Danaher Corp (DHR) 2004 Q1 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 the Danaher Corporation first quarter 2004 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. It is now my pleasure to introduce to you Mr. Andy Wilson, Vice President of Investor Relations. Sir, you may begin.

Thanks, 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'd like to point out that our earnings release and 10Q are available on our website under the heading Investor News. Our website address is www.danaher.com.

Additionally, access to a webcast presentation supplementing today's call can be found under the same heading, Investor News. Please note that this call will be replayed through April 26th. The replay number is 706-645-9291, ID code 6746257. I'll repeat these numbers 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 this call which involve risk and uncertainties. These include risks and uncertainties related to customer supplier relationships in prices, competition, market demand, litigation and other contingent liabilities.

The integration and operation of acquired businesses and economic, political, governmental, and technological factors affecting the company's operations, markets, products, services and prices among others as set forth in the company's SEC filings. It is 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 measures provided during the call today, the accompanying information required by SEC regulation G relating to those measures can be found on our website, www.danaher.com under the section Investor News. With that, I'd like to turn the call over to Larry.

Thank you, Andy. Good morning, everyone. We are very pleased to report this morning that our first quarter earnings per share were 90 cents, which represented another record first quarter for Danaher, and a 38% increase over last year's first quarter earnings per share of 65 cents. Sales for the first quarter increased 29% to a record $1.54 billion as revenues from existing businesses, also described as core revenues, increased 12.5%.

This included the effect of three additional business days in the quarter, which we estimate contributed about 4.5%, resulting in net core growth of 8%. The additional days are the result of our fiscal quarter ending on April 2nd this year versus March 28th in 2003. It should be noted that these additional days will be offset by fewer days in the fourth quarter of this year, when compared to the fourth quarter of 2003.

Acquisitions contributed 12% and positive currency effects contributed 4.5% to the quarter's increase. Gross margins for the first quarter improved from 39.1% in 2003 to 40.9%. Leverage from higher revenues, as well as higher gross margins in our recently-acquired businesses, primarily Radiometer, contributed to the improvement. Selling general and administrative expenses for the quarter were 26.4% of sales versus 25.2% last year. The year over year increase was due to higher SG&A structures in our recently-acquired businesses, again, primarily Radiometer. The currency effects on our European operations, which have somewhat higher SG&A structures than our U.S. operations as well as additional investments in our strategic growth initiatives.

Operating margins for the quarter improved 60 basis points to 14.6% versus the first quarter of 2003, driven primarily by incremental core revenues, mitigated somewhat by the higher cost structures in our 2003 and 2004 acquisitions. Net interest expense for the first quarter increased from $11.9 million last year to $12.9 million this year, primarily due to the currency impact on our existing, or, excuse me, on our outstanding Euro bonds. Additional debt assumed as part of the Radiometer acquisition and less short-term investment income -- interest income as cash levels declined, primarily a result of the recent acquisitions of Radiometer and Gendex.

As expected, our affected income tax rate for the quarter was 31.5% versus 33.5% in the first quarter of 2003, reflecting the growing percentage and profitability generated by our international operations. With the addition of Radiometer, and a significant non-U.S. operations, and the expected May 1 completion of our European tax reorganization plan, our effective income tax rate beginning in the second quarter of this year is expected to be approximately 30% or lower.

Net income for the quarter was $145.2 million, a 41% increase over the first quarter of 2003, and another record first quarter performance. Cash flow generation continues to be robust, with operating cash flows for the first quarter of 2004 of just under $252 million, a 17.5% increase over a very strong first quarter in 2003. Free cash flow, defined as operating cash flow, less capital expenditures was $232.7 million, a 17% increase over the prior year. Despite the significant increase in revenues, working capital continued to be a source of cash, though core revenue growth has put pressure on inventories and accounts receivable.

Our free cash to net income conversion ratio for the first quarter was 160%. While we do not expect these levels of free cash flow conversion to be sustainable over the balance of 2004, we do believe we are on track for our free cash flow to net income ratio to again exceed 100% for the 13th year in a row. Capital expenditures for the first quarter increased 23% to $19.2 million. Our current full-year estimate is in the range of 100 to $125 million. Even after over $800 million in acquisitions so far this year, our balance sheet continues to remain very strong with a debt to total of capital ratio of 26% and over 600 million in cash and cash equivalents at the end of the quarter.

Moving to the operating segment, Process/Environmental Controls revenues increased 32% for the quarter to $1.23 billion. Revenues from existing businesses contributed 11% to the increase, of which 4.5% is attributable to the extra days. Acquisitions contributed 15%, and currency gains provided 6% of the year over year growth. For the sake of clarity, as I discussed the platform revenues, the core growth rates I use are adjusted to eliminate the growth from the extra days.

