Good day, ladies and gentlemen, and welcome to the PerkinElmer Fourth Quarter 2016 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 call may be recorded.

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

Thank you, Takiya. Good afternoon and welcome to the PerkinElmer fourth quarter and full year 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 webcast is being webcast live and will be archived on our website until February 16, 2017.

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 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.

As a reminder, we have announced the divestiture of Medical Imaging business in the fourth quarter of 2016, moving the operating results of that business into discontinued operations. Our results will not be comparable to our previously issued guidance.

To help reconcile the differences, we have posted a deck to the Investor Relations section of our website to help bridge your results and our results. I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel.

Rob?.

NTD Labs, LABWORKS, and Medical Imaging to better sharpen our focus and allow us to redeploy $300 million in areas more aligned with our growth priorities. To facilitate and accelerate this evolution, we created a more effective operating structure to align with our customer requirements.

By forming two distinct segments – Discovery & Analytical Solutions and Diagnostics – we've created larger, more unified R&D commercial teams in VAS to better facilitate a realignment of the business. Diagnostics can now focus its effort on our clinically oriented customers and opportunities to expand our addressable market.

In addition, by combining our key capabilities and talents in the genomics space, we are already unlocking technical and commercial synergies in a meaningful way. This allows us more precision in our commercial structure and customer approach.

From a global accounts perspective, because we now sell into end service or end markets with one organization, we are better equipped to offer a full suite of solutions for our top customers.

For example, our OneSource service and informatics teams now seamlessly work together with what was once our former and environmental health commercial team to strategically partner with key pharmaceutical accounts, regardless of the number of departments or labs that might be involved and the spectrum of customer business challenges to address.

The power of our combined service and informatics offerings is helping bring drugs to market faster, while also improving the productivity capabilities of 8,000 labs around the globe. Another important priority last year was to continue to step up our efforts in fostering innovation.

As I mentioned previously, in 2016 we increased our spending on R&D as well as made a number of organizational changes and invested in new tools to facilitate growth.

During 2016, we launched several novel products, building upon our core capabilities in detection, imaging, informatics and service, including the QSight triple quad, the Operetta CLS High-Content Imaging System, Avio 200 ICP-OES, Signals for Translational, and a cloud-enabled version of ChemDraw.

In addition, we are expanding both our menu for newborn screening and our geographic reach, as we win new and incremental business around the globe. Most recently, we won our first contract for SCIDs testing in Spain.

And as I reflect on the year, we are most proud of the difference we are making on the lives of newborns and their families, having now cumulatively screened 560 million babies and helping save an average of 70 babies every day. Another important aspect of our growth priorities last year was an increased focus on our customers.

During 2016, we made a number of investments to get closer to our customers, including the opening of customer knowledge centers in Taipei and Singapore and the launch of our diagnostics lab in Chennai, India.

During 2016, we achieved a 10-year milestone with our largest pharma customer, surpassing 300,000 service events and 6,000 e-notebook users at 14 global sites.

And in China, our clinical lab in Xuzhou, which provides hospitals and patients with lab services for newborn, prenatal, and infectious disease testing, reached a run rate of 160,000 tests annually by the end of 2016. Our continued success requires us to consistently improve how we manufacture and deliver solutions to customers.

And I'm pleased to report that we have made significant progress this year in advancing operational excellence.

Our global operations team's goals to reduce waste, lower material costs, infuse Lean principles into our processes and increase productivity across manufacturing have contributed to meaningful product quality improvements, gross margin expansion, and improved customer service.

As I mentioned previously, we experienced a significant gross margin increase through a number of actions, including a reduction in material costs by 4.5%, the localization of production in China, and supplier consolidation.

Other cost of sales was reduced by 50 basis points as a percentage of sales through the increased focus on quality, better absorption and reduced cost.

Through the implementation of Lean manufacturing principles, over 50,000 square feet of space and 117,000 labor hours have been freed up to create capacity for growth and to in-source selective components. Clearly, 2016 was a year in which we elevated PerkinElmer's technological, operational, and organizational capabilities.

We enter 2017 with a number of exciting developments that will strengthen PerkinElmer's future growth and profitability. The sale of our Medical Imaging business will strengthen PerkinElmer by reducing revenue volatility and enabling us to focus our efforts and investments on core Diagnostics and Discovery & Analytical Solutions opportunities.

For 2017, our strategic priorities have evolved to not only enable us to meet our financial objectives, but just as importantly help us increase our impact on the world. First, this year we are amplifying how we innovate through more targeted R&D as well as innovating alongside external collaborators across our end markets.

A key differentiator for PerkinElmer is the incremental value we bring to our customers by providing them with complete solutions, uniquely developed to meet business critical needs. We remain committed to innovating across our core capabilities and product lines and maintaining gross share across our served market.

Second, essential to creating breakthrough solutions is understanding our customers' most difficult problems and most challenging needs. By evolving and innovating how and where customers need us, we will be better positioned to enhance the customer experience and increase long-term customer loyalty.

Third, from an operational standpoint we will continue to implementation of Lean to support product quality improvements, expand gross margins, and even augment our customer service processes.

Furthermore, this year our goal to advance our operational excellence will pair with our objectives to widen PerkinElmer's global reach and diversity of talent. Turning now to our guidance. We are forecasting overall end-market conditions to be similar to what we experienced in the latter part of 2016.

However, we are increasing our organic revenue forecast to 4% to reflect a strong pipeline of new products, and the fact that the majority of the organizational realignment is behind us.

