Revvity, Inc. (RVTY) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2013 PerkinElmer Earnings Conference Call. My name is Whitney, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to host for today, Mr. Tommy Thomas, Vice President of Investor Relations. Please proceed, sir.

Thank you, Whitney. Good afternoon, and welcome to the PerkinElmer fourth quarter 2013 earnings conference call. With me in 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 the 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 February 13, 2014. 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 statement in that attachment, we will provide reconciliations promptly. I am 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 PerkinElmer achieved a very good performance in the fourth quarter. During the quarter, organic revenue grew 3% and expanded adjusted operating margins by 90 basis points, resulting in adjusted EPS of $0.73, a 12% increase relative to Q4 in 2012. Operating cash flow is also strong, increasing significantly over Q4 last year to $71 million. All of these financial metrics exceeded our expectations. And while it is rewarding to close the year with strong financial results, more importantly, we ended 2013 a stronger company. During 2013, we made excellent progress on our productivity programs to rationalize our production footprint, shift production to lower-cost regions, better leverage our G&A expenses, and both simplify and strengthen our organization. In addition, we continue to make strides in expanding our capabilities into targeted, high-growth markets with a number of innovative new products launching in the first half of this year. We enter 2014 much better positioned to accelerate profitable growth and deliver innovative solutions to meaningfully improve human environmental health. As Andy will describe our Q4 results in detail, I will focus my comments on our end markets and discuss our guidance for 2014. Starting first with Diagnostics. Our specific end markets continue to be positively influenced by 2 major factors. The first is a desire by health care professionals to identify potential health problems as early as possible, because of both the clinical and economic benefits of early diagnosis. Second, the introduction of new technologies, products and analysis tools, particularly in emerging markets, is providing opportunities for us to leverage our knowledge and infrastructure. More specifically, we expect newborn screening to continue to expand into new markets globally, additional expansion of the newborn testing menus in certain geographies and noninvasive prenatal testing to grow sequentially as reimbursement trends improve. In China, we continue to introduce new products, expand our product and service capabilities, and gain market share in the areas of infectious disease testing. For example, we won nearly half of the Chinese tender for nucleic acid blood screening last year, solidifying our position as one of the top 2 providers in China. Due to our unique value proposition in emerging markets, our strong positions in newborn and prenatal screening, and the overall market expansion of these segments, we are forecasting our Diagnostic business to grow mid- to high single-digits in 2014. In Life Science Research, market conditions are clearly better than a year ago. The certainty concerning the NIH budget should avoid the funding delays we experienced last year and its 3.5% budget increase will improve public spending on research. In addition, biotech companies are increasing R&D spending and we are seeing modest improvements in selected foreign accounts. In addition to the improved market conditions, we introduced several new products this month and expect to launch several more midyear, which should provide incremental revenue growth. Two of the new products I'd like to highlight are the Opera Phenix launched at SLAS last week, which is a high content screening system using a proprietary technology, called Synchrony Optics, employing dual view confocal optics for significantly better speed and sensitivity by eliminating crosstalk between channels for 4 different markers simultaneously. In addition, we're introducing a multi-label slide scanner for research pathology, called the Lamina, that leverages our proprietary technology to reduce auto-fluorescence and improves the visualization of disease marker expression. Based on the forecasted impact of our new products and the improved end-market conditions, we are forecasting mid-single digit growth for the non-rad portion of our life science portfolio, with continued headwinds from Radiochemicals, resulting in overall growth in our Research business of low to mid-single-digits. In our Environmental end markets, overall conditions also seem to be improving, as capital expenditures in the developed world are recovering with PMI data in most of Europe at levels above the average for 2013, and continuing to indicate expansion. CapEx spending also appears to be improving in the U.S., but we are cautious given the likelihood of continued tapering by the Fed. We are also watching the implications of Fed tapering on certain emerging markets. However, we saw no impact in Q4, as growth continue to be double-digit. And to date, we have seen no signs of a decrease in order demand. Looking at specific application areas. Food analysis continue to be an attractive market, as increasing regulation on food control and production and brand protection from adulteration is increasing demand for food testing mid- to high-single digits. The environmental monitoring labs continue to consolidate and restructure, but regional areas of growth exist through the new water regulations in Europe and increased air monitoring in China. Demand from our industrial customers is largely tied to macro GDP growth. However, we do see opportunities for strong growth in materials research and testing applications, particularly in alternative energy. Finally, we continue to see our pharma customers outsourcing non-core activities, providing significant opportunities for our OneSource business. Based on this outlook for end markets, combined with the introduction of the iQT mass spec and several other new products, we believe our environmental business should grow mid-single-digits this year. A further contributor to our growth this year will be expanding the adoption of Spotfire visualization software. Recently, we introduced SciStream, which is a new configuration of Spotfire that allows direct collection of data from instruments, bypassing the need for additional programming. Initially, we are focusing this product on our line of plate readers, but eventually we will deploy the growth of the majority of instrument platforms, providing a significant competitive advantage to our detection and imaging products, and improving our customer's ability to visualize and analyze samples. Turning to full year 2014 guidance for the company, we are forecasting organic growth of mid-single-digits for the full year, with slightly higher growth in the second half, due to the timing of new product introductions. As a result of the productivity projects completed last year, and the higher volume, we should experience a significant adjusted operating margin expansion and our forecasted adjusted EPS in the range of $2.40 to $2.45 which represents adjusted EPS growth of 15% to 18%. EPS growth should be evenly distributed throughout the year, as the slightly higher revenue growth in the back half is compensated by the easier comps in the first half. Also, I should mention that our financial guidance does not assume any impact from the deployment of capital. Before I turn the call over to Andy to share more details on our 2013 results and 2014 guidance, I wanted to briefly mention our 3 key leadership objectives for the year. The first is accelerating profitable revenue growth by executing on our strategic plans. This incorporates increasing our leadership position in key end markets by leveraging our capabilities in detection, imaging, informatics and service. Second is achieving sustainable, best-in-class quality by producing superior products and driving efficiencies in all our processes. And third is building employee engagement and organizational strength through collaboration and investing in our people. We believe that engaging our employees in achieving these priorities will lead, not only to a very successful 2014, but will also be fundamental in fortifying the company for sustainable, long-term growth and shareholder value creation. I would now like to turn the call over to Andy.

