PerkinElmer, Inc. (PKI)

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PerkinElmer (PKI)

Q1 2013 Earnings Call

April 25, 2013 5:00 pm ET

Executives

Tommy J. Thomas

Robert F. Friel - Chairman, Chief Executive Officer, President and Member of Finance Committee

Frank A. Wilson - Chief Financial Officer and Senior Vice President

Analysts

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

Ross Muken - ISI Group Inc., Research Division

Doug Schenkel - Cowen and Company, LLC, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Amit Bhalla - Citigroup Inc, Research Division

Jonathan P. Groberg - Macquarie Research

Daniel Arias - UBS Investment Bank, Research Division

Daniel Brennan - Morgan Stanley, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Derik De Bruin - BofA Merrill Lynch, Research Division

Peter Lawson - Mizuho Securities USA Inc., Research Division

Bryan Brokmeier - Maxim Group LLC, Research Division

Zarak Khurshid - Wedbush Securities Inc., Research Division

Steve Willoughby - Cleveland Research Company

Presentation

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 J. 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.

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