Consistent with our goal to achieve 22% adjusted operating margins in 2020, we are forecasting adjusted operating margin expansion of 70 to 90 basis points, and at the midpoint of our guidance, adjusted earnings per share growth of 11% on a constant currency basis or 8% on a reported basis.

So before I turn the call over to Andy, let me reiterate our takeaways from the year. We executed well to deliver strong financial performance, continuing a trend of significant margin expansion and EPS growth. Through organization and portfolio changes, we are better positioned to grow and we have strengthened our operational capabilities.

And I'm confident that we have built a strategic and leadership foundation to accelerate the evolution of PerkinElmer, while at the same time delivering on our commitments to all of our stakeholders. I'd now like to turn the call over to Andy..

Thanks, Rob, and good afternoon, everyone. Consistent with previous quarters, I'll provide for additional color on our end-markets, a financial summary of our fourth quarter and full year 2016 results, as well as details around our 2017 guidance for the first quarter and full year.

Given that we have announced a new segment reporting structure of Diagnostics and Discovery & Analytical Solutions, as well as the pending divestiture of our Medical Imaging business, we've uploaded restated historical financial data onto our website at perkinelmer.com to help you reconcile our results with your models.

In addition, as Rob mentioned, we posted a brief slide presentation, entitled Fourth Quarter 2016 Earnings Release, which I will be referring to in my prepared remarks. Both of these presentations can be found in the Investors section of our website.

My commentary today will focus on these new segments and, unless specifically noted, will exclude the results of Medical Imaging, which is now reflected in discontinued operations.

As a reminder, effective October 3, 2016, the company's Diagnostics business, focused on reproductive health, infectious disease, and oncology, became a standalone segment seeking to better meet the needs of clinically oriented customers in regulated markets.

In addition to our chemagen DNA extraction portfolio, our oncology offering incorporates a combination of NGS-enabling technologies, including microfluidics and automation previously accounted for in our life science and solutions business.

The remaining products within the legacy of life science and solutions business were combined with our environmental health business to form the Discovery and Analytical Solutions segment, focusing on life sciences, food, industrial and environment markets. For the fourth quarter of 2016, we reported organic revenue growth of approximately 1%.

As we mentioned on our earnings call in January of last year, we had a significant licensing revenue in the fourth quarter of 2015 that created a headwind of approximately 1%. FX negatively impacted revenue growth by 1.3%, and the net impact of acquisitions and divestitures in the quarter was de minimis.

Referring to the slide presentation I just mentioned, if you turn to page 3, adjusted revenue from continuing operations was $567 million.

On a pro forma basis, including $35 million in revenue from the discontinued Medical Imaging business and the negative impact of approximately $10 million of incremental currency headwinds versus our original fourth quarter guidance, adjusted revenues would have been $612 million.

Adjusted earnings per share from continuing operations for the fourth quarter was $0.83, as compared to $0.81 in the comparable period a year ago.

On a pro forma basis, we delivered $0.89 per share, reflecting approximately $0.03 per share for the discontinued Medical Imaging business as well as approximately $0.03 a share for incremental foreign exchange headwinds since we last gave guidance.

As Rob mentioned, the trends we saw through the first three quarters of 2016 continued through the fourth quarter, specifically ongoing strength in our four key areas of focus, including reproductive health, emerging market diagnostics, food and biopharma services, we saw improving demand as well in the academic and government markets.

Analytical equipment sales into industrial and environment end markets remains sluggish, but stabilized somewhat in the quarter.

Looking at our geographic results for the fourth quarter, we experienced high single-digit organic revenue growth in Asia, flat revenue growth in Europe, and low single-digit declines in the Americas with continued weakness, specifically in industrial.

In the BRIC region, fourth quarter organic revenue increased high single digits versus the same period last year, driven by continued strength in China diagnostics and analytical equipment sales as well as double-digit organic DAS sales growth in India offset by declines in Brazil and Russia.

On a positive note, organic revenue declines in Brazil and Russia look to be stabilizing. As to our operating results, fourth quarter 2016 gross margins were up 90 basis points, driven primarily by mix and continued productivity improvements, a result our successful Lean initiatives.

For the fourth quarter, adjusted SG&A was down 80 basis points, driven by the success of our indirect spend initiatives, while R&D spend was up 120 basis points, this was prior to the same period a year ago, primarily a result of ongoing investments in Vanadis.

As a result, our overall adjusted operating margin from continuing operations expanded by 60 basis points. Switching to the new reporting segments for the quarter, Diagnostics organic revenue growth grew approximately 7% as compared to the same period a year ago.

Strength in reproductive health in both China and the Americas was a key driver of this growth and was augmented by demand for our advanced genomic solutions, which was up high-single digits. Organic revenue in our Discovery and Analytical Solutions business was down modestly as compared to the prior period.

Overall revenue was impacted by low teens growth in food, mid-single-digit growth in academic markets with expected declines in industrial and environmental. Pharma and biotech experienced low single-digit growth, driven once again by strong OneSource results.

As Rob mentioned earlier, we've made significant strides in reshaping the company in 2016 for all of our stakeholders, and I'd like to go over some of the highlights for the year.

Turning to slide 4 of the presentation materials, for the full year 2016, we reported approximately 2% organic revenue growth, with foreign exchange representing a headwind of approximately 1% with minimal impact from acquisitions and divestitures.

Full year adjusted revenue from continuing operations was approximately $2.12 billion as compared to $2.11 billion in 2015. On a pro forma basis, including $146 million in revenue for the discontinued Medical Imaging business and $10 million from incremental FX headwinds, adjusted revenue would have been $2.27 billion.

