Revvity Inc (RVTY) 2002 Q2 法說會逐字稿

Good day everyone. Welcome to this Perkin Elmer second quarter 2002 earnings results conference call. Today's conference is being recorded. At this time, for opening remarks and introductions I would like to turn the conference over to the Vice President of Investor Relations, Ms. Diane Basile. Please go ahead, ma'am.

Good morning. Welcome to the Perkin Elmer second quarter 2002 earnings conference call. If you've not received a copy of our press release you may get one from visiting our website at www.perkinelmer.com, on the first call network or for visiting our toll-free investor hotline 1-877-PKI-NYSE.

Before we begin we need to remind everyone of the following safe harbor statement. Certain remarks we may make about management's future expectations, plans and prospects may constitute forward-looking statements about the Company's performance that involve risks and uncertainties. These forward-looking statements are only predictions and actual results or events may differ materially from those indicated by these forward-looking statements. We disclaim any intention or obligation to update any forward-looking statements as a result of developments occurring after the date of this call.

Please refer to the documents filed by the Company with the SEC, specifically our most recent Form 10K for the fiscal year ended December 30, 2001 which identifies important risk factors that could cause actual results to differ from those contained in the forward-looking statements. I am now pleased to introduce the Chairman and Chief Executive Officer of Perkin Elmer, Greg Summe.

Thank you for joining us this morning. With me is Rob Friel, Chief Financial Officer. I will briefly summarize our Q2 results which we announced this morning. Rob will then talk in more detail about our performance. We will break for questions and answers and close the call.

As described in our press release this morning, we reported revenue of $336 million, up 11% relative to the first quarter of 2002. Each of our businesses had good sequential revenue growth ranging from 7% to 19%. We were particularly encouraged by the strength of the optical electronics business as that industry has depleted its inventories and is seeing some rebound in end user demand. Cash earnings per share were 7 cents for the second quarter, even after absorbing one cent per share write down of our investment in Genomic Solutions and two cents per share in restructuring and integration related costs.

During the quarter we drove sequential margin expansion of 130 basis points. This is progress, but we still have a lot of opportunity in front of us. We have allowed our SG&A to rise to an abnormally high level due to integration and restructuring expenses, senior personnel hires and transitions, and system investments. We will be taking this back down. We continue to improve cash flow by increasing working capital turns from 3.2 to 3.6.

We are very pleased with the traction of our C [inaudible] initiative which stands for compressing the cash cycle through more efficient inventory and accounts receivable processes. We are in the early days of this program and see a lot of promise for further gains. We also continue to focus our portfolio businesses around building the health sciences end markets. During the quarter we completed the divestiture of our detection systems business.

Also as a result of a previously announced strategic review we exited the telecom fiber optic components business and put the entertainment lighting business up for sale. We continue on with the sale process of fluid sciences. There are a number of qualified buyers. But frankly, we sold the process to allow the business to show its improved second quarter performance. This is a well managed business with strong cash flow and a rising order book.

In Q2 operating margins were 11% and revenues up 6% sequentially. We will continue to work the process to make sure we get appropriate value. We continue to invest in building our new product pipeline. R&D investment this quarter was about 7% of sales across the Company, up some $4 million from last year.

Some highlights from the quarter. Life sciences was awarded a patent covering the use of a geometric beam splitter technology. This is a key component of our DNA and protein micro ray scanning system. We also received the Frost and Sullivan award for developing a complete Protein/Array product suite which is built around our hydro gel micro ray technology pro express scanner and Protein/Array workstation and labeling reagents.

Instruments introduced two new software programs for the pharmaceutical 21 CFR part 11 compliance. An innovative new GC mass spec called the Clairis 500. Optical electronics introduced the Aster Cam [ph] Two which is a cold CCD camera and excels in applications such as protein quantification, fluorescent microscopy and chemiluminescence [ph]. Optical electronics also passed a significant milestone with the shipment of over five hundred amorphisilicon [ph] large area digital imaging array.

We feel good about the market traction of our new products and the products in the pipeline. Our strategy in these soft markets is to continue accelerating new products, improving sales force effectiveness and driving cost productivity.

