Revvity, Inc. (RVTY) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the third quarter PerkinElmer earnings conference call. My name is Philip 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, Mr. Tommy Thomas, Vice President of Investor Relations. Please proceed, sir.

Thank you, Philip. Good afternoon, and welcome to the PerkinElmer's Third Quarter 2013 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. Please note this call is being webcast live and will be archived on our website until November 13, 2013. Before we begin, we need to remind 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 day 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 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. Rob?

Thanks, Tommy. Good afternoon, and thank you for joining us today. I'm pleased to report that PerkinElmer achieved a very good performance in the third quarter. Despite a tough prior period comparison, we were able to deliver organic revenue growth of 2%, which was at the high end of our guidance. Also during the quarter, we expanded adjusted operating margins by 30 basis points and grew adjusted earnings per share by 9% to $0.49, $0.01 better than the top end of our guidance. With regard to our end-market conditions, we did not experience a significant change from trends we saw in Q2. In the pharma biotech research market, we continued to experience high single-digit growth, aided by our informatics and service offerings. In clinical screening and infectious disease, the markets grew mid-single digits, as birthrates in the U.S. continue to grow low single digits and demand remains strong in China. Both the Environmental and Safety and Industrial markets grew low-single digits during the third quarter, while our academic market was down mid-single digits as budget pressures continued to dampen demand. Geographically, we saw sequential improvement in the Americas, particularly in the Environmental and Research markets. However, in Southeast Asia, growth is slowing as a result of delayed capital investments into mostly the industrial end markets, as many countries such as India, are facing currency devaluation. Despite this uneven macroeconomic environment, we made good progress in areas we can control, including delivering margin expansion and productivity gains during the quarter. We successfully completed several manufacturing moves into Singapore and China, consolidated some of the legacy Caliper sites into a newly-opened center for innovation and ramped up the functionality of our customer relationship center in Kraków, Poland. As you recall, we took these actions to further simplify and rationalize our global manufacturing footprint, improve our R&D efficiencies and reduce our back-office expenses. In addition, we made good progress on our growth investments across our key end markets during the quarter. We significantly expanded our relationship with TIBCO for the Spotfire software product, a year after launching our successful collaboration, which brought the power of the Spotfire analytics platform to the global research community, our offering now positions PerkinElmer as the exclusive channel for Spotfire in clinical development and translational medicine. PerkinElmer is now a single provider of informatics and data visualization tools to all functions of life science companies, from early-stage discovery through development, sales, marketing and manufacturing. In Diagnostics, we made good headway in expanding our offerings into niche areas and new markets. For example, we saw tangible demand and a very strong tender win rate for nucleic acid test screens from our Haoyuan acquisition in China. As a reminder, the Chinese government has announced that it will mandate these screens for blood testing starting in 2015. In the food market, later this week at the International Dairy Show in Chicago, we will launch the DairyGuard Milk Powder Analyzer, the first in our new food guard platform series that leverages our frontier FTIR and proprietary algorithms specifically developed for food suppliers and manufacturers. The DairyGuard will be the only system available that tests for unknown adulterants in milk powder to help customers avoid product safety issues and protect their brand image. These investments in growth, combined with others we have discussed previously, plus the excellent momentum we are experiencing with many of our key customers, reinforces our confidence that we can return to mid-single digit organic growth in 2014. Turning to our outlook for the remainder of the year, we are forecasting that Q4 organic revenue growth will be similar to what we experienced in the third quarter. While revenue growth comparisons to last year become easier this quarter, we believe it is prudent to guide conservatively, given the current conditions in several of our markets and the potential for some impact from the U.S. government shutdown that may result in revenue shifting out of the quarter. Despite guiding to lower-single-digit organic growth, we believe we can still deliver significant adjusted operating margin improvement in the quarter of greater than 50 basis points, given the positive impact of the productivity actions I previously discussed. With regard to adjusted EPS guidance for the year, we are increasing the bottom end of our previous range by $0.01 to reflect the third quarter b and reducing the top end of the range by $0.03 due to the revenue risks I've noted. This results in our full year adjusted EPS guidance changing to $2.04 to $2.07, from our previous guidance of $2.03 to $2.10. I would now like to turn the call over to Andy to share more details on our results.

