Danaher Corp (DHR) 2001 Q1 法說會逐字稿

Good day everyone and welcome to the Danaher Corporation First Quarter 2001 Results conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Patrick W. Allender, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thanks, Tracy. Good morning everyone and thanks for joining us today. Joining me today is George Sherman, our President and CEO, and H. Lawrence Culp Jr., our Chief Operating officer. I would like to point out to you that our earnings release and summary financials are available on our website as we speak, and if you did not get a copy of the release itself, you can get it on our website www.danaher.com. I would also like to point out that 10-Q is also on the website as we speak, and I suggest you review in particular footnote 3, which provides some specifics on how the EPS calculation is done in order to factor in the January convertible bond issuance that we made. For purposes of the replay, it will be replayed for 48 hours after this call; the replay number is 719-457-0820, conformation code 519106, and I will repeat that at the end of the call for some late arrivals. I would also like to note that in order to help you understand the company's direction, we will be making some forward-looking statements during the call. It is possible that our actual results might differ from our predictions that we make today. Additional information regarding those factors is available in our SEC filings. With that, I would like to turn the call over to George.

Thanks, Pat. Good morning, everyone. I am pleased to report that our first quarter in 2001 represented another record for first-quarter revenue, earnings per share, and cash flow. We achieved 16% overall sales growth for the quarter with core volume growth of negative 2%, although 1% positive before anticipated declines in our Jacobs Vehicle Systems business. The core volume erosion resulted from a 18% volume decline in our tools and components segment, nearly 40% of which is attributable to the continued dramatic decline in the US heavy duty truck market. Our process and environmental control segment's volume growth was 8%, driven by our three strategic global platforms and indoor power quality. Currency had a 1% negative effect on the quarter, and acquisitions accounted for the balance of the sales increase. Our gross margin declined 50 basis points as the negative gross margin effect from last year's acquisitions and volume declines in our tools and components segment had been partially offset by broad-based cost reductions and the early effects of the motion 00:02:54 platform consolidation. First-quarter selling, general, and _____ 00:02:59 expenses were reduced to 22.3% of sales, 1% below last year's level, reflecting both continued cost reduction in these units as well as the preparation that we made for the manufacturing downturn beginning in the fourth quarter of 2000.

For the quarter, operating income increased 18% over 2000. Operating margins improved to 13.8% versus 13.6% last year despite the low-margin acquisitions of 2000. When we separate the effects of the 2000 acquisitions on margins, the remaining businesses' operating margins improved by over 100 basis points from 2000 to 2001.

Net interest expense in the quarter was approximately $6.3 million versus $2.2 million last year, entirely the result of the increased level of our cash acquisitions since the first quarter of 2000. Net income at $82.6 million for the quarter represents a 15% increase over the $71.6 million that we reported last year. The diluted earnings per share improved from $0.49 to $0.56, a 14% improvement over 2000. Importantly, operating cash flow for the quarter was $174 million, a 25% increase over 2000, and free cash flow, which we define as operating cash flow less capital expenditures, was $153 million, a 23% increase over 2000, well in excess of our net earnings for the period. _____ 00:04:51 and improved working capital management contributed $30 million to the year-over-year increase in cash flow.

Our balance sheet remains very strong, with debt-to-total-capital ratio of just under 37%. In addition, we have cash and marketable securities on hand of approximately $670 million, largely as a result of the _____ 00:05:18 convertible debt transaction we _____ 00:05:20 January of this year, in which we raised just over $500 million at an interest rate of 2-3/8%. Clearly, our ability to fund our acquisition holds has never been stronger. The _____ 00:05:36 environment, however, provides less visibility than what we have seen in the last decade. While there are isolating signs that the worst may be over for the US manufacturing sector, there is still a little bit of gains in factoring optimism into our 2001 plans. I am comfortable that Larry and the team have positioned the company to sustain a high level of performance going forward, and at that this point I would like to turn the call over to H. Lawrence Culp, Jr., who will provide some insight on the performance of our major businesses and some thoughts on the balance of 2001.

