Danaher Corp (DHR) 2003 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to Danaher Corporation fourth quarter and year end 2003 results conference call. [OPERATOR'S INSTRUCTIONS] I would now like to turn the conference over to Andy Wilson, Vice President of Investor Relations.

Thank you Kimberly and good morning everyone.

With me today is Larry Culp, our President and Chief Executive Officer and Pat Allender, our Executive Vice-President and Chief Financial Officer.

I would like to point out that our earnings release is available on our Web site under the heading Investor News.

Our Web site address is www.danaher.com.

As our year-end Form 10-K has not yet been filed, we have included as part of the earnings release, the year-end balance sheet and cash flow statements.

In addition, we have included 2003 quarterly segment data as well as supplemental income data and the release to facilitate your analysis.

Please note that this call will be replayed through February 2.

The replay number is 706-645-9291.

I.D.

Code 4971622.

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 that we might make today.

Additional information regarding the factors that may cause actual results to differ from these predictions is available in our SEC filings.

With respect to any non-GAAP financial measure provided during the call today, the accompanying information required by SEC Regulation G relating to those measures can be found on our Web site, www.danaher.com under the section Investor News.

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

Thanks, Andy.

And good morning, everyone.

We're very pleased to report this morning that our fourth quarter EPS were 97 cents.

Excluding a gain related to pension curtailment of 9 cents, which represented another record quarter for Danaher and a 23% increase over last year's fourth quarter EPS, of 79 cents before special credits related to real estate gains and the reversal of unutilized reserves related to 2001 restructuring activities.

Including the pension curtailment gain, fully diluted EPS for the fourth quarter were $1.06.

For the year, EPS before the pension curtailment gain were $3.28, a 20% increase over last year's EPS of $2.74 before special credits.

Fully diluted EPS including the pension curtailment gain was $3.37 for all of 2003.

Sales for the fourth quarter increased 17% to a record $1.49 billion.

As revenues from existing businesses also described as core revenues increased 6%.

Acquisitions contributed 6% with positive currency effects of 5%.

This was our strongest quarter of core revenue growth since the third quarter of 2000.

Full year 2003 sales increased approximately 15.5% to $5.29 billion with core revenue growth of approximately 1.5% with acquisitions contributing 10% and foreign currency effects of 4%.

Gross margins for the fourth quarter improved from 39.7% in 2002 to 40.6% in 2003, another record fourth quarter performance.

Gross margins for the year were 40.4%, up 140 basis points from last year's 39% and the first full year above 40% in Danaher's history.

Ongoing cost improvements in both our existing and newly acquired businesses as well as the leverage from higher revenues contributed to this improvement.

SG&A expenses for the fourth quarter were 24.5% of sales versus 24% in 2002.

The year-over-year increase in the fourth quarter reflects higher one-time costs primarily related to the closure of the Armstrong tools facility, Chicago, first-year costs for the Craftsman industrial and Lowe's programs.

As well as costs associated with transferring the Jacob's Chuck production to China.

We do not expect any material carryover of the costs into 2004.

Core growth as well as continuing improvements with our recent acquisitions cost structures particularly at Thompson and Willett reduced our SG&A rate from the 25% realized through the third quarter of this year.

For the full year, SG&A expenses were 24.9% of sales, versus 24% for 2002 excluding prior year one-time gains primarily reflecting the impact of late-year 2002 and 2003 acquisitions.

As well as currency effects on our European operations, which have somewhat higher SG&A structures than, do the U.S. operations.

Operating margins for the quarter excluding the pension curtailment gang were 16.1% versus 15.7% in the fourth quarter of last year.

Again, excluding one-time gains.

Cost improvements within the recently acquired businesses combined with incremental core revenues were responsible for the majority of the operating margin improvement.

This improvement was mitigated somewhat by lower margins within the tools and component segment resulting from one-time costs I just mentioned.

Full-year operating margins including the pension curtailment gain and prior one-time gains were 16% in 2003 versus 15.3% in 2002.

Excluding these gains full year operating margins in 2003 improved approximately 50 basis points to 15.5% from 15% a year ago.

Net interest expense for the fourth quarter increase from $11.2 million last year to $12.1 million this year was principally due to the currency impact on our outstanding euro bonds.

Short-term investment, interest income was basically flat as treasury rates continue to generate low returns in spite of the record level of cash-investments, which exceeded $1.2 billion at quarter's end.

Likewise on a full-year basis, net interest expense increased from $43.7 million to $48.9 million with the increase due primarily to the aforementioned currency impact.

Our effective income tax rate for the quarter was 32% versus 32.7% in the fourth quarter of 2002.