Full year adjusted earnings per share from continuing operations was $2.60, up 12% from $2.33 in 2015. On a pro forma basis, including $0.16 per share for the discontinued Medical Imaging business and $0.03 per share from the incremental FX headwinds, full year adjusted earnings per share would have been $2.79 per share.

Looking at our geographic results for the year, we experienced double-digit organic revenue growth in Asia, flat organic revenue growth in Europe, and a low single-digit organic decline in the Americas, again driven largely by softer industrial sales.

In the BRIC region, full-year 2016 organic revenues increased low double-digit compared to 2015, with low-to-mid-teens organic revenue growth in China and India, flat revenue in Russia, and soft demand in Brazil, which was down double-digits.

Looking at our total emerging market sales, organic revenues were up high single-digit for the full-year, and sales in these regions have been consistently resilient over the last four years, a testament to the criticality of the products we sell into these parts of the world.

Turning to slide 5, as to our operating results, full-year reported adjusted gross margins were 49.4%, up 110 basis points.

As Rob mentioned, this increase was driven primarily by a continued mix shift into our focus growth areas and productivity gains which contributed to a mid-single-digit reduction in material cost as we shift procurement activities to lower cost countries and continue our ongoing supplier consolidation.

Strategy deployment and Lean activities further expanded gross margins by an additional 50 basis points as we were able to drive better out-of-box quality, and reduce overall manufacturing expenses.

We are in the early innings of strategy deployment in Lean, and we remain confident in our ability to continue to expand gross margins by more than 50 basis points per year.

Full-year reported SG&A, adjusted SG&A was 24.9% of adjusted revenues, down 80 basis points over the same period a year ago, driven by indirect spend initiatives and prudent cost controls.

As noted earlier, full year research and development spending was higher by approximately $12 million, as compared to 2015, driven primarily by investments and innovative new products including the Vanadis non-invasive prenatal screening offering; and the IONICS mass spectrometer focused on food and environmental safety applications.

We are very excited about the potential these technology acquisitions represent and continue to be encouraged by the progress made in expanding our addressable market.

Overall, we were pleased with our operational performance for the full year, as we expanded our reported adjusted operating margins over 140 basis points, in spite of incremental R&D investments of 50 basis points as referenced earlier.

Below the line, full year net interest and other expense was up modestly to $45 million and our full year adjusted tax rate was approximately 18%. Turning to the balance sheet, we finished the year with approximately $1 billion of debt and nearly $360 million of cash.

We exited the quarter with a net debt to adjusted EBITDA ratio of approximately 1.6 times. Turning to cash flow, I'm very pleased to report that we once again had a record quarter of operating cash flow from continuing operations and a full year of $324 million, up 22% over the comparable period in 2015.

We experienced continued working capital improvement with better cash collections and lower inventory requirements. Free cash flow for 2016 including Medical Imaging was also very strong at $319 million, up 23% versus the prior year and 6% ahead of our full year free cash flow commitment of $300 million.

As we look ahead to 2017 and beyond, we believe we can continue to realize additional gains in this area through the expanded use of Lean tools to more effectively leverage our working capital needs.

To wrap up 2016, we are pleased with our strong operational progress in a slow growth environment, driving adjusted earnings per share growth from continuing operations up 12% as reported.

Looking ahead to 2017, we continue to believe we are well positioned to deliver another solid financial performance and see a path to improving organic growth driven by continued mix, new product introductions, and more favorable comparisons.

As a result, looking at slide 6 of the presentation, we expect full-year 2017 reported revenue to be in the range of $2.19 billion to $2.2 billion.

And as Rob mentioned, this represents organic revenue growth of 4%, which includes approximately $40 million in foreign exchange headwinds and approximately $30 million from our recent acquisition of Tulip, an India-based diagnostics company.

Full-year adjusted earnings per share is expected to be in the range of $2.75 to $2.85, which represents approximately 8% to 12% constant currency adjusted earnings per share growth from continuing operations.

On a pro forma basis, including 16% of earnings per share related to our Medical Imaging business, which is now a discontinued operation, adjusted earnings per share would have been $2.91 to $3.01.

Implicit in this guidance range is adjusted gross margin expansion of approximately 60 basis points and continued SG&A leverage with a modest increase in R&D resulting in adjusted operating margin expansion of 70 to 90 basis points.

Our full-year guidance assumes net interest expense and other of $50 million, an adjusted tax rate of 18%, and a weighted average share count of approximately 110 million shares.

For the first quarter of 2017, we are forecasting reported revenue to be in the range of $500 million to $510 million, which represents organic revenue growth of 2% to 3% with FX representing a headwind of approximately 2%.

Note in the first quarter of 2016, Medical Imaging's contribution to revenues and adjusted earnings per share was approximately $41 million and $0.05, respectively. As a result, our first quarter 2017 adjusted earnings per share are expected to be in the range of $0.52 to $0.54. This concludes my prepared remarks.

We'd like to open it up for questions at this time..

Thank you. Our first question comes from Jack Meehan with Barclays. Your line is now open..

Hi. Thanks. Good afternoon, guys. Yeah.

I want to get your perspective on the industrial end-market and just what the performance was in the quarter and then your outlook for 2017 and whether – within that, whether you saw any improvement in terms of the order book in the fourth quarter?.

So for us the industrial end-market was down in 2016 sort of depending on whether it's Q4 or the full-year somewhere between 3% to 5%. And I think, as we mentioned in the beginning of the year, we experienced strong growth in the industrial market in 2015.

