Good day, ladies and gentlemen, and welcome to the PerkinElmer Fourth Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. I would now like to turn the call over to your host for today's conference, Mr. Tommy Thomas, Vice President of Investor Relations. Sir, you may begin.

Thank you, Bridget. Good afternoon and welcome to the PerkinElmer fourth quarter and full-year 2015 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 that this call is being webcast live and will be archived on our website until February 18, 2016. 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 date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measure 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 the 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 delivered a solid performance in the fourth quarter, wrapping up a particularly successful year, one in which we delivered significant value for both our customers and shareholders. Looking at the fourth quarter specifically, we grew organic revenue by 3% and, on a constant currency basis, grew revenue by 5% and adjusted earnings per share by 11%. We also achieved strong operating cash flow of $126 million, which represented growth of over 30% over the fourth quarter of 2014. For the full year, we grew organic revenue by 4% and, on a constant currency basis, grew revenue by 7%, expanded adjusted operating margins by 50 basis points, and increased adjusted earnings per share by 13% to $2.55. All these financial metrics met or exceeded the goals we established in January last year, despite a more challenging economic environment than anticipated. In addition to our strong financial performance, we also achieved excellent progress against our 2015 strategic priorities, addressed critical customer needs throughout our end markets, and expanded our capabilities technically, organizationally, and geographically. Moreover, our increased emphasis on innovation is now recognized throughout the industry and has resulted in a number of impressive awards. For example, our Phenoptics platform for quantitative pathology was named one of the top 10 innovations of 2015 by The Scientist magazine. And our NexION 350 ICP mass spec was chosen as the best new spectrometer by SelectScience at last year's Pittsburgh Conference. As we enter 2016, I'm excited about the opportunities I see to advance our mission and profitably grow the company. While we expect challenging global economic conditions to continue, our hard work up to this point has positioned us well to both invest in several compelling growth…

Thanks, Rob, and good afternoon, everyone. Consistent with previous quarters, I'll provide some additional color on our end markets, a financial summary of our fourth quarter and full-year results, as well as details around our 2016 first quarter and full-year guidance. Given that foreign exchange has had a material impact on our financial results throughout 2015, I will once again provide much of my commentary on a constant currency basis in order to better portray our year-over-year results. For the fourth quarter and full year of 2015, foreign exchange negatively impacted revenues by $32 million and $142 million respectively and negatively impacted fourth quarter and full-year adjusted earnings per share by $0.08 and $0.25 respectively, versus the comparable period a year ago. For the fourth quarter, adjusted revenues were approximately $608 million, which represents cost of currency revenue growth of 5%, organic revenue growth of 3%, with FX negatively impacting revenue growth by 5%. Adjusted earnings per share was $0.86, up 11% on a constant currency basis from $0.85 in the comparable period a year ago. Please note, since we provided fourth quarter guidance in October, foreign exchange further impacted fourth quarter revenue and adjusted earnings per share by approximately $5 million and $0.02 per share respectively. The trends we saw through the first three quarters of 2015 continued through the fourth quarter. Looking at our end markets, we continue to see strength in pharma and biotech, stable academic and government spending, healthy demand in diagnostics and food testing, and stable but somewhat slower growth in our environmental, safety and industrial markets. Looking at our geographic results for the fourth quarter, we experienced high-single-digit organic revenue growth in Asia, while the Americas grew low-single-digits and Europe was essentially flat due to very difficult prior period comparisons, specifically in our research…

Thank you. Our first question is from Matthew Mishan with KeyBanc. Your line is open.

Great. Thank you for taking my questions. On Human Health, that was where my model was a little bit off for the quarter. I think the organic growth came in around like 2%. And I was thinking it was going to be in the 3% to 4%. What was the driver of the lower performance in Human Health in the quarter?

Yeah. I think it was fundamentally – comparisons to Q4 last year, we had very strong growth in Human Health last year in a couple of the areas and I would say that was probably the overlying issue.

Yeah. And I think, if you recall last fourth quarter, we talked about some revenue being pulled in, which created this very difficult comp. It was about $5 million. So, that obviously was another piece that we had to compare against in 2015.

So, essentially, when you look at the full year, Human Health and Environmental Health both grew about the same. So PerkinElmer was a 4%, Human Health was 4%, and Environmental Health was 4%. So, in any given quarter, there can be some sort of above and beyond either because of comparison purposes or, as Andy talked about, things can move in and out of the quarter. But actually it was fairly consistent when you look at the full year.

Okay. And then the first quarter versus the full-year guidance on the organic growth, I think the first quarter's 3% and then for the full year it's 3% to 4%. Can you comment a little bit about the cadence as you go through the year as you expect a little bit more of a back-half weighted? And then, maybe a little bit about the seasonality around customer order patterns in the first quarter? And is there typically little bit more of conservatism from some of your customers in the first quarter knowing that they can put some orders off into the rest of the year?

