in the environment. It is truly an exciting time to be part of PerkinElmer.

Through the first half of this year, our organic growth as of the high-end of our original guidance, while our adjusted operating margins have increased by 200 basis points, significantly greater than expected. Some of the higher margin expansion was due to a more favorable mix of revenue and better profitability of the former Caliper products. However, a portion of the higher-adjusted margin expansion was a result of the retiming of some growth and productivity investments due to both uncertainties surrounding Europe and a significant amount of integration activity underway.

Due to the strong first half and the rapid integration of Caliper and our other acquisitions from last year, we are planning to accelerate our spend against these initiatives in the third and fourth quarters, as we continue to see great opportunity to improve the operating margin and growth profile of the company. Even with this increased investment in the back half and the significant headwind from the stronger dollar, we feel comfortable maintaining our adjusted EPS guidance of $2 to $2.05.

I would now like to turn the call over to Andy, who will provide more details on the quarter and our Q3 guidance.

Frank A. Wilson

Thanks, Rob, and good afternoon. Consistent with prior quarters, I'll provide some additional color with our end markets and our second quarter results, and then I'll it open up for questions.

As Rob mentioned earlier, we were pleased with our performance in the second quarter delivering another solid quarter of growth in both revenue and adjusted earnings per share. Reported revenue for the second quarter increased 9%, while adjusted revenue for the second quarter increased by 10% to $532.3 million as compared to the second quarter of 2011.

Organic revenue increased 5% as compared to the same period in 2011. This performance was at the high-end of our guidance range of $530 million to $540 million, after adjusting for the negative impacts of approximately $7 million of FX headwinds, arriving subsequent to the guidance we've provided following our first quarter earnings call.

For the quarter, adjusted earnings per share increased 23% to $0.53, $0.05 better than the midpoint of our guidance.

By segment, organic revenue increased by 4% and 5% in our Human Health and Environmental Health segments, respectively. By geography, organic revenue in the Americas and Asia both grew at a high-single-digit rate while Europe declined low-single digits, but within our expectations.

We experienced continued strong demand from emerging territories with organic revenue growth in the BRIC countries up high teens, despite an even higher comparison in the prior year. As Rob noted, we remain pleased with our performance in China, with revenues up more than 20% on a year-over-year basis, despite similar growth in the prior year.

Looking at organic revenue, by product category, recurring revenue, which includes reagents, consumables and service, grew high-single digits in the quarter, while instruments and components grew at a low-single-digit rate when compared to the second quarter of 2011. From an end market perspective, PerkinElmer's Human Health segment represented approximately 49% of total revenue in the quarter. We served 2 end markets in Human Health: diagnostics, which represented 27% of total revenue; and research, which represented 22% of total revenue.

Organic revenue from our Diagnostics business increased mid-teens during the quarter, with notable contributions from both our Screening and Medical Imaging businesses. In our Screening business, we continue to experience solid demand across all major segments of the portfolio. This business is benefiting from the stabilization of U.S. birthrates and the expansion of our prenatal, newborn and infectious disease screening solutions in key regions outside of the U.S.

We continue to see strong uptake of our portfolio in China and feel that we are well-positioned to benefit from China's 12th 5-year plan.

Our Medical Imaging business continued see broad-based growth across all key technologies and applications in the period, with particular strength in traditional medical diagnostic imaging offerings. We also saw a healthy contribution from our CMOS imaging technology, primarily focused on surgical applications.

Organic revenue in our Research business declined high-single digits in the quarter, the result of a difficult year-over-year comparison, ongoing declines in our radio isotope offerings and softer pharma demand.

Caliper organic revenue grew mid-single digits on a difficult prior-year comparison of more than 20% and finished the first half with low-teens organic growth and operating profit ahead of our acquisition model expectations.

Our Research business continues to gain traction in new areas, such as biotherapeutics, NextGen sequencing and epigenetics, and customer acceptance remains high, as evidenced by the strong increase in our backlog as we exited the second quarter.

Moving to Environmental Health, which represents 51% of total revenue in the second quarter, we served 3 end markets: Industrial, which represented 8% of total revenue; Environmental and Safety, which represented 18% of total revenue; and Laboratory Services, which represented 25% of total revenue.

During the quarter, we experienced low-single-digit organic growth in the Environmental Safety segment, a low-single digit decline in the Industrial segment and high single-digit growth in the Laboratory Services business. We were particularly pleased with our performance in China, which continues to benefit from environmental applications, specifically focused on inorganic analysis solutions for the analysis of metal content and contaminants in water and soil.

