Danaher Corp (DHR) 2002 Q4 法說會逐字稿

Good morning.

My name is Amy, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to Danaher's fourth quarter and year-end earnings conference call.

All lines have been placed on mute to prevent background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, press star, then the number 1 on your key pad.

If you would like to withdraw your question, press the pound key.

As a reminder, this conference is being recorded.

At this time, I would like to turn the call over to Patrick Allender, Executive Vice President and Chief Operating Officer.

Thank you.

With me today is Larry Culp, our President and CEO.

I would like to point out our earnings release is on the web site and the securities and exchange Edgar site.

Our forms 10-K has not been filed, we have included as part of the release the year end cash flow statement.

Also included is a supplemental income statement identifying unusual income and expense items to aid and comparing 2002 and 2001 fourth quarter and year results.

In addition, we have included a 2002 quarterly segment dated in the release to facilitate your analysis.

This call will be replayed through Monday action February 3rd.

The replay number is 706-645-92 - 91, IDcode 762-4138.

I'll repeat that at the end of the call.

I'd 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's possible that actual results might differ from those predictions we might make today.

Additional information regarding these factors is available in our SEC filings.

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

Thanks, Pat.

Good morning, everyone.

We're very pleased to report this morning our fourth quarter earnings per share of 79 cents before special credits.

Which was a record for Danaher and a 52% increase over last year's fourth quarter EPS of 52 cents before restructuring charges.

After restating 2001 for a change in intangible amortization under FAS-142, earnings per share would have increased by 27% for the quarter.

All in, including special credits, fully diluted earnings per share were $1.03.

Our comment on these special items in a moment.

For the year, earnings per share before special credit cents and before the effects of the accounting change were the adoption of FAS-142 in the first quarter, were $2.74, a 19% increase over the $2.30 before restructuring charges in 2001.

And a 3% increase before restructuring charges in adjusting 2001 to exclude goodwill amortization.

Diluted earnings per share before the effect of accounting changes, including all special credits, were $2.98 for all of 2002.

Including the accounting change from the adoption of FAS-142 in the first quarter, 2002 earnings per share were $1.88.

Sales increased 39% for the quarter to a record $1.27b, in large part due to our strategic acquisitions, which contributed a 34% increase versus 2001.

Perhaps more importantly, though, our core growth was 3.5%, our highest since the fourth quarter of 2000.

Year-to-date sales have increased 21% with acquisitions accounting for 25%, with a 4.5% core revenue decline.

And a positive net currency effect of about 1.5% in the quarter, and approximately half of that for the year.

Gross margins for the fourth quarter improved from 36.8% last year to 39.7% this year, a substantial increase in our highest fourth quarter ever.

As the dilutive effect of lower gross margins in the newly acquired businesses have been more than offset by the core growth increases, and the significant benefits from the 2001 restructuring on our manufacturing cost base.

Gross margins for the year were 39%, up from last year's 38.2%, in spite of the 4.5% core revenue decline.

Again, reflecting the impact of our cost actions.

Selling, general, and administrative expenses for the fourth quarter were 23.9% of sales versus 20.7% before goodwill amortization in 2001, due principally to the higher cost structures of the newly acquired businesses.

At the time of acquisition, the newly acquired businesses, SG&A structures were, on average, 30% of sales.

SG&A for these businesses currently stand itself at about 27% for the fourth quarter.

For the year, SG&A expenses were 23.8% of sales, versus 21.4% before goodwill amortization for 2001.

Also reflective of the impact of the 2002 acquisitions.

Operating margins for the quarter before restructuring credits were 15.7% versus 16% before goodwill amortization and restructuring a year ago.

Acquisitions were fully responsible for the operating margin dilution with margins before acquisitions for margins on core operations approximating 16.3% this year.

Operating margins before restructuring and goodwill amortization for the year declined from 16.8% last year to 15.2%.

But, again, on a year-to-date basis, margins would have been 15.9% on the core operations.

Net interest expense increased from $6.4m last year to $11.2m this year for the quarter, principally due to the decline in short-term investment interest income as treasury rates continued at generational lows.

This is in spite of the record level of cash investments now in excess of $800m at quarter's end.

Likewise, on a year-to-date basis, interest expense increased from $25.8m to $43.7m with a decline in interest income nearly $13m between years.

As we have stated before, despite the obviously dilutive effect of maintaining our cash balance in safe, short-term liquid instruments, we believe that maintaining maximum liquidity and flexibility is a primary importance as we position ourselves to maintain an appropriate acquisition program in a changing capital markets environment.