Yeah. I think as we think about the cadence of the growth, clearly it'll be a little stronger in the back half. Some of that is just a function of we've got some new products coming out as we saw in 2015. I think, again, we had some large sales in the first quarter of last year that we're sort of cycling up against, particularly in the area of informatics. And so, I think as we think about it, we'll see it a little bit stronger. I think we're also a little concerned about the economic conditions in the first quarter relative to what we see for the full year.

Thank you.

Thank you. Our next question is from Steve Beuchaw with Morgan Stanley. Your line is open.

Hi. Thanks for taking the questions. Rob, I actually wanted to jump off on that, the point that you just alluded to, as you referenced macroeconomic conditions in the first quarter. It would be helpful if you could just isolate what you've seen in terms of the macro impact on the outlook and how that's evolved over the last 90 days or so. And then, to the extent you're looking for improvement over the balance of the year, can you give us a little bit more of a view on why it is that you're embedding that in the outlook?

So maybe it'd be helpful to just sort of walk through the end markets a little bit, both from an application perspective and a geographic. But I would say, just specifically with regard to the beginning of the year versus the latter part of the year, I would say it's fundamentally in a couple of areas. I think as we've talked about in the past, medical imaging I think has a little bit of a stronger headwind in the first half of the year. So we think they could be down sort of high-single, maybe low-double-digit. And we believe we'll see that recovered in the back half. And I think you'll also – when we think about Japan, Japan I think again we expect to see a little bit more challenging in the early part of the year. And we think that's going to moderate here in the back. One of the reasons is because, again, we get easier comparisons in the back part of the year. So I would say those are the big contributors. But to just sort of walk through the end markets in particular, I think in the case of the pharma/biotech market, we saw a good 15%. We grew sort of high-single-digits. We think that continues to be a strong market for us, maybe gets a little bit difficult from a comp, particularly on the OneSource service side. But we've got some new systems coming out in the sort of middle of the latter part of the year. We've got some new liquid handling, some cellular imagers, and some reagent kits that we're excited about. So we see that probably improving in the back half but moderating, but continuing to be a pretty strong market for us. Academic was sort of low-single for us last…

And then I'll dovetail on that very briefly here. As it relates to China and the hospital environment in China, are you seeing any signs that that has stopped the sort of pace of improvement that we've seen here lately? Or is that continuing to get a little bit better?

No. I think, for us, we continue to see nice growth in China. Now, some of that may be distorted because of the strong wins we're seeing in the blood screening area that Andy alluded to. We're seeing very nice interim placements there, and so we're quite excited about. So it may have to do with our mix of business, but we continue to forecast a strong growth in China. And of course, on the newborn side, we continue to see nice growth there as well.

Really helpful. Thanks so much.

Thank you. Our next question is from Miroslava Minkova with Stifel. Your line is open.

Hi. Good afternoon, guys. Let me start with the top-line growth outlook. I appreciate all the commentary on the end markets. However, historically you have started with a slightly higher, more like in a 3% to 5% growth range. And you've talked about accelerating growth towards the mid-single-digit average. Can you maybe sort of give us the puts and takes a little bit? Why 3% to 4% this year? Is it all about the industrial markets? And how much would that be weighing on your overall top line?

Yeah. I think that's probably the majority of the caution, I would say, going into 2016 year as we're – as I said, industrial for us grew mid-single-digits in 2015 and. as we sort of look at it right now, we're a little concerned about that. So we think that's going to be in the sort of more low-single digits. So I'd say that's probably the largest contributor to it. I would say also on the margin, I think we've talked about that medical imaging will probably be a little slower than what we've seen historically. So I would say those are the two changes. But as we think about the 5% versus 3% to 4%, we still feel like it's in that sort of 3% to 4% range. So I wouldn't say – I wouldn't read a significant deceleration into that.

Okay. And you gave us a lot of color on the areas where you're investing. You've stepped up R&D investment over the past year and it sounds like you're stepping them up again in 2016. Can you give us your thoughts about should you be sustaining these investments in the context of the current macro environment? And how should we think about your product flow in 2016? Can you sustain this as it has been the last few years? Or should we be seeing a more cautious stand, given where industrial markets in particular are?

Well, I would say it's a couple of things. First of all, as I sort of alluded to a little before, we see some great opportunities in some of our end markets, so whether it's in the reproductive health, whether it's in food, whether it's emerging diagnostics or the laboratory services. And we think it would be unfortunate to not invest in those opportunities because we think there'll be potentially significant growth down the road. That's number one. I think the second thing is we're starting to see I think good insight into the opportunity to expand gross margins. I think it's an area where, if you look over the last couple years, while we've had good operating margin expansion, it's largely come from leveraging of our operating expenses. And as we've done some factory rationalization in shipping in the past, we're now sort of going into the factories themselves and driving Lean initiatives and focusing more on the supply chain. And so I think we're more confident that over the next couple years we'll be able to see improved gross margin and use that to sort of, in some ways, invest more in the businesses. And I would say the third aspect of it is I think we're trying to be more focused on where we're investing. And I think what you'll see going forward is a more concerted effort to invest in those areas where I think we've got leadership positions and terrific capabilities. And so I think it's a combination of all those things.

