Revvity, Inc. (RVTY) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 PerkinElmer Inc. Earnings Conference Call. My name is Chanel, and I'll 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, to Mr. Dave Francisco, Vice President of Investor Relations. Please proceed.

Thank you very much. Good afternoon, and welcome to PerkinElmer's Third 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. It will be archived on our website until November 17, 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'm now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel.

Thanks, Dave. Good afternoon, and thank you all for joining us today. We're pleased to report another good quarter for PerkinElmer, which we successfully delivered strong financial results while continuing to make strategic investments to improve the long-term growth profile of the company. From a financial perspective, revenue grew 8% as reported and 4% organically, despite a very strong Q3 last year in which we grew double digits organically. In addition, adjusted earnings per share increased in the third quarter to $0.41, up 32% from Q3 of last year and exceeded our guidance range of $0.37 to $0.39 per share. In the quarter, we experienced continued traction on our margin expansion initiatives with adjusted gross margin expanding by approximately 120 basis points. Adjusted operating profit margins improved by 45 basis points, despite increased investments in R&D as we continue to focus on expanding our new product pipeline as well as selling and marketing investments to enhance our commercial capabilities primarily in emerging markets. On a year-to-date basis, our revenue was up 6% organically, adjusted operating margins were up 90 basis points over the prior year and operating cash flow is up over 30%. Additionally, growth in adjusted earnings per share has increased an average of 28% in the last 7 quarters over the respective prior year periods. Given that Andy will discuss our key market segments and financial results in more detail, I'd like to provide a few of the key highlights from the quarter and then focus my remarks on our outlook going forward. In the third quarter, we experienced growth in all major geographic territories, as well as the majority of our key end markets. Within diagnostics, we continue to benefit from the expansion of programs for both newborn and infectious disease screening, particularly within the emerging territories. Contributing to the solid growth in the period was a key win in Eastern Europe and the continuation of strong demand in Brazil and the Middle East. Additionally, we initiated a collaborative effort with a number of major Japanese universities to develop new methods of detecting radiation in soil, water and food, as well as a guide to develop and monitoring of decontamination methods, which resulted in strong demand for our radiometric detection equipment in the period. Also, in the quarter, we continue to broaden our OneSource service offering with the addition of an automated system for instrument qualification, applicable and regulated lab environments. Thereby furthering our commitment to maximize lab productivity for our customers. Additionally, we continued our efforts to expand beyond the pharmaceutical industry with our OneSource service offering and experienced early wins with customers in both environmental and industrial labs. We continue to benefit from our recent acquisitions in areas such as informatics, sample prep and imaging, which will increase our relevancy for our customers and better position us in higher growth markets. In Q2, we expanded our medical imaging growth profile with an acquisition of Dexela, which is seeing strong demand, including recently winning a contract with a leading diagnostic supplier and a leading orthopedic