Good afternoon, ladies and gentlemen and welcome to the PerkinElmer 2016 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Tommy Thomas, Vice President of Investor Relations. You may begin..

Thanks you, Amber. Good afternoon and welcome to the PerkinElmer third quarter 2016 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 November 21, 2016.

Before we begin, we need to remind everyone of the Safe Harbor statement 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 may 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 the GAAP statement in the 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. This afternoon I would like to discuss our third quarter financial results as well as give an update on the progress of our strategic priorities. During the third quarter, we continued to drive strong operating margin expansion and EPS growth.

However, our top-line performance was disappointing. Specifically, adjusted operating margins increased 190 basis points to 18.9% and adjusted EPS increased 13% to $0.68 per share over Q3 last year, while revenue was $548 million, representing a reported organic decline of 2%, and flat when excluding the extra week in the comparable prior period.

Looking first at our end markets, we are seeing market conditions consistent with what we have experienced over the last several quarters. In the areas where we have prioritized as attractive long-term growth opportunities which include reproductive health, emerging diagnostics, food analysis, and pharma services, we continue to see strong demand.

However, in government and academic, as well as industrial, environmental and medical imaging, end market conditions continue to be challenging.

Relative to Q3, our revenue performance was negatively impacted by the additional week we had in third quarter last year as well as a more significant headwinds than expected in radiochemicals and our inherently more capital-intensive businesses, including Medical Imaging and Environmental Health.

While most of the headwinds are market-related, we believe that our decision to deprioritize certain slower growth segments of the portfolio is negatively impacting revenue growth in the short-term.

Fortunately, from a profitability perspective, the significant traction we continue to generate on operational improvements more than offset this temporary revenue shortfall.

In addition, because the areas we are focused on not only grow faster, but also generate much better incremental profit flow-through, the company will inherently become much more profitable as the portfolio continues to shift in the direction we have outlined.

This is reinforced by both our Q3 results as well as our financial results through the first nine months. Year-to-date through the end of the third quarter, our growth areas of focus are averaging low double-digit organic growth with operating margins of greater than 25% and incremental profit flow-through in excess of 45%.

Year-to-date, absolute revenue growth is $5 million or 2% organic growth, while adjusted operating income has increased $19 million resulting in gross and adjusted operating margin increases of 100 basis points and 110 basis points respectively, and adjusted EPS growth of 12%.

Furthermore, the margin and EPS growth has been achieved while we have increased our spending in research and development by 7%, or 50 basis points as a percentage of revenue.

As we reflected in our third quarter results, we are disappointed by the top-line performance but pleased to see the operational execution continuing to improve gross margins and the ongoing validation of the financial benefits from our portfolio realignment.

We will continue to seek inorganic growth opportunities through bolt-on acquisitions and strategic partnerships that support our investments in these areas, as well as review the composition of the portfolio and prune where appropriate as we shift the portfolio to higher growth and profitability.

In addition to the inorganic moves, we continue to accelerate this transition by fueling organic growth through increased R&D as well as other organic moves.

In that regard, we announced a significant change in our organization at the end of September, providing what we believe will be a more effective operating structure to facilitate this portfolio shift and better position PerkinElmer to strengthen our core product offerings and better align with our customers' requirements.

As of the fourth quarter, Diagnostics is now a standalone segment, and we formed a new segment, Discovery & Analytical Solutions or DAS. The DAS segment combines our former Research and Environmental Health businesses. These new segments have now replaced our previous Human Health and Environmental Health segments.

Looking specifically at the Diagnostic segment, we have now fully consolidated our clinical business offerings which are subject to regulatory oversight.

We see significant growth opportunities across reproductive health, emerging markets, and infectious disease markets, as major macro trends generate over $2 trillion in healthcare spending each year.

Year-to-date, our Diagnostics business is growing about 10% organically, with our top-10 Diagnostic customers growing about 20% over the last 12 months as we continue to drive our reproductive health and emerging market Diagnostic strategy.

And as we continue expanding our capabilities in these diagnostics areas, such as our Vanadis non-invasive prenatal testing currently in development and on schedule, we are confident in our ability to open up new opportunities for growth.

Additionally, as part of the recent reorganization, we formed an applied genomics group within Diagnostics by aligning our company-wide genomics offerings to better serve the fast-growing genomics market, particularly next-generation sequencing.

Through this consolidation, we can now more effectively differentiate PerkinElmer as an integrated provider, helping customers with their preclinical and clinical applications. Ultimately, applied genomics will provide an enhanced sample to sequence or workflow proposition for NGS applications.

The DAS segment on the other hand will be able to better coordinate how we serve our applications-focused customers, especially within pharmaceutical and biotech services and food analysis, which we believe will be strong catalysts for future growth.

By changing how we are organized, we are taking the next step in our evolution to drive improved customer focus, facilitate more value-added collaboration, and deliver breakthrough innovations. During the quarter, we also continued to advance our efforts to improve our operational efficiencies across the organization.

While Andy will provide greater detail on the financials, we delivered stronger than expected gross margin improvement in the quarter. Increasingly, the integration of R&D and operations will become even more critical to how we deliver value for our customers, as we more thoroughly synchronize the design and manufacturing of our products.

