PerkinElmer, Inc.
Q1 2013 Earnings Call Transcript

Published: 26 Apr 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Quarter 1 2013 PerkinElmer Earnings Conference Call. My name is Jillian, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Tommy Thomas, Vice President of Investor Relations. Please proceed, sir.

[Tommy Thomas:]

Thanks, Jillian. Good afternoon, and welcome to the PerkinElmer First Quarter 2013 Earnings Conference Call. With me on the call are Rob Friel, Chairman and Chief Executive Officer; and Andy Wilson, Senior Vice President and Chief Financial Officer. If you have not received a copy of our earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com. Please note that this call is being webcast live and will be archived on our website until May 9, 2013. Before we begin, we need to remind everyone of the Safe Harbor statements that we have outlined in our earnings press release, issued earlier this afternoon, and also those in our SEC filings. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future, even if our estimates change. So you should not rely on any of today's forward-looking statements as representing our views as of any 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 measures is available as an attachment to our earnings press release. To the extent we use non-GAAP financial measures during the call that are not reconciled to GAAP in that attachment, we'll provide reconciliations promptly. I'm now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel. Rob?

[Robert F. Friel:]

Thanks, Tommy. Good afternoon, and thank you for joining us today. As many of you may have seen in our earnings release, in the first quarter this year, we experienced a 1% decline in revenue, following 12 consecutive quarters of greater than 3% organic growth. This lower-than-expected revenue, combined with our previously communicated growth and productivity investments, resulted in lower operating profit, and consequently, adjusted EPS was lower than both our forecast in Q1 of last year. During today's call, I will summarize what caused our top line miss, how it impacted our financial performance this quarter, as well as what we expect for the rest of the year. In addition, I will discuss several of the qualitative accomplishments this quarter. Turning first to our revenue in the quarter. 85% of our product lines performed as we expected and grew quite well during the first quarter. Our shortfall in the quarter was almost exclusively due to 3 distinct parts of our business that together represent about 15% of our revenue. While a small portion of our business, the magnitude of the decline in these areas drove the overall 1% organic revenue decline. The first of these areas was our environmental instrument business in Western Europe, which declined midteens versus our expectation of low single-digit declines. While the revenue declines were fairly broad-based and not restricted to any one country, from an end market perspective, the most significant headwinds were felt in the industrial end markets. As some of you may recall, at the beginning of 2012, we were quite bearish on macroeconomic conditions in Western Europe and planned accordingly. Despite the difficult operating environment in 2012, we were able to significantly exceed our projections in both Q1 and Q2. Although we remain cautious this year, conditions proved to be more challenging than we had anticipated. The second area of unanticipated weakness was in Japan. Japan represents about 5% of our revenue and has recently been growing high single digits. In fact, I was there at the end of 2012 attending a large customer event and did not detect any concern for funding or reduction in demand. Our forecast assumed a slight decline in Japan in the first quarter due to difficult year-over-year comparisons, resulting from strong sales of our radiometric detection instruments generated from the disaster response in 2011 and early 2012. However, our actual results declined over 25%. Lags in government funding resulted from the delay of supplementary budget approval, along with the lower yen and a general cautionary spending environment, impacted not only our radiometric detection business but the majority of our product offerings across the portfolio in Japan. The third factor impacting this quarter's financial performance was a significant decline in our in vivo imaging business, a product line that has a been historically long strong performer, generating midteens growth, and one which we believe we have very strong market share. As a portion of this business that's exposed through academic funding in the U.S., we assumed its growth would moderate to mid-single digits in the early part of this year, due to concerns over sequestration. However, this business was also down more than 25% in the quarter as delays in funding for academic laboratories brought on by austerity concerns were more severe not only in the United States but internationally as well. Due to the significant costs in our in vivo instruments and our strong share in this business, we generally have a strong indication of which customers will purchase and when purchase orders will be received. Going into March, we believed that we had good line of sight to achieve our in vivo forecast. Unfortunately, the majority of our deal pipeline was pushed out due to a number of reasons, which fundamentally centered on concerns over the uncertainty of future funding. Fortunately, we do not believe any of these deals were lost and believe most of the projected first quarter orders will result in future purchases. Before discussing our adjusted operating profit, I would like to briefly touch on the remaining 85% of our business, which as I mentioned previously, performed quite well and continues to generate very good growth. Our Diagnostic business grew mid-single digits and with contributions for both screening and medical imaging. Our screening business experienced good growth across every product area and geography, and with the newborn area growing double digits and our business in China continue to expand over 20%. Also, of note this quarter, was that based on our newborn screening data that appears that birth rates in the U.S. have increased almost 3% in the last 12 months. In the Medical Imaging business, despite difficult year-over-year comparisons, we continued to grow mid-single digits, and in fact, shipped the largest number of panels in the history of the business. Turning to our research business. We experienced good growth in those areas, where we have prioritized our investments, including sample prep for next-gen sequencing and reagents for the biotherapeutic area and High Content Screening. And our informatics business continues to perform well, growing over 20% in the quarter. Finally, in the environmental business, while our instruments have come under pressure, as I mentioned previously, particularly in Europe and Japan, the service business continues to grow, expanding mid-single digits as we win new customers with our comprehensive OneSource program. Turning now to operating income. When we issued guidance, we discussed our plans to use the incremental profit from our planned growth in the first quarter of the year to complete several productivity projects, as well as fuel incremental growth investments. Therefore, we guided to minimal adjusted operating margin expansion in the first half of this year. Since our revenue actually declined slightly in the quarter rather than increase, we, obviously, did not generate any incremental profit from the higher revenue. And as a result, our incremental costs have resulted in lower operating margins year-over-year. In addition, as our revenue shortfall did not become apparent until very late in the quarter, we did not have an opportunity to offset the revenue miss. Furthermore, much of the revenue that experienced the unexpected contraction carries some of our highest gross margins, which further compounded the profit delta and resulted in a very high percentage of the revenue miss flowing through to the bottom line. And for the remainder of the year, we've reforecasted both the top and bottom line assumptions to reflect more modest revenue growth, particularly in the short term. Specifically, we are assuming our demand profile in Q2 is similar to Q1, with Europe and Japan continuing to be challenging. However, we believe our in vivo imaging business will return to positive organic growth this quarter. As we move into the second half of this year, we believe the severity of the headwinds will moderate, and we will return to an organic growth rate more similar to what we had in plan, albeit probably at the lower end of our original forecast. Consequently, we now believe that for the full year, we will grow organically in low single digits as compared to mid-single digits communicated in January. In an effort to offset some of the profit miss from the lower revenue forecast, we will be both moderating our investment plans for the remainder of the year, as well as pursuing additional prudent cost actions and accelerating some previously planned productivity actions. However, given that the large bulk of our business continues to perform as planned and are in attractive growth markets, we believe it is important to maintain the appropriate balance between investing in growth and disciplined cost management. While Andy will cover the specifics of the guidance, overall, we believe Q2 will be another difficult quarter, where our financial results will be below last year. However, we believe that through actions we plan to take in Q2, and some recovery in the impacted areas, the adjusted operating income and adjusted EPS for the second half of the year to be close to our original guidance. Before turning the call over to Andy to cover our financial results in more detail, I would like to quickly highlight some of the areas where we made good progress in the quarter against our management priorities for the year. First of all, in the quarter, we continued to make strong headway on rationalizing our production footprint and are on target to transfer manufacturing several product lines to lower-cost regions by the end of June. We are accelerating our efforts to expand our global reach, most recently through opening of our new South African office. And we are in the process of growing our direct presence in other expanding economies such as Turkey, Israel and Vietnam. This quarter, we continued our efforts through developing the next generation of screening assays for genetic diseases such as SCIDS, which we discussed last quarter, and have now deployed, as well as Fragile X, a genetic disease that can result in mental retardation and neuro degeneration. This assay has already been successful with our collaborators in Hong Kong, and we look forward to expanding use later this year. Additionally, our recently introduced Spectrum Two infrared spectrometer instrument has been introduced in the air monitoring, food analysis, oil analysis and a wide array of applications within customers that meet expanding needs in measuring contamination in the world around us. We also continue to expand our prenatal and informatics capabilities in the quarter, and we are pleased to announce the expansion of our contract with Aetna to include an IPT screening. Aetna's approximately 20 million covered patients will now have access to Verinata Health's verify prenatal test, helping to accelerate the broader adoption of noninvasive prenatal testing. Now let me turn the call over to Andy, and then we'll open the call to your questions.