The strong core performance was broad-based and represented a continuation of the momentum we saw as we exited last year. Operating margins for the quarter were 15.3% versus prior year margins of 14.9%, a 40 basis point improvement and a 70 basis point improvement for businesses we have owned for over a year. Environmental revenues for the quarter improved 26% as core revenues accounted for 10.5% growth. Acquisitions contributed approximately 4%, and currency gains were positive 7%.

[Kaltenbach & Voigt Gmbh (Ka Vo)] showed strong core growth during the quarter. (Kaltenbach) delivered mid single-digit core growth in the first quarter of 2004 with particular strength in lab products and services in both the U.S. and Europe. The pace of growth in China continued to accelerate as revenues increased by more than 40% over the first quarter of last year. (Kaltenbach) recently signed a worldwide four-year agreement with (Violia Water Systems), under which we will provide a broad array of analytical instrumentation for both drinking and waste water applications. Other highlights in the quarter included our securing of an important strategic contract contract to you supply waste water instrumentation to the new waste water treatment plant in Vienna, Austria.

We continue to enjoy strong customer interest in our new LDO, or (luminescence) dissolved oxygen technology based products, one of our corporate breakthroughs in both lab and process applications, capturing over 5% -- or, excuse me, 5 points a share since its introduction in the second quarter of last year. Significant orders for LDO during the most recent quarter were received both from the city of Philadelphia and the state of Pennsylvania. Hach Ulta Analytics showed mid single-digit core growth driven by strong Asia sales supporting our flat panel panel display customers there, as well as the recovering semiconductor market.

We also introduced our new 21 CFR compliance software, providing traceability and data integrity of electronic records, a key requirement for our pharmaceutical customers. Gilbarco Veeder-Root, a global leader in integrated automation, and environmental systems and services for the retail petroleum industry experienced mid-teens core revenue growths for the first quarter in 2004 due in part to continued strengthening of the industry and a favorable prior year, January and February comparison. As we preceded the Iraq war. Strength in dispensing equipment and environmental services were the primary drivers of the core growth. The conversion of many [inaudible] distributors over the past year drove additional share gains in both the retail and commercial channels. Significant programs such as the diesel fuel dispenser upgrade in [inaudible], in Germany and a major national tank gauging program at Petro, China also contributed to our performance.

Danaher motion revenues grew 15% in the quarter with core revenues growing 5.5% and a favorable currency impact of 5%. Growth was broad-based, both from a geographic as well as from an industry perspective. We saw continued strength in North America in our direct drive product lines and with our semiconductor customers. During the first quarter, semi con-orders tripled from the same period a year ago. We received more than $10 million in new orders from PHOTON Dynamics, in response for a strong demand for flat panel display equipment, and as you know this represents another one of our corporate breakthroughs. We also saw continued strength in the broadly defined medical market, which we serve in motion, across key applications which include electrical surgical instruments, respirators and pumps, driving over 30% year on year growth in that vertical market.

Our linear business experienced solid mid single-digit growth as Thompson, our leading brand in the linear motion market, saw continued benefits from the integration and restructuring activities initiated in late 2002 as we continue to strengthen relationships with our key distributor partners. In Europe, we drove core revenue growth, in both the packaging and electronic assembly segments, with key customer (Tetropack) showing significant strength with sales up nearly 50%.

Our OTIS elevator business, a corporate breakthrough, remains strong driven by demand in China and Europe. Our lift truck business, another one of our corporate breakthrough, now has total annualized orders booked for 2003 in excess of $170 million, and we continue to see real progress there as sales in the first quarter increased by more than 50% over last year. In motion, our low cost region production efforts continue, and we now have over 30% of our total platform production in low-cost regions as we continue to expand our capacity in Mexico, the Czech Republic, India, and China. Electronic test platform revenues grew 24% in the quarter with core revenue growth of 8.5%, acquisition growth of 5%, and a favorable currency impact of 6%. Fluke's core revenue growth -- excuse me, Fluke's core revenues grew mid single-digit, with particular strength in the U.S. industrial channel, the European electrical China and continued double-digit growth in China.

Additionally, we experience a strong performance from (Raytec), where another quarter of double-digit growth was driven in part by sales of our new thermal imaging products, as well as continuing strength in our core temperature products. Double-digit growth in the European electrical channel was led by (CRIGHTON), our new breakthrough product, which is a portable multifunctional electrical installation tester commonly used by electricians in both residential and industrial settings throughout Europe. The combination of Fluke and the recently acquired (BAHA) continues to make inroads in Germany with nearly 250 electrical wholesale outlets now selling into this market with an additional 70 or more outlets, likely to be added this month.

Our DBS growth tools continue to win a claim in the marketplace. During the quarter, Fluke received the GRAINGER CFQ1 award, the highest honor, a vendor can received from GRAINGER for our overall performance, our business there continues to remain strong growing at high single-digits. Also during the first quarter, Fluke received (REXELL's) top merchandising vendor for 2003 award recognizing the sales and marketing support they received from the Fluke organization at both the headquarters and branch level. Fluke network's sales recovery continues to accelerate, as core revenues improve mid teens on a year over year basis in the first quarter. Continued double-digit growth in both copper and fiber testers was augmented with strength and both network analysis, and distributed analysis products.