In addition, we continue to see good acceptance in our Laboratory Service and Informatics platforms, as we help our lab customers manage their critical laboratory assets and the related data output.

As Rob mentioned earlier, our new OneSource Scientific IT services help customers improve the efficiency of their lab computing environment and the safety of the scientific data.

Now looking at the margin performance in the period, adjusted gross margins expanded approximately 200 basis points. This was driven by volume leverage, favorable mix, robust productivity gains and a favorable impact from our businesses acquired in 2011.

Adjusted operating margins expanded approximately 240 basis points in the second quarter to approximately 17%. As Rob mentioned earlier, given the significant amount of integration activity underway at the end of the first quarter and the uncertainty surrounding Europe at that time, we elected to defer some of our growth and productivity investments originally slated for the second quarter. Delayed timing of this spend contributed about 80 basis points to our strong margin expansion performance in the quarter, and is expected to negatively impact second half margins as we reaccelerate our spend against these initiatives in the third and fourth quarters.

By segment, adjusted operating margins at our Human Health business for the quarter were 22%, representing an increase of approximately 130 basis points as compared to the second quarter of 2011.

Our Environmental Health segment delivered adjusted operating margins of 16%, representing an increase of approximately 210 basis points. The combination of volume leverage, favorable mix and productivity gains across the company contributed to the strong performance delivered by both segments.

GAAP operating income from continuing operations was $49.8 million in the second quarter of 2012 versus $39.4 million for the same period a year ago. Our GAAP tax rate for the second quarter was approximately 13%. And on a non-GAAP basis, our adjusted tax rate was approximately 23%, which is slightly lower than our previous guidance communicated in April. We now expect our tax rate for the second half to be approximately 23%.

GAAP earnings per share from continuing operations in the second quarter of 2012 was $0.29 compared to GAAP earnings per share from continuing operations of $0.26 in the second quarter of 2011.

Adjusted EPS was $0.53 in the second quarter of 2012, up 23% from the prior period, and exceeding our guidance range for the quarter of $0.47 to $0.49, despite an FX headwind of approximately $0.02 per share, which was partially offset by approximately $0.01 per share from the lower tax rate.

Our weighted average diluted share count for the second quarter of 2012 was approximately 114.6 million shares, and our ending share count was approximately 113.6 million shares.

Turning to the balance sheet. We finished the second quarter with approximately $911 million of debt and approximately $171 million of cash. We continue to make progress on our delevering efforts as we exit the quarter with a debt-to-EBITDA ratio of 2.5x and a net debt-to-EBITDA ratio of approximately 2x.

Looking at our cash flow performance, operating cash flow from continuing operations was $77.4 million as compared to $54.9 million in the second quarter of 2011. We made good progress managing our working capital and cash collections in the quarter, delivering greater than 118% of free cash to net income. We believe that our second half 2012 cash conversion will be slightly below our stated goal due to increased cash taxes as a result of the settlement of certain foreign tax audits, as well as higher inventory levels, resulting from the move of manufacturing operations to lower cost regions.

In summary, as Rob indicated, we feel good about our performance in the quarter as we delivered 5% organic revenue growth, approximately 200 basis -- 240 basis points of adjusted operating margin expansion and 23% growth in adjusted earnings per share.

Now I'd like to discuss our third quarter and full year 2012 guidance in a bit more detail.

Consistent with our view from earlier in the year, we remain cautious regarding macro economic conditions, specifically with regard of Europe and the strength of the U.S. dollar. As a result of current FX rates, we now expect full year 2012 reported revenue growth to grow high-single digits and organic revenue growth, to be in the mid single-digit range, which is consistent with our original guidance provided at the beginning of the year.

Regarding adjusted operating margins, we expect to expand margins above our stated range of 75 to 100 basis points for the full year.

For the third quarter, we expect adjusted revenue growth of $495 million to $505 million, with organic growth -- revenue growth being in the range of 3% to 5%, with foreign currency headwinds of approximately 4% based on current exchange rates.

As we mentioned, we are planning additional productivity and growth investments for the balance of 2012, which we believe will further solidify our ability to achieve our longer-term growth and margin expansion objectives. These investments will have a dilutive impact on our adjusted operating margin expansion in the second half of this year, and as a result, we expect adjusted operating margins for the second half to expand more modestly.

Based on these assumptions, we are maintaining our full-year adjusted earnings per share guidance for 2012 of $2.00 to $2.05 despite FX headwinds of approximately $0.06 per share.

Additionally, we expect adjusted earnings per share for the third quarter to be in the range of $0.42 to $0.44, which assumes the negative impact of approximately $0.02 from FX headwinds.