Thanks, Rob, and good afternoon, everyone. I'll provide some additional color on our end markets, a financial summary of our fourth quarter results and details around our Q1 and full year 2014 guidance, and then we'll open up the call for questions. As Rob mentioned earlier, we were pleased with our performance in the fourth quarter. Reported revenue increased by 4%, while adjusted and organic revenue both increased by 3%. Adjusted revenue for the quarter was $594 million, as compared to $577 million in the fourth quarter of 2012. By segment, our organic revenue in Human Health business grew 4%, while organic revenue in our Environmental Health business grew 1%. Looking at our geographical results. Organic revenue increased high single-digits in Europe and Asia, but declined low single-digits in the Americas, primarily the result of a difficult high single-digit year-over-year comparison. We were pleased with our performance in China, as organic revenue once again increased double digits, despite a difficult year-over-year comparison of more than 20%. We continue to be encouraged by the demand trends for our key environmental and diagnostic 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 low single-digits in the quarter on a high single-digit organic growth comparison. Organic revenue for our instrument component offerings was at mid-single-digits in the quarter. From an end market perspective, our Human Health business represented approximately 57% of reported revenue in the quarter. We serve two end markets in Human Health: Diagnostics, which represented 27% of reported revenue; and Research, which represented 30% of reported revenue. Organic revenue from our Diagnostics business increased high single-digits during the fourth quarter, primarily driven by strength in our newborn screening and infectious disease solutions and our Medical Imaging offerings. As we guided on our third quarter earnings call, the Medical Imaging business returned to a mid-single-digit organic revenue growth in the quarter, and we saw strong demand from key customers in the oncology, diagnostics and industrial verticals. Our Research business delivered low single-digit organic revenue growth from the fourth quarter versus the comparable period in 2012. We experienced solid demand in our In Vivo Imaging, Microfluidics and Radiometric Detection businesses, which were notable standouts in the quarter, with double-digit revenue growth. Moving to our Environmental Health business, which represented 43% of reported revenues in the fourth quarter, we serve three end markets: laboratory services, which represent 19% of reported revenue; environmental and safety, which represented 17% of reported revenue; and industrial, which represented 7% of reported revenue. As I mentioned earlier, organic revenue in our environmental health business grew low single-digit in the quarter, grew 1%, driven by continued strength in our lab services business. Organic revenue from industrial end markets grew mid-single digit, while environmental and safety revenue declined low single-digits. Turning to our margin performance in the period. Adjusted gross margins were 49% as compared to 48.8% in the fourth quarter of 2012. We're beginning to realize savings related to the completion of our manufacturing consolidation and productivity initiatives, driving improved gross margins in the quarter despite foreign currency headwinds and our continued investments, primarily in software. As a reminder, investments in Spotfire's software are charged to gross margin as opposed R&D and SG&A, and therefore negatively impacted adjusted gross margins throughout the year. Adjusted operating margins in the fourth quarter were 19.2%, as compared to 18.3% for the same period a year ago. Restructuring efforts and recently completed productivity initiatives helped to drive profitability in the quarter. By segment, adjusted operating margins in our Human Health business increased approximately 100 basis points to 24.9%, as compared to 23.9% in the fourth quarter of 2012. The increase was primarily a result of positive product mix and the completion of a number of productivity initiatives. In our Environmental Health business, adjusted operating margins increased approximately 60 basis points to 15.9%, as compared to 15.3% in the fourth quarter of 2012. The increase was primarily the result of savings from our restructuring actions and operating expense controls. GAAP operating income from continuing operations was $84.7 million in the fourth quarter of '13, versus an operating loss of $30.8 million in the same period a year ago. GAAP earnings per share from continuing operations in the fourth quarter of '13 were $0.58, compared to a loss of $0.14 in the fourth quarter of last year. Recall that the fourth quarter of 2012 was negatively impacted by noncash charges related to pension mark-to-market and our trademark name rationalizations. Adjusted earnings per share were $0.73 in the fourth quarter of 2013, about $0.03 above the mid-point of our guidance range, on higher sales volumes and a lower tax rate. On a non-GAAP basis, our adjusted tax rate for the quarter was approximately 18% versus our forecast of 21%, a result of the shift in jurisdictional profits. Turning to the balance sheet. We finished the fourth quarter with approximately $930 million of debt and approximately $170 million of cash. We exit the quarter with a debt to adjusted EBITDA ratio of 2.4x and a net debt to adjusted EBITDA of approximately 2x. Looking at our cash flow performance. Full year GAAP operating cash flow from continuing operations was $158 million, as compared to $154 million in 2012. Note that our 2013 full year cash flow results were negatively impacted by approximately $87 million of pension and royalty payments in addition to higher working capital related to productivity initiatives. These payments are not expected to recur in 2014. And given the completion of our productivity initiatives in 2013, we expect significantly higher operating cash flows for 2014. As to 2014 guidance. Going back to Rob's earlier remarks on our served markets, and given the new products we expect to launch throughout the year, we anticipate adjusted revenue for the full year to grow organically mid-single-digits, or 4% to 6%, with the full-year impact from foreign currency being minimal. Given the timing of new product introductions, we expect growth to be slightly higher the second half of 2014, but both halves should grow mid-single-digits organically. Regarding adjusted operating margins, the combination of the carryover productivity initiatives completed in 2013, of approximately 100 basis points, and incremental margins on 2014 revenue growth, will contribute approximately 160 to 180 basis points of adjusted operating margin expansion. Partially mitigating this expansion are higher variable compensation and benefit cost due in part to a higher stock price and lower prior year payouts, as well as higher growth investments in the back half of the year. These costs in total are expected to negatively impact adjusting operating margins by approximately 30 to 40 basis points for the year. And as a result, we now expect operating margin expansion of at least 130 basis points for the full year 2014. Interest and other expenses are expected to be approximately $43 million. Our adjusted tax rate is expected to be 21%. And our weighted average diluted share count is expected to be flat or approximately 113.3 million shares. As a result, we now expect full year earnings per share to be in the range of $2.40 to $2.45, representing mid- to high-teens earnings growth for the year. Looking to the first quarter. Revenues are expected to be in the range of $525 million to $535 million. Adjusted earnings per share for the first quarter of this year are expected to be in the range of $0.42 to $0.44, which represents growth of 17% to 22% for the quarter. The significant growth in EPS is a result of the impact of our prior year productivity initiatives, but will be impacted by the aforementioned compensation headwinds, currencies, specifically the Japanese yen, as well as the negative mix impact from lower informatics and medical imaging revenues. This concludes my prepared remarks. Operator, at this time, we'd like to open up the call for questions.