If you recall, I think we were up mid-single-digits, so we actually anticipated industrial being sort of flat to low single-digits, but I would say we were disappointed by the fact that we ended the year actually down, like I said, sort of in the 3% to 5% range.

I think part of that was market, part of that was execution on not getting a couple of new products out, particularly in the back-half of the year, as we would have liked and so consequently, I think that that cost us a couple of points of growth.

As we think about 2017, we're forecasting industrial to grow low single-digits, and I would say that's not as much of a market phenomenon, although I would say we are seeing some early indications that that market is improving, but we attribute the improvement in 2017 more to our own execution from the perspective of getting the new products out.

One of the products that actually slipped was the NexION, which is a new ICP-MS, that was actually launched two weeks ago. So we feel good that got out in the marketplace and it's getting good receptivity in the market.

So I would say for 2017, we're anticipating an improvement in industrial growth, but the majority of that should come from our own execution as compared to the market..

Great. Yeah. That's great color. And then, Andy, I think I caught the share count guidance of 110 million.

Maybe could you just walk through some of the proceeds for Medical Imaging, and then what you're assuming in terms of capital deployment for the year?.

Well, I think at this stage, we are anticipating closing sometime after April, so we still have some time to decide what we want to do with those proceeds. It's about $265 million of proceeds; we've announced that.

And I think at this stage, we noted the dilution that was provided, and I think we believe that we will cover the majority of that dilution either through share buybacks or through acquisitions, and then I will probably have more to say on that as we get closer to closing on the sale, and we'll be very transparent with that communication..

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

Hey, thanks. I'm wondering if you can talk a little bit more about the 4% organic growth expectations for the year. How much do you guys expect from new products? You do a pretty good job typically quantifying that.

And then it sounds like, Andy, you mentioned that academic got better, which is somewhat in contrast to what we hear from peers, so just wondering if you can elaborate on that?.

So as I think about the move from call it 2% in 2016 to 4% in 2017, the majority of that is going to come from, like I said, execution and getting our new products out. So we talked about 2016 of a number of around $40 million. I would say, we probably at the end of the day, fell a little bit short of that.

I would say we felt pretty good clearly through the first nine months, but, as I sort of alluded to before, in the back half of the year we had a couple things slip. Two particular products, one actually shipped as I mentioned two weeks ago and one actually started shipping this week, so we feel good about the fact that they're out.

But I would say as we think about 2017, really starting with the products that are shipping now and really looking more in the sort of Q2, we think we're going to have another strong year of new products and actually probably something closer to $50 million as compared to the $40 million that we expected in 2016.

So that is a big contributor to the improvement in the growth year-over-year. As we think about it by market, I mentioned the fact that we're looking for a fairly significant improvement on the industrial side. I would say the other market that we're looking for is environmental, which historically has been a good market for us.

It was also down in 2016 and our expectation is that returns to a positive grower. So I would say that's really the majority of the improvement when you think about the 2016 to 2017 increase in organic growth, and a lot of that we believe will be fueled by new products..

On the academic side, I mean we had a fairly easy comp, we did see some – and some of our instruments are typically high-value instruments and we saw some growth in our high-content screening pathology products, which were beneficial in the quarter. This was probably our best quarter in academic for the year..

Yeah, as Andy mentioned, a lot of our academic exposure is in more of the Imaging area, which is, as you know, Tycho, are large ticket items. So you can, from quarter-to-quarter, you can see things move around because of the lumpiness of those orders in sales..

And then lastly, can you maybe just give us a framework for M&A this year as you think about it?.

Well, I think we want to do – I think we mentioned the fact that we did four deals in 2016 with about $350 million of value, and of course that includes the earnouts as well. I mean we'd like to do more than that this year. As Andy mentioned, we've got – we think a very strong balance sheet. We'll have the cash coming in from Medical Imaging.

So we think we're well positioned financially to be aggressive. I think the other side of it is, I think we feel very good about the sort of operational capability and organizational capability we have, so that we could take on additional complexity.

So we've got a pretty full pipeline and I would be disappointed if we weren't able to do more significant M&A in 2017 that we did in 2016..

Thank you. And our next question comes from Doug Schenkel with Cowen and Company. Your line is now open..

Hey. Good afternoon. My first question is on the fourth quarter and then I want to come back with a follow-up on new products. So, first on the fourth quarter. Under the new reporting segment structure, organic growth was 1%. This was with Medical Imaging eliminated as a drag on growth.

You guided investors to model low single-digit organic revenue growth and most were looking for around 2% with imaging as a drag.

So, I'm sorry if I missed it, but could you just walk through where you came up a little light of growth expectations in the quarter or were there timing dynamics, is that why you feel at least in part confident that you can see the acceleration of growth that you're guiding to in 2017..

Actually, when you look at the guidance that we put out – I guess it was in November – we talked about low single-digit growth. Actually, the numbers I think were 0% to 2% is actually what we were guiding to do, so when we came it an 1%, we felt like we came in at about where we had sort of guided.

To your point, Medical Imaging was a headwind, but really doesn't round either sort of up or down. We would have been 1% with or without Medical Imaging.

But having said that, we guided $610 million to $620 million, and I think Andy showed a chart that said we're $612 million, so I would say we are sort of at the bottom end of our guidance, but I think within the amount we talked about.

I would say to the extent that things were a little light, they were on the DAS side, and clearly some of the end markets that we've seen all year, so industrial was down sort of mid-single digits, environmental was down mid-single digits, so those are the two that have been the challenging headwind all year, and that was again the case in the fourth quarter.