Our effective income tax rate for the quarter was 32.7%, after completion of several years audit itself, both domestic and foreign.

As well as a favorable ruling from the Chinese government requires us to lower our currently and effective rate from 34.5% to 34%, to more closely reflect the ongoing benefits of these resolutions.

The catch-up effect from the prior three quarters is approximately $2.5m or 2 cents per share.

We will begin providing for income taxes at no more than a 33.5% rate for 2003, down from our previous guidance of 34.25%, principally reflecting the settlement effects on our foreign income tax burden.

We commented in our December investors meeting that a tax credit was likely.

We can now quantify this at $30m, and it has been classified as discontinued operations because it relates to a previous divestiture.

As we also noted at our December meeting, the quarter does reflect some recovery of amounts set aside for the 2001 restructuring, approximately $6.3m before taxes, approximately 3 cents per share after taxes.

Attributable primarily to lower than estimated cash costs for our European restructuring as well as the opportunity to sell as opposed to close one of our U.S. power quality lines.

As Pat mentioned, as part of our earnings release, we have provided a quarter in year-to-date analysis setting forth the effect of each of these special items.

Net income for the quarter was $124.4m before the credits, a 35% improvement over the fourth quarter of 2001 before restructuring and goodwill amortization.

And a 62% improvement over 2001 after goodwill amortization.

Earnings per share for the year before credits excluding real estate gains were $2.74 and $2.76 with the real estate gains.

All in, with credits, net income for the year before accounting changes was $464m, or $2.98 per diluted share.

Cash flow continues to be a strength of Danaher.

And a function of our unique operating system and culture, the Danaher business system.

Operating cash flow for 2002 was $710m, a 17% increase over 2001.

With free cash flow of $645m, exclusive of real estate sales, over $4 a share, a 23% increase over 2001, and a more than 50% increase over calendar year 2000.

As we discussed in our third quarter conference call, fourth quarter cash flow moderated from the prior quarter as tax payments and a prepayment of our 2003 401K contributions exceeded $100m.

In spite of these payments, cash flow for the quarter was over $100m.

At the higher end of our expectations.

For the 11th year in a row, free cash flow exceeded net income with a 2002 ratio of 139%.

Overall, our balance sheet remains very strong with a debt to total capital ratio of 30%, with over $800m in cash and cash equivalents.

In spite of the fact we spent approximately $1.1b to fund strategic acquisitions in 2002.

Sales in the process environmental control segment increased 59% in the quarter, to $967m.

Core revenue before currency increased over 5% year-over-year, the first core increase since the second quarter of 2001.

While the increase was expected, it was somewhat more than the anticipated 2 to 3%, and I'll share some details here in a moment.

For the year, process environmental control segment revenues increased 29%, with a core decline of approximately 8%.

Attributable to the significant difficult comparisons in the first half of the year.

Currency resulted in a 2% increase in the quarter and 1% for the year, with a balance of growth attributable to acquisitions.

Year-over-year core revenue in our environmental platform was flat in the fourth quarter.

An improvement over the low single digit decline in the second and third quarters.

We enjoyed solid mid-single digit volume growth in our core Hach water business, led by high single growth in the laboratory and reagent side of the business.

Europe saw better performance than the U.S.

While still growing something slower, the process business had its best quarter in 2002 with low to mid-single digit growth over last year.

The Ultra-Pure businesses continue to experience mid-single digit declines in the quarter, largely attributable to the continuing weakness in the semiconducter markets.

Our key water growth initiatives continue to grow momentum.

Our water sales in China rose over 35% in 2002.

In the area of home land securities, we received the largest order to date for our distribution system monitoring product by a major metropolitan authority here in the U.S.

Core revenue declines moderated somewhat to mid-single digits for our Veeder-Root leak detection business led by the growth in Veeder-Root environmental services revenues.

Gilbarco, which is not reflected in our core growth revenues, continued to decline a somewhat higher rate.

As the retail petroleum market continues at the sluggish pace experienced throughout 2002.

We continue to be very pleased with the acquisition integration process for this platform with both Viridor and, most recently, [Ott] on the and Gilbarco on the retail and services equipment side.

The two North American operations of Viridor have been completely consolidated with Hach in Loveland, Colorado.

And the Ott business is in the process of integrating with the Viridor Hydrolab business to replicate in hydrology a European-North American strategy similar to our Hach [longer] strategy in clean water and waste water.

Clearly, the major integration undertaking for the environmental platform has been Gilbarco.