I will now turn the call over to Rob to discuss the financial results in greater detail.

Thank you, Greg. Good morning.

This morning I will briefly review the financial results for the quarter from continuing operations and provide some color on our segment performance. I will then review the discontinued operations and gains and losses from the sale or writedown of businesses in the quarter and conclude with a discussion of cash flow and debt levels. All the attachments to the press release have adjusted the prior periods to show commercial lighting and telecom components as discontinued. Page 10 also adjusts Q1 for these changes.

If you would turn to page 5 of the press release, I would like to give some detail on our second quarter results. Revenue for the quarter was $336 million, up 4% on a reported basis over the second quarter last year. After adjusting for the impact of the Packard acquisition, and divestitures made in the last 12 months, revenue declined 4% year-over-year or 6% excluding the impact of foreign exchange. Sequentially, revenue increased 11% over Q1 as all three SBUs experienced higher sales relative to the first quarter of this year. I will go into this in more detail within the discussion of the segment results.

Cost of sales in the second quarter was $187 million or 56% of sales, down 1% sequentially and up from 52% in Q2 last year. The improvement from the first quarter of this year, year-over-year, is due to pricing pressure in a number of our businesses, and lower capacity utilization in optical electronics and analytical instruments.

Research and development expenses increased year-over-year by 20% to $22 million and up one million from Q1. As a percentage of revenue, R&D was about 7% in Q2 this year, up about 100 basis points year-over-year as we continue to invest in our new product pipeline.

SG&A was $107 million in the quarter, up significantly from the prior year due to the inclusion of Packard. As a percentage of sales, SG&A was about 32% this quarter, up 300 basis points on a pro forma basis due to the inclusion of one-time restructuring and integration costs. Sequentially, SG&A was down about 100 basis points.

Operating income of $19.1 million represents 5.7% of revenue, which is down from the prior year due to lower gross margins and higher SG&A. This lower margin is despite our total head count being down year-over-year in excess of 1,000 people when you adjust the prior year for Packard and divestitures. Relative to Q1, margins are up 130 basis points due to the higher volume. Other expenses increased by $1.7 million year-over-year, included in this quarter was a $2 million charge for the writedown of our investment in Genomic Solutions. Net income from continuing operations was $8.2 million or 7 cents per share, down from 30 cents last year and up from 3 cents on an adjusted basis in Q1.

If you would turn to page 6 of the press release, I would like to review our results by segment.

Life sciences revenue for the quarter was $129 million an increase of 66% over Q2 last year. Pro forma with Packard, revenue was up 2% including the positive effect of currency and flat in local currency terms. Sequentially, revenue was up 10% with all product lines experiencing growth over Q1. Year-over-year we experienced particularly strong growth in high [inaudible] screening in both reagents and instruments. Genetic disease screening continued to make excellent progress in expanding its market presence with its first shipment to the Egyptian screening program and 20% growth in China and Brazil. However delays in some domestic funding depressed overall growth to low single digits. Looking at all of life sciences from an end market perspective the academic market grew about 5% year-over-year and 7% sequentially.

The pharma bio-tech market contracted about 4% year-over-year, but grew 11% sequentially. In general, the business climate in life sciences remained similar to Q1. Capital spending is still tight leading to longer sales cycles, particularly in pharma. For new product introductions the bar has clearly been raised as understandably they must have a clear impact on productivity before companies are willing to make the investment.

Academic funding continues to be strong, and pricing pressure is more apparent as customers are very budget conscious. Operating income in life sciences was $12.3 million for the second quarter or 9.5% of sales. On a pro forma basis, with Packard, operating margins in Q2 last year were 15%. The decrease in margins year-over-year was due to investments in systems and front end distribution capabilities, integrated related expenses and pricing pressure.

Turning to optical electronics. Revenue for the quarter was $83 million, down from $98 million in Q2 last year. Adjusting for businesses divested in the last 12 months, revenue was down 6% including the positive impact of foreign exchange and down 7% adjusting for the weaker dollar. Sequentially, revenue and optical electronics recovered nicely, up 19%. Strong growth both year-over-year and sequentially came from digital imaging and sensors. Lighting was down about 10% year-over-year, but up sequentially over 20%. The business environment within opto electronics appears to be improving. The bio medical markets continue to be attractive, particularly in digital imaging and a number of our lighting and sensor applications and photo flash in the industrial markets appear to be stabilizing.