device company. Chemagen also showed terrific growth in both North America and Europe, with its nucleic acid sample preparation solutions as laboratories seek ways to facilitate their higher throughput applications. Additionally, our informatics acquisitions have demonstrated solid growth and although still early days, are already making us a more important partner to many of our customers. Our expected acquisition of Caliper Life Sciences will also strengthen our position in the growing area of personalized medicine, as it will bolster our ability to provide customers with an even stronger pipeline of innovation. In particular, Caliper will bring excellent technology across the value chain from in vitro to in vivo imaging, as well as expanded offerings across several of our key end segments. Today, Caliper reported another strong quarter with solid growth on both the top and bottom line. We remain on track with this transaction and having secured HSR approval and the required financing. I look forward to closing the transaction in the near future. Now let's turn to the global economic environment, and how we believe it will impact PerkinElmer. Starting first with Europe. During the quarter, we experienced low single-digit growth with much stronger headwinds in the southern part than the northern and central parts. While about 30% of our revenue is from Europe, much of that is in end markets that we do not believe will be significantly impacted by the challenging economic conditions. Furthermore, only about 5% of our revenue is tied directly to European government spending that could be exposed to European government austerity measures. In the U.S., we experienced mid single-digit growth in the quarter, and similar to Europe, expect that macroeconomic conditions will continue to be challenging. However, we are seeing birth rates improving over last year and continued demand for environmental and safety products due to the both growing regulatory requirements and customers seeking to protect their brand reputation. And, of course, our service business provides real stability, as well as terrific access to our customers to expand our commercial relationships. In the developing parts of the world, which represent about 25% of our revenue, we continue to see strong double-digit growth and expect this to continue. During the quarter, we once again increased our investments in these markets, and believe we will have a great opportunity to leverage our channel capabilities to bring many of the products and technologies we recently acquired to this part of the world. Through the last several years, we have made a number of changes to our businesses, organization and global footprint, which I believe has resulted in a stronger, more resilient company. As a result, due to the nature of our end markets, our global diversity and strong customer relationships, we believe that we can continue to grow should economic conditions become more challenging. As we face the challenge of how to manage economic uncertainty while remaining focused on driving growth, our strategy will be to prudently deploy our investments toward growth areas that we believe will create the best long-term returns. However, we will not be immune to the impacts, and so we will be prudent with our investments and continue to look for ways to improve our processes and eliminate unnecessary costs. As we move into Q4, I'm encouraged by our ability to continue to deliver solid financial results. We have a portfolio that is uniquely positioned to capitalize on key trends impacting Human and Environmental Health and most importantly, this is backed by our outstanding team of people around the world. I would now like to turn the call over to Andy to get into the financial results in a little bit more detail.