For the quarter, Fluke network saw a strong recovery across the enterprise segment with business orders up in excess of 20% as a result of an increase in IT spending and share gains. Growth in the U.S. was up high teens, and of particular interest, growth in China was up high single-digit. Two of our newer products, the (Inteltone) toner and probe and the super agent were introduced during the quarter expanding our capabilities at both the high and low end of the product range. We believe in (Inteltone's) breakthrough digital technology sets a new standard for its product category in its ability to locate, isolate, and validate communications cables. At the high end super agent extends [inaudible] offering by providing visibility into application performance issues and the ability to isolate whether network performance, bottlenecks, are due to the application for the network itself.

Also, during the quarter, (Ethnid's) optiview integrated networking analyzer won the best network test product roundup by Info World. This is a product, as you know, that provides troubleshooting capability for numerous enterprise network challenges. Product identification revenues improved 62% during the quarter with solid core growth performance of 10.5%. Acquisitions, primarily Accu-Sort, contributing 41%, (encouraging) gains contributing 6%. Core growth was driven by double-digit equipment sales, primarily continuous inkjet equipment.

We also saw double-digit year over year growth in our new laser thermal transfer overlay and binary array technologies. Importantly during the quarter, we secured a strategic contract with the United States Postal Service to provide equipment and inks for the Postal Service's stamp cancellation project. A contract well in excess of $10 million. This contract represents a six-year commitment to buy video jet equipment and consumables with a potential for USPS to extend the agreement to 10 years. Accu-Sort's long-standing relationship with the USPS was a key factor in our winning this business.

Speaking of Accu-Sort, early results are encouraging. Accu-Sort is a leading provider of stationary scanning equipment, which we acquired in the fourth quarter of last year. In the first quarter, we enjoyed significant wins at target and on separate projects at the USPS, which led to strong double-digit pro forma growth. Our newest corporate breakthrough in RFID is building momentum with several orders received during the quarter for both -- both for manufacturing and baggage handling applications. On balance, we believe the Accu-Sort integration activity is on track.

During the quarter we completed the previously announced acquisitions at Radiometer and Gendex establishing our newest platform medical technology. Radiometer, with sales of approximately $300 million, is a leading supplier of arterial blood gas analysis equipment and consumables based in Copenhagen, Denmark. Gendex, with revenues of more than $100 million, manufactures dental imaging equipment and is located outside of Chicago. Our first strategic plan review is complete at Radiometer, and DBS training is well under way at both Radiometer and Gendex.

Also during the quarter we announced the signing of a definitive agreement to acquire Kaltenbach & Voigt, or Ka Vo, a leading manufacturer of high precision dental equipment based in Biberach, Germany. Cable revenues for 2003 were approximately $450 million. Reality magazine, a key dental equipment information source, recently selected Ka Vo as the number 1 and number 2 reality choice winner for product superiority in both the air and electric hand piece categories.

The acquisition is subject to regulatory approval and customary closing conditions and we currently forecast a closing in the second quarter of 2004. The anticipated combination of Ka Vo and Gendex, both leading brands in their respective product categories, is expected to provide a broad and complementary product offering which will make Danaher a market leader in the dental equipment space worldwide. With the addition of Ka Vo, the medical technology platform will be over $800 million in revenues with mid single-digit historical pro forma growth.

We are excited with the opportunities we see for our newest newest platform as we continue to grow our presence in these attractive markets. Within our niche businesses, the industrial controls group, core revenues grew low single-digits in the first quarter driven by higher and (coder) in relay shipments. Aviation in defense revenues declined low single-digits primarily due to the to the timing of Department of Defense shipments, which are now expected to occur later in the year. During the quarter, we acquired aviation mobility, a $4 million provider of on-board oxygen and medical equipment to domestic air carriers from strategic airport hubs and metropolitan centers across the country. This acquisition will provide additional capability to our existing safety product service offering. Power quality core revenues improved low single-digits; although, utility end markets continue to be sluggish.

Turning to tools and components, revenue for the quarter grew 18%, a result of core revenue increases of 13.5%, with the balance coming from additional days. Core revenue increases across the segment were broad-based with all business lines growing at least at high single-digit rates, with the exception of Joslyn Manufacturing, which despite a very sluggish utility market, still managed to grow over 3% in the quarter.

Operating margins for the quarter were 14.1%, an increase of 120 basis points over the prior year, driven by the impact of incremental revenues and cost reduction programs implemented in 2003. Hand tool platform core revenues grew 12%, this very strong revenue performance was led by our Craftsmen industrial and (Lowe's) programs. Two of our successful corporate breakthroughs as well as a mid teen revenue increase at Matco, our high-end mobile distributor brand, primarily from increase same store sales to our franchisees. Sears revenue was flattish for the quarter when compared to the first quarter of 2003. However retail sale through was up mid single-digit for the same period as Sears adjusted inventories during the quarter.