Okay. Sounds good. And maybe if I could sneak in a final one. The foreign exchange surprise on the bottom line, you called that out, of about $0.02 per share. It seems like at least relative to my motto, that wasn't that big of a difference on top line. Was there something about the mix of currency that happened this quarter? Where was the surprise?

Well, I think if you look at relative to when we guided in October until the end of the year, you saw some significant movement on foreign exchange, not only with some of the major currencies, but probably in particular in the emerging markets. So I think when you look at our split of our international, of course we've got a fairly heavy concentration in emerging markets, and if you look at the movement that's occurred in the fourth quarter, it's been much more significant on the emerging market side.

Okay. Thank you, guys. And I'll get back in queue.

Okay.

Thank you. And our next question is from Derik de Bruin with Bank of America. Your line is open.

Hey. Good afternoon.

Hey, Derik.

Hey, a couple of questions. So, looking at the – if I heard you right, Andy, you said 40% reported operating margin expansion in 2016. So, that's about 18.1%-ish in 2016. So can we talk a little bit about forward operating margin expansion, and that 20% target? I mean, obviously, FX has been a huge hit to the margin target that you laid out back there (35:02). So can you just put this in terms of thinking about the longer-term trajectory, where's this going? Is 20%, 22% still in the cards?

I think it is. I think we've made a conscious decision, though, as Rob mentioned, to invest some of that back. Our goal is not to get to 20%, 22% at all cost. So we're investing some of that back this year. But I think, underlying all this is the fundamental growth that I think still supports the 60 basis points to 80 basis points. And I think we're going to derive potentially more upside from that with some things that are going on in our gross margin that Rob just mentioned. So I think, at this stage, it may not be completely linear, but I think two things. One is we're going to continue to do the things that drive operating margin, whether that be Lean or indirect spend. But I think a lot of these investments that we're making in new products are going to start to convert into revenues that are going to be higher margin as well. So I think, if you look at it from a three-year or four-year point of view, which is the way we look at it, we still feel very, very good about our ability to hit that 20% to 22% operating margin.

Great. So I want to talk a little bit about the acquisition you just did, the Vanadis for the NIPT technology. So, a couple of questions on this. First one is, what's going to be the incremental R&D spend to sort of get that to market? I mean, I know just looking at the white paper that they have out, I mean I know there's a proof of principle. And they've had some clinical trials – clinical data that's out. But it still actually looks like it's a ways. Like, what's the investment, what's the timeframe before that's going to be ready for prime time?

So I would say, if you look at the incremental R&D investment we're talking about this year, probably half of it or so is coming from Vanadis. And we're quite excited about the opportunity here. And the way I would describe it is, I think we understand the screening market probably better than anybody, with our work in newborn and prenatal. And our sense is, it's critical to focus on the workflow. So, rather than just looking at the detection technology, you've got to look at sample collection all the way to the patient report. And while we feel that NGS is identified with NIPT, it's identified a significant need and opportunity to provide an alternative to invasive screening. Our concern all along has been that the complexity of NGS, at least how it's done today, is not conducive to sort of large scale population screening. And therefore, we thought, and we've been looking for and continue to look at different technologies in a way that's sort of democratized non-invasive screening. And our sense all along is it's got to be a simpler format, a simpler work flow and one that can be sort of deployed into the labs that are out there today. As you may know, there's probably 1500 biochemical labs in the world doing clinical tests either through newborn or prenatal. Our sense is probably 100 or less than 10% are actually doing some kind of NGS per clinical testing. So, clearly, we need to define or I think there needs to be a simpler work flow and that's what excites us about Vanadis. It's simple, it's automated. You use basically one instrument. But to your point, it's early and so we need to invest, but we're quite excited about it. And it fits well within our current prenatal capabilities and channel.

No. I mean, certainly, it fits in with your work flow. I mean the readers and microplate reader. Just the question I have on it, I guess, from a technical standpoint and maybe you may need to go with this offline, is that I know it does a – you take the cell-free DNA fragments and you convert them into circles like that. And I guess it's like what's the efficiency in terms of doing the conversion and the rolling circle like this? And then we can – this is may be too technical, but I'm just curious to see if it's high enough efficiency to sort of deliver the counts that you need on this.

Yeah. I think our guys have looked at it. And, of course, the other thing, it uses imaging technology with fluorescence, and we understand that well. But to your point, it's early days and we'll continue to invest in it, but we're quite excited about it. And this is a team that's been successful in the past and so we're feeling pretty good about.

Okay. Great. Thanks.

Thank you. Our next question is from Doug Schenkel with Cowen & Co. Your line is open.