Thanks, George. Good morning, everyone. Our performance continues to be _____ 00:06:15 by the _____ segment, with poor volume growth of 8% adjusting for 1% negative currency effect for the segment in the quarter. Total quarterly segment sales were $724 million versus $520 million in 2000, a 39% increase. Our process and environmental control segment performance was again led by our strategic growth platforms of motion, electronic test, and environmental _____ 00:06:47 quality, as well as our indoor power quality business. Our motion platform's volume growth moderated from the double-digit raise experienced last year to mid-single digits in the first quarter. Its continued strength in Europe and growth in medical, aerospace, and fiberoptics end-markets were somewhat offset by double-digit declines in our semiconductor and electronic assembly end-markets. We are particularly encouraged by the progress we made integrating the motion businesses both strategically and operationally. Organizing under general purpose, special purpose, and motion components has received positive response from both key customers and the market place at large. We have improved operating margins through our newly acquired businesses more than 200 basis points since the acquisitions, with most of the benefits of the previously announced five 00:07:49 facility consolidations scheduled for this year yet to be realized. Additionally, we have now parted with several other facility closures, which could begin before the end of this year. The electronic test and measurement platform, anchored by Fluke, delivered mid-single digit volume growth, with Fluke Networks leading with 20% year-over-year increases - a testament to the new products, the sales and marketing execution, and, I think, the opportunity we have to better demonstrate the productivity value proposition to our endusers, who were previously preoccupied with capacity expansion at the expense of systems optimization. Both the entry-level MetTool and the high-end Optiview product have built on the success of their introductions last year, particularly in Asia. Fluke Industrial's volume growth in the quarter was low single digits, attributable to a sluggish US economy slowing sell-through growth and with inventory reduction in most domestic distribution channels.

Our environmental platform achieved double-digit volume growth with solid performance in both water quality and _____ 00:09:14. Low economic sensitivity coupled with building momentum from our global product strategy continues to deliver results in all major markets. _____ 00:09:26 continues to build its value-added services offerings, which now services over 45,000 retail petroleum outlets in the US and in Europe. Our most recent acquisition _____ 00:09:42, is progressing on plan with a closure of one of its three US facilities, which in fact takes place tomorrow, with production there already transferred to _____ facility in Loveland, Colorado. Indoor Power Quality again achieved in excess of a 50% sales gain year over year, as the quest for high-reliability data centers and its related backlog carried over into the first quarter of this year. However, the internet infrastructure capacity _____ 00:10:15 has slowed dramatically recently and we expect this slowdown to result in unfavorable revenue comparisons for at least the next several quarters. The first quarter also included the divestiture of two product lines, _____ 00:10:30 and the telephony components line of _____ 00:10:34 Electronics, as we continue to selectively prune non-core businesses as opportunities presents themselves. Annual revenues for these lines are under $50 million.

Switching to tools and components, the anticipated continued decline in our Jacobs Vehicle Systems heavy duty truck component business as well as our shorter-cycle tool businesses resulted in an overall segment core sales decline of 18%. Currency and a small divestiture amount to 1% for the quarter. JakeBrake 00:11:14, which declined over 50%, accounted for approximately 40% of the segment's sales decline. Other businesses which experienced double-digit declines included both industrial and consumer hand tools and Jacobs' Chuck and _____ 00:11:31 hardware, as end-user demand declines were accelerated by dramatic adjustments in inventory levels at the OEM, distributor, and retail customer levels. _____ 00:11:46-49. _____ Tools continued to _____ with positive comparables versus last year. Fortunately, we expect the severity of the year-over-year declines for tools and components to peak 00:12:04 as evidenced by sell-through of our products by our customers declining at substantially lower rates than our sales to these same customers. For example, at Sears, sales decline in our categories was mid-single digit while our first-quarter shipments to Sears declined at a double-digit rate. Last year, Sears was building inventory during the first quarter, while this year the opposite occurred. Likewise, in many of our industrial markets our sell-through is flat to up compared to last year, with distribution customers supporting anywhere from a 2% to 30% reduction in the inventory levels in our categories. We continued to work closely with our major customers to balance these inventories while maintaining capacity for the return of more customary volume levels. Additionally, while there is no near-term expectation of a recovery in the heavy-duty truck market, the first quarter of 2001 was a cyclical peak with the comparables likely to improve as the year continues.

Returning to profit performance, operating profits for process and environmental controls increased 42% to $160/116 million, or 16% of sales, versus 15.7% in 2000. Before the diluting effect of last year's lower-margin acquisitions, year-over-year margin improvements exceeded 100 basis points. Operating margins increased in each of the three strategic platforms by more than 100 basis points. There was no earnings impact from the _____ 00:13:48 divestitures, as the minor gain on the sale approximated the historic profit contribution of those businesses. Operating margins declined from the tools and components segment to 10% from 11.6%. Its volume declines impacted our ability to offset fixed costs with cost reductions, although at a much less severe rate without those cost actions 00:14:11.