[Frank A. Wilson:]

Thanks, Rob, and good afternoon, everyone. Consistent with prior quarters, I'll provide additional color on our end markets, the financial summary of our first quarter results and details around our revised 2013 guidance. And then we'll open up the call for any questions you might have. As Rob mentioned earlier, the majority of our businesses performed as expected. We did, however, experience declines in instrument demand late in the quarter concentrated in 3 key areas. Specifically, we saw declines in the environmental instrument business in Western Europe, overall weaker demand in Japan and significant declines within the in vivo imaging business. I will provide additional details on our top line performance later in my prepared remarks. Reported revenue for the first quarter declined 1%, while adjusted revenue declined by 2% to $507 million as compared to the first quarter 2012. Organic revenue for the quarter declined 1% as compared to the same period a year ago. Adjusted earnings per share for the first quarter was $0.36 as compared to $0.43 in the same period a year ago, impacted by the lack of volume growth and negative mix with the decline in higher-margin revenue and incremental growth in productivity investments deployed through the quarter. By geography, organic revenue in the Americas grew low single digits. Asia declined low single digits, and Europe declined at a high single digit rate. China remained resilient with growth of approximately 20%. Looking at organic revenue by product category. Recurring revenue, which includes reagents, consumables and service, was solid with mid-single digit growth in the quarter. This was the -- primarily the result of continued demand for our diagnostic products and strength in our OneSource and informatics offerings. Instruments declined at a high single digit rate, negatively impacted by delayed capital equipment spending due to funding delays, primarily in Europe and Japan as we discussed. From an end market perspective, PerkinElmer's Human Health segment represented approximately 56% of reported revenue in the quarter. We served 2 end markets in Human Health

[Operator:]

[Operator Instructions] Your first question comes from the line of Paul Knight, CLSA. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division Rob, if you recall, the gas chromatography, spectroscopy, I think that's what you would define as environmental analytical instruments. I guess, you are assuming that, like past cycles, that this is, what, down for another quarter or 2?

[Robert F. Friel:]

Yes, I think that's fair. A lot of it -- what we're seeing, Paul, actually is it's dependent to a large extent on geography. So actually, in the U.S. we saw growth -- slight growth in our analytical instruments in the first quarter. But as I mentioned, we saw fairly significant declines in Europe and Japan. China continues to do quite well. So actually, when we look at the growth profile of the company, it seems to be more impacted by geographic region than necessarily application or technique. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division So meaning, across-the-board, on the analytical instruments side, Raman spectroscopy, GC, LC, et cetera?

[Robert F. Friel:]

Yes, I would say across the technologies. Again, when you're thinking about the decline in Japan and Europe, it was pretty much across almost the entire portfolio. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division And then on the Japan side, you mentioned down 25%. I guess, 17% of that 25% is from the yen, so kind of a mid upper single digit decline in the organic on the Japan side, is that the way we should think about it?

