Danaher Corp (DHR) 2002 Q1 法說會逐字稿

Welcome to the Danaher Corporation 2002 first quarter earnings 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 Allender, Executive Vice-President and Chief Financial Officer. Please go ahead, sir.

Good morning, everyone, and thanks for joining us today. Joining me today is Larry Culp, our President and Chief Executive Officer.

I'd like to point out that our earnings release and summary financials are available on our Website, as well as our full 10Q, as we speak, if you did not get a copy of the release itself. Our Website address is www.danaher.com. In addition, this call will be replayed through Monday, April 22 and will be archived on our Web site later today. The replay number is 719-457-0820 on the conference call. Confirmation code is 752066. I'll repeat that at the end of the call for late arrivals.

I'd also like to note in order to help you understand the company's directions, we will be making some forward-looking statements during this call. It's possible that our actual results might differ from those predictions that we might make today. Additional information regarding those factors is available in our SEC filings.

With that, I'd like to turn the call over to Larry.

Thanks, Pat, and good morning, everyone.

As expected, our first quarter earnings and earnings per share declined two percent to 55 cents from last year's first quarter of 56 cents per share. Revenues were about even with last year, although on a core volume basis, they declined 15 percent versus 2001.

Currency effects were one percent negative with acquisitions making up the difference. Adjusting 2001 to make it comparable to 2002 would change an intangible amortization accounting under FAS 142. The earnings per share decline for 2001 was 14 percent. Also, as expected, we recorded a $174 million, or $1.13 per share, non-cash charge to account for good will impairment associated with the change in accounting required under FAS 142. This charge approximated nine percent of our total good will and related exclusively to our power quality businesses.

For the quarter, gross margins were comparable at 37.4 percent with last year's 37.5 percent. As the effect of our cost reduction efforts nearly offset the impact of lower core volume with the attendant lower fixed-cost absorption. Selling, general and administrative expenses for the quarter were 23.5 percent of sales, up slightly from last year. Acquisitions over the first quarter of last year added approximately $50 million to the first quarter SG&A. Core businesses accounted for a year-over-year decline in SG&A of approximately 15 percent as our broad-based cost containment programs have continued into this year.

For the quarter, operating income declined one percent from 2001, 8.5 percent before the FAS 142 amortization change. Operating profit margins, after adjustment for the amortization change, declined from 15.2 percent to 13.9 percent, nearly all of which would be effective margin dilution associated with the newly acquired businesses as overall cost reductions substantially offset margin erosion from core revenue declines.

Interest expense increased from $8.3 million in 2001 to $10.9 million due to the cash investments and recent acquisitions, as well as lower interest income rates on our cash investments compared to 2001.

Our cash rate for the first quarter of 2002 was 34.5 percent, a reduction from last year's 37.5 percent, due to the elimination of non-deductible good will charges, but associated with the adoption of FAS 142 and a higher proportion of foreign earnings. At $82.7 million, net income for the quarter was flat with 2001 but, of course, last year had approximately $12 million more in amortization. There was no net earnings per share impact from the partial quarter results from the acquisition of

, Video Jet and

and, at this point, nine million share common stock issuance in March.

During the quarter we also sold the heat transfer subsidiary of ATI for a total consideration of approximately $66 million. No gain or loss was recorded on this sale. The transfer was previously recorded as an asset held for sale.

Operating cash flow for the quarter was $263 million, compared with $174 million in 2001, an increase of 51 percent. Free cash flow for the quarter was a record $253 million versus $153 million a year ago, an increase of 65 percent and representing over 300 percent of net income for the quarter. While the cash flow and the cash flow ratio reflect normal seasonal high cash flows, it is also a reflection of continued DBS efforts to improve working capital turnover and a lower level of core business versus last year.

Additionally, cash flow from newly acquired

was more than would be expected by approximately $15 million as the company, under its prior ownership, conducted a major sales promotion just prior to the acquisition closing. Not all working capital improvement is strictly volume related, as we have been able to reduce core inventories by $98 million, over 20 percent since the end of the first quarter last year.