[Operator Instructions] And our first question comes from the line of Dan Brennan with Morgan Stanley.

Maybe to start off, Andy and Rob, as we think about 2014 and the margin expansion is significant, that you're guiding to. However, just wondering, is 18% now kind of off the table, given some of the investments that you're looking to make in the back half of the year, plus in the variable comp?

Well, I wouldn't say it's off the table. I think what we're trying to do is we guide where we think is sort of realistic and achievable. And I would think about it that if we see a little bit improvement on the top line and we get a little bit better mix, I think there's a possibility we can get there. But we don't think it's prudent to sort of guide to 18%. And as Andy said, we think we can get at least 130 basis points of margin expansion this year.

Okay. And then maybe on the environmental side. It was a bit weaker than we expected, human was stronger. Maybe can you just talk to, versus your own expectations, maybe how did environmental come in and maybe anything on pacing in the quarter that might give us some visibility on how it's shaping up as you look in to kind of '14?

Yes. So I would say, when we reflect back in 2013, and particularly in environmental, as you know we had a lot of focus around improving our cost structure, particularly on the manufacturing side and the back office. And while I feel great about how we did relative to making all those moves from the standpoint of very minimal customer disruption, I think in hindsight, one of the areas we're probably impacted on was our ability to get innovation in the new products. And we've talked a little bit about the delay that we've seen in new product introductions, particularly in the back half of the year, and I think it impacted our environmental business. I mean, clearly, we spiked out the mass spec, slipping a little bit. And a couple of other products that we would have liked have seen get out in the latter part of the year, and we didn't. And I think that clearly impacted the growth rates. I would say the good news is, obviously, all those activities are behind us. And I think, from a management disruption perspective, we can now be singularly focused on driving growth and innovation in the marketplace. So, again, looking back, we're a little bit disappointed on the growth, particularly on the instrument side. I think service continue to do well. But on the instrument side, a little disappointing. But as I mentioned in the remarks, we're quite excited about both the market trends, as well as some of the new products and capabilities we've got coming out in '14. And that's why we're fairly confident forecasting a mid-single-digit growth for that business this year.

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

So my first question is last quarter you mentioned some challenges in Southeast Asia and also some inspection-related delays that prompted you to take, I believe, about $10 million out of Q4 guidance. I may be off a little bit with that number, so please correct me if I'm wrong. But I'm just curious, how did that play out in Q4 and is there any related backlog to those dynamics that you would expect to be part of Q1?

Right. So, I would say, I think we sort of indicated something in the $5 million to $10 million range. So I think $10 million was probably the upper range that we talked about. I would say, when we look back on '14, we clearly did not see the headwinds that we had expected. So, as Andy talked a little bit in his comments, emerging markets continue to do well. We grew double digits in emerging markets again. So maybe a little bit of an impact, but not significant. And with regard to the government shutdown, while we didn't get everything out that we expected, it wasn't a material impact to us. I would say, relative to the $5 million to $10 million impact that we were concerned about, we think it's probably in the $2 million to $3 million range to sort of what we didn't get out in Q4, and that sort of spills over Q1.