[Robert F. Friel:]

I would say on the currency side, it was probably closer to 10%. And so on an organic basis, it's probably closer to 15%. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division Okay. And then on the in vivo side, I guess, this is the animal imaging technology. What's the ASP on those units? It's high, right, like 250?

[Robert F. Friel:]

Yes, it's that -- in north of that. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division Is the academic side on the in vivo that was soft?

[Robert F. Friel:]

Yes, absolutely. And we expect it because the sequestration, that it was going to be softer. As I mentioned in my prepared remarks, this is a business that's been growing consistently midteens or better. And we expected some moderation of that, but we're, quite frankly, surprised by what happened in the first quarter. I think my own view is that I think there's a -- there was a lot of uncertainty as to how budgets would be handled and, of course, people were trying to preserve on to labor and maybe other types of expenses. So they really pushed off a lot, particularly the large capital expenditures. I will say we have started to see, in early part of April, some of that come back. And so as I mentioned, we're fairly optimistic that in this business returns to at least mid- to high single digits for the remainder of the year. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division Yes. And then last, I guess, in Europe, can you say what industries? Was it, oil, gas, petroleum, refining? Was it that area?

[Robert F. Friel:]

Yes. I would say it's largely in the chemical and energy area. I mean, the 2 that I would spike out as where we saw a fairly significant cut back from instrument purchases.

[Operator:]

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

[Ross Muken:]

Obviously, a pretty rough quarter. I think as you look at the results, I mean, the thing that stands out to me and sort of the decremental, which shows, obviously, as you said in some parts, you didn't see the sort of revenue miss come probably until late in the quarter, so you weren't able to adjust spending. I guess, when you sort of went back and you sort of sat down with heads of divisions or with the sales force, I mean, how do you feel -- as you sort of think about when you were projecting out for the next quarter, how did you get comfort that you kind of got a hold on, sort of where those businesses are and sort of the causes behind some of the -- I guess, pauses or pullbacks in demand? And then, how much of it going forward is just going to be now, you have to be a lot more proactive on the cost management, because obviously, you don't want to have 150% decremental margins for more than one quarter.

[Robert F. Friel:]

Yes. So I would say, first of all, it's 15% of our revenue we're talking about here, so -- and again, in these 3 components, I think first of all, if you take in vivo imaging, it's a business that we have a good share in, so we think we understand almost product by product, or customer by customer what happened in the first quarter, and we can track those. And so again, we're starting to see some recovery. So I think we've got a pretty good handle on what's going on there. Of course, you still have the risk of uncertainty around funding. So we -- like I said, we think this recovers -- starts to recover in the second quarter and in the back half start to get more to what we've seen historically. I think in the case of Japan, as we look back in hindsight and understand it, I think a lot of it was this issue with the supplemental budget that was pushed. Our view is that, when you had a change in government, you created some uncertainty -- and keep in mind, one of the bigger pieces of our business in Japan is the radiometric detection, and a lot of that is government funded. And so we think that will sort itself out over the year. And so we do think there's some recovery there as well. I think the bigger question for us is Europe. And as I mentioned before, and as you recall, we -- in 2012, we're fairly bearish on Europe, and we're surprised with the upside in first half. And so, consequently, I think we're probably more optimistic in our projections than we probably needed to be. So as we think about the rest of the year, I think Japan will recover, I think in vitro will recover -- we're still fairly cautious on Europe, and that's how we tried to build our forecast, in trying to be a forecast that we think is accurate but also achievable.

[Ross Muken:]

And so when you think about managing the business the next quarter or 2. I mean, this has -- when you saw the roll up, you had to be pretty disappointed. I mean, this is a pretty terrible outcome from at least in earnings and op income standpoint. And so, I guess, when you're thinking about what you need to be ready to do or how you need to sort of be proactive to kind of manage through this tough environment, what are the sorts of things, internally, you guys have been discussing? And what sort of in the thought process of -- we, obviously, don't want to have another delta of this magnitude, versus sort of your forecast in the Street. And so what's sort have been the discussion point around that on your side?

[Robert F. Friel:]

Yes. I think the other thing to point out is that, as you mentioned, there -- it's not just a revenue drop, but I think probably more surprising than the revenue drop is the flow-through. So whether you look at, for example, year-over-year, we've got over 100% of flow-through where our operating profit decline is greater than our revenue decline, and when you look at relative to plan even it's fairly high. I think one of the things that was unfortunate, particularly, in the first half was that we went into this year, again, assuming we were going to see some growth. And so we were investing both from a R&D and growth perspective, as well as from a productivity program. And so again, with sort of a drop late in the quarter, we couldn't respond to that, and so, consequently, you're seeing increasing costs and no revenue to cover that. And so that's really what's caused the significant flow-through. So consequently, we are looking at a couple of things. We'll probably take some of those investments and defer those, given the revenue drop. We're also looking at pulling in some further productivity plans that we had on track for maybe later in the year in 2014. So I think as we've talked to you in the past is we think we've got a series of things that we can do that continue to drive efficiency through the organization. And then the third thing is we will take a hard look particularly in those areas, where we're not seeing the growth, and in fact, seeing accelerating declines, and we will take some cost actions there. So combination of cost actions in the areas where we're seeing declines, accelerating productivity plans that we would have done either later in the year an '14, and a deferral of some of the investment plans that we had in the second quarter and either later in the year or into 2014.