A key driver of our success is our implementation of Lean as we continuously work to enhance our manufacturing, supply chain, and business processes. Andy will share more details on the actions we've been taking, and we are already seeing early wins from our projects targeting quality, cost, capacity, cycle time, and productivity.

In the quarter, we also were able to successfully leverage our SG&A spend to fund our increased research and development expenditures. With regard to innovation, we continue to introduce new products into the marketplace, as offering truly differentiated solutions is an important component of our strategy.

Based on our performance in the third quarter, we remain confident that our new product introductions this year will generate an incremental $40 million in revenue. In addition, we continue to increase the importance of new products and innovation throughout the organization.

During the third quarter, we held our second annual innovation summit, which brought together over 175 of our top scientists, engineers, and product managers with several key customers to facilitate collaboration and sharing of ideas.

At this event, we also recognized 25 PerkinElmer associates who were responsible for securing two or more patents over the last 12 months. The recent organizational changes announced at the end of the quarter should permit a more efficient use of our R&D spending, as well as better enable us to prioritize our spending toward higher growth areas.

These changes, combined with our commitment to increase R&D spending as a percentage of sales, should accelerate the increase of our vitality index over the next several years. As we approach the end of 2016, our ongoing operational improvements in the business should help mitigate the impact of softer, near-term macroeconomic conditions.

Meanwhile, we will continue to direct both our organic and inorganic investments toward our four key strategic focus areas, shaping our company into a faster organic grower with higher margins, stronger cash flow, and lower volatility.

But given softer demand for analytical equipment, and as we work through the realignment of our portfolio, we remain cautious on the top-line. We are, therefore, forecasting low single-digit organic growth for the fourth quarter and adjusted EPS of $0.85 to $0.87.

Assuming we achieve this guidance, our results for the full year would be organic growth of 2%, adjusted operating margin expansion of 90 basis points, and adjusted EPS growth of 8 to 9%. 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 year-to-date and third quarter results as well as details around our fourth quarter outlook.

As Rob mentioned, our third quarter performance was mixed as revenues fell short of expectations; however, we continue to make very good progress towards improving our operational effectiveness, allowing us to deliver significantly better gross and operating margins along with strong adjusted earnings per share of $0.68, up 13% from the comparable period a year ago.

For the third quarter, adjusted revenues were $548 million representing an organic revenue decline of approximately 2% from the same period a year ago, while year-to-date organic revenues are up approximately 2%.

Looking at our end markets for the third quarter, we continue to see broad based strength in Diagnostics, healthy pharma and biotech demand, lower than forecasted academic and government sales, and essentially flat industrial revenues.

We did see significant softness in environmental capital spend, particularly at the end of the quarter, as well as in Medical Imaging, which declined double-digit.

Year-to-date, we've seen significant strength in our focus growth areas as we saw better than expected low teens organic growth in food, double-digit organic growth in Diagnostics, and low single-digit organic growth in pharma and biotech, in line with our expectations.

In contrast to these strong performances, Industrial, Academic, and Government markets have been slower than expected, experiencing low single-digit organic revenue declines with Environmental experiencing a marked deceleration towards the latter part of September.

Medical Imaging remains challenging, and has underperformed versus our initial expectations entering 2016.

Looking at our third quarter and year-to-date results by geography, emerging markets remained resilient with organic revenues growing high single-digits in both the quarter and year-to-date, while developed markets softened, declining mid-single digits in the quarter.

Strength in China and India continued with organic revenue growth greater than 20% and 10% respectively in the third quarter with a similar performance year-to-date.

We believe that our focus in continued investment in emerging market opportunities is a compelling strategy and we are actively looking to increase our presence in those higher growth geographies.

As to our operating results, third quarter adjusted gross margins expanded 170 basis points to 48.9%, while year-to-date adjusted gross margins expanded 100 basis points to 48.3%, driven by solid productivity gains and a positive mix from strong Diagnostics and Informatics growth, particularly in the current quarter.

We have broadly rolled out strategy deployment and Lean initiatives across the organization with the aim of making meaningful improvement in operational efficiencies and product quality.

In addition, we have made incremental investments in Lean talent, assembling a global team of experts focused on teaching and implementing key principles and process improvement tools across all aspects of the company.

As a result, we're starting to see early successes as we more efficiently manage operating cost, which is reflected in lower scrap and warranty expenses year-to-date, as well as the creation of additional capacity within our manufacturing operations.

This incremental capacity has afforded us the opportunity to bring in-house a number of previously outsourced manufacturing activities, reducing overall product cost and thereby contributing to incremental gross margin expansion.

We see this momentum building in the coming months and years as we expand these efforts across all of our manufacturing and service operations, giving us increased confidence in our ability to meet our long-term goal of expanding gross margin by more than 300 basis points by 2020.

Moving to our operating expenses, we continue to leverage SG&A and reinvest in R&D. Third quarter adjusted SG&A was down 90 basis points with R&D approximately 50 basis points higher than same period last year.

