Revvity, Inc. (RVTY) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 PerkinElmer Earnings Conference Call. My name is Kathy, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's call, Mr. David Francisco, Vice President of Investor Relations. Please proceed.

Thank you. Good afternoon, and welcome to the PerkinElmer Second Quarter 2011 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 a copy of our earnings press release, you may get one from the Investors Section of our website at perkinelmer.com or from our toll-free investor hotline at 1-877-PKI-NYSE. Please note this call is being webcast live and will be archived on our website until August 18, 2011. Before we begin, we need to remind everyone of the Safe Harbor statements that we’ve outlined in our earnings press release issued earlier this afternoon and also those in our SEC filings. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future, even if our estimates change. So you should not rely on any of today's forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly. I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel.

Thanks, Dave. Good afternoon, and thank you for joining us. I'm pleased to report another very good quarter for PerkinElmer. From a financial perspective, we continued to deliver strong results, exceeding our guidance on both the top and bottom line. Revenue grew 14%, our fifth consecutive quarter of double-digit growth. And adjusted EPS grew 27%. We're particularly pleased with the growth year-over-year, as we had some difficult comparisons given the very strong quarter we had in Q2 last year. In addition to the strong financial results, in the second quarter, we continued to expand the capabilities of the company and invest to improve our growth profile through acquisitions, as well as internal investments in R&D. In the second quarter, we further expanded our presence in emerging markets, such as China, the Middle East and Africa with targeted applications. In particular, we made good progress with the launch of our new high-sensitivity kits for hepatitis and sexually transmitted diseases in China, and experienced strong demand in the Middle East to meet the rising need for better newborn screening capabilities, including a large installation in Saudi Arabia, which follows our major installation in Cairo earlier this year. In addition, we obtained our first sickle cell anemia screening orders in Africa, a region with high-incidence levels, to provide earlier diagnosis for management of this disease. We also launched a series of innovations within our market-leading inorganic analysis portfolio, targeted at helping customers ensure safer order, food and pharmaceuticals. The label-free EnSpire plate reader, which we introduced last quarter, continues to experience strong receptivity, as scientists look to improve the discovery of potential new therapeutic targets. Our OneSource Laboratory Service business continues to experience good growth and is gaining traction expanding outside of its traditional pharmaceutical base, evidenced by the recent addition of a significant new account in environmental testing. During the quarter, we were able to further expand PerkinElmer's current Medical Imaging portfolio with the acquisition of Dexela, providing customers with high-speed, high-resolution CMOS technology. This technology is complementary to our amorphous silicon-based technology in key areas, such as surgery, dental, cardiology and mammography. And as the only provider of both amorphous silicon and CMOS capabilities, we can now provide the technology that best fits our customers' specific applications. As I mentioned last quarter, the growing challenge for customers is managing and interpreting large amounts of data. A key area of focus for us is helping customers overcome these data challenges by providing enterprise-wide knowledge solutions. During the second quarter, we continued to expand our capabilities in the area of informatics, with the addition of Labtronics, which uniquely positions us to deploying Electronic Laboratory Notebook solution across our global customers' entire value chain, from research to manufacturing. Combined with our service and instrument capabilities, we are increasing our ability to closely collaborate and partner with our customers across a broad set of laboratory note needs in order to generate higher-value solutions. Before I turn the call over to Andy, who will discuss our financial results in more detail, I wanted to give you a perspective on what we are experiencing in our end markets in the second quarter and the environment we are basing our second our forecast on. Starting first with the Environmental Health end markets, we again experienced broad-based growth during the second quarter, driven by continued focus on food safety and investments in environmental testing, particularly in developing countries. In addition, the materials and chemical markets were strong. As we look to the second half of 2011, the recently released macroeconomic statistics are concerning and suggest we may continue to experience uneven economic growth. However, we believe that the environmental and food safety end markets will continue to grow, despite the challenging economic conditions due to the high priority being placed on these critical needs, particularly in emerging markets. In addition, given the recently introduced new products and strong traction in service, we expect our demand profile to remain similar to the first half. But organic growth could moderate a bit due to more difficult comparisons, resulting in mid-single digit organic growth. In Human Health, the businesses are much less impacted by overall GDP growth and more tied to specific factors like birth rates and pharma R&D spending. During the first half of this year, birth rates in the U.S. continued to decline slightly, putting pressure on our Screening business. Medical Imaging experienced good growth on both Diagnostics and our newer applications. Our Research business grew in the second quarter, largely from new products introduced and good traction in academia, where we have historically been underrepresented. For the second half, we expect growth to gradually improve in Diagnostics as U.S. birth rates stabilize, and we continue to expand programs outside the U.S. Within our Medical Imaging business, we expect growth from newer applications in markets to offset the impact of more modest growth in our traditional diagnostic applications, which are cycling up against difficult comparables in the prior year. Lastly, in our Research business, we believe our organic growth will be in the mid-single digits, as we continue to migrate our portfolio to higher growth areas and benefit from the increasing expenditures in emerging territories. Accordingly, we are forecasting for organic revenue growth to be in the mid-single-digit range for the second half as well as the third quarter, and expect growth to be more consistent across our Human and Environmental Health segments as we progress through the back half. While we are maintaining a cautious outlook regarding the global economic recovery and the corresponding impact to our served markets, we remain confident in our ability to grow the top line and continue to drive operator margin improvement. As a result, we are raising our estimate for full-year adjusted earnings per share for 2011 to the range of $1.64 to $1.68, representing growth of 23% to 26% over the prior year. Additionally, we expect adjusted earnings per share for the third quarter to be in the range of $0.37 to $0.39, representing growth of 19% to 26% as compared to the third quarter of 2010. Let me now turn the call over to Andy, who will discuss our end market and financial performance in greater detail.