And while the top line softness has been disappointing, we are very leased with the progress thus far on the integration side.

The integration of the product lines and selling efforts has already generated share gains in distribution ask several key accounts, despite the challenging market conditions.

In addition to reducing square footage by 14% and headcount by 17%, we have also significantly reduced the total manufacturing costs of the new encore dispenser line since the beginning of 2002.

Despite the revenue decline, we achieved our goal of exiting the year at Gilbarco with a low double-digit operating rate.

Additionally, just yesterday, we announced an additional rest at the company's south cotton Germany facility which will reduce headcount by an additional 80 associates.

Our motion platform was the largest contributor to the change in core growth for the quarter, with both revenue and orders up low double-digits versus 2002.

While the fourth quarter of 2001 was the bottom of the market, the fourth quarter of 2002 was also up mid-single digit sequentially.

The growth was led by motors and drives both in the U.S. and Europe, with somewhat lower but still positive growth in linear components.

While some of the gain is due to market recovery, it also reflects our design share wins beginning to drive revenue.

A primary example of which is our electrical vehicle initiative which we expect will add an additional $25m of incremental sales to motion this year.

For the year, core motion sales declined high single digits, primarily due to significant negative comparables in the first and second quarter.

For the second half, core sales increased 6%.

While the revenue stability is positive, we are still far from motion's full potential, particularly on the bottom line.

Operating profits for the year were high single digits.

Although they were low double digits in the fourth quarter, excluding the recently acquired Thomson business.

We have undertaken a substantial amount of restructuring since 2000, and I believe with the revenue stability we are now experiencing that the fruits of those efforts will show the expected profitability rewards in 2003.

Still, the job is far from done, and I am confident our team is up to that challenge.

To that end, we have already begun our integration of Thomson with the announcement of the closure of two facilities with an estimated headcount reduction of 300 associates.

While Thomson is not likely to achieve double digit margins in 2003, we are very pleased with the progress to date.

And have already begun the transition of our branding and channel strategy to take advantage of Thomson's position of the number one North American brand in linear motion components.

We have also begun the integration of Dover instruments business with our NEAT operation to form a global leader in high precision staging systems solutions.

The electronic test platform was also a strong contributor to process environmental control segment growth, posting high single digit growth both sequentially and year-over-year.

Fluke industrial led the way with low double digit core volume growth in the quarter.

Led by a strong showing in North America as our new product and channel initiatives have resulted in share gains in both industrial and electrical channels.

Non-north American markets also had their best year-over-year performance with positive comparisons for the first time this year.

We achieved share gains in both the U.S. and Europe in 2002 due to new product and distribution programs.

Particularly with those that comprise our electrical growth breakthrough.

Fluke Networks had low single digit year-over-year growth in the quarter.

Its first quarter of growth since 2001, with strength in the U.S. market offsetting more sluggish sale in Europe and Asia.

Network test product growth drove the performance in the U.S. with double digit year-on-year positive comparisons.

Key product launches included our new OTDR with fiber premises testing.

And a new opti-view unit which has both gigabit Ethernet and wireless land testing in a single unit.

Given still a very soft IT spending climate, there's little doubt that Fluke Networks outperformed its market and gains shared in the quarter.

For the year, electronic test platform core sales were down mid-single digit.

With Fluke industrial down low single digits and Fluke networks down low double digits.

Operating margins continue to improve in electronic tests with Fluke industrial reaching high teen margins for the year.

And Fluke Networks achieving low double digit margins in spite of the year-over-year decline.

We view this as outstanding performance given the difficult datacom and telecom test and measurement markets in 2002.

We were also pleased with the progress made this year on acquisition integration with Microtest being fully absorbed by Fluke Networks.

Now Fluke biomedical being integrated with Fluke industrial.

Pat and I recently visited our latest addition to the platform, Raytek, and came away very impressed by both the new product pipeline as well as the early progress with DBS implementation.

Our newest platform product identification and our new platform anchor business, Videojet, continued to operate ahead of schedule from both the profitability and revenue standpoint.

Year-over-year revenues were, again, up mid-single digit on a pro forma basis compared to the fourth quarter of 2001.

Equipment and after market revenues were up at almost equal rates.

Sales growth in the U.S. and Europe outpaced Asia.

Operating margins are now in the neighborhood of 20%, well ahead of our original expectation.

With the January 2003 addition of Willett to the product identification platform, we have an added important leverage to the platform from both a geographic and product offering standpoint.

In addition to increasing our number one position in high speed, high precision product marketing to more than 50% greater than our nearest competitor.