Thanks, Rob, and good afternoon, everyone, and a special good afternoon to everyone in Red Sox nation. Consistent with prior quarters, I'll provide some additional color on our end markets, a financial summary of our third quarter results and details around our fourth quarter guidance. Then we'll open up the call for questions. As Rob mentioned earlier, we were very encouraged by our performance in the third quarter as both adjusted and organic revenue came in at the top end of our guidance range. Reported revenue increased by 3%, while adjusted revenue and organic revenue both increased by 2%. Adjusted revenue for the quarter was $525.1 million as compared to $514.8 million in the third quarter of 2012. We experienced 4% organic revenue growth in our Environmental Health business, while our Human Health business was flat, primarily due to a difficult comparison to the same period last year. Looking at our geographical results. Organic revenue increased mid-single digits in the Americas, low-single digits in Asia and declined low-single digits in Europe. We are once again pleased with our performance in China as organic revenue increased low double digits despite our most difficult year-over-year comparison of more than 30%. We remain encouraged by the strength and resiliency of the demand for our key Environmental and Diagnostics offerings in China, which help address critical needs in that part of the world. Looking at organic revenue growth by product category. Recurring revenue, which includes reagents, consumables and service, grew high-single digits in the quarter, primarily as a result of continued strength in our OneSource Laboratory Service business and the success of our informatics offerings. Organic revenue for our instrument and components offerings was down mid-single digit in the quarter, primarily a result of prior-year comparison headwinds at our Medical Imaging business. From an end market perspective, our Human Health business represented approximately 56% of reported revenue in the quarter. We serve 2 end markets in Human Health: Diagnostics, which represented 27% of reported revenue; and Research, which represented 29% of reported revenue. Organic revenue from our Diagnostics business declined low single digits during the third quarter, primarily impacted by the previously mentioned decline in our Medical Imaging business. Excluding Medical Imaging, our Diagnostics business grew mid single digits in the quarter. We continue to benefit from positive U.S. birthrates and the expansion of our newborn screening solutions in key regions outside the U S. We are particularly pleased with our SYM-BIO infectious disease diagnostic offerings in China, once again delivering organic revenue growth in the mid-teens, as well as the ongoing newborn screening uptake in Asia, which saw organic revenue growth of more than 30%. As we forecasted on our last earnings call, our Medical Imaging business faced significant headwinds in the quarter with organic revenues declining high-teens, a result of customer ordering patterns and high-teens comparisons versus the same period last year. We did, however, continued to see good acceptance of our CMOS offering in the marketplace, as evidenced by 2 new industrial product design wins for nondestructive testing applications. For the quarter, CMOS organic revenue grew by more than 20%. Our Research business delivered low single digit organic revenue growth in the third quarter versus the comparable period in 2012. Despite ongoing funding challenges, we experienced solid demand in our In Vivo business, as well as in our informatics offerings, which were notable standouts in the quarter, particularly in the U.S. During the quarter, as Rob mentioned, we completed the construction of our new center for innovation located in Hopkinton, Massachusetts. The recent opening of this state-of-the-art facility represents the culmination of our manufacturing and R&D consolidation activities, which began in 2012. This initiative has resulted in the closure of 5 facilities and has afforded us the opportunity to better leverage our manufacturing operations, as well as more effectively focus our R&D efforts across the company. Moving to Environmental Health, which represents -- the business represented 44% of reported revenue in the third quarter. We serve 3 end markets: Laboratory Services, which represented 19% of reported revenue; Environmental Safety, which represented 17% of reported revenue; and Industrial, which represented 8% of reported revenue. During the quarter we experienced mid single digit organic revenue growth in our Laboratory Services business and low single digit organic revenue growth in both our Industrial and Environmental and Safety businesses. We are pleased with the organic revenue growth in the third quarter. And while customers continue to be cautious with their capital spending, we continue to be encouraged by strong order demand in China. We experienced another solid quarter of organic revenue growth in our Laboratory Services business, as we help our lab customers better manage their critical laboratory assets and related data needs. Our OneSource business saw a robust revenue growth, driven by an expansion of services within several major pharmaceutical companies during the quarter. Turning to our margin performance in the period. Adjusted gross margins were 47.4% as compared to 48.3% in the third quarter of 2012. While currency was a headwind in the quarter, the decline in gross margin is primarily due to 3 factors: First, we incurred one-time costs related to the closure of 2 additional facilities we highlighted in Q2, in conjunction with the establishment of our center of innovation. As mentioned earlier, this effort is now largely complete and we expect gross margin savings in the fourth quarter as a result. Second, within informatics, we deployed investments supporting our rollout of Spotfire into a number of new channels. And third, we continue to face product mix headwinds and modest pricing pressures in our environmental business, primarily focused in emerging markets. Adjusting operating margins in the third quarter were 15.5% as compared to 15.2% in the comparable period a year ago. Restructuring efforts and operating expense controls enabled us to offset the lower adjusted gross margins just mentioned. By segment, adjusted operating margins in our Human Health business increased approximately 80 basis points to 22.4% as compared to 21.6% in the third quarter of 2012. The increase was primarily the result of positive product mix and operating expense controls. In our Environmental Health business, adjusted operating margins declined approximately 60 basis points to 10.6% as compared to 11.2% in the third quarter of 2012. This decrease was the result of price and product mix headwinds just mentioned. GAAP operating income from continuing operations was $57.2 million in the third quarter of 2013 versus $43.2 million in the same period a year ago. GAAP earnings per share from continuing operations in the third quarter of 2013 was $0.36 compared to $0.25 in the third quarter last year. Adjusted earnings per share was $0.49 in the third quarter of 2013, $0.02 above the midpoint of our guidance range. On a non-GAAP basis, our adjusted tax rate was approximately 19%. Turning to the balance sheet. We finished the third quarter with approximately $900 million of debt and approximately $130 million of cash. We exited the quarter with a debt to adjusted EBITDA ratio of 2.4x and a net debt to adjusted EBITDA ratio of 2.1x. Looking at our cash flow performance year-to-date, adjusted operating cash flow from continuing operations was $161.8 million, up 8% as compared to $150.3 million in 2012. Adjusted operating cash flows are expected to continue to improve in Q4, primarily the result of lower working capital needs. Turning to our Q4 of 2013 guidance. As Rob mentioned, there continues to be headwinds across many of our end markets. And as a result of these headwinds, we believe it's prudent and appropriate to be conservative in our outlook. There are 2 specific areas that I'd like to discuss further. First, we are forecasting a softer performance in certain emerging markets, where we experienced a modest slowing in the third quarter this year. We believe recent currency fluctuations in certain geographies, including India and Southeast Asia, have dampened capital spending in these regions and we believe these markets will continue to moderate. Secondly, a large majority of our highly sensitive instruments are shipped overseas and require the issuance of government export licenses. As the recent government shutdown has directly impacted this area, we are currently waiting for the government to work through this backlog but expect the delay to have an impact on fourth quarter revenues. We also expect the total revenue impact of these initiatives to be in the range of $10 million to $12 million in the fourth quarter. And as a result, we expect adjusted revenue for the fourth quarter to be in the range of $582 million to $592 million, which assumes low single-digit organic revenue growth. Regarding adjusted operating margins, despite the impact from the revenue headwinds mentioned above, we estimate adjusted operating margins will improve in the range of 60 to 80 basis points for the fourth quarter. Our Q4 and full year adjusted tax rate is expected to be 21% and our weighted average diluted share count for the year is assumed to be approximately 113 million shares. We expect interest and other expense to be approximately $12.5 million in the fourth quarter. So based on these assumptions, we now expect our Q4 adjusted earnings per share to be in the range of $0.68 to $0.71. This concludes my prepared remarks. Operator, at this time, we'd like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Bill Quirk with Piper Jaffray.