Operating income in opto electronics for the second quarter was $5.2 million or 6.3% of sales. As in Q1 we again reduced our optoelectronics inventory levels in Q2. Whereas in Q2 last year we were building inventory. Therefore, the change in production levels year-over-year was 20%. Over the last six months, the lower production volume and pricing pressures have more than offset significant cost reductions in the business as we have tried to right size the business for the appropriate demand, while at the same time insuring we do not lose critical engineering, sales and management talent. We now believe we have the appropriate cost structure and the portfolio to begin to drive growth and achieve higher operating margins. Sequentially margins improved 800 basis points in optoelectronics.

Turning to analytical instruments revenue was $124 million, down 8%. Adjusting for the sale of the [inaudible] radiation testing business and including the impact of foreign exchange, revenue was down 11%. Sequentially, revenue grew 7%. Sales to the environmental market was up both year-over-year and sequentially, bolstered by increased spending on bio monitoring activities in the U.S. Spending by the pharmaceutical industry continues to be constrained with sales into that segment down 4% year-over-year and up slightly from Q1.

In the chemical petro chemical market we experienced a sales decline of 15% year-over-year as that industry continues to defer capital spending. Operating margin for analytical instruments in the second quarter was 4.6%, down from last year due to the divestiture of [inaudible], lower volume and competitive pricing pressures.

Before reviewing discontinued operations you will note on page 7 we have provided a reconciliation to GAAP financial results for our continuing operations. As you can see on this page, the only difference in Q2 between cash and GAAP earnings was the amortization of intangibles. As a reconciliation shows the amortization is roughly $7 million yielding GAAP EPS of 3 cents. We have also provided a full GAAP P&L on page 8 for the three and six-month periods ending June 30, 2001 and 2002. This page also shows the impact of adopting FAS 142 in this quarter.

Based on independent valuations of all of our businesses, we determined that only the lighting businesses, due to recent softness in end markets, did not support its book value, including goodwill. Accordingly, we have eliminated the goodwill associated with the lighting business. This adjustment was made effective for the first of the year so it is recorded as an accounting change for the six-month period ending June 30.

Turning to Page 9, you will see this quarter we have provided details on the four businesses that we have reported as discontinued. During the quarter, fluid sciences generated about 11% operating income on $47 million of revenue. Offset by the results of the other three businesses. After tax, the four businesses lost a million dollars or one cent per share.

Turning to the gains and losses associated with the sale or writedown of these businesses, you see that we recorded a pre tax gain of $16 million from detection systems, offset by an $18 million writedown of our telecom assets and a $2 million writedown of our commercial lighting assets. Result of these gains and losses is a pre tax loss of $4 million and an after tax loss of $11 million or 9 cents per share.

Before I open the call up for your questions, I would like to briefly review cash flow and debt levels. For the second quarter GAAP operating cash flow as defined in 10Q was $11 million, up significantly from Q1 as we had lower restructuring payments this quarter and improved working capital turns. In the quarter working capital and turns improved from 3.2 to 3.6 thus providing a source of $18 million, even with sales up 11%. Improvement was achieved in both inventory and receivables, and despite reducing the level of AR securitization in the quarter by $6 million.

As we have discussed in the past reducing our cash cycle was an important area of focus for the Company this year. Early indications are it is having a significant impact as we both increase the focus and improve our processes. The positive cash flow generation in the quarter combined with the proceeds from the sale of detection systems resulted in a $118 million reduction in total debt to $706 million from $824 million at the end of the first quarter. Net debt went from $654 million to $563 million as cash at the end of the quarter was $143 million.

Now let me open the call for your questions.

Thank you, sir. The Q&A session today will be conducted electronically. If you would like to ask a question, please press star one on your touch tone keypad. We'll take as many questions as time permits and proceed in the order you signal us. Star one if you would like to ask a question.