Last week we held our first combined strategic and operating review for the combined businesses at Willett's continental European headquarters in Dusseldorf, Germany.

Pat and I came away very impressed with both the caliber of the talent we have assembled at these businesses as well as the opportunity from both a market and cost standpoint.

For example, we recently cap purred a 100 unit marking system order we believe neither company would have captured by itself.

While it would be premature to discuss any specific restructuring plans, suffice it to say that the opportunities identified prior to acquisition have since been reconfirmed.

For the most part, the non-platform businesses and process environmental controls had their best year-over-year revenue comparables in the fourth quarter.

With most businesses showing low to mid-single digit growth with the exception of power quality, which while still in decline, is now running about 5% behind the prior year.

Turning to tools and components.

Overall revenue decline was slightly less than 1%, a rate of decline somewhat less than expected at the beginning of the quarter.

While the anticipated post-EPA admissions change declined and heavy truck production did occur, negatively affecting our Jacobs Brake business.

The rate of decline versus last year was closer to 20%, rather than the original expectation of, potentially, as much as 50%.

Year-to-date segment growth was just over 2%.

Revenue in the hand tools platform increased low single digits with growth in the industrial and professional end markets, offsetting some modest decline in the Sears consumer channel.

The early response from distributors and customers regarding our Sears industrial initiative -- the breakthrough in which we have obtained exclusive rights to take the power Craftsman brand to distribution serving industrial and electrical customers have been overwhelmingly positive.

The balance of the tool segment was essentially flat year-over-year.

With growth at Hennessy offsetting some decline at Delta and Joslyn manufacturing.

For the year, the hand tool platform was up 1%.

Mid-single digit declines in consumer tools were more than offset by mid-single digit growth at Matco and industrial channels and double digit growth in China.

Operating itself margins again improved significantly year-over-year from a pre-restructuring, pre-goodwill 13.7% in 2001 to 15.5% in 2002.

Those significant benefits from the restructuring drove results at both Jacobs Chuck and Joslyn manufacturing.

For the year, operating margins for the segment before restructuring and goodwill amortization improved from 13.5% in 2001 to 15.1% in 2002 on just a 2% segment sales gain.

While it is admittedly difficult not to be encouraged by our fourth quarter and 2002 performance, caution remains the watch word as we enter 2003.

We continue to operate with the expectation of sluggish -- essentially, a no-growth economy.

What others have called a low growth equilibrium where we'll have to make much if not all our own luck.

As we outlined in our December investor meeting, we are comfortable that it give us an enviable starting point to show year-over-year improve meant in 2003 without help from an economic recovery.

Our expectation for 2003 earnings per share of $3.10 to $3.25 before adjusting for a modest positive impact from a lower effective tax rate is unchanged.

At this point, we expect the year-over-year increases to be somewhat more ratable than experienced in 2002 versus 2001.

With a first quarter estimate 10% to 20% above 2002's 55-cent per share.

This, of course, is absent any impact that could occur from a political event.

Such as a U.S. war with Iraq, contingency plans for which are already in place.

We're now ready for questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone key pad.

We'll pause just a moment to compile the Q&A roster.

Your first question comes from Harriet Baldwin with Deutsche Banc.

Good morning.

I was wondering the process and environmental, obviously, sales came in a little bit higher than expected.

Was that steady through the quarter, or did you see any improvement as we went October, November, December?

Good morning, Harriet.

We typically will see, in the fourth quarter, a strong finish particularly in Europe.

So there was a little bit of pick-up as the quarter went on, but I would suggest to you that that was not unusual.

There is a year-end budgetary positive impact we often see in that business.

I don't think we saw anything unusual this year in that regard

And speaking of Europe motion is continuing to do well there.

I'm assuming it is mostly share gains, or is the end market actually improving?

Certainly the stability we see in the market is an improvement from what we have seen previously.

We think we have taken sharing distribution.

We know that design share wins are really beginning to bear fruit.

I would expect there is a little bit of buoyancy in the market.

I would suggest it is modest, very modest at best

How about pricing in the segment on the quarter?

Any shift in recent trends and outlook for '03?

Well, the pricing in most OEM markets, if you're talking about just motion, there's kind of a expectation of price increases each year.

I would not say it's different, but it's consistent and it's down.

Thanks.

I'll let someone now.

Thanks, Harriet.

Your next question comes from Nicole Brandt from Bank of America

Good morning.

On the core volume increases you saw in the quarter.

It likes like there was three main drivers, obviously tools, which you explained, and motion and electronic tests.