The extra week in the third quarter of 2015 was comprised of a full week of incremental expenses, coupled with more modest revenue growth, and this had a positive impact on our year-over-year operating results.

Year-to-date, adjusted SG&A is down 50 basis points, driven by prior restriction activities and indirect spend initiatives, while incremental R&D investments are focused on new product development, primarily within reproductive health.

Overall, we were very encouraged by our strong third quarter and year-to-date operational performance as we expanded adjusted operating margins by approximately 190 basis points and 110 basis points respectively.

Turning to the balance sheet, we finished the quarter with net debt of approximately $800 million and a net debt to adjusted EBITDA ratio of 1.8 times. We feel we have significant flexibility to create further shareholder value through M&A and we are actively looking to close on transactions in the coming quarters.

Our operating cash flow generation remains strong with year-to-date operating cash flow of approximately $200 million, as compared to $160 million in the same period last year.

We are beginning to see improvements in our working capital performance driven by system enhancements, which are facilitating our collection efforts, as well as our Lean initiatives, which are helping to lower our global inventory requirements.

Turning to our segment results for the third quarter, Human Health organic revenue was essentially flat, with Environmental Health declining 5% as compared to the same period a year ago. On a year-to-date basis, Human Health organic revenue was up 3%, with Environmental Health flat as compared to the same period last year.

This will be the last quarter we will be operating our operating segments in this format. For the fourth quarter of 2016 we will report our segment results as Diagnostics and Discovery & Analytical Solutions, or DAS, and we expect to have restated results posted to our website ahead of our fourth quarter analyst conference call.

From an end market perspective, our Human Health business represented approximately 62% of adjusted revenue for the third quarter of 2016, with Diagnostics representing approximately 29% of adjusted revenue and Life Sciences Solutions representing approximately 33% of adjusted revenue.

As I mentioned earlier, we had strong and broad based demand across our Diagnostics portfolio, which resulted in a high single-digit organic revenue growth in the third quarter. All of our Diagnostics franchises continue to experience healthy growth, led by Haoyuan blood screening, which grew over 50% in the quarter.

We also saw strong demand for our new India lab services and forecast that demand to continue.

As Rob mentioned, our top-10 Diagnostics customers in both developed and emerging markets continue to rely on PerkinElmer for their critical needs, with sales over the last 12 months growing over 20%, further validating our reproductive and emerging market strategies.

Organic revenue in our Life Science Solutions business declined low single-digits in the quarter, primarily due to the impact of the extra week in the comparable period last year, which disproportionately impacted our OneSource service offering.

We experienced modest growth in academic and government end markets in the third quarter, as pharma and biotech markets remained resilient after adjusting for the extra week. Moving to our Environmental Health business, which represented approximately 38% of adjusted revenue, organic revenues declined 5% for the third quarter of 2016.

During the quarter, we introduced new products at analytica China and this region continues to be a standout for analytical equipment demand. However, slower than expected results in the U.S. and Europe more than offset this strength.

Looking ahead to the fourth quarter of 2016, we believe that our focus on continued operational improvements can help us weather the current slower growth environment.

We continue to expect to see solid growth in our Diagnostics business, partially offset by slower than forecasted academic and government demand, as well as somewhat softer economic conditions in developed markets.

As a result, we are slightly widening our fourth quarter revenue guidance to a range of $610 million to $620 million, representing low single-digit organic revenue growth and adjusted earnings per share guidance to a range of $0.85 to $0.87. This concludes my prepared marks. Amber, at this time, we would like to open up the call for questions..

Certainly. Your first question comes from Jonathan Groberg from UBS. Your line is open..

Great. Thanks a million. So, Rob, can you talk – I know in kind of your more recent comments you obviously had highlighted that you saw some weakness in Europe.

From your comments here, didn't sound as much as – that you were calling things out geographically; it sounded like you were talking a little bit more around your growth businesses versus your non-growth businesses.

So can you maybe just talk maybe a little bit how that quarter you saw develop and if there's anything kind of geographic that stood out to you on the top-line?.

Sure. So I would say, first of all, as the quarter played out – and I think Andy mentioned this a little bit in his prepared remarks. You know, sitting here in sort of the second week in September, we are sort of tracking pretty well to what we would ship historically during a quarter.

And again, just to remind everyone, particularly on the instrument side, it has a tendency to be fairly back-end loaded where the service and the reagents, let's say our Diagnostic business, is more consistent through the quarter, but clearly the instrument business is back-end loaded.

And again, probably second week in September we were sort of tracking maybe even a tad better than what we had historically seen to get to the sort of 2% growth that we had guided to. I would say the last couple weeks of September, we saw particularly on the capital side, a fairly amount of deferrals or push-backs – push-outs.

And I would say, we've seen that in the past, but normally there was the ability either to pull things in or to readjust and still achieve our revenue number. And unfortunately, we were unable to do that in the last couple weeks of this September.

So the real shortfall was on the capital side of things, and our sense is, in talking to some of our customers, is there was a real interest in delaying capital purchases unless it was absolutely necessary. So whether it was capacity or replacement, we did get a sense that there was some deferral in the back part of September.

