Revvity, Inc. (RVTY) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 PerkinElmer Earnings Conference Call. I have the 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.

Thanks, Regina. Good afternoon, and welcome to the PerkinElmer's Third 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 a copy of our earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com or from our toll-free investor hotline, 1 (877) PKI-NYSE. Please note, this call is being webcast live and will be archived on our website for 2 weeks from today. Before we begin, we need to remind you, everyone, of the Safe Harbor statements 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 other 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, that are not reconciled to the GAAP in the attachment, we will provide reconciliations promptly. I'm now pleased to introduce the Chairman and Chief Executive of PerkinElmer, Rob Friel. Rob?

Thanks, Tommy. Good afternoon, and thank you, all, for joining us today. I'm pleased to report another excellent quarter for PerkinElmer, in which we continued to make strong progress against our strategic priorities and also delivered solid financial performance exceeding our forecasted revenue growth and adjusted profitability. During the third quarter, our adjusted revenue grew 11% year-over-year, which represents the 10th quarter in a row that we have reported growth of 10% or higher. Organic growth for the quarter was 6%, and over the last 10 quarters, our organic growth has averaged over 7%. While Andy will get into specific details of the organic revenue growth, I would like to mention a couple of the key drivers of this strong performance. Our Human Health business experienced 10% organic growth, with both our diagnostic and research businesses benefiting from strong demand in emerging markets, especially in Asia. In particular, our newborn screening, medical image and infectious disease testing all experienced double-digit growth in the quarter. In our Environmental Health business, the majority of our growth came from the service business and the sale of environmental analysis products into emerging markets. Our adjusted operating margins increased another 60 basis points in the third quarter after funding our planned spending increases on several initiatives to simplify our global manufacturing footprint, reduce our administrative costs and expand our capabilities into the emerging markets. Marking this 10th quarter of consecutive double-digit adjusted revenue growth, I wanted to take a moment to give my perspective on why I think we've been able to continue delivering consistent and differentiated growth despite a choppy macroeconomic environment. When signs began appearing in late 2008, that uncertain times might be on the horizon, we made a conscious decision to not back away from our long-term vision of the company's portfolio, geographic focus areas and critical mission. As a result, over the last 3 years, we have made important investments in every aspect of our business through acquisitions, acceleration of R&D spending and operational improvement initiatives. Ultimately, our performance over this period is an incredible tribute to the dedication and the excellence of our people. Internally, our culture is now one where we all are deeply motivated by advancing our mission of improving the health and safety of people and the environment and energized by the positive difference that is being made. The strength of our organization, our steadfast commitment to growth and our operational excellence have been critically important to advancing our mission, as our growth and increased profitability enables us to invest in new innovations and capabilities to solve our customers' needs. In the past year, we've increased our spending in research and development by over $20 million to bolster our innovation efforts. And since the beginning of 2009, we have increased R&D spending by over $40 million, which represents approximately 10% of our increase in revenue during that time. This increased R&D spending has resulted in a strong pipeline of new products and services that have been major contributors to our strong organic growth over the last several quarters. In addition to higher R&D spending, we also have continued to make significant investments to accelerate operational improvements and expand our capability to better serve our customers. For example, in the third quarter, we opened our new Shanghai headquarters, which quadruples our footprint in this critical location and features 3 new state-of-the-art centers dedicated to developing application solutions to address the needs of our growing Chinese customer base. In addition, our new diagnostics, R&D and manufacturing facility outside Shanghai, in Taichung, received the manufacturing certification from the SFDA. This site has now begun production of high-quality diagnostic reagents and testing instruments for the rapidly growing emerging markets. During the quarter, we broke ground on a new global Personalized Health Center of Excellence in Hopkinton, Massachusetts, establishing a centralized location that brings together some of our best minds to focus on solving critical needs for our research customers. We also opened a new customer relationship center in Krakow, Poland to position PerkinElmer to capitalize on the rapid growth and business potential that we see in Eastern Europe, while enabling us to leverage the recent economic competitiveness. And finally, we've accelerated our progress in realigning our manufacturing assets to improve efficiencies and to better reflect our changing geographic distribution of revenue. During the third quarter, we also began a number of new initiatives that will continue to fuel our growth. I thought I would give you an example of these initiatives in each of our 3 key end markets. In diagnostics, we partnered with one of our customers to establish a lab in a lab to provide realtime PCR assays to help diagnose SCID in newborns. SCID is a terrible disease that attacks the immune system and can make children extremely vulnerable to infectious disease. However, with new advances in recent years, children with SCID can now be successfully treated, and screening for this disease has begun in several U.S. states. In the research area, we announced the strategic relationship with TIBCO for exclusive licensing rights of its Spotfire data visualization and discovery software. Spotfire and our other informatics offerings are critical solutions for our customers, as they harness and extract value from the big data they are producing with exponential speed. And in the environmental market, we are collaborating to embed our ultrasensitive air analyzers into air monitoring systems to detect the existence and concentrations of potentially toxic compounds. These activities, as well as many others, are what inspire us and also give us the conviction to once again raise our adjusted revenue and adjusted EPS guidance for the year. We are still in a challenging economic environment. Fortunately, we've been able to do well due to our long-term commitment to serving our customers, strength in several key end markets, our differentiated product offerings and an organization that is focused on making a safer, healthier planet. I would now like to turn the call over to Andy, who will provide more details on our financial performance in the quarter and full year guidance.