Okay. And specific to Asia Pacific, Southeast Asia, we did actually see that return to modest growth in the quarter, primarily from SEA [ph].

That's helpful. And then two of the more challenging areas for the company -- and I would say especially in the early part of 2013, were In Vivo and Medical Imaging. The silver lining there, as we look ahead to 2014, is that you have some favorable comps, especially early in the year. Could you just talk about how those businesses have been trending the past couple of quarters, maybe from a sequential standpoint, and how would you describe visibility on those businesses heading into the new year?

So, first of all, let me take In Vivo and Imaging. And as Andy mentioned, that was solid double-digit growth in the fourth quarter. So, ever since Q1, we've seen a nice recovery in that business. And in fact, it's been accelerating on a sequential basis. So, actually, if you look at that business for the whole year, despite, as you know, a very significant decline in the first quarter, we still grew mid-single-digits. And looking forward, we think the pipeline looks strong. And clearly, with the NIH budget going up a little bit and the certainty around funding being available, we think that business should have a strong 2014. Medical Imaging was a little different situation, where, obviously we knew going into '13, it was going to have some difficult comps. And what we saw in the fourth quarter is Medical Imaging return to mid-single-digit growth. So that was great to see. As we go into '14, we've got a little bit of an issue in Q1 because of some ordering patterns. So we expect Medical Imaging to actually be down a little bit in Q1. But for the full year, it'll probably be growing in the mid- to high-single digits.

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

This is Elizabeth Anderson in for Ross Muken. I just had a question, in terms of you can give us an update. I know you've done a lot in terms of productivity enhancements in the past year, and restructuring and sort out what your -- a little bit more color on what your plans are for those areas in 2014.

Well, as I said in my prepared remarks, we're entering 2014 with about 100 basis points of margin expansion. It's a bit north of $20 million of cost. Some of this is the annualization of some of the restructuring activities with the second quarter. And we had completed the 3 major projects in '13, that we've been talking about over the last couple of years. I think as we look into '14, we obviously have leverage off the incremental volume. We also have a couple of the areas that we've talked about, that we're just beginning work on, which is really around our go-to-market strategy. And I think there are some real opportunities there, as well as our investment in indirect spend. We have consolidated all of our purchasing onto one ERP system. That affords us the ability to look across the corporation at our spend. And our indirect spend is actually almost the equivalent of our direct spend. So it's a fairly significant number, north of $400 million. And we believe that there's a lot of opportunity to consolidate vendors, really drive pricing, savings, as well as better terms. So not only should it help us on the bottom line, but it should also help us in working capital. So I think the combination of those with the volume leverage, we feel like we have, potentially, some additional upside. Those are the key areas we'll be focused on in '14.

Your next question comes from the line of Jon Groberg with Macquarie.

So, Rob, I guess just starting off, what's your expectation, if you had to kind of lay it, what's your expectation for just kind of your underlying market growth? And what are kind of the key things that you'll be watching? It sounded like you mentioned blood screening, which I thought maybe would be more of a '15 event. You think you'll see some of that in 2014 in China or maybe just highlight some of the things that you think can get you growing a little bit faster than the market.

Yes, first of all, I think you're right on the blood screening. And I mentioned from the standpoint is we continue to see the traction in the market. But I think you're going to see a significant ramp-up in '15. And I think that's largely probably being driven by funding than it is market dynamics. So I would say, when I think about the overall markets on a weighted basis, it's probably in the 3% to 3.5%. And I think we should be able to drive 150 basis points to 200 basis points additional growth this year, largely through our new product introductions. And as we've talked about, probably now for 4 or 5 quarters, we have been making a number of investments in the businesses. And we think '14 will be the year where you'll start to see some of that throughout the year. I mentioned a couple that have come out now; you'll see a couple more in the second quarter and then 1 or 2 in the second half of the year. But I think that's really going to be a significant contributor to our growth. As markets sort of recover here and probably don't get back to a full mid-single-digit growth from an end market perspective until probably the latter or middle part of this year.

Okay, that's helpful. And, Rob, as you and Andy sat down and thought about this year, obviously, if I just go back and look, in 2012 you had a lot of margin expansion. You made some investments in '13, and then the market didn't grow as expected and so it didn't work out. I'm just curious how you thought about maybe the next 3 years and kind of what your targets will be in terms of margin expansion and EPS growth. If that's kind of -- is it at all involved in your thinking about how much you want to spend this year, how much you want margins to expand this year?

I mean, I think what we talk about, on a multiyear basis, of revenue growth starting off sort of mid-single-digits and obviously trying to drive that up further. Operating margin expansion in the sort of 75 basis points, plus or minus, range. And I think if we can get 5% top line growth, we should be able to grow the bottom line greater than 2x that. So think about a 12% to 15% EPS growth off of a mid-single digit organic growth. And as I mentioned in my prepared comments, none of that employ, considers any deployment of capital. And clearly, what we'd like to do is supplement that with anywhere in the sort of 2% to 4% of additional growth through business development or acquisition activity. So, again, when we think about 2017, I'd like to be able to look back and say, 8% compounded growth, sort of call it mid-teens EPS growth. And that would be comprised of 75 or so basis points of operating margin expansion.

Okay. So, just to be clear, that would kind of be on average over the year.

Right.

So I was just curious, if like this year let's say you do 150 basis points because you had a tough year last year, right, and then do you still see a path for expanding margins in 2015 or do you get kind of this lumpiness or choppiness to the...