We'll take our first question from Larry Neighbor with Robert W. Baird.

Thank you. Good morning, everyone.

Good morning, Larry.

Could you give us some idea of the trend through the quarter in terms of your order book? Are you moving into the third quarter with a solid order backlog? Or given the sequential gain from the first quarter, did you use up a lot of your powder in that quarter?

No. I don't think the latter is true. In most cases, our businesses had order rates, maybe in all cases our businesses had order rates that exceeded the billings through the quarter. Now, I mean that doesn't -- that's no guarantee of third quarter or anything else in that respect, but I mean in general, we saw a stronger booking in the second quarter.

What kind of backlog did you end the quarter with?

Well, we don't -- we don't measure or really disclose the backlog as we go through it. But I would just say that the backlog at the end of the second quarter was stronger than the backlog at the end of the first quarter.

Okay. And could you detail any further cost reductions that could lead to an operating margin improvement in the second half of the year?

Well, I mean I think across the board we look at a number of opportunities within the businesses.

You know, there's everything from rationalizing capacity within the factories to continuing to improve the SG&A cost, which I mentioned earlier we have a number of things in there, I'll call it shorter term investment. So whether it's an Oracle 11i implementation in life sciences. Whether it's a transition of a number of people. Whether it's building up some of the sales organizations, going through some of the moves we made in terms of consolidations which, in the short-term bring additional costs because you bring on the new capability, you don't really get rid of the old process.

So I think really, across the board there's a number of opportunities for us in the second quarter. And in '03 going forward.

What would you consider to be a goal for SG&A as a percent of sales going forward?

This is Rob. I would think in the short-term, we should be able to get it down in the 30% range. Longer term we will try and migrate it down more towards the mid-20s.

Thanks. I'll get back in cue.

Yep.

Thank you. Moving on we'll take our next question from Thomas Weisel Partners, Paul Knight.

Hi, guys.

Hi. How are you doing?

Good. What was the generation of cash from working capital, Rob?

$18 million.

And the sale of Detection [ph] generated how much cash?

On a net basis, about $93 million. Of course that does not include potential working capital adjustment that is made, you know, post closing.

And then Cap-X in the quarter?

Cap-X was about $9, and we did have some asset monetization that offset a good portion of that.

What was total repayment of debt in the quarter? Net repayment?

$118 million.

And then the Genomic Solutions that was a $2 million charge?

Right. That's in other expenses.

That's in other?

Yes.

What was interest income and interest expense?

Interest expense was about -- on a cash basis is about $4 million and on a P&L basis is about $6.

Oh, okay. And then the other $2 million Genomic Solutions, and we can back out interest income?

Right.

The other costs, Greg you mentioned, [inaudible] 2 cents of other costs that are in the SG&A line?

Right. Those are restructuring and integration costs so we actually continue to take cost down in the quarter and, of course there was severance cost associated with that as well as some -- what we would refer to as integration costs. We had six-month retention bonuses for example in Packard. Historically we would pull that out as nonrecurring. Going forward I think we are trying to move closer and closer for our results to coincide with the GAAP results. Actually, we have actually absorbed them this quarter.

The last question is in terms of viewing these discontinued operations, what -- is telecom going to recur as a cash charge in future quarters?

No, actually the telecom component business we shutdown in the second quarter. So we stopped that cash spend.

Entertainment lighting will be a continuing [inaudible] pending sale, correct?

It will. That is a business that is being actively marketed.

Okay. The life science group, I'm assuming the reagent part was showing the best strength in the quarter like Q1[inaudible]?

It was. However, if you look on a sequential basis, actually our instruments were up a little bit greater than consumables in the quarter. We saw, as I mention we saw some very nice recovery, particularly in the High Two Put [ph] screening area. Sequentially our instruments were actually up greater than our consumables in the quarter. Year-over-year consumables actually grew better than instruments. But on a sequential basis, instruments was better than consumables.

And your past integration of the sales force of Packard and yours. Are you done with cost reductions as well?

I would say the -- Paul, Greg. The integration of the sales force is complete.

Okay.