Thanks, Rob, and good afternoon, everyone. I'll now provide some additional details on our second quarter results. And following our prepared remarks, we'll open it up for questions. Before moving into the financial details, I'd like to clarify that whenever I talk about a particular measure being up or down, I'm referring to an increase or decrease that's measured in the second quarter of 2011 compared to the second quarter of 2010. As Rob just discussed, we were pleased to deliver another strong quarter of revenue and adjusted EPS growth, particularly considering the difficult comparisons from the second quarter of 2010. Revenue for the second quarter increased by 14%, and organic revenue increased by 6% as compared to the same period last year. By segment, organic revenue increased by 2% and 9% in Human Health and Environmental Health segments, respectively. All major geographies contributed to our organic revenue growth, with the Americas and Europe growing at a low single-digit rate and Asia growing high teens. We also continue to successfully leverage our investments in emerging markets, enabling us to generate another strong quarter of double-digit growth in these key regions. From an end-market perspective, PerkinElmer's Human Health segment represented 46% of total revenue in the quarter. Within Human Health, we served 2 end markets: Diagnostics, which represented 28% of total revenue; and research, representing 18% of total revenue. Organic revenue from our Diagnostics business grew at a low single-digit rate in the second quarter, with solid growth generated from our Medical Imaging business, offset by a modest decline in our Screening business. Organic revenue in our Medical Imaging business grew at a high single-digit rate in the quarter, despite cycling up against the difficult comparison from the prior year. Solid demand generated from our base medical diagnostics offering, coupled with our continued momentum from industrial and veterinary applications drove our performance in the period. Additionally, as Rob mentioned, the acquisition of Dexela brings complementary imaging technology to further expand our addressable market and diversifies our customer base. In our Screening business, demand remained strong within the emerging territories, including China, India and South America, as we further broadened our penetration into these key regions with our neonatal and infectious disease screening solutions. This growth was offset by revenue softness within North America, driven primarily by the continued impact of declines in U.S. birth rates and the favorable timing of certain instrument replacements in the first quarter. Organic revenue for our Screening business grew in the low-single digits for the first half of 2011, consistent with our expectations. Organic revenue in our Research business grew at a mid-single-digit rate in the second quarter, as we continued to experience strong demand from the academic sector across a broad set of technologies within our research portfolio. We saw a good growth for our Operetta cellular imaging systems, JANUS Automation tools, as well as our EnVision and EnSpire multimode plate readers. This broad-based demands illustrate the increasing value that we were able to bring to our academic customers with our highly efficient and integrated instruments, as well as reagents to help them solve their most critical research needs. We are encouraged by some early indicators of positive trends in the pharmaceutical sector. Specifically, we're experiencing strong growth in Asia, as we capture demand from internal pharmaceutical research migrating to lower-cost regions or being outsourced to CROs. Additionally, we're seeing the initial benefits from our customers' investments in preclinical research with solid demand for our in vivo imaging technology to better understand the disease mechanisms and therapeutic responses. We expect these trends to persist, providing opportunity to offset ongoing challenges in our legacy product offerings, particularly our radioactive chemical [ph] portfolio. Let's turn now to Environmental Health, which represented 54% of our total revenue in the second quarter. Within Environmental Health, we served 3 end markets: Laboratory services, which represented 25% of total revenue; environmental and safety, which represented 20% of total revenue; and industrial, which represented 9% of total revenue. Organic revenue in our Life Services business grew in the low single-digit range in the second quarter. Within service, our OneSource business posted strong top line growth, but moderate from prior quarters as we cycled up against the large contract win from the second quarter of 2010. Organic revenue in environmental and safety markets grew mid-teens in the second quarter as investments in critical environmental and food safety applications drove strong demand for our analytical instrumentation. As Rob mentioned, we