Thanks, Rob, and good afternoon. Consistent with prior quarters, I'll provide some additional color on our end markets, as well as the financial summary of our third quarter results. And then we'll, as usual, open it up for questions. As Rob mentioned, we were pleased with our performance in the third quarter, delivering another solid quarter of organic revenue growth. Reported revenue for the third quarter increased 13%, while adjusted revenue for the third quarter increased by 11% to $514.8 million as compared to the third quarter of 2011. Organic revenue for the quarter increased 6% as compared to the same period a year ago. Adjusted earnings per share for the third quarter was $0.45, driven by stronger top line growth, partially offset by productivity and growth investments deployed in the quarter. By segment, organic revenue increased by 10% and 3% in our Human Health and Environmental Health segments, respectively, versus the same period last year. By geography, organic revenue in both the Americas and Europe grew at a low single-digit rate, while Asia grew by more than 20%. We continued to experience strong demand from emerging territories with organic revenue growth in the BRIC countries, up greater than 20%, despite a growth comparison of more than 20% in the prior period. I'd also like to note that the majority of our businesses in emerging territories, specifically, the BRIC countries and especially China, continued to experience strong demand, reflecting the strength of PerkinElmer's brand and product portfolio, as well as the attractiveness of the verticals we serve. Looking at organic revenue by product category, recurring revenue, which includes reagents, consumables and service, grew mid-single digits in the quarter, while instruments and components grew at a low double-digit rate when compared to the third quarter of 2011, primarily a result of strong demand in Human Health. From an end market perspective, PerkinElmer's Human Health segment represented approximately 50% of total revenue in the quarter. We serve 2 end markets: in the human health diagnostics, which represented 28% of total revenue; and research, which represented 22% of total revenue. Organic revenue from our Diagnostics business increased low double digits during the quarter, with notable contributions from both our Screening and Medical Imaging businesses. In our Screening business, we continued to experience solid demand across most major segments of the portfolio. This business is continuing to benefit from the stabilization of U.S. birthrates and the expansion of our prenatal, newborn and infectious disease screening solutions in key regions outside the U.S. We are extremely pleased with our sales uptake in China and feel that we are well positioned from a geographic and end customer perspective to continue driving strong organic sales in the region. Our Medical Imaging business continued to see broad-based organic growth across all key technologies and applications in the period, with particular strength in traditional medical diagnostic imaging offerings. We continue to be pleased with the exception -- acceptance of our CMOS imaging technology, which provides us access into new verticals, including mammography, dental and orthopedics. Organic revenue in our Research business rebounded from the second quarter, growing at a high single digits in the quarter, the result of strength in automation, High Content Screening, imaging and liquid handling capabilities, as well as somewhat easier year-over-year comparisons. Moving to Environmental Health, which represented 50% of total revenue in the third quarter, we served 3 end markets: Laboratory Services, which represented 25% of total revenue, Environmental and Safety, which represented 18% of total revenue; and Industrial, which represented 7% of total revenue. During the quarter, we experienced high single-digit organic growth in the Laboratory Services business, low single-digit growth in the Environmental and Safety segment and a low single-digit decline in organic revenue growth for the Industrial segment. We remain pleased with the performance of our Environmental Health business. In China, organic revenue, once again, grew by more than 20%, benefiting from our market-leading environmental product applications. In addition, we continue to see good acceptance of our laboratory service and informatics offerings, as we help our lab customers better manage their critical laboratory assets and related data needs. Now looking at our margin performance in the period, adjusted operating margins expanded approximately 60 basis points in the third quarter to 15.2%, while adjusted operating income increased 16% in the quarter to $78.3 million. We are pleased with our adjusted operating margin improvement in the quarter, particularly given the growth and productivity investments made during the quarter, as well as a difficult year-over-year comparison, resulting from the impact of a significantly higher stock price on our stock-based compensation expense. By segment, adjusted operating margins in our Human Health business for the quarter were 22%, representing an increase of approximately 180 basis points as compared to the third quarter of 2011. The combination of volume leverage, favorable mix and productivity gains contributed to the strong performance. Our Environmental Health segment delivered adjusted operating margins of 12%, representing a decrease of approximately 30 basis points. This decline was within our expectations. It was primarily due to the growth in productivity investments just mentioned. GAAP operating income from continuing operations was $43.2 million in the third quarter of 2012 versus $36.1 million for the same period a year ago. Our GAAP tax rate for the third quarter was approximately 8%. And on a non-GAAP basis, our adjusted tax rate was approximately 22%, which is slightly lower than our previous guidance communicated in August. We now expect our non-GAAP tax rate for the fourth quarter to be approximately 22%. GAAP earnings per share from continuing operations in the third quarter of 2012 was $0.25. Adjusted EPS was $0.45 in the third quarter of 2012, exceeding the midpoint of our guidance range for the quarter of $0.42 to $0.44 and a 5% improvement over the same period last year. I want to point out that our third quarter 2012 EPS results include approximately $0.02 per share of incremental interest costs related to the terming out of our variable debt in the fourth quarter of 2011, an excess of the funding requirements needed to fund the Caliper acquisition. Our weighted average diluted share count for the third quarter of 2012 was approximately 115 million shares, and our ending share count was approximately 114.2 million shares. Turning to the balance sheet. We finished the third quarter with approximately $930 million of debt and approximately $171 million of cash. We continue to make progress in our delevering efforts, as we exited the quarter with a debt to adjusted EBITDA ratio of 2.3x and a net debt to adjusted EBITDA ratio of 1.9x. Looking at our cash flow performance. Year-to-date operating cash flow from the continuing operations was $113.8 million, as it compared to $151.5 million in the comparable period of 2011. Operating cash flow performance in the quarter was affected by restructuring payments, higher working capital needs, including incremental needs related to the previously announced manufacturing moves to Singapore and China and royalty payments related to Spotfire licensing. Overall, we were pleased with our performance in the third quarter, which represented the continuation of the momentum we experienced in the first half of the year. Looking at our performance for the first 9 months of 2012, organic revenues increased over 5%; adjusted operating margins expanded by approximately 150 basis points to 15.8%; and adjusted earnings per share grew to $1.41, a 17% improvement over the comparable period last year. Now I'd like to discuss our fourth quarter 2012 guidance in a bit more detail. But before I do, I want to remind everyone of our performance in the fourth quarter of 2011. As you may recall, we experienced a particularly strong finish last year due to the timing of the Caliper acquisition and the strong year-end demand across most of the portfolio. In fact, roughly 2/3 of our businesses experienced double-digit growth in the fourth quarter of 2011, which resulted in adjusted operating margin expansion of 250 basis points and adjusted EPS growth of 38%. Consequentially, this performance creates a very challenging year-over-year comparison. Despite this challenge, we still believe we can grow revenue organically, expand operating margins and grow our earnings per share in the fourth quarter of 2012. As the fourth quarter guidance, we now expect fourth quarter adjusted revenue to be in the range of $570 million to $580 million, with foreign-currency headwinds of approximately 1% based on current exchange rates and organic revenue in the range of 2% to 4%. Regarding adjusted operating margins, we expect modest margin expansion in the fourth quarter due to very difficult comparisons related to the Caliper stub period in the fourth quarter of 2011, as well as the ongoing growth in productivity investments we mentioned previously. Based on these assumptions, we expect adjusted earnings per share for the fourth quarter of 2012 to be in the range of $0.64 to $0.66. And for the full year, we are raising our adjusted EPS guidance from a range of $2 to $2.05 to a new range of $2.05 to $2.07. This concludes my prepared remarks. Operator, at this time, we'd like to open up the call for questions.