As we look forward to the balance of 2001, we continued to remain comfortable with our ability to outperform in a clearly challenging and low-visibility domestic economic environment. While overall GDP has not officially reflected year-over-year declines, the manufacturing sector has dealt with varying degrees of decline for six months now as evidenced by the NAPM 00:14:39 data. Over that period, our profits from process and environmental control businesses had combated these effects with lower cyclicality and lower dependency on the US domestic market. However, we are planning for further moderation of the core process and environmental controls segment growth as the year progresses and for the domestic market weaknesses to begin to manifest in Europe, signs of which are already beginning to be felt. We do expect the moderation of tools and components sales erosion even without our manufacturing recovery as inventories return to balance. We expect comparables to turn positive later in the year as the falloff of the short-cycle businesses, which is 1000, becomes annualized. Our outlook does not incorporate the so-called rebound recovery, and therefore we will stay very tight foreign cost. The 1000 headcount reductions targeted at the end of last year now exceeds 1200, which is still before our major motion group consolidations. Limits on discretionary spending have been implemented at all business units without sacrificing our key growth investments that will sustain a long-term performance. We have also accelerated our regarding-procurement activities with free markets in our implementation of ARIVA 00:16:15. In spite of this climate of uncertainty and barring further economic deterioration, we are comfortable with a consensus estimate of $2.55 EPS in 2001. Difficult times do create opportunities both in current businesses and prospects. Our acquisitions pipeline is active and public company candidates previously viewed dearly in public markets are becoming more reasonable. _____ 00:16:50 continue both our existing platforms as well as new potential platforms that provide opportunities consistent with our criteria for growth, sustainability and opportunities for Danaher to add value.

As many of you know, this is George's last conference call and thus his last official appearance with this audience as he retires the week from Tuesday. His impact at Danaher has been immense, and I know all of us here are grateful for having had the opportunity to work with him in the past 11 years. I know I speak for many of you in wishing George's nothing but the best in the future.

This concludes our formal comments and we are now open to questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question please press the * key followed by the digit 1 on your telephone. We will take our first question from Don MacDougall with JP Morgan.

Good morning, everyone. George, let me add my wishes for some happy retirement days ahead. I was going to ask a question, I guess, on the cost _____ 00:18:02. The 1200 employees that have been taken out so far...I was wondering if you could give us a sense for how those savings roll into your PNL as we go across the year, if presumably you do not get all right away, and I guess kind of the same look on the facilities closures.

Well, of the original 1000, I would say - it is tough to calculate exactly without a lot of additional work because it is incorporated into our profit plan, that first 1000 was part of what we had set up for last year - I would say rough cut, maybe we got half of that first 1000 in the first quarter; we will get it all from the second quarter on. The last few hundred probably had no effect in the first quarter and will probably get substantial effect beginning midway in the second quarter, and then the five facility consolidations which will add at least 200-300 more would be my estimate - of course that has not in fact begun to roll yet - and that will be beginning to pay dividends more likely beginning in the third quarter.

Okay. And on the working capital you did see some improved performance there. Inventories seem to have stabilized. I am wondering what your outlook on the inventory would be as we go through the year. Would you expect that to come in?

Yes. Every year we have an increase in the first quarter in great part due to the fact that we do need the level low for the Sears business, and this year's increase was half of last years increase and we still stand by our expectations that we will have a overall positive effect from inventories on working capital this year. H. Lawrence Culp, Jr.: Don, I was encouraged - we have talked in the past about the channels we had in the second half of last year, particularly in water and electronic test - we continue to make progress in both businesses in the first quarter, and while we are satisfied with our current level in that regard I think we are on the right track and the data is bearing that out.

Thank you.

We will hear next from Jeff Sprague with Salomon Smith Barney

Good morning. Just a couple of questions. First, I wonder if you guys could characterize how much worse, if in fact it was in fact worse, the demand side was in Q1 in the short-cycle businesses relative to what you saw in December. And, as part of that answer, the comments you made about sell-through. Was sell-through improving as you exited the quarter at some of the short-cycle customers?

H. Lawrence Culp, Jr.: I think with respect to the sell- through, we are pleased to see the positive sell crew at Fluke and in the _____ 00:21:33 of the tools business despite the inventory adjustments that we were seeing. With respect to the trend through the quarter, I think it was spotty as we went through the quarter; I don't think we saw, frankly, in March an improvement that I think some people have talked about. I think we saw a relatively stable environment through the bulk of the quarter. With respect to the comparison versus the fourth quarter, I think we continue to see a softening, perhaps soft in a more broad way, than we saw at yearend; obviously you get the holidays in at yearend and _____ 00:22:25-27 only a little bit annoying in trying to discern the signal.

Looking at how the forecast was developed, I would say, in terms of trying to gauge the sell-through, I think we knew that there is a tiny difference with the _____ 00:22:41 at Sears, and I would say we had that sell-through difference pretty well pegged 00:22:46. I think the relatively dramatic inventory change that occurred was more than we were looking at at that time.