Good afternoon, guys, and thank you for taking my questions. So, first topic is margin expansion. You've guided us to model, I think it's 50 basis points of constant currency operating margin expansion. This is a bit below what I think many were expecting. So, two parts to just trying to get at this topic. One, does this guidance fully capture the margin relief associated with the inventory issues you're working through last year associated with the Waters' LC deal? And then, secondly, keeping in mind that part of the reason margin isn't higher is that you plan to hide an investment in R&D. You've been talking about your R&D investment leading to new product acceleration at the top line. Really is that being a major driver to revenue growth or revenue acceleration? It's not apparent based on recent results and your guidance that this is happening. So can you just talk about whether you did hit your 2015 new product revenue target of $35 million and what's embedded into 2016 revenue guidance for new products?

Okay. Doug, this is Andy. Maybe I'll take the first part of the question and Rob will take the second part of the question. Our stated goal is and continues to be we think we can, with mid-single-digit growth, drive operating margin expansion in the 60 basis points to 80 basis points, some cases higher. We made a conscious decision this year because of a couple of what we think are very promising R&D programs to invest. And so, that is really the headwind to the margins. We're going to continue to try to drive more, but I think we feel like it's prudent to come out with a number that we feel like that we're comfortable with, at least at this point in the year.

Yeah. And what I would say is, first of all, relative to the NPIs, I think we've talked about that we've exceeded the $35 million that we laid out early in 2015 from the new product. I think it was probably closer to $40 million actually when you look at the results. And I would say, as we go here in early 2016, we think we'll do at least that amount, if not more. So I would say the new products are doing well and we're getting them out into the marketplace. I think the thing to consider though is, and I've sort of mentioned this in the prepared remarks, is we set some goals together – put some goals out there in January that talked about 3% to 5% EPS growth margin expansion. And despite some of the challenges from an economic perspective, we met or exceeded all of those. So I would say the NPIs are doing well, but of course some of the things where some of the other end markets have been a little bit more challenging from a macroeconomic perspective is offsetting the progress we're making on the NPIs.

Okay. And one more. The commentary on industrial exposure, I mean I think we're all hearing what's going on in the news and seeing some of the data. But your commentary is a bit more negative than I think what we've heard from others in the group thus far. Your percentage of sales exposure isn't all that different from the diversified tools peers. So I'm just trying to get at what's driving this for you? And why would this be tougher in Q1 and improve over the year? Sorry to be basic about this, but it's just hard to understand why this would be a temporary cyclical industrial concern. Is it comps? Or is it something else? Thank you.

So maybe I'd sort of clarify. So let me separate. The industrial concern is one of a full-year concern. And as I said, it's as simple as we grew mid-single in 2015 and we think that moderates to low-single. So, that's not necessarily a Q1 issue. The Q1 issue is more tied to medical imaging and some sort of large revenue recognition that we had in informatics in the first quarter. So those two are separate. The industrial one is more of sort of an annual issue. I don't know if it's unique for us based on our product mix, but we are a little concerned about it. To your point, it's not a huge exposure for us. But on the margin, it could be 30 basis points or 40 basis points of growth there. And then, I think the other one is we're concerned about the comp on pharma. And so, instead of growing high-single-digits as we did in 2015, we probably think that moderates to sort of mid-single. Those are basically the two things as we look into 2016 versus 2015 that we think are different.

Okay. Thank you, guys.

All right.

Thank you. And our next question is from Tycho Peterson with JPMorgan. Your line is open.

Hey, guys. It's actually Patrick Donnelly in for Tycho. Maybe just looking at the China screening market, can you talk about the impact from moving – the Year of the Goat last year was a bit of a headwind, moving through Year of the Monkey this year. Maybe just talk through how the birth rates were impacted last year and what kind of tailwind that could lead to screening revs this year?

So, if we look at 2015, births in China were down about 10%. So we think it recovers that and maybe goes a little bit more. It's a little hard to parcel that out specifically because you've also got the one-child relaxation. But our sense is you will see births up this year relative to China, and whether that's high-single-digits or low-double-digits, it's probably in that type of range.

Okay. And then, staying in China, just on the nucleic acid testing market, there was a delayed implementation there. Can you just talk through where we stand with the tenders and what the impact on 2016 could be from that market?

So we saw a very strong tender activity, particularly in the fourth quarter. And so, to a large extent, while we slowed down early in the year, I would say they sort of more than made up for that with the strong activity in the fourth quarter. And I think as we – or as Andy mentioned in his comments, we are very pleased with our win rate there. So our expectation is as we sort of get to the latter part of 2016, we'll start to see some of the ramp up in the reagents. Normally what we've seen historically there's probably a six-month implementation to when they get the instruments put in place and sort of they run some controls and tests and those types of things. So our expectation is we'll see the benefits of the win that we saw in fourth quarter in the latter part of 2016.

Are you still thinking that business could ramp to call it $50 million over the next three years?

Yeah. Yeah.

That's right. Yeah.

We feel good about that.

We're north of $10 million this past year and with these placements in the reagent flow coming through, it'll ramp really quickly.

Got it. Thanks, guys.

Our next question is from Jonathan Groberg with UBS. Your line is open.

Great. Thanks. Andy, just I wasn't sure I exactly understood your answer. So, for 2017, do you still think you're going to do 20% operating margin?