[Operator Instructions] And gentlemen, your first question today comes from the line of Paul Knight with CLSA.

This is Bryan Kipp on behalf of Paul. Just to start off, how has pharma performed as an end market? Has it been stable for you all, worse or improving?

Sure. I would say what we saw in pharma was actually -- as Andy mentioned, we saw our Research business up high single digits. It was driven to a large extent by growth in Asia. I would say we continue to see softness in the Americas. Europe was, I think, in sort of low mid-single digit growth, but we really saw the strength in Asia. And in our case, the strength was much stronger in instruments than reagents. So I would say a little bit better than what we've seen. But again, the majority of the strength is coming from Asia.

Okay. And just an additional question. We saw -- it looks like a 400-bp fall in adjusted Environmental op margin. You guys kind of alluded to that a little bit. Can you give any more color on that and just any specific analytical instruments that were better or worse in the quarter?

Two questions. I'll answer the first part. Maybe Rob can answer the second part. This is Andy. In the quarter, we had talked about deploying some investments, and these really center around the movement of some of our manufacturing operations to China and Singapore. And those expenses hit gross margin in the quarter and were predominantly within Environmental Health. In addition, there were also some costs related to our shared service consolidation. We've now or -- now up and running with our shared service center, and so both Environmental and Human Health were impacted by those costs. So the combination of those 2, plus some of the instrument revenue and the mix towards instruments, really contributed to that performance in the quarter.

But I would say, overall, the performance of Environmental actually came in pretty much what we thought. And when we look at back at the end markets, environmental analysis was actually strong, sort of mid-single-digit growth, again, predominantly outside the U.S. Services did well in the quarter, and to the -- the only area where we saw a little bit of weakness, and particularly toward the end of the quarter, was clearly on the Industrial side, which, as Andy mentioned, is less than 10% of our revenue.

Your next question comes from the line of Jon Groberg with Macquarie. Well, we'll go ahead and take a question then from the line of Ross Muken with ISI.

So on Asia, I mean are you surprised with sort of the success you've had there? I mean, obviously, we've seen all the data on some of the challenges, particularly in China and even in other parts of Southeast Asia. And so, I know it's more on the healthcare side. I mean, can you sort of tease out between the 3 segments? Is there key there, your Life Sciences, Environmental, Industrial, kind of what you saw on some of those key countries?