Thanks, Rob. Good afternoon, everyone. I'm pleased to provide some additional details on our third quarter results and following my prepared remarks, we'll open it up for questions. Before moving into the financial details, I'd like to clarify that whenever I talk about our particular measure being up or down, I'm referring to an increase or decrease in that measure during the third quarter of 2011 compared to the third quarter of 2010. As Rob just discussed, we were pleased to deliver another solid quarter of growth and revenue, adjusted earnings per share and cash flow, particularly considering the difficult comparisons from the third quarter of 2010. Revenue for the third quarter increased by 8%, and organic revenue increased by 4%, as compared to the same period last year. By segment, organic revenue increased by 2% and 6% in our Human Health and Environmental Health segments, respectively. All major geographies contributed to our organic revenue growth with the America's growing at a mid single-digit rate, Europe growing at a low single-digit rate and Asia growing high single-digits, with China up over 20%. Additionally, our presence in emerging markets continues to significantly contribute to our organic revenue growth with these key regions generating another strong quarter of double-digit growth. From an end-market perspective, PerkinElmer's Human Health segment represented approximately 46% of total revenue in the quarter. Within Human Health, we serve 2 end markets, diagnostics, which represented 29% of total revenue; and research, which represented 17% of total revenue. Organic revenue from our Diagnostics business grew at a mid-single digit rate in the third quarter with solid growth generated from both our screening and our Medical imaging businesses in the period. Organic revenue at our screening business grew at a mid single-digit rate in the quarter, as we experienced solid demand across all territories. In the U.S., we experienced healthy growth across all major areas of the portfolio. As discussed in prior quarters, we are seeing improving trends in birth rates, which we estimated as flat in the period, representing a significant improvement from the declines we experienced in 2010 and the first half of 2011. Outside of the U.S., we continue to see steady growth within the emerging territories, particularly in China and Brazil as we continue to expand our footprint of screening solutions in these key high-growth areas of the world. In our medical imaging business, organic revenue grew at a mid single-digit rate in the quarter, despite cycling up against the most difficult quarterly comparison from the prior year. Our penetration in adjacent markets for this key imaging technology continues to benefit the business with very strong demand for industrial and veterinary applications in the period. Additionally, we were gaining traction with our CMOS imaging technology, experiencing early wins with our key OEM partners for orthopedic, surgical and industrial applications. The strong growth in adjacent markets offset a modest decline in our base medical diagnostics offering due to the very difficult comparison from the prior year that I mentioned earlier. Organic revenue in our research business declined in a low single-digit rate in the third quarter despite continued healthy demand for our preclinical offerings including our Operetta, cellular imaging instrument utilized for in vitro research, as well as strong growth in our fluorescent agents utilized for in vivo imaging. Within the pharmaceuticals sector, we experienced strong growth in China and India in the period, as we continued to leverage our regional growth investments and benefit from the ongoing CRO outsourcing trend. We're encouraged by our early success in capturing preclinical opportunities, as well as the progress we continue to make in emerging markets. However, during the period, these advances did not completely offset continued soft demand for our pharmaceutical customers in the developed regions of the world, particularly related to our legacy products including our radioisotope portfolios. Let's turn now to Environmental Health, which represented 54% of total revenue in the quarter. Within Environmental Health, we served 3 end markets, laboratory services, which represented a 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 lab services business grew low-single digits in the third quarter. As Rob mentioned earlier, we're seeing good traction in our informatics as we begin to be to leverage our broad-based OneSource relationships to increase the knowledge content we are bringing to our customers through our robust enterprise-wide software systems. Our traditional service offering was essentially flat in the period due primarily to difficult comparisons in our OneSource service offering as the business cycled up against a significant contract win in the prior year. Organic revenue in our environmental and safety markets grew low-teens in the third quarter as the expanding number of environmental and food safety applications continue to drive strong demand for our analytical instrumentation and follow-on consumables. We experienced another strong quarter of organic revenue growth from our inorganic analysis offering, since trace metals identification remains a critical component of contaminate protection for environmental, as well as food and consumer safety applications. Additionally, we experienced healthy growth in our molecular spectroscopy offering utilized primarily for material safety and quality applications. We believe these trends will continue as emerging contaminant testing protocols and corresponding regulations are developed, resulting in continued strong demand for a highly efficient, analytically sensitive