While we do not expect to maintain this rate of cash flow for the year, as business volumes increase and our accounts receivables rise, we are clearly off to an excellent start for another likely record cash flow year in the 11th year of free cash exceeding net income.

Our balance sheet remains strong with a debt to cap ratio of 31 percent as well as quarter end cash of marketable securities on hand totaling $571 million, thus maintaining an excellent position to fund additional potential acquisitions.

Let me know turn my remarks to each of the business segments. Process and Environmental Controls revenues increased a little over one percent year-over-year from $724 million to $734 million. However, core volume was down 19 percent when compared to 2001, which was the peak 2001 Process and Environmental Controls core revenue quarter.

More meaningfully, however, sequential core volume decline has moderated significantly to only about one percent between the fourth quarter of 2001 and the first quarter of 2002. Negative currency effect accounted for one percent of the year-over-year decline with acquisitions adding 21 percent in the segments revenues for the quarter. Our environmental platform volumes were flat year-over-year with strength in our North American being offset by continuing softness in our major European markets, particularly Germany, and market verticals such as Semicon, which we serve principally with ultra-pure test instrumentation.

Motions revenues declined over 25 percent compared to last year, which was our peak quarter for this platform in 2001. Importantly, however, after significant sequential declines for the balance of 2001, motion sales have increased mid-single digits from the fourth quarter. Our first quarter orders are up double-digit from the second half rate in 2001, although still down 20 percent from last year's first quarter. While it's still early, this trend has continued so far into April.

Our electronic test platform declined high single digits year-over-year with a greater relative decline in

networks as the cable and media tested this as they negatively impacted and the tremendous success of the

product line, which offset much of the overall industry decline last year, has been anniversaried. Sequentially, the decline was mid-single digits.

Most noteworthy among our non-platform businesses, Power Quality, down 50 percent from last year's first quarter was flat sequentially from the fourth quarter.

Operating margins for process and environmental controls declined from 16 percent in 2001 to 14.6 percent this year. The new acquisitions, which represented over 20 percent of the segments revenues in the quarter, contributed operating margins at an eight percent rate, diluting 2002 segment margins by about 1.5 percent. A circumstance review is an opportunity, of course, as opposed to a problem as we work to bring our renewed businesses close to segment averages as they become more integrated with the Danaher business system.

The year-over-year margin decline would have been about one percent greater were it not for the change in good will accounting as the negative margin impact or the 19 percent core volume decline was not totally offset by cost reductions, particular affecting Motion and Power Quality margins.

Switching to Tools and Components, revenues declined just four percent, our lowest rate of year-over-year decline since the third quarter of 2000. The Hand Tool group was flat year-over-year with

up to mid-single digits and the balance of the group off about two percent. We again experienced some erosion in the equipment lines, principally Delta and

and at Jacobs Chuck, but with signs of moderation from the very difficult 2001.

Jake Break was flat against last year with likely positive comparisons at least for the second and third quarter of this year as the industry experiences the effect from the heavy-duty truck pre-buy in advance of engine emissions standard changes scheduled for October of this year. With the stabilizing revenue picture, we were able to achieve Tools and Components margin improvement from 10 percent to 12.9 percent. Eliminating the FAS 142 effect from last year, the improvement was just under two percent from an adjusted 11 percent operating profit in 2001, due almost entirely to the recession-driven, cost cutting efforts that have been a way of life for this segment since the second half of 2000.

The challenging, but improving markets, in which we compete tempered our organic growth in the recent quarter but they have not slowed the intensity with which we are pursuing organic growth. We've kept our "play offense" mindset and it is yielding results, both in terms of tactical sales wins in the quarter and visible progress with our corporate breakthroughs. These are our, now, 20 high priority organic growth initiatives which represent over $500 million of annual organic growth potential.

A few highlights that I'd like to share with you from the quarter include Motion's progress with their electric vehicle initiative. In market opportunities of $400 million by our estimates where we continue to gain traction, two new design wins in the quarter, which will represent $10 million in annualized revenue were secured and they served to strengthen our leadership position in this exciting application. Staying with Motion, we're encouraged by the progress

and the CQ team are making in launching their revolutionary product. We secured a couple of contracts and are active in evaluations with several other customers with derivatives of this breakthrough motor technology that's used in the CQ.