Ross, actually, we saw a pretty good growth across all 3 of the end markets, and I was just there a couple of weeks ago. And you continue to see a lot of emphasis in investment by the Chinese government, first of all, in improving the access to healthcare for all the citizens there. So we see a significant amount of investment. There, we saw a growth both on the newborn side, as well as the infectious disease, a very strong growth. On the research side, we continue, as I mentioned, to see strong traction there. And I think a lot of that is coming from the multinationals that they continue to build capability in that part of the world. And similarly, we saw a good growth on the environmental side, as I think they recognize is that is going to continue to big a big barrier to their continued industrialization. And so they're investing money in cleaning up the environment. So I would say, across the board, we saw a continued growth throughout China.

And in general, on the P&L, I mean you guys have just been really killing it all year. You outperformed peers on organic. You've done well on the margin. The one thing we haven't seen from you guys in a bit has been on the capital deployment side. There, we've been mainly focused obviously on debt pay-down. Andy, where are we getting with the leverage? Do we feel like you guys could be back in market buying stock at some point? Is that the focus? Is M&A still more on the radar? Where are we sort of with that part of the equation?

Well, I think if you look at our debt to EBITDA, as we exit the third quarter, we're essentially where we were before the Caliper acquisition. So I think we're in a pretty good spot from a leverage perspective. I think we continue to evaluate opportunities more from -- on the M&A side more from a bolt-on perspective. And we also are socializing the opportunity to buy back some shares. We -- as indicated before, we'd like to take out some of the float -- or some of the creep that's come in to the stock. So I think the opportunity to do that is -- has increased, just given our de-leveraging. I think we have been very active on the M&A side. So I think it'll be something probably moving into '13. There could be something small between now and then.

Yes. Ross, what I would say is, and I think we mentioned this, in the early part of the year, we took some time to focus internally on making sure we got the integration of the acquisitions because, as you know, we're quite active in '11. And we also wanted to bring the debt burden down a little bit. I would say, probably in the last couple of months, we've ramped up the M&A activity, and we've started to fill up the pipeline. And I wouldn't be surprised to see a couple of bolt-on deals here may -- possibly getting done in the next couple of quarters.

Yes. I think the only thing I'd add do that, Ross, is our authorization for a buyback expired in October, and it was renewed for another 2 years.

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

A question on the investments you're making to leverage the business. How should we think about the timing of when you're going to harvest those investments? So you mentioned you're already up and running with the shared service organization. Does that mean those investments are now going to decline and we're going to see growth in the fourth quarter or beginning of '13? Or just pacing of that.

Yes. I -- when I said we were up and running with our shared service center in Poland, we've established that shared service center. We're making the investments now. Those investments will continue through early part of the second quarter, so we'll start to see some savings from that really in the second half of next year. I think on the facility move, I think you're also looking into '13, probably maybe a little early in the year but a 2013 situation where we'll start to see some of those savings come through the numbers. But there's still some more investments, and I just want to make sure that that's clear, that we will continue to be making some investments probably up through the second quarter of 2013.

Okay, that's very helpful. And then my follow-up question, Rob and Andy, are you managing the business any differently in front of the uncertainty around the fiscal cliff in the U.S.? And if you are, and in what -- in what fashion?

I don't think so. I mean, I think when we look at the -- at least, first, we started with sequestration and I think we've talked about this in the past that the impact was -- it's relatively small. I think what we said is when you look at NIH, it's probably 5% or less of our revenue. So obviously, we're conscious of it, but we're not seeing really any significant impact or pullback at this point. Having said that, I don't know that I would attribute to the fiscal cliff. But clearly, we'll continue to manage it in light of a fairly uncertain global economic environment. So I don't know if I'd call out either the fiscal cliff or the sequestration as an issue. But I think we are conscious of some real uncertainties, so whether it's Europe, whether it's some of the concerns in emerging markets, as well as some of the issues we've seen here in the U.S. So I think we have been conscious of growth opportunities as we get into '13 here.

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

Yes, Zarak Khurshid of Wedbush. I guess so much for hard landing in China. Dovetailing on that prior question, can you just talk about strategically -- would you say you're pushing or investing more aggressively into that region more than you originally anticipated, say, 6 months ago? And then kind of as you look further out, what are the fears for that region around kind of competition or sort of knockoff products or patent infringement, things like that?

So I would say, the answer to your first question is we continue to accelerate our investments in that part of the world because we continued to be encouraged by, as I mentioned before, the opportunities across all our end markets. So I think that the answer to your question is yes. And I talked a little bit about the investment in both real estate from the standpoint of a much larger headquarter facility. We're putting a global software development there. We're adding application, a laboratory there. We're expanding manufacturing and R&D capacity there. And I would say all is -- mostly for China, we also see it as an opportunity to leverage that into other emerging markets because, obviously, the beneficial cost position. I would say the biggest concern or barrier we see there, quite frankly, is management talent. As we continue to expand, as we continue to put much more capability there, it's really having the management capability to absorb the additional capacity. And so we're spending a lot of time. We've -- as part of this additional investment into our headquarters, we actually put, as part of that, a development and learning center that we now have in our China headquarter facility. And like I said, that's the area we're spending a lot of time on. From a patent infringement, and those type of things -- we're not as concerned about that. And we have some, actually, R&D capabilities in China that we continue to expand upon.

Great. And then just as a follow-up, on the free cash flow side of things, can you just talk a little bit about the Spotfire license? Should we expect that to continue? And what do you think kind of the run rate is for, say, maybe this year or next year? Normalized...

