PerkinElmer Inc

LSE:0KHE

Earnings Call Transcript 2020-Q2

[Bryan Kipp, executive]

Thank you, operator. Good afternoon, and welcome to the PerkinElmer Second Quarter 2020 Earnings Conference Call. With me on today's call are Prahlad Singh, President and Chief Executive Officer; and Jamey Mock, 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, this call is being webcast live and will be archived on our website until August 11, 2020.

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. Statements or comments made on this call may be forward-looking statements, which may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors which are discussed in detail on 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 other 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 this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly.

I am now pleased to introduce the President and Chief Executive Officer of PerkinElmer, Prahlad Singh. Prahlad?

[Prahlad Singh, executive]

Thank you, Bryan, and good afternoon, everyone. To start, I could not be more proud of how we, at PerkinElmer, have met the obstacles that have faced us the past few months. We have proven to be a resilient, responsive and agile organization. Individually and collectively, we are all being presented with new challenges, big and small, every single day. At PerkinElmer, our employees have met these challenges by rallying and responding to a call to action to help during the global pandemic.

As I mentioned on our first quarter call, improving lives is in PerkinElmer's DNA. It is what impassions our team. The energy and purpose that pervaded throughout the organization during the second quarter was palpable. I felt it daily, and I recognize the same passion in the countless number of employees who went above and beyond. Whether through late night time-sensitive discussions with hospitals, health care systems and governments to determine the best way to quickly ramp up COVID-19 testing, rapidly scaling our test kit assembly to fulfill urgent customer needs or personally delivering products to testing sites, PerkinElmer colleagues demonstrated over and over again the very passion, perseverance and purpose that underpins our culture.

Our strong second quarter results were truly a team effort and further reinforced the diversity of our business from a portfolio and geographic standpoint. Jamey will speak in more detail about our second quarter performance. However, overall, we delivered very strong top and bottom line results despite severe macroeconomic headwinds. Our COVID-related sales contributed $196 million, 27% growth. And our non-COVID or core portfolio declined 14% organically, with Diagnostics, excluding COVID, declining 20% and Discovery & Analytical Solutions declining 10% compared to the second quarter of last year.

In terms of profitability, we delivered the best quarter of profitability since the creation of the modern-day PerkinElmer in 1999, with 28% adjusted operating margins. And we grew our adjusted earnings per share over 50% and our adjusted free cash flow by over 200% compared to the second quarter of 2019.

PerkinElmer, as an organization, has dramatically transformed over the past year. Not only did we undertake the largest organizational transformation in our company's history last summer, but unbeknownst to us then, we made the changes months ahead of the largest global pandemic in over a century. At the time, the change was a conscious decision to better position PerkinElmer for the future. We needed to become a more collaborative, responsive and nimble organization. We thought the progress would be iterative, and it would take years before bearing real fruit. However, looking back, the timing could not have been more ideal. Our first half performance in 2020 validates that the actions taken were the right decisions. We've reduced red tape, promoted cross-functional collaboration, and we've struck a cord with employees that has resulted in our launching breakthrough innovations at the fastest clip I have ever seen in my career.

While I could easily do so, I will refrain from spending the next hour talking through all our recent product introductions because I know you have a lot of questions teed up for Q&A, but we have launched over a dozen new products and solutions to help combat COVID through the first 7 months of the year, and we have several more COVID-related products and solutions in the pipeline. Additionally, we have launched 13 non-COVID products year-to-date, with one of the most significant being the NexION 5000, a true multi-quadruple ICP-MS, which delivers performance beyond high-resolution ICP-MS and traditional triple-quad technology, with phenomenal stability and unmatched matrix tolerance. We also expanded our flagship cellular imaging portfolio with the launch of the Opera Phenix Plus, which marries our premium high-content screening system with a fully automated liquid handling option and fast imaging frame rate, allowing researchers to tackle fast response assays ideal for cardiology and neurology research.

If you recall from our first quarter earnings call, 1 of our 4 guiding principles during the pandemic was to utilize our expansive capabilities to join the fight against COVID-19. We remain committed to doing so. We see the future COVID diagnostics landscape splitting into 2 broad categories: direct viral detection; and immune insights. There will be many different types of tests that will be needed. In response to that need, we are actively investigating additional solutions to help on both fronts.

On the viral detection side, in addition to our full suite of PCR solutions, we are looking to add both point-of-care and ELISA antigen testing as well as a respiratory panel that brings together COVID and flu that we hope will be commercially available before the start of the flu season in the fall.

On immune insights, we believe that antibodies are only part of the story. There has been increasing COVID-related research into innate or cell-mediated immunity over the past few months as some recent work suggests that not all infected patients appear to have a durable circulating antibody response. As a result, we have several assays in development that we hope will aid researchers and clinicians in understanding how the broader immune system may help confer protection, including a patient's T cell response, cytokine levels or cellular damage.

PerkinElmer has a storied history of being at the forefront of innovation in the analytical tools industry. Our teams are passionate about developing solutions that address unmet needs or solve common customer pain points in the markets we operate. We have and will always lead with science. Specific to COVID, this has been no different. From our R&D team in Taichung, to our manufacturing groups in Turku and Texas, to our scientists in Lübeck, we ran full speed ahead with the confidence we have always had in our capabilities and technologies and never looked back. Each of our COVID offerings, spanning RT-PCR, high-throughput RNA extraction, automation, ELISA and lateral flow-based serology testing, have proved vital for specialty and reference diagnostics labs, clinics, hospitals, pharmaceuticals and biopharmaceutical labs, academia and governmental and research institutes in combating the pandemic.