In Water Quality, the successful conclusion of

bio-terrorism system implementation at the Salt Lake Olympics is running through a range of inquiries from other drinking water authorities. Lockheed Martin recently launched their bio-mail solutions, which utilize our high-speed anthrax protection technology.

In China our

hand tool business was up significant double digits in the quarter and our team at

in China continues to make real progress. We're stepping up the investment in China for

as evidenced by the recent groundbreaking of

first Chinese manufacturing operation in Shanghai. We were in China in the first quarter reviewing our Water Quality opportunities there, an effort we intend to turbo-charge by leveraging the talent and critical mass we have in China as a result of

and

businesses.

I was recently in the labs at

and saw two very exciting new technologies for lab and process applications, that I'd prefer not to detail at this time, but they continue to take shape and we should have products we can launch, exciting products, early next year.

Again, while not all these breakthroughs will reach their aggressive revenue targets, we continue to focus and fund these organic growth efforts even in this tough operating environment.

I should also mention that we kicked off an internal effort to better institutionalize our organic growth skills. In essence, we're adding more growth tools to the DBS tool kit to continue to make DBS more than just a lean manufacturing system and more a comprehensive model for running our business.

As our end markets begin to stabilize, we are moving rapidly to achieve our objectives from the 2001 announced restructuring, to take full advantage of the inevitable recovery. To date, we have closed or ceased production in six of the 16 announced facilities representing over 400,000 square feet of facility space and 500 associates. Through the end of the first quarter we have spent approximately $14 million in cash of the $53 million cash portion of the restructuring charge.

Nearly all of the $16 million in non-cash asset right down have now been taken. This, of course, does not include collateral costs associated with the facility closures, such as planning efficiencies, training new associates and moving and relocation costs which we are absorbing as part of our regular operating budget. Our restructuring efforts are proceeding on plan to deliver $38 million of annual benefits, approximately half of which we should benefit in 2002.

As you know, we've been active on the acquisition front this quarter with the addition of

and

to our environmental platform and with Video Jet at the beginning of our fifth strategic platform in product identification bringing our total strategic platform revenue to over 75 percent of the

total revenue. We are pleased with the integration progress on all three units as well as the rate of adoption of the Danaher Business System.

In addition to these three significant acquisitions, we also added to our Electronic Test platform with the March, 2002, acquisition of Lion Heart, a $20 million leader in hand-held test instruments with the medical market, adding a new important vertical market to this platform. Lion Heart, acquired for approximately $25 million, is not expected to have any measurable earnings per share impact in 2002. We also added IDC, a small, under $10 million, turbo drive product line to our Motions platform.

Looking forward to the balance of 2002, we do expect to continue to see stabilizing revenues and expect sequential revenue improvements over the first quarter in both our Process and Environmental Controls and Tools and Components segments. However, in spite of these improvements, year-over-year declines are still likely in Controls, in part, because of the full effect of the 2001 recession not having been felt by Motions or Power Quality until the third quarter.

Nevertheless, core volume revenue declines should be lower, we expect in the 10-percent range, which is well below the first quarter. We also expect low or no year-over-year revenue declines in the Tools and Components segment in the second quarter. Trends with support of return to overall year-over-year, as well as sequential core volume growth, in the second half of this year. Please do not read, however, our optimism with respect to a recovery in the latter part of 2002 as anything other than our recurrent best estimates. The European markets, particularly German, have shown little in the way of recovery and we believe the U.S. economic recovery is fragile.

As a result, we intend to remain tight on costs. Near term, we remain comfortable with analyst's estimates for the second quarter, the majority of which are in the 63 cents to 66 cents range. The anticipated economic recovery, coupled with cost reductions achieved, expected from our restructuring along with the momentum from our acquisitions, reinforce my comfort with the $2.75 range of earnings per share for 2002.

This concludes our formal remarks and we are now open for questions.

The question-and-answer session will be conducted electronically. If you would like to ask a question, please press the star followed by the digit one on your touch-tone phone. Once again, press star, one to ask your question.