2017? No, I didn't – I actually wouldn't respond to that. We were talking longer term. But I would say, given the investment and depending on where FX is, I think it's still the goal. But I think if FX continues to be a headwind, it's going to be a difficult goal. And again, as I mentioned before, we're not really trying to get to 20% just to get to 20%. We're trying to do it in a fairly logical, methodical way and invest back. And again, we made a conscious decision for 2016 to make those investments.

Sure. I get that. Your target before had been 20% and from your previous answer it wasn't clear to me. So, yeah, we should adjust for FX and maybe some of these investments in terms of what we're thinking about for out margin in 2017.

I think that's fair. I mean, if you go back to our 18% guidance, I mean we came in at 17.6% that year and the difference was FX. So, I mean, there are going to be things that impact our ability to get there, but that's still our goal is to stripping that out and get to 20%.

Yeah. I would say, John, we're trying to control the things that we can control, and obviously FX is a difficult one to do. I think if you went back and tried to do it on sort of a pro forma basis based on a euro of $1.25 or something when we set this up, my sense is we probably could get to the 20%. But as we sit here at $1.10 for the euro or whatever, I think that's going to be more of a challenge. The other thing is, when recently in January we came in and rather talked about a 2017 target, we've talked more about a longer-term 2020 target and felt like we could go another 400 basis point to 22%. So I think that's how we're modeling it. As we model that, we had R&D going up the 6% of sales or a 50% increase in R&D, and the way we're offsetting that is we expect 300 basis points of gross margin expansion and about 150 basis points of SG&A.

Okay. Thanks for the clarification. And then, Rob, PerkinElmer has obviously been on a journey for a while and I think you made a distinct point to say, look, you're not trying to be all things to all people. You want to focus in the four key categories where you think you can be a real leader in your markets. And I'm just curious, as you've done the analysis and thought about the strengths that you want to have as a company and the leadership positions, how does – is it about throwing more money in some of these categories? Is it about being smarter in some of those categories? Is it about – is there more you can do from a business development standpoint, maybe divesting out of certain assets and utilizing those funds to invest more of the M&A to increase your competitive position? I'm just kind of curious internally how you kind of come to the decision to jack to boost the R&D spending?

Yeah. Well, first of all, I think it's all the above. I mean, but some we have more control over than others. So, in some of the more attractive areas or areas where we have stronger positions, we'd like to be more active on the business development side or M&A side, but again that's hard to predict. So we'll continue to look there. But, in the meantime, we'll try and control the things we can control. And so some of that is where we see opportunities and we want to be able to do that. But, as I mentioned before, this is always going to be a balance for us. I mean, we're not – it's going to be rare in a situation where we would come out and say we're not going to grow margin or EPS at all. But I think we're constantly trying to walk a balance between making sure we're returning cash to the shareholders and expanding operating margins, but at the same time investing in those areas that we think have great long-term prospects. So it really gets down to focus and prioritization. And so one of the things I was trying to lay out earlier is to say, look, I think you're going to see a much more differentiated and focused investment profile at PerkinElmer going forward. And I think the four areas that I identified are ones that are clearly getting a disproportionate part of the investment. And for the foreseeable future, I think that'll be the case.

And just one last one on that, a bit of a follow-up. You mentioned, Andy, I think 50% of your cash flow to buybacks. Should we assume – is there anything in the pipeline that you think could happen from an M&A standpoint? And should we assume that those four categories that you listed is where you'd be most interested from an M&A standpoint as well? Or is there a chance you'd go to a new pillar?

I think that's right. I mean, this is half our free cash flow we still have. As I mentioned, we're 1.7% net debt to EBITDA, so we still have some leverage as well. And we think we have a number of things in the pipeline. So I would say it's really no different than any other time we've gone to it in a year.

Thanks.

Thank you. Our next question is from Ross Muken with Evercore. Your line is open.

I'm just going to touch quickly on a question that was sort of just asked. But as you think about the sort of transformation of the asset, and it's very clear you're kind of prioritizing growth here and that obviously makes sense given what longer term drives value. I guess, as you've seen some of the transactions already year-to-date in the market within or around some of the areas that you play, I guess when you think about your ability to execute at least maybe something moderately larger. Because it's been a bit of time since we've seen you do something more than sort of a small tuck-in. Is it always price, is it sort of a debate internally on fit, is it maybe not the right time? I'm just trying to get a sense for – again, given just the multitude of stuff that we've seen, I'm not asking you to comment on anything specifically, as you think about it, the various reasons? And then what's likely in your mind changed to allow you to maybe do something a little bit more substantial? Or are we okay with sort of just the small tuck-ins?

So I would say, first of all, it starts with strategy and fit, right? I mean I think, when we think about our acquisition pipeline, we set forth our priorities or what our highest priorities are and then we look for the assets that will continue to build our capabilities in those applications or end markets that we think are most attractive and fit best with our strategy. So I think it starts there. Then, of course, if you decide a strategic fit, it then gets the valuation and can we get good financial returns. And of course, one of the things we're always looking at is the alternative is either to invest back in the company or quite frankly invest in PerkinElmer by buying back stock. So, that's the process that it goes through. But, clearly, it starts with a strong strategic fit and attractive assets. I mean, as you pointed out, I mean I think going forward, and I think we've said for some time, probably the more likely scenario is we do more sort of bolt-on transactions, and maybe bolt-ons by their nature hopefully get bigger. But as I think, when we look at the opportunity or the alternative to do something larger, either because of fit, strategy or valuations, we don't see much out there quite frankly.