Underlying our science is our customer-first approach that has earned us the trust of so many. Our commitment to producing and delivering high-quality COVID tests, especially in light of shortages and bottlenecks and pockets around the world, has proven to be and will continue to be a differentiator. In fact, we are now live-streaming our turnaround time for the delivery of COVID tests to increase transparency and allow testing centers to maintain maximum capacity and enable labs to rapidly respond to evolving public health needs.

Having our own network of clinical labs has also been a competitive advantage for PerkinElmer during this crisis. The PerkinElmer genomics team has been instrumental in helping PerkinElmer be at the forefront during the pandemic. We have been able to respond more quickly to market needs because we are one of the only life sciences and diagnostics companies with a clear end cap-certified internal commercial testing lab. Our lab in Pittsburgh allows us to rigorously test our full suite of solutions to better optimize them for our customers. It also allows us to actively demo full workflow solutions in a real-time clinical setting for labs across the globe looking to scale. And it affords us the ability to develop and validate testing in-house.

Combating COVID has energized our organization and enhanced our ability to deliver what our customers need in the most agile way with science they can trust. Moreover, the brand equity we have built up from new partnerships in the wake of COVID has opened doors to larger, even more impactful opportunities to make a difference. For example, governments around the world have chosen to partner with PerkinElmer on milestone collaborations, such as our partnership with Public Health Wales. We are honored to work with them, and we are filled with gratitude for the feedback they provided in their recent press release on the collaboration.

We have engaged in similar collaborations across the world, setting up labs, providing around-the-clock support and swiftly delivering instruments and reagents to various top hospitals, national ministries of health, networks of labs and testing companies as well as state health organizations. For example, we recently announced collaborations with Semaphore as well as with Sonora Quest Labs through its partnership with the state of Arizona. We also teamed up with the Texas Department of State Health Services and the Georgia Esoteric and Molecular Laboratory.

At our EUROIMMUN site in Lübeck, Germany, we received a visit from the Prime Minister of the region to learn more about our test systems, automation solutions and software. From drive-thru testing in Brazil, to labs in New Zealand, PerkinElmer's global footprint helped us make a global impact.

Again, much has changed at PerkinElmer over the past year. While there is a lot of uncertainty in the world, our focus and determination to help is resolute. I am humbled by and proud of our entire organization. Our 13,000 employees have and continue to go above and beyond. To them, I say thank you.

As I close my prepared remarks, I want to take a moment and make some general comments. Setting COVID aside, we are all living in a challenging and ever-changing world, whether it is due to climate change, important social justice issues or increasing constraints on global resources. At PerkinElmer, we need to do more to be a part of the solution. We need to take a more proactive role to be better, to do better. Ask any PerkinElmer employee, and they will tell you the same thing. We do what we do because we are passionate about helping people. It's personal, but it also extends beyond the individual. It includes helping our communities and our planet.

It was very timely that during the second quarter, we debuted our latest corporate social responsibility report, which put a stake in the ground for PerkinElmer as we enter an era where our voice as a company needs to ring even louder. I invite you to read this report and share your feedback with us since we are all truly in this together to make the world a better place.

With that, I will turn it over to Jamey to discuss our financial results in more detail. Jamey?

[James Mock, executive]

Thanks, Prahlad, and good evening, everyone. To start, I hope you are all safe and doing well. I would like to echo Prahlad's comments by thanking the global team at PerkinElmer. We've all been through a lot of change over the past 18 months, and our team's passion and dedication has been amazing. So a big thank you to everyone.

Over the past 3 months, I spent a disproportionate amount of my time working with our segment leaders, especially within our applied and food businesses, to understand our go-to-market strategy, competitive advantages and future opportunities. We evaluated the product pipeline, strategy and profitability of these businesses, and we identified significant opportunities that have me even more excited about the future potential of PerkinElmer. We will be sure to democratize some of those learnings in future discussions with the external community, but I wanted to take the time to reinforce that we have also been making a lot of progress on our non-COVID portfolio, which will position us well for the future.

On a related point, given our inability to get together in person due to the current environment, we will postpone our Analyst Day originally planned in September to a date to be determined in 2021. That said, we recognize there have been a significant amount of time since our last Analyst Day and our portfolio has dramatically changed. Given this, our hope is to host virtual webinars to walk through our end markets and product portfolios over the coming quarters.

Before I begin, I want to remind people that our second quarter earnings call presentation has been posted on the Investors section of our website under Financial Information. As always, I will begin my prepared remarks by highlighting the second quarter, then I'll provide some additional color on our served end markets and financial metrics, and I will end with third quarter guidance as well as some updated full year details that will hopefully assist you in your own modeling.

At a high level, we are extremely pleased with our second quarter and first half results. The team executed well despite COVID-related customer shutdowns severely impacting business activity in April and May. There were some signs of improving momentum in June, but business activity across the globe has yet to fully normalize.

Revenue grew 12% to $812 million and included a 2% foreign exchange headwind and a 1% net acquisition tailwind. Organic revenue increased 13% year-over-year, which is 1% better than what we had previously communicated. As Prahlad mentioned earlier, overall COVID-related products contributed $196 million in the quarter, propelled primarily by our PCR tests, RNA extraction solutions and serology kits. Demand was strong across all 3 of these product lines, with each contributing in excess of $50 million during the second quarter.

By business. Diagnostics, representing 52% of total sales, increased 48% organically as strength in our immunodiagnostics and applied genomics businesses more than offset a modest decline in our reproductive health franchise. Discovery & Analytical Solutions, representing 48% of total sales, declined 10% organically as better-than-expected performance in our life sciences business was more than offset by softness in food and applied markets.