We'll take our first question from Dean Dray with Goldman Sachs.

First question is on the goodwill write-down. Could you give us a sense of the process that you went through and did you look at other acquisitions, other assets and is this process complete? Might there by any divestiture decisions coming out of that review?

Let me talk about the process at a minimum here, Dean. We hired KPMG Consulting to provide us an analysis to put the implementation of FAS 142 in. That process covered each and everyone of our companies and platforms and the review of our entire good will. The conclusion that came out of it was as we had kind of anticipated late last year and had reported in our 10K that we felt that the basic preliminary view of that in our own calculations that it would net somewhere between 150 to $200 million write-off. We're very comfortable that this is it. The KPMG process is 95 percent finished. The numbers, I think, are on the conservative side, towards the upper end of their range of estimates, so we're comfortable with this as a secure number.

Larry, if you want to talk about the divestiture?

I think the short answer is no. The process we went through, as Pat has just described, in no way impacted out strategic thought process with respect to the portfolio at large.

Then just a follow-up, you made a comment in the prepared remarks regarding the contributions from Video Jet,

and

not providing any EPS impact for the first quarter. What should we be thinking about in terms of contribution for this group of acquisitions for 2002?

I think the guidance that we provided when we made the original acquisitions, coupled with the additional shares that we've issued this year, that entire package, I think, should yield several cents of accretion for the balance of the year with some upside. I think the numbers that we provided previously would add two to four cents accretion, but I think those numbers have been baked in by most people already in their estimates.

OK. Thank you.

Next, we'll hear from Nicole Parent with Bank of America Securities.

Just wondering if you could give a little bit more clarity on the Water Quality environmental platform?

versus Water Quality, you noted that Europe, in particular, dragged down the Water Quality. Also, could you elaborate a little bit more on the China Water Quality opportunities you mentioned?

Let me talk Water and then

will talk China. What we saw on Water, I think, was a continuation of what we were seeing in the second half of last year where things were slowing down. In the U.S. we actually had a good quarter. The lab business was flattish and, given what was happening in the last spending, we thought we did pretty well in that regard.

The Process business actually finished pretty strong in the U.S. and we were pleased by that with a number of things kicking in to provide a strong second half of the quarter. Europe, obviously, we have a little bit of a currency issue, but on a local currency basis, basically, flat to slightly down, both from

side and Process side. Things just seem to be sluggish there as they were as we ended last year. I think we continue to have a compelling competitive position, there're really market dynamics that we're seeing there.

With respect to

where we saw

was, basically, a flattish quarter as well, a little bit of currency impact there, obviously, given the European exposure. I think what we saw was fundamentally a slow start to capital spending on the part of the customers, particularly in Europe, that

serves. We did have some success with

on the services front, added just under 2000 new sites to the service business. Here in the U.S. that swivels up close to now 45,000. Interestingly, speaking of Europe, we actually got our first significant account for the services operation over there in Europe. Good performance in that regard.

With respect to China, we have under $10 million of business in China today. Nicole, really serving China in a way that I would describe as very traditional, going through distribution without a strong presence on the ground. I think we've learned from

, we've learned from

, that a strong direct presence on the ground makes a world of difference. What we're doing is leveraging. Basically, that means taking people from Fluke and putting them on the Water Quality team to scope and pursue the opportunity there.

As you might imagine, there is a broad range of water projects, both wastewater and drinking water, underway in China. We've had, I believe, approximately 200 of the Water Quality authorities from China at the

in Loveland as far as their benchmarking effort. We're

, basically replicate our leadership position in China over there as that market takes shape. We're excited about that and, clearly, with the

manufacturing facility going in, we'll have the ability to produce in country when that's appropriate. We're pretty excited about that. It's early, but certainly more to come.

Great. Could you also just elaborate a little bit more on, I guess, the implementation of DBS as a new acquisition and where you are in that process?