have a full suite of new products across our inorganic analysis portfolio to detect trace metal contaminants, such as lead, cadmium, arsenic and mercury, primarily in water, soil and food. The lost of the Pinnacle, AA, the Optima ICP 800 and the NexION ICP-MS further expanded our leadership position in these key technologies with highly efficient, easy-to-use instrumentation for detecting some of the most widespread contaminants globally. Lastly, organic growth in our industrial markets grew to low-double digits in the second quarter. The strong demand from the Industrial segment continues to be mostly related to the characterization of materials, chemical processing and imaging -- or energy applications supported by our molecular spectroscopy and chromatography platforms. Looking at our financial performance, adjusted operating profit margins expanded 80 basis points in the second quarter to 14.1%. In the quarter, we benefited from solid incremental flow-through on higher sales, strong gains on productivity initiatives as well as a minor benefit from the flow-through from foreign exchange, given the significant fluctuation year-over-year. For the first half of 2011, adjusted operating profit margins expanded 120 basis points as compared to the first half of 2010. In our Human Health segment, adjusted operating profit margins for the quarter were 19.8%, representing a decrease of 70 basis points as compared to the same period a year ago. Productivity gains in Human Health were offset by unfavorable product mix due to a high percentage of instrument placements as well as growth investments deployed in the quarter. In our Environmental Health segment, adjusted operating profit margins were 13.4%, representing an increase of 240 basis points as compared to the second quarter of 2010. Within this segment, we experienced healthy volume leverage, the benefit of new products and solid productivity gains. GAAP operating income from continuing operations was $37.5 million in the second quarter of 2011 versus the $33.2 million in the second quarter 2010. For the second quarter, we had a GAAP tax rate of 16%. And in on a non-GAAP basis, our just adjusted tax rate was 25%, which is favorable to our guidance communicated in April. This favorability is due primarily to a favorable distribution of income in the period. And for the full year, we expect the adjusted tax rate to be approximately 26%. GAAP EPS from continuing operations in the second quarter of 2011 was $0.25 compared to $0.40 in the second quarter of 2010. And in the second quarter of 2010, as a reminder, other income included a pretax gain of $25.6 million or $0.21 per share related to the purchase of the remaining interest in the SCIEX joint venture. Our adjusted EPS was $0.42 in the second quarter of 2011, up 27% from the prior year. Our weighted average diluted share count for the second quarter of 2011 was 113.6 million shares, and our ending share count was approximately 112.7 million. Turning to the balance sheet. We finished the second quarter with approximately $276 million of net debt, which we defined as short- and long-term debt minus cash. This reflects an increase in net debt of approximately $176 million as compared to the first quarter of 2011, resulting primarily from payments for acquisitions completed during the period. At the end of the quarter, we had approximately $395 million of cash. Looking at our cash flow performance in the quarter, operating cash flow from continuing operations was $54.9 million as compared to $62.8 million in the second quarter of 2010. For the first half of 2011, adjusted operating cash flow, adjusted for the impact of -- the tax impacts associated with the sale of IDS, was $110.8 million. Free cash flow, which we defined as adjusted operating cash flow less capital expenditures, was $94.8 million, representing 108% of adjusted income. In summary, we're pleased with our financial performance for the quarter, as we continued to drive strong revenue and adjusted EPS growth. Now like to discuss our third quarter and full-year 2011 guidance. As Rob mentioned earlier, we're maintaining our full-year forecast for organic revenue growth to be in the mid-single digit range and mid-single digits for the third quarter as well. We expect adjusted operating profit margin expansion to be at the high end of the range of our annual objective of 75 to 100 basis points for 2011, driven predominately by volume leverage and our multiyear productivity initiatives. Regarding full-year adjusted earnings per share for 2011, we are raising our estimates to the range of $1.64 to $1.68, representing growth at 23% to 26% over the prior year. And regarding the third quarter, we expect adjusted earnings per share to be in the $0.37 to $0.39 range, representing growth of 19% to 26% as compared to the third quarter of 2010. This concludes our prepared remarks. I'd now like to turn the back over to Dave.