Now, there are still some back office operations that are still being consolidated. Certainly all the front end piece of this is done. And, in terms of cost reduction, I really go back to my answer to Larry's question and I think that's just a whole lot of opportunity across the business every day to improve it. So I think we continue on that track.

Last question is, you know, you have made a seemingly significant turn around here in Q2. Where do you think you are in that process? Halfway there? You know, a quarter of the way there? What's your feeling?

Well, I -- I mean I think from an operational execution, we feel good about the -- we feel very good about the operational capability of the Company and the execution of the Company. I think the trend line that, you know, on your question is so it depends on what happens in the economy. And whether the -- you know, the economy for us certainly doesn't seem to be getting any worse. If anything getting a little bit better. I don't know if that's a slow uptick. I don't know if that's a plateau. I don't know if that's a fast ramp. You know, so I think the answer to your question sort of depends on that.

So all I can comment on is the quality of our execution. And I think the quality of the execution improves every day and we feel very good about our momentum in there and our ability to take that up.

Thank you.

You're welcome.

Our next question comes from Edwin Johnston with Harold Brown and Company.

Hi. You mention the revenue on fluid at $46 million, Rob; is that correct?

Yes. $47 I think is the number.

How much is that up or down year-over-year? I believe it's down.

It's up 6% sequentially and it's down about, I think it's 15% year-over-year.

Okay. And what was the book-to-bill on fluid? Not a specific number. Greater than one? Less than one?

Greater than one.

Significantly greater?

I would say noticeably greater.

Okay.

Where it is in the spectrum, but it wasn't 1.0003 or anything like that.

Okay. The putable debt, Rob, next year we are now within a year of it. How much is potentially putable? If we could bring that one on the table. Next August.

Well, potentially the entire amount is putable. Which would be around $500 million.

Okay. All right. Given that fluid has been on the table for a year now, seems to be in a recovery phase and you are probably not in a rush to sell it. Can you comment on your thinking for the financing of that, assuming with your stock price where it is and the debentures put, how you would finance that?

Well, I would say first of all, you know, as you look at our debt, I think from a total level of debt, we are quite comfortable with that. Net debt in the $500 million range. We are looking at a net debt to capital around 30%. So I don't think it's a question of the level of debt, I think it's a question of the maturities. Of course with the convertible potentially being put in a year, I think our maturities are probably on the short side. I think it's really a question of what do we do to lengthen out those maturities? I would say we have a fairly wide range of options to do that. So we believe, you know, if we do have a put back to us in a year, we feel comfortable that we will be able to refinance that either through asset sales or a number of other things.

Are you going to try and do any, lengthen out the term ahead of that? Are you going to do anything in anticipation of that? Or are you going to wait to see how this plays out?

I think there's a lot of options available to us. You know, I think probably rather than get into specific details now, I would just say there's a whole host of possibilities here.

Okay. One last question. You mention that there was $11 million in GAAP cash flow. You also mentioned when you answered a question, $18 million was generated in cash flow from working capital on your better terms. Am I reading this right? Does this imply a negative $7 million in cash flow from operations discounting changes to working capital?

It does, and that's largely because of, I would say four or $5 million of restructuring expenses in the quarter which, of course, we treat as operating cash flow as well. And fundamental other differences, some changes in accruals. And one of the things that was a negative impact this quarter was the timing of our payroll. So if we look at Q1 where it fell, versus Q2 where it fell, has the impact of reducing the accrual on our payroll. That's actually $9 million. That's probably the biggest single swing in the operating cash flow.

Thank you.

We now go to Robert Jaworski with Jeffries and Company.

Could you tell us what your guidance is for Cap-X for the next couple of quarters is?

I would say Cap-X for the second half of the year is probably going to be in $20 million range.

Okay. And what was the depreciation and amortization in the quarter?

Depreciation and amortization depends whether you are excluding the -- if you start with with GAAP net income --

Uh-huh.

You subtract it, the amount would be about $21 million.

Okay. Thanks a lot.

You're welcome.

As a reminder, that is star one if you would like to ask a question. We'll move to Stan Ontis with CS First Boston.

Congratulations on an improved quarter.

Thanks.