Just last week, the tool group received the supplier of the year award from Sears for both the full-line mall stores and the direct-to-customer organization, which supports catalog, direct response, and internet sales. This is the highest level of recognition awarded by Sears and is a tribute to the entire tool group team, especially our senior Sears relationship executive, (Tom Celentic). Clearly, an outstanding performance by Tom and the team. In closing, I would like to highlight an additional press release issued today announcing our board's decision to declare a 2 for 1 stock split. This split will be effected in the form of a stock dividend payable on May 20, 2004 to shareholders of record on May 6, 2004. With the first quarter of 2004 behind us, we do see strength across most of our businesses as well as in many of our end markets and served geographies.

Despite recent interest rate concerns, and inflation worries, and certain commodities, our outlook remains positive though guarded. Consistent with this outlook and our DBS process, we have authorized in excess of $20 million of previously unbudgeted 2004 spending for growth initiatives and accelerated cost reduction actions to take advantage of current conditions and provide additional revenue growth and profitability opportunities in 2005 and beyond.

In spite of these added period costs and even with a more conservative growth outlook for the balance of 2004 than experienced in the first quarter, we expect our 2004 earnings per share in the second quarter to be in the range of $1.01 to $1.06, and full-year earnings per share for 2004 to be in the range of $4.15 to $4.30, which includes modest accretion upon the completion of the Ka Vo acquisition and the estimated 30% effective tax rate for the balance of the year .

Thank you, Larry. That concludes our formal comments. Kimberly, we're now ready for comments.

As a reminder, ladies and gentlemen, if you would like to ask a question press star then the number 1 on your telephone keypad. Your first question comes from Jim Lucas of Janney Montgomery Scott.

Thanks, good morning.

Good morning, Jim.

Larry, one of the things that was talked about back in October was the addition of the growth tools in DBS and you alluded to it briefly in your comments. Can you talk about some of the near-term successes and how that's being rolled out through the organization?

I can Jim, and hopefully I just did. I think that two of the key tools that, I think, were inherent in the recognition we recently received at GRAINGER and REXELL, with the Fluke business, came from our cooperative business planning, process or tool, where we -- where we going in and have a very, very focused results oriented cooperative business plan with the, with the distributor, looking to jointly grow the business and grow it profitably.

And you can get into those conversations and then throw, say, another one of our growth tools, which we call value selling, where we focus a very directly, very quantitatively on the value proposition of our products, those -- those two in combination not only help mobilize our organization but help mobilize the distributor and the distributor salespeople to drive the, sort of, growth, I think, we're seeing there and in other places.

Jim, with respect to the way we're rolling out the tools, you're familiar as anybody with the DBS tool kit. We're rolling out these tools, exactly the way we roll out all the other tools. We have these tools documented, we have people who are identified as trainers for the organization, and we'll bring groups of 15 to 30 people from across the organization, as we roll these tools out, and make sure we're building the skills across the organization accordingly.

We have people who are trying to become, if you will, a master black belt in these tools just as do in some of the more manufacturing-oriented tools. So, it's still early days, frankly, Jim, in terms of having these tools have the impact we think they will over time; but we are excited by the traction that we developed last year, and it's certainly building here in '04.

Okay. And, on the acquisition side, you know, clearly the balance sheet has been put to work here and there's still ample opportunities. Could you speak not only to the pipeline, but what you're seeing from the valuation standpoint and the opportunities out there?

Sure. I don't think I would change my tune, Jim. With respect to the pipeline. I would characterize it as full, and we remain quite busy, not only integrating or hoping to close and integrate the acquisitions we just discussed, but also others, which we think will help augment the existing platforms.

I would say, clearly, that the combination of the private equity folks that are out there with a lot of cash, and the number of strategics that are back in the game, again, after a hiatus, makes it a more competitive environment out there. Having said that, part of what we're seeing is a robust, a robust offering of high quality properties, as well. So, some positives and some negatives there. Perhaps if rates do rise during the course of this year, that will put a little bit more pressure on the private equity competition.

But, having said all of that. I think we feel very good about these new businesses that we can talk about, and to use your word, there are ample opportunities still out there, which also excite us.

And a final point on the acquisition side. I guess we could characterize the recent build as more medium sized, and have you close come close to any larger bills and would your preference be to more, to maintain the medium size going forward?

Well, I think that we've always said these sorts of deals are the types of transactions that would represent the vast majority of the acquisitions that we do. With respect to deals we haven't done, I only talk about those as fish that are in the boat, Jim.

Okay.

Thanks for the question.

Thanks.

Your next question comes from Robert Cornell of Lehman Brothers.

Yeah, good morning, everybody.

Good morning, Bob.

Hi, everybody, congratulations on the quarter. A couple of questions, in the guidance, what is the organic growth rate you've built into that number over the balance the year?