That concludes my prepared remarks. Keith, at this time, we can open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Jon Groberg from Macquarie Capital.

Jonathan P. Groberg - Macquarie Research

So can you -- just a couple of this clarification, I'm trying to understand. So on Caliper, that is about $38 million last year. Looks like, you're saying about 8% acquisition, that's what it did this quarter. So it was up 5% organic and that's kind of offset with currency. I'm just trying to understand what they did in the quarter.

Frank A. Wilson

Caliper was a little less -- Caliper grew mid-single digits organically. It's a little hard to kind of break out Caliper now that it's being integrated with the larger business. But its impact to overall PerkinElmer organic was fairly minimal this quarter. But the rationale, or the reason behind that, Caliper had a very strong 20-plus percent organic growth quarter last year, so it was a little bit lower. But first half, we're seeing Caliper generating about 13% organic revenue.

Jonathan P. Groberg - Macquarie Research

Okay. And then just one other quick clarification and then -- I'm sorry, one question. I think in the past, you guys have said you're basically have -- you're pretty neutral from a currency standpoint. I remember a lot of calls. So is that kind of changed as you've gone through this? Or is this a mix of currency? So maybe just talk about, I think you said that makes impact.

Robert F. Friel

I think what we talked about is that we're fairly neutral from the standpoint of revenue and expense across the various regions. But, of course, what you have is the profitability. When we talk about the currency impact, think about it as just at a high-level earning. Europe is close to 30% of our revenue and call that our profitability, right? So 30% of our profitability is going through sort of 15% decline. So as you convert that profit in Europe to dollars, that's where your impact is, you're converting that in a much lower rate.

Jonathan P. Groberg - Macquarie Research

Okay. That's helpful. I was just trying to triangulate with what could -- we had a lot of those questions in the past. And then, Rob, for you that last question, Europe is kind of down, China seems really strong. Can you maybe give a little bit more detail? You mentioned some diagnostic business. Is that primarily the kind of postnatal screening or the neonatal screening, I mean, or what else is going on there? And can you maybe -- others are seeing a slowdown there, sounds like you haven't. Can you maybe just talk about what you're seeing and what you're outlook for those businesses?

Robert F. Friel

Well, try not to -- we fundamentally have 2 businesses. One, we have, as you said, the newborn screening, and that continues to grow. But more importantly, when we bought SYM-BIO in 2009, we also got a business that's involved in infectious disease, so hepatitis and HIV. And that continues to see very strong growth and continued to come out with new products there. You may recall, we talked about building out a big production capacity there, so we've continued to invest there and that's contributing a big portion of the growth in China. I would also say, on the environmental side, we see strong growth there as well. So I would say, mostly on the environmental side and on the diagnostic side is what's driving the over 20% growth in China.

Jonathan P. Groberg - Macquarie Research

So even in some of the more instrument-related markets like thermal analysis, maybe, and some of the monitoring -- environmental monitoring, that for you is still very strong in China? You don't see that slowing?

Robert F. Friel

Yes. I would say it's still strong. I would say it's slowed a little bit in the second quarter. And, of course, we also have some new products coming out, particularly in the ICP-MS area and those sides. So that's -- we're seeing, I would say, good growth in China. It's probably slowed a little bit relative to what we saw in -- I'm talking specifically on the environmental side relative to Q4 and Q1.

Operator

Your next question is from the line of Daniel Leonard from Leerink Swann.

Daniel L. Leonard - Leerink Swann LLC, Research Division

I was just hoping you could give us some flavor on the types of growth investments you're planning for the back half of the year.

Robert F. Friel

Well, I would put it in some category, some buckets. So I would say, first of all, we continue to invest in some interesting areas around detection capabilities. So we talked about -- I talked a little bit about this sample introduction technology from Aspect[ph], so I would say that's one area. Clearly, continuing to expand out our menu in the screening area, is an area that's going to get some investment here in the back half. I think in the research area, biotherapeutics and epigenetics are 2 areas that we feel very good about. And of course, we announced recently our expansion of a personal health innovation center in Hopkinton, so the focus in those areas and a couple other ones. So -- and of course, informatics, I would say is another that, I think, you'll continue to see us investing here in the back half.

Daniel L. Leonard - Leerink Swann LLC, Research Division

Okay. And then my follow-up question. In terms of what you seeing from the pharmaceutical market, is the weakness you're seeing there in the research product business, is that -- is it worsening? And is your strength in the services more than enough to offset that going forward?