It's actually Dave Clair in for Bill. I guess the first one for me, it sounds like the In Vivo business is going pretty well for you guys. What's behind the growth there and what's your outlook going forward?

So yes, as you point out, In Vivo grew probably mid single digits in the quarter. And going back to the first quarter of this year, where we -- there were some delays in the ordering pattern there, we think we're catching up in Q2 and Q3. We saw a very strong growth in the U.S. and I think that was -- we're starting to see some of the funds that have been tied up in sequestration being released. So like I said, we saw very strong growth in the U.S. And I think that's what's driving some of the growth in this quarter. But fundamentally, I think this is a good product and I think it's an attractive market. And I think we continue to believe that this is a product that probably grows high single digits once we get through some of the issues with the sequestration.

Okay, great. And then can you give us an update on the AxION iQT launch? How is that going and is that hitting internal expectations?

So we continue to be very excited about the iQT offering as well as the longer-term opportunities, we see to leverage the platform. It continues to garner a lot of interest and we remain encouraged by the current interest levels from both customers and KOLs. We purposely have a little bit of a minor delay due to -- attributable to some supplier issues and have used that time to build out our application support for several key market segments that have been identified based on customer feedback. The delay will have a minimal impact on our Q4 revenue. But again, because of some supplier issues, it's been pushed back a short period of time.

Your next question comes from the line of Ross Muken from ISI Group.

On the panel business, I mean, the weakness was expected rather than you guys highlighted last call. I admit it, my memory serves me poorly but I thought we were supposed to get -- I thought that was more of a timing issue than something related to demand. And so as we look at the 4Q assumption, do we get some of that back? Is that a 2014 revenue line now? I'm just trying to get a sense for the sequential...

So specifically in the Q3, it was really a year-over-year comp issue. I think we talked about this before based on some ordering patterns. Our customers ordered a lot of panels in 2012. As we think about Q4 now, we think this business returns to probably mid single digit growth. And as we go out into '14, we think that level may be even a little better than that. So it returns to a more normal growth rate, where we think it's sort of a mid to high single digit growth business. But again, Q3 was driven more by ordering patterns in 2012 that caused the decline, or drove a lot of the decline in Q3.

Okay. So I guess just mathematically, by that going from a high-teens decline or to a -- to growth, it's got a pretty upward impact on organic. I guess I'm just trying to see what the delta is. I mean, the comp sequentially is not tougher. So I'm just trying to get a sense for how much kind of conservatism you're putting into the revenue forecast, just based on all the uncertainty. I know you called out some of the delays. It's just the first time we've heard of that. So I'm just trying to figure out how much is you sort of assuming stuff doesn't get shipped because you don't have the export licenses plus some of the shutdown on the consumable side, plus anything else in the emerging markets versus sort of some of this we're getting back. I'm just trying to tease out...

Yes, I would say, relative to our original forecast at Q4, about half of that is attributable to -- and again, this is -- we're trying to estimate this based on the backlog that's at the government export license right now. But we think that could be sort of half of the issue. And we think the other half is potentially just some slowing in the selective emerging markets, as Andy talked to. It's really just a couple of the areas in Southeast Asia, where we believe that we've seen a fairly dramatic devaluation of their currency and at least we're seeing some impact there in the industrial end markets. So again, probably $5 million there and probably $5 million potential risk associated with the government licenses. And again, you hadn't heard about it before because it's never been an issue. I mean, this is something that generally works well. But I think because of the shutdown of the government, we're stacking up against a relatively tight timeframe to get this stuff out.

No, that's appreciated. And maybe for Andy, on the margins, you've done quite well relative to what's been a tough top line or tougher than an average year. How does -- sort of the progression we've had so far this year, how does it make you think about your multiyear targets? Do you still feel good about where that is? Is it more a top line dependent now? I'm just trying to get a sense for -- have you sort of back solved with costs for your multiyear plan or maybe the revenue outlook kind of puts a little bit of a question mark next to it?