and information-rich testing solutions. Lastly, organic revenue in our industrial markets grew mid-single digits in the third quarter. This industrial demand continues to be primarily associated with materials analysis, chemical processing and semiconductor applications supported by our molecular spectroscopy and chromatography platforms. Looking at our financial performance. Adjusted gross margins expanded 120 basis points due to productivity gains and the favorable impact of acquisitions. Adjusted operating profit margins expanded 45 basis points in the third quarter to 14.2%. In the quarter, we benefited from higher volume, productivity gains, particularly in G&A and lower corporate cost. This impact was offset by growth investments in R&D and our commercial infrastructure in emerging territories, as well as upfront costs related to new product launches, particularly within our Environmental Health segment. Year-to-date, during the third quarter of 2011, adjusted operating profit margins expanded approximately 90 basis points, as compared to the same period a year ago, representing the high end of our stated objective of adjusted operating profit margin expansion of between 75 to 100 basis points. In our Human Health segment, adjusted operating profit margins for the quarter were 19.5%, representing an increase of 20 basis points as compared to the third quarter of 2010. Favorable mix and productivity gains in Human Health were offset by growth investments initiated in the period. In our Environmental Health segment, adjusted operating profit margins were 12.2%, representing a decrease of 100 basis points as compared to the third quarter of 2010. Within this segment, we experienced strong volume leverage and productivity gains, offset by unfavorable mix between instruments and service, investments in commercial resources primarily in emerging markets, as well as incremental cost as mentioned previously related to new products. GAAP operating profit was $34.2 million in the third quarter of 2011 versus $41.4 million in the third quarter of 2010. As year-over-year decrease is primarily attributable to the impact of acquisitions we completed earlier in the year. These acquisitions resulted in a reduction in GAAP operating profits due to primarily to higher amortization of intangibles, as well as the purchase accounting adjustments related to the acquisition of CambridgeSoft. For the third quarter, we had a GAAP tax rate of 11.9%, and on a non-GAAP basis, our adjusted tax rate was 24.2%, which is favorable to our guidance communicated in August. This favorability is due primarily to a favorable distribution of income in the period. For the full year, we expect the adjusted tax rate to be approximately 25%. GAAP EPS from continuing operations in the third quarter of 2011 was $0.24 compared to $0.22 in the third quarter of 2010. Our adjusted EPS was $0.41 in the third quarter of 2011, up 32% from the prior year. Our weighted average diluted share count to the third quarter of 2011 was approximately 113.4 million shares and our ending share count was approximately 112 million -- 112.7 million shares. Turning to the balance sheet. We finished the third quarter with approximately $260 million of net debt, which we define as short- and long-term debt minus cash. This reflects a decrease in net debt of approximately $16 million, as compared to the second quarter of 2011. At the end of the quarter, we had approximately $248 million of cash. Looking at our cash flow performance for the quarter. Adjusted operating cash flow from continuing operations was $50 million, as compared to $37 million, up 35% year-over-year. Subsequent to the end of the third quarter, we issued and sold $500 million of 10-year senior unsecured notes due November 2021, having a coupon rate of 5%. These proceeds will be used to fund a portion of the Caliper Life Sciences acquisition and for general corporate purposes. As result, our fourth quarter outlook will reflect just over $5 million in additional interest expense. In summary, we are pleased with our financial performance for the quarter as we continue to drive strong growth in revenue, adjusted earnings per share and cash flow. Now I'd like to discuss our fourth quarter 2011 guidance. As we look at the fourth quarter of 2011, we are encouraged by the resilience of our portfolio. Most areas of our business continue to grow and experience healthy demand. While we are not ignoring the risk that could arise from the current global economic uncertainty, we firmly believe we are well positioned to deliver strong results in the fourth quarter. As a result, we are expecting our organic revenue growth in the fourth quarter to be similar to what we experienced in the third quarter, and we are maintaining our full year forecast or organic revenue growth to be in the mid single-digit range. We continue to expect adjusted operating profit margin expansion for the full year to be within the revised guidance range of 75 to 100 basis points, driven predominantly by volume leverage in our multiyear productivity initiatives. Regarding full year adjusted earnings per share for 2011, we are raising the bottom end of our estimate from a range of $1.64 to $1.68 to a new range of $1.66 to $1.68, representing growth of 25% to 26% over the prior year. Accordingly, we expect our fourth quarter adjusted earnings per share to be in the range of $0.49 to $0.51. Including in -- Included in the fourth quarter outlook is approximately $0.03 per share of incremental interest expense, a benefit of approximately $0.01 per share due to a lower tax rate and a benefit of approximately $0.01 per share from the addition of Caliper Life Sciences. This concludes my prepared remarks. I'll now turn the call back over to Dave.