[Operator:]

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

[Doug Schenkel:]

So just to run through some math. If 85% of your revenue grew at close to mid-single digit levels, the other 15% would seemingly have had to have declined over 30%. Put differently, I believe we're talking about a base of about $75 million to $80 million in revenue, accounting for what was over a $20 million miss relative to expectations. And again, this was all late in the quarter. This seems pretty remarkable, again, given you said that you were on track until late in the quarter. So just to be clear, was the other 85% of your business truly in line with expectations?

[Robert F. Friel:]

So let me just help you a little bit with the numbers. The 85% grew about $3 million, and the 15% declined about $25 million, so those are the numbers. So the answer to your question is, yes. If you look at the 85% -- now, if you look at those products and geographies, those businesses generally were not off more than $1 million individually. Now of course, you have some that are up a little bit, some that were down a little bit, and that's basically all it says [ph]. But the fundamental, the 85% of the revenue, as I said, it did as we projected. With regard to the -- late in the quarter, we look at our revenue through the quarter on a week-by-week basis and measure the percentage of revenue we've achieved to date and compare that sequentially to the percentage in Q4, and we compare it year-over-year to the percentage in Q1. And actually, if you look at week 12 and actually up through week 11, we were tracking within 50 basis points of where we needed to be. And there was really only in week -- partly, in week 12 that we started to see a decline that ended up resulting in the, call it, $25 million miss to the revenue. Now having said that, particularly, when you're talking about instruments, a big portion of our instruments occur in the last couple of weeks of the quarter.

[Doug Schenkel:]

Okay, that's helpful. You indicated, I guess, just kind of digging in again more on the math that Asia-Pac declined low single digits? We talked a lot about Japan. I believe that only accounts for about 5% of sales, maybe that's higher this quarter, typically, given it's the end of the fiscal year. But you combined that with the fact that, I believe you said China growth was still strong. Were there other pronounced areas of weakness in the region?

[Frank A. Wilson:]

The 2 other areas were Korea and Southeast Asia that were really declining significant double digits. So those, combined with Japan, unfortunately offset a relatively good performance in China.

[Robert F. Friel:]

But again, going back to my comments before, there were other areas that were declined. But in these instances this was planned, either because of difficult year-over-year comparisons or various dynamics that were going on in those countries, either from sort of a mix.

[Operator:]

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

[Isaac Ro:]

On the cost savings that you guys are pulling forward from 2014, can you maybe put a little more detail around what kinds of cost savings they are? And then maybe update us on some of the facility consolidation works you have in store this year, just wondering how much that will help in the back half of the year.

[Robert F. Friel:]

All right. Well, let me take the first one, and maybe Andy can talk about the status of productivity. So I think as we sort of laid out a roadmap in the past, we talked about initially doing some things from a sourcing perspective, doing some things from a factory consolidation and doing some things from a back-office. I think the other opportunity is to do some things on how we go to market. So from a selling and marketing perspective, also as I mentioned in some instances, maybe going direct versus indirect. So those are the types of things that we had teed up largely for 2014. I think we'll look for opportunities to pull that in earlier into 2013.

[Frank A. Wilson:]

And on the other question, we are actually relatively complete with one of our facility moves, which is really the transfer of manufacturing to Singapore and China, and we will start to see the benefit of that in the second quarter, and then the full benefit at the third and fourth. On the other facility consolidation in the U.S., where we're consolidating 3 facilities into 1, the actual activity will be completed in the second quarter, we'll start to see that benefit as well in the second half. And the spending, we -- within the first quarter, the spending was a little over $5 million for these projects -- for these growth and productivity projects. That will decline some, but the savings we're going to generate just from the manufacturing and restructuring on an annualized basis is about $15 million.

[Isaac Ro:]

Okay, that's helpful. And then just, Rob, if I could press you a little bit on the longer-term picture for the business. If we look at the short-term disruption and put that aside for a minute, I think last quarter, you guys were relatively optimistic that the organic growth of the company could accelerate beyond the mid-single digit range in the out years, is that still a fair characterization?

[Robert F. Friel:]

Yes. I don't think there's anything that occurred this quarter that changes our mind with regard to that. And again, that's what I wanted to sort of reemphasize the point that -- well, obviously, we want to be responsive to what we're seeing from a revenue shortfall here in the first quarter. We want to make sure that we're balanced from the standpoint of trying to attack the cost in the areas where we think it's appropriate, but we want to continue to fuel this significant opportunities we see. Because we do think with the portfolio we have now and the end markets that we serve, that we do think there's an opportunity to sort of expand faster than mid-single digit.

[Isaac Ro:]

Got it. And then last -- one cleanup item on the financials, Andy. You guys repurchased, I think about 3.5 million shares this quarter, a little more than we had in our model, can you just talk about incremental uses of cash for the balance of the year, just given that you guys didn't update the share count guidance?

[Frank A. Wilson:]

Yes. I think, as I said, our share count for this year will be about 113 million. We had indicated going to the year, we would take out, but it was essentially the option creep from 2011 and we did that. I think going forward, we have an acquisition pipeline primarily of bolt-ons that we're continuing to work through and I think there's some opportunity there. And we will continue to look at further share buybacks as well.

[Operator:]

Your next question comes from the line of Amit Bhalla, Citi.

[Amit Bhalla:]

Rob or Andy, when you're talking about moderating investments, I wanted to see if you could give a little more detail there, because I think in the past, you've talked about investments in China and Molecular Diagnostics, the NIPT channel and some informatics. So what exactly are you going to be moderating on the investment side?

[Robert F. Friel:]

I think what we'll try to do in here, some of those investments, to the extent that they were sort of people, some of them were sort of marketing and training and those types of things. And what we'll probably do is sort of delay some of those, rather than say being in the second quarter, and maybe we'll wait and look to see how this revenue grows. If we get more comfortable that the third quarter will be at least as we project or maybe better, we'll start to feather those out a little later in the year, or if we have to hold them off to '14. So I would say it's generally in the areas you mentioned there and we'll just sort of moderate that as we see the revenue.

