Welcome to the Danaher Corporation second quarter 2008 earnings results conference call. (Operator Instructions) I would now like to turn the call over to Andy Wilson, Vice President of Investor Relations.
On the call today are Larry Culp, our President and Chief Executive Officer and Dan Comas, our Executive Vice President and Chief Financial Officer.
I would like to point out that our earnings release, Form 10-Q, a slide presentation supplementing today’s call and reconciling and other information required by SEC Regulation G stating non-GAAP financial measures provided during the call are all available on our Investor section of our website at danaher.com, under the heading earnings. It will remain available following the call. In addition the audio portion of the call will be archived on the Investor section of our website later today and will remain achieved until our next quarterly call.
A replay of this call will also be available until July 22. The replay number is 888-203-1112 in the U.S. and 719-457-0820 internationally, with a confirmation code of 497-9941. I will repeat this information at the end of the call for late arrivals.
During the presentation we will describe certain of the more significant factors that impact the year-over-year performance. Please refer the accompanying slide presentation and other related presentation materials supplementing today’s call as well as the MD&A section of our second quarter Form 10-Q for details regarding additional factors that impacted year-over-year performance.
Also, all references in the presentation to earnings, revenues and other specific financial metrics relate only to the continuing operations of Danaher’s business unless otherwise noted.
Our earnings for the period include the results of operations of Tektronix, which was acquired in the fourth quarter of 2007. Included in our earnings are certain non-cash charges related to Tektronix acquisition for fair value adjustments, to recorded inventory and deferred revenue, which reduced total net earnings by approximately $10 million or $0.03 per diluted share in the second quarter and approximately $29 million or $0.09 per diluted share of the first half.
These charges are included in our reported results for the second quarter and the first half of 2008, but excluded from the adjusted earnings per share guidance that we will provide at the end of the prepared remarks. The amount of these non-cash charges related to the Tektronix acquisition was expected to reduce our earnings by approximately $0.13 per share for the full-year of 2008. Throughout the call all references to non-cash acquisition-related charges for Tektronix relate to these items.
I’d also like you to note that we will be making some forward-looking statements during the call, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties including those set forth in our SEC filings. It is possible that actual results might differ materially from any forward-looking statements that we might make today. These forward-looking statements speak only as of the date they are made and we do not assume any obligation or intend to update any forward-looking statements.
With that I’d like to turn the call over to Larry.
We are pleased to report that our second quarter earnings per diluted share were $1.09, representing another record second quarter for Danaher and 14.5% increase over last year. Included in the second quarter earnings per share was approximately $0.03 per share of non-cash acquisition related charges for Textronix, as well as the benefit of approximately $0.03 per share related to just pre-tax items and another tax related benefits.
Adjusted earnings per diluted share for the second quarter improved 17% over last year’s adjusted earnings per share. Revenues for the quarter increased 25% to a record $3.3 billion with core revenues up 5.5%. Acquisition contributed 14% and we have positive currency effects of 5.5%. Robust growth in our Water Quality and Medical Technology businesses led the way and an improved performance of motion was partially offset by continued soft demand in our consumer driven businesses.
Year-to-date revenues increased 22.5% to $6.3 billion as core revenues grew 4%. Year-over-year gross margin for the second quarter improved approximately 190 basis points to 47.5% primarily due to the impact of higher gross margins in our new businesses and improved mix of revenues from existing businesses as well as ongoing cost savings initiatives.
SG&A expenses were 26.2% of sales, compared to 24.4% a year ago due primarily to higher SG&A levels in our new businesses. Research and development spending as a percentage of sales for the three months ended June 27 was 5.8% as compared to 4.9% last year. This increase was largely due to the impact of newer businesses with higher R&D levels primarily Tektronix, but also because of increased investment levels in our Med Tech businesses.
Operating profit for the quarter was $510 million representing a 15% increase over the second quarter of last year. Included in the second quarter of this year operating profit was approximately $13.5 million of non-cash acquisition related charges for Tektronix. Adjusted operating profits for the second quarter increased 21.5% year-on-year. For the first six months, operating profit was $924 million, a 13.5% increase over last year. Adjusted operating profit for the first six months increased 20.5% year-on-year.
Operating margins in the second quarter was 15.5%, a 130 basis point decrease from 2007. The impact of newer businesses including the non-cash acquisition related charges for Tektronix negatively impacted margins by approximately 65 basis points. Also impacting year-over-year margin comparisons were prior year one-time gains of approximately 50 basis points. Adjusting for these items operating margin was down 15 basis points in the second quarter compared to the prior year.
Our operating margin has been impacted by both inflationary pressures and by the effective of currency changes. In addition included in these results are the impact of approximately 50 basis points from our continuing restructuring spending and the settlement of certain legal claims. Our effective income tax rate for the second quarter was 24% which benefited from the impact of certain discreet tax items as well as a slightly lower effective tax rate. We expect our effective tax rate for the balance of the year to be approximately 26%.
Net earnings were $363 million for the quarter, an increase of 18% compared to net earnings in the second quarter of last year. For the first half net earnings were a record $640, an increase of 14.5% over last year. Included in net earnings are non-cash acquisition related charges for Tektronix. Adjusted net earnings for the second and first half improved 22% and 28% respectively over adjusted net earnings from last year.
Operating cash flow for the first six months of 2008 was $915 million, 33% higher than the same period last year. Second quarter free cash flow was $537 million, an increase of 65% over the same period last year and represents a record quarterly free cash flow performance. Improvements in working capital from first quarter levels primarily related to receivables collections, contributed to this record performance.
Free cash flow for the first half was $831 million representing a 34.5% increase over last year. Our free cash flow to net income conversion ratio was 148% for the second quarter and 130% for the first six months. We continued to be optimistic about our ability to deliver free cash flow in excess of net income for what we would be our 17th year in a row. During the quarter we reduced our outstanding debt by over $400 million and over $650 million from the first six months. Our debt total capital ratio at the end of the quarter was 23% with over $280 million in cash and cash equivalents at quarters end.
Turning to our operating segments, professional instrumentation revenues increased 52.5% for the quarter with core revenues up 4%. For the first half of 2008 revenues increased 54% with core revenues contributing 4.5%. Operating margin for the 2008 second quarter was 20.1% as compared to 23.2% in the prior year. It’s the dilutive impact of recent acquisitions in the non-cash acquisition related charges for Textronix, negatively impacted margins by more than 300 basis points. Year-to-date operating margin decreased 300 basis points to 18.4% when compared to 2007 due principally to these same factors.
Environmental platform revenues grew 23.5% with core revenues up 6%. For the six months ended June 27, sales increased 24% with core revenues contributing 6.5%. Water Quality core revenues grew at a low double-digit rate in the second quarter. This represents the eighth consecutive quarter of double-digit growth at Hach-Lange. We continue to see solid demand for both our process and lab products with particular strength in Europe as well as in Asia where we experienced sales growth of more than 20%.
During the quarter we launched our new total organic carbon analyzer, the ANATEL PAT700 which provides advanced analytics in digital communications for pharmaceutical manufactures. It enables certain water analysis to be moved from the lab bench to the plant in an online mode charging new delivered mid-teens core revenue growth for the quarter reflecting significant demand for our wastewater solutions in both Europe and in China.
During the quarter Orange County California was awarded the 2008 Stockholm Industry Water Award recognizing the County’s efforts to develop the world’s largest water purification plant for ground water replacement. A key to the success of this project was the incorporation of Trojan’s World Class UV Disinfection Technologies. ChemTreat achieved mid-single digit revenue growth in the quarter.
During the quarter the company won several large industrial contracts and expanded its international sales initiatives, leveraging the Water Quality groups existing sales infrastructure. We look forward to sharing more about our Water Quality businesses at our mid-year analyst and investor meeting slated for September 3 in Loveland, Colorado.
Gilbarco Veeder-Root’s core revenues grew at a low single digit rate in the quarter has increased sales of our environmental and payment products and overall strengthened most emerging markets were partially offset by soft dispenser sales in Europe and North America.
During the quarter we announced the signing of a definitive agreement to acquire Autotank Group based in Finland. With approximately $80 million of annual revenues we expect the acquisition of Autotank to help Gilbarco’s footprint in Scandinavia, Eastern Europe and Russia by providing payment systems, installation and maintenance service to our customers there. The acquisition is subject to regulatory approval and other customary closing conditions and is expected to close during the third quarter.
Moving to Test & Measurement, revenues grew approximately 100% in both the quarter and in the first half with core revenue contributing one half of 1% during the quarter and contributing at a low single-digit rate for the first half. Fluke core revenues grew at a mid single-digit rate in the quarter led by demand for our new low cost thermography products, the Ti-10 and the Ti-25. Geographically, we experienced growth across all major regions with particular strength in Latin America and Asia.
Fluke network sale were down low double-digits during the quarter resulting from softer sales to and through the major telecom providers in addition to a difficult comparison due to a large project a year ago. We expect the FNET results to improve sequentially over the balance of the year, but to remain challenging.
At Tektronix revenues declined at a high single-digit rate in the quarter, which is consistent with our expectations. We experienced double-digit sales growth in several product lines including certain scope in video test categories, as well as in network management where core revenue growth was driven by large customer wins in Asia and strength amongst our U.S. carrier base. This growth was offset by difficult year-over-year comparisons due to a very significant prior year shipment to a single customer, as well as softness in our network diagnostics business.
The launch of our new DPO3000 digit Oscilloscopes, which is used in designing, testing and ensuring quality control of electronic products is going exceptionally well with strong order performance and excellent customer awareness globally.
The collaboration among TEK and Fluke associates is progressing extremely well. In emerging markets the teams have been working together leveraging combined resources to expand our sales presence in these important and rapidly growing regions. We’ve also seen strong support from a number of our large U.S. distributive partners including doing sales and marketing promotion for the Fluke and TEK basket of products.
We’re quite pleased with the company’s high teens operating margin performance in the first half of 2008, excluding of course the non-cash acquisition related charges. While still early, this is a substantial improvement versus the same period a year ago. It is a testament to both the quality and commitment of the Textronix’s team and their embrace of DBS.
Moving to Medical Technologies, revenues for quarter increased 18.5% compared to 2007 and core revenues we’re up 10% with Radiometer, Lika and Dental all delivering strong performances. For the first half revenues increased 15% with core revenues up 6.5%.
Med Tech operating margin for the second quarter was 10.8% compared to 11.1% a year ago due primarily to the impact of lower operating margins from our newer businesses; the negative effect of currency changes given our largely European cost base in Med Tech as well as restructuring and increased investments in both new products and go-to-market activities.
The operating margin for the first six months decreased 70 basis points to 11.1% as compared to the first six months of last year, a result of these same factors. Core revenues in our dental businesses improved sequentially and grew at a high single-digit rate in the quarter. Sybron grew at a mid-single digit rate let by a strong performance from several new product introductions and solid general and administrative consumable sales.
Our newly launched Twisted File is designed to meet Danaher’s needs by making rotary root canal preparation safer and more predictable resulting in a higher lever of doctor and patient satisfaction. We continue to see some pockets of softness during the quarter, particularly in Orthodontists although this portion of the business still grew at a modest rate.
At KaVo, we experienced robust demand for our 3D imaging product in both Europe and North America. With the new Gendex CB-500 medium field of view 3D combing imaging product has been very well received. Our first quarter initiative related to our Asian distribution channel continued to gain traction and we believe these changes will enhance our ability to rapidly expand our position in this fast growing part of the world.
During the quarter, KaVo completed the acquisition of Infrared Fiber Systems, a small producer of optical fibers for laser power transmission in dental applications including hard tissue lasers.
Radiometer’s core revenues grew at a higher single-digit rate for the quarter, driven primarily by strong consumable sales across all major geographies with particular strength in Russia, where we experienced double-digit growth. The rollout of AQT in Europe is progressing with positive reactions from the market. Like our core revenues grew at a mid-teens rate in the quarter, not withstanding the mid-teens performance a year ago, driven by robust compound microscopy demand, as well as more than 20% growth at Leica Biosystems, our pathology diagnostics instruments and consumables business.
We experienced growth across all major geographies with particular strength in Asia and Europe. During the quarter Leica acquired core-tax small manufacturer of pathology instruments and consumables. We expect core TEK will enhance our ability to deliver end-to-end workflow solutions for our customers at Leica’s Biosystems.
Moving to Industrial Technologies, revenues increased 9.5% in the segment for the quarter with core revenues up 4%. For the first half, revenues increased 6.5% with core revenues contributing 1%. Operating margin for the second quarter was 17.1%, a 160 basis point decrease compared to the same period last year due primarily to a prior year gain on indemnity proceeds from the litigation matter, which impacted margins by approximately 155 basis points as the lowest restructuring charges incurred in the second quarter of this year. The second quarter restructuring activities eliminated more than 150 positions in the segment.
Year-to-date operating margins decreased 120 basis points to 16% largely due to the same factors. Product ID core revenues increased 1% during the quarter. There’s a delay in certain large parcel projects and a reduction in traditional USPs projects at Accu-Sort’s partially offset low single-digit growth in the core marketing and coating side of the business. For the first six months sales increased 5% with core revenues declining slightly.
In Videojet growth and consumables in our laser and thermal transfer over printer product lines was partially offset by softer demand for our continues inkjet product offering as customers anticipate the upcoming launch of our new continuous inkjet 1510 high volume coating printer. The 1510 will consolidate six existing CIJ platforms into one and is expected to provide customers with industry leading up time and improved maintenance requirements.
Switching to motion, revenues were up 9.5% in the quarter with core revenues contributing 3%. Growth in our aerospace and defense, flat panel display and elevator businesses was partially offset by softening demand in the U.S. and Europe for our standard motor and drive products. For the first half, sales increased 5.5% with core revenues down slightly. We are encouraged by the improved performance at Motion and expect the third quarter performance to be comparable or slightly better than the second quarter results.
Finally, moving to Tools and Components, revenue for the quarter was up 4%, with core revenues contributing 3.5% primarily driven by the strong performance Jacobs Vehicle Systems. For the first half revenues were up 1.5% with the core revenue contributing 1%. The operating margin for the quarter was 13%, a decrease of 90 basis points from the prior year largely due to increased commodity costs, primarily steel and the impact of lower production levels within mechanic’s hand tools. Year-to-date the operating margin decreased 10 basis points to 12.4% due principally to these same factors.
Mechanic’s hand tool revenues declined 2% in the quarter. Asada’s double-digit growth in China was offset by weakness in both professional and consumer businesses in the U.S. Our sell-through at lows was positive in the quarter while customer demand in Sears remained soft. For the first half Mechanic’s hand tools core revenues declined to 4%.
During the quarter we announced an agreement with advanced auto parts to supply their stores with the full complement of our gear ranch brand of tools with revenues starting in the second half of this year. We’ve also received the contract to supply general mechanic’s tools kits to the U.S. army over the next five years, with a contract valued at approximately $100 million which represents the largest government contract win ever by the tool group. We expect shipments to begin later this year.
So to wrap up, we are pleased with our performance in the second quarter. Record revenues including a solid core growth performance, record earnings and strong pre-cash flow and while we are keenly aware of the impact of higher commodity prices and the difficult credit markets are having on consumer consumption, in the economy as a whole we remain encouraged by what we see across the majority of our businesses.
In those businesses, where we’ve seen top-line softness, we have taken action in implementing cost initiatives to protect the bottom-line. In those businesses where we have opportunities to invest in growth, we’ve continued to make those investments. As always our focus is on delivering strong financial results regardless of the economic environment.
As a results our adjusted earnings per share guidance for the third quarter is estimated to be in the range of $1.09 to $1.14, which excludes the non-cash charges related to the Tektronix acquisition. We are raising our full-year 2008 adjusted earnings per share guidance from $4.30 to $4.40 to a new range of $4.34 to $4.42, which excludes both the acquisition charges related to Tektronix and the benefit of the $0.03 per share of discrete tax items realized in the second quarter.
Thank you, everybody that concludes our formal remarks. Nicky I think we are now ready for questions.
(Operator Instructions) Your first question comes from John Inch - Merrill Lynch.
John Inch – Merrill Lynch
Hey, so margins under a little bit of pressure. I mean the top-line was great, margins under a little bit of pressure in terms of the sequential year-over-year trend, could you guys talk about how much of that kind of overall was raw material pressures and how much restructuring actually incurred in the quarter and what the results would have been after that?
At headline level clearly we were up 35 basis points year-on-year absent basically 50 basis points of negative impact from restructuring and legal settlement that we mentioned. Clearly third quarter in a row, we’re taking these restructuring actions. I think they are the right things to do right now particularly, we could do it, so we did it despite the context where obviously we’ve got earnings at mid-teens; we had very strong cash.
I think the inflation that we reference is very much what you’re reading about in the papers. Metals inflation clearly at tools particularly is pitching margins there, you see that. I think we’re seeing the energy cost really top-up in a lot of places from freight to travel, so that’s going across the board challenge. With that’s said we still have PPV, Positive Purchase Price Variance from our corporate procurement low cost region initiatives. It’s just not as much as it would be in a more normal environment.
The other thing I would just highlight is in Med Tech again the OP in dollars is up 16% year-on-year, very pleased with that, but we obviously have a situation where we’ve got a euro denominator cost base by-and-large at Radiometer with KaVo at Lika and that strong euro depresses the ratio, but when you look at Med Tech FC acquisition restructuring noise, we were up 50 bps in the quarter and that euro pressure that I referenced probably is suppressing about 50 basis points of that margin expansion elsewhere, during the good work in the business.
So, it’s clearly a tougher environment and probably a stage challenging in that regard, but I think we know what we need to do here as we look forward to the third quarter and the second half.
So John, I mean in total absent restructuring in the one-time items we referenced that hit us by roughly 50 basis points, our operating margins would have been up 35 basis points across the company.
John Inch – Merrill Lynch
And what’s restructuring Dan I think you did about $10 million in the first quarter. It was a…
50 basis points is approximately $15 million in the quarter, the large majority of that was restructuring. There’s a little bit of kind of some settlement of some legal claim.
John Inch – Merrill Lynch
Okay, so just to switch gears here. I guess Photon Dynamics, one of your big customers when motion was acquired; is that going to affect your outlook for that business in anyway do you think?
John, I think the over tech transaction with Photon is something we need to sort through it. We know them from our servertronics business in each real of course, but it’s really too early to tell.
Your next question comes from Robert Cornell - Lehman Brothers.
Robert Cornell - Lehman Brothers
A couple of questions; first of all, Tektronix and Fluke, the organic growth at Tektronix was off a little bit. I mean there was -- I think they’ve been running ahead of what you thought so far at the beginning of the year and this is off, maybe you could talk a little bit about why that was and then just maybe give a little more detail about the integration and where they are getting -- whether the integration is a net disruption or a net positive thing. You talked about the distributors and so forth and so on, but maybe some more color around the organic growth and the integration?
Sure, Bob. Let me be clear. I mean we are right where we thought we would be and right where we want to be with TEK here at mid-year. Its interesting Dan, I was going back through the board plan for TEK the other day. We’re almost at right at the dollar level of revenue that we expected with Tektronix. So, we knew we had a though comp, we knew there were some other issues like network diagnostic offsetting, some of the good growth that I mentioned in the prepared remarks, so no surprises there quite frankly. OP is the positive surprise, we’re ahead schedule.
I think, what we have seen thus far is the business is everything we thought it would be from a brand, from a technology, from the global reach perspective. I was with the team last month in Japan in fact and walked away I think very encouraged by what we are doing there. Really the team around the world is just tremendous people. I think the synergies that we see clearly are there both with respective to revenue and cost. We’ve talked about the cost progress this year where. We are well ahead of $40 million a year one reduction that goes well for ’09 of course.
I continue to believe that there are opportunities from a product and from a channel perspective for Fluke and TEK to work together, and I think we’re going to help them to be frankly more aggressive and more competitive in the marketplace. So, I think all-in-all we are, where we thought we would be feeling very good about the addition of Tektronix and looking forward to many good years ahead.
Robert Cornell - Lehman Brothers
Yeah, that’s question one. Question number two is, if you don’t mind is there’s a lot of chatter all this year about possible, optional dental procedures you mentioned that briefly with the orthodontics comment and maybe you could remind us you mean how much of the dental business could be considered high-end deferrable and so how is that doing? What’s the outlook?
Well the highest end into our business will really be the ortho or the Ormco business, where we saw a deceleration of the core growth trends there, but we were still nicely positive. I think it’s been pretty well documented in the U.S. that their ortho starts have softened a bit here, but I think the other thing to keep in mind is why that is taking place is doctor’s transition, case starts in patients to our self ligating technology. We get a very positive mixed benefit there, which is why we were able to show the growth that we did at Ormco despite the softness in case starts.
If we look at Ormco and other regulated high-end businesses as a percent of the total, we were talking probably 10% of the total dental platform. So, you had, 90% of it was up high single digits and yet 10%, that which was kind of flat slightly up resulting in sort of high single digits for all of dental.
Our next question is from Deane Dray with Goldman Sachs. Please go ahead.
Deane Dray - Goldman Sachs
There was a nice rebound in core revenue growth for the quarter and it takes us back for the first quarter when you disclosed an order growth which is sort of a new data point for Danaher; is that -- what was the comparable order growth in the second quarter? Is that a data point that we should expect on an ongoing basis?
I don’t think that’s a data point that we’re going to talk to on an ongoing basis, Deane. I think we talked to that. I think to put the first quarter shipment number in context that you see that reading through as we get anticipated hear in the second quarter, but since you are asking we were -- orders were up in the mid-single digit rate in the second quarter.
Deane Dray - Goldman Sachs
That would indicate sort of a nice trend line there as well. So copying about the balance of the year for core revenue growth?
Yes, I think we are really pleased with the second quarter performance. I think particularly when you look at the way all four segments contributed this time around we had -- I think there was a minimum of 3.5%, as you look across the four segments. Clearly water and Leica did it again. The water growth as we mentioned in the prepared remarks is very broad based. All three legacy of Med Tech really performed I think quite well.
I think as we look to forward though Deane, clearly with the decidedly negative macro news flow out there, we want to make sure we stay ground. I think when you look at the first half in it’s entirety you see 4% core growth. I think that’s a good basis for projecting forward into the second half. I think we’ll be in-line, perhaps slightly ahead of that level with respect to core growth in the second half.
I think as we look into third quarter, particularly we would expect to see all our four segments in a mid single-digit zone clearly the high flyers Water and Leica are likely to de-sail off those double-digit growth rates, but still perform well. I think we’ll see tools and motion incrementally get better as we head it -- I think flag through the second quarter.
Mid Tech should be in the mid, maybe high single digit range. I think it’s whole 179 incentive in dental equipment around KaVo is a bit of a Wild Card. It should be a net positive for us, but what that does for us in third quarter versus fourth is a little unclear right now and particularly with respect to order books, Gilbarco built a fair bit of backlog in the second quarter, which should board well for them here in the third.
So all-in-all I think we would expect the second half inline with the first half obviously mindful of the risks that are out there and that’s why you see it’s taking the cost actions as well as just to make sure we protect in the event things get sloppier.
Our next question is from Jeff Sprague with Citi Investment Research. Please go ahead.
Jeff Sprague - Citi Investment Research
On the telecom side Larry, can you give us a little color in terms of what you are seeing in terms spending priorities? As you noted maybe not too much different than what you thought, but just the complexion of demand here the next couple of quarters?
Yes, I think what we are -- when we talk about it in a Fluke network context, we’re really talking about a big project, with respect to network optimization that we will repeat this year. At that main into the technician level, what we are seeing is clearly a tightening of the bell and in turn lower spending levels for those tools that go on those belts amongst the maintenance text out in the field.
I think over at Tektronix, specifically Tech communications clearly seeing the carriers spend money broadly in network management and optimization, that’s the core business of what we do at Tech and that’s the business if it’s up double-digit, we call that network management and we state networks again those are really the carriers not the enterprise customers, that we serve at FNET.
The other bit of the business that has been weaker is really what we call network diagnostics Jeff and that’s what we are working with the equipment manufacturers, which is I think you know have been soft for a while and I think we will continue to be soft as we look through the balance of this year.
Jeff Sprague - Citi Investment Research
And now Larry, this is a solid separate follow-up on the deal side can you give us -- you raveled off a couple of deals, most of them sound small expect for the one in GVR, but what where the acquired revenues in the quarter, on the go forward basis and what does the pipeline look alike?.
A little over $100 million Jeff, acquired revenues most of that being leads and other pending order pegs.
To finish that 200 million with Autotank, a little over 100 million on the three other deals. Sorry.
Andy always has the facts. The pipeline Jeff, I think it continues to be very promising relative to the second half. We have seen really no let up in activity, I think we have seen in isolated situations encouraging effects from the tough capital markets with respect to value, but is I think as I said a couple of times during the second quarter its still very early I think in that adjustment, but we continue to be I think poised here to be an active strategic acquirer in the second half.
Our next question is from Wendy Caplan with Wachovia. Please go ahead.
Wendy Caplan - Wachovia Capital Markets
Hi, good morning. You mentioned that in product ID that there were some order delays, was this exclusively related to the customers waiting for the new product? Were there any other issues, are you seeing other order delays anywhere else and can you comment on product ID share please?
Good morning Wendy. The delays that we referenced in product ID were specific to Accu-Sort and again the customer base there, U.S. Postal Service and some of prominent global parcel delivery folks, we saw from projects slip in the first quarter and intern they have continued to slip. I think you have seen some of those companies talk about rating and capital spending this year as their volumes have declined. We’ve certainly been on the receiving end of that. I would really contrast that with what we have seen in Videojet and that’s where the new product reference is relevant.
We have a new printer coming in as part of our platform consolidation effort there, not only with Videojet but some of the other acquisitions. I think we probably had some, I’ll call it modest negative effect from the pending launches. People, who know about this product and know that it’s coming and are excited about it, held off on some purchases, but the core business there I think is performing pretty well, no signs amongst that customer base of capital reductions or delay, but obviously in that business like in many of our businesses, we are watching carefully the trends.
And Wendy, this is a reminder an Accu-Sort, it is a low -- particularly that project business is at low margin. We are currently forecasting that piece to be down double-digit in Q3 that could be a year-on-year reduction of over $5 million of revenues, but the operating profit about $5 million is less than $500,000. So, we’re not happy about the revenue picture there, but it’s not having much of a profit impact.
Wendy Caplan - Wachovia Capital Markets
Thanks, and just the last part of the question was about market share in product ID, and as well are there any other areas of the company that you’re seeing any kind of project delays related to customer spending?
I think our share in product ID, particularly around Videojet continues to be strong. We have a number of good competitors there, but it’s a good market and I think we do well and I surely look forward to getting the 15, 10 out and the products that come behind it.
As we look across the business given what we saw to Dean’s question with respect to order flow and the like really nothing of it is pronounced Wendy as it is in at Accu-Sort with respect to big customer’s clearly delaying programs. Certainly, you’ve heard us talk about a couple of businesses, where certain product lines are seeing soft demand, GVR being another example, but I think that really is a simply well correlated to the headlines out there today.
Our next question comes from Richard Eastman with Robert Baird. Please go ahead.
Richard Eastman - Robert Baird
Just a quick comment if you will; across platforms and businesses, what’s your perspective on the kind of developing dynamics in Europe, Larry? I mean are things turning down as quickly as some of the data point suggest and are you seeing that specifically in any portions of the business?
Rick I think if you look at our Danaher-wide European performance in the second quarter, it was fundamentally inline with what we saw in the first quarter. Obviously there’s some noise there with the Easter timing in ’08 compared to ’07.
We really have not seen a material or marked shift there broadly but there have been a couple of pockets I would see in motion, which can be above where they are at least with respect to some of our OEM oriented customers, clearly have presented some softness of deceleration there and I think we are very focused right now on seeing, winning where the macro indicators out of Europe are leading our business, but you wouldn’t be overly concerned about Europe.
We’re simply looking at our second quarter figures, but we operate with a little bit more -- with a different mind set. So we’re going to take nothing for granted over there right now.
And Rick, one thing that’s helped core in Q2 was very strong performance in Eastern Europe, Russia, Turkey. We actually saw an acceleration in those regions from Q1.
Richard Eastman - Robert Baird
Okay, alright and then just is a, may be a follow up. Larry, in terms of the Gilbarco business, are you treating the downturn as structural or cyclical?
Well, I think it’s a mixed bag there Rick I wouldn’t want to characterize it as structural because we saw excellent growth in our environmental products both our air and water quality products there. Retailers continue to invest in security and payment systems, so we actually saw I think very good growth in the quarter. Despite more that’s getting pinched the way they have been really around the world.
You clearly see the softness with dispensers but to the extent that these stations continue to operate, people are going to continue to use gasoline; people are going to sell gasoline. We think that’s an opportunity to be a provider of choice. So I think this is more -- the approaches is probably somewhere between in that we’re going hard after cost not only here in the North American operations but really around the world.
And our next question is from Ajit Pai with Thomas Weisel. Please go ahead.
Ajit Pai - Thomas Weisel Partners
A couple of quick questions; the first one is just looking at the amount of your net debt going down to about $500 million, could you give us some color as to how much you have available right now with your creditor facilities that are already opened to be able to finance acquisitions right now?
Ajit just in terms of the existing facility it would be the approximate $1.5 billion today and I think we would be able to access more because giving existing lines.
Ajit Pai - Thomas Weisel Partners, LLC
And the pipeline of acquisition, you said that the pace and interest of folks that you are speaking with hasn’t gone down, it’s been fairly steady, but could you give us some indication as to the nature, not necessarily the industry, but the rough size of potential acquisition that you are the closest to?
Well, I think that the pipeline is shaped as it often is by a large number of smaller transactions and possible transactions, a healthy but smaller number of if you will midsized transactions, a $100 million or $200 million to $300 million and then the smallest piece of the pipeline is the that the Tektronix type transactions of companies north of $500 million in revenue.
So, there’s really no change there and I would expect this year to play out more of less the way we’d seen it over the last several years. Though we never plan it that way, we do a dozen transactions, tends to be one large transaction, two, three, four midsized transactions and the rest the smaller built-on that provides important technology or distribution access.
Ajit Pai - Thomas Weisel Partners
Right and when you’re looking at the sort of tightening credit markets out there, are you seeing a greater willingness to speak with strategic buyers like, your selves and of the valuation have you seen any material change in the potential acquisitions, expected evaluations?
I think Ajit the tightening credit market has definitely helped the number of conversations. In terms of valuation, I would say that valuations offset, our trailing numbers are coming in, they are coming down. Of course the challenge is to sort figure out what the next year or two is going to look like, but I would say Ajit, I would say that we’d seen improvement in the sort of value on the valuation side.
And our next question comes from Steve Tusa, with JP Morgan. Please go ahead.
Stephen Tusa – JP Morgan
Tektronix, what was the revenue that that contributes like $350 million bucks, is that right?
It’s probably more than 200 to 300.
Stephen Tusa – JP Morgan
200 to 300, so what was the …
More than 200 to 300.
Stephen Tusa – JP Morgan
And then so the profit contribution from that?
Well, on a segment basis, on a business un it basis we said high teen, so again we’ve got, the non-cash origins, we’ve got a fair amount of amortization on that as well.
Stephen Tusa – JP Morgan
Okay. So is there a seasonality to that business or anything like that or that seems like a pretty high margin?
Well, that’s what we’re working towards in lead.
There was some benefit given that May was at their year-end but the margin we generated in Q2 was better than Q1, but not meaningfully better. So, I think we’ve got pretty good traction there.
And due to time restrains our final question comes from Mr. Nigel Coe with Deutsche Bank. Please go ahead.
Nigel Coe - Deutsche Bank
So I missed this; you’ve already said this, but restructuring obviously you’ve taken some expenses in the last three quarters, anything in the second half of the year within guidance?
Yes and we currently have a comparable to slightly lower amount planned right now for the third quarter and we are all looking at other activity thoughts for Q3 and the fourth quarter.
Nigel Coe - Deutsche Bank
Okay and is that within industrial again.
That’s in industrial, it’s also some in professional instrumentation part of that Fluke network.
Nigel Coe - Deutsche Bank
Secondly on free cash, I think you said in the past roughly $5 per share of free cash. You had a great quarter of free cash for the last quarter. I mean does that increase or do we get a little pullback in the second half of the year.
I mean obviously it’s a very good quarter. We did benefit a little bit from the timing of tax payments, but remember you’ve quoted it’ll work out to a little bit under $1.7 billion. I think the street numbers we have seen are $1.5 billion to $1.7 billion. I think we’re based on what we know comfortable with the high-end of that.
Nigel Coe - Deutsche Bank
And then finally on the tax rates, it’s coming in a little bit lower in the second half of the year. It looks like that’s a mix of, profits overseas this U.S. is that right and if so what do you think is seen at that kind of level?
Well I think given the current tax law that’s sustainable that we are feeling the change in tax laws in different jurisdictions, but right now we are comfortable with it.
Nigel Coe - Deutsche Bank
Right and then maybe just one more; obviously you’ve done a great job with the Textronix’s margins; have you thought to attack the R&D base of that business yet because obviously R&D’s in the team. Is that to come?
Well I would use different language there Nigel. I think that the R&D group there is exceptionally talented. We want to make sure that we have those folks working on the right programs and driving that sort of shift in focus and accelerating the impact are they going to have on the top line. It’s really where a lot of our energies are in right now.
I think that this changes you put in this reference out there have impacted all functions not only some of the back office operations, but really across the board but we’re trying to being smart about it, because that engineering group is the really the heart and soul of what has made TEK strong and we want to build on that strength as we go forward.
Ladies and Gentlemen that does conclude today’s question-and-answer session.
Just as a reminder for those who have joined late, the replay number for today’s call is 888-203-1112 in the U.S. and 719-457-0820 internationally; confirmation code 497-9941. Thanks for joining us today. If you have further questions Dan and I are available all afternoon. Thanks.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!