Just general question that was addressed a bit earlier with respect to financing. With the put coming due in August, is there any thought as to maybe buying some of that back in the market at this point as the bonds seem to be trading fairly low?

As I mentioned before, I think there's a lot of options available to us. Clearly that is something we look at, and we would consider.

Okay. Also, what's the bank EBITDA amount?

I'm sorry?

The EBITDA amount that's used to calculate for the debt covenant?

What -- the calculation is EBITDA on a GAAP basis, is that what you mean?

Yes.

What is the question? The actual amount?

Yes. The total EBITDA amount. That's used to calculate the EBITDA coverage ratio per the bank covenants.

Okay. The way it's calculated is it's a rolling four quarter EBITDA based on GAAP.

Okay. Thank you.

We'll go to David Hager with Kennedy Capital. Mr. Hager, your line is open. Mr. Hager, if you are using a speaker phone, please release the mute function or pick up your hand set.

Can you hear me now?

Yes, we hear you better.

Sorry about that. I was curious, first on the outlook in the pharmaceutical business if you have seen any improvement there? And then, also if you could give an update, as far as the fluid sciences business, and potential sale if you have any type of timeframe that you are looking now to try and get that closed? And finally, if you can provide additional guidance for the upcoming quarter in terms of sequential revenue improvement in the bottom line?

I'll start off on that question the series questions, take the first two and turn the third over to Rob. In the pharmaceutical market place, it was up sequentially from the first quarter, but down year-over-year. And so I don't -- I mean I would say, obviously pharmaceutical is going through some turmoil. I expect that to continue for the foreseeable future. The next couple quarters or so and to carry on in that way.

Fluid sciences, as we mentioned earlier, has a rising other book and increasing performance. We have a number of qualified buyers. So I think we continue to look at both the, you know, that's still the ongoing divestiture of that business. If we think we can reach the appropriate value for it. So I don't really have anything more specific than that which is to say we continue to proceed on that track and we'll see where that takes us.

With regard to the guidance for Q3 or for the rest of the year for that matter. I think, as Greg sort of alluded to, I think predicting the top line in this environment continues to be fairly difficult. I think our lack of clear visibility makes it difficult for us to give specific guidance whether it's Q3 or Q4. So I think, at this point, we would like to shy away from that.

Okay. Can you even give any indication you feel like there could be ongoing sequential improvement? Obviously you had some nice improvement for the second over first quarter?

I would say third quarter is normally a weaker quarter, you know seasonably. Third quarter is a weaker quarter than Q2. So you probably won't see sequential improvement Q3 from Q2 because of all the holiday shutdowns, if you will in August, particularly in Europe. You know, so I think you have to factor that out.

Okay.

But I would say, you know, the back half we expect to be stronger than the front half.

Okay. Thanks.

Yep.

We'll take our next question from David Siegel with Mutual Series.

I have a couple of questions. Does any of your debt have ratings trigger debt that is on balance sheet or off balance sheet?

Yes. We have accounts receivable securitization that has some triggers relative to below investment grade at the end of the quarter that was about $35 million. I would say that's the probably the most significant.

Okay.

With regard to just pricing for example obviously our resolving credit has some pricing associated with it.

And in terms of your covenants on the debt that you have, what are they? And if you can give us some guidance on how close you are to breaking them?

There's fundamentally two covenants. One is a debt-to-capital it requires us to be below 55%. As I mentioned before we are in the low 30 range. We are obviously very comfortable there. The other is which we sort of talk about a little bit is the rolling fourth quarter EBITDA to gross interest 5 times gross interest. And that's one, also that we feel comfortable with. Going forward based on our projections, as we look right now we feel comfortable we can meet that one as well.

Where are you on that covenant now if you had to look at it today?

Well, we are north of 5. You are saying specifically where we are?

Yes.

I would say we are sort of in the -- well, we are -- I would say north of 5, you know, but less than six, I guess that's the best way to describe it.

Okay. So if you have -- the thing is with rolling four quarters, if the next couple of quarters are weak, if you are -- the two quarters that you had that were pretty good last year are going to fall out. So do you think you are in danger of failing that trigger?