[Amit Bhalla:]

Okay. And the second question is on Medical Imaging. I know the performance was fine in the quarter, but can you just talk to what's happening on flat panel pricing and the competitive dynamics? Anything that we should be aware of that could take place later in the year.

[Robert F. Friel:]

I don't see anything happening on the competitive dynamics that should have any impact on our Medical Imaging business. I think we still feel very good about our share. I think with regard to pricing, and this is something we talked about in the past, this is a business that every year generally has pricing decreases that are, in the last cases, contractual with our customers. Because as volume increases, generally, it's -- think about fab economics, the incremental costs to produce that additional panel is fairly low, and so some of that is shared with the customers. So generally, in any given year, we're probably looking to 100 basis points or so margin contraction, and 2013 is similar.

[Operator:]

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

[Jonathan P. Groberg:]

Rob, I guess one question with -- I know you said it's hard to kind of de-convolute [ph] what's going on with Caliper, but just given since that was a big investment, what did Caliper grow? I know that in vivo was down, it sounded like you said sample prep was still up, so maybe just some color there?

[Robert F. Friel:]

Yes. I would say, again, it's getting harder and harder to do, but I would say, given the magnitude of the drop in in vivo, Caliper would've been negative in the quarter. I would say it was probably something in the high single digit decline. But as we think about those products and those applications, we still feel very good about it. As I said, I do believe the in vivo imaging has probably mid-teen opportunities as we sort of go out later in the year and into '14. We continue to feel very good about the microfluidics business and think that will see very strong growth in the back half of the year. And I mentioned the fact that sample prep around NGS saw good growth in the quarter, and I think that will continue to do well. I mean, one of the challenges is, as we talked about some of the cannibalization, so we saw very strong growth in our JANUS liquid handling. And some of that was cannibalization of some of the Caliper liquid handling business.

[Jonathan P. Groberg:]

Okay, that's helpful. And then obviously we've been hearing a few company's reports, and it's kind of tough to piece together exactly what's going on and obviously, not everybody sells the exact same product in the exact same market. But I don't know, I guess as you kind of see the business and you think about the M&A opportunities that Andy was referring to, does anything that you're seeing right now, or kind of as you consummated that, does it change how you're thinking about which businesses you want to invest more in, versus ones that you want to invest less in?

[Robert F. Friel:]

I don't think so. I think we still feel good about the growth prospects for all the business. And like I said, I don't -- well, obviously, from a cost and investment perspective, we want to sort of get after this. I don't think we want to sort of overreact from a sort of one quarter phenomena here. And again, I think it's fairly geographically focused in Japan and Europe, and of course, the sequestration impact in the U.S. So I think we'll continue to look across the portfolio. There are areas of the portfolio that we feel better about from the macro trend. So -- and it's clearly, some of the areas of Diagnostics continue to be attractive. And again, we saw a good growth in Q1. Informatics, I think, is an area that again put up very strong numbers in the first quarter, and so I would like to continue to build our capability there. I think that is something that somewhat differentiates us relative to some of the other peers. And of course, China is an area that with 20% growth, is an area that will continue to -- will try and build out our capability there.

[Jonathan P. Groberg:]

I guess one thing I was kind of contemplating, and that was helpful is, do you see -- given someone like Thermo who's really increasing their scale and some of the other players that have really increased scale, I mean do you see any of the things going on in some of these businesses as where it's more difficult for you to compete and there are certain areas that you should either get out of, divest or deemphasize, or you don't see this as a share issue, it’s more of a mix issue?

[Robert F. Friel:]

I would say, clearly, the competitive landscape is changing. But I think we still feel good about our position in the areas where we're focused. And again, our strategy has been a little different in that we're not really trying to sort of be sort of all things to all people. What we're trying to be is very focused in areas where we think our technology and our intellectual property can be differentiated, and hopefully we can target those in areas that have a little higher growth. So I think we continually are assessing our portfolio. And if there are some product lines on the margin, we think there should be somebody else that might be a better owner, we'll continue to look at that. But I would say, for the most part, we feel good about our positions, we feel good about our technologies, and we think we can continue to be fairly differentiated in our offerings.

[Operator:]

Your next question comes from the line of Dan Arias, UBS.

[Daniel Arias:]

Rob, over the last couple of quarters, you've kind of expressed a level of comfort with the potential impact from NIH exposure. So I guess, is it just the magnitude of the decline that caught you by surprise, or given that it's not always easy to pinpoint where resources are coming from. You found that maybe federal funding is a bit more meaningful than you thought?

[Robert F. Friel:]

I think first of all, the magnitude of the impact, I think, did catch us by surprise. I think we were saying, it could be 10% to 20%. I think clearly, it was more than that. And my comment previous was, I think, a part of the issue has been just the uncertainty. I think, a lot of the labs are still trying to figure out how it's going to work, will they reach back and cut some grants that have been issued previously? And so I think the magnitude of it was a little higher. I think the other thing is, well, I think it's difficult to tie it directly to sequestration. I think there has clearly been a ripple effect with general austerity. Because again, I'm not sure our exposure is any different than what we thought, and we, I think, sort of calibrated that around mid-single digits. But we were surprised to see the global aspects of it. So again, the in vivo business has probably 50% of its business outside the U.S., but we saw researchers in Brazil and researchers in Asia and researchers in Europe pulling back as well. So I think the general sort of economic austerity, we were surprised by.