Larry, can you characterize them in terms of degree of improvement over expectation -- where you saw the biggest and how we should think about process and environmental core volumes as we move into the first quarter?

Should we expect it to be at a similar clip?

Good morning, Nicole.

I would say that we were pleasantly surprised with the finish that both motion and electronic test had at the end of the year.

We had thought that we would see some positive comps finally at Fnet.

And given the year-end and quarter spending in that market, you wait for a bit throughout the quarter to make sure that's going to happen.

We were pleased to see that come to fruition in December.

I think in motion, as we alluded to, we saw strengthening, we saw positive unit comparisons, really, throughout the second half building.

But given what we've been through in that market, we've been cautious.

We were able to exceed our conservative internal forecast.

I think as we turn the calendar, Nicole, and go from December to January, we have not changed our point of view about what this year is likely to bring.

You can often finish strong in December and see a little bit of sluggishness in January.

I think that's quite normal.

More importantly for us, given all the uncertainty in the world right now, we don't think that we're going to see this rate of organic growth continue here in the first quarter.

In fact, I think that as we look at the quarter, we would continue to submit to you that our outlook is very flat-ish type performance.

And that may come across as conservative.

I think we're well served having that point of view given everything going on, certainly what could happen here in a couple weeks in Iraq.

Great.

Just one follow-up on the motion strength.

Was there any particular -- you indicated motor and drivers were stronger than [actuation] -- were there any particular end markets that drove the strength in the quarter?

I would say it was fairly broad-based with the exception of the tech markets that we serve.

I think we have seen, really, in the last six to eight weeks, Nicole, further signs of softness, delivery post moments.

For example, in some of the tech markets that we serve, certainly in semis we may have indicated, we were with this team within the last ten days.

They are seeing a number, electron assembly and semi folks push out a bit.

Another reason for the cautious and conservative approach we have to the year now.

Thank you.

Thanks, Nicole.

Your next question comes from Deane Dray with Goldman Sachs.

Good morning, Pat and Larry.

Can we revisit your cap ex plans for '03.

I think you raised some eyebrows back in November when you talked about potentially increasing your budget by 25% in '03.

Could you give us a sense of how much of that is the expectation of real spending versus an internal signal to your managers to look for ways to invest?

And maybe a portion across the five platforms where you think there might be opportunities to invest?

My sense is there's not -- you're pushing capacity at this stage in several of those businesses.

Good morning, Deane.

I would like to understand that better.

I don't think we're pushing capacity.

Certainly, if you lock at what we've been through, I think we've certainly got our cost structures in line.

I don't think we are capacity constrained, certainly in a way that would require material capital infusions into the business.

You're right.

We have signalled an increase in cap ex.

Given where we came in, the increase would be more pronounced.

We have budgeted that as a result of the opportunities, both to fund growth projects and to fund productivity in the operating businesses.

I think that is a phenomena that would apply to every one of our operating businesses.

As you can imagine, we certainly put more emphasis on the growth investments in the four process environmental control platforms than we might in some of the other businesses.

So that's where you would see some of the step-up.

We certainly did signal that early on so that we could throughout the budget process.

And as we continue to operate the businesses, to push the businesses in the leaders to find growth opportunities that were attractive.

We could find, given some of the success we enjoyed in 2002 with the break-throughs we did fund.

Clearly we're in a position to fund more of those.

I would like to do just that.

I think the working premise should be that we'll be somewhere in the $100m range for cap ex this year, which is -- would still be no more than 2% of sales.

Okay.

And then with regard to the 10-K filing.

Pat, is there any additional disclosures versus what was in last year's filing??

Yes.

As you know, in the third quarter we dramatically expanded out a lot of disclosures.

There will be a full year version of a lot of that in the year-end statement.

Yes, there will be additional disclosures.

But nothing to be concerned about, Deane.

Okay.

Thank you.

Your next question comes from Jeff Sprague with Smith Barney.

Good morning, everyone.

A couple questions.

First, Larry, I was wondering if you could characterize how you see the acquisition landscape?

Updating us from December in terms of where pricing is.

You know, people coming around and just the general size and shape of the funnel?

Sure, Jeff.

Good morning.

We're really no net change, Jeff, from where we were in the middle of the December.

I think we would still characterize the pipe line as full and active.

There are opportunities, I suspect, we'll consummate this year.

Again, that's not a forecast.

We know full well we could go through this year without doing a single transaction.

But I feel confident that we'll have another active, successful year in that regard.