Ross, I think we've always said that in order to achieve our 4-year goals, we really needed mid single-digit organic growth. So I think when we don't get that, it makes it much more difficult. But if I step back and look at what we've done to-date, I think we've made great progress on the initiatives we've talked about over the last several years, I think certainly the last several quarters. We may have been a little bit late with the center of innovation at Hopkinton, but it is now up and running. And I think we're going to start see good savings from that. I think Project Rabbit [ph] continues to ramp as we try to get supply chain savings. This is our name for the movement of the manufacturing over to Asia. And then on the operating expense side, we should be completely moved in to Krakow by the end of this year, so we will have all of our European back-office operations basically domiciled now in Krakow. So there's a number of savings opportunities that are now getting close to or are already completed. So I think, structurally, we're going to have a very good position. I think we still need that organic growth to drive significant leverage on that, but I feel very good about where we are today with those initiatives.

The next question comes from the line of Paul Knight with Janney Capital Markets.

Hi, Rob. Could you point to -- what was it chromatography, spectroscopy, what end markets as well on the Environmental Health side? Does it continue to be what a shallow recovery and weak or -- what exactly was it?

So Paul, actually, when you look at it from a technology perspective, the 4% growth in the third quarter, it was fairly broad-based. So whether it was chromatography, Metcar or inorganic, we saw similar levels of growth, call it sort of low to mid single digit growth across the entire product portfolio. So we were pleased to see that. Andy mentioned the fact that OneSource continued to do well. If you look at it geographically, what you see is good growth in the Americas, again sort of mid single digits, a slight decline in Europe, sort of low single digits, and continued strong penetration in China. So in the Environmental area, China again was sort of north of 20%.

And then on the facility consolidation, could you go over that again? I mean, you've said it's 5 facilities, I think it was less than that when you spoke to it a year ago or so. And did it start just recently or at the beginning of the quarter? When was the exact timing you expect to see benefit from that?

Right. So our initial plan was to consolidate 3 facilities, one of them in Canada, 2 of those in the West Coast into Hopkinton. And then in Q2, particularly post Q1 when we saw a revenue growth lower than we anticipated, we made the decision to put 2 additional facilities in the Hopkinton. And again, Andy alluded to the little bit of pressure on the gross margin in this quarter, getting that completed. Those are now done. Last week, we actually kicked off the opening of the Hopkinton Center. And as Andy said, it's a workplace facility and we're quite excited about it. So our expectation is we'll start to see benefits in Q4. It is to some extent why you're seeing, or at least we're forecasting, greater than 50 basis points of operating margin expansion despite guiding to low single digit growth. So some of those productivity savings that we've been talking about over the last couple quarters, we expect to start seeing in Q4 and obviously as we get into 2014.

The next question comes from the line of Doug Schenkel from Cowen and Company.

My first question is -- and I apologize if I missed this in your prepared remarks. Did you talk about growth in Japan and specifically how stimulus is impacting your performance in that geography? And how should we think about the outlook from here related to stimulus?

So we didn't talk about Japan specifically, but Japan in the quarter grew across the company low single digits. I think it was around 3%. And I think we're starting to see some benefit from the stimulus, but it's not a significant driver to the growth at this point. We hope, as we get -- sort of probably into '14 is where we'll hope to see more of an impact for that. And I would say, our expectation continues to be in sort of low to mid single digits, maybe increasing a little bit as we get into '14, as we get -- as I said, some of the benefits of participating in the additional funding being provided by the government. So I think since Q1, we've continued to see sequential improvement in Japan and I think that will continue for the next couple of quarters.

Great. That's helpful. And during the quarter, Merck announced plans to rationalize some of their R&D efforts. I believe Merck's a customer of yours. I can see where this would be potentially a threat to revenues. I can also see where this would be really good opportunity for you to go in and work with them as they work through this process. Could you just help us understand how we should think about either this announcement specifically or more broadly, whether the things like this are really a threat or really an opportunity for you?

So I would say, first of all, whenever one of our customers or sort of a group of companies announces a restructuring, it can be difficult for a number of constituents. However, as you sort of point out, if you think about the logic and the rationale for these types of announcements, it's all around becoming more efficient in how they run their R&D facilities. And that really sort of plays into the strategy of not only OneSource, but real -- our emphasis in informatics. And as you point out, while specific to certain customers, there may be some minor impacts. But quite frankly, that's offset by other outsourcing opportunities around relocation, scientific services and asset management, sort of more than offsets that. But when we think about the opportunity to penetrate more pharmaceutical companies with our OneSource and informatics offerings, we think this provides a tremendous opportunity. And we talked about the fact that OneSource had a nice growth in Q3. And so the dialogue now around driving productivity in the pharma and biotech markets, being somewhat necessitated by the restructuring actions, is really driving great demand, again, not only for OneSource but as our informatics capabilities are being deployed into OneSource to enable customers to better understand the capital purchases they need to make and the utilization of their assets within their labs, I think it's just going to create a great opportunity to further penetrate what we think is probably a $1.5 billion to $2 billion market opportunity, where we're just scratching the surface right now.

Your next question comes from the line of Amit Bhalla with Citigroup.

This is Nick Nohling in for Amit today. First off, could you talk a little bit just about trends in emerging markets. I mean, it seems coming into the quarter, you were a little bit more cautious on the emerging markets in the second half. And it seems like pretty much your market performance is pretty good in the quarter, but you did cite some moving parts there. So what's going to lead to the slowdown? Is China going to be as strong also to offset some of these other EM government regulation concerns?