[Daniel Arias:]

Got it. Okay. That's good color. And then maybe a strategic one, on the RAD business, do you still feel like that's something that makes sense in the portfolio? And if so, what's sort of the pitch for those assets at this point?

[Robert F. Friel:]

Well, the issue this quarter was really more of the RAD detection, so it's a little different than the issues that we've seen historically. The RAD detection business, it's grown modestly, I would say over the last couple of years. It had a pop because of the tsunami in Japan. But I think what you're probably referring to more is the RAD radiochemical business, which again saw probably a mid- to high-digit decline from a year-over-year perspective. Again, that was something planned, that's something we've seen for quite some time here. And I think as we think about it, it does give us some ability to discuss with certain labs. And we think about disposing of it, we're not sure that we would get a lot of value. Our view is that people will probably just discount the cash annuity. And so as we think about the opportunity to bundle it with some things that we do, we think it still probably makes sense for the stay in the portfolio, but we don't think it's probably ever going to be a significant grower.

[Operator:]

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

[Daniel Brennan:]

Regarding the in vivo business, what's implied in the remainder of your '13 guidance for in vivo growth? And could you share with us, Rob, the details. Like, what gives you confidence in that business recovering towards double digits, which I think you mentioned earlier in the call?

[Robert F. Friel:]

Yes. I would say for the rest of the year, it's probably high single, low double, is what we're assuming. And I would say, if you look at second quarter, it's sort of 5 to 8 and then it sort it picks up as you go through the quarter. And I think what gives us the confidence is there is still a fairly significant pipeline and there's a fairly significant demand from researchers to use that product. It's very instrumental in a lot of cancer research. And so in just the discussion with researchers and looking at the pipeline, we think once we get through some of these funding uncertainties, we think the demand will continue. And again, because we have pretty good insight into the customers and because we have pretty good share here, we're fairly convinced that this is not a share issue, and we're not losing share.

[Daniel Brennan:]

Right, right. So I think earlier in the call, you had mentioned the prepared remarks. It looks like a lot of those orders use felt you actually would recapture, they weren't lost. So is that -- what can you share with us about the commentary there, maybe early action in April thus far, is there any color towards that confidence?

[Robert F. Friel:]

Yes. I would say we are seeing an early -- some of the funding free up a little bit. So I think that gives us a little bit more confidence. But clearly, this is an area we are going to watch very closely. We were surprised in Q1, and so we feel like this will recover, but it's something we're going to have to keep a close eye on. But early indication is in April, it seems to imply that there is some funding freeing up and we're starting to recover some of these that got pushed.

[Daniel Brennan:]

And then, Andy, how did this quarter's results impact your long-term margin targets?

[Frank A. Wilson:]

Well, we've had an 18% target out there for operating margins in 2014 for some time, and I think this obviously makes it more difficult. I think we feel, if we can deliver the second half forecast that we have now, it's still achievable, it's going to make it a lot more difficult to do. But as Rob mentioned, there's some things we're pulling in on a cost savings perspective. And I think some of the initiatives that are actually complete and the cost are rolling off will start to generate some fairly significant savings in 2014. So we're still sticking with that at this point.

[Daniel Brennan:]

Okay. And then, Andy, one more. After a shortfall of this magnitude, I think we'll hope that there's a significant level of cushion in terms of the guidance that you're providing, so that we don't see a shortfall again. Maybe can you just discuss, I think it was an earlier question was asked, maybe a similar question, but can you discuss, Rob, any kind of planning in terms of what you put into this guidance and kind of what level of conservatism if it there?

[Frank A. Wilson:]

Sure. Well, this is the first quarter we've missed guidance in over 10 years, and we do not want to miss guidance again. So we took a very detailed bottoms-up approach to the forecast, and we also then put a very conservative overlay on that forecast. So our confidence level in achieving this forecast is, I would say, high.

[Operator:]

Next question comes from the line of Tycho Peterson, JPMorgan.

[Tycho W. Peterson:]

Rob, earlier, you kind of laid out some timelines just to how the quarter tracked. Can you just talk as to why you didn't pre-announce given you had the data a week ago?

[Robert F. Friel:]

Tycho, I would say, our practice has been to announce on schedule and not to release early, whether we are positive or negative. Because we don't think it makes sense to go out with incomplete data. Our view is it's better to provide a complete analysis and we wanted to make sure that we -- when we did go out, that we had a complete understanding of what happened, how it affects the business and what we're going to do about it. And to sort of depart from that rigor, would just lead to speculation and probably increase volatility. So we wanted to make sure that we had it buttoned up and said, hey, we fully understand what happened. This is what we think the implications are for the rest of the year, and this is what we think we can do about it. And my own view is to go out with incomplete data, again, just would lead to speculation and further confusion.

[Tycho W. Peterson:]

And then going back to a prior question on Medical Imaging, I know you got a question about flat panel pricing, but just the CapEx datapoints haven't been great around hospital spending. Can you just talk us to what gives you conviction that, that business still holds up for the next couple of quarters?

[Robert F. Friel:]

Well, I would say, for our guidance, we have generally guided Medical Imaging to relatively modest growth in 2013. And part of that was because we saw a very strong growth in 2012. So our expectations for Medical Imaging, even in the beginning of the year, were relatively modest, I'll call it sort of flat to low single digits and we still think we can deliver that. We did a little bit better than that in Q1, but we have fairly modest expectations for the Medical Imaging business throughout the remainder of the year.

[Tycho W. Peterson:]

All right. And then just lastly, on the environmental business, I don't know that the commentary from your competitors has been as negative as you guys, particularly on Japan. Can you just convince us that that's not a share issue, it's more of a mix issue?