We've met already this year with a number of principals, talking about how we might add some really interesting strategic businesses to the portfolio.

So we'll see what happens.

I think we still feel confident about our prospects in that regard this year.

Of course, the numbers that we've shared with you this morning regarding our potential performance this year do not include any acquisitions.

And then just to switch gears a little bit in the environmental businesses.

I don't know if you said directly, but on a pro forma basis, how much were Gilbarco revenues down, and what do you see based on the cap ex plans for your customers for '03?

Jeff, I think the outlook for the Gilbarco Veeder-Root business is perhaps the most uncertain of the large businesses today, simply given the Iraq overhang with those businesses.

The fact that you have very tight margins at the pump -- even in today's journal there's articles with some of the pressure the downstream operators are having.

We need to get past Iraq for many of our customers -- the super majors as well as the convenience store operators and jobbers -- to feel comfortable investing at a more normalized rate.

We do believe there is a pent up demand for these types of products that will have to be cut loose at some point here.

I think we need to be in a post-Iraq environment for it to be meaningful for us

Finally, you reference the homeland defense metro sale.

You highlighted some activity of that in December.

How big are the revenues now in what you would characterize as homeland defense-type of activities in water?

Still relatively small?

Yeah.

I would say they're relatively small.

It's a tough one to answer specifically, Jeff.

In part because much of the equipment we have been selling for years have can be used in what you might consider to be a homeland defense-type application.

We don't often see or have visibility on that change in application.

But the distribution monitoring system that I alluded to in our prepared remarks is very similar to the product that we had in Salt Lake City at the Olympics.

That continues to generate real interest, but, frankly, as you suggested, the interest is ahead of the order rate now.

Great.

Thanks a lot.

Thank you.

Your next question comes from Don MacDougall with J.P. Morgan.

Good morning, Larry and Pat.

I guess the first question would be on the first quarter guidance.

I think you said 10% to 20% with, roughly, 60 to 66 cents.

I'm wondering what the assumptions you have behind that.

Looking for that kind of sequential drop from 4 Q to first quarter is not typically what we would expect to see from Danaher.

Especially when I lock at your year-over-year comp and the beneficial acquisitions that you've been able to do since then.

Well, I think if you look in longer term history, Don, it is fairly common for there to be this kind of drop.

The first quarter is always our slowest quarter.

We have five fewer shipping days in the quarter versus any of the other quarters.

It's really not untypical, frankly.

Okay.

Is there any kind of a hangover expected from, perhaps, inventory in the tools channel like there was last year?

I would say there would be some.

We factored that in.

But, yeah, there's probably some hangover in some of the channels.

Yeah.

I would agree with that, Don.

Okay.

My second question relates to Iraq.

Larry, you mentioned you have contingency plans in place.

If you could maybe share some of that with us.

Just thinking about the impact of an Iraqi war on Danaher, my guess is that your customers are probably already assuming that this is going to take place.

And that's why there's not a lot of capital spending going on.

I guess what I'm wrestling with is how much of a negative would an Iraqi conflict be on the volumes that your businesses are experiencing?

Don, it's an excellent question, and it's really hard to, I think, precisely quantify that.

Just given the nature of the issue here.

I think what we've done in terms of preparing for this outcome, which I thought has been highly likely for some time, is we went through the budget process last November.

We asked the businesses to budget assuming there was not an Iraqi situation, but to come in prepared to discuss contingency plans.

In many businesses, what we've done is, basically, pulled the trigger on those plans.

So we're delaying filling some new positions.

We're tightening down on some discretionary spending.

It certainly varies in degree from business to business.

It is perhaps is most acute in the Gilbarco Veeder-Root business where we have seen conflict in the Middle East cause the most disruption.

If we look at the business performance of late, we would agree in that business we're probably already seeing the effect of the Iraq impact.

However, if you look at the January numbers we've seen so far, it's not as if everybody is in retreat.

We have -- motion was up, again, in January.

Some of the other platforms -- like ID, water, Fluke -- were fairly flat-ish in the month.

So I don't think we have seen the full effect yet, but certainly the events of the last week are tightening around us.

I'm convinced we'll do the best job possible in dealing with whatever this does to our top line.

It's just hard to predict that and quantify that for you right now.

Okay.

Final question.

With the reversal of the restructuring reserve this quarter, should we assume that the 2001 restructuring is, essentially, done?

And we're kind of now back to more normalized levels of continual improvement type of spending we expect to see out of Danaher?

Don, that's a fair summary of where we are.

Please remember that we didn't take 2002 off in that quiet restructuring.