To your point on the geographic side, we saw that clearly in most all developed markets. The one area that continued to spend through the entire quarter was China. As Andy mentioned, China was up over 20%. And we saw that fairly broad based.

But I would say, outside of China, we did see this capital-intensive side of the business definitely suffer here as we got into the latter part of September..

And then just sticking with the top-line for a second more, I think you said your kind of forward growth initiatives were up double-digits. And if I remember correctly, I think that's maybe around $1 billion or so of sales. So that means that the other parts of your business, which is a little over 50% would have had to have been down double-digits.

You are talking about maybe accelerating some of your corporate development initiatives.

How do you, I guess kind of handicap where you are in the cycle when the right time to sell some of these businesses might be versus trying to improve? I guess I'm trying to think about your – you seem to be a bit more vocal on the capital deployment side and pruning the portfolio side, so I'm just kind of curious how you are thinking about the timing of those actions..

Right. That's a good question. Let me just clarify one thing. So the 10% growth that you referenced on the growth businesses are really year-to-date. And so, the growth business, while they did grow, were probably more in the mid to high single-digits. Again, every aspect of our portfolio was impacted by the additional week over last year.

And so that's why, to some extent we are trying to look at this over a little bit longer period, at sort of year-to-date numbers, because I think the Q3 is clearly distorted because of the extra week last year.

But I think directionally your comment is correct where obviously the growth side of the business is doing very well, and we continue to have challenges on the sort of core part of the portfolio. To some extent, that was one of the reasons we moved to the reorganization.

We talked about the benefits of having the clinical business and sort of the more application businesses together, and I think it does drive collaboration and it allows us to serve our pharmaceutical and food companies a little bit – the customers a little bit better.

But the other aspect of it is, when Research and Environmental was separate, it was a little harder to be more aggressive on pruning some of the product lines, because as those businesses were separate we became a little bit of a sub-scale in areas like front end and some of the other areas.

So I think one of the things that this reorganization does I believe, is allows us to get a little bit more aggressive on the pruning side in addition to the other benefits of the collaboration, the R&D, the manufacturing scale, and serving our customers.

The other thing obviously is, we want to make sure as we prune the portfolio that we've got a great foundation to build upon. And so it was important for us to get the organizational structure right. It was important to get our operating execution right, so that again, as we make the portfolio moves that we're not as disruptive to the bottom line.

We recognize as we make these portfolio moves that we will disrupt the top-line, but we're trying to do as best we can to maintain the margin expansion and the EPS growth that we've talked about.

Therefore, it was important to make sure that the flow or sort of way that this was staged was to make sure that we had the organization, the operation and execution, and then we could start to be more aggressive on the pruning of the portfolio..

Okay, thanks.

Could I just – and one last one if I could sneak it in? Rob, do you mind just – I think it's a nomenclature thing maybe to some degree, but I think what you said around environment – can you just remind us what you include in environmental, because some firms, well, they talk about industrial versus environmental, I think not everyone is talking about the same thing.

You mentioned your food business was strong. And so, can you maybe just clarify kind of when you talk about environmental being weak -.

Yeah, no I think that's fair because we do split food from environmental and from industrial. And so when we talk about environmental, we're talking about something in – about 10% of our revenue, and it's largely in air, water, and soil.

So that's how we would define environmental, whereas food, because – as that's become a big area of focus for us, we have sort of separated that. And then we have, industrial would be – the other areas, which would be more for us, petrochemical, fine chemical, and those types of areas..

Thanks, Rob..

Okay..

Your next question comes from Steve Beuchaw from Morgan Stanley. Your line is open..

Hi, good afternoon. Thanks for taking the questions. Just as we take some of the commentary and try to put it all into context, it would be really helpful if you could speak to the businesses, excluding instrumentation.

Do you have a view on what consumables growth – maybe consumables and other repeatable business growth was in the third quarter and how that compared to the first half?.

Yeah, so the consumer business grew. Services was sort of flat to up a little bit. And of course services is probably the business that's most impacted by the week. So – of course that gets distorted a little bit as – the consumable business. And the instrument business was down sort of mid-single digits.

So again, it was really more of a capital-intensive period. And of course if you look at the areas outside of Diagnostics, then you can imagine, the instruments was down even greater than that..

And then just looking at the margins, were there any concentrated cost actions taken in the quarter, given the environment that we should contemplate as we think about the sustainability of margin expansion? Thanks a bunch..

Sure. Well, Steve, this is Andy. We had two things – we obviously had very strong gross margin, and we had very good SG&A leverage. On the gross margin side, we are seeing an acceleration maybe slightly faster than we had forecasted going into the quarter from our Lean initiatives.

So I think, of the upside we saw in the quarter versus our guidance, about a third of that was due to productivity gains. And then the rest of that was really more mix, where we saw high growth in our Diagnostics and Informatics franchises. On the SG&A side, a lot of it was around our indirect spend initiatives.

We did want to go in with a bit of cushion, so we did accelerate some of our cost controls in the quarter. I think that we'll continue to do that, and we also had some favorabilities, given the comparison last year with the five weeks – the extra week of cost. But that was probably less.