I think what we're suggesting with the revised guidance is that our full-year estimate, given that we came in at 8% in the first quarter, is probably, at this point, somewhere in the 5 to 6% range, which implies a 4 to 6% core growth range for the second, third and fourth quarter period.

Okay. Next question, I guess, for you or Pat, I mean, tax rate is coming down, you know, and I think the queue implies that this Ka Vo gets put in place and the tax rate could even drop below 30, I mean, you know, could Pat or Dan or yourself just help us understand, you know, what it is about bringing on these international earnings that causes the tax rate to go down? And how much down if Ka Vo comes in?

I don't have an answer to the second piece of it right at the present time, it depends on how we are able to put it into our structure. And we're still looking at that.

Bob, essentially, the primary ingredient here, which is, I think, you 'll see this in many multi-industry global companies, is that the opportunity to shelter income outside of the U.S. is often times derived by the way that the individual acquisitions and entities are capitalized.

So, many of the businesses can be in country, capitalized, using much higher leverage than would be representative of Danaher overall with the, in effect, the loans into those countries being paid to Danaher affiliates, and in such a way that they would be more, a more sheltered, let's say, income company.

So that's at it's essence what drives opportunity. Now, to make that work, you need income offset. And that's frankly where a lot of the, you know, the real impact that 's come in recently has come from, particularly with a high profit company, like Radiometer, coming into the equation.

Yeah, now Mr. Kerry is out there saying that too many U.S. companies are doing this kind of thing, and he's proposing that the, you know, these sorts of structures would be eliminated. Is that correct or am I headed in the wrong direction?

Well, he's making comments to that extent, but this is all within the context of businesses that are outside of the U.S. This has nothing to do directly with the money and income that we earn in the U.S. These are between foreign, you know, foreign countries that are owned by Danaher. So there's not really a direct implication on the U.S. income tax piece of this.

Yeah. One final question, guys. I mean, what has been the experience with these Fluke gross profit margins since the acquisition?

I mean, you know, when you brought that business, you know, the gross profit margins in the 50% ballpark that Ka Vo and Radiometer are in. And I think you've said that you've made as much headway in the gross profit margin there as you did in Fluke, as you did in getting some of SG&A and other costs down. What has gross profit margin, Fluke, gone up (ex-Fluke) net Fluke networks about?

Well, you're right, Bob, the blended average was north of 50. But that did include Fluke networks, which is, you know, some, closer to 70. But if you you took the two businesses together, kind of, at the same relative weighting, we're probably up about 5 to 700 basis points in the margin. Now, part of that is also not just DBS but also some acquisition opportunities that we've leveraged.

I guess final question, what's the feeling about the April business levels relative to March?

I think, so far so good.

Great quarter, guys.

Thank you, Bob.

You're welcome.

Your next question comes from Jeff Sprague of Smith Barney.

Thanks, good morning, everybody.

Hi.

Just a follow-up on the tax, and then on to some other items. Are you bringing the full-year tax rate down to 30, or is it 30 in the subsequent quarter, so the full year blends to something above 30?

I think, well, for purposes of the guidance we, I just gave, that would imply a 30% rate for the last three quarters. I think we said, it could be less, but that's what's implicit in the forecast.

And just on the cash tax side, you know, any rough guidance there for '04?

It will be higher than '03. Again, it's a little premature to, kind of, know exactly where that's going to end up, but we did, you know, the first quarter we did pay more than last year; and I would expect that will be the case for the balance of the year.

All right. And I was wondering, on Radiometer and Gendex, although they're new to the family, you know, do you have a sense of what their organic growth was on a like-for-like basis, kind of, on their own, and, you know, how that might play out over the balance of this year?

Jeff, we have got more than a sense, you know, we obviously should look at that for even the new acquisitions. Combined, you should assume (Medtech) was in the mid single-digit range on a pro forma core growth basis, again adjusting for currencies.

So, they've continued, I think, to perform at the pace that they clearly performed at during the last several years and are moving at a pace that we would have expected given the pending, in the completed transactions.

The Radiometer growth was, was somewhat higher than Gendex, partly because we're in the, we're transitioning, you know, from the dental supply sales force in lots of parts of the world, so it's had a slightly, which we anticipated would have a slightly dampening short-term effect until we get that fully rationalized .

And Larry, can you elaborate where you're at now on RFID, and just, kind of, you know, it's potentially a big space, a lot of different niches. You know, we've heard a little bit about it in some of your analyst meetings, but could you refresh us on where you stand? And really, where you want to focus going forward?

I can, Jeff. The RFID capability that we picked up at Accu-Sort was, frankly, the foundation for this new corporate breakthrough.

And all we're really suggesting with that designation is that both the Videojet and Accu-Sort teams are coming together, very focused with full funding to pursue our opportunity in that space. I think you're right, it is full of a lot of niches. We have a nice position in the retail market at Gilbarco Veeder-Root with the speed path type RFID readers; but at Accu-Sort, what they have historically done is, basically, manufacture and integrate stationary scanning equipment, scanning primarily for barcodes, but the technology can be used in other applications.