For all of 2003, our effective income tax rate was 32.7%, down from 34% last year.

As we discussed in our December investor meeting, we will begin providing for income taxes at a 31.5% rate in 2004, principally reflecting the growing percentage and profitability of our foreign operations.

With the addition of radiometer and it's significant non-US operations, we will re-evaluate the impact on our tax rate once it is integrated into our existing tax structure in the second quarter of 2004.

Net income for the quarter was $155.4 million, before the impact of a pension curtailment credit, a 25% improvement over the fourth quarter of 2002, before restructuring and real estate gains.

All in, net income for the year was $536.8 million or $3.37 per diluted share.

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

Cash flow continues to be strong with operating cash flow for 2003 of $862 million.

A 21% increase over what was an exceptional 2002.

We generated free cash flow defined as operating cash flow less capital expenditures of $781 million, a 21% increase over the prior year.

We have now generated free cash flow in excess of our net income for 12 years running with free cash to net income conversion ratio of 146% in 2003.

While we expect these levels of free cash flow conversion to moderate in 2004, we do believe our free cash flow to net income will again exceed 100% for the 13th year in a row in this year.

Capital expenditure for the year increased 23% to $80.3 million, versus $65.4 million in the prior year.

Overall, our balance sheet remains strong with a debt to total capital ratio of 26% and over $1.2 billion in cash and cash equivalents at the end of 2003.

As we previously communicated, a put option was available to put to holders of the liquid yield option notes or lines due in 2021.

This option expired on January the 22.

The aggregate amount of if bonds tendered amounted to $1.1 million.

With approximately $555 million in aggregate of the securities remaining outstanding.

The next put date for the notes is January the 22, 2011 and the company has the right to call these bonds at their accreted value at any time.

As we stated in prior quarters, despite the obviously dilutive effect of maintaining our cash balance in shave, 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.

Given the recent acquisition of substantially all of the shared capital of Radiometer this past Tuesday and the anticipated acquisition of Gendex in early February, these cash balances will decline approximately $875 million.

However, our strategy of maintaining liquidity will continue into the foreseeable future.

Even after funding these acquisitions, our debt to total capital and pro forma net debt to total capital ratios will be approximately 26% and 19% respectively.

Moving to the operating segments, revenues within process and environmental controls increased 19% for the quarter to $1.15 billion, revenues from existing businesses contributing 5% of the increase.

Acquisitions contributed 8% and currency gains provided 6% of the year-over-year growth.

While 2 to 4% core growth was expected, a particularly strong December with about 10% year over year improvement pulled the growth higher.

For the year, process and environmental control segments revenues increased 21% with core revenues accounting for 2%, currency gain of 5% with the remaining 14% attributable to acquisitions.

Year-over-year core revenue improvements contrast favorably with an 8% core revenue decline experienced in 2002.

Operating margins for the quarter were 17.3% versus prior year margins of 16.3%, which excludes 50 basis points of margin related to real estate gains and restructuring reversals.

All in, full year 2003 margins improved approximately 50 basis points to 16.5%.

Turning first to our environmental platform, revenues for the quarter improved 15% as core revenues accounted for 5% of the gain; acquisitions contributed approximately 3.5%, and currency gains accounting for the remaining 6.5%.

Both our water quality and Gilbarco Veeder-Root businesses showed core growth during the quarter.

For the full year, revenues grew 15.5% with core revenues increasing 2%, acquisitions providing 7.5% and currency gains of 6%.

Hach/Lange delivered low single digit core growth in the fourth quarter with continued strength in Europe and in the US particularly in our lab instrument and reagent markets.

This growth was partially offset by continued softness in the ultra analytics market.

During the quarter, we launched the laboratory version of our Luminescent Dissolved Oxygen or LDO censor in Europe and it's scheduled a first quarter launch this year in the US We believe this corporate break through has revenue potential quickly in the $10 million range.

Additionally, we saw a growth in our Hydromet business during the quarter with strength particularly coming from the developing world.

For the year, the Hach-Lange core revenues grew at a low single digit rate.

Gilbarco Veeder-Root, a worldwide leader and integrated automation and environmental systems and services for the retail petroleum industry, experienced high single digit core revenue growth for the fourth quarter, a strong year-end buys from key major oil company customers for both retail automation and environmental system added to the broad based second-quarter strength we enjoyed.

Gilbarco Veeder-Root continues to take share with the most comprehensive product and service offering in the industry.

Specifically the team made excellent progress in the high-volume retail customer market, growing sales by more than 50% and capturing new opportunities with customers like Wal-Mart and Sam's clubs as well as gaining share with many distributors previously served by Toucan.