No, no. I think we see a path every year. Again, with the revenue growth in mid-single-digits of getting a 75 basis point margin expansion. I think if you go back prior to '13, what you saw was something more, on average, north of 100. And I think that's because we were being a little bit more aggressive on the production side. And while Andy talked about some of the other activities we're focusing on this year, I think as we look forward, we think 75 basis points per year is probably a better average. But clearly, we'll continue to get operating margins expansion going forward.

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

Did we see the full effect of the facility consolidation in the fourth quarter, Rob?

This is Andy. But, no, we did not. We'll see a full impact to that in the first quarter of this year. There were still some carryover. And really there's no carryover expense. There is some remaining restructuring carryover that'll hit our cash flow, that'll go through '14. But from a profitability perspective and a return, that'll hit in the first quarter of this year.

What are the major things you want to get done on the environmental side to get that margin a little higher?

I think it's a couple of things. First of all, obviously getting these new products out into the marketplace because they'll bring higher margins with it. I think when you look at our margin profile in Environmental, we've talked about it in the past, we've got to get more consumables or make consumables a higher percentage of our business. So, obviously changing the mix out a little bit. And then, as I also mentioned, driving sort of the informatics and software capabilities that we have into that business as well. And I think if we can do those things, and obviously get the top line growth, you'll see improved operating margin in that business.

And then last, Rob, I think all of us see a stacked up pipeline of diagnostic startups out there. Are you getting approached more and more for companies trying to leverage your distribution channel? What are the dynamics happening there?

Yes, I think it's fair. As I mentioned, clearly there is an emphasis on earlier detection, right? And so, clearly our capabilities and our share in prenatal and newborn are very attractive. And so we do get good looks, particularly at some of the exciting new technologies. Because in many instances, and you're clearly see this on the NGS side, that some of the early adopters will be in that portion of diagnostics.

Your next question comes from Amit Bhalla with Citigroup.

I wanted to just dig into two things on the guidance. I guess, first on the instruments side. Can you help us with what's the embedded instrument growth rates in guidance? And then just second, on mass spec, can you just help us with the supplier issues you've been having on the mass spec side? Just get us comfortable on the timing of the launch of new products there?

Sure. Within the guidance is an assumption of mid-single-digit growth. It's also mid-single-digit growth on the services side as well. And again, a lot of that's driven by the new products we've talked about, as well as just general market conditions.

Yes. With regard to the mass spec, I think we feel better about the supplier issues, and so we continue to feel like it's a late Q1, early Q2 launch.

And just a quick follow-up on the first quarter guidance. Andy, can you just go through, again, the hit to EPS in the first quarter? Obviously, the EPS was a little bit lower than we were expecting. And I was hoping you can just break apart the -- quantify the hits.

Sure. Well, I talked about some items at the beginning -- or at the end of my prepared remarks, rather -- and we had some compensation headwinds and some benefit funding that's really more first quarter specific. Some of the competition headwinds will continue through the year. That's a piece of it. As you realize, our comps in some cases is tied to the share price, and the share price has gone up. So that has created a headwind. And in addition we had a lower payout in '13 than we are currently assuming in '14. Currency for the year is minimal, top and bottom, but in the first quarter it's about $0.01 on the bottom line, and it's specifically the Japanese yen. We had very little expense in Japan to offset the revenue FX change. And then, really, the third thing is the mix of income. Because of customer ordering patterns, med imaging, as Rob mentioned, will be softer in the first quarter, as will informatics. And that's the third piece I think. All in, those 3 pieces are about $0.04 to $0.05 of headwind on the quarter.

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

So, on the bio pharma spending comments you had early. Can you just tell a little bit of color where you are part of portfolio you see the most benefit? And I'm just trying to get a better sense of how broad-based that is. We've obviously seen some of that elsewhere in the sector. And at the same time, you're seeing drug companies with some renewed pipeline productivity. So, trying to figure out how much of this is really secular versus maybe one-time in nature?

So if you look at Q4 specifically -- let me start there. We saw it in Asia, we saw it in Europe, less so in the U.S. We believe, in Europe there was clearly a -- we got a benefit from some of the budget flush, I think. When we talked to customers there were some money available and I think they were spending that before the end of the year. However when we look forward and talk to our customers, I think the benefit we'll get going into '14 is clearly in the academic area. And that will benefit, obviously, the imaging area and some of the more capital-intensive products that we sell. And then I would say the other area, clearly, is in the informatics area. We continue to see nice order growth there, particularly in the fourth quarter we're strong. And as Andy said, while the first quarter will be a little slow, we do expect strong growth coming out of informatics. And a lot of that is going into the pharma markets.

That's helpful. And then just while you're talking to informatics, maybe to expand on that a little bit. We did see an acquisition of the one sort of independent publicly-traded company. And at the same time you've seen some active M&A with the other players in the NGS space. So maybe if you could just walk us through at a very big picture. You mentioned Spotfire, but across the entire portfolio of assets put together here, how do you guys look at your competitive advantage in informatics relative to some of these other companies who are now getting in?