[Robert F. Friel:]

Well, again, I sort of mentioned a little bit before. A significant piece of our Japanese business is radiometric detection. It was down, actually close to 40% year-over-year, and I don't know that any of our competitors do radiometric detection in Japan.

[Operator:]

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

[Derik De Bruin:]

Tycho sort of got to some of the cleanup questions I wanted to ask, but let me just ask some other ones that I need. Can you just -- how big is, sort of like, the in vivo imaging business in terms of a dollar amount?

[Robert F. Friel:]

Yes. It's about 4% or 5% of the revenue, call it $80 million business.

[Derik De Bruin:]

And I'm going to ask the competitive question another way on this. I mean in Japan, have SHIMADZU and Hitachi, given that the yen has gotten weaker. Have you seen -- was that part of the issue, that people were buying more local suppliers for some of the environmental equipment there?

[Robert F. Friel:]

I think it's -- at this point, it's a little difficult for us to go back and sort of parse out whether our competitors are getting share or not. I mean, I think that's going to take us a little bit time to understand what's going on, and I just sort of mentioned, sort of understanding what are the other competitors. We know because we have a big presence in radiometric detection and that was a big driver to the decline. If you pull that out, actually our analytical instrument business in Japan was down single digits.

[Derik De Bruin:]

Okay, okay. That's actually the data point I wanted. So I guess, and can you just sort of talk about geographies in Europe? I mean, your more pronounced weakness in Germany, that came in late in the quarter, was it more pronounced?

[Robert F. Friel:]

Yes. Actually, when we looked out and sort of mentioned the prepared remarks, it was pretty pervasive. I mean, it wasn't, in fact, actually there was a slight higher downturn -- decrease in sort of the northern and central parts of Europe as compared to Southern Europe. But it was across the board. And again, and what I'm talking, the decline, it was really Western Europe. Actually, Eastern Europe was fine, Eastern Europe grew for us. But when you look across Western Europe, and again, the area I'm spiking out as sort of the significant decline was in analytical instruments, but it was, whether it was north, central, south, they were all down fairly significantly.

[Derik De Bruin:]

Great. And I guess just one final question on -- is there any update you can share on sort of the Verinata transaction, I mean how has that gone so far? What are you seeing? Can you give us any sort of color on that?

[Robert F. Friel:]

Yes. I mean, I think Andy mentioned is we're very pleased with -- we launched it February 1, and so we've got a little bit of history here. So we're seeing a very nice uptick running in through our channel. But as I think we mentioned, the key here is you've got to get paid. And so we're taking a very conservative approach to revenue forecasting. But we still feel very good about it.

[Derik De Bruin:]

And along those lines, are you running into -- are there one competitor you're running more into those markets when your people are going out, are you running more into Sequenom or into Ariosa. I'm just curious about who are your people sort of interacting with in the field.

[Robert F. Friel:]

No. I would say, not really. And I think it's continued to validate our hypothesis, as because we had great relationships with the physicians, particularly in this area because of our NTD business, that we're getting great traction and uptick.

[Operator:]

Our next question comes from the line of Peter Lawson, Securities U.S.

[Peter Lawson:]

Rob, of the 3 issues that happened, which ones are starting to turn around in the first few weeks of Q2, and how are you sure that you didn't lose share and what gives you the confidence it isn't going to bleed into 3Q?

[Robert F. Friel:]

So I would say the area that we're seeing the most significant change was probably in the in vivo area, where we are starting to see some people actually purchase instruments. And as you can imagine, Q4 was down very significantly. So I would say that here. Also in the case of Japan, we will see some recovery there for no other reason than we have much easier comps. I mean part of what was driving again -- and we knew we were going to be down because of the tsunami sort of blip we had in late '11 and early '12, so we will see some recovery in Japan. I mean Europe, it's a little early to tell, because going back to my earlier comments, a lot of the instrument purchases are more back-end loaded in the quarter. So I would say we're not seeing a significant uptick in Europe, but we will probably see some recovery in Japan for no other reason than comps, and we are seeing some improvements in in vivo.

[Peter Lawson:]

And what stops it bleeding into 3Q, let's say, Europe?

[Robert F. Friel:]

Well, I think Europe is -- and I think as we have put together the forecast, we have been probably most cautious about Europe. And so I think Japan we feel better about, again, part of that is just comparison purposes. I think in vivo, again, because of our pipeline, but I think we are cautious in Europe. So while we think Europe gets a little bit better, we are forecasting for analytical instruments in Europe still fairly modest demand.

[Peter Lawson:]

And then I mean, is there anything wrong with the reporting systems? And why didn't you see it earlier?

[Robert F. Friel:]

No, I don't think so. As I said, I mean this is something that we track on a weekly basis up until the last 2 weeks of the quarter and then we track it on a daily basis. And we were tracking pretty well. And when you look at both Q4 as a percentage of our revenue during the various weeks and Q1. I think one of the things though as we go back and analyze this in more detail now, we believe what may have been happening is, there were some declines that were inherent in the weekly numbers that were being masked by revenue that was not necessarily beating plan but was just coming in early in the quarter. So while we were tracking, again, on a percentage, we were within 50 basis points of our percentage revenue on -- in week 9, 10, 11, and going into 12. But we think that what was happening was that some of the revenue for the quarter was pulled earlier in some of these areas other than the 3 I mentioned.

[Peter Lawson:]

And in any of those 3 areas you think you've lost share?

[Robert F. Friel:]

As I said, we don't believe so in in vivo, and we've got pretty good visibility into that. We don't believe we're losing share in radiometric detection because, quite frankly, there's not a lot of people that do that. I think there is a question with regard to Europe, and I just don't know that we have enough data to have a good appreciation for that.