Our China business doubled over the 2002 rates.

For all of 2003, the group showed low single digit growth, which we think, is quite satisfying given the contrast with the double-digit decline in first quarter prior to the Iraq war.

While revenues for the fourth quarter may have somewhat been enhanced by year-end purchasing by the major oil companies, order rates continued strong here in January and we remain optimistic as we begin 2004.

Speak to the motion platform; motion revenues grew 13% in the quarter with core revenues growing 4%, acquisitions contributing 2% and a favorable currency impact of 7%.

Continuing momentum in direct drive sales in the US, over 50% growth in electric vehicle shipments, and stronger linear sales were the primary contributors of this growth.

Additionally we saw strength in our (inaudible) elevator business as we recently launched phase one production in China.

I had a schedule generating higher than expected production volumes.

Motion exited 2003 with more than $10 million of new flat panel display equipment orders, including key orders from Photon dynamics and Zygo here in the US and LG in Korea.

Flat panel display equipment orders strengthens sequentially during the year and included orders for next generation equipment.

Activity in the semiconductor market continued to accelerate through the quarter, as orders for the fourth quarter grew over 40% versus the third quarter as key OEMs such as Applied material, Brooks automation and Ram research began ramping production.

Our Linear business showed low single digit core growth, the first quarter of core growth this year driven by increased shipments for missile programs to the government as well as distributor programs focused on replenishing inventory shells.

We were also quite pleased to capture top honors in three product categories for service and support in control design reader's choice magazine, further evidence of our progress in building a precision motion powerhouse.

For all of 2003, motion revenues grew 33% as our core revenue increases accounted for 4%, acquisition represented 21%, and currency gains of 8%.

Our motion platform has now delivered six consecutive quarters of core revenue growth.

Despite the tougher year-over-year comps in the second half of 2003.

Our electronic test platform revenues grew 10% in the quarter with core revenue growth of 3%, acquisition growth of 2% and 5% of the growth due to favorable currency.

Fluke's core revenues improved low single digit due to growth in the US industrial channel, the European electrical channel and continued double-digit growth in China.

Additionally we experienced a strong performance from Ray check (ph) where double digit growth was due in part to sales from temperature products as well as our new thermal imaging offerings.

This growth is partially offset by declines in low margin third party resale programs.

We completed the acquisition of Bay Hart during the fourth quarter.

Bay Hart a $20 million leading German manufacturer of handheld electrical test equipment serving the European electrical market and Bay Hart nicely compliments Fluke's existing European presence.

Also in Europe during the quarter we introduced a new portable multifunctional electrical installation tester, a product used by electricians in both residential and industrial settings.

This new product integrates multiple electrical testing parameters into one ergonomically designed tester, eliminating the need for multiple pieces of test equipment previously required.

Initial interest from customers has been very strong.

The Fluke team continues to make progress as well in 2003 in their low cost region sourcing initiatives.

With a more than doubling of its low cost region spend to 25% compared to a year ago.

Fluke networks delivered mid single digit growth year-over-year.

Excuse me, Fluke networks delivered mid single digit year-over-year core growth in fourth quarter.

Double digit growth in both copper and fiber testers after two years of decline combined with strength in network analyzers and more than 20% growth in distributed analysis products to deliver this performance.

Fluke networks grew across all major geographies with Europe and China showing the most significant revenue gains during the quarter.

Total orders were up here than 20% in the fourth quarter versus prior year in all geographies and within nearly all-major verticals.

For the year, electronic test platform core sales were down less than 1% with Fluke up slightly and Fluke networks down low single digit.

Operating margins continue to improve as Fluke networks achieved low teens operating margins.

Their highest operating margins ever, in spite of the year-over-year revenue decline.

We view this as an outstanding performance given the difficult technology markets of 2003.

Product identification revenues improved to 66% during the quarter with strong core growth of 11%.

The acquisition of Willett and Accusort contributing 50% and currency gains contributing 5%.

Core growth was fueled by mid single digit increases in our CIJ or Continuous Ink Jet products.

Our increase investment in additional marking technologies including laser, thermal transfer overprint and binary Ray drove more than 25% growth for the quarter and for the year in those product categories.

Several significant wins for the quarter included orders from two fortune 50-consumer product manufacturers providing marking systems for their facilities in US Europe and Asia for both printing and coding applications.

We also received a significant order from the from the United States Postal Service to supply over 1,000 custom designed Continuous Ink Jet postal service printers used to handle larger pieces of flat mail such as express mail envelopes.