Yes. I mean, specific to the Spotfire license, the way that transaction was established was, in a large extent, a prepaid license agreement. And so there'll be continued payments for the next couple of years. And as we continue to distribute that and sell that product, we'll sort of work off that prepayment.

Can you quantify it?

Well, I would say we're not really, at this point, talking about it. It's not a significant amount of money, but we're not really talking about the -- at sort of the agreement with our partner, not to get into specifics of the financial arrangement.

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

So Andy, I appreciate some of the color on cash flow, but third quarter is particularly weak. Can you guys still do about 100% of adjusted net income? Or is that too much of a stretch at this point?

I would say our performance year-to-date is in line what we expected. I think, given the investments we're making with some of these initiatives, some of them requiring capital investments and restructuring investments, it's got to be tough to get to 100%. I mean I think we'll have a very strong performance in the fourth quarter, both in working capital and free cash flow, as we start to normalize some of the working capital because of the manufacturing moves. But -- I mean we are consciously spending on these initiatives. So I would say, this year, it may be a little short of that. But I think our long-term goal is to always be north of 100%.

Yes. So Jon, one of the things, and you probably have an appreciation of it, as we move some of our manufacturing facilities, we're clearly building some excess inventory to give us some leeway there, as we sort of train people in other areas. So some of that's going to clearly carry over into the early part of 2013. And so that additional investment in inventory, while we think it's appropriate, while we continue to make these moves, probably is going to make it difficult for us to achieve what we've historically been able to do, which is to match our free cash flow with our net income.

Okay, very good, understood. A follow-up, can you call out the Caliper -- how the Caliper business did on the top line, as well as any comments on kind of costs rationalization or where you are you on the -- in the actual integration there?

Yes. The Caliper business continues to perform very well. We're ahead of the model from a profitability and accretion perspective. It - quite frankly, it's really becoming quite difficult to sort of track the revenue, because we're in the point now where -- we've even got to the point where we're substituting products, so in the liquid handling, the JANUS for the Zephyr and FMT versus the Spectrum. So it's not really that meaningful anymore, but I would tell you that, again, they're doing well relative to the organic growth calculations for PerkinElmer. They added slightly, but I would call it less than 30 basis points.

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

I had 2, one on Diagnostics and the other one on margins. On Diagnostics, could you maybe just give us some color on the overall volume environment and your sense of birthrate, how that's driving the business both domestically and abroad?

So in the U.S., based on our numbers, we would say birthrates are up about 1% over the last 12 months. So obviously, we're not having the headwind that we had over the last couple of years. It's obviously driving some nice growth there. And outside the U.S., while birthrates have been positive, what's really driving the growth is much higher adoption. And for example, we saw in the quarter, as we do in every quarter, we continue to add additional countries or regions. So we saw some wins in Europe, parts of Germany, Norway and Italy we added. And of course, we continue to see strong expansion in Middle East and particularly, as I mentioned before, in China. So outside the U.S., it was clearly much stronger. But we also saw good growth in the U.S. as well because of back to a positive birthrate.

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

Maybe the first question would just kind of be more on the economy and the end markets, maybe an update on the pacing of demand. As you exited the quarter, looking towards Q4 -- I didn't hear, in your guidance, the Q4. Cited very tough comps but still generating good growth, but didn't really hear anything too much about the economy. Most of the companies are at least kind of referencing conditions. Are you seeing any impact? Is there any -- instrument is also growing greater than -- reagents was kind of interesting. We'd love to take get your take there.

Yes. I wouldn't suggest that we're sort of immune to what's happening in the overall global economy. But I would say, because I think some of our end markets are more resilient than some of the others, we're not being as impacted. I would say, as the third quarter played out, the industrial end markets -- clearly, we saw some softening there as we got into the later part of Q3. Other than that, and as we said, that's less than 10% -- other than that, I would say, our end markets were fairly consistent through the quarter. So I would say a little softening on the industrial side. Other than that, fairly consistent.

Okay, great. And then maybe on the Screening business, Andy gave kind of an interesting conversation on our conference about China and kind of a number of tests that are being done there today and what the opportunities. So I'd love to hear your kind of thoughts maybe within China, kind of where you guys are today and kind of maybe where you envisioned, maybe on a test basis, kind of growing that up kind of -- what's the opportunity to look at a few years? And kind of what would -- kind of how would that translate into a growth impact?

Well, I would -- in China, specifically, the opportunity, number one is on the newborn side. And obviously, they have a lot of births there, in the sort of 15 million to 16 million births per year. Currently, depending on where you are in China, it's anywhere from 2 to 4 tests. And as you probably know, in the U.S. right now, the standard of care is 29. So there's a significant opportunity to continue to expand, not only the number of children that are tested but also the amount of tests. So we're excited by that opportunity. And then also on the diagnostic side where -- largely, what we're doing there is infectious disease for hepatitis B, C and HIV are our larger tests. We're seeing a nice opportunity there, particularly this year, because what you've seen is, for surgeries now there that's done in China, they're now requiring 5 tests for various infectious disease, and that's driving a lot of our growth. So we continue to see a nice runway to continue to expand diagnostic test, particularly in the verticals that we serve within China.