[Operator:]

Our next question comes from the line of Bryan Brokmeier, Maxim Group.

[Bryan Brokmeier:]

You cited OneSource as one sort of area of strength in the quarter and you've been seeing that growth over the last several quarters. There are numerous players in the lab services market, and I was just sort of wondering how are you sort of differentiating your business? A lot of them are also talking about growth in the lab services business and wondering why customers are choosing OneSource over some of the other offerings out there.

[Robert F. Friel:]

Yes. I would say for me, it's probably 2 or 3 differentiators. One is we've been doing it for a long time, we've got a great track record and we've got a lot of experience in doing this, and we've done it with a lot of customers. I would say the second thing is, because of some of the acquisitions we made in the informatics area, call it, 18, 24 months ago. We are now able to bundle some very unique offerings, where we can provide our customers not only opportunities to manage the service aspect of what's going on in their labs, but we're giving them visibility through the use of our informatics capabilities.

[Bryan Brokmeier:]

Okay. And you talked about the weakness of your instruments in the environmental market, and some of your competitors have talked about strengths of their food safety businesses, specifically. I was wondering if you could provide some color around your food safety business and what you're seeing there.

[Robert F. Friel:]

Yes. Actually, food safety was up for us, probably sort of high single digits in the quarter. So we continue to see good growth in the food area. And again, the majority of the weakness that we saw was on the industrial analytics. So the environmental piece, air and water was fine, the food area was fine. We mentioned the fact that the service was fine. It was fairly contained within Europe and Japan, and largely focused in the industrial end markets.

[Operator:]

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

[Zarak Khurshid:]

So how are things developing in China around the blood screening opportunity, government tenders and so forth?

[Robert F. Friel:]

Yes. So I would say, we continue to be very pleased with the integration, first of all. I think that's going well into our -- in our business there. And we continue to feel good about our win rate there. In the Q1, we continued to win tenders there, and so we think we're getting more than our fair share of the business. So we continue to be excited about that business and think come '14, '15, that's going to be to a big contributor to our growth.

[Zarak Khurshid:]

Interesting. And then, just curious on the analytical instrument business as it pertains to China, how significant is that, and could your issues in Europe sort of bleed into China, which has issues of its own and maybe isn't immune to some of these kind of credit issues?

[Robert F. Friel:]

Yes. Our analytical instrument business is, call it 60%, 65% of our China business. And as we said, we continued to see very strong growth in China in the first quarter. And the growth was sort of broad-based across all our businesses. All of our businesses in China grew mid-teens or better, including the environmental business.

[Zarak Khurshid:]

That's encouraging. And then maybe I missed it but what was the overall currency impact and if you could comment on the CapEx spend for the remainder of the year, that would be great.

[Frank A. Wilson:]

On the FX side, we did have about a $6 million FX headwind on the revenue side. We did have a flow-through of that. Because of the change in the yen, we don't have a very large cost base or manufacturing presence in Japan, so that flowed through, so we had about a $0.02 hit on the FX side year-over-year. I think the CapEx piece, we're usually about 2% of revenues. That's pretty much on track at least thus far in the first quarter, and I think we may end up being a bit below that in the second half at this stage having reviewed the projects in the pipeline.

[Operator:]

Your next question comes from the line of Steve Willoughby, Cleveland Research.

[Steve Willoughby:]

Two questions for you. First on the earnings guidance. I was just wondering with the new guidance, what you're assuming as it relates to the impacts from currency as a headwind? And then also secondly on that, given the reduction here, are you still having incentive comp in the guidance or was that halted as well?

[Robert F. Friel:]

Andy, why don't you do number one, I'll do number 2.

[Frank A. Wilson:]

Right. Within the full year plan, year-over-year, our currency impact is going to be about $10 million, that's in the forecast.

[Steve Willoughby:]

Okay, great.

[Robert F. Friel:]

Revenue perspective. Yes. So from an incentive comp standpoint, obviously our incentive comp is down significantly. But keep in mind, some of the businesses continue to do well. And in fact, some of our businesses actually did a little bit better than their forecast, so obviously, the leaders in those businesses will continue to expect and will probably continue to pay incentive comp in those businesses. Obviously, the businesses that have not done as well, the incentive comp will be down significantly.

[Steve Willoughby:]

Okay. And then my second question was just -- or I guess it will be my third, is on your second quarter guidance and saying that you expect organic growth to be, I think, you said relatively similar to what you saw here in the first quarter. I was just wondering how to think through that with the in vivo business maybe getting bottoming or getting a little bit better, and the Japan business maybe not being as bad as it was in the first quarter.

[Frank A. Wilson:]

Steve, what I had said was the majority of the business would be similar to the first quarter, but we are seeing an uptick. And I think our guidance calls for flat to low single digit in the second quarter, so that is an uptick from the negative one in the first quarter.

[Operator:]

Thank you. Sir, you have no questions at this time. [Operator Instructions]

[Robert F. Friel:]

Great. Well, thanks, everyone, appreciate your questions. So let me just close by saying that despite the performance this quarter by a limited portion of our portfolio, I see a lot to be optimistic about for PerkinElmer for the remainder of 2013, as well as the years to come. I remain confident that we are extremely well positioned to drive our mission of improving human and environmental health through the development of cutting-edge solutions, serving attractive markets. Our ability to weather more difficult economic times is well proven, and I believe we can continue to deliver strong shareholder returns and accelerate our growth through the quality of our offerings, as well as our operating discipline and the dedication of our 7,500 terrific employees. Thank you, again, for your continued interest in PerkinElmer, and have a good evening.

[Operator:]

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.