We just had a lot going on because we were doing the normal restructuring in addition to those activities we funded with charge.

Thank you.

Thank you, Don.

Your next question comes from Bob Cornell with Lehman Brothers.

Good morning, everybody.

The question that hasn't been asked is the rate on the margins.

You mentioned Gilbarco at double digit.

Early 2002 margins you mentioned Virador, you mentioned Gilbarco a little bit.

All in those early year acquisitions were 8% at the beginning of the year.

What are they running now exit rate?

20% roughly for Videojet and, roughly, 10 for Gilbarco.

That's the lion's share of it.

That would weight out to about 13%, 14%.

The other question is going into the free cash flow surprise.

You talked a little bit about it, Pat.

Even the number does weigh more than we had in our model and other people.

Would you go into more detail what was driving that number?

Well, it's come from kind of the traditional sources.

We had another very good year in working capital.

All our working capital turns improved by nearly a full term this year.

And that's in spite of the fact the acquisition is coming in at lower terms.

This is last year's exit rate based on the exit rate we had last year versus this year.

It is driven working capital improvements as a major contributor.

Relatively speaking, we had a better performance than last year.

Given last year we had the unfortunate benefit of having lower sales which lowered the receivables and increased the cash flow from accounts receivable.

We also had, as we've had in the past, the benefit of having paid lower taxes.

Even in spite of the settlement we had in the fourth quarter, lower taxes, than we've been providing.

Part of the reason why we are we feel the need to bring our provision rate down.

What would be -- have you given guidance at '03 at this point for free cash flow?

Is there an absolute dollar amount or percent of net?

No.

How about some guidance?

At earnings at $3.20, that equates to about $520m of net income.

Saying that, I think we should be able to handily exceed that this year.

How much it is relative to this year is hard to say.

I don't expect to have the dramatic benefit that we had the last two years from working capital improvements this year.

But I would still say it should well exceed net income and should exceed $600m plus again this year.

Before any effects that might come down the pike from new businesses.

Larry, your comment about the flat-ish performance.

You're referring to all the process environmental?

What sort of the mental framework you have in that respect?

Is that a full year, first quarter?

What exactly were you referring to there?

I think I was referring both, Bob, to the quarter and the year.

We've assumed it will be fairly flat-ish and stay that way through all of this year.

Certainly, I don't think we've seen anything year-to-date with respect to both the quarter and year to give us a different point of view.

Again, that assumes no Iraq.

We're thrilled with the momentum we had at year end.

I just don't think in this environment that we're in a motion to extrapolate a trend and a forecast along that path at this point.

I think it's going to be more tempered, and more sluggish and spotty.

One more question, Larry.

You mentioned the $25m in the electrical vehicle program.

That's a bit of a surprise to get hard on that number.

When are we going to see those sales in the results?

Is that an early year or second half type of thing?

It would build throughout the year, Bob.

But keep in mind we had EVS or electrical vehicle system revenues coming in throughout 2002 as well.

So we were with that team last week.

They continue to do a wonderful job capturing three quarters of the design wins in that space for writing more content.

The EOM are really accelerating that conversion to the model.

It is a wonderful win for us.

Okay.

Thanks.

Thank you, Bob.

Your next question comes from Jim Lucas with Janney Montgomery.

Thanks a lot.

Larry, I want to follow up on a comment that you made in your opening remarks where you chose some words carefully.

You talked about an appropriate acquisition program in a changing capital market environment.

Could you expand upon that comment, please?

Good morning, Jim.

I consider those words carefully.

Hopefully they were self-evident.

Our strategy, Jim, has not changed at all from what we've talked about over the last 12 month.

We want to be active in building our company over the long term, being ever mindful this is a unique opportunity to do just that.

Given the availability of properties, valuation, and a reduced level of com competition.

Pat and the team and I are out looking for opportunities that first are defined by strategy, and then by their financial attractiveness.

Where we find situations we can bring on board, you should expect us to do that.

Clearly, we're thrilled to have two years where we've had record volume -- in terms of transactions the year before last, in terms of revenue dollars acquired last year.

It's hard to predict what will happen this year.

We could surpass this past year.

We could have a very quiet year.

But suffice to say we will be very much in this game.

We fortunately have the financial flexibility to do that, and certainly the commitment and support throughout the organization to make that happen.

Okay.

And not to beat a dead horse.

But on the cap ex, which obviously has been a theme in this call -- could you expand a little bit what types of projects -- or is this more software-related versus machine-related?

Just kind of expand on where you see your capital dollars being spent this year?