Okay great. Also on the comment about power quality, I think the terminology was the comparisons become unfavorable. Does that mean the growth is much lower, or do you expect in fact to see the business turn negative over the next couple of quarters?

I think perhaps we should have been more clear in that regard. We think we will see negative growth on a cost basis, going forward, as a result of the delays and cancelations as well as the soft order book in that _____ 00:23:35. I don't think we're alone in that regard; I'm sure we've seen that elsewhere. We did carry a lot of backlog into the first quarter, hence the results that we shared with you, but I think as we look out without visibility as to when the construction begins to rebound, it's tough to see a favorable comparison 00:23:56. I think the magnitude is probably somewhere, say, in the 2% range in terms of the impact it will have on the overall segment core growth over the next couple of quarters.

Okay, great. That's it from me. George, good luck!

Thanks, John.

Robert Cornell with Lehman Brothers has our next question.

Yes. I guess it's appropriate for me to say "Thanks, George, for the ride; it's been fantastic." With regard to the quarter, you guys never mentioned how much cost is embedded in the quarter for other restructuring moves you make; you don't take one-time gains. I think there was one comment Larry made in that regard, but maybe you could tell us what in the way of expenses ran through the PNL with regard to the restructuring moves your are making?

The _____ 00:24:48-49 has only been to deal with that as an ongoing cost, and for the last 10 years we've seen that continue to restructure and not take a one-time cost. So we don't forecast those, we just continue to do that as part of an ongoing business, and that is why cash flow remains strong rather than one major takedown, we see cash flows stay consistently strong.

Okay. Just another question. Both questioners have asked about, I think, the tools issue. Could you give us a profile of the declines monthly as it went through the first quarter? Are we seeing a lesser rate of decline in March as we move towards these positive comments that you are talking about? H. Lawrence Culp, Jr.: I think again it was mixed. We have a business like Jacobs' Chuck, where we've really felt the fact of what we think of as a triple whammy of inventory adjustments; when Home Depots is adjusting, they're having an impact on Black & Decker and other power tool manufactures both at a finished goods and raw material level. So, we feel all of that. I think we're by no means through that, but I think optimistically that that does end, perhaps by midyear so there's some moderation there. I think that Delta, as we indicated, saw a single-digit decline; I think we are encouraged with some of the sell-through numbers that we saw as the quarter ended. So I think it's a mixed tag. I don't think we are ready to declare _____ 00:26:28 the market did yesterday, that the softness is over. I think there are some signs that might offer the optimists some hope. We are going to stay tight on costs and continue to make sure that we ring out any unnecessary inventory, which I think, frankly, doing today is a good think for us. With EBS, we do provide single-piece, high-on-time delivery opportunities for our customers. They don't need the inventory and they ring that out. We think that brings them more closely aligned with our system.

What do you think will be good target to talk about, maybe the tools, when this swing from negative to positive comes? What sort of period in the year?

I'm sorry. I know you directed the question at Larry, but...I'm sure we still have some runoff on the inventory side in the second quarter, but I would say the third quarter is probably the... H. Lawrence Culp, Jr.: I would say the third quarter, assuming that our own thoughts on this inventory adjustment, and what we are hearing from other people _____ 00:27:40 this comes to an end by midyear...

Final question... H. Lawrence Culp, Jr.: ...I think the wildcard in all that, frankly, is what happens ultimately with the consumer; again, a lot of sell-through data is not deriving the inventory adjustments dollar for dollar, and if there is impact on the consumer at that point in time this year, then I think that's ultimately the wildcard.

The cash flow conversion _____ 00:28:13 was remarkable, 180-something percent in the first quarter. Is there anything unusual in those numbers? H. Lawrence Culp, Jr.: No. Unusual, no, but obviously you can't annualize that, but it was comparable to what happened last year; the only real difference was we had _____ 00:28:33 low tax expenditures both years, relatively low cap examination reveals, and the big swing here was the more positive effects on working capital. So, working capital is only the real difference between the years, and that was positive.

Okay. Thanks everybody.

And we'll hear next from Nicole _____ with Bank of America.

Hi, guys. George, best wishes for having an _____ 00:29:03 retirement. I am just wondering if you could shed a little bit more light - George, you indicated that you are seeing isolated times with the work may be over. That seems a little bit optimistic to me, particularly since we have not seen...you know, the consumerly feel was going on. So, I guess just in terms of as we see process and environmental control's core growth come down by business, where are you are seeing some of the impact of just a macro downturn worse than others? Also geographically what are you seeing in Europe, particularly wire quality is hanging in there, but... across some of these other businesses?