Makes sense, Rob. And maybe I can just sense from the degree of the questions, obviously maybe modest disappointment on sort of the 8% FX neutral growth. I mean, it seems to me in this environment that that's a reasonable outcome given the investments. But I guess, as you think about the go-forward, I'm not asking for specific long-term guidance, but one would think, again to my prior point, the investments you're making should ultimately yield better top line and then hopefully then more margin expansion. So, I guess, as we think about the next few years, obviously going forward, I mean clearly your goal is to be at a materially higher earnings growth rate, correct? I mean, I guess when you were debating this with the board, was the trade-off, yes, we may be less on currency neutral this year, but the hope is this will yield a better outcome than where we were maybe prior to these investments going forward?

Yeah. I think, absolutely. I mean I think the goal is that we make some investments this year, but that puts us in a stronger position going forward. And so the thought here is that, as you go out a couple years, both the top line and the corresponding EPS growth accelerates. And so, I mean that's the purpose of sort of taking it up. So, again, it was just some significant opportunities we saw in the marketplace and we think now's the time to make the investment. And even though, let's say, relative to our historical track record the EPS growth is a little lower, we think it's the appropriate investment to make. And over time, we think this will yield significant financial returns and a stronger company.

Makes sense. Thanks, Rob.

Yeah.

Thank you. Our next question is from Dane Leone with BTIG. Your line is open.

Hi. Thank you for taking the questions. Just a point of clarification in terms of the commentary. Do you guys consider 3% mid-single-digit growth or low-single-digit growth?

No, I mean, generally the way we think about it is we would say sort of 4%, 5% and 6% as mid and 1%, 2%, and 3% as low.

Okay. So, kind of in that context and in line with some of the other questioning on the call, how do you think about the natural growth rate? You guys have been kind of on that mid- to low-single-digit rate for a while now. And arguably, by comparison, other peers in your group kind of have put up some higher growth, even despite being conservatively larger. Do you feel that you might just be kind of investing in structurally lower growth markets and maybe you need to kind of consider or reconsider where you're kind of focusing over the long term for exposure?

Well, I guess I would maybe initially take exception to your premise. So I guess, if I look back six years, I can only think of one year where we grew less than 4%. So I would say five years of the last six years we grew mid-single-digits.

Okay. I mean, do you think that kind of 4% is the right growth rate?

Well, I think you've got to look at it, first of all, if you go back a couple years it was higher than that, but I think you also need the consideration is, if you look over the last couple years, I'm not sure the macroeconomic environment was one that, when you look across the globe, particularly lately in the emerging markets, it's been a little challenging. Of course, 28% of our revenue – and this is something we've worked on because we think longer term it's got strong prospects, but with 28% of our revenue in emerging markets, places like Brazil, Russia, et cetera, that's created a little bit of a headwind. So, actually, I feel pretty good with despite what we've seen in some of the challenging macroeconomic environments that we've been able to put 4% organic growth up. Feel pretty good about it quite frankly.

Okay. So, in terms of the growth rate, do you think 19% without the FX adjustment is the right operating margin if we look to 2017 now?

Well, I don't know that we want to get into sort of forecasting 2017 or 2018 or 2019. I mean I think what we've said is here's our forecast for 2016. I think, going forward, our expectation will be we'll continue to invest but we'll get, hopefully, good gross profit and gross margin expansion. And again, we've set a goal out there by 2020 to be at 22%.

Okay. Thank you.

Thank you. And our next question is from Bill Quirk with Piper Jaffray. Your line is open.

Great. Thanks. Good afternoon, everybody. First question...

Hey, Bill.

Hi, there. First question, Rob, I guess, can you help us think a little bit about the academic market in Japan, kind of what are you seeing and are we starting to see any funding shake loose?

Well, the academic market in Japan has been challenging for us, probably all of 2015. I was there a little while ago and I would say I'm not optimistic we're going to see a big turnaround there anytime soon. I would say, maybe the back half. I would say the only thing that's potentially happening is the comparisons obviously get easier this year. So maybe we'll see some release of some funding, but I think it continues to be challenging. I think what we're seeing in our business is the consumables still to do okay, but I would say in the capital equipment area is where the challenge has been. And unfortunately, in Japan, for us it's probably more of an instrument play than it is a consumable play. So we're hopeful that we'll see some improvement soon, but I'm not optimistic at least in the first half of the year.

Got it. Understood. And then, and you can probably categorize this as somewhat of an oddball question, but it's certainly garnering a lot of press. So, Zika virus, if we think about newborn screening, kind of how much exposure do you have in South America and are you guys keeping an eye on this at all? Thanks.