On a geographic basis, Americas grew low double digits. Europe grew strong double digits. And Asia Pacific was flat. China improved sequentially. However, growth remained negative as non-COVID diagnostics demand was anemic due to ongoing clinical caution, leading to lost prenatal and infectious disease testing and deferments in autoimmune and allergy testing.

Operationally, we are extremely pleased with our performance. Adjusted operating margins expanded 790 basis points in the second quarter to 28.1%, led by business mix, productivity and operating expense leverage. Adjusted earnings per share of $1.57 in the second quarter increased 57% year-over-year.

Looking further into the key drivers within our segments, let's start with our Diagnostics business. As mentioned in my earlier remarks, organic revenue increased 48% as robust growth in Europe and the Americas drove the momentum, with both regions generating greater than 50% organic growth. Our applied genomics business led the way, posting over 150% organic growth on broad-based momentum across all geographies and led by our nucleic acid extraction and liquid handling product lines. Combined, these product lines grew more than 6x year-over-year as they have proven to be vital upstream solutions in automated, high-throughput, COVID RT-PCR detection workflows.

Meanwhile, immunodiagnostics increased 60% organically, with EUROIMMUN increasing over 30%. Demand for our RT-PCR and serology assays was particularly strong across the globe. The quality of our COVID solutions and breadth of capabilities led to strong interest in PerkinElmer assays throughout the quarter, including several prominent customer wins.

Reproductive health declined mid-single digits organically driven by lower newborn and prenatal testing across the globe. Performance was consistent across all 3 major geographic regions. If you recall, we experienced some stocking of reproductive health products at the end of the first quarter as certain customers in the U.S. and Europe built additional inventory as COVID-19 started moving west. Normalizing for the impact of stocking at the end of the first quarter, our reproductive health business would have been flat in the U.S. and Europe in the second quarter.

Turning to Discovery & Analytical Solutions, organic revenue declined 10% in the second quarter. By end market, we experienced a low single-digit organic revenue decline in life sciences. Pharma/biotech was up low single digits driven by strength in informatics. Academic and government declined high teens. Our OneSource enterprise service was nearly flat as strong professional services demand was offset by billable business declines due to COVID-related pharma lab shutdowns. Applied markets declined approximately 20%, with all 3 major geographic regions experiencing double-digit declines as customers dealt with ongoing shutdowns and funding delays.

Food declined over 20% due to muted demand in the Americas and Europe. Asia Pacific food rebounded sequentially to flat, led by our growth within our grain and milling and dairy franchises in China. Meanwhile, industrial and environmental safety declined high teens. Trends were generally consistent throughout the second quarter, which has us a bit more cautious on the velocity of a rebound near term. Order pacing in Asia Pacific in the second quarter was encouraging, though it is still too early to say whether this momentum is here to stay.

Shifting to below-the-line items. Net interest and other expense for the first quarter was approximately $11 million, and our adjusted tax rate was 19%.

Turning to the balance sheet. We finished the quarter with approximately $2 billion of debt and $219 million of cash. Free cash flow was $122 million in the quarter, and adjusted free cash flow was $127 million. We achieved an adjusted free cash flow conversion of 72%. Finally, we exited the quarter with a net debt to adjusted EBITDA ratio of approximately 2.3x, down 0.5 turn since the beginning of the year.

Closing the books on the first half of 2020, we are extremely pleased with our performance, including 6% organic growth, 33% adjusted earnings per share growth and over 400% adjusted free cash flow growth. Adjusted free cash flow conversion was 67%, up from 17% in the first half of 2019. We are encouraged by our accounts receivable progress at the start of the year. The reduction in our DSO year-to-date has been a function of process improvements as well as due to more favorable terms associated with the COVID-related demand. Additionally, we consciously invested capital and inventory to start 2020. We expect that the increased inventory levels should support our higher COVID and non-COVID backlog as we transition to the back half of the year.

As I mentioned on our first quarter call, we remain steadfastly committed to returning our adjusted free cash flow conversion to the 85% to 90% range over the next 2 to 3 years. For many reasons, the first half of 2020 will no doubt be one to remember. And again, I could not be prouder of how the PerkinElmer team has together -- has come together and executed during these difficult times.

As we transition to the back half of the year, I want to provide an updated view on modeling items that are less dependent on COVID impact scenarios. We now anticipate 1% foreign exchange headwind for 2020. For below-the-line items, we anticipate $44 million to $46 million in adjusted interest and other expenses, a tax rate of approximately 18% and our share count to average 112 million for the year. We are assuming a tax rate at the higher end of our previous guidance as we now expect a greater mix of profits will come from areas with higher jurisdictional tax rates.

Turning to the third quarter of 2020. We are forecasting reported revenue of $760 million to $860 million, representing 7% to 21% organic revenue growth, including a negligible impact from foreign exchange. Embedded in this guidance is $150 million to $200 million of COVID-related revenue, representing approximately 21% to 28% organic growth, partially offsetting an organic demand drop of 7% to 14% for our non-COVID product lines.

In terms of adjusted earnings per share guidance for the quarter, we are forecasting a range of $1.18 to $1.53. All of this is detailed in the second to the last page of our second quarter earnings presentation.

In closing, I am extremely proud to be part of the PerkinElmer family. The energy and purpose that pervades throughout our organization propels us all to do better. While we are operating from a strong foundation, we are improving every day. I have no doubt that the upcoming years will be even more fruitful for all our stakeholders.