As you know we acquired Accusort systems incorporated a leader in stationery scanning and MGM products and services during the fourth quarter and integration activities are on track.

Accusort and Video Jet are combining their efforts to focus on the RFID supply chain and baggage handling opportunities.

New product developments around automated cartoon labeling with RFID tags are underway, a need for many high-volume manufacturers.

For the year, product identification delivered revenue growth of 55%, 5% from core revenue increases, 55% from acquisitions and 5% from foreign currency gains.

Within our niche businesses, aerospace and defense realized mid single digit growth in the quarter resulting from strong military aircraft components shipments while the Commercial Accusort segment in the market remained challenging.

During the quarter we acquired a Wee Coe, a $25 million manufacturer of electronic components for commercial and military aviation markets, providing access to high-end power conversion technologies, which compliment well our R 2's operation.

Power quality core revenues though positive in the quarter continue to lag the segment as a whole.

In our industrial controls group core revenue for fourth quarter grew at a low single digit rate.

Near the end of the quarter, we acquired Neg Allah, and nearly $10 million German manufacturer of sanitary instrumentation, used in both food and beverage and pharmaceutical applications.

This business is being integrated with our existing Anderson instruments business.

Turning to tools and components, revenue for the quarter grew 10%.

Solely as a result of core revenue increases.

High single digit core revenue increases in the hand tool platform and the previously predicted strong year-over-year growth at Jacobs vehicle systems drove the image of the increase.

Revenues for all of 2003 were up marginally for the segment.

Operating margins for the quarter were 13.9% versus 15.5% in the fourth quarter of 2002 before re-structuring reversals.

One-time costs associated with the closure of the Armstrong tools facility in Chicago, first-year costs for craftsman industrials and Lowe's as well as costs associated with the transfer of Jacobs Chuck production to China were the primary contributors to lower fourth quarter margins.

Full year operating margin for 2003 and 2002 were 14.5% and 15.2% respectively.

As mentioned earlier, we do not expect any material carryover of these costs into 2004.

The lower year-over-year margins for the full year in 2003 were due to the same reasons.

The hand tool platform high single digit core revenue increases for the revenue were driven by revenue growth from Sears, our Lowe's and craftsman industrial initiatives to our corporate break-through which in the aggregate represented more than $35 million of revenue in 2003.

High single digit growth at Matco and double digit growth from our Saud, up tool businesses in China.

Sales to Sears during the quarter were up mid single digit.

Sell through increased at a mid single digit rate during the key November-December holiday selling season.

On a full-year basis, platform revenues improved low single digits, a result of the above factors offsetting low single digit declines in consumer tools.

The remainder of the segment revenues improved mid teens, driven primarily by over 50% core growth, at Jacobs reliable systems and was also the prior year third quarter buys in advance of an EPA regulation change.

Full year revenues for the remainder of the segment were down mid single digit a result of core growth at Henesey, being offset by declines at Delta, Jacobs Chuck, Johnson and manufacturing and Jacobs vehicle systems.

On Tuesday, of this week, we closed on the purchase of substantially all of the outstanding shares of Radiometer and look forward to completing this transaction and integrating it into the data Hoche organization.

Our expectation is that Gendex will close within the next two weeks.

Both Radiometer and Gendex will be part of our recently established platform medical technology.

We are very excited about this new platform, which we expect to add $400 million in annualized revenue, and expected to add 14 to 17 cents to earnings per share in 2004.

As we begin 2004, we see a continued strength in many of our businesses as well as in many of the end markets and geographic markets that we serve.

We look forward to continuing the out performance we did during three-plus years through the recession, which began in late 2000 for us.

During that down turn, we increased revenues from under $4 billion annually to what is now with the acquisitions and over $6 billion run rate.

Operating income is increased over 50% and free cash flows have almost doubled during that same period.

During that time we also added two new higher growth strategic platforms, product identification and medical technology.

We also broadened the impact of the Danaher Business System, not only on the factory floor, but also in the back office through our use of transactional process improvement tools and in the sales and marketing organizations through the implementation of our new growth tools.

As we communicated in our December analyst meeting, we believe that the momentum we built throughout 2003 puts us in an excellent position to accelerate our year over year improvements in 2004 for both a top and bottom line perspectives.

Given our recent fourth quarter performance, and double digit order rate that continues into the current year, we are becoming somewhat more optimistic in our expectations for 2004 and while there may be additional opportunity, we intend to maintain a conservative outlook at this time.

Until we have more of the year behind us.

With that said, we expect our 2004 EPS in the first quarter to be in the range of 76 to 81 cents per share, and full year EPS for 2004 to be in the range of $3.85 to $4 per share.