I think Larry has got the answer to that. He had a couple of positive things, but I think what he said and you should pay attention to is we're not planning a new _____ 00:29:54 and we are staying very tight until we hit actually hypnotize the much broader clients _____ 00:30:00 and I think Larry can answer your question more concisely and more pointedly.

H. Lawrence Culp, Jr.: I will try and recall. With respect to Europe, you're right. We are certainly seeing, I think, a lot of resiliency out in the longer business over there and the water business in general. I think we have seen some signs of a bit of a slowdown in March; I think it's early to call that a signal, but we saw that at Fluke, in electronic tests and we also, I think, saw some signs in motion. Pat Allender and I are going to be over there in fact next week visiting all of our businesses; I think we'll get a good flavor for/before 00:30:41 that, but as George indicated, when we went to Battlestations on cost, preparing for this year, we did the same in Europe. I don't think that we thought Europe would be immune from the softness that we have seen here, and the teams over there have been taking actions, I think, similar to ones that we implemented here in that regard.

With respect to your first question, could you restate...? What we're going to get regarding the signs of the recovery?

Yeah, it just seems a little bit optimistic, I guess. I know that you had followed up and said that you guys aren't forecasting any pickup at the end of the year or over the course of the year, but I think...it just seemed a little bit optimistic, that was all. H. Lawrence Culp, Jr.: Yeah, I don't think we want to sugarcoat that, but I think when you look at what's happening in a number of the businesses where I think we've got new products that are coming out, we anticipate the effects as soon as new product launches and increased promotions in the tool group. Hawke is rolling out some new _____ 00:31:56 equipment on the Odyssey family as we speak; last month we unveiled some of the new products in motion. So I think we feel good about our ability to make the best of the domestic situation, and while we talked about Europe a moment ago, we shouldn't discount Asia. We are off to, I think, a very positive start to this year in Asia. Again, while we are cautious about what we're talking about the tool business in China, _____ 00:32:25 Fluke's efforts and FlukeNetwork's efforts across the region, we're very encouraged and I think we'll see that continue through the balance of this calendar year.

Great. And just one last followup: could you just comment on the profitability of tools, as we are seeing inventory flow into the second quarter. It's still going to impact the top line. How should we think about profitability in that business improving over the course of the year? H. Lawrence Culp, Jr.: With respect the margin, I think we'll get some help sequentially as we go into the second quarter as we'll get the full benefit, or almost the full benefit, of a number of cost actions that we've been talking about. While we have been implementing in the first quarter, we certainly did not see 90 days of readthrough in the period. I think also, as we go into the second quarter, we get some seasonal mixed benefits within the _____ 00:33:28, which should help us in the second; we see that pretty much every year.

Yes.

Great, thanks.

And we'll go next to Jim Lucas with Janney Montgomery Scott.

Thanks a lot and best wishes, of course, George. First question, Pat: the tax rate 37.5%, should we expect that for the remainder of the year?

Yeah, as you may recall, last year we were able to bring it down half a point and it looks like that is going to be pretty clean for the balance of this year as well.

Okay. And focusing on tools, it appears that the industrial channel you alluded to briefly in the opening comments is going through the same inventory correction that has been occurring at retail for the past two quarters. To what degree are you seeing the inventory correction in industrial and how do you think that is going to impact the business, going into not so much the second but into the third quarter? H. Lawrence Culp, Jr.: I think that these inventories adjustments are likely to not be with us materially in the second half. I do think you're right, the industrial channels that we worked with seem to have initiated some of the _____ 00:34:56 in comparison with what we saw from the retail folks at the end of last year. The activity is ongoing and we're trying to sort through as they are the ultimate effect here, but I do think that given the sell-through robustness in relative terms that we see, again barring some consumer meltdown, we are optimistic that we'll get through this over the next several months.

Okay. And switching gears to the integration of the acquisitions, have you uncovered any successes, can you give me any type of anecdotal evidence of what your finding is that may be better or may be worse as the integration has progressed? H. Lawrence Culp, Jr.: Jim, with respect to the water quality businesses and the motion businesses, I don't think a month goes by without us finding new opportunities to leverage the synergy within the businesses for growth and to define cost. We mentioned earlier that we think we will ultimately do much better in the short term on the cost side in motion. We talked in December about closing five facilities and taking out 200 associates. We think that it's having had the team in room, working together, that they've got a handful more facilities and several hundred more people, that they're going to be able to take out before long. So I think that sort of activity is really always part of acquisition integration. We have certainly seen that at Fluke as well, where the opportunity to continue to focus and invest...the really good opportunity continue and I think they are impressive. We mentioned Asia, for example, but by using DBS not only to get that business up to that 15% operating margin you heard us talk about, we've really been able to double down the investments in Asia, not only within China but elsewhere, including Japan, and I am confident that we're seeing the benefits of above investments as we execute better than competition in that region today.