Operator, at this time, we would like to open the call to questions.

[Operator]

[Operator Instructions] Our first question comes from Vijay Kumar with Evercore.

[Vijay Kumar, analyst]

And wow. Best quarter since 1999, and that came in the midst of a pandemic. Congrats on your terrific execution here. Maybe I had 2 questions, one on the 3Q guide, Jamey. The non-COVID revenue base, I think the range is minus 7% to minus 14%. The base business was down 14% in 2Q. And I think commentary from your peers would suggest that the base business is improving. So I'm just curious on the assumptions around that minus 7% to 14%, particularly at the high end.

COVID revenues, $150 million to $200 million. It seems it's sustainable into 3Q. Curious about that into 4Q on -- specifically on COVID diagnostics.

[James Mock, executive]

Great. Thanks, Vijay, for the question. First off, obviously, it's a very volatile environment. So the pandemic could swing both our COVID and non-COVID revenues. But we've put a lot of time into looking at this and looked at the trends over the last 3 months, including the first 3 weeks of July, looked at our backlog and feel pretty comfortable with both ranges. So I'll address the non-COVID piece. So the minus 14% is similar to last quarter, the second quarter. And while we saw some positive trends, particularly on the recurring side, where we see services and consumables upticking through the quarter, instruments were a bit more lumpy, but backlog did grow in DAS. But we just think it's prudent that in this scenario -- in this time frame, there could be a scenario where something happens and there's a setback. So while we did see improving trends through the quarter and continue to do so, I think the low end of our range, we think, is no worse than the second quarter. And if the trends continue, we would get to the minus 7%.

On the COVID side, the $150 million to $200 million. Inside the $150 million, basically, that's just adjusted for serology. So serology was, as I mentioned in my prepared remarks, a little over $50 million, and we're planning for that to be under $10 million in the third quarter. And so the difference between $196 million and $150 million is solely serology. And we feel confident as we look at our shipments to date and our backlog that RNA extraction and PCR tests will continue. And then if you get to the high end, we're in the midst of a lot of commercial discussions, and those commitments could be coming but the ramp of those and the timing of when they would happen is still in flux. But we do see the opportunity to get to the high end of $200 million, and so that's how we derive the range around COVID revenue.

[Vijay Kumar, analyst]

That's helpful, Jamey. And then one for Prahlad. Thinking about sustainability of trends. A couple of comments you made, Prahlad, in your prepared remarks. I think you mentioned something along the lines of opening new doors in terms of relationships, just given the amount of placements you guys have done on nucleic acid extraction, liquid handling. I'm just curious whether that has any implications for tender wins going forward. And I think you also mentioned a COVID-plus-flu combo test. Perhaps, could you address the pricing or how we think about opportunity for this combo test?

[Prahlad Singh, executive]

Thanks, Vijay. I think the way I would address the first question around the extraction kits, that I think what has been really good is that the number of installed base has obviously increased significantly this year, and that bodes well for the other assays that are coming through the pipeline, both COVID and also non-COVID, related to infectious diseases and others. So I think longer-term, as customers get to using our RNA extraction kits and see the benefits that being on the magnetic-based solutions provide versus what others provide, especially in high-throughput labs, we are seeing a lot of traction, and that will, I think, be quite beneficial for us and competitively in the long run.

In regards to your question around the pipeline and the flu test, et cetera, the way I would look at it, Vijay, is I would sort of demarket it in 2 parts. One is workflow solutions around direct testing, and that could be either a flu pack test or a viral detection pooling or a direct antigen test. And the second one is around immune insights, the ways that we can look at what immune responses come out from the human system and how do we measure that in regards to COVID.

So I think while it's too early to opine on the pricing, our focus is that -- to sort of put as many ways that we can in terms of detecting the disease directly and also indirectly. And then that's where our focus has been.

[Operator]

Our next question comes from Steve Willoughby with Cleveland Research.

[Steve Willoughby, analyst]

A couple of questions for you. First, on PCR test demand. For latter, Jamey, I know things are shifting quickly. When we look back 90 days ago, your 1Q call, it seems like you maybe downplayed the opportunity within PCR. Obviously, it came in much better than expected. Could you maybe just provide a little bit more color on sort of what changed as it relates to the demand for your PCR test?

And then secondly, on PCR, Prahlad, when we look out, how are you guys thinking about the sustainability in PCR test demand maybe even beyond the third quarter? And then I have one quick follow-up.

[Prahlad Singh, executive]

Sure, Steve. I think when we look back 90 days, the science on the wires was still very evolutionary. And I think we, along with others, were still trying to figure out, hey, do we want to focus on the direct testing, or was serology more important? And that's when serology came about, there was a large spike in it. And the thought was that maybe this will tell us very quickly what the immune response is and people would get back to work. And I think that sort of played a role. But the long and short of it is, Steve, that we expect direct testing, the direct vital testing to be vital and expect sustained demand for it, not just in 3Q, but at least until the year-end that we look at it. So I don't think direct testing is going to go away anytime soon.

[James Mock, executive]

I would just add 2 things, Steve. At the time of our last call, remember, we had not made any shipments yet of PCR at that time. So we were having some import issues at the time. So having the confidence to be able to ship that amount was still in question, I would say. And then the second thing is I think our workflow is terrific. So when you combine RNA extraction capabilities with our PCR technology and liquid handling, I think that's resonated very well in the marketplace.

[Steve Willoughby, analyst]

So Jamey, with that then, if you were only shipping the PCR test for, let's say, 2 months out of the quarter and you did, let's call it, close to $100 million in revenue, it seems like the guidance for 3Q as it relates to COVID tailwinds, are we now assuming the PCR test makes up $150 million or so of that $150 million to $200 million?

[James Mock, executive]

Yes. That's right. I mean as what I tried to mention in Vijay's question is that serology, which was a little over $50 million, obviously, the time and place for serology is going to be in the future, we believe. We'll see. So therefore, that demand, we have taken down to less than $10 million. And therefore, the PCR and RNA extraction technology, which, as you said, was, let's say, $100 million is much more a bigger portion of the total $150 million to $200 million.

[Steve Willoughby, analyst]

Got you. The other quick follow-up I had is just what are your -- what's your outlook or how are you thinking about demand overall in China and if there's any nuance between different end markets in China in the back half of the year?

[James Mock, executive]

Yes. So China improved sequentially for us. So it was down over 30% in the first quarter and down about 14% in the second quarter. And we had hoped actually that it would get to flat at one point in the quarter here. DAS did get to flat and in fact, built a little backlog as well. So we feel good about that. Diagnostics, though, went from down 40% to roughly down 20% in the quarter. I think whether that's the second outbreak in June in Beijing that happened, but we're still not at the utilization levels of having people comfortable going to the hospitals and clinics, et cetera, it's still not at that 100% level and hasn't returned to normal.

So as we look forward here, we're hoping again that it will get to flat as soon as possible and perhaps in the third quarter. But what we're planning on in the third quarter is down high single digits to low double digits as a whole for overall China. So again, if it gets back to flat, that will be upside to our current range. But right now, the way we see it is Diagnostics is still a bit challenged. It's probably going to uptick a little bit. But that's what we're currently planning on.

[Operator]

Our next question comes from Derik De Bruin with Bank of America.

[Derik De Bruin, analyst]

So Steve just took my China question. So I now I got to think, I got to get a second one here. So the free cash flow guidance, going back to 80% to 90%, and also I just want to sort of talk about your comments in the opening about having accelerated some programs and seeing things pick up. And I think one of the questions we're all asking is sort of what does things look like for these businesses that are getting these big COVID tailwinds when things "go back to normal." Can you opine a little bit on how you sort of see margins and the overall impact to margins post this crisis and what you need to do to sort of get back to the free -- what you need to do to get to the free cash flow levels you were talking about?

[James Mock, executive]

Sure. So you want to talk both margins and free cash flow. So margins, obviously, it's an unprecedented quarter. We had strong volume growth. We had great product mix. We had all the productivity programs that we had already been working on, largely in services and DAS and EUROIMMUN, and on top of that, we had great OpEx leverage. And so even though our OpEx was up, it was still good leverage.

So I think in terms of the sustainability of that, I think it supports the overall thesis for PerkinElmer long term, that when those things happen, we do have the ability to get to a mid-20s to high-20s operating margin business. But certainly, this was an unprecedented quarter of margin expansion in the short term. But some of this will remain. I mean I think we're becoming more efficient. I think the productivity programs are being put in place. I think our volume and mix is changing over time. So it's difficult to say what it would completely snap back to in the very short term, but I think the long term, this is proving what the business can be.

As it pertains to free cash flow, we had one of our best quarters again and certainly our best first half in a long time. And that is -- there's a couple of things in there. Our receivables, we've been -- as you know, and we've been talking about we're making a lot of process improvements on, but we also did have a small benefit with regards to COVID terms. But I think receivables progress will continue to happen here over time even in a normalized environment.

You can see that we invested a significant amount in inventory. And I think most -- half of that is about our COVID inventory. And we think that having the product ready, which Prahlad mentioned in his prepared remarks, that we are tracking our turnaround time, is enabling us to be ready for customers and win customers that need the product immediately. And then the other half, we always have a first half build. It's probably a little bit more than normal due to the demand levels, but our non-COVID backlog has increased. So I do think that the second half will -- our inventory levels should come substantially down.

And so we're still -- I think what we were saying, Derik, is that 80% to 90%, we're tracking. There's a lot of good underlying progress here on receivables, on our ability to manage our SIOP. It just so happens right now that our inventory is required to be high and to meet our customers' demand. But we're focused on it. And I think we feel confident that we can get to that 85% to 90% range in a couple of years. And if it happens before that, that's great.

[Derik De Bruin, analyst]

Great. And just one follow-up. You mentioned some of the point-of-care, ELISA antigen test. Are you looking at those as sort of going in with an EUA authorization or -- and then following up with those, eventually going to a more FDA-approved -- I'm just sort of curious because you haven't historically done things in the infectious disease market in the U.S. from an FDA standpoint. It's been more focused in China. I'm just sort of curious on your longer-term strategy, if this is sort of like some shift?

[Prahlad Singh, executive]

Yes. I think COVID-specific, Derik, we continue to actively investigate that as a detection method. I think the key for us is it's very important that the quality of our tests should meet our threshold. I mean we would not release a test that are in the low 80s or somewhere around that. So if we have a test, which has got the right relative sensitivity that we would expect it to be, then we would release it, specific to COVID.

I think longer-term, will we have a point-of-care test strategy in the U.S., that is TBD.

[Operator]

Our next question comes from Tycho Peterson with JPMorgan.

[Tycho Peterson, analyst]

Jamey, just a clarification on the gross margin comment. Can you quantify how much of the step-up was the COVID testing accretion versus the cost-cutting measures for 2Q? I didn't hear you quantify that in response to Derik's question.

[James Mock, executive]

Yes. So overall mix, Tycho -- so we grew gross margins about 600 basis points. And I would say mix made up 85% to 90% of that. So even ex the mix impact, we expanded gross margin by 50 to 80 basis points, and that was on our productivity programs. But mix certainly, and in total, not just COVID-related, but in total, probably made up 85% to 90% of that increase.

[Tycho Peterson, analyst]

And then on the 3Q outlook for the non-COVID-based business, can you just give a little more color on what you're thinking in an academic recovery, for example, and in -- making in a sequential improvement? Just a little bit more color by end market might be helpful.

[James Mock, executive]

Yes, sure. So I think in total, in the 7% to 14% range, at a high level, we have Diagnostics, which was down 20% in the second quarter ex COVID in a minus 10% to 20% range. And I'll talk about some of the end markets. And then DAS, which was down 10%, obviously, in a minus 5% to 10% range. So let me just hit some the end markets underneath there.

So reproductive health, I think, continues to tick up a little bit. And I think we mentioned that it was down mid-single digits. We're kind of planning on down low single digits. China utilization, particularly on prenatal, is not yet at 100% normalization, so that's reproductive health.

Immunodiagnostics and applied genomics down kind of high double digits. I think it will remain down double digits. And that's just a function of when do people feel comfortable coming back to see physicians and hospitals and whatnot, but we expect a little bit of uptick there.

Flipping to the DAS side, life sciences, which was down low single digits, we think probably grows low single digits. In the second quarter, we were buoyed by a strong informatics business. Enterprise was flattish, and Discovery was down. I don't anticipate informatics to be as strong, but I think Discovery will pick up and we're seeing that in some of the consumables business in our backlog and our tenders as well as the enterprise business has more labs return. So we expect looking at life sciences to kind of move from down low single digits to up low single digits. Again, this is on the high end of our range, that is.

Applied markets and food, again, was down, I think, 20% and on the low end of our range. Obviously, that remains at that level. And -- but we are expecting it to start picking back up. We had a bit of backlog growth, but that we would expect to tick up. But it would still be down double digits even in the high end of our range, which is down 7%. But I think simplest way is down 5% to 10% for DAS and down 10% to 20% for the others, excluding COVID.

[Tycho Peterson, analyst]

Okay. That's helpful. And then just one for Prahlad on the antigen test you mentioned. I assume that uses some of the lateral flow technology. But can you just talk about the thought process there? We've seen a lot of lower-quality antigen tests coming to the market. So I'm just curious why you're entering and how you think about the role of antigen testing versus PCR longer-term?

[Prahlad Singh, executive]

Yes, Tycho. Thanks. I'm not saying that we are going to. I'm saying that we are evaluating it. And you're absolutely right. There are -- while we actively investigate it, the focus for us is that we would only launch it if the quality met our threshold. And Tulip is one aspect from where we would develop it, just like on the rest of our product portfolio, where we've been able to leverage our capabilities from across different sites and companies. We've got competencies and capabilities on this in China and Europe, too. So we would be leveraging. So in the event we would come out, it would only be if we get the sensitivity and specificity levels at the high end.

[Operator]

Our next question comes from Dan Arias with Stifel.

[Daniel Arias, analyst]

Maybe just on the reproductive health side. Obviously, it's a tough-selling environment for your Vanadis franchise right now. But can you just sort of level set us on expectations? And then what's going on in Europe? And then just thinking ahead there, where does all of this have the value study with women and infants shaking out? Is that data that can still show up at the end of the year? Or is it best to sort of think of that as a 2021 thing?

[Prahlad Singh, executive]

Yes. So thanks, Dan. The Vanadis, as a program itself, it continues to progress very well. The funnel continues to be stronger. Obviously, COVID has resulted in installation delays. The funnel for us is stronger, and the installations generally are being held up right now.

In terms of the tests, they continue to run smoothly, and the demand is high. The challenge for us, both in terms of publishing the study and getting the installations all in place, is that the market shifts in terms of COVID, I would say, freeze or travel restrictions, et cetera. But I think as it starts to loosen and open up, the installations will pick up. I will say that I don't think we expect the installations to be anywhere up to 55 in 2020 as we had projected. But we are very hopeful that as regions open up in Q3 and Q4, that we will be able to fill the pipeline that we have seen.

[Daniel Arias, analyst]

Okay. And just maybe going back to COVID on serology. Prahlad, does the data that you're generating suggest that your ELISA assay can be used to provide information on neutralizing antibodies? And then just thinking about commercialization, to what extent are you able to maybe bundle the serology test and then maybe some of the other things that you're working on with the PCR test since it's obviously in pretty high demand? It sounds like some of your larger diagnostics competitors, at least on the European side, have adopted that strategy. So just curious whether that's something you're able to use to drive volume there.

[Prahlad Singh, executive]

Yes. And to your first question, Dan, I think the -- in the case of serology, our understanding of the science, as I said earlier, is evolving every day. I think if I were to look in a crystal ball, I would say that we expect the epidemiology study is around serology to continue. And for it to provide a better understanding of the immune response and as vaccines come into play, it will drive broader immune insights testing, and that's where serology will play a larger role.

In terms of us being able to put it together, I mean, there are examples, as you saw with Sonora Quest, where we've done both serology and PCR testing. So I would say that it is larger. In larger customer bases, we are seeing traction around our total solutions, whether it's around collection devices or extraction kits, PCR or serology. I think the challenge as of now is that serology is, to some extent, taking a backseat. And most of the focus continues to be on direct virus detection.

[Operator]

Our next question comes from Catherine Schulte with Baird.