Yes. So first of all, to clarify, we continue to see good growth. And emerging markets, generally speaking, specifically and China did well and Brazil did well. I think our comments were really talking about a subset of those countries, particularly where there's been -- at least our belief, has been influenced by currency devaluations. So I think a good example is India, where the rupee is down double digits over the last couple quarters. And of course as a local company buying product that's dollar based, that's dramatically increasing the price of those products. And so we're seeing, in Southeast Asia and in India, specifically, slowing demand where historically that's been sort of a solid mid-teens grower, and that's moderating into sort of mid to high single digits. And so that's where we're just sort of teeing up as a little concerning. It's -- 1 point doesn't make a trend. But as we go into Q4, we're concerned that we're not going to see a moderation of the currency pressure and therefore, that's going to continue to put pressure on capital purchases, and like I said, particularly in the industrial markets where there's maybe some more flexibility in deferring them, those purchases for maybe 1 or 2 quarters. We don't think this is necessarily a longer-term trend, but it's just something that we have identified. But again, to reinforce, in places like China and Brazil, we continue to see very good strength.

Okay, great. And then when you think about 2014, you are confident that you can get back up to mid single digit growth, what are the businesses that you look at to see the inflection point that's going to get the overall company to get back into that mid single digit? Is it a turnaround in the industrial business? Where is the focus points to where the business is going to turn?

So I would say, when we talk about mid single digit growth for '14, the assumption is that the fundamental end markets are not going to change significantly. And so what's going to make the difference to a large sense is either comps in our business and, particularly, where we talk about Medical Imaging. So when I was discussing with Ross earlier, if you look at 2012, we had a very strong growth in Medical Imaging, clearly greater than the market. And in hindsight, it was really probably some ordering patterns that our customer, maybe sort of built some inventory. And we had to sort of burn that off in '13. So Medical Imaging will probably not grow in '13. And going into '14, we think we'll have that inventory burned off, and you'll see sort of normal market growth of sort of mid to high single digits. So that's an indication where it's more unique to our business rather than market. And then I think the other areas are largely driven by new product introductions or fundamental changes in the businesses that we think can -- should allow us to get to more of a mid single digit organic growth.

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

Rob, can you elaborate a bit on Europe? How did the orders pace through the quarter? And I guess, given where you left off in September, what are you thinking for 4Q there? I think comps get a little bit easier year-over-year.

Yes. So when we look -- and I would say this is true not only of Europe but we didn't see a significant change in ordering patterns really through the quarter relative to, let's say, period periods -- previous periods. So consequently, our view is that Europe in Q4 looks probably fairly similar to Q3. And for us, it was sort of slightly down, down low single digits. So that's our assumption. In fact, when we look at Q4 generally from a geographic perspective, our assumption is, it really looks very similar to Q3. So Europe down slightly, America is in the sort of low- to mid-single digits and Asia probably more mid single digits.

Okay. And when we think about your assumption that the end market conditions next year are unchanged, should we think about the natural improvement in the business that you would get just from macroeconomic conditions being slightly better on, say, GDP, view as serving as an offset to something on the Human Health side? Or would be upside? Just sort of where your expectation's were...

No. I would say right now, if there was a better GDP growth in 2014, I think that probably would be more -- I would think of that more of upside, than I would as sort of offsetting concerns in other parts of the business.

The next question comes from the line of -- from Brandon Couillard with Jefferies.

Andy, could you quantify the 3 factors that contributed to the gross margin pressure in the third quarter? And then as we'd look into the fourth quarter margin ramp, what are some of the puts and takes between mix, restructuring and otherwise that gives you confidence in the uptick, sequentially?

Yes, of the 3 items I would say the first 2 I mentioned, which is really around investments as we opened up the center of innovation. And the second one...

The informatics.

The informatics, I would say that's probably about a little less than half of the impact. And I would say the remainder of that would have been the margin headwinds, the mix headwinds in emerging -- in the Environmental Health. So that's the way I would split it. I think if you look at the fourth quarter, we are going to start to see an improvement in the gross margins because we've now completed the Hopkinton transition. We also have completed, as I spoke before, the transition to Asia, which provides us with some savings also on the margin side as we optimize our supply chain. And then there were some minor restructuring that will also help us in the fourth quarter. So I see -- there could be some continued pressures within Environmental Health but I think we'll be able to offset some of those, one, by not having to spend in the fourth quarter, but two, we're starting to realize the savings of those initiatives that we have completed.

And then on the cash flow front, pretty nice progress on the DSO side but still only about 70% free cash flow conversion. How should we think about that metric as we look out into '14? And was there also a divestiture benefit in the investing cash flow line as well?

It was. It was a small -- it was the divestiture at an Asian facility but it was single-digit, $1.5 million. The way to look at I think cash flow going forward is, certainly in the last 2 or 3 quarters, we've seen a buildup of inventory. As we started to do consolidation activities around the manufacturing facilities, we've had to had duplicative levels of inventory. I think you'll start to see those bleed down in the fourth quarter. I think you'll also start to see those improve as we get through the year. I think on the DSO side and the receivables side, that continues to be a challenge. We have -- I think have made good progress against our aging, but we have a lot of customers that are putting additional pressure on stretching those receivables out. So we continue to have to manage that. But I think all-in, I think we should start to see more of a normalization of that working capital and I think that will eventually end up allowing us to get closer to that 1:1 conversion of net income to free cash flow, but we have a ways to go to get there.