Okay. Finally, from a divestiture standpoint. In addition to the cut we had in the first quarter, shall we expect to see more of this as the year progresses, just small product lines here and there? H. Lawrence Culp, Jr.: I think that we're always looking to do that sort of stragetic pruning, Jim, so whether it's one or two or three a quarter, it's hard to predict, but I don't think we're done.

Okay, thanks a lot.

And moving on to William Potter with ING Barings...

Thank you. Good morning. In order to be comfortable with analyst estimates, Larry, you must have a view - this is for any for you - you must have a view on what the progression will look like. I was just looking at the quarterly progressions over the years, and while eight of the last 11 years had four consecutive sequential revenue and income increases, three did not. So, do you think that this year is going to show another healthy pattern and make it 9 out of 12, or do you think there is going to be a different pattern that you have to deal with? H. Lawrence Culp, Jr.: I think with perspective sequentials moving out through this year, we're not banking on a robust sequential growth track, going into the second quarter and the end of the second half. I think this year will continue to be largely a cost-gain force and we're approaching it appropriately.

Are you saying that you may not have sequential revenues increases, but you are going to bring sequential increases to the bottomline? H. Lawrence Culp, Jr.: I think that we'll be flattish sequentially. I think the fourth quarter, given that we are optimistic about some of the new products and some of the promotion activity planned could give us a little bit of a bump. I think this year is a margin gain.

Okay, so flattish on revenue in the second quarter with some help in the fourth quarter, but on the bottomline, to get to the numbers, I imagine that you are looking at more EPS than more of a smooth progression. H. Lawrence Culp, Jr.: You got it.

Okay, and just on one other point that we have not talked about. You did talk about how well positioned your are in terms of the balance sheet to finance acquisitions and when we saw at National Manufacturing Week, you were emphatic, Larry, about your opportunity to take advantage of the situation, and we take that mean to gain share as well as to make acquisitions. You talked a little bit about gaining share, not much, today and you haven't talked about your acquisition pipeline. So, can you give us some light? H. Lawrence Culp, Jr.: Sure. I think I am as emphatic today as I was back on March 8 with respect to the current environment offering us a lot of opportunity to do what I call playing off _____ 00:41:03 and we are, I think, looking to take share in a number of businesses; we mentioned Maco 00:41:10 in particular. I think Maco is growing at the start this year in large part because of the goods effect the team had had in taking share as we have been doing for some time. I think as we talked about acquisition, we've never been busier with respect to both the bolt-ons for the existing four strategic platforms as well as in exploring new platforms to deploy the cash we have and, I think, the cash we are clearly going to generate. And I should also add that we've been very aggressive on the talent side. While we have a corporate-like hiring freezing effect, we're by no means not hiring. This is a great environment to bring in talent. So we're going to continue to look to top-grade our organization throughout all the business, and I think that we're encouraged with the quality of the people that we have been talking to lately. So I'm encouraging all of our operating people to take full advantage of that as well.

Right. Would you want to venture any guesses as to when we should see the fruits of your labors on the acquisitions pipeline?

You're crazy if you try to forecast acquisitions.

I'm crazy, then.

Once you do that, people make bad distinctions, and I've had people ask me, 'Can't you do it smoothly on a quarterly basis?' and the answer is 'No.' But if you look over time, you can see our track record of growth and you can see what we _____ 00:42:52 bottom line...you can't and you don't want to forecast. And I think what you have to look at is our track record and you have to look at how we're positioned today in cash and low-cost debt to move forward.

Okay. And George, thanks for the track record.

Moving next to Dean Dray with Goldman Sachs.

Good morning. My question centers on Fluke and Fluke Networks; the 20% growth was pretty impressive for the quarter. I'd be interested in hearing how much the net tool amounted to that you provide in terms of that revenue gain. H. Lawrence Culp, Jr.: Good morning. I think both Optiview and NetTool were a significant part of the gain, Optiview in particularly really is the key product now for _____ 00:43:47 network engineer and it's that base which is the main engine for poor growth. So both of those products are key. Again, I can't understand the execution that we've seen globally, particularly in Asia, another part of story. We have not felt the dramatic downdraft that others in the markets have been talking about. We had long thought that a bit of a slowdown would give us an opportunity to create these markets that we play in, build them, make them larger, and so far that's playing out.