Sure. As we indicated, Nicole, we're well underway at

. We put in one of our outstanding DBS executives, a 10-year club Danaher veteran as Vice-President of Operations worldwide. The DBS trading at the senior level has been complete. I went down and actually did the policy employment training myself. We've done 17 tie-ins to date. They've, basically, reconfigured the entire Greensboro facility, making tremendous progress. We completed a budget recently for the business where we are in the process of removing just under eight percent of the headcount that we had at the beginning of the business

from a DBS perspective. I'll just limit my remarks there for now.

Very encouraged by what we seeing at

. I was just at Video Jet yesterday. There we have an outstanding Vice-President of Operations. We didn't need to make a change, a very capable team there. I was with them out on the floor. They were showing me the results of 14 kinds of events that they've completed and wrapped in 90 days. The main facility there in Wooddale, Illinois has freed up over 15,000 square feet of floor space, if you can believe it, and there's a productivity improvement there of about 30 percent they should see through here in the next couple of weeks. That puts us in a very good position to exit four of the eight facilities in the Video Jet network. Lots of progress. Very encouraged. It's early, but I really like what I see.

Thank you.

Harriett Baldwin with Deutsche Bank will take our next question.

At Motion and Power both, it sounds like you have started to see some much more encouraging signs and maybe even a little visibility that weak times will add. Are there particular anecdotes that give you this confidence? Is it discussion from customers? Is it actually orders? What is giving you the improved visibility there?

A number of things I can share with you. I think the sequential revenue performance certainly suggests that things are stabilizing. That's probably the foundation of what gives us some optimism. I think that's, frankly, been fairly broad-based, as we look at the different components of the Motion business, distribution OEM and the like.

Certainly, as we look at the February performance and, certainly, in March, we had better visibility. We were able to have more people deliver on their short-term forecast. Obviously, with the revenue levels that we're putting up right now, we ought to be able to deliver forecasts at those levels, but we haven't had that level of visibility and I take that, frankly, as an encouraging sign.

To talk with customers certainly is a more upbeat tone. Even if you look at some of the tech verticals where we've been hurt, like electronic assembly and Semicon, the talk, not entirely the orders, but the talk area is certainly more upbeat. We're seeing the tone in tentative discussions move from let's talk about designing the next generation of product to let's talk about your ability to ramp because when these markets come back, they're going to come back hard. We're not betting on a major tech return, but I think those are some of the tidbits that we would share with you within the Motion business.

Clearly, within Power, I think what we've seen, particularly on enterprise side of things where are Danaher Power solutions sells to the corporate environment, we've seen good progress. The businesses that we have acquired there have been integrated through the facilities that we closed in a quarter were from that group. The integration has given us the ability to consolidate our representation, domestically. That's given us, I think, some good traction in improving the overall quality of the people that we work with to sell product.

Obviously, sequentially, we're seeing some stabilization there. Frankly, we're encouraged. We've seen some large financial institutions, a couple of them, I think, are represented on this call, are buying some of our equipment. We're encouraged by that. We also saw some of our

which is going into the UK for the first time. I think that business is stabilizing. I don't think we have any illusions that we'll return to the rapid growth we saw just a couple of years ago. I think from here, the trends are certainly encouraging.

Is there any sense, Larry, that the demand is actually pulled through from the end customer or is it more the inventories have bottomed out or is it too early to say for certain?

I think it's too early to say. In Motion, I think there is some pull-through. We don't have the best visibility on that, frankly. In Power, that business is principally a direct business so we're not putting anything into a channel. With respect to some of the other businesses in that regard, Harriett, clearly, we are off to an encouraging start.

In the Tools business, I think the distribution that we work with there is pretty much on record saying that we're betting on a return, we're betting on a recovery, inventory is a competitive advantage, we're going to bulk up in a way that we didn't last year. In that area, we're seeing good sell-through. That's very encouraging to us.

In the businesses where

participates, we, obviously, haven't seen that with the numbers that we shared and sell-through has not picked up. I think it's still an evolving situation. We watch it as closely as we can, but as we indicated, if some of the near-term performance is driven by inventory replenishment, as opposed to pull-through, I think we're going to be well-positioned because we are staying very tight on cost.

Great. Thank you.

Next we'll hear from Jim Lucas with Janney Montgomery Scott.