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

[Operator Instructions] And your first question comes from the line of Ross Muken of Deutsche Bank.

This is Vijay in for Ross. I guess, Rob, the first one is on the macro. Could you comment on some of the conversations that you've been having with your industrial supply customers, and specifically conversations you've been having in China?

So specifically on the industrial customers, I would say what we're seeing in China is continued good demand, particularly when you look in Europe, I would say the southern parts of Europe are obviously much more significant headwinds than I would say central and north and in U.S., I would say again continue to be pretty good demand. So I think on the industrial side, with the exception of the southern part of Europe, we continue to be -- feel pretty good about the opportunities, particularly in the environmental area.

I guess, digging in on the question [Audio Gap] when you talk to your customers, has the sort of tone changed in the 3 months prior to what it is now? Are people worried, I guess, about the macro and what other views and ...

Yes. I mean, clearly, over the last 3 months, people have gotten more cautious. But I would say, we haven't seen a dramatic change in ordering patterns. I think people are, as I said, more cautious the about 2012. But I would say, at this point, again, particularly on the industrial side and the Environmental side, we're not seeing significant reductions in ordering.

Your next question comes from the line of Dan Leonard of Leerink Swann.

A couple of questions. One, do you have any meaningful pieces of your business that build off of a backlog? And if so, how is the backlog trending?

I would say some of the business, for example, medical imaging will be a business that has a much longer order cycle times, so they have a backlog. Some of the instruments, but to a large extent, most of it is book and bill in the current quarter. But specifically about the business, is that they do have a longer order, for example, medical imaging. Again, I would say that's holding up pretty well. And that's why I think we continue to feel that Q4 will look a lot like Q3. Of course, keep in mind, when we went into the back half, we mentioned the fact that there's much difficult -- or much more difficult comparisons. Because if you look at Q3 and Q4 last year for 2010, one was up 10%, and one was up 9% organically.

Okay. And if you look at -- well, Caliper's results today exceeded at least what the Street was looking for previously. So did that -- are you still sticking with the $0.08 accretion estimate for 2012 or did anything in their resolve to cause you to think differently about that?

No. I think we still believe that $0.08 accretion in 2012 is the right number.

And then my final question on capital deployment. It looks like you're going to be up, getting closer to the 3x debt-to-EBITDA range after Caliper. Do you have comfort to go higher than that? Or what sort of your -- the ceiling on where you get ...

And I would say, it's probably driven at this point more by the management bandwidth. And I think with the combination of the Caliper acquisition and of course, a number of informatics acquisitions that we've done in the past couple of quarters that I wouldn't expect significant acquisitions done here, and I think the focus will be more on sort of deleveraging the balance sheet and getting the acquisitions that we've made over the last couple of quarters well integrated and running well within PerkinElmer.

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

Andy, appreciate you giving that additional color on kind of the end markets and you're feeling that you're still -- you feel pretty good about growing, even if the end markets kind of softened. Could you kind of compare and contrast where your portfolio stands now versus like 2008 when you had the lighting business, for example, and maybe some other businesses that were more cyclical in nature?

I wasn't here in 2008, so I'll let Rob answer that question. But there are a number of differences now in the portfolio but...

Quintin, so I would say it's not only, I would say, end markets. As you point out, we don't have the lightings, we don't have the sensor businesses. The acquisitions we've made, I think, put us in a more resilient markets. I would say it's also we've seen a shift more into developing. So as I mentioned, 25% of our revenue now sits in developing, and that's a significant increase over 2008. Also, we've seen a bigger increase in the sort of consumable reagents and software aspects of the businesses. So the capital component of our business is much less. So I think it's a combination of factors that leads us to believe that we feel good about the resiliency in a difficult economic situation. I would say the other aspect of it is when you look at the revenue split between sort of capital and consumables and reagents and informatics, it's probably about 60-40. However, when you look at the profitability, it's more like 75-25. So as you can imagine, our consumable reagents and software businesses are much more profitable. So again, I think this -- and again, that's a change over 2008. So I think it continues to have sort to be supported by strong financial results even though macroeconomic conditions are challenging right now.

And then, as we look out, not just organic revenue growth but leverage, especially dropping down to the bottom line. In the event that we do see a slowdown, could you kind of talk about potentially what other levers you could maybe pull or accelerate to help drive bottom line growth?

Yes, I mean I think that would be a choice we could make, because what we have is obviously very strong gross margins. And we've been fairly aggressively investing both on the R&D. I think you saw that R&D stepped up fairly significantly here in third quarter, and we continue to build out our infrastructure in emerging markets. So I think one lever would be, not necessarily would be our first preference, but would be to sort of to slowdown in some of our growth investments, which as you can see, particularly in this quarter as we've been sort of stepping up here to continue to build out the growth profile of the company.

And Quintin, I think as we look out to 2012, we obviously won't talk about '12 until January. But as we have the businesses start to look at different scenarios, they are putting together different outlooks and how they would react to those from an investment perspective and so forth. So I think as we report our results for the fourth quarter and talk about our outlook for the first quarter or for 2012, I think we'll be able to share more detail with you.

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

Just wondered if you could talk to the pharma decline you are seeing. If you could add some kind of granularity around that, where you're seeing weakness?

I would say in the research market and you saw that we were down low-single digits. In academia, we were sort of flattish, and pharma was down sort of mid-single digits. So we are seeing, almost across the developed markets, a pull back from the pharmaceutical R&D, continue to see growth in Asia, both in Europe and in the U.S. We are seeing declines in the pharmaceutical side. I think that's one of the things we hope we'll be able to improve with the Caliper acquisition because I think they bring some great technology and products, particularly around that area that will give us much stronger capabilities, particularly in the imaging side because when you look in the pharmaceuticals, we continue to grow in the imaging side and we think that's an opportunity for us. And of course, a number of the areas that they're focused on continue to see good growth. But clearly, in the pharmaceutical area in the quarter, we saw a lot of declining revenue.

What was the biggest area of weakness in the quarter? What are the expectations for those markets in Q4?

Well I would say, first of all, almost every quarter we go into, we're facing declines in the radiochemical area. So the reagents around the radiochemical side, I think are -- because as people want to use less and less of radioisotopes in their experimentation. So that continues to be in the sort of mid- to high-single-digit declines. And so, again, Caliper helps to sort of balance that natural decline in that business. So I would say, those are the areas -- that's the area we probably saw the biggest decline. Offset to some extent by the imaging, which we saw a good growth.

Your next question comes from the line of Tony Butler, Barclays Capital.

Rob, just if you could comment on Environmental Health. The sequential growth you had has been really, really strong, and even if I take it back to last year, really a slowdown in this quarter relative to what you've been able to do in past quarters. Could you -- As I highlight that, could you give some greater color to what's really driving that slowdown?

Yes, I think some of that was -- we indicated at the end of second quarter that we're going to cycle up again against a difficult comparison. The environmental group in the third quarter of 2010 grew in the mid-teens. And so, I think that was part of it. I think also on the service side, we are cycling up against some very significant wins in Q2 and Q3 of last year. So I would say that's the fundamental reason that you saw sequential declines on the Environmental side. But within the businesses themselves, we see -- we continue to see good demand particularly around the new products and in the organics. And of course, the informatics business performed very well in the quarter. So I would attribute it to more of -- more difficult comparisons as compared to anything that we're seeing from a demand perspective. Having said that, clearly, going back to the, I think, the first question that you asked, the customers are being a little bit more cautious given the macroeconomic environment.

I appreciate that. But in Q2, you did have some pretty tough compares as well but you tended to pull out 9% organic, and that look really attractive. So it just seemed despite the tough compare, it was a little more pressure.

Yes, I would say on the margin, there is -- in Q2, we had some new product rollouts that provided us a little bit of a benefit there. But again, Environmental Health was still pretty strong.

Your next question comes from the line of Paul Knight, CLSA. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division Rob, the Q4 guidance, I guess, it's suggesting low single-digit organic, is that right?

No. I think I had indicated that it was going to be consistent with the third quarter.

We're sort of seeing the 4% to 5% range, I think is what we're seeing from an organic perspective for Q4. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division Okay. And then, can you add any color around that regarding geography, U.S., Europe, and then I guess emerging market?

Our sense right now is it's probably going to look somewhat similar to what you're seeing in this quarter with Europe being low single and then the U.S. being mid and probably continuing to see stronger growth in Asia. This year it was -- this quarter it was high single. It's been sort of either high single or low double the last number of quarters. And so I think the geographic split is going to -- continue to look very similar in Q4 as it's been in Q3. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division And then lastly on the China market, how is the development of the business going there, Rob?

It continues to go very strong. China again was north of 20% growth. And I would say it's fairly pervasive across almost all our businesses whether it's the Environmental side, the diagnostic side and even within the bio-discovery or the research side, which is a relatively small piece for us, we continue to see good traction there.

And Paul, as we mentioned earlier, part of the expansion we're seeing, some of the investment we're seeing on the Environmental Health side is really around selling resources in China. So we expect that to continue to grow at above company rates.

I mean, one of the significant opportunities we hope to achieve in 2012 is both the informatics businesses that we acquired as well as Caliper did not have a very strong infrastructure. I would say in emerging markets generally speaking, but specifically in China. So we think we can really make some inroads there with bringing new technologies and products through our channel. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division I don't follow Caliper anymore but between Caliper and your research products businesses, are you seeing the -- any increase or any change in translational research validating gene function, et cetera, following all the human genome work that's occurred?

Well, as you know, we haven't actually combined the businesses yet because we haven't closed. But I think when you look at some of the exciting technology innovations that Caliper has been working on, I think there'll be a tremendous opportunity to expand or improve medicine, particularly combining with some of the things we do both on the research side as well as the diagnostic side. So I really think combined, we can really make a significant difference in improving both diagnostics as well as therapeutics.

Your next question comes from the line of Jon Wood of Jefferies.

This is Brandon Couillard in for Jon tonight. Andy, the corporate overhead expense component fell pretty sharply in the period. Is there something unusual going on there in the quarter?

It's primarily related to compensation that's tied to the stock price, and the stock price unfortunately over that time frame was down. And I think if you look at the fourth quarter or you start to look at forecasting the fourth quarter, it will probably return to more normalized levels. We expect it to and hopefully the stock price will as well. But the more normalized levels that you saw in the first and second quarter.

As you can imagine, a lot of the senior managers' compensation is tied to the performance of the stock price. And so when we see the type of decline in stock price that we experienced in Q3, it can dramatically impact our compensation.

Okay, that's helpful. And then, Andy, back on the environmental incremental OP margins in the period, I mean should we anticipate that, that phenomenon persist into the fourth quarter and...

No. I think you're going to see operating margin expansion in reasonable incremental flow-through in the fourth quarter. I think a lot of the heavy-lifting investment was done in the third quarter.

Okay. So that was the second part of my question, if you could give us some sense of the impact between mix and the commercial investments you are undertaking.

I would say, of the decline, about 2/3 of it was investment. And the mix would be the other third.

Okay, that's helpful. And then lastly, Rob, you quantified the exposure to European government and academic end markets. Can you expand on that and talk about the U.S. and maybe your aggregate footprint in that?

So the U.S. is a little higher than that, but of course, when we talk about government exposure, a large portion of our exposure is our newborn screening, which is state funding. And quite frankly, as long as I've been here, we've never seen a decrease in newborn screening coming out of the states. And normally when there's pressure on the state funding, it has a tendency to suppress growth, but not necessarily result in decline. And again in the fourth quarter -- I mean in third quarter, we saw growth in the newborn screening businesses in the U.S. So while the number is probably closer to 10% in the U.S., again, it is distorted by the newborn screening business.

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

This is actually Jeff in for Isaac. Looking at gross margins and understanding the stuff you guys talked about so far, I mean, it's the highest gross margin quarter you guys have had in a while. How should we look with the sustainability of this going forward? How much of it was mix versus volume?

Well, adjusted gross margins for the quarter were up 120 basis points, and about half of that was acquisition-related and that will obviously continue. These acquisitions we brought out have higher gross margins. But the other was really productivity, and that should be sustainable. Certainly -- maybe not at the 100-plus basis points year-over-year but somewhere in that range. So I would say as you look into the fourth quarter, we should see sequential and year-over-year gross margin improvement.