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

Rob, I wanted to go back to the comments you made earlier on OneSource. It sounds like you're getting good traction there. Can you just talk to the degree that this is going deeper with existing customers? Or are these competitive wins? And then to what degree are you bundling informatics? You called that out as a decent opportunity. So I'm just wondering how often [indiscernible]

As I would say, when you think about the growth we've seen, it's really a little bit of both. So it's continuing to do more with our existing customers, but we've had a couple of nice wins here in the first couple of quarters of the year. And that puts a little pressure on gross margins as well. Andy didn't talk about that. But when we win a OneSource contract, there's obviously some investments upfront to do that and obviously that improves the profitability going forward. But I think, we have had some nice wins. I would say not as much as penetration outside of pharma up to this point and I think that provides another opportunity, but we continue to see opportunity there. But I would say, we're not getting as much traction there. With regard to the informatics business and the deployment into OneSource, we've got a number of sites where we're doing that but that's still probably a relatively small percentage of revenue. But we think it's a nice opportunity for us and it provides a significant differentiation. And I think when you talk to the customers as to why they chose or choose PerkinElmer in a lot of these competitive situations, I think the capability to bundle informatics and our historical OneSource capability is a big factor.

Okay. And then if we think about the labs business you guys just launched, the pre-eclampsia screening test, can you maybe just talk about how you think about that opportunity and then further menu buildout? Is there ongoing opportunity? Can you just talk to the investments there?

I think as we look at our screening business, whether it's newborn or prenatal, we continue to see that as a good growth opportunity and it's both sort of penetrating new markets but continuing to build out the menu. And I would say the menu expansion as well as the penetration of additional, whether it's countries or reaching more children, it's all contributed to our view that this is an area of the business that I think can over a long period of time grow mid- to high-single digits. And so in any given period, it may be driven by penetration into countries or markets or it may be driven by menu expansion.

Okay. And then one last one on Imaging and actually on In Vivo Imaging, so for Caliper, can you just talk about how that business, I mean, you had a nice recovery last quarter after the March quarter issues? But can you maybe just talk to whether that business is kind of back on track and the outlook there?

Yes. So it grew mid-single digits in the third quarter. So again, this has been a little bit less than what we've seen historically. And I think sequestration continues to have an impact on dampening some of demand there. But I think we continue to feel very good about that business. And I think, as we go into '14, we think that will be a big contributor getting to that mid single digit organic growth we talked about.

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

So the developments with A1 sound pretty interesting. Can you provide a little color just on the broader opportunity there, and timing around the Chinese mandate and tenders and other opportunities in Asia?

Yes, so as you pointed out, we were -- we feel good about that. There were 7 tenders in the last quarter and we won 5 of those. So we feel good about our win rate. I would say the revenue ramp-up has not been as significant as we would like because some of the locations in China are sort of late in funding it. As you may know, the Chinese government mandates nucleic acid testing for blood screening by beginning of 2015. So there's still some time to ramp up. But we feel good about our win rate and we think this provides a significant market growth opportunity for us. But I would say, the revenue is still sort of the single million dollar range. It will start to ramp in '14, but I think you'll see the real growth occur in the 2015 timeframe.

Great. That's very helpful. And then the DairyGuard opportunity sounds pretty interesting to us. Can you just maybe talk about the -- I guess, the selling process there, in terms of -- are these current customers that you're already selling into? And how does that business look in terms of a razor, razor blade model and just overall opportunity?

So we have a good food business today. It continues to do well. And think of this as a new product offering. I think in a lot of these end markets it's all around getting innovation into the marketplace that allows our customers to be able to find things that they couldn't see before, again, sensitivity, speed, accuracy and those types of things. So we're excited about the opportunity. As I mentioned, this is utilizing our FTIR capability combined with some significant capabilities that we have around algorithms. So we think it's an exciting market for us. We do think this is a unique offering in the marketplace from the perspective of there's not an analyzer today out in the marketplace that can look at powdered milk for pollutants or adulterants. And so it's early days. Like I said, it's going to be introduced at a dairy show here on Friday. But we feel good about it. We have a channel into food already. And so this will be largely through our direct channel into the food industry.

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

So one housekeeping question. Top line FX impact you're looking for in Q4?

It will be a little less than 100 basis points, which is similar to what it was last year.

Great. Okay. And there's been some chatter coming out of China about potentially relaxing the 1-child policy. Have you heard anything on that recently? And obviously it will be a positive for your business if that were to happen.

So I would say we've heard the same chatter that you have. But I would -- we don't have any more definitive information as to when that might be relaxed. But like you said, there's a lot of discussion around that. And obviously, that would be a positive for the business. And we think probably over time, it will probably to take a couple of years to ramp up, but it could lead to a $20 million to $25 million increase in revenue for us over multiple years.

Great. You mentioned something about some pricing pressure in the environmental markets, if I heard you correctly. Was that local vendors or is that the usual suspects just being a little bit more aggressive in the emerging markets?

I would say probably more of the latter. And where you see it more aggressively is in government tenders.

Got you. Just one final question. A lot of noise recently in the bioinformatics space, a lot of acquisitions obviously, big push on it. What's going on with Spotfire and Geospiza. And I guess, are you -- can you talk about a little bit about how you're -- are you winning any new contracts, what's going on in terms of the growth rate? I'm always still a little bit curious on how to model that business.