I contrast that with the areas that we saw good growth in year continued to do very well, so we talked about the fact that Diagnostics was up strong, OneSource had a good quarter again, even against a pretty tough comp, and food was strong in the quarter as well.

So I think the areas that have done well continued to do well and the areas that were challenging continued to be challenging in Q4. And as I mentioned before, the idea is to turn that around.

Some of that I think will be helped by having the realignment behind us and I think the other thing will come from getting some of these new products out into the marketplace..

Okay. Super helpful, Rob. And then actually, a good segue to the new products.

I just want to see if, one, you'd be able to just provide a little more specificity on what the key new product drivers will be in 2017 and in the context of looking at growth and then just from a math standpoint, it sounds like you guys did something like $30 million to $40 million in new product revenue in 2016 and you're targeting something like $50 million in 2017.

So that's obviously around $20 million incremental on that line; that's 75 bps of revenue growth.

So is the balance of the 4% target for the year just attributable to better execution and end-market improvements? Is that the right way to think about it?.

Yeah, I think that's exactly the right way to think about it. And again, when I talk about the improved end-markets, my assumption is most of that's going to come from better execution. So we're not really building a lot of I would say market improvement relative to sort of external factors.

With regard to the big drivers, I would say in 2017, so we mentioned the fact that two weeks ago, we introduced a product called the NexION 2000. We're quite excited about that; that's the new ICP-MS, that's actually there's been some interesting write-ups about in some of the trade articles, so we're excited about that.

We actually introduced the Operetta CLS, which is a high-content imager. That came out in September of last year and that started gaining very nice traction in the marketplace; it's got some unique, I would say, competitive differentiation. It's got this water-immersion lens and very fast mechanics in harmony software. So we feel good about that.

We introduced the Avio 200; that was also in the back-half of 2016. That's an ICP-OES and we think that's got the lowest cost of ownership on the market and probably the best analysis uptime. So we're excited about that one, and again that will continue into 2017.

And then another product that we're just introducing now is a new quantitative pathology called the Vectra Polaris and we've got significant expectations that – it's the only platform on the market that can detect up to seven colors or in essence six biomarkers on a single tissue section, so that's another one that we feel good about.

So there's a couple of other ones later in the year, but those are the ones that I think will – should drive the majority of the $50 million of incremental revenue..

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

Wow, that's a new one. So a couple from me, one on tax and then one on Vanadis. Andy, I wonder if you could just give us a little bit of scenario analysis or war-gaming on the possibilities, as you think about the potential impact for tax reform.

Are there scenarios that we might be concerned about, including border adjustability and can you give us a sense for what you think a sort of middle-of-the-road outcome is? And then I guess for Rob on Vanadis. You guys continue to sound excited about the product, sounds like you're getting more excited about it as you see more data.

I think you saw a pretty significant amount of data here within the last couple of months. Can you remind us how you frame up the Vanadis opportunity and strategy? Is this an emerging markets product, a global product, is this a product for a subset of disorders or is this a broad NIPT offering? Thanks so much..

Maybe I'll start with your question around taxes. As you know, there is still not a lot of clarity around how this is going to settle, although we do hope that there is some movement on tax reform. Right now, we've kind of looked through and done an analysis of the three plans that are out there, the Trump plan, the House plan and there is a third.

And they're all fairly similar. I think we do feel like there will be a lower tax rate overall, corporate tax rate, whether it's 25% or 15%, no one really knows. Obviously that's going to be a net positive for us. We do pay taxes in the U.S. As far as being a net importer or exporter, we are a net exporter.

We have a fairly large significant amount of revenue that is exported out of the U.S. So that will also be a net positive. And then the third piece, I guess, is around repatriation. A repatriation holiday would obviously be helpful. We have been very successful in the past without one.

We've been able to utilize some of our tax attributes to bring money back overseas with very limited cash taxes. So all-in-all, I think we feel like it's going to be a net positive. We've done some detailed analysis and based on what we know today, it's probably about 1 percentage point to 1.25 percentage points to our current tax rate..

And Steve, let me take the second one on Vanadis, and I think you're probably interpreting our tone appropriately. I think we do get increasingly excited about the opportunity here. To answer a couple of your questions, we do see this as more of a broad-based offering as compared to going after specific disorders.

When I say broad-based, it's really going to be targeted at sort of 13, 18, 21s, right. The key aspects of prenatal screening. I think the thing that excites us about it is the fact that we believe it's unique in that it is a product that's actually been designed from the beginning for screening.

What we're finding – what we believe is some of the applications now are things that were, say in the case of NGS, probably designed for different applications that are trying to be applied in IPT and population screening. And then that – I mean it's got to meet a couple criteria, right.

It's got to be simple to use, it's got to be automated, it's got to be accurate, and it's got to be fairly cost effective. And I think that was when Vanadis was put together in design, they were sort of after those characteristics. So I think it's unique in that way relative to what's on the market today.

Relative to our sort of how we're thinking about rolling this out from a market perspective, it's going to be driven to a large extent by regulatory requirements. And so the way we think today is initially it will go into Europe as CE IVD, and there's probably some 70 countries that provide some nice opportunity.

Simultaneous with that, we'll be seeking CFDA approval in China and in fact we're going to see if we can get this fast-tracked because of the need there as well as we think the uniqueness of our offering.

And then probably, and of course as you know that's a significant market, and then probably the third market will be in the U.S., and it will probably be offered there as sort of a kit. But that's probably a little farther out. And we're quite excited about it; we believe we're still on track.

We'll see some initial beta units at key opinion leaders, starting in sort of mid-2017, and we still think we're on track for CE IVD approval in early 2018..