I mean, one of the things we're seeing with some of the acquisitions we've made is they have a tendency to be higher growth, higher gross margin and higher R&D. And so what you saw in this quarter is the beginning of some of the impact of that where you so higher gross margins and higher R&D. We actually think that's a favorable improvement to the P&L.

Going back from the questions you guys had, touched on the pharma segment. If you x out the radioisotope declines, did you see growth from your pharma customers overall?

Yes. I mean, I haven't done that calculation, to tell you the truth. But -- yes, I would say, probably pulling out the radiochemical business, we probably would have seen growth.

Okay. And then -- well, lastly on Europe, can you give a little bit more color in terms of where in Europe, not necessarily geography, geographically for the weakness but from a product line basis, was it more in diagnostics or research or...

It was clearly more in research. Diagnostics grew in Europe and the Environmental business grew in Europe.

Your next question comes from the line of Steve Willoughby of Cleveland Research.

Last quarter, you said that you expect Human Health to remain or either grow into the mid-single digits for growth in the fourth quarter. Is that still accurate based on the comps that you guys are facing?

Yes. I would say, I think, we're going to see improvement in the Human Health in the fourth quarter, as compared to what we've seen historically. Well, I mean, a lot of that will be dependent on what happens within the research markets, but I think we're clearly seeing some recovery in diagnostics. I think you saw that in the third quarter. And so it's really a question of the improvements on the research side. And of course, we do expect to get some contribution from Caliper.

And then secondly, on the radiochemicals business, how much would you estimate that represents of your total revenue these days?

It's about $100 million in total for the company.

Okay. And then final question, given the CambridgeSoft contracts, I know they're a little bit more skewed towards the fourth quarter. What's a good number for acquisition revenue that you're expecting in the fourth quarter?

For total acquisition revenue, it's going to be around $27 million. Pre-Caliper, right. I'm sorry, that was pre-Caliper just to be clear.

[Operator Instructions] Your next question comes from the line of Jon Groberg of Macquarie.

So just maybe a quick follow-up on the other one. Do you -- I'm just trying to understand the revenue line and some of the adjustments that you made a little bit. I'm just trying to understand from an acquisition standpoint, some of those acquisitions you made, I'm trying to understand how they performs. So if I'm reading it right kind of in your release how you talked about the reported revenue and some of the acquisition you're adjusting for some of these purchase accounting issues. So what was the -- on an adjusted basis, what was the acquisition contribution in revenues for third quarter?

Just over $20 million.

Okay. So there's no deterioration there in those businesses that you acquired?

No. And from a profitability standpoint, they were just under company average margins.

Okay. Yes, the initial 2% makes it look like there was some kind of severe deterioration but I just wanted to make sure, okay. And then -- I'm sorry, I don't know if you're going to say something else?

No.

Okay. And then Rob, obviously, a lot of people have hit on the macro quite a bit. But kind of what can we expect in -- as we move throughout this year in 2012 from a new product standpoint? At times that's an important driver whether or not you're able to sustain some of the growth as I think you mentioned earlier on the call. So where are we in terms of kind of some of the -- what you expect coming out of the product pipeline?

Well, you've seen a little bit of an increase in R&D, and I think that's focused around getting more new products into the pipeline. I think what you saw in 2011 was some really terrific products coming out in the Environmental side. And as we go into 2012, our expectation is to see some good products coming out of the, hopefully both, but probably geared toward the Human Health side as compared to the Environmental side.

And there are no further questions in the queue. I'll now like to turn the call back over to Mr. Robert F. Friel.

So first of all, thank you for all your questions. Let me say, in closing, we feel good about our portfolio and our continued ability to invest in key growth areas that will create long-term value, while also driving our multiyear productivity initiative. Our approach will be to balance investments in long-term growth, combined with our continued pursuit for operational excellence as we continue to play a critical role in creating better outcomes that help to improve the health and safety of people and the environment. Thank you for joining us today and have a terrific day.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.