So first of all, I think the noise in that area hopefully validates that it's attractive, so we feel good about that. So as I think about our approach, it's really targeted at really a higher level of integration of information. So we're quite excited about the Spotfire clinical deal. And when we combine that with our previous capabilities, think of our approach as really building a platform through the interface of research in clinical, so really more focus on translational opportunities. And of course, that leverages our knowledge, not only in the research area, but our experience in diagnostics. So we're sort of more of a platform play across research and clinical versus a specialized play on a particular technology. So maybe that helps you sort of differentiate that. And Andy alluded to this in his comments, we continue to see nice growth in informatics. We continue to get good traction with particularly the large pharma. In particular, we had a user group meeting here a couple of weeks ago where we had, what we call, the Executive Customer Advisory Board. It's attended by the top 15 global pharmaceutical companies. And they continue to sort of embrace our strategy of this sort of translation opportunity in medicine. So we continue to be quite excited about it. And we think it can grow double digits for the foreseeable future from a top line perspective. And obviously, this is a business that has very nice operating margins associated with it.

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

On the newborn business, just wondering if you put a little more color on the trends you saw this quarter geographically. Any notable tenders on the horizon as well just outside the U.S. that we should be aware of?

Well, the U.S. we get helped by the growth -- in birth. For us it looks like it's about a 2% number, sort of low single digits. We saw some nice growth in South America. And I think Andy mentioned the fact that in China, we continue to see good adoption there, so very strong growth in APAC. We did not see as much growth in the EMEA region. And I think some of that was just some delay in spending. We did get some pushout -- we had mentioned a number of years ago that we had put some big installations into the Middle East. And some of the disruption there I think has delayed some investment. So from a geographic perspective, Europe sort of down slightly, Americas, call it mid single digits, South America and APAC very strong growth, sort of north of 20%.

Got it. And then just a follow-up on the Caliper franchise. If we look across the NGS landscape, a lot of the major players there have made some interesting technology acquisitions and sample prep. You guys have obviously had a pretty good track record in playing around the edges there pretty successfully. Just wondering if you could maybe talk a little bit about the long-term plus maybe you have regarding a new product development and how you plan to participate in the continued growth of sequencing, as we look towards toward 2014 and beyond?

Yes, I think it's similar to what we've talked about in the past, where we think there's real value opportunity in the sequencing workflow to be in the front end, in the automation and sample prep. And we'll continue to innovate there. It's an area we continue to make significant investments. We hope to come out with some products hopefully in '14 that will continue to advance innovation in that area. And also in the back end, in the informatics area and leveraging what we're doing with Geospiza and now using some of the capabilities with Spotfire. So I think our strategy will continue to be in those focused areas. And as you're pointing that out, that's -- we think that's a nice growth area and I think we're well-positioned in those 2 spaces.

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

I just wanted to figure out, maybe on the fourth quarter guidance, I know you called out the $10 million to $12 million, the kind of one-timers. If we strip those out, like, can you just give us a high level view, how would you characterize the demand environment for your businesses in the fourth quarter? We think stable, maybe weakening a bit, improving a bit? How would you think about it from a high level?

No, I think it's stable, as I sort of alluded to, with the exception of Medical Imaging, which is really sort of a year-over-year comp issue, and so we're looking to see some improvement there. But I think order trends, and I talked about even toward the latter part of Q3, I think are fairly stable here. So we've got some concerns as we voiced in this sort of $10 million. But other than that, we feel pretty good about the demand profile in the market.

Okay. And then maybe, Andy, to the extent the environment remains muted possibly, we don't get this industrial recovery that could mean, maybe PMI does, I suggest and it doesn't translate into increased demand and we get to '14 and the top line hasn't recovered to the extent you hoped for, how much of the margin expansion is in your control, given the discrete actions you guys have already taken, and how much is dependent upon top line? Such that, let's say, you grew 3% next year, what -- can you frame a little bit of a margin sensitivity towards maybe a 3% growth and a 6% growth or however you want to phrase it to give us a sense of how much is in your control?

Maybe I'll take it to an even more draconian level and say if we really are kind of volume neutral going forward, we have a certain amount of savings that should generate about 100 basis points of margin expansion. And as we start to look out at the top line starting to improve, I think if we get to that 5% to 6%, mid-single digit level that we hope to in 2014, we have some fairly significant leverage, not only on the gross margin line but even more significantly in the operating margin line. But I think we've -- in the past, when we've been at those levels and we've been able to do certainly well north of 100, in some cases, north of 150, I think we're in a much better position today. So I think if we can get to those types of revenue numbers, we should see some fairly robust margin expansion.

Okay. And then maybe one more, just on the acquisition strategy, I know you guys have discussed how, given the business is optimized, you feel you have the right pieces to the puzzle but now you're looking at maybe some tuck-ins here incrementally. I just want to go back to the Thermo Life deal and just kind of check in with you guys now. I think you guys have discussed in the past your OneSource business, which is critical and growing nicely, is sticky, given some of the informatics business as you can put on that. But just stepping back, I just would love to get your take on the acquisition strategy, kind of going forward from here, whether directly addressing Thermo Life or just how do you think about opportunities as they come up?

So I think you've characterized it well from the standpoint of, we feel good about the portfolio but always looking for opportunities to improve it, and so, I think right now, our approach is continually look at bolt-ons and look in those areas where we can continue to be differentiated in our offerings. So I think one of the reasons, I mentioned before that we've been successful in OneSource is when we combine it with deploying the informatics capability, that starts to really differentiate us in the marketplace. And so that's the area that we want to focus on. So obviously, the Imaging area is an area that we like both from a growth perspective and our internal capabilities. You know our emerging diagnostic capabilities are ones that we think we can continue to build and work off the terrific channel we have there. And so again it's going to be probably focused in those areas where we both have good market positions today but also see nice growth prospects and continue to differentiate us from other competitors.