That customer base that they have, whether it's Wal-Mart, whether it's Target, FedEx, USPS, UPS, etc, are all looking at this technology and clearly are looking at vendors who not only can provide the equipment but also the integration capability, and the service support to help them along, along this path. So, we're getting a number of inquiries, have a number of project and product efforts under way, a couple of baggage handling wins, integration project wins in the quarter were, I think, further signs of that momentum.

But, again, I think here, it's still a situation where there's probably more talk than action on balance; but clearly, this is an opportunity within product identification, which initially attracted us to the space broadly defined and certainly Accu-Sort specifically.

Great, thanks a lot.

If I could jump in for a second. We've got a limited amount of time and quite number of people, I think, that want to ask questions. So, if you could limit it to two questions, it would be greatly appreciated. For those that we don't answer, Pat and I, again, will be around the rest of the day to answer those.

Your next question question from Deane Dray of Goldman Sachs.

Yes, good morning, a couple of quick questions, at first to just get clarity on how the quarter progressed in terms of the core growth. You know, did you see acceleration? Was it steady throughout the quarter?

Good morning, Deane. I'll take that. It was a good quarter all the way through.

I think there was a little bit of acceleration in March, as there typically would be with the weather getting a little bit better at the end of the quarter, all of that. But I -- really hard to point to the airpockets in the first quarter. It was just a very, very strong performance around the board.

Okay. And then, with regard to your comments towards the end and regarding the guidance, you talked a bit about there being some additional spending, and did I hear that $20 million number? So where is that going to go and is that part of Cap Ex, is that an incremental?

Well, that's really operating expense. It wouldn't be Cap Ex.

Basically, what we're doing, Deane, is -- is trying to manage our investments, if you will, on a single piece flow, fashion, not of like the way we to manage the factory. And coming out of budgets there were a number of projects which were identified, both from a growth perspective and from a cost reduction perspective that were not funded or not funded as much as we would have liked. We wanted to see how the year played out.

So, on the growth side we've increased the funding available to the sales and marketing teams in China, at Videojet, the Fluke (thermography) effort, stepped up for some additional funding, the (printos), the new inkjet technology at Videojet, which is meeting strong success in the market as well, I got some additional money, and there are a number of facility rationalization opportunities ,which I won't mention by name at this moment, but whose closure we anticipate at our releasing funds to go through that activity.

So, I think, I think a good opportunity for us to continue to reinvest around the growth, both from a sales and earnings perspective, drivers in the business.

So we should see some restructuring charges flow through, would that be as early as --

No, no, this is, we're not going to -- this is not a restructuring charge. This is just operating expense aimed at growth and cost reduction, which we're letting you know, we are putting into the system right now, despite the fact it was not budgeted.

Yeah. I didn't mean to say restructuring charge. I meant, to be flow-through operating results.

I know, but you know how some people might parse that, Deane.

Absolutely, thank you.

Thank you, Deane.

Your next question comes from Wendy Caplan of Wachovia Securities.

Good morning.

Good morning, Wendy.

The raw materials as a percentage of inventories is up to 42% in the quarter from 36 at year end.

Is that simply raw materials cost increases, or is it something else? And since we're talking about raw material costs, can you comment on the costs, how you're handling the pricing, your pricing too, in terms of pass-throughs and what you're seeing, if you're having any issues relative to raw availability?

Let me. Let me take the piece that relates to the balance sheet, Wendy. Actually, it's not a -- I mean, the ratios that you see here, the biggest influencer, frankly, is the addition of Radiometer into the company's balance sheet.

Radiometer has a very high level of finished goods because of their consumables and their demo equipment and so forth, so that has, kind of, an impact, a, kind of, adjusts the, kind of, relative ratios between the categories. That's actually the biggest impact.

Wendy, if I can take the second part of your question. I think the commodity category in which we're seeing the most pronounced pressure, not surprisingly, is in steel. Fortunately for us, steel represents about 5% of our total commodity buy. So, it's not a major driver for us.

Unfortunately, we're not immune to the price spikes that others, I know, are talking about in this space, and what we see at this point is approximately 8 to $10 million of operating profit head wind this year, that we need to find a way to offset, that equates to about a penny a quarter, and that is fully included in the revised guidance that we've shared with you this morning. There are pockets where we are getting the opportunity to offset that with price increases.

To be honest, I don't think we're going to completely offset the cost increase with pricing increases, so we're trying to find ways to offset that elsewhere, whether that's digging deeper in other opportunities, where we do have opportunities, accelerating our low cost region procurement and production activity or finding ways to, perhaps, manage the marketing mix a little differently to get price and ways that don't require a -- an outright price increase.

So, the businesses that are effective, and even those that aren't, are certainly engaged in the counter measures required to make sure that's a non-issue for us at the bottom line this year.

And the availability?