Thanks, Andy. Operator, at this time we'd like to open up call for questions, please.

[Operator Instructions] The first question comes from the line of Quintin Lai of Robert W. Baird.

Rob, you said 3 words that we haven't heard a lot this earnings season, strong academic markets. Others have seen little weakness. You sound a little different. I mean, first, could you remind us what your exposure is on the academic, Rob, and maybe U.S. academic? And then, why are you seeing the demand for the products that you are?

Yes. So academic exposure for us is probably less than 5%. We talked about this in the past. It's one of the reasons why -- when the stimulus spending a couple of years ago, we didn't see a significant benefit from that. So consequently, we're less impacted. As I sort of mentioned before, I think historically, we've been underrepresented in the academic area of research because a lot of our products were more tailored to pharma and biotech. It was a strategy, probably about 12 months ago that we started to adjust some of our product portfolio to do better in academic markets. And so, we're getting some of the benefit of that. So I still think spending is probably flat to maybe up a little bit across academia. I think we're just seeing a little bit of growth relative to, as I said, we're fairly up, underrepresented in that area. So I'm not suggesting that the market is growing much. I think it's a question of we're probably doing a little bit better.

And then, with respect to your kind of outlook on the Environmental Health. Could you maybe talk a little bit about how spending was through the end of June and maybe through July? Because -- are you seeing signs of just tougher comps or maybe a little bit more of a slower growth outside of the...

I think you got to look at it region by region. I think in Asia, we continue to see good growth there. I don't know that we're seeing much moderation, particularly in the emerging areas. I think Europe clearly has slowed. For us, Europe was, as Andy mentioned, was sort of low-single digits, but we continue to see good strength in Asia. I think while that was true across the entire company, that's specifically on the environmental side. But having said that, there's continued demand within both the environmental and the food and consumer areas. I mean, you continue to see, whether its regulations or EPA putting out the list of chemicals of concern or the China 5-year plan, including directives and procedures targeting at reducing and monitoring water pollution, the U.K. government laying out specific air quality targets. Of course, you've got the U.S. Food Safety Modernization Act. So you continue to see a lot of focus and emphasis in this area. And that's why I sort of said in my prepared remarks, while clearly, we think it's going to be a challenging economic environment, particularly, and I said sort of uneven growth, I do think there is a high priority being placed on this area. So we're still fairly optimistic that we'll continue to see growth in the broader environmental health arena because of the things I mentioned before.

Our next question comes from the line of Isaac Ro of Goldman Sachs.

Rob, I know this is a very uncertain environment that we're in here, but I'm wondering if you could maybe go back to the late '08 and '09 periods and provide some commentary if you compare that timeframe to now and how you think your outlook and visibility might be -- might be similar or different? I think it's certainly hard to call us with any specifics where we're going in the economy, but thoughts on how do you see some parallels and differences would be helpful.

Yes. So if you look at our performance sort of from '08 to '09, we were down sort of low-single digits from a top line perspective. And of course, back then, we had IDS, relating in Sensor business, which is we call that -- it was a little bit more cyclical and more sensitive, I would say, the downturn in the economy. And as I think about the portfolio of businesses now without IDS and, of course, a higher percentage of service, and I would say the software businesses, I think we will, similar in what we were in '08, '09, continue to be very resilient even if we see a more difficult economic environment and even if we dip into another recession. So I guess I feel pretty good about our position from a portfolio of the end markets we operate in, as well as the position of PerkinElmer within those end markets. So that's why even though it's a challenging macroeconomic environment, we're still talking about mid-single growth, and we're taking our guidance up.