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

Just a couple of quick ones. One, I was wondering if you could tell us how much of your total revenue comes from places like India and Southeast Asia, or maybe just emerging markets minus China or something like that?

Yes. This is Andy. Our total emerging market exposure is around 28% and. I would say, China is around 11%, 12% of that and the rest is pretty widely distributed. In total, it's a little north of 25% of our total revenue.

But India specifically is around 2% to 3%. And if you look at Southeast Asia as a whole, it probably adds another 6%-ish. So southeast Asia and India will be something sort of south of 10%.

Okay, got you. And then just on your guidance I guess, for the fourth quarter, for the full year, I understand the $10 million to $12 million of revenue impact. Is that the main driver to the top end of your EPS guidance coming down? Is that the right way to think about it? Because I also saw you're saying your effective tax rate is also going to come down 1% as well. I'm just trying to think about what the moving pieces are there.

Yes, I mean that's the major driver to coming off the top end, because I think we felt that in order to get to top end of our guidance previously, we would have had to have been closer to the top end of the revenue guidance. And I think because of some of the things we talked about before, we think it's right now prudent to sort of guide down and, consequently, if we're not going to get to the top end of the revenue, it's unrealistic to think we get to the top end of the EPS.

Okay, got you. And then just final thing, there was an article in the press a week or so ago talking about some air quality monitoring business that you've won in China. I'm just wondering if you could provide any more color or timing or size on that.

Yes. So that's a partnership we have with the China State Environmental Protection Administration. And it's really a partnership with them to help set the air quality standards as well as test for heavy medical particles in the air. To me it sort of speaks to the terrific relationships and capabilities we have broadly in emerging markets but specifically in China. And I would say, for the next couple of quarters, I wouldn't think of it is a huge revenue driver. But I think, again, it's the relationships we build with the government agencies. And as we come out with more innovation and new products, I think it opens up the opportunity to grow fairly significantly. And as you know, China is dedicating a significant amount of resources to improve their air quality. So we're quite excited about it. But I would say for the next couple of quarters, that's not going to be a significant revenue contributor.

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

I just wanted to clarify, so did gross margin in the quarter, did it come in line with your internal plan or was there some variance from plan?

It was down slightly from plan, partly because of some of the mix shift that we saw in Environmental Health. We had not forecasted that level of mix and mix headwinds.

Yes. So when Andy talked about the 3 factors, clearly the informatics investment was in our plan. Post the Q2 announcement to move those other 2 facilities in, we suspected there will be a little bit of additional cost through our cost of sales line. But I think the mix and to some extent the pricing pressure was a little bit more than we thought.

And I think the last item is we had really hoped to complete the Hopkinton move at the beginning of the third quarter. We really didn't open the facility until the beginning of the fourth quarter. So the savings we had hoped to get will -- are still there. They're just pushed out a quarter.

Okay. And then finally, can you give us an update on how a couple of your important growth drivers for '14 are tracking, maybe something around the order book for the iQT and also the cell-free fetal DNA?

So I mentioned little bit before that we continue to see good receptivity in the marketplace as we talk to potential customers and KOLs, but because of a specific supplier issue around one of the components the actual shipment of the product will not occur until the first quarter of 2014. Again, minimal impact in Q4. And we really don't think it's going to have a significant impact in 2014 as well. Again but based on early indications, we feel good about that. And we continue to make nice progress on our contracting with regard to NIPT. I think now we're up over 160 million covered lives. And again we feel good about the growth opportunities but that will also be more of a 2014 growth driver. Some revenue this year, but relatively small.

You said that supply issue is not going to impact you on iQT, that's not going to impact you in 2014?

No, we don't think -- minimal but not much of a big impact. It's a supplier issue, yes.

Your next question comes from the line of Eric Criscuolo from Mizuho.

On the facility relocations, specifically, the international relocations, does that have any positive effect on the tax rate going forward?

Well, we do have an opportunity with Singapore to leverage our tax planning. So there is potentially a modest benefit from that. I think it really -- the bigger fluctuations around the tax rate really are around where our operating income is domiciled. So I think it's difficult to say or pinpoint how much it's going to be. It is somewhat of a tailwind. And as we kind of move through '14, we'll probably update you on that progress.

Yes. But I would say by moving the manufacturing out, it does put some downward pressure on the tax rate.

Got you. And on the informatics, the bioinformatics businesses that you have, do they have similar margin profiles to the typical software industry margins?

So it depends a little bit on what part of the software business. So I would say, the electronic notebook business, I would say, yes. The Spotfire is a little lower because -- think of that as sort of a licensing agreement, so still very good margins. But because we're paying some licensing to TIBCO for that, there's lower margins associated with the Spotfire business as compared to the electronic notebook business.

Ladies and gentlemen, this will conclude the question-and-answer portion of today's call. I would now like to turn the call back over to Rob Friel for closing remarks.

Great. Well, first of all, thank you for your questions. So in summary, I'm pleased with how the company is executing on balancing growth investments while being responsive to global economic conditions. Again, just to reinforce, I remain confident we have created a really great foundation to deliver long-term value to our shareholders while helping customers solve critical challenges in both Human and Environmental Health. Thank you for your continued interest in PerkinElmer and have a great evening.

Ladies and gentlemen, that will conclude today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.