An increase from our December commentary to adjust for the additional accretion of 14 to 17 cents for Radiometer and Gendex and the improved revenue outlook.

With that, I think we are now ready for any questions you may have.

[Operator Instructions] Your first question comes from Stephen Volkmann of Morgan Stanley.

Hi, good morning.

Good morning.

Larry, we talked about some of these extra costs in the tool group that are kind of going go away in '04 but I don't think you mentioned a number.

Is there a way we can kind of get a sense of what was one time in there and what was not?

Well, we normally don't, you know, nail those precisely, Steve, but I think you could say it would be safe to say that our operating margins would have been higher year over year than lower had these not occurred.

OK.

All right.

That's helpful.

And then a little more strategically, I mean, we remained closed on a couple of acquisitions are about to, I guess. 800 million or so, should we look for you to kind of take a step back and integrate these or should we expect you to continue to put cash to work in the near term?

Steve, I don't see that really as an either or situation for us right now.

In fact, Peter Kurstein, the President of Radiometer is here with us in Washington today working on a few things.

So we are very much in the throws of the integration process at Radiometer.

We're, I think, making progress at Gendex as well even though the transaction is not complete.

But as we indicated we will still have a significant cash balance in the eyes of some.

The balance sheet will still be under-levered so we continue to see opportunities.

I think as we look out, I would anticipate that the -- that we will continue to be active and the probability is far higher that we will stay within the zone of the six strategic platforms that we have during the course of 2004 than they are that a seventh strategic platform would be established.

Not that I would rule it out, but that's the way the pipeline looks and where our energies are being focused right now.

Great.

That's helpful.

Thanks.

Thank you, Steve.

Your next question comes from Deane Dray of Goldman Sachs.

Yes, good morning.

I'd like to visit the assumptions that you're using now for '04, and just the first question is the assumed acquisition, the assumed accretion from the acquisitions 14 to 17 cents.

That does not include cost synergies is that correct?

Those are the numbers that we have talked about previously.

Obviously, the businesses coming in don't necessarily have a lot of operating synergies per se (ph), but I think we get DBS put into the businesses as we get the corporate procurement programs laid in, I'm sure we're going to find additional opportunities, but the 14 to 17 cent number that we talked about previously that we're reiterating today I think the numbers that we're comfortable with at this point.

OK.

And then your comments regarding the 3.85 to $4 you said in light of the improved revenue outlook.

And in December analyst meeting you were using a 2% base business growth outlook.

What assumption are you using now having exited at a much higher rate in the fourth quarter?

Deane, I think that if you go back to the December numbers, you add to that the 14 to 17 cents that we have talked about with respect to the acquisitions.

You don't get to the 3.85 to $4 range that we're talking about today so obviously we are providing an uptick in the guidance without trying to calibrate it finely, I would share with you that we're obviously thinking that revenue will be better this year in large part of the start that we're having than the 2% we talked about in December.

I think that as we look at what we have the best visibility on here in the first quarter, we will do we'll do well better than that 2% we talked about in December.

And I suspect we'll probably be closer to the 6% number that we put forth in the fourth quarter than that 2% we talked about for 2004.

We're off to a to a very strong start.

I'm very encouraged by that, but again I think we want to maintain that conservative posture which has served us well.

But rest assured we're out there working it hard every day.

Good.

And then last question, related to the fourth quarter 6% organic growth rate, if you look across the platforms, did you benefit in any way of what might be characterized as flush spending by any customers that were just sort of completing or filling out a budget and use it or lose it or was it more of what might be a sustained improvement broad based economy?

Deane, excellent question.

Let me share a couple of data points.

There were a number of businesses that clearly saw year-end buys occur.

I don't think we would be disingenuous to suggest we did not see that.

We didn't see it everywhere; it wasn't what drove the 6% number versus the flattish number we put up for nine months.

But we saw that, but frankly that to me was a very encouraging sign because we had not seen that in many years.

So to see that, we saw that at F-net and at Gilbarco and some of the other businesses that suggested to me that there is that broad-based confidence within the business community.

I think almost more importantly, Deane, is that when you see that that tends to suggest you're going to come out of the following quarter the following year slowly?

And what we have seen in January so far would suggest anything but that.

We have come out of the blocks fast, and I think that in combination with what we saw in year end I think helps us increase our optimism about the environment.

That we're going to be selling into this year.

Thank you.

Thanks, Deane.

Your next question comes from Jim Lucas of Janney Montgomery.

Thanks, good morning, guys.

First question, Larry, just wanted to ask regarding a word you used in your opening remarks.