So I would say a couple of things. First of all, our approach in informatics is not to be necessarily focused on one type of technology or application and to be more sort of a platform. And so if you think about Spotfire, Spotfire is a visualization and analysis capability that ultimately we think will go into research, it'll go into environmental, it'll go into diagnostics. So I think that's, we believe, advantageous for us. And then, obviously, the other thing is because we have the underlying source of the data, so whether it's detection, whether it's informatics or whether it's some of our diagnostics screening tests, I think that provide us a significant advantage to better understand what the customer is trying to do. And again, it's the interaction or the inter-connectivity of having the detection and imaging, providing the informatics. And also through some of our service capabilities, understanding what our customers -- or the information and answers that our customers are trying to drive. So, again, you're already seeing a lot more activity in this, but I like our competitive advantages relative to the assets we have in informatics and also, again, the breadth of our capabilities.

Got it. It's very helpful. And then lastly, if I could sneak one in with Andy on the deployment of capital. You mentioned your guidance doesn't factor that in and you guys have obviously been pretty opportunistic on tuck-in M&A over the last couple of years. But can you maybe, today, refresh us on your rank order priority, uses of cash between M&A and maybe a small buyback? Just wondering why something like that wouldn't be on the table as well.

Yes. I think right now, we have said we're going to hold our share count flat. I think, obviously, we have the opportunity to do something different. We're still working with Moody's on our credit rating. So we've been on the negative watch. So hopefully that will get behind us at some point. But I think M&A is really our primary focus, it will continue to be. There's a number of, what I would consider, attractive bolt-on and tuck-in transaction, really, across the portfolio. Maybe a few more in human health. But I think that's really probably where you're going to see most of our capital deployment in '14, and actually in '15 as well.

Your next question comes from line of Dan Arias with UBS.

Rob, any way you can help us with the contribution you expect from the Verinata collaboration for the year?

Well, I would say, we -- as I said in the comments, we're -- I would say long-term we feel good about NIPT, right? And you can see the ramp-up in the coverage has been very good. The real question is how quickly the payers and the payment occurs. And one of the things that -- we look back even at our NTD business and the biochemical screening, and it does take a couple of years for that test to ramp up and to beget a sustainable reimbursement rate. So I think that's the question for us. It's being adopted. Its being sort of picked up by contract. But I still think it's going to take a little while before you'll see consistent, repeatable reimbursement.

Okay. And then maybe on the newborn side. What is the outlook for getting things going on the increases in the number of screening tests offered internationally? Do you think you can have some meaningful discussions there this year? And I guess, when do you think you could start seeing those menus begin to expand?

Yes, I mean, I think -- we're in those discussions now. And I think I mentioned a couple of weeks ago that we've seen an increase in China now. It's, on average, going from 2 to 4. There's actually some provinces that are doing 6. And we're actually in some discussions that are actually doing some things around mass spec. So we're clearly seen in China. I think in Europe we're quite excited. We just got the skits test that we deployed in the U.S., now CE marked. So we're in discussions with a number of countries there. So as we said in the past, these things never go as fast as we would like. But we are in a number of dialogues where we think we'll continue to see good movement on the menu expansion. And hopefully we'll see some, maybe, step moves here in 2014.

Okay. And then if I can sneak one more in, just on the informatics effort. To what extent do you think you can leverage OneSource as sort of a vehicle there, to make an impact with the accounts that, that business touches?

I think OneSource is having and will continue to have an impact on that. And one of the clear synergies that we saw with, for example, CambridgeSoft is they had relationships with some companies where we weren't as significant on the OneSource side and vice versa. So I would say, over the last year, we've been averaging those. I think we've got good synergies on that. And now, with the Asset Genius and a couple of other products that we've evolved from the informatics side, I think we are seeing good traction. And we have a number of customers now where we're in beta test with some interesting informatics capabilities that sort of supplement what we do or complement what we do on the OneSource side.

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

So, actually kicking off the last one on OneSource. I mean, we saw the Merck news. Maybe just talk about visibility with that business and growth assumptions for this coming year in light of, obviously, some pipelines being rebuilt but obviously restructuring as well.

So first of all, I would say OneSource continued to do well in the back half of '13 and had a good sort of mid-single-digit growth in the fourth quarter. And so while clearly you see some of the large pharmas, like Merck, restructuring. At the same time you're continuing to see other pharmaceutical companies recognize the benefits of outsourcing some of their noncore activities. In addition, even with our existing customers, as we mentioned, whether it's informatics or some of the other capabilities that we've developed, we continue to win new business with existing customers. So I think the combination of new customers starting to outsource more of their non-core work, as well as getting more business with existing customers, we still think OneSource can grow sort of mid- to maybe high single-digits in '14.

Okay, that's helpful. And then, obviously, there's been a lot of focus on margins. But on the flip side, can you talk about where you're making incremental investments in '14 either channel-wise, in terms of -- you mentioned a pathology system. Do you need to do more there? And then, conversely, if you could talk on R&D, other priorities? At one point, I think it was mentioned, you can add an LC maybe to the ITT and how do you think about opportunities like that?

Yes, so I would say, first of all, from an R&D perspective, we want to continue to keep our R&D at least at the same level as revenue, as a percentage of revenue, and maybe increase that a little bit. There are some technologies that we're focusing on to sort of expand our capabilities, particularly in the imaging area. You mentioned pathology. I think the exciting thing about the new product, the scanner, is it's being added to a growing range of what we would refer to as quantitative pathology solutions. So we now have a reagent of protocols for staining. We've got imaging instrumentation. We've got analysis software. So that's an area that we think will provide a nice growth. As you point out, we are investing in the channel there, bringing in some additional capabilities there. And I would say, incrementally, in some of the emerging markets, we're looking to add sales and distribution capabilities. So sort of at the next level now beyond the BRIC. So, South Africa, Turkey, some of the Middle East, some of the areas of Eastern Europe. So that's the area of where we're investing, where we see nice opportunities to grow.

I guess, along those lines, you mentioned the China net opportunity, obviously, that's kind of 2015. But can you maybe help us think about whether you need to make investments there, what the size of that opportunity could be in the next couple of years. And then are there similar nat-based [ph] testing opportunities beyond China that you're going after?

So first of all, in the China diagnostic area, that's an area where we have been investing fairly significantly, probably since the 2012 timeframe. I think we now have over 100 engineers in our Diagnostic business based in China. And so we'll continue to invest there. I think the opportunity for blood screening, longer-term, could be quite significant, probably in the $30 million to $40 million per year. That may take a couple of years to ramp up. But I think that's -- when you look at the amount of screening that's done in the U.S., the potential for China is could be quite significant. And then, of course, India, I think is another area where we think we want to leverage what we're doing in China and move that into some of the other emerging markets.

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

So, we haven't really talked about sort of what the Caliper business has done. And I'm curious in terms of how the sample prep portion of it is done, the automation portion of it. And I guess, have you thought about what sort of the role is for the Caliper and some of the next generation seamless workflows over the next couple of years as a number of other players are sort of entering the market or people that actually sell equipment are starting to launch their own prep systems.

So let me start off with the first question. So if you look at Q4 specifically, the Caliper businesses all did very well. I mentioned In Vivo, Microfluidics had a good quarter and the liquid handling portion associated with NGS. I think they all were probably high single, low double. If you look at the year, probably a little disappointing relative to the original model. But I think a large reason for that is just because, obviously, when we bought Caliper, we did not assume we were going to see the academic funding issues that we saw, particularly in the first part or the first half of 2013. But overall, if you look at a couple of years, I think we feel good about the returns and we feel good about the traction we're getting in the marketplace. And probably most importantly, the synergies that we've been able to drive by taking some of the Caliper products and combining it to what we've done historically at PerkinElmer. So I think we feel good. Going forward, again, the Microfluidics work, we continue to move that into other applications. So we've got an interesting product coming out probably a month that'll be more focused in the diagnostic area and to leverage what we do, obviously, in that area. I mentioned the fact that In Vivo was strong, and I think you're going to see a good pipeline in that in 2014. And we continue to believe there's an opportunity in Next Gen sequencing sample prep at the sort of higher volume end. And I think that's clearly where we see the opportunity continue to play and continue to work the synergies with that in our informatics back end.

Okay. It sounds like you're going to do -- whatever your M&A strategy is, a lot of is going to be focused on the Human Health side of the business. And obviously the Human Health side of the business is where a lot more of a more robust growth opportunities are. I guess, does it make sense to sort of contemplate maybe divesting some of the Environmental Health businesses and maybe making it as a pure-play on Human Health? I guess, I'm thinking about -- how do you think about strategy of the company going forward?

So, first of all, I just want to say, while I think Andy mentioned that there's sort of a bias in Human Health, there are a number of opportunities we're looking in the Environmental Health area. Because we think, particularly in the area of, let's say, air monitoring and food, there are some nice growth areas there. And we think we've got some good capabilities to pursue those. That's one. The second thing is, increasingly, when we look at the core capabilities of PerkinElmer, like informatics, like imaging and some of the other things we do, we see applicability, both -- across both areas, Environmental and Human Health. So I would say unlikely that you would see a situation where we would split. If anything, we'd like to great greater synergies across the businesses. So when you think about the new mass spec coming out, that's going to have applicability in the environmental end markets, but we ultimately would like to see that also going to the Human Health. So the core capabilities around detection, imaging and informatics has applicability across -- whether its research, diagnostics and environmental. And I think, over time, you're going to see us continue to leverage that and gets benefits from the broader market opportunities.

Great. And just one housekeeping question. Andy, the $12.6 million other expense net item, is that just debt extinguishment cost?

It is. It's a make-whole.

Your next question comes from the line of Bill Quirk with Piper Jaffray.

It's actually Dave Clair in for Bill. Sorry, I missed the first part of the call. I'm not sure if you addressed this already. But I was just curious, if you could give us an update on Japan. Are you seeing any impact from the stimulus over there?

So Japan has continued to improve sequentially since the first quarter. And I would say, slight benefit. We do you think in 2014, we'll see a more of an impact from that. But Japan, I think for the year, is in the low to mid-single-digit growth. And again, given the difficult first quarter, that was pretty good improvement.

Okay. And Andy, thanks for the color on operating margin. I was curious if you could talk about how you're looking at gross margin in 2014.

Well, I think we've said all along that we feel like we can get almost an equivalent amount on the gross margin, on the operating margin. If you look at the initiatives that we had last year, the move to Asia, primarily Singapore and China, was really to drive supply chain savings. There are some labor arbitrage. That we will see, I think, ramp over time, as we build out the supply chain there. So it's still early days. So I think that the mix going into the year will be probably a little more skewed towards the SG&A side than on the gross margin side, but we should see improvement in both. And I think that gross margin will start to ramp up as we start to really make progress on the product side.

Yes, I mean, the one thing we mentioned in gross margin, and we spec this out in the prepared remarks, is the investment in informatics goes into gross margin. So while Andy talked about the productivity savings we're seeing, and we do expect to see gross margin improvement in 2014. That has a little bit of an offset as we continue to build-out, and that will be an area of investment in informatics. That does cause a little bit of an offset to what otherwise would be, I think, fairly significant gross margin expansion in '14.

That's right. The accounting treatment does put it into cost of goods versus -- traditionally it would be put in R&D or SG&A.

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

Just filling in for Peter. Did you see, I guess, toward the end of the quarter and maybe even the first couple of weeks of 2014, did you see any increase in U.S. health care utilization rates?

No. I mean, that'll be probably be difficult for us to see it based on the newborn or prenatal area. But I would say no, nothing that I would say would be significant.

Okay. And then, given the term -- while it's kind of happening right now in various emerging markets, whether it be maybe in Europe or Southeast Asia. Has that kind of changed your outlook in any ways or are you baking in any more risk in those markets in 2014?

I think we're monitoring it. But if we look at Q4, as I mentioned, it continued to do well, and the ordering pattern, at least in the sort of pipeline and discussions with customers. At least in the areas where we're focused, which is fundamentally Environmental Health Care we're not seeing that. But it is something we're keeping a watchful eye. I think we mentioned in the prior call that, obviously, when you see the currency devaluations that you've seen in a number of these countries, that the initial impact of that is products that are based fundamentally in dollars become significantly more expensive. And we have seen a couple of countries, obviously, Turkey and, et cetera, that have taken fairly aggressive actions from interest rate to try and offset that. But that is something we're keeping a careful eye on. But I would say that up to this point, we haven't seen anything that it indicates that its impacting our business directly.

Yes, I think part of that is due to the product set, the offering that we bring over there. And if you think about diagnostics and environmental tools, I mean, those are kind of critical needs right now within emerging markets. So as far as prioritization, we feel a little better about their ability to prioritize that spend maybe versus others. But we'll continue to monitor it.

Your next question comes from the line of Jeff Elliott with William (sic) [Robert] W Baird.

Just looking at the free cash flow commentary. Can you be more specific on what you're looking for in terms of free cash flow or cash flow from operations in 2014. And then can you give us some color on the metric business? Could you update us on the size of that business and what you're seeing for growth there?

Sure. Why don't I take the first question, and Rob will take the second question. On free cash flow, we always try to shoot for 100% of net income. We've obviously made some investments as a part of our productivity initiatives and working capital, as well as with some of our informatics. And I think that has impacted our cash flow. But I think those are behind us. I think I said in my prepared remark, we have about $87 million of cost in the year that we won't see next year. So I think we're going to be in that solid 90% free cash flow to net income range. In 2014, I think the difference will be our ability to generate more working capital improvement to get to 100%. But we still have some restructuring that is a carryover from some of the productivity initiatives we had in '13 that will dampen that a bit. But I think, if you look at operating cash flow, we talked about close to $160 million. We're looking at closer to $300 million going into 2014, it's operating, not for EBIT. A fairly significant improvement year-over-year.

Let me just talk little bit about the Radiometric Detection business and the Radio Chemical business. So the Radiometric Detection business actually had a good fourth quarter. It's been fairly lumpy, obviously we had some issues in the first quarter. I think that's a business that can probably be flat to down slightly. We continue to come out with -- in 2014, potentially a refresh of that product line, and so we'll have some expectations. The Radiochemical business continues to be down in the sort of mid-to high-single digits. Again, we've seen that slow down a little bit. But our expectations for '14 that, that will continue to be a headwind relative to the growth of the Research business.

Our final question comes from the line of Steve Willoughby with Cleveland Research.

Two quick questions for you. First, just a housekeeping. Andy, the Service business, did you mention how much that grew in the quarter itself?

Mid-single-digits. I don't think I did mention it, but it grew mid-single-digit.

Okay. And then secondly, I was just wondering if you can provide a bit more color within the diagnostic business, both in the quarter and kind of looking to 2014, as it relates to growth in the newborn business versus growth in the Infectious Diseases.

Yes. So both of them, I think, should have strong growth in 2014. So if you look at the newborn business we're anticipating. That's probably going to be in the high single-digit growth. And it's fundamentally -- the couple of drivers that I mentioned about before, we're going to -- we expect to see continued adoption in some of the countries, and we expect to see menu expansion. The other thing is, if you look in China in 2013, births were down about 15%. And what caused that phenomena is, in 2012, you had the Year of the Dragon. And in 2013, you had the year of the Snake. And so what we expected is, in China, you'll see a rebound of births to a positive number. And again, that should be a contributor. And then of course, of the last aspect of it -- although we don't think it's going to be huge driver is, obviously, the relaxing of the one child policy in China will also be a contributor. In the case of infectious disease, that's a business that's consistently grown in the sort of high-teens to over 20% for us. And we would say, we think that's going to continue to be a strong grower. It may moderate a little bit. But I think it's still going to be something in the sort of mid- to high-teens growth for us.

That concludes our Q&A. I will now turn the call back over to Mr. Rob Friel. Please proceed, sir.

Okay, great. Well, first of all, thank you for your questions. So let me, in closing, just say we entered 2014 optimistic about our end markets and enthusiastic about our capabilities. We look forward to leveraging opportunities this year to deliver differentiated value to both our customers and our shareholders. Thank you for your continued interest in PerkinElmer and have a great evening.

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