Robert F. Friel

I would say, from a market perspective, it's maybe worsening a little bit on the pharma side, particularly in the small molecule area. And our focus is to continue to migrate into some of these higher-growth areas like biotherapeutics, epigenetics, next-gen sequencing. Obviously, that was one of the big incentives or benefits of buying Caliper. So I would say that's slowing a little bit. I would say to be fair also in Q2, we made some switches with the Caliper integration. We went on to SAP and a number of other things, and probably that maybe cost us a little bit of growth. And I think, as Andy mentioned, we've built some nice backlog. So our expectation is that the Research business probably returns to positive growth in the back half.

Operator

Your next question is from the line of Ross Muken of ISI.

Ross Muken - ISI Group Inc., Research Division

Particularly on some of your shorter cycle businesses, maybe in the industrial side, can you talk a bit about sort of the pacing through the quarter, and what you sort of saw in the latter half? And how you think about that in sort of the context of your 3Q assumptions and sort of the full year kind of organic growth guidance?

Robert F. Friel

Yes. I would say that where we saw the biggest change through Q2 was in Europe. So as you recall, Europe in Q1 for us was sort of mid-single growth. And in Q2, it was actually a decline of low-single digits. And so we saw that occur from sort of the April to the May timeframe and into June. I would say, since sort of mid-June to July here, that's been fairly similar. And so other than Europe, I would say the trends in most of our end markets has been fairly consistent over the last couple of months.

Ross Muken - ISI Group Inc., Research Division

I guess, Andy, on the SG&A line, it just seems like a heroic sort of performance there, in terms of what that line is doing, given all of the moving parts from the deal and the organic. I guess, I know you're putting in some investments back half of the year. But if you sort of had to tease out the components of how you manage that Q-to-Q, for the last few quarters it's been relatively flattish to modestly up. What would sort of be the key deltas of why we're not seeing that line inflate more?

Frank A. Wilson

Well, I think we -- we've been talking about sort of productivity initiatives that we've been putting in place. And if you really look at a lot of our ability to expand margins, it's really been levering that G&A base. So as we grow, we're able to basically keep our headcount fairly flat. And obviously, that translates into good margin expansion. We did get a little bit of help from FX in the quarter. So if you're just looking specifically at the second quarter. I think overall, though, it's really been a corporate focus on trying to make sure we're efficient with spend. And I think that it's taking hold. And over the last several quarters, we've continued to see that gain traction. And I think we've got some spending that we're going to be doing, some heavier lifting over the next 2 to 3 quarters that we think will further enhance that as we look on the gross margin lines to move things, move some of the manufacturing from developed -- developing economies, as well as really leveraging more at the back office and in certain parts of the world. So I think we feel good about the progress, some heavy lifting left to do, but a lot more opportunities as well. And I think we still feel pretty good about our ability to get to the high-teens operating margin by '14.

Operator

Your next question is from the line of Daniel Brennan from Morgan Stanley.

Daniel Brennan - Morgan Stanley, Research Division

I was wondering first, just on your kind of instrument business, I'm particularly hearing from some other peers about signature levels rising up. I know you've already commented on some of the pacing in the quarter, but maybe in the -- your call specifically in the instrument side, there maybe -- see any change there in the dynamic about CFO-type levels being more inclined to kind of wait on spending the money?

Robert F. Friel

I would say that's a trend that has been around for at least a couple quarters. I would say the one area where we are seeing some changes on the instrument side is some more aggressive pricing by some of the competition. So I would say that's for us, that seems to be more of a recent change. But as far as higher-level approvals within our customer base, I think that's been around for a couple of quarters.

Daniel Brennan - Morgan Stanley, Research Division

And then maybe just on the big user group meeting that you had up, up in your headquarters in England, attended by over 500 customers. Is there anything kind of notable feedback you can share in terms of whether it be products or applications that seem to be in the highest demand? Anything kind of surprise you from detraction maybe coming out of the meeting, just some of the highlights from that were.

Robert F. Friel

Sure. Why, Kevin's here, that was sort of Kevin's meeting to some extent, so maybe I ask him to comment on some of the takeaways from that.

Kevin Hrusovsky

Yes, Den, it was actually well-attended and we had a meeting in U.K. the following week as, which was well-attended. And we had over 800 customers and I would say the next-gen sequencing, biotherapeutics, as well as epigenetics, which PerkinElmer is uniquely qualified to address, because it's really how the environment is affecting health. Those topics seem to really resonate. We actually had to track as well on informatics, and that was -- the rooms were completely full on informatics. And I think, the combination of those 4 topics was about, let's say, 65 presentations from customers, really created -- we think good demand for the second half as well as next year and with us opening up the new Personalized Help Innovation Center, we think that there's great momentum for a lot of these newer hotter markets in the positioning that we have inside of them.