And just one other item, Andy, on the numbers. Could you maybe just walk us through how we should expect the impact of acquisitions relative to the numbers on revenue for the rest of the year, just given some of the contracts you had lined up to there through 2011?

Yes. For all the acquisitions until we have said $35 million, I think, in the last time we talked, and that's -- we're just under $20 million in the second quarter right about that in the third quarter and then the balance will be in the fourth quarter. So we'll see somewhat of a linear ramp through the year. And all through the full year released around $75 million. And then on the profit side, the majority of the profits will be recognized in the fourth quarter, and that's primarily due to CambridgeSoft, which we talked about last quarter.

And if I could squeeze in last one, Rob. You guys commented briefly on your new customers in the OneSource business. Can you just put a little more color around what you meant by that?

What I talked about was more specifically that we're seeing growth outside of our traditional base, which is the pharmaceutical companies, and I just spoke in particular a big contract that we got in the environmental testing area. So while we do continue to get customers, probably more important is we're broadening out the addressable market.

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

So first question was on the Research business. Andy, you were probably trying to talk slower than normal but still talking pretty fast. And I thought you said high single-digit growth in Research business, but then I think afterwards I thought I heard something like mid-single digits. So I don't know I had -- I was just trying to understand exactly, if you could give a bit more detail on how the research markets overall grew for you, guys?

I appreciate the feedback. I'll get slower each quarter, but at mid-single digit is what I said in my prepared remarks for the Research business.

So okay, for the second quarter?

Second quarter, yes.

And you said most of that was good growth in Asia, right? And Europe and U.S. and Research, how are those?

I know where I would think about Research. It was driven by Asia and was also driven by academic as compared to pharma and biotech.

And if you split up? The Asia was, I'm assuming, was more pharma-oriented than academic, and U.S. is maybe more academic?

Yes, that's correct.

And Europe, overall, was kind of sluggish?

Yes, I think Europe was sort of flattish for us.

It was up slightly, yes.

And then the second question, Rob, what are you doing and what plan I guess are you putting in place from an expense standpoint, from a CapEx standpoint, maybe what you're thinking about doing for the second half of the year, just given the macro signs that you said you're starting to see and the markets is kind of telling us? But maybe the markets have been wrong before, maybe things are going to get tougher. So I was just curious what you, yourselves, are doing there?

Well, I think generally we're trying to be sort of prudent with how we expend, whether it's expenses or capital. But we continue to see growth in the mid-single digits. So while I'll say we're being cautious with, I would say, significant investments, we're continuing to spend money in R&D and building out infrastructure, particularly in the emerging markets. So I think it will be prudent, but I would say we're not, at this point, at the level we were is sort of late '08.

So you have no plans today to proactively stop some spending that you're previously going to do for the balance of the year?

Yes, I would say we haven't stopped anything right now that we planned in the second quarter.

And just a follow-up. What would you -- would it be just kind of seeing your revenues fall off that would get you to kind of change that? Is that what you're looking for to actually starting to see some decline in terms of...

Probably, orders and bookings, if we saw -- and of course, it's hard to characterize across the entire company because within various markets or with various businesses, we may see some slowdown and, therefore, we'll be responsive to that. But that's really up to the sort of individual business leaders to monitor that. But I would say across the corporation, we do not have any overall plans to curtail our expenditures or capital.

Our next question comes from the line of Dan Arias of UBS.

Rob, just sort of following up on the last question. Is there any change in the way that you're viewing the use of cash or the preservation of cash, just given the current level of macro uncertainty?

No, I think it's still consistent with what we've done historically, which is we look at acquisitions and then we also look at buying our stock. As I'm sure everybody is painfully aware, our stocks are a lot cheaper today than it was 7 or 8 days ago. So I think that's -- if there's a difference, it's only that perspective is that probably buying back PerkinElmer stock is a lot more attractive than it is now than it was 2 weeks ago. But I think we look at both, and we look at the financial returns and consider the risk aspects of both of those investments. And in fact, if you look back 2 years, I think the split is about 60% of the cash we generated through operations, and asset sales was invested back in acquisitions and about 40% was return to shareholders through share buybacks.

And then can you just talk about the Signature Genomics business? I know there's been some publications that lay out best practices for labs doing postnatal testing. Can you just talk about trends and market growth there with that business?

I think Signature Genomics is a business where we invested into -- continue to expand our capabilities into the chromosomal analysis side. I think we continue to see good progress on the OncoChip and getting that out into the marketplace. I would say the area that's been somewhat difficult is the -- I would say, the ramp up in the reimbursement of that product has probably gone a little slower than we would have originally anticipated.

And then just quickly, Andy, are we able to get a currency impact forecast for the full year?

Well, sure. We were -- it was 6% tailwind in the second quarter. We expected to be 4% in the third and probably around 3% in the fourth. So hopefully, that's what you need.

Our next question comes from the line of Peter Lawson of Mizuho Securities.

Rob, what's your total government spending exposure and which parts do you think would be insulated from any cuts?

Well, when we start talking about total government, I guess, we need to sort of separate that in a couple of categories. I talked earlier about our exposure to academia, which was really in the Research area. And when you look at the U.S. aspect to that, we think that's something less than 5%. When we started expanding it to all governments and you get into newborn screening which, of course, in most cases, in the U.S., the newborn screening testing is reimbursed by state governments. And of course, when you get into outside the U.S., a lot of what we do in the screening area is paid ultimately by the government in the various countries. So I guess, if you're just talking about total governments across everything that we do, it's probably 20%, 25% of our revenue.

And then, the other trend other than academia you seem to buck was the instrument placements, strong instrument placements in Human Health? What industry was that in? And is there an annuity stream attached to that?

Yes, I mean, historically that's been the case. So while we are disappointed from a gross margin perspective because of the mix issue with insurance being a little lower and gross margins, in the long term, we think it bodes positive for the business because, as you said, a lot of the instruments we placed have a revenue stream associated with that. Quite frankly, the instrument growth that we saw was both in academia, pharma, biotech and on the diagnostics side as well. So if you look within the Screening business, we saw good placement of instruments and, again hopefully, that bodes well for the future as it usually does carry with a good annuity stream on the consumable and reagent side.

For the second half organic growth number, if you -- is there anything in there where you're looking for an acceleration or improvement in particular end markets?

I would say that one area that I would spike out and probably slight improvement on the Screening side, as I mentioned before. I think we are expected to see a little stabilization in birth rates. And hopefully, we continue to get good traction outside the U.S. So I think we're expecting Screening to improve a little bit, Research to sort of be consistent with what it was in the second quarter, and probably, a little moderation on the Environmental side. And as I said before, not necessarily because of demand characteristics but just because of comparisons year-over-year.

Our next question is from the line of Steve Willoughby [ph].

I guess, first, if you could remind us on your Screening business, how that breaks down in terms of revenue per U.S. versus o U.S.? And then, on the assumption that Screening should return to more normalized rates, is there any evidence you're seeing in the market today? I guess, what's that based off of?

So I would think of the Screening business probably 2/3, 1/3 from the standpoint of U.S. to outside the U.S. And I would say, we're seeing some early indication based on data that we track in the hospitals with regard to sort of deliveries that there may be some again modest improvement in stabilization in the back half.

And then just a question on the share buybacks. How much do you have left remaining under your authorization?

We have been 6 million shares remaining at this point.

Our next question comes from the line of Jon Wood.

So Andy, on the -- just looking at your third quarter guidance, and it looks like you're implying incremental margins a bit below, which you had in the second quarter. I guess tying this into what happened on the Human Health side, you kind of talk about some growth investments in mix. Can you just kind of talk us through the Human Health incrementals going into the back half of the year vis-à-vis the overall business?

Well, yes. The growth investment side of it, we're really referring mainly to our DNA business we talked about over the last couple of quarters and some of the expenditures around that. I think the rest of the Human Health outside is really going to be impacted by mix. I think the overall margins we expect to return to positive in the second half for is Human Health primarily because we do think there's a bit of a pickup in that mix with our Screening business kind of get them up to more of a positive than what we saw in the second quarter. So I think there's incremental there. And I think we still have very difficult comps in the Med Imaging side. We were up over 20% on Med Imaging in the third, fourth quarter last year. So I think that's going to be a little bit of an offset to that. So I think with those investments and with volumes getting -- returning to more of a mid-single type growth rate, that's kind of where we think we'll end up.