No. Like I said based on our forecast right now, we think we are comfortable meeting that covenant.

Okay. You had mentioned something about the securitization. I missed that comment. The securitization increased by $6 million or decreased by $6 million?

It decreased by $6 million.

Okay. Okay. Thanks a lot.

You're welcome.

Final reminder that is star one if you would like to ask a question. We'll take a follow-up from Larry Neighbor.

Thank you.

Yes.

Your comments that you are seeking appropriate value on the fluid science business, what's your fall back if none of the bids are what you feel to be appropriate value?

Well, look, I mean fluid sciences is a very good, strong cash generation business. In fact, if we kept it, it would be accretive, 15 to 20 cents a share. Our anticipation is that we will sell the business just because of the fit with our strategy. It's not a financial decision from that standpoint, it's more of a fit with the strategy of where we are driving to really build in the health science market place. That's why we embarked on the divestiture And I think we are still on that track of going forward.

Okay. What are the typical economic triggers that you could look to for potential increase in your analytical instruments business?

I think the biggest trigger there, Larry, is probably GNP growth. Overall in the market place. Now elements within our control really come down to, you know, the product line invasion and what we are doing both on the product line side and the services side. You know to capture a larger share of the scarce dollars that are out there, if you will, of the spending.

I think the general trigger if you think about Petro Chem or some of the other areas is probably going to be GNP growth and of course pharmaceutical which has been in some turmoil as well [inaudible] business also. The strongest growth area both organically and sequentially -- at least organically has been environmental. That's been driven by some of the bioterrorism and just general quality of air and water concerns. We see that continuing on both in the developing nations and -- you can call it developing nations and basic water and air quality and in the U.S. it's around and in Europe it's really around bioterrorism.

Okay. Thank you.

You're welcome.

Paul Knight also has a follow-up question.

Greg, you had an earlier question regarding, you know, the discussion of sequential business. Seasonallywise, things are down sequentially in top line. That's what you were alluding to, you are not providing EPS guidance, is that the correct interpretation?

Yes, it is. It's just -- right. It's just to say that the third quarter, you know, because of the vacation schedules, particularly in Europe, revenues are always lower in the third quarter than they are in the second quarter.

Like everybody on the planet.

Like everybody on the planet.

So you are not referring to an EBIT or EPS situation?

No I'm just talking about the revenues.

Okay. The other is, Rob, doing my cash flow, the net from operation number that portion, what's the net number that I should have?

Cash flow from operations?

Yeah.

$11 million.

11.

Yep.

And that -- there's going to be an other number in -- 11 positive?

Yes.

Okay. So there's another plug in there that includes accruals, et cetera?

No. No. That's net of that. I mean the bottom line, operating cash flow was 11 million positive. After accruals, after restructuring --

All in it's 11?

Right.

Okay. Thanks.

Yep.

We'll go back to Edwin Johnston.

Rob, if you do breach the covenants, what happens and how much of what you have drawn down, if any, is affected? What is the recourse?

Well, we are not really planning on breaching the covenants.

I'm saying if it happens. Obviously if you are just north of five, that has to be looked at as an eventuality. Obviously you don't want to. I'm just curious to what happens if that did happen?

The amount that's drawn right now or at the end of the quarter is about 100 million. Was I mentioned before we have $143 million of cash.

You have cash to pay it down.

So, you know one of the -- I guess one of the things that we would prefer not to do is bring the cash back from overseas. The negative of that there is some incremental tax costs to do that. All things being equal, we would prefer not to do that but if we had to bring it back, we would bring it back.

Are you renegotiating at all with whoever is extending the lines to get the covenant changed, softened a little?

We haven't had any discussions with them again, because I think at this point our belief and our forecast says we'll be okay.

Super. Thank you.

That does conclude the Q&A session today. Mr. Summe, I would like to turn the call back over to you.

First of all I would like to thank you for joining us today. As we stand back from the quarter we are pleased with our momentum on a number of fronts and we frankly look forward to posting you on our continuing progress . So with that, thanks for your time, your questions and interest. Have a great day. The call is adjourned.

Once again everyone thank you for joining us today. That does conclude today's presentation.