Yeah. I mean, Brazil for us is not a large, that's probably the majority of where our newborn screening business is. We're growing in Mexico. But I would say there's sort of pluses and minuses, I mean obviously to the extent it reduces birth rate, that's not great. But I would tell you it is increasing sort of awareness of the whole sort of newborn health and newborn screening. So we're actually getting a number of inquiries as to sort of the opportunity to focus more and more on the newborn screening in Latin America. So it's obviously an unfortunate situation currently, but I think longer-term it is raising some awareness.

Okay. Got it. Thanks, guys.

Okay.

Our next question is from Isaac Ro with Goldman Sachs. Your line is open.

Good afternoon, guys. Appreciate you guys taking the question.

Sure.

There's been a lot of – yeah, there's been a lot of inquiry around M&A so far, but I was interested in maybe exploring divestitures. I think you guys probably don't get enough credit for having been proactive, modifying the portfolio over the years. I'm curious if divestitures are in any way part of the operating plan over the next few years to hit your goals on the financials.

Well, I think as we become more focused and prioritize our investments, I think there probably will be a couple product lines that over the next year or two years probably become strategic for us. So, I mean, I don't know if it'll be a significant amount of revenue, but I wouldn't be surprised if in 2016 and probably in 2017 you see a little bit more focus on the portfolio, which will entail disposing of some of the product lines.

Got it. And then maybe a follow-up on the organic growth side. You had a lot of questions around the sort of sustainable organic growth rate. Do you guys need to do M&A to hit that mid-single-digit range that you aim for, just in the context of the current macro? Or do you think some tuck-in M&A would be needed to get you to that mid-single-digit range? Thanks.

No, I don't think so. I mean I think as we look at the portfolio we have and we look at the end markets, and I think one of the things we didn't do (1:03:24) is just sort of shift the weighting a little bit. And obviously that's – part of the way we're doing that is through investment. But we have a number of our businesses and product lines that are growing well into the high-single-digits and low-double-digits. It's just that we've got to grow out in some of the areas that are a little bit slower growth. We've talked about it in the past. I mean we've got a strong position in radiochemicals and radiometric detection. It's a great business. We make a lot of money. But that every year probably grows low to mid – or declines low- to mid-single-digits. And so we've got a couple of those that obviously put a little pressure. But so over time as we shift the weighting to the higher growth areas, I think mid-single-digit is the appropriate number for us.

Got it. Thanks a bunch.

Okay.

Thank you. Our next question is from Dan Arias with Citigroup. Your line is open.

Afternoon. Thanks for the question. Rob, just to go back to the industrials, are you able to put some numbers to the impact of what's going on in the energy sector on your GC and your ICP-MS franchises? I do appreciate that the exposure is smaller, but kind of just trying to better understand the effect that rate closures and oil prices are having, as we read what our energy guys are publishing.

I would say the industrials exposure for us across the company is probably in the maybe 10% or so. So it's not a huge number. If I was sort of prioritizing industrial exposure, it starts with sort of fine chemical and petrochemical. So oil and gas is sort of a little further down. I think where we're seeing it though, so it's not specific to oil and gas or sort of natural resources. It's the sort of knockoff effect that I think it's having. So we're seeing the impact of some countries that are relying on oil revenue. Clearly, they're pulling in. Clearly, in the emerging markets, the lower dollar or the stronger dollar is having an impact. So I think the concern on the industrial side for us is more broad-based than it is specific to oil and gas.

Thank you. And our next question is from Jeff Elliott with Robert W. Baird. Your line is open.

Yeah. Thanks. First one for Andy here. Could you give a guidance number for free cash flow for 2016? And then you talked about using half of that on buybacks. How should we think about the pacing of buybacks during the year?

Yeah. I think, for 2016, we're going to shoot for what we've always shot for, which is one times net income. So, that'll be about $300 million of free cash. This is the first year we've had a three handle on our operating cash flow. So we hope that this year we'll have our three handle on our free cash flow. So, that's basically $150 million in buyback. I think you'll see that through the year maybe a little bit more front-loaded, but it will probably average to a weighted average share count of 111 million shares. So you can kind of do the math on that.

Thank you. Our next question is from Dan Leonard with Leerink. Your line is open.

Thanks. I was hoping you could perhaps elaborate further on the sources of the 70 bps in gross margin expansion you're expecting in 2016. Rob, I think you made a comment about Lean earlier, but I thought there might be more to say.

Yeah. I would say a number of things we're doing. Some of it is Lean and the in fact through we did get more efficiency, and where we'll see that is sort of expand our capacity. And then consequently we were looking at actually pulling some stuff that we've outsourced historically in, so we think we can get some savings there. I think clearly in the supply chain is I think we've talked about before. When we were moving in a number of the factories, we've been probably or we weren't as aggressive on the supply chains. So we're putting plans to do that. And then I think the other thing that will help is clearly the mix shift as we – partly the new products come out also as we sort of focus on these areas that have a tendency to be higher growth and higher margin. So I think the combination of those will make up the 70 basis points. I would say we're assuming for 2016 very little price. And so I know if we can get some price, that'd be great. But our assumption is that price is pretty flat for us. And so it's really coming from productivity and mix.

And our next question is from Paul Knight with Janney Montgomery. Your line is open.

Rob, earlier in your dialogue, you had mentioned the software acquisitions coming together along with your other focused M&A in Life Science. Can you talk about how the software business looks, like Cambridge and Spotfire, and kind of that convergence point you're starting to see?

Yeah. I think it continues to perform well. It had a good 2015. I think we're forecasting probably high-single-digits for it in 2016. And our strategy in the informatics area is that we've built some great capabilities around the ability. For example, Spotfire is a very powerful tool with data. And then, of course, we've got our electronic notebook, which is great at sort of collaborating the data. And so what we're doing now is building that bridge, because the challenge is getting access of that data sort of easily. So what we're looking to do is take – if you think about ELN as a data repository and you think of Spotfire as the ability to give you good analytics and visualization, we're now working on that sort of in between that gap. So our approach is to make sure that we get the right data to the right people very easily in sort of a scalable, very useable format. And we're getting a lot of receptivity around that, and we're building some terrific capabilities. And then when we do that, it allows us to better leverage what we're doing on the instrument side and build that linkage. So we fundamentally create the informatics and the software to allow people to take data out of a repository, analyze it real well, and then we facilitate getting that information into the repository through our instrument in imaging and other capabilities. And we're seeing a fair amount of receptivity with a number of our customers.

Our next question is from Steve Willoughby with Cleveland Research. Your line is open.

Hey, guys. Thanks for taking my call. It's actually Josh in for Steve tonight. Just making sure I didn't miss it, did you guys provide a tax rate on the quarter?

We did. It's for the year. We basically said flat to 2015 or 19.5%.

Okay.

Thank you. Our next question is from Brandon Couillard with Jefferies. Your line is open.

Hi. This is Sachin in for Brandon. Thanks for taking our questions. Will you discuss the strength in operating margins you saw in the period, particularly in Environmental Health? Was it a lot stronger than we had in our model? And speaking of like the 50 bps of core operating margin expansion for the year, would you divide that up between like Human Health and Environmental Health?

Sure. For the quarter, on the Environmental Health side, we saw a couple of things. One is we saw a very positive mix shift into MATCAR (1:11:09), and we also talked about some licensing revenue, very high margin. And then we also did a lot of work in the fourth quarter around some cost controls. And so I'd say that's about half and half. And again, they had a fairly easy comp from a year ago. It's kind of the flip of that with Human Health where we saw very, very strong margins in the fourth quarter of 2014, so a much more difficult comp for them. So, a little bit of the comp, a little bit of the mix and some cost controls. As far as the 50 bps, I think that it's fairly evenly split. If you look at the full year for 2015, I think both businesses contributed. I think if you move forward to 2016 and look at the margin expansion, you're going to see more of it coming out of Environmental Health because we're really making the investments in the Human Health segment.

Yeah. If you look at the four areas that I highlighted, three of those come out of Human Health: so the reproductive health, the emerging diagnostics and the laboratory services. So clearly there's much more investment going back into Human Health this year, and so the majority of the margin expansion we expect will come out of Environmental.

Thank you. And our last question is from Bryan Brokmeier with Cantor Fitzgerald. Your line is open.

Hey. Good afternoon. Thanks for squeezing me in. Rob, could you elaborate a little bit on the strengths, the level of strength you're seeing in the newborn screening market in the U.S.? And the benefit you might be seeing from any more – if you're seeing any more states expanding their test menus, including anyone yet adopting LSD screening?

So I would say, first of all, the strength that we've seen historically has been probably more outside the U.S. than in the U.S. I mean U.S. is growing, but if you look at the strength it continues to be in emerging markets in China and those types of areas. What I was referring to was the number of investments that we're making in the LSDs and the TMV and those types of things, which we're excited about, but you're probably not going to see those into the U.S. market probably till end of 2016, 2017 at the earliest. So these are investments that you're probably not going to see. The U.S., the growth there is coming from our SCIDs platform that we introduced about a year or so ago. So, like I said, we're excited about these investments. We think they continue to build out our strong position in the marketplace. But I think a number of these will not have meaningful revenue in the U.S. probably till 2017 because generally what we're doing with these tests is probably going to Europe first. So we'll see them introduced in Europe probably as a CE-marked IVD and then you'll see it later in the U.S.

Thank you. I'm not showing any further questions. So I'll now turn the call back over to Rob Friel, Chairman and CEO.

Thank you very much. First of all, let me wrap up by again thanking you for joining us this afternoon. And I want to reinforce the terrific opportunity we have to continue to innovate across our capabilities of detection, imaging, software, and service to enable critical insights that will have a dramatic impact on improving human environmental health for the better. I hope you all have a great evening. Thank you.

Ladies and gentlemen, that does conclude our program. And you may all disconnect. Everyone have a great day and a great weekend.