[Catherine Ramsey, analyst]

Just first, can you just walk us through where you are from a manufacturing capacity standpoint on the serology, PCR and extraction kits today? And what are your plans in terms of expanding capacity further as we move through the rest of the year?

[Prahlad Singh, executive]

Yes. So I mean, in all cases, we are highly scalable and are manufacturing multiples of what we have previously disseminated in terms of our capacity. I think this is where the benefit of the breadth of our capabilities and having a broad geographic footprint in all 3 parts of the world, whether it's in Asia, Europe or North America, comes to bear. We've also put very strong supply redundancies in place. So we are not sort of dependent on any sole suppliers, et cetera, or any particular country or a region.

I mean at this point, we do not feel supply to be a constraint. In fact, as you probably -- as we've probably -- as we've talked about earlier, we put turnaround times on our website and you can live track -- it's live-streaming in terms of our capability to provide turnaround time to our customers.

[Catherine Ramsey, analyst]

Okay. Great. And then as we think about -- you're getting pretty incredible incremental margins on this COVID testing business. What's your thought process in terms of letting that drop through versus using that to maybe accelerate some strategic investments?

[James Mock, executive]

Yes. I mean, Catherine, I think we are biased to invest. And so actually, some of the spending levels in the first half and second quarter are not at the levels by choice. It's the levels because you can't travel or you can't get a third-party service, et cetera. So I think if we look into the second half of the year, we are going to step up our investment in areas like R&D, digital investments as well, so information technology. There's some pockets of the organization where we want to invest with some additional people. So I think we will continue to spend and probably invest a little bit more than we have been.

Of course, we'll always monitor the outlook, but I think one of our guiding principles has been to emerge from this as a stronger company. And I think we're fortunate enough to be able to reinvest back in the business, and we plan on doing so.

[Prahlad Singh, executive]

And especially around R&D, Catherine. I think some of the investments that we did want to make in the first half of the year we couldn't just because of whether it was travel restrictions or availability of scientists to come to the bench. So I think that definitely. And given the pipeline and the NPI pipeline that we are talking about, that's where we will continue to invest incrementally.

[Catherine Ramsey, analyst]

Okay. And maybe just last one for me, going back to Jamey's comment on emerging as a stronger company after this. If we step back and think about how part of the strategic rationale around the EUROIMMUN acquisition was really the opportunity to grow its U.S. presence, it seems like once we emerge from COVID and those tailwinds subside, you should be in a much stronger position from a U.S. adoption perspective than you would have been if COVID had never happened. So is there any way you can help us think about just how much of an accelerator COVID has been in terms of the U.S. adoption of that portfolio longer-term?

[Prahlad Singh, executive]

So there are 3 ways to look at it, right? One, Catherine, the way I would look at it, in terms of the relationships or the emerging relationships that we are establishing with those customers. That has become significantly stronger, whether it's at institutions such as Mayo or with the large reference labs.

I think the second aspect is the familiarization of -- with the science aspects of EUROIMMUN and with the workflow that the team has been doing in Lübeck. That has significantly improved, and it has also allowed us to leverage the relationships to provide a peek into our current pipeline of products that are commercially available and also what's coming into the future. As we've talked about earlier, right, we're getting our random access platform, [ Ascentis ], that would be out from EUROIMMUN, hopefully, by the end of the year or early 2021, given some COVID restraints. The adoption of that is -- the barrier for adoption of that is going to be much lower, given what we have done around COVID with our customers. So that's one way sort of to quantify, to some extent, as to what the benefit of COVID provides longer-term to the company as a whole.

[Operator]

Our next question comes from Steve Beuchaw with Wolfe Research.

[Stephen Beuchaw, analyst]

I'll ask one for Prahlad, one for Jamey and then just jump back in queue. The one for Prahlad is if we reflect a little bit on the experience that we've had with serology and some of the learnings for the clinical trial data that we've seen out of some of the vaccine studies, it seems like T cells have gained more and more attention, at least in the clinical community, but it's not clear to me necessarily how much demand there is for broader, so outside of vaccine clinical trials, T cell reactivity assessments. Could you speak to that and the extent to which outside of clinical trials, those types of assays might be in demand?

And then, for Jamey, there's been some focus on margins on the call, but can we just jump out like -- sorry to ask it this far, but 3 and 4 years and say, what does the margin trajectory of this company look like relative to what you thought 7 or 8 months ago? I would imagine there's been some discovery of structural cost savings. And you flagged on the call or in Q&A earlier that there's a path to mid-20s or maybe even higher margins, which makes a lot of sense on some amount of time. But can you speak to whether you think that's within the next 4, 5 years? Or is that a longer-term view? I really appreciate all the help here.

[Prahlad Singh, executive]

Yes. Let me start with the easier one and then Jamey can take the -- I think, Steve, the aspect around the T cell response, I think it's a little too early to tell, in my opinion. I think one would have to look at the total response, whether it's humoral or innate response and how to look at it. But the more germane way to think of it is that immune insights are going to be important, and that's where sort of we are trying to focus on as to what aspects and what avenues do we need to look at. So I think it's something TBD or yet to come.

[James Mock, executive]

Yes. And as for the margins, Steve, I mean, it's difficult to give an exact target here in 3 to 4 years, and we said we would come out with our Analyst Day and that's when we were hoping to launch what our outlook is for margin in the next 3 years. Obviously, we -- as you mentioned, we have had a lot of learnings. So I would -- what I would say without giving an exact number is I would say we're even more confident in our margin expansion opportunity.

I mentioned in my prepared remarks how much time we've spent in the analytical and food business, in all segments for that matter. But I think the margin expansion value-creation opportunity there is substantial. I think it is a 3- to 5-year play, some short-term actions. But certainly, over the course of our NPI cadence, what we're doing with procurement, what we're doing with SKU rationalization, I think it will be rather substantial. So I did mention mid-20s and maybe that's in 3 to 4 years, but I don't think we want to sign up for anything at this point. And again, we're still learning here. But I would say we are even more confident in that approach.

[Operator]

Our next question comes from Doug Schenkel with Cowen.

[Doug Schenkel, analyst]

Just a couple of quick ones. The first is just as a guidance cleanup question. It appears your third quarter guidance implies that you expect operating margin to decline about 300 to 400 basis points sequentially despite similar sequential revenue numbers. Could you provide a bit more detail on what drives this? I'm guessing it's a combination of change in mix and a reflection of some of the opportunistic investment and long-term growth initiatives that you talk about.

[James Mock, executive]

You nailed it. It is about half that. And I think I would expect the gross margin line to come down about 200 basis points sequentially versus the prior quarter, and that is mostly mix, both non-COVID and COVID. So the non-COVID book coming back up a little and the COVID book coming down a little bit at the midpoint, to your point, as well as some sub-business mix with a little less informatics in the third quarter versus the second quarter. So a little -- half of this probably comes down through the gross margin line. And then you're right, the other half comes in through incremental investments and everything I mentioned to Catherine's question in terms of R&D, digital, people, continuing to invest and emerge stronger here.

[Doug Schenkel, analyst]

Okay. Super helpful. The second one is -- and I think this is a Prahlad question. I'm just -- if you would be willing to provide a bit more detail on your PCR revenue assumptions moving forward. Specifically, what I'm thinking about here is one of your peers who also produces nonautomated PCR kits produces -- well, they're driving to produce 10 million tests per week. The automated diagnostic system vendors are expected to ramp manufacturing meaningfully by the next flu season. So just with those 2 examples in mind, I'm just wondering if you could just share a little bit more on how you would expect your PCR revenue to evolve over time. Like are you expecting to maintain share? Do you expect to gain share? Or is this really just as simple as you're going to sell as many as you can produce for the foreseeable future?

[Prahlad Singh, executive]

Yes. I think -- let me put it this way, Doug. As of now, our capacity is greater than the demand. And we feel very good about where we are because what we are realizing, that customers are coming back to us from some of our competitors because they realize that we provide a full workflow solutions, with collection media, extraction kits, extraction units, PCR and fully validated workflows. And I think that's the benefit that we are seeing from our customers, and I think that's where we feel that as we progress and we see sustained demand, we are very well-placed with the solution that we bring to direct antigen testing.

[Operator]

Our next question comes from Dan Brennan with UBS.

[Daniel Brennan, analyst]

And congrats on the quarter. Just wondering if you could share a little insight on the liquid handling kind of the robotic market. We haven't dove in too much there, but obviously, you're a leader there, and it's hard to do due diligence because there's not as much information. So if you just give a little color on maybe the size of that market, any color on kind of instrument placements in the quarter and kind of how we think about the opportunity going forward for COVID?

[Prahlad Singh, executive]

I mean it has been particularly strong and especially, our JANUS product line has seen a lot of demand in the second quarter, and the ongoing demand continues to be strong. I don't know if we break it down specifically to product lines around automation.

[James Mock, executive]

No, the only thing we said, Dan, was that it was up 6x year-over-year here in liquid handling.

[Daniel Brennan, analyst]

More color on that, Jamey, like 6x, I mean, how much of the $190-or-so million in the quarter? I know you gave some color on PCR traction, but how much was liquid handling of that? And kind of how do we think about that implicit in kind of [ expectation ]?

[James Mock, executive]

Yes, I think, Dan, we're trying not to get into exact numbers here to walk through and be able to be off of and whatnot. So I think we would like to keep everybody focused that the overall franchise is doing well and that the Diagnostics opportunity across all of our product lines is doing well. So selling together.

[Daniel Brennan, analyst]

Got it. Okay. And then maybe just a couple of other related ones and just on kind of sticking with COVID, if you don't mind. Could you share any insight at all on pricing since it's hard for us to back into kind of share of market? And as Doug mentioned, there's a lot of capacity out there, but the revenue contribution really matters. Obviously, the branded players are in the 20s. Maybe the less automated players are in the teens. Any help you can give us on PCR pricing? And then any color also about OUS U.S. mix in terms of your PCR and extraction businesses?

[Prahlad Singh, executive]

I'm happy to tell you that we feel that our RT-PCR and extraction pricing remains consistent. And I think that's the level of detail we want to share. There has been some decline in serology, modest, but it's not for us. I think the whole serology market has seen a decline, but I think we want to stay away from getting into specific pricing.

[Daniel Brennan, analyst]

And in terms of U.S., OUS, is it just follow along your geographic split? Or are you kind of having more success in one market or the other?

[Prahlad Singh, executive]

I think we are seeing success in both markets, both in the U.S., Europe and OUS, also in Asia. So we are seeing a broad penetration across countries in all continents.

[Operator]

Thank you. I would now like to turn the call back over to Prahlad Singh for any closing remarks.

[Prahlad Singh, executive]

Thank you for your questions. Again, I'm proud of our entire organization and how everyone has rallied together. Our breadth of capabilities puts us in a unique position to help combat this pandemic. We are focused on leading with science, and that is clearly resonating. I have no doubt we emerge from this crisis as an even stronger company. Thank you for supporting PerkinElmer, and I look forward to providing further updates on our third quarter earnings call. Thank you.

[Operator]

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.