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

Good afternoon. Thanks, guys. Rob, just going back to the 1% organic for the quarter, can you comment on growth if you just look at the group of businesses that you're investing in heavily versus the group that's less of a priority.

How does that split look?.

Yeah. So it was high-single; it was sort of 8% to 9%..

And then if you care to touch on where, I mean, obviously I guess we can do the math on what that means. But, just sort of maybe the outlook on the less prioritized stuff, I mean, how do you think about that in 2017, as you – as the portfolio ....

I mean, I think there's three ways to get that growth up. One is we've got to get sort of innovation in new products out. We've got to execute better in the marketplace. And probably the third aspect of it is we will continue to look to prune some of the products that we think are just not a great strategic fit for where we want to take the company.

So I think it'll be a combination of all three of those. It's obviously – the first two are more within our control. But we'll look to use all three of those levers..

Thank you. And our next question comes from Jonathan Groberg with UBS. Your line is now open..

Thanks. So, Andy, on the – I just want to make sure I'm 100% clear hear.

On the Medical Imaging, the $0.16 is your – it's discontinued, so if the full-year impact is $0.16 and what you're assuming in your initial outlook here is nothing is done with the cash at this point?.

That's correct. So the guidance we provided assumed no use of those proceeds. And as I mentioned earlier, we will – as we get to the point where we close on the sale of the Medical Imaging business we'll be very clear as to how we employ that.

But our intention is to cover the majority of the dilution with either buybacks or acquisitions and we'll be more transparent on that as we move forward..

Yeah. Jon, the way I think I would describe it is that, again, because we don't know when it will close, what we've said is think of it as $0.16 impact. So if it closes a third of the year, let's say, that means $0.05, assuming it's linear, will run through our earnings but through discontinued operations.

And so I think what Andy is implying is that that $0.11 that's left we'll look to cover the majority of that either through acquisitions that we do or through share buybacks, so that if you look in total between the earnings that run through discontinued and things we do to offset the dilution when it's sold or maybe even before it's sold that we're guiding to say, look, the majority of that $0.16 we looked is offset, it's just that we can't give you a specific split until we know when it closes..

I just wanted to make sure we were crystal clear on what that $0.16 was.

And then on the – I know we've cut this a few different ways, but did I miss, if you just looked at it by your new reporting segments, Diagnostics and DAS, how you're thinking about those growing to hit the 4% next year?.

Sure. Right now, we see the Diagnostics business really growing at a 7% or so high single-digit type growth rate and then 3% for the DAS business. That gets you to the 4%..

Thank you. Our next question comes from Matthew Mishan with KeyBanc. Your line is now open..

Hey, good afternoon, and thank you for taking the questions. Could you give us a sense of where you are at now with the portfolio as far as the pruning and the divesting goes.

Is there – like how much left do you think you have there and is it a big chunk or is it more product line coming out here or there?.

I think there was – a question that's always difficult to answer because I think as the company evolves, I think we'll continue to get more discriminating against the sort of products and the technologies we have.

So – but I would say, with regard to sales like Medical Imaging, I know, I wouldn't anticipate as we think about 2017 here that we would see another divestiture of that size for 2017. There will be some product line pruning, but I don't think anything of the size of call it $150 million in revenue.

Now when we get into 2018 and to 2019, possibly, and I think that will also be dependent on how successful we are on the acquisitions side..

And the 70 to 90 basis points of operating margin expansion you're expecting in 2017, how much of that is just simply mix coming out of Medical Imaging? Was that at or above company average margins?.

Well, when we moved Medical Imaging to discontinued now, it doesn't have any impact, right, because we're now comparing numbers in 2016 and 2017 that don't have Medical Imaging in them. So the 70 to 90 basis points has no impact from Medical Imaging leaving..

Thank you. And our next question comes from Steve Willoughby with Cleveland Research. Your line is now open..

Hi, good evening. Two different questions for you. First, just your thoughts on your outlook from a geographic standpoint. And then secondly, last quarter, you talked about how some of your product lines were emphasized versus deemphasized and you might have seen a little bit increased employee head count turnover.

Just was wondering if you continued to see that through the fourth quarter, if it had any impact on results? Thank you..

So I'll take the second one and then maybe Andy will do the sort of geographic split.

So I think that it's hard to tell that answer, right, I mean, we don't have a precise way of measuring, but clearly, when we made the decision, call it sort of third quarter to start to focus on some areas and deemphasize some others, there was some transition within both the sales force and the product manager.

I would say the majority of that's behind us. Now we've communicated it, I think, to the people that it impacted and they didn't like it. I think the majority of them have left or got sort of comfortable with the situation. So I think that the majority of that's behind us. It clearly impacted us in Q3 and it probably had a residual impact in Q4 as well.

I think we mentioned this before – one of the reasons we announced the realignment on October 1 was we wanted to try and get all of this behind us. So as we entered 2017, any disruption as a result of this – again, it's hard to make the disruption zero, but I think to a large extent, that's behind us.

So as we forecast here, and as we enter 2017, our assumption is the organization is well aligned in support of how we're running the company right now, and I don't anticipate any disruption in 2017 as a result of the strategic decisions that were made last year..

And I'll answer the other part of the question. By major geography, our expectations, at least that are reflected in our guidance, are the Americas essentially mid single-digit with the U.S. part of that being really low to mid single-digit. Europe we are assuming is going to be low-single digit with high single-digit growth in the APAC region..

Thank you. Our next question comes from Isaac Ro with Goldman Sachs. Your line is now open..