The availability is still good. Lead times are expanding in a number of categories. Pat and I were with the water business last last week, and we saw some evidence just in terms of the, our (Conbond) system where we have lead times in isolated categories stretching out from days, in some cases to weeks.

Thank you.

Thank you, Wendy.

Your next question comes from Matt Summerville of McDonald Investments.

Hi, good morning. Two questions, first Larry, can you talk about the overall trajectory that your're seeing in businesses in China and whether or not you've seen any change there.

I believe, in the last conference call you were a little cautious in terms of whether or not your business there could sustain the growth rates that you've seen the last couple of years, if you could comment on that, and then, I believe China accounted for about 250 to 275 million in revenue, both in country and re-export last year. What sort of number you think is attainable for that business in '04?

Matt, your facts are spot on. I hope when we spoke last on this, I didn't express any concern about our business.

I think the concern I would have about China, simply the macro-economic situation, the government wants to slow down that economy, I would be hard pressed to bet against them. They, obviously, are working hard to do that.

But, as I shared with you during the course of our prepared remarks, every business we have in China had a white-hot first quarter, and even with some dampening, it's hard -- I'm hard pressed to think that we'll do anything other than a strong double-digit growth performance this year in China. The teams are getting incremental investment to build on the momentum.

I think we're helping, in some cases, build markets for our products and share along the way. But, having said all that, I think, the risk factor that I see is just a general slow down at some point out there in the future, as the authorities try to dampen the economic growth they're currently enjoying.

And then secondly, to get back to a question, I think Bob asked, in terms of what you're seeing in April from a demand perspective, are you seeing some sequential slow down from March to April and that, you know, you're talking about a 4 to 6% type of organic growth rate, and if you are seeing some sequential slowing, can you talk about where?

Well, I don't want to get too granular on a week or two of data, particularly the first week or two of a new quarter. But, I would say on balance, Matt, it is still busy out there.

Whether we're talking here in the states, whether we're talking about China, Europe, clearly not moving as briskly as the U.S. is but we're seeing signs of improved demand as well as share gains.

So, I think that clearly we benefited from a lot of our own luck and an easier comp in the first quarter, compared to what we'll see later on this year, but things are quite positive right now.

Great. Thanks a lot, guys.

Thank you, Matt.

Your next question comes from Brian Langenberg of Langenberg and Company.

Hey, guys, just a very quick one. When we take a looked at the SG&A that you've layed out for us so it's pretty clearly that acquisitions from [inaudible] incremental ratio increase, if we think about that extra 50 million, just to know the percentage of sales increase in SG&A. Could you break out for us just about how much that was, the acquisition impact and how much that was, hey, things are going pretty good, let's add some more?

Well, 100 basis points of the changes is Radiometer.

Okay.

That's the biggest, biggest piece.

That's maybe a third of it, roughly.

Maybe a little bit more, Brian.

Part -- in terms of the percentage of change, that's the lion's share of it.

Okay, [inaudible]. So, basically if we assume, about, you know, say, 20, 20 even half of it is Radiometer, it sounds like you guys beat the quarter and even after spending about another $25 million or so to go do good stuff, is that a fair assessment?

I think the Radiometer impact was a little higher?

Oh, it was --

Than what you just suggested. It's probably closer to 3/4 of the bump.

Okay.

And then obviously the -- some of the investments that we were able to make.

Okay. Thank you, very much. All of my other questions are answered.

Thanks, Brian.

Your next question comes from John Inch of Merrill Lynch.

Thanks, good morning. Hey, Europe -- It sounds as if Europe, for you guys, seems to be doing much better than what the macro would suggest and what other companies are talking about. I don't know, Pat, if you have what your European revenues did. Did you see a sequential pickup? Any kind of color in Europe would be helpful.

John, this is Larry.

Larry.

We -- and we've obviously spent a lot of time in Europe, not only with Radiometer and Ka Vo, but also some of the other businesses of (late). I do think that the European economy is improving gradually, though, if you look at some of the macro numbers out of Germany of (late), I think there are people who are concerned about how sustainable that is.

It's hard to parse what we're seeing, in terms of how much of that is market versus share gains in such a short period of time, but we know we have a number of good things going on at Motion, at Videojet, Fluke, Gilbarco, that I do think on balance are areas where we might be enjoying more of the upside than some other folks may be.

But I think it would be fair, John, to say that, you know, Europe, if we looked at Asia, North America , and Europe as the three primary markets, that Europe would still be slowest core growth of the three that we experienced in the quarter.

That's fair, then. You know, my follow-up question is on the tools business. I think, Larry, you mentioned very high growth rates at Matco.

I guess, the question is, is -- are you concerned at all that perhaps there has been some kind of a pull forward in any or all of the businesses within tools in this quarter for whatever reason, and as tools, as you think of, kind of, core growth slowing from A to your guidance, is tools one of those areas where you would expect to see some slower growth in the coming quarters?