You talk about maintaining an appropriate acquisition program.

Could you expand on that a little bit more?

Yeah.

I rather I guess define the word appropriate as opposed to the word is that I think what we're trying to express there is that we're still going to be very much in this game.

Again, as we talked about a moment ago, we have a number of opportunities that we're excited about to augment the existing platforms.

Clearly, the cash position in the balance sheet would support activity in this regard, and I hope that we have a -- an active year in 2004.

But again, we never forecast what we'll do but we still see opportunities despite where some of the public evaluations are these days.

OK.

Within Gilbarco Veeder-Root clearly the customer are beginning to open their purse strings a lot more.

Could you talk about some of the further opportunities in both Europe, the US and also in Europe in particular?

Sure.

I would say that we are probably further ahead in the US, Jim, than we are in Europe or Asia in putting together the integrated offering and having that be meaningful to the customer.

So when we talk about some of these wins, with a Wal-Mart, with some of the toe kind distributors, Exxon mobile and the like, those are really US-based.

We certainly had some good opportunities in Europe.

Shell, for example, a key customer of ours over there, but we're not yet putting the package together in a way that is going to maximize our competitiveness over there.

There are some new products coming out later this year, which will help in that regard.

But I think we know what we need to do.

Just we need the time to get it done.

OK.

Thanks.

Thanks, Jim.

Your next question is from Nicole Parent of Banc of America.

Good morning, guys.

Good morning, Nicole.

I guess I was hoping for a little bit more clarification, you alluded to the potential impact that, you know, the higher international sales could have on the tax rate once it's fully consolidate with Radiometer.

Is that -- is that exclusive of the 14 to 17 cents of accretion that you're modeling in or inclusive?

We haven't -- we haven't brought in the -- any potential reduced tax rates into that accretion assumption.

That assumption would be at the -- you know, the overall corporate tax rate being applied to the pre-tax.

So if there is an adjustment to the overall tax rate for the company attributable to that, that's not already put into the 14 to 17.

OK, great.

Then I guess as a followup to the tools question, and I'm not sure, Pat, if I heard you correctly.

Could you clarify did you say year-over-year X the one timers margins would have been up versus a year ago or just higher than what they came in the quarter?

Above the prior year.

OK.

Great.

And I guess, Larry, just to also follow up on Deane's question.

I just want to confirm I heard correctly that you said 6% organic revenue in Q1?

I didn't say that, Nicole.

What I tried to say that we're off to a strong start.

I think that we are for the full year acknowledging we'll do better than the 2% that we talked about in December.

If you were to look at first quarter, our aim we get the best visibility, the number's probably closer to the 6% that we registered in the fourth quarter of last year than the 2% we talked about in December.

OK.

Great.

And then just one last question on Jake Brake.

Given where the class A truck builds have been I guess through 2003, December was pretty good as you look at kind of what your expectations are for FY 04 what do you think for that business, just particularly since it's one on the higher margin business in the total platform?

You are right.

I think that we're looking at probably a 225-build rate this year.

Which would be obviously a favorable comparison of the prior year.

Maybe a little conservative than some the estimates that are out there.

But while it is one of our better businesses clearly in what segment, it is a smaller business for us.

And as we look into '04 we are undergoing some product transitions with customers as we go to a more integrated architecture and that creates some price pressure on the business.

So I don't think we're going to see that business explode positively, but, again, a terrific business but a smaller -- an increasingly smaller part of the pie.

Culp thanks.

Great quarter.

Thank you.

Nicole.

Your next question is coming from John Inch of Merrill Lynch.

Well, thank you.

Good morning.

Just trying to gauge a little degree to which you're being conservative or cautious, Larry.

It looks like your guidance range including the acquisitions went up 5 to 8 cents but, I mean if you do the 6% organic top line it's an extra 200 million of revenue which even if you keep your 16% OP margins which suggest a low variable cost at conversion it you know - it should be around 15 cents versus 5 to 8.

So are you guys assuming that future revenues prospectively come in at lower profitability than say based on mix or anything else?

Well.

I think that certainly, John, there will be challenges to maximize profitability in a robust economy.

And I think all of us are seeing some of the early effect in the steel commodity, for example.

But I don't think we're trying to signal anything in that regard.

We're going to work hard to make sure that every incremental dollar of revenue yields as much profit as it can.

Some of that will fall through.

Some of that we'll reinvest in the business.

But again, I don't think that we're trying to signal a 6% full-year 2004 organic growth number at there point in time.

I think all we want to acknowledge is that we exited strongly.