So I guess when we think about the third quarter is we do expect to see incremental margin improvement on the Human Health side. What we are forecasting is not as strong of expansion on the Environmental side. Of course, if you look at the first half, Environmental Health was expanding operating margins over 200 basis points. We're assuming that moderates down a little bit.

Got it. You kind of touched on this, Andy, but just looking at the comps, obviously, in the Human Health business in the back half of last year, right there, they're increasingly or they appear to be increasingly tougher. And Europe, you kind of call that as being the Imaging growth in the back of last year. So can the Human Health business, as kind of consolidated, actually accelerate in the back half of the year given that Imaging comp?

From a margin perspective, we think both gross margin and operating margin will expand in the second half despite the year-over-year comparison in Med Imaging.

And do you, Andy, remind us, do you have any incremental capital redeployment activity built into your guidance at this point?

The incremental capital? No, we do not.

Jon, do you mean like a stock buyback, additional stock buyback?

Yes, right.

We have the authorization out there, but we don't any of that built in into the guidance.

[Operator Instructions] The next question comes from the line of Paul Knight of CLSA. Paul Knight - Credit Agricole Securities (USA) Inc. When we look in the world of the traditional analytical instruments, did you see any booking change? I mean obviously, we worry that it's cyclical. What's happening there? And then I guess, Rob, when you look at the Service side of the business, it's a lot larger portion of Perkin, do you really see any change in tone on Service? Or should Service really go through a rougher economic patch better? What's your thought on, A, hardware instrumentation? And secondly, what do you think happens in the Service business in a recession if we have one?

So on the Instrument side, I think alluded to this a little bit before, we have seen some slowing in Europe, not surprising, I think given what we're hearing about the economic environment there, we are not seeing anything in Asia that's really noteworthy. So Asia continues to be strong for us. And the U.S. seems to be fairly consistent. So I think we still feel pretty good about the demand pattern for the Analytical Instruments side in the back half. As I said, we're moderating a little bit just relative to the strong second half we had last year. On the Service side, if you go back again to the discussion we have before in the '08, '09 timeframe, Service business continued to do quite well during that period of time. So it's difficult to say something is immune to the overall macroeconomic environment. But I do think that the Service business has done pretty well historically. Now part of that is if you were to sort of separate it between classical, billable or time and material, I think that does take a little bit of a hit during a difficult economic time. What was more than offsetting that during the '08, '09 timeframe was we're continuing to expand the OneSource program because of the continued adoption of that, largely within the pharmaceutical industry. So I think the real challenge, as we get into a more difficult environment is, we'll we be able to continue to expand our addressable market with OneSource? And when I say that, it's not only from an industry perspective, it's also from a geographic perspective. For more than offset, what will be some pressure on the historical time and material aspect of service. Paul Knight - Credit Agricole Securities (USA) Inc. And then Rob, on the Research, Reagents businesses, are you happy with the rejuvenation of that product line? Is that product line growing consistently now? What is the status of that?

Well, I think when you think about our Research Reagent business, you really need to bifurcate it between the radio chemicals and the non-rad. The radio chemicals, as we talked on a number of occasions, continue to be under pressure. And so, again this year -- this quarter, it was down sort of high-single digits. And we're continuing to try the best we can to sort of manage through that transition, and we think, at some point, that does stabilize at a certain rate. On the other hand, on the non-rad side, I think we continue to see good growth there. And as you said, I do feel good about the rejuvenations there, both within internal investments that we've made, as well as some of the external acquisitions we made. So for example, the VisEn business in the preclinical side saw a good growth in the quarter. So I feel terrific about the progress we've made on the non-rad. It's going to take us a little while to sort of make that piece large enough to make the non-rad piece not have such a big impact on the overall growth of the Reagents business.

With no further questions at this time. I would now like to turn the call over to Mr. Robert Friel for closing remarks. Please proceed.

Okay. Well, first of all, thank you for your questions. As we move into the third quarter, our priorities will remain focused on bolstering our growth and utilizing a focused approach to improving our operating margins, while investing in new technologies, software and services that advance human and environmental health. During our next earnings call, I look forward to discussing our third quarter performance and how we're progressing against our priorities. Thank you for your participation in today's call and your continued interest in PerkinElmer. Have a great day.

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