I think that's a fair observation, John. We certainly look at sell through as best we can, let alone sell in. And, I think that what we're seeing in the industrial channels is, is very healthy sales out, but not nearly at the rate that we're enjoying.

You look at Matco, favorable comp or not, being in that mid teens range is pretty, pretty darn impressive to my eyes. Can they sustain it? We got a heck of a team, a lot of momentum, but I don't think you necessarily plan on that when we talk publicly, but we sure, we sure work it hard.

Maybe another way to ask it, Larry, is get a sense of the industry also whether it's Matco or some of the other businesses improve by the kinds of percentage gains that you guys saw.

I'm sorry, John, could you rephrase that?

Yeah, you know, Matco. I thought Matco was, kind of, a single-digit type of grower. And if you look at Matco or any of the other tools business, maybe the way to look at your growth rate is in the context of the industry, do you have a sense of the industry also grew or industries for tools also grew at the kinds of healthy gains that Danaher saw this quarter?

Well, I don't know that we've seen the, kind of, most direct competitor data that would, kind of, match up to Matco, which of course would be snap on, and the (Stanley's MAC) business. But, I think, certainly some of the power tool companies and others have shown a pretty, pretty healthy growth rates as well.

Now, we're not a direct match against power tools. Power tools by and large is somewhat more cyclical than mechanics tools. But, I think the market, I think, has been fairly robust. The industrial markets have not been not been quite this strong generally, but they have been reporting, you know, high single-digit type growth, so it's not abnormal. I think the couple, you have a couple phenomena here too as well. You've got, you know, the Sears, a lot of the Sears, the Craftsmen program really didn't kickoff in earnest until the second quarter of last year, so we, you know, we have quite a bit of year over year growth from that.

But then offsetting that, going out for the balance of the year, we do expect certainly higher growth, let's say sale-out on Sears than we experienced in the first quarter. So, I think we'll have, you know, maybe, you know, obviously not expecting, you know, kind of mid teens growth overall, you know, for the balance of the year, we want to be more conservative than that, but we will have some less from Sears given their sell-through being higher than our sell-in in the first quarter.

That's fair. Thanks, guys.

You bet, John.

Your next question comes from Ajit Pai of Thomas Weisel. Good morning, gentlemen, and congratulations on a great quarter.

Thank you.

Two quick questions, the first is, you know, just looking at your businesses in terms of, you know, geography, (have your business mixes) changed because they made a couple of acquisitions, but could you give us some color as to what percentage of your businesses came from the three major geographies and, you know, at the end of the year, where do you expect that to be?

Well, the U.S. market clearly represents a, still the largest major geographic market for us. We have, we have approximately 60% of our revenues here. The bulk of our non-U.S. revenues are still in Europe. I think that mix, obviously, will -- will shift more heavily toward, toward Europe.

Radiometer has a very strong position in Asia, particularly in Japan. Ka Vo has opportunities in Asia, that we think are not fully realized, but largely a European business, as we indicated on the call, when we announced the transaction.

But you believe that your mix in terms of costs would shift exactly the way that your mix in revenues will?

That's a good question, Ajit, I think that certainly in the case of Radiometer, where we have the bulk of the manufacturing and the headquarters activity in Denmark, we'll have a strong, stronger shift there than we would, perhaps, in some of the other businesses that are more geographically dispersed.

Okay, the second question is about your tools business. Just looking at the year over year growth as well as looking at the year over year margin improvement on the operating margin line.

Given like, you know, I think the commodity price increases are probably going to impact this business a little bit more than the, you know, the processing environment business. How sustainable do you think [inaudible] levels of growth and margin improvement are through the year?

I think the guidance that we've just shared does suggest that we're going to see a tempering of the growth in tools. I just think it's not likely to think that that segment continues to move at the pace that we enjoyed in the first quarter.

Having said that, we think we're going to have a very respectable and satisfactory year of growth in the business. The guidance that we've shared as well, which obviously will require a strong earnings growth from the tools segment takes into account fully our current view about the head wind we're facing, particularly in steel. So, I think we feel good about the fact we're going to grow that business and grow its profitability despite the fact that clearly we are seeing that pressure in steel.

And what kinds of contracts do you have on steel? Is it one year, two-year, what's the duration of the contracts, and are any of them going to be coming up for renegotiation any time soon?

Well, they're, I mean -- we're seeing pressure in real time, whether it be a price increase or surcharges. So while we, we have contracts of varying terms, we are seeing the pressure right now and are having to deal with it. As I indicated, we think it's an 8 to $10 million challenge for us this year at this point.

Okay, thank you so much.

Ladies and gentlemen. We have reached the end of the a alloted time for questions and answers. Gentlemen, are there any closing remarks?

Yes, Kimberly, as a reminder the replay number for this call is 706-645-9291, ID code 6746257. As you know, Pat and I will be available later in the day for anyone who might have additional questions or like to follow up on other items. Thank you.

This concludes your conference call for today. You may now disconnect