So I think we'll continue to have that as a lever, and I think that was really the primary reason we saw the upside to our forecast despite the top-line decline..

And your next question comes from Dan Arias from ZE (30:05) Citigroup. Your line is open..

Yeah, hi, good afternoon.

Rob, what's your outlook for the Medical Imaging business at this point? Is that a down double-digit business for the year, and, I guess, how far are you thinking you might be from a trough at this point?.

Well, I would say – I think Andy mentioned it was down double-digits in the third quarter. We're not forecasting that it continues at that rate. And I think it sort of improves a little bit here in the fourth quarter, probably still be down sort of mid to high single-digits is what our current forecast.

And the whole key for that business is to continue to get some new products out into the marketplace. We've got a new cassette product that we are getting out and to continue to diversify away from some of the end markets that are a challenge; I would say specifically the radiology end market.

So, getting more into some of the industrial applications and some of the other areas that we are seeing some growth. But our forecast right now for Q4 would be more sort of mid to high single-digits, which, again, that would put them down for the year in that sort of range of sort of high single-digits..

Okay.

And then maybe on the newborn screening business, specifically in India, if we look ahead to 2017 revenues, do you think that you can start to benefit from tests per birth going up there once we get through the pilot programs, or as we think about next year, should we think about that being a 2018 contributor and not necessarily something that falls into the 2017 timeframe? Thanks..

Well, newborn screening continues to do very well for us. It has a strong Q3, and if you look at year-to-date it continues to do quite well. The growth drivers are both in the developed areas, to your point, Dan, where we continue to expand the menu, and we continue to see nice traction there, as well as the emerging markets.

Particularly, China continues to see very nice growth. We're seeing growth both in the birth rate, which is up fairly significantly during 2016, as well as the expansion of the menu in China. And as we've talked in the past, we continue to see opportunities in other emerging areas that have expanded.

So I think we continue to feel like the newborn screening area should be a high single-digit grower going into 2017 and beyond..

Your next question comes from Tycho Peterson from JPMorgan. Your line is open..

Hey, thanks. Rob, can you provide a little more color on the environmental drop-off? I know you said it was U.S.

and Europe, but any additional color? And then, across the portfolio did you see any improvement in trends in October?.

So, I would say the environmental shortfall was – again, going back to my comment, was everywhere other than China. China, we continue to see good investment in the sort of air, soil, and water. So outside of China, it was fairly broad based; it was both in the U.S.; it was Europe. It was down fairly significantly.

I think some of that might be a little bit of product positioning for us, where we had scheduled to get some new products out, and while they got out, they got out late. But clearly, Environmental was in the developed areas, a headwind for us in the third quarter.

With regard to October trends, I would say, we saw October trends improve up from the back half of September, but still, concerning to the point where – again, given the significant miss on the top-line in Q3, we just thought it was prudent to be sort of conservative here as we guide on the top-line for Q4.

So, a little bit of improvement in October, but not, I would say significant..

And then on guidance, can you help reconcile the fact you beat this quarter on EPS, but the midpoint of the EPS for next quarter goes down by $0.04. Are you baking this metric into -.

I think it's a function of the concern on the revenue. I think we still feel like we can do a good job on the operating margin, but again, because we guided conservatively on the revenue side, we just thought that EPS guidance was the prudent..

And I think the other piece of it, the difference between – sequentially between the third and the fourth quarter is the mix. Within the fourth quarter we're going to see more of an impact from Environmental Health than we had in the third quarter, where we saw very strong Diagnostics and Informatics revenue..

And your next question comes from Derik de Bruin from Bank of America. Your line is open..

Hey, good afternoon..

Good afternoon..

So, as you think about pruning the portfolio, given the strong margin expansion that you have seen there, can we assume that anything that you prune will be basically neutral to EPS?.

Well, I think that – we're trying to get the portfolio in a position from a margin expansion perspective that the pruning of the portfolio will be minimally impactful on the EPS. I think it's probably difficult to say that it wouldn't have any impact..

Right..

Now, if we turn around and say, we take the proceeds and use it exclusively to buy back shares, that's a possible way to do that. But I think right now it would be challenging to sort of say, by selling a business and reducing the revenue that it would not have any impact on EPS..

And the share buyback was my next question in terms of sort of what are your plans. It sounds like you are looking for more M&A opportunities.

Would you talk a little bit about the buyback plan, what's the share count implications for the year?.

Well, I think as we said in the past, our preference would be to continue to sort of add bolt-on acquisitions to the portfolio. Having said that, our share buyback would be determined on basically how we see the sort of size of the realistic acquisition opportunities and sort of availability.

And to the extent that we think there are some realistic opportunities to improve the portfolio, I think that would be our preference. To the extent we don't see those, or that the size of those are such that we could do both, then we would buy back share. And I think we've done that in the past and will continue to do that in the future..

So I think if you're looking at the share count for this year, we're going to be similar to where we were in the third quarter, about 110 million shares for the year..

And your next question comes from Doug Schenkel from Cowen & Co. Your line is open..