Within the sick 004435 inventory situation at Fluke, one of the things that you are looking to do is to continue - I guess you had four consecutive quarters of inventory improvements - is that still a top priority? H. Lawrence Culp, Jr.: Without question. The team had another good quarter of progress. I think when we talk of that/talked last 004456, we were really talking about four months. I wish it was four quarters of inventory progress. So they naturally build on the success they had at the end of last year, but by no means are they finished in terms of working the inventory side. We've put in some additional talent this quarter into the organization out there, and I remain optimistic that we'll get to our level of expectation out at Fluke.

Great. And a question for Pat about cap ex. You started the year somewhere targeting the $100 million area versus $90 million last year. How are you feeling about that as the year progresses?

I think that's still a good number to work with for now. I wouldn't change anything.

Okay. And let me join everyone here in wishing George all the best.

Thanks, Dean.

Donna Takeda with Merrill Lynch has her next question.

Thanks. Good morning, everybody.

Good morning.

Just a followup on the comments about Fluke. Larry, maybe you can refresh my memory. As I recall, Fluke actually used to do a fair amount of their business in Asia. I'm trying to remember back now, my memory of course is failing me, but it seemed like 19-20% of their sales used to come from that region, or something like that. Is it still that high or is it higher now? H. Lawrence Culp, Jr.: You have two things going on there. I think that is a good range to work with. Keep in mind that as we walked into Fluke, the Asian business in particular was really hemorrhaging and that ratio came down. It came back, I think, and it seems normalized. But the results the team is putting up today I really think are less a result of favorable costs and really is the combination of an increased level of investment, outstanding execution, and products both on the industrial and the network side of things that geared more appropriately to the customers base.

Could we talk about that industrial side for a moment? Certainly some of those customers were actually down over the last year or so on their cap ex, but with the kind of capabilities you provide it's really a different kind of a buying 004726 decision, isn't it? H. Lawrence Culp, Jr.: On the industrial side, most definitely, Donna, we're really much more targeted the MRO or the discretionary stand-in we are on cap ex, and as we look at some of the sell-through patterns - for example in March we were up double-digit at Granger - we're encouraged by that. Because we sell to distribution, we don't have excellent visibility on what's happening vertical by vertical, but give Granger's breadth nationally, to have that sort of sell-through in this environment, I think, is again testimony to the new product and the work that we've done with Granger to grow our brand and in turn grow the category.

What's your estimate of what that segment of the industry is growing? H. Lawrence Culp, Jr.: The industrial electronic test tools business, I would suspect right now, Donna, is flat to just slightly down. I think we're really talking of a trend there.

So it sounds like they're doing some terrific work in terms of the those share gains. H. Lawrence Culp, Jr.: A lot of good fundamentals.

I think you mentioned that _____ 004846 had closed one of their facilities here in the US... H. Lawrence Culp, Jr.: Yes...

...and you had transferred some of that production already. Were the people involved in that transfer counted in that 1200 or is that incremental to that? H. Lawrence Culp, Jr.: That would be incremental, Donna. We brought some of the key engineers up to Colorado. The rest of the team from a manufacturing perspective was not required.

Probably less than 50 headcounts were affected by that change.

Okay... H. Lawrence Culp, Jr.: ...But I think, Donna, the key there is just the speed with which we executed some of these _____ 004928 opportunities, particularly in light of the economic environment.

Okay. And just switching gears on _____ 004836, it sounded like their service business continues to grow nicely. How much of their total is now accounted for by the services? H. Lawrence Culp, Jr.: Donna, globally about 20% of _____ 004949 overall revenue is now made up from the services business, which is a nice bump from where we were, when we started the whole service initiative just a few years ago. I don't think by any means that we topped out at 20% and became so optimistic about the opportunities in that regard.

Both in the US and in Europe? H. Lawrence Culp, Jr.: Yes.

Great. And I also would like to add my congratulations to George, and George! Also thank you for all that you've taught all of us over the years. I think we've learned some very good lessons about how good company should run, so thanks for that.

Thanks, Donna.

Due to time constraints today, we do ask that you limit yourself to one question and one follow-up question. We hear now from Brian Langenberg with First Union Securities.

Actually it's one question, one follow-up question, and one congratulations. George, it's been a pleasure.

Thanks, Brian.

Just a couple of small tidbits. Number one, I think you mentioned that there was some kind of a gain in regards to divestitures, you mentioned a process. Was that flowing through the process segment, and how much was that? That's my first question.

The gain was about half a million dollars.