We entered this year with momentum, and that 2% that we talked about in December might by our own admission at this point be a tad conservative.

But still is January.

The comps are obviously easy here in the first quarter given the Iraq impact from a year ago.

And we're just going to take it --we're going to take it slowly.

That's fair.

Larry, are you as part of your expectations for conversion net income in your free cash for this year expecting working capital to be a use or source of cash?

And, you know, within kind of what range?

Well, I think if we get -- we get the growth obviously, we will -- we'll have some pressure on receivables.

But we would be working hard to have a contribution, albeit presumably a far more modest one than it has been.

Then lastly, what were your China sales for the year and, you know, what would you expect those sales to be in 2004 of collectively for Danaher?

Our China sales all up came in closer to $250 million for 2003, a very strong double-digit increase, as you know the business investment increases over there probably a good 5 to 8 basis points above the published EDP numbers.

I suspect -- because I talk to people that there will be de-sale in China this year.

But the focus will clearly be on auto and residential real estate.

I don't know how much of that will bleed over into our businesses, so we're not expecting to have another growth rate like we did this year.

It probably will be tempered a bit, but again, it will be the strongest, most rapidly growing market geographically speaking that we serve in 2004.

Your profitability of these, are they below corporate or above?

I would say they're on balance, around the average.

Excellent question.

We are not subsidizing a China business in order to take the exceptionally long view.

We're of the mind that those businesses ought to earn their keep.

And they do.

And the profits would include the export business.

There's not strictly based on what we're actually selling in China, but that would include the export business.

Thanks, guys.

Thanks, John.

Your next question is from Matt Summerville of McDonald Investments.

Good morning.

Couple of questions.

First, Larry.

Can you give us what the run rate of the operating margins in your motion business was at the end of the year and given that you're seeing what sounds like a pretty marked pickup in some of your higher tech market, where you see margins in that business evolving over the next 12 months?

Sure, Matt, the motion team continues to make headway with respect to their operating ratios.

We exited as you indicated with some nice revenue momentum.

Six quarters in a row now.

The operating ratio is still in the low teens but moving along.

And I think they still have --they still have room to go.

With respect to some of the other platforms, clearly we have very healthy margins when you look at environmental.

You look at product I.D., now clocking close to 20% with Willett, but not of course Accusort.

Testing measurement right in that same zone.

I mean, clearly those businesses have very high contribution margins.

But again I think that we are not anticipating -- you shouldn't expect the incremental sales dollars to fall through at the variable margins because we want to make sure that we are continuing to invest in R&D, through our international selling organizations for example is aggressively as we can, while still yielding good flow-through on the revenue growth.

What - were your R&D investment be in '04 versus '03?

We'll be -- I think we'll a little over 4% of sales.

And where does that compare with '03, Larry?

We will be -- give me a second, Matt, I will pull that.

That will be -- that will be up I think 10% or 11%.

And are your Capex plans next year still about 100 million?

A little over.

OK.

And then, you know, you have an interesting point in terms of the assumptions on the variable margin on the next dollar of revenue.

You know, for every point of core growth that you get in 2004 what do you think the fall through is on an EPS basis?

Well, I don't think we would go any further than what we talked about in December.

Where we talked about 2% of growth this year yielding $100 million of revenue and in turn approximately 13 cents.

That was an assumption that we used in the build-up that you recall from the meeting in New York.

But I think as we move forward, I would not use that as an extreme calibration with each uptick in the business.

I would use that

Then lastly you talk about Radiometer and Gendex what your key priorities are for 2004 from an integration standpoint and what sort of growth initiatives that you see on the table there?

Well, we haven't gone through the strategic plan reviews, Matt so it's a bit premature for me to talk about that publicly.

But clearly, the priorities are here in the short term to get both businesses oriented to DBS.

I would say that they have both been embracing DBS quite actively.

I think both businesses share a desire to step up their new product development, both their investment levels and the efficiency and effectiveness of what they do in that regard.

I think we saw in the course of due diligence some clear areas where we have real opportunity that we should exploit.

That work will clearly be the top of the agenda.

There are some other things, but perhaps I'll hold that question until we get through the 100 days flat plan reviews that we'll do with both businesses here in over the coming weeks.

Great.

Thanks a lot, Larry.

Thank you, Matt.

Your next question comes from Ajit Pai of Thomas Weisel.

Good morning gentlemen

Good morning.

The first question is about looking at the electronic desk motion and product platform, when you talked of it the auto growth entering 2004 being in the double digit are these segments above that, you know, higher than for the company?

No, I would not say that they're particularly out of line.

OK.

On the within electronic desk are you seeing an improvement of spending at the end of the enterprise, as and looking at optical versus copper and looking at industrial versus the others on the Fluke side, but within the enterprise, are you seeing an improvement in spending?

The vast majority, 85% plus the fluke revenue base come from the enterprise customer, directly or indirectly.

And we clearly saw real strength with the enterprise customer at year-end.

And that business has continued to get off to a good start here in 2004.

So we're hopeful that continues.

And you mentioned RFID.

Can you give us more color on the auto I.D. you mentioned earlier?

Again, Accusort really helps us in the RFID arena given their experience both in terms of scanning and integration of tags and readers for primarily baggage handling applications.

The programs that Video Jet and Accusort will be tackling together are immediately early stage, but I think the access that Video Jet has to some of the commercial and industrial customers in addition to the product and integration capabilities that Accusort provides I think offers up some real optimism with respect to what we can do outside of the baggage handling expertise that we have today.

I would also mention when it comes to RFID that there are two that I would call mature applications of RFID out there today.

One being the automated toll collection market, the other being the basically the credit card or the transaction processing at the --at the gasoline dispenser.

Gilbarco obviously a key technology provider in and around the speed-pass type application, so we have some experience there in a real-live application, which we think will be added to the overall effort.

And one last question which is that, you know, with within your overall business that you talked about entering the year over double-digit auto growth and than you mentioned that you expect to be perhaps towards the higher end of that 2 to 6% core growth, you know, rather than the lower-end that you talked about in December.

At what point do you expect a deceleration in autos to take place just internally when you thinking about things going forward?

Well, I think the momentum that we have right now what we're hearing out in the market would suggest that I don't think that too many people are drawing a line on the counter saying this is when things begin to decelerate.

There's a lot of energy out there right now and I think sometimes the psychology is such that tends to feed on itself.

So I don't think we are necessarily looking with great clarity at when this current momentum dissipates.

OK.

Thank you so much.

You bet.

Thank you.

Your next question is from Martin Singe (ph) of Newburger Barmen.

History of Larry.

I guess you -- you spoke a little bit about starting to see materials cost pressures.

Could you be a little bit more specific about where it is and which business units might be affected by it and then I have another question?

Sure, Martin.

All I was referencing there was that we're certainly beginning to hear and see some of the rumblings in the steel commodity category of the platform business is where that is most relevant.

There's clearly within the hand tools business.

OK.

Then my second question is if you sort of look at your -- your revised guidance, if you assume that -- that core -- that you get a 6% core growth kind of number in first quarter that your revised guidance sort of projects out to 2% for the remainder of the year.

Is that kind of how you see the year?

I think the -- what we're trying to express today, Martin, is that we're not necessarily I think ready to declare the second to the fourth quarters of '04 to be up anywhere close to the rate that we saw in the fourth of last year or that we're enjoying here in January.

But that we are acknowledging that things appear to be getting better than they were back at the end of last year.

So that's not a leap that I think we're ready to make just yet, but obviously we're quite pleased to see the momentum that we have right now.

OK.

And I guess lastly, you alluded to a -- in your December presentation that a 30% incremental margin on 2% of core growth and then today you said, well, as we move into '04 and incremental and maybe core growth gets fast, you start running into -- into additional costs that might lower incremental margins.

Would some of that be discretionary investments or maybe perhaps accelerated production moves?

Martin, you're exactly right.

I think that it has been a long time since we have had those sorts of investment opportunities, both in terms of growth and in enhancing our cost structure.

Despite the tremendous head count and facility rationalizations that we have made over the last three years, there are still costs that can come out of this organization.

And I'd like to think that we're going to be in a mode here where we can take those actions.

In addition, to doubling down around both the tactical growth opportunities that we have and the larger corporate break through that we talked about in December.

So all I think we're trying to communicate is that while I understand people have models to maintain, I think we want to make sure that we maintain as much flexibility as we can muster to do the right things to make the right investments for the long term health of this business.

Doesn't mean that we're not going to be looking for every variable margin dollar we can if sales grow, but no one should expect that to all fall to the bottom line.

We have investments to make.

None of it is -- it's catch-up, mind you.

I think when we can invest it at greater rates that only help --that only serves our long-term objectives.

OK.

I guess I'm not going to get any sort of an equation on this, so I'll cede the floor.

Thanks.

Thank you, Martin.

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

I will now turn the call back over to Andy Wilson for any closing remarks.

Thanks, Operator.

As a remainder the replay number for this call is 706-645-9291, I.D. code 497-1622.

Also, Pat and I will be available later today for anyone who might have additional questions or would like to follow up on any items.

Thank you.