Sure.

Well, I think, Jim, there's certainly some IT projects that will be initiated this year.

Certainly with motion.

As you know, we have six significant pieces of that business and, over time, we're going to migrate that to a more unified IT structure.

If you go back to our meeting in December, you look at the products, the breakthrough initiatives.

In different ways and forms they require capital.

Whether you're talking about in the development process or in the production preparation process, there will be a level of capital required to bring those products to market.

We'll be funding those, obviously, at a greater level, fortunately, than we did a year ago.

As Pat indicated a moment ago, it's still relatively modest levels.

Okay.

Thanks a lot.

Thank you, Jim.

Your next question from John Inch with Merrill Lynch.

Thank you.

Good morning.

Just in terms of above the line restructuring cost actions.

Larry or Pat, how does your guide an incorporate in terms of what you're going to spend in restructuring and cost actions this year versus last year?

John, we've never carved there out as a separate item.

It is embedded in the budget itself of the individual businesses.

I would have to extract that in some fashion that I don't have readily available right now.

I would say the level of restructuring, the level of ongoing commitment for cost take out is not substantially different in '02 versus '03 on a relative basis.

After you exclude out in on 2 the actions taken against the 2001 restructuring charge.

That's fair.

My follow up is -- we talked about stability and upside in the exiting of some of the businesses in the quarter.

Larry or Pat, were there any businesses individually that actually got worse as the quarter progressed?

Perhaps not material to the overall company, but anything that surprised on the downside as we exited the year?

John, as we indicated, the power business was down again.

Throughout the second half that was a business that was probably softening at different points along the way.

That's probably the one outlyer for us as we lock at the fourth quarter of last year.

Okay.

Thank you.

John, the other bit would be some of the news we're getting out of semi with the with the delivery postponements and push-outs.

Your next question comes from Matt Summerville with McDonald Investments.

I was wondering if you could comment on the sequential margin declines that occurred in processes.

Is that solely related to mix, i.e. more motion in there, perhaps?

There's some of that.

Clearly, when motion is up and we have the relative softness that we've seen of late, say at Veeder.

That is not a good margin trade-off for us given the profitability and growth of profitable in the businesses.

I think the other thing to keep in mind, Matt, we had less flexibility last year.

We were squeezing very hard, particularly in process and controls.

We had a bit more latitude.

We didn't have to hold our breath as much through most of 2002.

We certainly wanted to fund the growth opportunities that we could identify and pursue.

You see some of that as well, particularly at Fluke and at water.

And motion, frankly, reading out in those numbers

I mean, one of the mechanics we go allow, Matt --which also exaggerates year-over-year and even sequentially -- is for our IC, incentive comp programs.

We require all the division, even if they are behind plan or ahead of plan -- they will be recording their IC at budgeted rates throughout the first quarter.

And then we adjust those rates to the actuals in the fourth quarter as we get closer to where we think the years are going to come out.

This year we're coming in better than expected.

We increased the IC provision in the fourth quarter.

Last year the opposite happened and we decreased it from what was being accrued.

There was a fairly significant kind of sequential impact that was different year-over-year

Okay.

And then a follow-up question, Larry.

It sound like you're trying to talk people to more of a zero type of organic growth outlook for Danaher in 2003.

And, quite frankly, I have a hard time coming up with the zero number.

Based on the success you have in motion, based on the share gains in Fluke, particularly on the industrial side, based on solid growth in China again next year, just to name a few of those things.

Can you talk about that some more?

I'll try harder.

Matt, we have a lot of good things going on.

I just think there's so many macro uncertainties right now that are out of our control.

I think we will be well-served, as we have been well-served, by taking a very conservative approach to the top line.

Because that creates what I call tension in the system with respect to expenditures.

It's that tension which has given us the ability to grow earnings the last two years, despite the recession.

It makes us better allocators of the resources we do have.

I'd love to talk about organic growth numbers, like the ones we've turned in over the next several quarters.

I think there's so much uncertainty and risk out there outside of our control.

I would be naively optimistic to try to share with you a more buoyant near-term outlook, despite the high level of confidence I have in what we're trying to create value -- long-term at Danaher.

Thanks, guys.

Thanks, Matt.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Mr. Allender, are there closing remarks?

Yes.

I want to remind every the row play number is 706-645-9291, ID code 762-4138.

If there was anyone who was not able to get a question in, I will be available for follow-up calls individually or if anyone would like to follow up on some more details.

Thank you.

Thank you for participating in today's conference.

You may now disconnect.