Daniel Brennan - Morgan Stanley, Research Division

Great. Maybe, can I just sneak one more in. Just in terms of the gross margin in the quarter. I know you mentioned you had some mixed benefit but seems they're up really significantly year-over-year, maybe. Can you just flesh out specifically, again, like what the key driver was at that expansion?

Robert F. Friel

Yes. Of the 200 raised points, about 80 of that was just the higher gross margins of the acquisitions we acquired in 2011. So they contributed 80 basis points. And then the rest of it was strictly around productivity with some of the initiatives I talked about earlier within the factory. And I think that's -- we did also see, in the quarter, a bit of an increase from a mix perspective and some licensing revenues, as well as some informatics revenues, which are higher gross margin than in the average.

Operator

Your next question is from the line of Daniel Arias with UBS.

Daniel Arias - UBS Investment Bank, Research Division

Just a question on Environmental Health. I guess, Rob, can you talk broadly about your applied market customer base and the overall tone that you have there right now? We sort of kind of think of those markets as pretty secular and pretty steady over time, but there has been some discussion about maybe some fluctuations in certain areas. So I guess, how are your food and beverage and environmental safety customers thinking about purchasing in this environment? I guess how much visibility do you have there?

Robert F. Friel

Yes, so I would say in this quarter, we saw a much more severe bifurcation between emerging markets and developed markets. I think if you look historically, as you mentioned, the difference might have been 200 basis points between the growth we saw in developed world versus emerging. This year, we saw a much greater differentiation. So clearly, in the emerging markets they're continuing to spend, particularly in the environmental area and I would say also in the food safety area. We saw a little bit of a pullback, or let's say less growth in the developed world. So that's how I would characterize some of the change you're seeing now. And, of course, Europe is a big part of that. So that's a large contributor to it. But we did see a much larger gap between the 2, the developed and the emerging markets.

Daniel Arias - UBS Investment Bank, Research Division

Okay. And then, Andy, did I hear you say that U.S. was up in the teens in the quarter? And if so, can you comment just a bit broadly on that strength?

Frank A. Wilson

Well, it was -- the U.S. was actually up high-single digit in the quarter. And we had some strong informatics revenue in the quarter, which was a piece of that. But overall, it was a very solid quarter.

Daniel Arias - UBS Investment Bank, Research Division

Okay. And then maybe one more for Kevin. You mentioned some momentum in next-gen sequencing. I guess, when you think of the Caliper business, do you think that the pieces are in place there for the move to clinical sequencing and taking medical genomics to the next level, as they say?

Kevin Hrusovsky

Yes, Dan. I think that we are still investing in this area. We were watching carefully the evolution of kind of the centralized next-gen sequencer to the benchtop, and looking at accuracy and precision rates, but most importantly, we're seeing that sample prep is playing an important role in that overall accuracy, so we are continually -- PerkinElmer's is continuing to make strong investments in sample preparation, not only to improve the precision, to help it get in to the clinic more productively, but also the sample sizes, in general, are getting smaller. We had many physicians at our user conference talking about circulating tumor cells, as well as fine-needle aspirate biopsies, as opposed to large biopsies. And as these sample sizes get smaller, I think our microfluidic estate is well-positioned to really help the sample preparation of these smaller samples and eliminate biosnisis[ph which has been a big issue, which is important for getting into the clinics. So I think we're -- we've got strategic relationships with all of the major NGSs, and we have -- now we have an informatics platform from Geospiza, that's really focused on trying to create medical reports, as opposed to research reports from the data. So I think both on informatics and sample prep, we're well-positioned but we'll continue to make investments as we want to improve accuracy rates.

Operator

Your next question is from the line of Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

I'm wondering if you could first help me maybe touch on the pace of business during -- in Europe during the quarter. I think there's been some debate there across the industry regarding whether or not conditions there really deteriorated or sort of steadily kind of pressured environment. So any color you could put on the European-pacing across the various businesses would be great.

Robert F. Friel

Well, first of all, when I talk about our Europe business, we actually had -- our diagnostic business continued to grow. So what we saw -- we actually saw growth on the diagnostic side. Where we saw a decline was sort of, I would say more in the instrument-based businesses, so both environmental and the research side. And as I mentioned before, we did see -- now, of course, we grew in the first half as well, as I said mid-single digits. So we did see fairly, sort of steady, sort of consistent decline beginning sort of early Q2, sort of in the early June. And then like I said, it sort of stabilized a little bit, and our sense is, at least through the first couple of weeks here, in the third quarter, it's more stable. So that is how I would describe our experiences in Europe.

Daniel Arias - UBS Investment Bank, Research Division

Okay. That's helpful. And then maybe just secondly on informatics, Kevin, can you maybe comment on one more detail regarding how product integration there is progressing and sort of the overall trend that you're seeing in the OneSource business as well?

Kevin Hrusovsky

Yes. I think overall, we're very encouraged by the acquisitions that have been put together. First of all, that integration is ahead of schedule. And I think there's a strong focus now towards applications, using the systematic capabilities that are somewhat unique. And as I think Andy and Rob both mentioned, there's some really nice -- in OneSource, new technology, new informatics that really help customers with utilization rates of their assets and to better optimize those investments. And I think, both in OneSource as well as future application opportunities, and next-gen sequencing, and even biotherapeutics, we're seeing nice integration opportunities with some of the Caliper product lines with the informatics. And so overall, I would say that's going very well, and we see it as a major piece of the future growth profile for PerkinElmer.

Isaac Ro - Goldman Sachs Group Inc., Research Division

That's great. And then last one for me, just certainly for either Rob or Andy. Can you guys maybe update us on the latest thoughts from the board regarding future management incentives that might go in providing ROIC-based metrics? I think that's one area where a lot of investors would have a pretty positive response, if we got a path there.

Robert F. Friel

Well, I would just say, Isaac, generally we -- to the extent we're going to do anything on incentive comp, we would do that sort of on the latter part of the year. So I would say no current plans to change it. But again, those discussions usually occur at our December board meeting.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. Fair to say it's a possibility? Or...

Kevin Hrusovsky

I know, I think it is a possibility. We've had some discussions about it, but I would say nothing definitive at this point.

Operator

Your next question is from the line of Jon Wood with Jefferies.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

So you've got about a $4 million benefit from, I guess, deferring some of the investments in the second quarter. So my question is, are you actually incrementally stepping up in the second half? Or you're just basically adding back that benefit you got in the second quarter, if you will?

Robert F. Friel

I would think of it more as sort of adding back the benefit in the second quarter. And again, we'll sort of evaluate as we go along. I mean, that's the plan right now into Q3, and we'll sort of reassess that depending on how we go in Q3. But I would think of it as sort of taking it from the first half and moving into the second.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Okay, great. Andy, you commented that acquisitions were 80 bps in gross margins. Do you have that impact on OP margins?

Frank A. Wilson

It was negative 30 basis points on operating margins.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Okay, so diluted operating margin?

Frank A. Wilson

Yes, it was accretive to gross and diluted to op.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Okay, great. And then, Rob, how are you thinking about the imaging business in the second half of year? I mean, obviously, you had a pretty strong first half. How have you guys come model that in second half, given what we've seen from some of the bigger industry players?

Robert F. Friel

I mean, I assume that it will continue to grow in the back half, probably moderate a little relative to what we've seen here in the first half. But we feel like we'll continue to see pretty growth there. They do have a very strong growth in Q4 that will make it a little bit more difficult comparison. I think they were up sort of mid-teens, organically, in the fourth quarter of '11. But generally speaking, that business continues to do well and we see good demands there.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Okay, great. Last one for Andy. Delevered about $23 million, is there any reason why that wasn't higher? Is it just timing? I think you guys had talked about like $150 million for the year of deleveraging. So just looking for some color on pacing there.

Frank A. Wilson

It's in line with the timing we set in place at the beginning of the year. It maybe a little off, but not much. I think we're still on track. I think there's 2 components of it as well. There's EBIT -- there's EBITDA and the debt delevering, and we're doing a little better on the EBITDA as well so there's a bit of a mix there. But I think overall, we're on track.

Operator

Your next question is from the line of Peter Lawson from Mizuho Securities.

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

This is Eric Criscuolo filling in for Peter. The investments in the second half that are going to increase, is that going to be focused more on R&D or SG&A?

Robert F. Friel

No, I think it's going to be both. And I think there'll also be some on the cost of sales line as well which will be some of these productivities. But I would say R&D and selling, as Andy talked about before, we're trying to be fairly aggressive on trying to reduce our G&A. So I would say it's on those 2 areas, most, and then you see it in cost of sales.

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

And on the share count, it's been creeping up a little over these past 2 quarters. Is that going to continue to increase incrementally? Or is there a way to kind of slow that down?

Frank A. Wilson

I think for modeling purposes, I would keep it kind of fairly steady at that level. I don't think it's going to go -- we're not going to let it go any higher.

Unknown Analyst

Okay, great. And then any color on volumes or activity in your sequencing center that just got the CLIA certification?

Robert F. Friel

Yes, I mean, as we said, it continues to grow nicely. It's off of a very low base, but as far as growth rates, it continues to do well. I think the CLIA certification opens up some additional business we can get. Again, this is largely focused on the research area and pharmaceutical companies. So we have had requests in the past where they wanted some of the samples to be done under CLIA because they're either going into preclinical or clinical tests. And so I think it's really -- it's, again, really focused on the research and, mostly, pharma side.

Operator

Your next question is from the line of Bryan Brokmeier from Maxim Group.

Bryan Brokmeier - Maxim Group LLC, Research Division

First, you commented earlier about the diagnostic -- you are actually seeing diagnostic growth in Europe. Is most of that in eastern Europe? Or is there a positive growth in -- sorry, was most of that in eastern Europe or you're also seeing positive growth in western Europe?

Robert F. Friel

We're actually seeing in both regions.

Unknown Analyst

And is that kind of across the infectious disease and prenatal?

Robert F. Friel

Well, in Europe, it's fundamentally newborn and prenatal.

Unknown Analyst

Okay. And also the -- are you bringing your infectious disease products into new markets? Or is a lot of the strong that you're seeing in markets that you've traditionally had a presence in, including China?

Robert F. Friel

Well, I would say specifically, in infectious disease, it's mostly in China.

Isaac Ro - Goldman Sachs Group Inc., Research Division

It's most in China?

Robert F. Friel

Yes.

Unknown Analyst

And just real quickly, last the -- have you started to shift in any of your -- the sales of any of those Caliper products from distributors to your sales force in some international markets?

Robert F. Friel

We have. I would say it's still small. I mean I would say we've targeted that more sort of the latter part of this year. So we started to move some, but it's been very small, I don't know if you want to...

Kevin Hrusovsky

I think that while it has been small, we've had really strong relationships with the distributors and we have been able to rationalize multiple distributors into single distributors, and the growth that those accounts and those distributors are continuing to ramp nicely. So we do feel like while we're waiting to make the final conversions, we're making nice progress with a lower number of distributors.

Operator

Your next question is from the line of Derik De Bruin with Bank of America..

Derik De Bruin - BofA Merrill Lynch, Research Division

You were fairly conservative on Europe, a little bit more so than a lot of your peers on this. I guess, Europe, generally in line with where you thought it would be, to be getting incrementally worse, are you expecting it to be incrementally worse from where you initially guided?

Robert F. Friel

No, I don't think so. I mean, I think, particularly when you look at the strength in the first quarter and sort of average that over the year, our assumption is that Europe will be sort of flat to down slightly.

Derik De Bruin - BofA Merrill Lynch, Research Division

Okay. So last quarter, some of the companies that supply stuff to the sample prep market for next-gen sequencing reported some pricing pressures and some competition there is. Caliper didn't see that kind of headwind. Has -- you're still seeing good demand there in that market -- has there been any change in the competitive dynamic in sample prep area?

Kevin Hrusovsky

I think the term sample prep does get used a lot because many of the large NGS providers are actually providing their own sample prep reagents for certain steps. We're upstream with that, and we haven't seen any slowdown at all. It's been strong double-digit growth occurring for next-gen sequencing sample preps for us. And we actually have pretty good visibility to the future here as well, and we're seeing really strong demand for this. So both -- I would say expansion into Asia, as well as just primarily in North American markets, we see really nice sample prep on demand.

Derik De Bruin - BofA Merrill Lynch, Research Division

And is there any demarcation between some of the big-box machines and the benchtop machines? Are you supplying both of those? Can you just talk about how the market is?

Kevin Hrusovsky

Well, interestingly, it's probably as expected. The larger machines initially were acquired by our customers, and then many of them started coming to our shows and realizing that the bottleneck became the sample preparation. And so, mostly they would buy those as secondary investments after they bought their first unit, but now that they've had experience, many of the same steps are needed for benchtop us well. And so, they've now gone into this investments a little bit more knowledgeable about the need for sample prep. And so, we do see, in many cases, we've got relationships with Life, with Alumina, with Packbio and others. But primarily, Life and Alumina, when that initial acquisition is made now on the benchtop version, you'll see sample prep being brought in right away.

Operator

Your next question is from the line of Zarak Khurshid with Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

So it's the year of non-invasive prenatal diagnosis. Clearly, it's a little bit early for the impact on your business. But can you just remind us how large, how important is your prenatal screening franchise today, and how are you thinking about that business given the rapid evolution of the field?