Two questions. The first with DBS adding this new internal growth component, can you talk about where you benchmarked to add this tool? You indicated this as historically being bent more toward lean, but adding growth as an obvious evolutionary step. Where did you benchmark here?

As you know, we have a lot of folks at Danaher who work for a number of very good companies and I think what we've done over time is we've assembled a number of tricks of the trade, best practices and the like, whether we're talking Black and Decker, General Electric, Microsoft, just a number of different places where we've seen things that we like, a lot of which are like, as you know, very simple in their constitutions. What we said is we understand some of these practices in different parts of Danaher, but we don't implement them broadly. We don't share them broadly the way we do some of the manufacturing tools. That's all we want to do.

In fact, a lot of the benchmarking that we've shared as part of this initiative was internal. You go to

, for example,

does, I think, a tremendous job in idea generation. Conceiving new products out of thin air, I'd put

up against anybody. I want all the Danaher companies that need to have that capability to have that capability. You look at Matco, Matco growing in a very soft environment, very good activity in their merchandising and some of their work with related product vendors. That's applicable to a number of our businesses. We've had the team there to share that capability.

Certainly, as you look at our acquisition integration process, that continues, I think, to get sharper and better. You see the steam with which we're moving with Video Jet and

. I want to institutionalize that so that's not dependent on a few people being involved in every transaction. That's really what we're talking about as part of these growth tools becoming part of DBS.

In Italy, not a lot of magic or sophistication there, but it's fundamentally all about execution at the end of the day.

From communicating this on a corporate basis, is this something that will just then be integrated in the executive training? Will you bring managers that have been with the company for a while and/or is this just kind of on a as needed basis?

This is something we go through in February. We bring all of our top 150 executives together every year in early February to look back and look forward. We spend three days going through our internal and external benchmarks in this regard so that we can go back to our individual businesses and identify the one or two or three high priority tools that we need to implement that are relevant or appropriate to those businesses. That's a process that is underway and I think that you will see that that will evolve over time so that we'll, hopefully, manage that tool not unlike the way we would manage TPM or other kinds of shop tools.

OK. If I could just switch gears briefly,

has been a success for you. Can you talk about if you've seen any sort of competitive response in China?

There's competition there, Jim, but I think that -- -

But to the level of

?

No. The short answer is no.

OK.

I was over there seven or eight weeks ago and I haven't seen it.

OK. Thank you.

Don MacDougall with J P Morgan will have our next question.

We'll move on to John

with Bear Stearns.

Is it possible to get the core revenue growth in overall company Europe and North America, perhaps, year-over-year and sequentially?

I don't have a direct answer to that, John, but the core growth in Europe was lower than the core growth in North America, particularly in Water Quality and, to a lesser extent, in Motion. We don't collect information that way so I can't give you that. I'd have to roll that up and give it to you offline.

That's fine. I can come back to you. Larry, you mentioned this new acquisition in the medical test arena. How big would you estimate the medical test market to be and what are the plans there? Are you thinking of, possibly, further acquisitions or is this just sort of a test-to-test market or how should we think about this?

I think spending $25 million, John, is a pretty serious commitment on our part. The market is an interesting one because

has participated in this market, principally with the digital multi-meters and the scope meters. They've gone into medical applications,

, for example, customer where their service techs will carry some of these pieces of equipment.

As you know, those are, basically, general pieces of test equipment. What Lion Heart brings us is a number of different products which are really targeted specifically at that vertical. A vertical that's probably under $200 million in size, but one that we think offers good growth and stable potential for us. There are some other opportunities there but, again, I think we've increased our focus here with the Lion Heart acquisition. We're not dependent on further acquisitions to be successful here. If we need more products and certain situations arise, we'd obviously be interested.

Last question. Could you characterize the month of March in terms of your operating performance? Overall, did it regress a little bit? Did it improve from sort of the trend of January, February?

I think we ended strong, John. I think, however, you want to look at it from a revenue, from a profitability, certainly from a cash flow perspective, I think we ended on a high note.

March was up versus January, February?

Yes.

I would say, particularly, distribution had a very difficult December and that reflects on reorders for us in January. January did get off to a pretty slow start, particularly on the distribution side, but February improved, and March improved over that.