Oh, my God! I'd better do some recalculating. Okay, my second question, you mentioned acceleration of e-initiatives. Was that additional spending on your part or shelving more procurement through free markets in ARIBA? Can you give us a degree of how _____ 005122 reducing your purchasing by about 10%. How much of that are you expecting to get this year? H. Lawrence Culp, Jr.: Brian, the acceleration was both an acceleration in terms of the timing of a number of free market reverse 005138 options as well as the implementation of the ARIBA corporate _____ 005144 procurement system. It certainly involves the acceleration of expanding as well, but I think when we looked at the payback, we thought we were well served pulling more of that expense into the front part of the year to get more of the benefit in the calendar year. We are making good progress with ARIBA system, and that's the implementation that is geared at the 10% reduction or $800 million in annual non-production material. I think we'll begin to see impact in that direction in the second half of this year as we get the bulk of the corporation up and running in that regard. So, in the second half, I think impacts for this year obviously a full-year impact in 2002.

Okay. So, _____ 005242 you've had some benefit with additional spending, so you're basically saying, 'We're not even going to have this spending yet just on the first half and more benefit.' H. Lawrence Culp, Jr.: I think that's right, both with respect to the free markets initiative as well as the ARIBA effort.

Okay, thank you very much.

Moving on to John Inch from Bear, Stearns.

Thank you. Organic growth was up 8% in the process and environmental control businesses. Larry, where would you guess that is going to end up for the year? How do you see organic growth in those businesses going forward, given what you've already described as a favorable comparison to your power business, etc.? H. Lawrence Culp, Jr.: John, I think rough cut mid-single digit is where we're likely to be.

What about to the whole company? You're down too, what do you think for the year? H. Lawrence Culp, Jr.: I think what you saw, we get the favorable impact of the _____ 005404 in the second half, but I think we're going to be flattish the rest of the way.

Okay. Larry, you said that water was up double digits, organically. What struck me was the higher run rate than what we've seen before. What's pulling that up? Were there new orders signed? Was it _____ 005425 what's the counting for that big increase? H. Lawrence Culp, Jr.: I think what we saw, John, was this double-digit growth in water, but surely not a pickup from what we had seen previously. We saw robust double-digit growth in local currencies in water through all of 2000 and we were pleased about that performance. And the pickup for environmental really came at _____ 005455, where we saw the service initiative have impact and to stay at healthier overall spend level with some of the key customers.

How much was the year up, again? H. Lawrence Culp, Jr.: The year was up double digits in the first quarter. So we're pleased to see that return to growth continue at _____ 005518.

Last question on Fluke. You said Fluke, not the Fluke Networks side, but the other side of the business was in the low single digits. Does that imply that the US was down, and if you could provide still a little bit of color in terms of US versus overseas and in terms of what is going on and what you are seeing in the Fluke business ex-Fluke Network? H. Lawrence Culp, Jr.: Sure. I think what we saw was low single digit improvement overall. We certainly felt the impact of the inventory adjustments here, but we were still positive domestically. Europe was okay; Asia was strong, but strength in Asia that I referenced was particularly acute from the networking side.

Thank you.

We have time for one final question today, and that comes from Cliff Ransom with Statestreet Research.

George, you didn't think you're going to get off easily without a comment from me. It's not the huge price appreciation that you all develop but it's that knowledge of process that has taken all that time to make me understand the power of DBS. That's really the huge benefit, and thanks to you and everybody else there who have put up with my questions for these last 11 years.

Thank you.

I know you can't program acquisitions, but you have this sub-optimized balance sheet now and you have this incredible integrated power of DBS. Are you really comfortable that your beefed-up MNA efforts are doing the work that they need to do? I know you can't talk about specific projects, but can you give us a sense, for example the amount of focus on bolt-ons versus the amount of focus on new platforms. Have you looked at something seriously that's a big deal, that's a half a billion dollar deal? Just sort of talk through Larry or whoever you want to have do it, or Pat, a bit more color, if you will, on the MNA side of the house.

H. Lawrence Culp, Jr.: I think the color I can best provide you with our operating forecast - as George pointed earlier, really not the way we'd like to talk about it - if you were to look at the calendar that Pat and I have over the next six weeks, you would see that we are very active on the MNA front, both with respect to the existing platforms, much of the work in which frankly is led by Phil and Steve - _____ 005820 - two EDPs as well as the exploration of the new platforms. So, I realize the data you would be looking for is the press release, which will come at some point, but in the 11 years that I've been here I don't think we've ever had more talent and more hours being poured into that effort. We understand the state of the balance sheet, and I think more importantly we understand the magnitude of the opportunity in front of us.

Okay, thanks guys. I won't belabor the point, thank you.

And Mr. Allender, at this time I'll turn it back to you for any closing comments.

Okay. Thanks everyone. I want to remind you of the replay number 7119-457-0820, conformation code 519106, and there will also be a webcast later day for those who would like to hear this or didn't have a chance to hear the entire original broadcast. I also will be available for the balance of the day for individual calls as needed, so feel free to call. Thank you.

And that concludes today's conference. Thank you everyone for joining us.