Robert F. Friel

So I think from a size -- I don't if we've got into the specifics of how big that business is, specifically, but I would say it's less clearly, less than 5% of our revenue. And I think, we've talked about this on our other calls, we're really pursuing 2 alternatives. We're pursuing some things internally and in this specific case, we're using some technology, actually, that Caliper had combined with some capabilities that we had to see if we can orchestrate around some of the difficult IP issues in this area. And then, of course, the other thing is we're watching that very closely because I think one of the challenges with some of the current providers is, there seems to be a sort of an IP minefield right now. So I would say we're sort of analyzing that, as well as sort of doing some things internally to potentially have our own offering.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Interesting. And then maybe a question for Kevin. Sounds like the Caliper microfluidics business was pretty robust in the quarter. Can you maybe just talk about the comparison versus the In Vivo Imaging side? And I guess, as we look further out, how are you thinking about the runway of growth in that In Vivo Imaging segment?

Kevin Hrusovsky

Yes, Zarak. You actually have hit upon [indiscernible] -- if you look at it from a product or technology standpoint, you've hit upon the 2 double-digit growth components of the old Caliper that have now been integrated with some product lines and technologies from PerkinElmer, which, I think, increases our menu. So when you look at microfluidics, we have had very strong ramp in next-gen sequencing and biotherapeutics. And when you look at the In Vivo Imaging, we've had very strong ramp in biotherapeutics, where there's a lot of distribution studies, as well as continued focus on oncology, and that expanding now into inflammation and metabolic. So we're seeing nice growth across all regions of the world, and we're seeing nice growth across those market segments, which were very concentrated. Now we're starting to pull along some of the traditional legacy PerkinElmer products into those newer markets, which was one of the strategies that Robin outlined for the acquisition. So I think that the areas where the growth has not been as strong, are probably in areas of small molecule, and there were still some assets in Caliper technology for small molecule, but the good news is that, that's now rapidly moving over to large molecule and even epigenetics. So I think across-the-board, and the 2 categories you mentioned, we still feel we've got strong growth and good visibility for the future. And these shows we've had with customers, most of the talks, if you looked at the 65 talks we had, I would say that 70% of them hit those 2 product lines, the In Vivo Imaging and microfluidics. And I should also mention that we're having 2 major shows in 2 weeks, in China. One in Shanghai, one in Beijing. And then we're going to having 2 more shows out on the West Coast that investors will be invited to those, as well as our customers, over the next 2 months.

Operator

Your next question is from the line of Jeff Elliott with Robert W. Baird.

Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division

Your OneSource offering continues to do well and you keep adding to that offering. With competitors increasing their focus here, how will you continue to win with new and existing customers?

Robert F. Friel

Well, I think it's just continuing to be able to differentiate what we're doing. I think that drove us to some extent into some of these informatics capabilities. I mentioned the current collaboration with our informatics business and OneSource that we've now come up with a very interesting product that, for example, Mark is using. So it's just continuing to build out our differentiated capabilities. I would say that's one. I think the other thing is just to continue to expand geographically. I mean, historically, OneSource was adopted in, sort of the developed world, and now it's -- almost all of our customers seem to move a lot of their lab activity into emerging markets. We continue to build our capability there. So I think that really is how we'll continue to grow.

Operator

[Operator Instructions] Your next question is from the line of Steve Willoughby with Cleveland Research.

Steve Willoughby - Cleveland Research Company

Just wondering, looks like the past couple of quarters here, you guys have benefited in your diagnostic business from some larger equipment placements. I remember a couple of quarters ago, you mentioned Russia, sounds like this quarter maybe China. I'm just wondering, what's going on there and what's the future look like for those kind of larger orders?

Robert F. Friel

Yes. Let me just clarify. I would say that in the case of China, that wasn't a large equipment. That was just a continued growth. I talked about expansion of more customers there. So in Q2, we did not have a necessarily large interim placement. But what happens periodically is we'll build some large -- in most cases, newborn screening labs. I think Egypt was one, we mentioned last year. But I would say in Q2, that was not the case.

Operator

And we have no other questions at this time. So I'll turn the call back over to Mr. Rob Friel for closing remarks.

Robert F. Friel

Great. Thank you, Keith. And thank you, all, for your questions and continued interest in PerkinElmer. So in summary, let me just add, we were -- we're very well-positioned, but given the attractiveness in the end markets and the criticality of our offerings, our ability to continue to provide differentiated innovations to our customers and our focus on providing strong financial results while investing in the long-term growth aspects of the company. So again, I look forward to updating you on our continued progress at the end of next quarter. Thank you, and have great day. This call is now adjourned.

Operator

Ladies and gentlemen, that will conclude today's conference. Thank you very much for joining us. You may now disconnect. Have a great day, everyone.

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