Hey, good afternoon. My first question is I guess a bit of a follow-up to Derik's last question. Andy, in your prepared remarks you did indicate that you are actively looking at acquisitions that could close in the coming quarters.

Could you just refresh your M&A parameters when it comes to size of deal, growth profile, willingness to take on dilution? And I'll pause there..

Sure. Well, I think first and foremost, it has to fit the strategic framework of the company. We also then look at, from a financial perspective, returns. We still look for greater than our cost of capital returns on deals we've made. We've been unfortunate enough to generate those types of returns on the deals that we've undertaken.

I think the ones that we think we could close in the coming months will fit that criteria, and from an accretion dilution perspective it's highly unlikely we would do a diluted deal, especially in today's market. I think we really look more at our ability to generate those return on invested capital numbers..

Okay, thank you for that. And one – I guess one other question. Would you be willing to disclose what licensing and royalty revenue was in the quarter and how does that compare to the last couple of quarters? Thank you..

In the third quarter of this year, it was essentially zero. And as far as our expectations going into the fourth quarter, it's going to be minimal. I mean as far as incremental, we obviously get revenues periodically through the year, but as far as significant incremental changes, no.

And we did talk about, last year in the fourth quarter we did have some incremental licensing revenue in the quarter. We don't expect something like that to repeat..

And your next question comes from Bill Quirk from Piper Jaffray. Your line is open..

Great, thanks. Good afternoon, everybody. First question. Rob, you mentioned softer several times in your prepared comments and then also talking about the realignment being – or enabling you guys to prune some of the businesses faster.

Can you help us think a little bit about the framework in terms of the transition with some organic products coming through the pipeline? And recognizing you don't have a perfect crystal ball around pruning, but is this something that we should be expecting to see here as soon as the fourth quarter, or is this more 2017 continuing on to 2018? Just trying to get a framework.

Thanks..

Yeah, I would say with regard to inorganic moves whether it's selling or buying, it's hard to predict the timing on those because obviously it's not something that's totally within our control. I would say that's one aspect of it.

I would say the other aspect of it is, as we think about making moves, and again, this would be either buying or selling, we want to make sure that to Andy's point it obviously makes strategic sense, but also, we want to make sure that we're sort of optimizing the return for shareholders.

And when we think about that optimization, we want to make sure that it's both on a pre-tax and an after tax basis. And sometimes that requires transactions to take a little longer than I think we would all like. So I would say, again, that sort of speaks a little bit to the timing of it.

But I would say – could we see something here in the fourth quarter? We could. But if not, we'll probably see something in the early 2017 timeframe. But again, it's hard to put specific timing around those, because it's not things that are totally within our control..

Understood. And then just two quick ones for me on the product side. With respect to blood screening, kind of where are we in China right now with the full transition to screen their entire blood supply with NAT? And then secondly, the sample-to-answer workflow for sequencing, when might that be available? Thanks..

So I would say on the blood screening, we continue to do very well there. The Chinese government has instituted the mandatory blood screening this year, and so we're seeing sort of a nice ramp up there. We continue to see strong growth, so that business continues to operate well.

If you recall, in the fourth quarter of 2015 we had a lot of instrument placements and we're now seeing the revenue flow from that. So that business continues to do quite well. And we continue to feel good about our opportunities to sort of expand there.

Oh, and the sample to sequencer is – I would say we have components of that today, but there's a couple areas we think we've got to sort of develop and add to. To give you a timeframe, it's probably into the sort of mid-to-late 2017 timeframe..

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

Good evening and thanks for taking my questions. Just had a couple for you.

First, Andy, was wondering if you could – was there any impact from, like incentive comp here in the third quarter? Just thinking, as you accrue incentive comp in the first half, has anything reversed here in the third quarter that benefited SG&A?.

No, there was nothing reversed..

Okay. Perfect. And then secondly, Rob, you made a comment about $40 million of revenue from new products. What timeframe were you thinking the new products would generate that revenue? Is that a 2017 event, or -.

No. That's a – so we came out in the beginning of 2016 and said we were looking to add $40 million of incremental revenue from new products. And what I was commenting is, based on what we are seeing through nine months, we feel like we're going to be on track to achieve that.

So, it was just sort of reconfirmation of the fact that we think we'll be able to add $40 million as a result of new products that were sort of launched in the past 12 months..

Your next question comes from Bryan Brokmeier from Cantor Fitzgerald. Your line is open..

Hi, good afternoon.

How has OneSource performed, and is there any (43:25) of benefit from grouping that business back with the Environmental business?.

So OneSource continues to perform well. I think if you look through the year, it's up sort of high single-digits. So it continues to do well. I mean, Q3, again, because of this one-week impact, wasn't as strong for OneSource. But, again, when you look at year-to-date, it continues to do very well.

And we do think that service, in general, will benefit by regrouping Research and Environmental back, because if you recall, couple years ago we sort of split it apart. And I think it has caused an issue relative to some of the areas where we don't have the density, quite frankly.

And I think by putting it back together, that is one of the benefits we think we'll get from the new organization..