Good afternoon, guys. Thank you. Andy, I was hoping get a little bit of color from you, as you think about the post-divestiture portfolio, what the incremental margin framework we should put in mind, as we think about a long-term model for the business.

Obviously, the fixed cost coming out of the company with the Imaging sale will be pretty reasonable and I just thought it would be helpful to have a framework for incrementals..

I think that, as Rob may have mentioned, I think as we look forward, we still believe we can drive 70 to 90 basis points of operating margin expansion consistently. I think that, if you look at this year it was a bit higher, and I think that there'll be years where we are able to drive more than that.

I don't think the framework has really changed dramatically without Med Imaging on the bottom-line, but I think it has on the top. I think we're going to have less volatility, and I think net-net over time, we're going to have a steadier and hopefully a better growth rate organically..

So, Isaac, I would say the incremental flow-through is, within the company, is largely dependent on where the growth is coming from. So one of the reasons why the operating margins was as strong as it was in 2016 was because the growth was coming from the Diagnostics side.

So I think when you see growth on the Diagnostics side, generally that's got sort of a 45% incremental flow-through or so associated with it. When the growth occurs on the DAS side, it's lower than that; it's probably in the low 30s. So I think as – and of course Medical Imaging was different, but again that's sort of out of things.

So I think that's really the determinant of the incremental flow-through; it's really where the growth is coming from..

And I think our expectation is that most of the growth is going to come from our focus areas, and those are typically higher margins..

Okay. That's really helpful. Thank you, guys. Follow-up here would be on the food safety business; obviously, that's just a great place to be. You guys have done well there.

Can you give us a bit of a mark-to-market in terms of roughly how big that business is today for you guys as a percentage of total sales or something in that neighborhood?.

It's about $175 million for us right now. To your point, I wish it was a lot larger..

All right. Well, you have time for that to happen now that you can keep working on it. Thank you..

Thank you. Our next question comes from Bill Quirk with Piper Jaffray. Your line is now open..

Great. Thanks. Good afternoon. Couple questions from me. I guess first off in China, have you by any chance seen any impact from some of the new food regulations, and if so, is this contributing to some of the food safety strength? If not, potential driver in the future? And I have a follow-up. Thank you..

Yeah, I do. It's hard because it's so new. You're talking about the regulations now requiring almost like farm-to-table type of analysis. And I think our leaders there think that there has been some incremental growth attributable to those regulations. So we're fairly optimistic that that will continue to be a driver to the food business in China.

But I would say it's in the fourth quarter probably some of the strong food revenue growth was attributable to – clearly it was in China and I think some of it was the new regulatory standards that have come out..

Got it. Okay. Fantastic. And then just staying OUS, appreciate the Tulip color around the contribution for 2017. Can you help size the total opportunity in India for us, Rob? Thanks..

Well, I think when you think about the diagnostics market in India right now, it's relatively small in the scheme of things, right. And we've seen some numbers that says, if you look at the diagnostic tests per capita in India, they are 100th the size that they are in the United States.

So when you think about the size of the population, as the sort of technology evolves and I think costs come down, I think that can be a significant opportunity. But just to give you a sense, the diagnostic market in India is probably $1 billion and growing very quickly.

So the nice thing we like about Tulip is it gives us significant distribution capabilities. I think I mentioned on my prepared remarks some 30,000 customers.

And so we see two great opportunities, one is at some point to take some of the product offering that we have in China, and run that through the channel in India and then also use that channel to help drive our reproductive health growth.

And then we'll continue to be aggressive to look at other types of products that we can go through the channel, but we thought it was important to get good access to a market that we're quite excited about..

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

Hey, guys, this is Luke in for Ross. I guess, just looking at now that you have the kind of a greenfield in front of you at 2017 and you're looking at bolstering your high gross businesses.

I guess looking at the Diagnostics, I know you're not going to give framework on the size of the deal, but just kind of areas where the portfolio you'd like to fill in?.

So, I think, Luke, to your point, I mean Diagnostics is a high priority for us. If you look at the three areas that we play in right now, anything we can do in reproductive health we would like to do. We've got a nice franchise there.

I would say also in infectious disease in emerging markets, so we talked a little bit about Tulip, anything we can do to sort of continue to bootstrap those capabilities. And then we'll continue to look for opportunities in the oncology area around enabling technologies.

So we think we've got some nice capabilities in the front end of the sequencers, so whether it's DNA extraction or automation or sample preparation. So I would say those are the three areas that we're focused on. The other thing that we continue to look at it is opportunities to expand our addressable market.

I would say, when I think about our Diagnostics business, it's a very strong business, but the addressable market needs to be bigger than it is. And so we'll look for adjacencies that we can sort of leverage some of our capabilities into some markets that allow us to grow.

What I would say right now, our addressable market in Diagnostics is probably in the $3 billion range, and we've got to make that much larger..

Great. That's very helpful. And I guess, turning to biopharma, it's been really strong across all of your peers and with you guys as well. Can you just talk about the order trends that you've been seeing in there at the end of the quarter.

If you saw any pause within the larger pharma versus smaller pharma or CapEx spend versus consumables, it would be great..

So as we think about biopharma, I would say the OneSource side, or the service aspect of our business has been very strong; the product side of it is a little mixed, so we have not sort of enjoyed the growth that I would say some of our peers have. And to some extent that's a function of our product mix, right.

So I would say on the imaging side, things are going well, and some of the reagent areas, things are going well. But when you get into the plate readers and the radio chemicals and radiometrics that becomes a little bit more challenging.

So our growth for biopharma has been low single-digits, maybe in some quarters mid-single digits, but we unfortunately have not seen some of the growth as I mentioned that others have. But to answer your question specifically, we have not seen any indication that it's slowing. We believe pharma will continue to have a strong 2017.

It will probably manifest for us, again, more on the service and informatics side than on the product side..

Thank you. Our next question comes from Derik de Bruin with Bank of America. Your line is now open..

Hi. Good afternoon..

Good afternoon..

So could you just give us some – first a housekeeping question.

So based upon your commentary on Medical Imaging's impact organic revenue growth in Q4, is it safe to assume that when we look at the organic revenue growth in the prior quarters in Q1 for Q3, it's similar to what you reported?.

Yeah.

I think in a given quarter, it may – I mean, it may have caused a percent, but think of it as about 7% or 8% of our revenue and it was generally down anywhere from mid-single digits to low-double digits, so when it's – obviously, when it's down mid-single digits, it's less than a percent, but there was – I think Q3 in particular it may have been down low-double digits and at that point, it probably moved it a percent or so.

So depending on how it did in the quarter, it could have – it could have moved our organic growth a point..

Okay.

And can you just give a little bit more color on Tulip and the opportunities there and long-term goals, what you can do with the margins and just a little bit more color on that business?.

Well, it's about – I think it was $35 million in revenue or so and, as I mentioned, it closed this week, so we'll get 11 months or so of the revenue. The margins are, I would say, better than – around corporate average maybe a little bit better than the corporate average.

Maybe there is an opportunity to improve those, but I think really the focus is going to be on growth, how do we accelerate the growth. As I mentioned, we think the IBD market is around $1 billion or so and we think that's going to grow fairly significantly.

Their offerings are really around call prevention screening and diagnosis for infectious disease, so things like malaria, HIV and hepatitis, so very synergistic with what we do in China with our SYM-BIO acquisition we did a number of years ago.

And as I mentioned, the strong products and channel access to over 30,000 customers, diagnostic labs, government, private healthcare facilities, et cetera. So we're quite excited about it.

I would say the other thing is, if you go over the last couple of years we've built a nice team within India, within PerkinElmer, and so we feel very good about the ability to integrate this and leverage the capabilities there. I think they've got like 350 sales people and so we'll look to grow that quite significantly.

It's a business that has been growing I think low double-digits, and we'll look to accelerate that..

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

Hi, good afternoon. You had previously indicated in the past that you had about $1 billion in M&A capacity. Now you have the additional $265 million from the Med Imaging business, or you will soon.

Would you say that you have $1.3 billion of capacity or is it even higher than that since you've strengthened your balance sheet and cash flow over the last year?.

We have approximately just under $1 billion of leverage through our revolver, and then we've talked about our cash as being north of $350 million. So you layer on top of it the $265 million and so we're really around $1.5 billion of available, and then if you throw on top of that our free cash flow generation, it's higher another $300 million or so..

And staying on M&A, are you focused on accretive deals and could you more broadly remind us of what the criteria is that you focus on?.

Yeah, I would say it starts with, obviously, strong strategic fit, and then we generally look at return, so when you think about it cash-over-cash returns.

We are generally looking at something that exceeds our cost to capital and depending on the size of the deal it'd be anywhere from three to five years, and for a larger deal we might stretch out for a period of time. Our cost of capital is probably in the mid to high 8's.

So we probably look to find something that gets us returns of 10% or so in that time horizon. I mean, I think in this environment with interest costs where they are, most things are accretive. So I think it's, I would say, unlikely that we would do something that wasn't accretive.

But again, the real criteria is what kind of financial returns and how does it improve our businesses..

Thank you. And our next question comes from Catherine Ramsey with Robert W. Baird. Your line is now open..

Thanks, guys. I was curious what newborn screening contributed from a revenue ....

Catherine, can you speak up a little bit? I can just barely hear you..

Oh, yep.

Is this better?.

Okay. Yeah. Yes, much better..

All right. I was curious what newborn screening contributed from a revenue perspective in 2016.

And then could you walk us through your assumptions there for 2017 and what kind of China menu expansion and India penetration are embedded in those?.

Yes, so newborn screening grew low double digits in 2016. So it was a significant contributor to the growth of Diagnostics. It is the largest business within Diagnostics. So it's done quite well. And our expectation is it will continue to grow in 2017. We are expecting to see a moderation of growth in China.

We saw mid-teen birth growth in China, birth rate growth, and that was partly due to the relaxation of the one child, but probably more significantly as a result of what I'll call sort of the zodiac year and what our expectation is, as we think about 2017 is the year of the rooster that it will be – it will go back to sort of a moderate sort of normal growth rate probably in the sort of low-to-mid single digits..

Okay. That's helpful. And then just quickly looking at the fourth quarter again, its decline in DAS, can you parse out the performance in instruments versus recurring revenue.

I know, you touched on pharma briefly, but was the decline there mostly capital purchases getting pushed out?.

Yes. It was mostly on the instrument side. Where we saw growth was on the service side. Instruments was negative and consumables, and reagents on the DAS side was sort of up slightly, the majority of the growth on the reagents and the consumables comes from the Diagnostics side..

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. I would like to turn the conference over to Rob Friel for closing remarks..

Great. Well, first of all, thank you all for your questions and your interest in PerkinElmer. So, in closing, let me just emphasize the sense of enthusiasm that exists across the company to both provide significant value for our shareholders as well as advance our mission to make the world healthier.

Again, thanks for joining us for the call and have a great evening..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day..