Your next question is from the line of Doug Schenkel with Cowen and Company.

Just a first cleanup question, could you increase the pace of restructuring this quarter to compensate for the fact that you delayed some of the productivity spend and investment that you had planed originally in Q2? If I remember correctly, your operating margin benefited by about 80 bps due to those delays, so I'm just wondering whether there was a full catch-up this quarter. And what's the right way to think about the pacing of further investment heading into Q4?

No. I think that the -- from a restructuring perspective, there was a fairly small impact. From an overall productivity and growth initiative perspective, that really is being spread over 2 quarters, so we saw about half of that in the third quarter. We'll see the other half in the fourth quarter.

Okay. Yes, really what I was trying to get at is, were margins almost artificially, in a way, depressed this quarter because you delayed some of that spend from Q2 into Q3?

Yes. I mean if you look at our remarks in expansion of 60 basis points, about 80 of that -- on top of that, we had about 80 basis points of margin contraction due to our investments in the quarter. And that there was also, as I mentioned, in my prepared remarks, a fairly significant comparison on our stock-based compensation due to the change in stock price. So those 2 items were the 2 kind of significant spike-outs that I would mention, and combined, would have said we were up about 150 basis points.

Okay, that's helpful. And sorry to beat a dead horse on the Environmental Health, specifically, the Industrial subsegment. But Environmental Health did come up a little bit light of Street consensus. I'm just curious, relative to your internal plan, was this also the case? And if you came up a little bit lighter than planned here, was it truly all industrial? And if so, is it fair to conclude that there were really no changes in competitive or pricing dynamics?

As I sort of alluded to before, Industrial -- or Environmental came in about what we thought. We probably would've pegged that in Q3 about 3% to 4%. If you look back in Q3 of '11, it did have a fairly difficult comparison, particularly in the instrument side. We saw a very strong growth on the instrument side in Q3 of last year, so we knew we were cycling up against that. So maybe Industrial was a little bit lighter than we thought. I would say, overall, it's probably about down mid-single-digits. But when you look at the rest of the business, on the instrument side, we saw a good growth. And as I mentioned, service was up mid to high single digits.

Your next question is from the line of Tycho Peterson with JPMorgan.

This is Ramesh in for Tycho. It looks like, excluding Caliper and obviously, you mentioned that the Research or the Life Sciences business is merging with Caliper quite nicely now. But it looks like some of the other sort of legacy Research businesses, the radiochemical business perhaps, the high throughput screening, those businesses may have done better or at least stabilized a little bit. Can you talk just about how those trended in the quarter?

Yes. I think that's fair. I mean when you look at high single digits for the Research business, clearly, the -- I would call the historical PerkinElmer businesses have done better in Q3 than they've done over the last couple of quarters. Again, it's getting a little hard to sort of parcel that out as precisely as we've had historically. But I would say, a couple drivers to that. One is they did have some fairly easy comparisons. They were actually down low single digits in Q3 of '11. I would say, that's one thing. Second is -- I mean whenever you're dealing in sort of the research, particularly with high-end instruments, you're going to have some timing, sort of fall in and out of a quarter. And clearly, we were a little short in Q2. I think we recovered some of that in Q3. And then the other factor is we are seeing a benefit from the PerkinElmer instruments of having the Caliper products sort of in our tool chest, if you will. And as we go out there, we can talk about some of the exciting products for Caliper, as well as some of the exciting for PerkinElmer. I think we are getting some ancillary benefit of a pull-through on the -- on historical PerkinElmer products.

And then just a follow-up, guys, on the software business and informatics. I guess, how are you approaching integrating Geospiza and maybe Cambridgesoft into the Life Sciences business? And how a PKI informatics is going to work, I guess, under the still of the Environmental Health umbrella?

So what we are in the process of doing is taking a lot of -- virtually all of the informatics and Geospiza and merging it with the research. And that's something that we'll -- we're in the process of doing now. So probably going into 2013, we think it makes a lot more sense to have the informatics business more aligned with sort of the Caliper and the research businesses. And so, I think you'll see that coming out into '13.

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

A lot of my questions have been answered, so I'm just going to fish around the edges here. So when you look at your mix of business geographically, and also your manufacturing, I guess, where do you see the business in -- from a, particularly from an emerging market, international -- non-U.S. non-Europe sort of standpoint now and, say, 3 years from now? And I guess, how much of your manufacturing footprint are you going to be able to move over as well? I'm just trying to get a sense of what -- how much more opportunity there is in those markets for you.

Well, I think from a revenue perspective, we talked about private emerging markets being around 28%, and given the growth differential we're seeing now, and I think we'd continue for some period of time. In addition to sort of our investment priorities, I could clearly see that gets to mid-30s over the next couple of years. From a manufacturing perspective, we're clearly under-weighted in the Asian region right now, and so that's why we've embarked on this initiative to move a lot more of the production there. And again, not primarily driven by costs, really it's trying to get better alignment between where our manufacturing is and where our customer base is. And so I think we've got a fair amount of opportunity. We've, like I said, embarked on a couple of these now, where we'd like to be fairly better aligned. So we've got 35% of our revenue there. At least 30% our manufacturing is coming out of there, and that's really the intention. So we have a roadmap right now over the next couple of years that will be much better matched between our revenue profile and our manufacturing cost profile.

Great, that's actually very helpful. When you look at the -- sticking with the China theme, when you look at the infectious disease testing that you're doing there, it's like -- what's the basis of your platform? And I guess, who are you running into from a competition standpoint? Are you running into the [indiscernible] of the world, for example? What's just the lay of the land there?

So our assays are fundamentally around fluorescence or time-resolved fluorescence. It's the technology. We're generally targeted the Tier 2 hospitals. And so that's where we're getting good inroads, because we provide sort of a cost structure base on China but bringing sort of technology and brand associated with a multinational. And so we can price the products a little bit above the locals and under the sort of classical international companies. And that's what's allowing us to take a lot of share.

Okay. And one final question, speaking on the competition. You know, we've obviously seen lot of changes in the -- some of your traditional businesses, in chemical testing, in environmental as you've seen some obviously varying [indiscernible] and [indiscernible] expansion. What's the pricing environment going on in that space? Are things fairly still rational?

Well, I think they're rational, but they're tight from the standpoint of a lot of people. If you're talking specifically around the analytical or instrument space, there's more supply than demand. And particularly, as we see the industrial end markets starting to look like slowing, I think that's only going to get worse. So I think it is a difficult pricing environment. But I would say, people are still rational. But it this -- I would say price discounting is accelerating.

Your next question is from the line of Dan Arias of UBS.

Andy, I'm not sure if I missed it, but can you parse out instrument growth or decline specifically for Environmental and Human Health?

I didn't give that breakout. I'm mean, overall, instruments were up 10%. And I would say the Human Health instruments were kind of high single and environmental were low single. And most of the growth in Environmental Health instruments were in emerging territories.

Okay. And then on the emerging territories, and China specifically, just given the way that you're talking about investments and expenditures there, do you think that margins stay above the corporate average for the foreseeable future? Or does that gap start to close and come down to the mean over time?

I'm sorry, could you repeat the question? I didn't quite understand the first part of it.

Just looking at the margins in China and the way that you're investing there and how that looks relative to the corporate average.

Well, they've been in line with the corporate average. And if anything, they've actually been improving. We obviously have lower gross margins but have a lower cost base as well. So they've been in line. I think, over time, with some of the manufacturing moves and some of the infrastructure moves, I think we will see China margins ahead of company average.

Okay. And I guess one last one, I think you get this question pretty consistently. But on OneSource, what are the pricing and market share change dynamics looking like in that part of the business?

Say that again, I'm sorry, I missed the beginning of that question.

In the OneSource business, I'm just curious about pricing and market share changes. Obviously, you have a big competitor that seems like they're doing well. But clearly, it's doing well for you as well. So I'm just trying to understand the business a little better, the market a little better.

Yes. I mean, I think the dynamics in this environment right now is sort of similar as I mentioned on the analytical instruments. It's sort of an aggressive pricing environment. And we're -- we've got a very good position with a lot of our customers. And so I think we feel good about our capabilities there. But I think there is continued pricing competition there, particularly across some of the bigger contracts that are up for bid. Fortunately, because in a lot of cases, we're the incumbent. I think we understand the opportunities there, and I think -- feel we're in a very good position to be able to identify where we can take efficiencies and work within -- partner with our customers to sort of drive those savings where we sort of both benefit.

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

Can you quantify or provide some qualitative comments on the benefit that your microfluidics business is realizing from the recent Ion Proton commercialization?

Yes. Bryan, this is Kevin Hrusovsky. We're actually continuing to make great headway on all aspects of our microfluidics relative to sample prep. We actually have had, in the last 2 quarters, continued build-out of our platforms, both from a sample prep and quality control. And we've made it agnostic to Life and to Illumina, as well as some of the newer entrants. We're feeling pretty good that, that will only help. So the more traction they get, we do believe it's going to be a positive for our business.

Any way to estimate for every new sequence there -- every new desktop sequence there that is sold out in the market? You got maybe 20% of those or 40% of the new placements?

Yes. We've got some algorithms that we built basically to try to test the market, but it's too early for us to be able to know how we're going to secure that. But we do think it's going to be north of 10%. But we're just -- at this point, it's premature.

Okay. And then on the Environmental side of the business, did you see any material benefit in the quarter, Rob? Do you see any material benefit in the quarter from the Chinese food labeling law that takes effect in January 1? And do you expect to see any material improvement in the fourth quarter?

Yes, I would say that something we've seen for the last couple of quarters. There's the new regulation where they've got to put nutritional labeling on their food now. It's something that's driven our growth probably since Q2 of this year. So I think clearly, we're seeing a benefit in China as a result of those new regulations.

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

Rob, the softening you saw in the Industrials business, is that continuing for Q4?

Say it again, Peter, I'm sorry I missed the...

Sorry, that softening in that Industrials business, does that continue into Q4?

You mean the -- yes, I think we have seen that continue sort of from an industrial perspective. As I said, it was -- we started to see it sort of mid-Q3. And I would say, it continues here in Q4. So our assumption in our guidance is that the industrial markets will be soft, and in fact, will probably be down year-over-year from a revenue perspective.

And have you made any changes in the sales force around that business? Is it that concerning?

I wouldn't say we're at the point now we're sort of adjusting our sales force. And again, a lot of our sales force is based on technology to some extent. So we look for other markets to sort of focus some of the products in. But at this point, we're not making changes to our sales force.

Got you. And then were there any pricing pressures across the various business lines during the quarter?

We talked about that a little bit earlier, where I would say, clearly, in the environmental area, on the instrument side, we continue to see fairly severe discounting going on relative to the competition. So I think that's an area we see a lot of pricing. Outside of that, I would say, in the Human Health area, where I think the products are much more differentiated, less so.

One thing I -- while we have a brief moment, one thing I'd like to add and just clarify, I know this is going to come out in the -- in print. But the question around instruments, total PKI was up high single digit, environmental Health was up low single, and Human Health was up low double. I just wanted to clarify because I think my comments before didn't make a lot of sense.

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

I'm just wondering, on China, it sounds like a lot of the growth there was driven by instruments. So I'm just wondering what your thoughts for on the sustainability of that going forward and if anything was kind of onetime or anything like that this quarter.

Well, I would say, if you look at the growth in China, it was really across the board both instruments and reagents. So we saw it on the instrument side. I would say, when you look in research, it was largely on the instrument side. But clearly, when you go into diagnostics, that's largely a reagent business anyway. And when you go in the environmental side, it was a little bit of both on the service as well as the instrument. So it was fairly broad-based from both instruments and reagents. With regard to your question, if we see it's sustainable, we do. I think we continue to feel very good about our position there, our product offerings and our organization in China. And so we continue to expect that China will continue to provide good growth for us.

Okay. And then just one other thing was with acquisitions adding 18 points to your Human Health business, were there any other acquisitions in there other than Caliper? Because just doing the math, it seems like Caliper probably didn't grow that much, is that correct?

Well, the answer to your question is, it was only Caliper is in the acquisition number.

All the informatics acquisitions anniversaried in the second quarter.

Okay. So it was just Caliper.

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

I was hoping to get a little bit more color on the strength, the traditional medical imaging that you called out. And just to follow-up on the tax -- on the manufacturing moves, can we see the impact on the tax rate as you expand overseas perhaps?

Yes, I think it could. I mean, as we put more and more of our profitability outside the U.S., clearly, we have a lower tax rate in Asia than we do in both Europe and the U.S. So I think it does provide some downward pressure on the tax rate. With regard to the medical imaging, we actually saw a nice growth really across all aspects of the business. So radiology, both oncology, and I think any spike-out in particular, while small numbers, our new entry into CMOS with our Dexela acquisition actually saw a very strong growth. And as Andy also mentioned, it gets us to new couple of other end markets that we're quite pleased about. So in the medical imaging area, we actually saw a nice growth across all of our end market applications.

Okay. And I know you have the Investor Day coming up in December. Just curious, any kind of early highlights you can share with us?

I think we're still trying to finalize those plans. Nothing has been set on stone. So we'll have to get back to you on both dates and content.

You have a follow-up question from the line of Jon Groberg.

So just following up on what you said, Andy. This is going to be my question. As Human Health instruments grew low double digits but Rob talked about...

Low single... They were low single digits. I'm sorry, Human Health was low double digits, yes, correct.

It was low double digits. I think I got you, right?

You did.

So -- and you already talked about the decrementals [ph] in Environmental. But I guess my question is, it seems -- normally, we think about if instruments grow faster than consumables, that actually is a negative mix on margins. But Human Health is where you saw, obviously, some good margin expansion. So if you can just maybe talk about what happened with mix, was that -- is that imaging strength? Or is there something else going on in Human Health?

Well, I think we saw a pretty good performance across the board. I don't know if there was anything in particular that spiked out on mix.

Yes. I would say the other thing is when you look at particularly the research area, you don't see as much disparity on the margins. I think classically, the big disparity we see between reagents and instruments is more on the diagnostic side, where a lot of cases, you're placing the instruments and then getting the reagents. When you look more on the research side, there's -- I mean, clearly, reagents are still more profitable. There's a much closer sort of match there between what the gross margins are. And so consequently, a lot of the instrument growth was driven by the research side. And so therefore, I don't think it was as detrimental on our gross margins as you might think.

All right. And then it seems like -- it seems fairly interesting. And then one more on Human Health, as you look out to '13, are you guys anticipating any impacts from the medical device tax? I know a lot of the diagnostic stuff is overseas in China, and so I'm just curious what you're...

Right. Yes, I mean our calculation right now says it's a relatively minor impact for us, again, because a lot of our business is outside the U.S. I mean, I would say it's, right now, sort of less than $5 million is the impact. But we continue to sort of try and understand some of the issues that regulations are still yet to be forthcoming on. All right. So with that, let me wrap it up. First of all, let me thank all for you for your participation and continued interest in PerkinElmer. As we look to close out another strong year, I just feel great about our future because of our ability to grow, and most importantly, our dedication to making a lasting difference in the world. And I think we've got a great organization, and I'm quite excited about the future at PerkinElmer. So thank you, all, for joining us, and have a great evening.

Ladies and gentlemen, thank you so much for your participation today. This does conclude the presentation, and you may now disconnect. Have a great day.