Okay. And on terms of the new product revenues, I thought – I don't know if I have these numbers correctly, but I thought that you'd indicated that you had $35 million in revenues in the front half of the year.

So if that's correct, does that mean that you're only generating sort of another $5 million in the back half of the year from new product?.

Well, I tell you, I don't recall that. I recall having a discussion around $35 million in 2016 and saying we were growing at – I mean 2015 and growing at the $40 million. So we'll just have to go back and – circle back and get that..

All right. I thought it was $18 million in the first quarter and $17 million in the second quarter but – okay. Thanks..

And your next question comes from Isaac Ro from Goldman Sachs. Your line is open..

Thanks. Maybe just a follow-up on the new product question.

Just curious if you could quantify how much contribution, either on absolute dollar or percentage terms you expect in fourth quarter organic growth?.

You know, I think it's been running in the sort of $10 million to $12 million a quarter, to tell you the truth. So I would assume it's going to be similar to that in the fourth quarter..

Okay, that's helpful. Thank you. And then just a follow-up on capital allocation. If we just look back the last few years, you guys have been pretty opportunistic on buying back stock when you get a good chance.

Given your earlier comments on the M&A aspect, wondering if we get to some point in the first quarter and you aren't able to close a deal that you want.

Is it possible that we might see some use of your cash to buy back stock?.

Yeah, Isaac, this is Andy. We obviously look at the tradeoffs between M&A and buybacks as well as the timing, and if we see some of these slowing, I think we're going to generate some pretty strong cash flow. So I could see us taking some shares out of the system if the M&A doesn't come as quickly as we'd like..

And your next question comes from Paul Knight from Janney Montgomery. Your line is open..

Hey, Rob, on the re-org with the split of Diagnostics and then can you talk to specifically the analytical instrument business? I know you have always enjoyed a pretty top position in the world, but what do you want to accomplish with analytical, you know, manufacturing, distribution? What are your thoughts there?.

So I think, to your point, we want to continue to be sort of the top player in that. I think PerkinElmer has got a good brand in analytical instruments.

I think the opportunity we see of putting it together with the research is, in a couple end markets I think we'll be able to hopefully drive better coordination, particularly in the pharmaceutical area where we go call on those customers on a research – sort of drug discovery area, we think we can get some leverage.

I think the service thing we talked about, I think specifically in food where we have some assets, again it – sort of we're in the research area, but are also in the historical Environmental area.

So I think we should be able to continue to sort of try and be at that preeminent position, particularly in the areas of, like inorganic, materials characterization, and thermal. I think those are the areas where I think we've got a strong position and hopefully we'll continue to maintain that and grow it..

And then on the China business for Diagnostics, it's been obviously a success story there.

What are plans on that? And also, what are you – are you seeing that market pick up with the release of the five-year plan in March? I mean – so can you talk to the dynamics following the release of the plan, and, you know, what do you want to do next in that market?.

So we – I would say we have continued to see very strong growth in China. I don't know that I could sort of attribute anything to the release of the five-year plan. I would say where we've seen it a little bit more is on the research side in areas like this precision medicine initiative, and an increased focus on food.

They've come up with some new regulations on food where they are looking at the entire food chain. I would say, there I think we have seen a little bit of an inflexion, probably a positive. But Diagnostics has been strong, continues to be strong there. And I think we're well positioned in sort of several facets.

We talked about newborn; that continues to do well. We continue to see very strong growth on the prenatal or the maternal fetal side. Of course, we mentioned blood banking, and then of course our infectious disease area. So I think across those businesses, I think we feel good about it.

So one of the areas where we're focused on is, we are seeing increased pressure on local manufacturing of products. And I would say, to a large extent we're in a good position there, but we just want to make sure we continue to have the majority if not all of our Diagnostic products manufactured locally.

So that's a big focus for us, to make sure, as it becomes more challenging, both from government tenders as well as local competition that we've got a strong capability to produce everything and fundamentally design everything in China..

And your next question comes from Jack Meehan from Barclays. Your line is open..

Hi, thanks. Good afternoon. I wanted to follow-up on the capital equipment commentary and just dig in.

Do you think any of the softness was simply timing-related? And how does that roll into the fourth quarter guidance you gave?.

Well, we do believe some of it is timing. It's hard to determine at this point how much of it was.

There's – I would say, at this point a lot of the information we have is sort of more anecdotal, right? You hear people talk about, you know, are they deferring things until after the election? Are particularly academic or government budgets on hold a little bit? So we're sort of anxious to see whether or not if that happens.

But probably some of it was deferred spending until a little bit more certainty from whether it's a geopolitical or economic condition. Because we do believe some of these things are – that were sort of pushed off, will be needed or required at some point, again, whether it's for capacity expansion or just replacement..

Got it. And there has been a little bit more noise on the academic/government side this quarter. Is it more nuanced within that, either by product categories or academic versus government? Just any additional color would be great. Thanks..

For us, it's probably more on the academic side than it is government. And we can tell you, the area we see it probably most acutely is in our imaging area. And for example, I think you saw virtually no S10 grants over the last 90 days, so we clearly have seen a slower funding environment on the academic side.