Thanks, guys.

Next we'll hear from Donna

with Merrill Lynch.

Larry, could you talk a little bit about, maybe, what some of the initial integration efforts are between

and

?

The process has focused, initially, in a couple of areas. The first being, obviously, the implementation of DBS. As I indicated in the call, I think we're thrilled with what we're seeing in terms of the acceptance of DBS and the progress and the results the team is putting up here in the very early stages. Organizationally, we have initiated some integration at a senior level. We now have a president who is running the combined

and

operation. That's a business that, basically, has a combined

masthead on it now. The VP of Operations that I indicated that

has will ride responsibly for both

and

and, obviously, looking at what opportunities like there. We sent one of our strong product line general managers down there to run the service station equipment business at

.

We've also put the services business, both at

and

under a single executive gentleman from

so we can begin to find those synergies, both in terms of the top and bottom line. We've also inserted a number of DBS managers from different Danaher businesses to help the very good team at

move forward. In fact, because of some of the systems opportunities,

and services businesses and overall, we put in a new Chief Information Officer in the business.

Organizationally, in senior level, a number of moves to begin to push the agenda forward. I think what we've seen, both from customers and distributors is a very positive response to all of this. The customers that I've talked to, what I've heard secondhand, are pleased with the fact that

now has a parent that likes being in the business, that knows the business as a known quantity. Certainly, the synergies with

and Red Jacket are showing themselves. We've had some early wins with Shell in Europe and Chevron Texaco here in the U.S.

I think we're very encouraged about the opportunity to bring these businesses together, both operationally in the short-term and to pursue some of the

and service opportunities that we've talked about in the medium to long-term.

Sounds encouraging for just a couple months of work.

Keep in mind, this is what we've known for 50 years and one that some of us have thought about for a little longer than 90 days.

Can we go back to something that you mentioned earlier. I think that you said that on the Processed Water side that you saw some strengthening in the second half of the quarter. What was the cause of that?

Honestly, I'm not sure. I think, sometimes, we see, particularly, in the first part of the calendar year, a slow start to budgeting and spending, but that's, frankly, a hypothesis of mine more than anything else at this point.

Great. Thanks a lot.

We have time for one more question and that will come from John

with UBS Warburg.

Regarding the Tools, can you give a sense, given the inventory work down that's gone on for a couple of quarters, do you get a sense that the weakness is continued inventory work down or is it just general demand by your customers?

I'm sorry, John. Could you repeat that, I didn't get all that question?

The weakness in Tools, the chuck business and so forth, are you getting a sense that that's still working the inventory down or if that's, now that the inventories have been worked down, that that's a natural demand decline?

I think in chuck it's a combination, and it's hard to segment one from the other, frankly. There's still an element of a lower unit pricing, average unit pricing, which is affecting, obviously, the top line. This is the one business that we have that has a fairly significant kind of continual lower price, average price point impact. The top line is not a function of units as much as it is price.

OK. On a different subject, on the cap ex side, how should we look at the cap ex for the year given that it looks like, on a year-over-year basis, it's down from first quarter of last year?

Don't multiple the first quarter by four.

No. But I mean as far as it being about a half of where it was last year, should we be looking at something under 80 or so for the year?

I would think it will be within a close range of where we were last year, given what we know at this point. We didn't clamp down in a way that made that $10 million figure, it's just the way, I think, a number of products are rolling out. Obviously, given the environment, we are being tight, but that wasn't a manufactured number.

There is likely to be a number of building sales that will be a by-product of the restructuring. It's hard to predict how and when that might happen but there's likely to be some offset to the gross number from that but I think, other than that, it should be comparable.

OK. Thanks.

That concludes today's question-and-answer session. I'll turn the call back to Mr. Patrick Allender for any additional or closing remarks.

Thanks, Operator. Just to restate the replay number. The number is 719-457-0820. The confirmation is 752066. I will be available for additional questions offline for the balance of the day for anyone who couldn't get their question in on the conference call or any follow-up questions from others. Thank you.

That concludes today's conference call. Thank you for your participation.