And we saw it, as I said, again, mostly in the research area..

And your next question comes from Catherine Ramsey from Robert W. Baird. Your line is open..

Hi, this is actually Emily on for Catherine.

So I guess turning towards newborn screening, how many tests per birth are you seeing right now in China, India, and the U.S.? And then how have birthrates been trending in comparison to last year?.

Okay. So in the case in China, it's starting to vary fairly significantly. I would say if you look back a couple – maybe a year or two ago, it was either two or four.

We are starting to see certain areas like – particularly around Shanghai and a couple of the large cities start to implement mass spec, so we have seen a ramp up in almost sort of a bifurcation.

You still, out in the West, continue to see in the sort of two to four area, but on the East, and particularly in the large cities, you are starting to see menus now get up to sort of 15 to 20. But I would say on average, in China right now we're probably six or seven. But there is sort of a movement into higher menus. In the U.S.

right now, the standard of care is 29, as you may know. We're probably in average in the States in the sort of low-40s. And then if you look in India right now, we're only testing right now.

We've got four pilot programs; two of those pilot programs have moved into actual full-fledged programs, and to the most extent, of those four, they are in the sort of four to six range as far as the menu. So it varies a fair amount. Obviously, U.S. is by far the highest number..

Okay. Thanks.

And then the birthrates in comparison to last year?.

So the birthrates, I would say globally it looks relatively flat, and I would say similar in the U.S. for us. Earlier in the year, we were seeing a little bit of a – sort of a positive trend on rates. We've seen that come down a little bit now, and I would say that's flat. China is very strong; China has probably mid-teens growth rate.

And when our people in China sort of dissect that, we think probably about 10% of that – or 10 points of that is because of the sort of change in the zodiac sign, and we think probably 5 percentage points is because of the second child..

Your next question comes from Matt Mishan from KeyBanc Capital Markets. Your line is open..

Hey, guys this is actually Aubrey on for Matt.

Can you hear me okay?.

Sure. Yeah..

Great. Thanks for taking the questions. You mentioned in the prepared remarks that the decision to deprioritize certain areas of the portfolio is also slowing sales growth a little bit faster than you expected on your last guidance update.

Could you maybe just parse out how much of that impacted the third quarter and your guidance going forward versus a change in market demand?.

So I would say, to determine that precisely is hard.

But we believe it's having an impact, because as we've sort of announced some of these changes, we have seen for example in the sales organization or in some product management, we have seen a little bit of turnover, not probably unexpected, and so we're backfilling with individuals there; I would say are more consistent with the strategy.

But we think some of that disruption is having an impact, I would say probably more in the sales organization or product management. I don't think I can give you a exact number, but when we look at – clearly in Environmental Health, we think that had an impact..

Okay. Got it. And then I just wanted to touch on free cash flow.

Are you reiterating your guidance for $300 million? And if so, what gives you confidence that you are going to see an inflection in the fourth quarter?.

Well, I think that if you look at last year – our most significant quarter is the fourth quarter. For us to hit the $300 million, it's going to require some very significant working capital improvement, given the slightly lower earnings. I think the team is basically been tasked with still delivering the $300 million.

I will say it's going to be a bit harder. But that is our goal, and if we can do somewhat similar to what we did a year ago, we should be very close. So, we are not coming off of it at this point. It's just becoming a little bit harder. And really that's overcoming a fairly weak first quarter of this year.

So, again, we're sticking with the $300 million, but it's becoming more challenging..

And your last question comes from Brandon Couillard from Jefferies. Your line is open..

Thanks. Rob, just a quick question on the pharma business. I know you noted it was up low-single-digits in the period, but any chance you could parse out the deviation in mix between equipment and instrumentation and in the software and service components, which I imagine were much more stable in the period.

Any change in the end markets? And then I got one follow-up for Andy..

Sure. Okay, so if you look at – as you said, software informatics saw good growth in the quarter. Service grew, but not what you would normally expect in sort of the high single digits, I think because of the weak – one less week year-over-year, but this still grew (57:11).

And we saw pressure, mostly again on the capital equipment side, so whether it was in plate readers – I mentioned the fact that imaging was down a little bit on the academic side. I think on the high content side we continue to see growth, and, of course, radiochemicals was a drag..

Thanks. So then, Andy, one for you. In terms of the EPS bridge for the year, is there anything specific that contributes to the higher purchase accounting adjustment in terms of the bridge between GAAP and non-GAAP EPS for the year? (57:47)..

No, the majority – the majority is the – basically the amortization. We have that. That should be detailed in our reconciliations within the press release. But if you can't find it, let me know and I'll get that to you. It should be in our documents that are on our website..

I am showing no further questions at this time. I would now like to turn the conference back to Rob Friel..

Great. Well, first of all, thank you for your questions. And so in closing, let me just say, we continue to feel good about our long-term opportunities to deliver value to our customers and shareholders as we work to accelerate growth, while most importantly advancing our mission of innovating for a healthier world.

Thank you again for your interest in PerkinElmer and have a great evening..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect..