Danaher Corp (DHR) 2004 Q2 法說會逐字稿

Good morning, my name is Miles and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Danaher Corporation second quarter 2004 earnings conference call.

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

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

If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.

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

Thank you.

I would now like to turn the call over to Mr. Andy Wilson, Vice President of Investor Relations.

Sir, you may begin your conference.

Good morning, everyone and thanks for joining us today.

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

I'd like to note that our earnings release and summary financial financials are available on our Web site as well as the 10-Q for this quarter under the heading, "Investor Information".

Our Web site address is www.Danaher.com.

Additionally, access to a Web cast presentation supplementing today's call can be found under the same heading, "Investor News".

This call will be replayed through Monday, July 26th, and the audio portion will be archived on our Web site later today and will remain archived until our next quarterly call.

The replay number is 706-645-9291, with the confirmation code of 8676766.

I'll repeat this information at the end of the call for late arrivals.

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 risks and uncertainties.

These include risks and uncertainties related to customer and supplier relationships and 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's possible that actual results might differ from these predictions that we 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 Web site, www.Danaher.com under the section, "Investor News".

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

Thanks, Andy.

Good morning, everyone.

We were very pleased to report this morning that our second quarter earnings per share were 56 cents, representing another record second quarter for Danaher, and a 44% increase over last year's second quarter earnings per share of 39 cents.

Revenues for the quarter increased 25% to a record $1.6 billion.

Revenues from existing businesses also described as core revenues, grew 10% from a year ago.

Acquisitions contributed an 11, excuse me, an increase of 13%, and positive currency effects contributed an increase of 2% to the quarter.

Year-to-date revenues increased 27% to a record $3.2 billion.

Revenues from existing businesses grew 9%, acquisitions contributed 13%, a positive currency impact contributed 3%.

The impact from three additional days in the first quarter of 2004 gave us approximately 2%.

Gross margins for the second quarter improved from 40.4% in 2003 to 42.3%.

Leverage from higher revenues, ongoing cost reductions in our existing businesses, including our low cost region sourcing and production initiatives, as well as higher gross margins in our recently-acquired businesses, primarily Radiometer, drove the improvement.

Gross margins for the first six months improved 180 basis points to 41.6%, due primarily to these same factors.

Selling, general, and administrative expenses for the second quarter were 25.6% of sales, versus 24.9% last year.

Year-to-date, SG&A expenses have increased 100 basis points over the same period last year to 26%.

The year-over-year increase was due to higher cost SG&A structures and our recently acquired businesses, again primarily Radiometer.

The currency effects on our European operations, which have somewhat higher cost SG&A structures than our U.S. operations, as well as continued additional investments in our strategic growth initiatives which I will discuss in more detail in a moment.

Operating profit for the quarter was $272 million, a 35% increase over 2003, and $497 million for the first six months of the year, also a 35% increase over the same period last year.

Operating margins for the second quarter improved 130 basis points to 16.8%, versus the second quarter of 2003, driven primarily by leverage from incremental core revenues and cost reduction activities, mitigated somewhat by the higher cost structures of our 2003 and 2004 acquisitions.

For the six months ending July 2, 2004, operating margins improved to 15.7%, from 14.8% last year, due primarily to these same factors.

Net interest expense for the second quarter decreased from $13 million last year to $11.9 million this year, primarily due to the completion of the amortization of origination costs related to our zero coupon convertible notes.

This decline was partially offset by declining interest income due to lower cash balances, a result of over $1.3 billion invested in acquisitions this year.

As expected, our effective income tax rate for the quarter was 30%, versus 33.5% in the second quarter of 2003, reflecting the growing profitability, excuse me, the growing percentage of profitability generated by our international operations.

With the recent addition of KaVo, and its significant non-U.S. operations, our effective income tax rate is expected to further decline.

The analysis of the impact on our tax rate of KaVo, combined with several organizational realignments related to the integration of KaVo, and the ongoing integration of Radiometer will be completed during the third quarter.

Net income for the quarter was $182 million, a 46% increase over the second quarter of 2003, and another record second quarter performance.

Net income for the first six months was $327 million, an increase of 43% over the first half of 2003.

Cash flow generation continues to be robust with operating cash flows of $499 million for the first six months of 2004, representing an 11% increase against a very strong 2003.

This performance was achieved despite an increase in working capital requirements, a result of our strong revenue growth.

The second quarter is also traditionally a period of peak inventory build, primarily related to the inventory requirements in the Tool group in preparation for holiday sales.

Notwithstanding the increased inventory levels, our inventory turns at the end of the second quarter improved almost a half turn versus the same period a year ago.

Free cash flow defined as operating cash flow less capital expenditures, was $456 million for the first six months of 2004, an 11% increase over the prior year.

Our free cash to net income conversion ratio for the first half was 139%.

We are on track for another record year of cash flow and we believe our free cash flow will again exceed net income for the 13th year in a row.

Capital expenditures for the first half of 2004 increased 15% to $43 million.

Our current full-year estimate remains in the range of 100 to $125 million.

Even after investing over $1.3 billion in new acquisitions, primarily in medical technology thus far this year, our balance sheet continues to be strong, with a debt to total capital ratio of 24.6%.

And over $300 million in cash and cash equivalents at the end of the quarter.

Moving to the operating segments.

Process/Environmental Controls revenues increased 28.5% for the quarter to $1.3 billion.

Revenues from existing businesses contributed an increase of 9.5%.

Acquisitions contributed an increase of 16.5%, and currency gains provided an increase of 2.5%.

The strong core performance continued to be broad-based and represents a continuation of the momentum we began to see in the fourth quarter of last year.

For the first six months of this year, revenues increased 30%, to $2.5 billion, as revenues from existing businesses grew 8%.

Acquisitions contributed 16%, currency gains yielded 4%, and the extra days in the first quarter drove the remainder of approximately 2%.

Operating margins for the quarter were 17.5%, versus prior year margins of 16.2%, a 130 basis point improvement.

For the first six months of 2004, operating margins increased 80 basis points to 16.4%.

Environmental platform revenues for the quarter improved 11.5%, with core revenues accounting for growth of 9%, and the remainder due to a currency impact of 2.5%.

Both Hach/Lange and Gilbarco Veeder-Root continued to show solid core during the quarter.

Core revenues in our water quality businesses in the quarter grew high single digits, led by continued strength from our Hach Ultra Analytics business which was up low double digits.

Hach/Lange delivered growth in both lab and process products, with Europe outpacing the United States by a slight margin.

Core growth was achieved across all geographies with China setting the pace, up more than 50% versus last year's second quarter.

We continue to take share with our LDO or Luminescence Dissolved Oxygen process and lab products.

The recent expansion of our digital LDO offering creates a complete range of fully integrated digital sensors capable of measuring a number of key water quality parameters including dissolved oxygen, PH and conductivity.

We also introduced Pipeson, our multiparameter in-pipe probe providing real time monitoring for water distribution systems.

A first of its kind, this innovative product allows for extensive water distribution system monitoring and security capability.

Initial interest amongst customers for both of these products has been very strong and will contribute to the more than $20 million in new product revenues Hach/Lange will generate this year.

As I mentioned a moment ago, Hach Ultra Analytics delivered low double digit core growth driven by continued strength in both Asian and U.S. markets.

We've saw improved ultra pure instrumentation demand across all segments particularly in electronics and food and beverage.

Hach Homeland Security technologies secured incremental funding during the quarter from DTRA or the Defense Threat Reduction Agency for our laser particle counting technology development efforts and bio threat detection applications.

Gilbarco Veeder-Root experienced strong, low double digit core growth for the quarter, for the second quarter of 2004 despite tougher year-over-year comparisons.

Solid performances across all major geographies were driven by strength from both our environmental and retail automation products.

We continue to make progress integrating the Veeder-Root and Gilbarco product offerings.

Customers buying the complete suite of products have increased by 25%, and we are on track to deliver more than $10 million of incremental revenues this year as a result.

Just within the last week, we also began certification of our passport point of sale system with Shell, as part of Shell's program to standardize U.S. equipment across its entire U.S. network of branded location.

Sales in China continue to remain brisk, growing more than 20%.

Gilbarco's new mid price point dispenser introduced this year in China has allowed us to expand our offering to a broader array of Chinese customers.

Also during the quarter, we received a significant equipment order from BPCL, a major oil company in India.

This represents a significant win for us in the emerging India market, and importantly, we'll be supplied with product manufacturing in our China facility, a result of Gilbarco Veeder-Root's new global manufacturing strategy.

Danaher motion revenues grew nearly 20% in the quarter with core revenues providing growth of 13%, acquisitions contributing growth of 4%, and a favorable currency impact contributing the balance.

Core growth continues to be very broad-based.

We continue to achieve market share gains from our electric vehicle and Otis initiatives and across the core geographies, primarily in Europe and in Asia.

Year-to-date, orders from the semiconductor market have more than doubled from the same period a year ago, and our flat panel display corporate breakthrough is now expected to generate more than $20 million in revenues this year.

Our new AKM servo motor line continues to perform extremely well gaining rapid acceptance with customers in North America and in Europe.

Our Otis Elevator business remains strong as this corporate breakthrough is expected to generate year-over-year revenue growth with Otis of more than 50%.

And our lift truck initiative, another one of our corporate breakthroughs remains on track with over $100 million of revenue expected in 2004.

In April, we acquired MEI, a leader in multiaccess motion control.

This $15 million Santa Barbara, California-based company strengthens our controls position allowing us to provide our customers one of the most complete motion solutions for the most demanding motion applications.

Our linear business contributed high single digit core growth during the quarter, driven by solid revenue increases across all product groups due to stronger end markets, the integration of sales channels, and increased programs to strengthen the distributor network.

In June, we introduced our Next Generation Profile Rail, an important linear motion product for use in a variety of, and industrial and commercial applications.

This new product provides a higher level of precision, quieter running capability, and an improved cost position.

We've been pleased with the initial reception this product has received from customers and key channel partners.

During the quarter we also acquired [NEF] Automation, a $15 million German manufacturer of precision linear systems.

The acquisition of [NAF] broadens our linear product offering and further expands our geographic presence with linear products in Europe.

Our electronic test platform revenues grew 17% in the quarter, with core revenue contributing growth of 7.5%, acquisitions contributing 6.5%, and a favorable currency impact of 3%.

Core growth for both Fluke and Fluke Networks grew at a similar pace during the quarter.

Fluke's core revenues were driven by strength in the U.S. industrial channel, the European electrical channel, and continued double digit growth in China.

Raytek had another strong quarter driven by sales of the new TI30 thermal imaging product which is finding tremendous success by taking this technology to new users through our innovative designs, ease of use, and lower price points.

Sales of the TI30 and related temperature products continue to accelerate across all key geographies.

Additionally, our new Fluke 1650 series, a portable multifunctional electrical installation tester, a key product design for European standards, captured Business Week's Best Product Designs of the Year 2004 Silver Award in the Medical and Scientific Products category.

Fluke Networks core revenue was driven by cable installation, and distributed enterprise network analysis products.

Order rates remain strong, led by double digit growth in Asia, with the U.S. and Europe posting mid single digit growth during the quarter.

Continued share gains were achieved in both network analysis and copper and fiber instrumentation.

Also during the quarter, we introduced the DTX Cable Analyzer, an advanced high speed hand-held fiber and copper cable tester that provides pinpoint failure information as well as corrective action solutions.

Responding to the voice of the customer, this product provides the fastest, most complete Tier One certification for both copper and fiber infrastructure.

Fluke Networks cutting edge new product development skills continue to win recognition, most recently with the new Inteletone Toner and Probe which received Cabling Business Magazine's Award of Excellence.

This innovative digital product allows network technicians to detect hidden voice, data, and video cables in floors, walls and ceilings providing significant gains in speed, accuracy, and importantly productivity.

In May, we acquired the $35 million Telecom Tools Test Sets and Access Test and Measurement business from Harris Corporation, strengthening Fluke Network's offerings of critical process improvement solutions to our telecom customers.

Product identification revenues improved 36% during the quarter with solid core growth performance of 6%.

Acquisitions, primarily Accu-Sort, contributing growth of 27%, and currency gains contributing 3%.

Core growth continues to be driven by strong equipment sales, primarily continuous ink jet or CIJ equipment, as well as more than 50% growth in both our thermal transfer overprint and laser products during the quarter.

Ahead of some key new product introductions later this year, the Videojet team has been implementing value selling, a key DBS growth tool which has dramatically improved the skills of the Videojet selling organization.

For example, for the first six months of this year, the average Videojet sales person has doubled the rate at which they are converting competitive accounts versus the same period a year ago.

Also in the quarter, Videojet and Accu-Sort teamed to sort an RFID tag verifier in application systems which enables the user to apply and ensure the proper functionality of an RFID tag which also includes bar codes and human readable information.

With this launch, we have become one of the first companies to market a product that meets the needs of major companies required to comply with Wal-mart and Target supplier requirements, as well as certain DOD regulations which become effective in January of next year.

This initiative represents our newest corporate breakthrough and is one of the growth opportunities funded by incremental investments we highlighted last quarter.

Videojet completed two acquisitions in the quarter.

In May, Videojet acquired ALLTEC, a $15 million German manufacturer of laser marking systems.

ALLTEC broadens Videojet's product breadth and provides tremendous application knowledge as well as new product development capability, particularly around laser technology.

In June, Videojet acquired Zipher, an $8 million coating business based in the U.K.

Zipher is a key supplier of advanced Thermal Transfer Overprint or TTO technology.

Prior to the acquisition, Zipher was the primary supplier of TTO equipment to Videojet providing variable marking equipment for a variety of food and pharmaceutical packaging opportunities.

The acquisitions of ALLTEC and Zipher served to accelerate our efforts to become the supplier of choice for all of our customers coding and marking requirements.

Also during the quarter, Videojet opened a new facility in Suzhou, China, producing CIJ printers, valves, and inks for the China domestic market and for export worldwide.

Growth in China remains strong with over 30% core growth in the quarter.

Turning to our newest platform, Medical Technology, we were pleased to see very strong low double digit pro forma revenue growth on a constant currency basis from Radiometer versus the second quarter of 2003.

This strength was broad-based across all geographies, particularly Europe and Japan, with the U.S. improving.

Integration activity is on plan at Radiometer with DBS implementation well under way.

DBS tools are being utilized across the business with early success both on the shop floor and in R&D.

The engagement of DBS, by the Radiometer team, has been outstanding, and we continue to be excited with the progress that we're seeing.

We're also excited to see the KaVo acquisition close in the quarter.

KaVo is a worldwide leader in dental equipment.

Integration plans remain on track here as well, and as we discussed last quarter, KaVo will be minimally accretive in 2004, or about 1 to 2-cents per share.

Because of the timing of this transaction, having closed in recent quarter, no revenues or profits were recorded in the second quarter.

Gendex, a leader in dental imaging equipment, continues to perform well, growing mid single digit for the quarter on a pro forma basis, driven by strong digital equipment sales.

The integration of the Gendex and KaVo businesses is under way.

We have already announced organizational changes as a result of the combination.

We have recently completed our first strategic plan with the Gendex team.

DBS training and implementation is well under way as we continue to improve upon our position in this very attractive segment of the dental equipment market.

Within our niche businesses, core revenues in industrial sensors and controls grew high single digits in the second quarter, driven by strength in industrial, technology, and medical end markets.

Aviation and defense core revenues improved low double digits compared to the second quarter of 2003, after a low single digit decline in the first quarter, primarily due to renewed strength in both commercial and military aircraft orders.

Our power quality business grew at a high single digit rate.

Turning to Tools and Components, revenue for the quarter grew 11%, solely a result of core revenue increases.

Increases across the segment were broad-based with all business lines growing at mid single digit rates or better.

For the first six months of 2004, revenues increased approximately 14.5%, to $634 million, as revenues from existing businesses contributed 13% and the extra days in the first quarter contributed the remainder or approximately 2%.

Operating margins for the quarter were 15.9%, an increase of 60 basis points over the prior year, driven by the impact of incremental revenues and recent cost reduction programs, including the closure of the Armstrong facility and the transfer of Jacob's Chuck reduction to China.

These improvements were offset somewhat by continued increases in steel prices and related surcharges.

Operating margins year-to-date increased 80 basis points to 15%.

Hand tool platform revenues grew 9.5% entirely due to core revenue increases.

This performance was led by our industrial businesses, including Craftsman Industrial, as well as continued strength in China with our SATA brand.

Matco, our high-end mobile distributor brand grew at high single digits due to continued strength in same store sales by our franchisees.

For the first six months of 2004, Matco's core growth was approximately low double digits.

Revenues to Sears were up low double digits for the quarter when compared to the second quarter of last year, primarily a result of an easier comparison resulting from an inventory reduction taken during the second quarter of last year.

Retail sell through year-to-date is up mid single digits despite a flattish Father's Day performance.

During the quarter, Sears acquired 61 K-Mart locations which will be converted to Sears outlets over the coming months.

We expect these additional locations will contribute to our business with Sears beginning in the second half of next year.

The Tool groups recently launched gear plier, was chosen as a winner of Motor Magazine's prestigious Top 20 Tools Award.

This innovative new product will be highlighted in the September issue and will be featured as a tool that helps make the job of professional shop owners and technicians easier.

Our niche businesses in this segment posted mid teens core revenue growth for the quarter, led by Jacob's Vehicle Systems, which grew more than 20% due to the very strong classic truck market.

As we mentioned last quarter, we have now authorized approximately $30 million of previously unbudgeted 2004 spending for growth initiatives and accelerated cost reduction actions to take advantage of current conditions and to provide additional revenue growth and profitability opportunities in 2005 and beyond.

Approximately half of these initiatives are targeting cost reduction opportunities while the other half are funding growth initiatives such as accelerated new product launches at Hach/Lange, Fluke, Fluke Networks, and across a number of businesses as we invest aggressively in China.

With the first six months of 2004 behind us, we are pleased with the strength we see across our businesses.

Given the broad-based nature of the strength, our outlook for the second half of the year is becoming somewhat more positive than we expressed after the first quarter call.

But we are still assuming more modest growth rates than we enjoyed in the first half of the year, particularly given more difficult comparisons.

Furthermore, we are sensitive to the mixed signals from industrial output and consumer spending figures.

Nevertheless we now expect our 2004 earnings per share in the third quarter to be in the range of 54 to 59 cents and full-year earnings per share for 2004 to be in the range of $2.15 to $2.25 which assumes a 30% effective tax rate for the balance of the year.

Thank you, Larry.

That concludes our formal comments.

Miles, we're now ready for questions.

Thank you, sir.

At this time, I would like to remind everyone if you would like to ask a question, please press star, then the number one on your telephone keypad.

Again, if you would like to ask a question at this time, please press star, then the number one on your telephone keypad.

Your first question comes from the line of Jim Lucas with Janney Montgomery Scott.

Thanks, good morning, guys.

Good morning, Jim.

A question, as you look out to the second half, in your closing remarks you talked about the broad-based recovery and clearly there are a lot more positives than negatives.

As you're looking forward, there anything you see standing out, either more positive or potentially a negative in the second half?

Anything that's causing you more worry?

Well, Jim, I think we certainly would agree with you that we see more positives than negatives at this point.

No doubt about it.

I think as we look out into the second half, as we indicated, we would expect on balance for the terrific growth that we've enjoyed here in the first half, to moderate a bit, but that certainly isn't uniform.

I think our motion businesses for example, are well poised for the second half, and perhaps will continue to move at or above the brisk pace they've enjoyed here in the first half.

I don't think we have any particular concerns that stand out clearly.

I think we are mindful of what we're seeing in terms of the consumer confidence numbers, the auto production numbers, interest rates, the concerns about China slowing, all of that which doesn't have a lot of direct impact on us, at least as best we can see.

So I think at this point, given what we know, given what we don't know, we're obviously confident in taking up the third quarter and the second half as we have.

Okay.

And Jim, I might point out that of course the third quarter is the last quarter where we had essentially nominal growth, I mean the third quarter of last year we were essentially flat against 2002, and we did have a 6% growth in the fourth quarter, so it's not necessarily a reflection on momentum, as much as it is just, we're starting to lap into a tougher comp period.

Okay.

And switching gears to the new medical platform, as you've gotten in there, you gave a little bit of color on the integration.

Has there been any, has there been anything out of the ordinary, again, either positive or negative that you've seen there that gives you increased confidence with the new platform?

That you could point to?

Well, I think that we are particularly pleased, I think, Jim, with two things that I'll speak to, and this is by no means a comprehensive list.

I think the first is that both at Radiometer and at KaVo, large, strong, proud European businesses, the open-mindedness, the engagement to find ways to use DBS to improve the business has been well beyond expectations.

So we're already seeing impact across literally every function in that regard which I think bodes very well.

I think we'll get well down field here in the first 12 months for these large European acquisitions.

I'd say the other item that I would speak to is that as we have gotten into the operating issues in the U.S. for both Radiometer and KaVo, I think we have, we've been able to add some value despite perhaps our inexperience in the medical market.

There have been significant changes with the Radiometer business in the U.S. already.

We have a new leader in place.

We have a new CFO in that business as well.

I spent the day, a week and a half ago, at the Americas sales meeting, and the changes there, both in terms of action and tone are extremely positive.

I think that's going to be a real nice step up in performance for us.

At KaVo, the integration with Gendex, while still in its early days, is proceeding very well.

The teams are working well together.

The discussions around how to leverage each other in the market, how to thoughtfully work together from a product perspective to make sure we have a true global organization, things are going very well.

Pat and I will be with that team next week in Biberach, looking forward to another update, but the early progress around the U.S. businesses and the integration with Gendex are things that we're certainly pleased with at this point.

Okay.

Thank you very much.

Thank you, Jim.

Your next question comes from the line of Jeff Sprague with Smith Barney.

Thank you, good morning, everyone.

Good morning, Jeff.

Larry, a few questions around product ID and then maybe a tax question also.

The product ID core growth of 6%, certainly perfectly fine, but seems kind of is so-so relative to the backdrop, you know, in the other businesses.

You talked about some new products coming in the second half.

Is there, you know, is there a little bit of selling delay in the channels around that or is there some other issue to point to there?

No, I think we look at that growth that product ID turned in and we really look at it in comparison to what we think the market's doing rather than what the other businesses are doing and frankly give them very high marks.

There were some larger projects they shipped last year which provided a bit of a tough comp, but if you hadn't asked, I wasn't going to mention it because we need to grow through that.

I think the products that will be introduced later in this year will certainly help us, certainly the integrations of ALLTEC and Zipher will also help, I think, broaden that product line.

So we're pleased with where that business is.

We think we are taking share in that market, and like the other businesses expect the second half will be quite strong.

And could you just elaborate on the RFID tag verifier?

Would that would a quality control device that tag manufacturers would use or is that something that would be used more in a distribution channel by the retailer or wholesaler?

It would really be used Jeff, by the manufacturer, who would be shipping products to a Wal-Mart, for example.

Basically, before that, that crate or that box, what have you, the secondary packaging, goes on to a truck, let's say, they need to put that tag on there.

One of the things we're able to do is make sure that tag is operating.

What we find is that when it comes to the point of installation, if you will, or application, not all tags are working.

So the yield there is not, you don't want to put a dead tag on that box before you ship it to Bentonville.

The other thing that we're able to do is obviously put the bar code information and the human readable information in and around that same tag in addition to doing the quality check, which I think is important, because while there's a lot of hype around RFID right now, we would agree with the sentiment that was in the Times article a week and a half ago relative to bar coding.

Bar codes, RFID and human readable information will be required for a long time to come on packaging.

Great.

And just on the tax, Pat, you had said then, you'll finish the analysis in the third quarter, but do you have an early read of kind of where tax is trending over the next, certainly into the second half and to maybe even out over the next couple of years?

Well, you know, I think the next couple of year question is a tougher one to answer because of, you know, the unpredictability of how our acquisitions may layer in, and this year, we've kind of had an unprecedented level of acquiring non-U.S.-based businesses which is the major contributor to this difference.

We haven't finished the analysis.

I think it's safe to say that we probably would not adjust the rate down unless it was probably at least another full point.

But we're not ready to say that that's a firm number at this point.

So is there any tax embedded in the tweak to the guidance then for the year or -- No, the guidance is at 30, so if there's any change in the tax rate, we would reflect that in the change in our guidance.

Thank you very much.

Thanks, Jeff.

Your next question comes from the line of Deane Dray with Goldman Sachs.

Hi, good morning, everyone.

Good morning, Deane.

I'd like to touch on Danaher's technology exposure, just walk us through where are the different touch points for your businesses, and address where you think you are according to what your customer is saying, you know, in the later part of the cycle, where lead times are, maybe some book to bill color.

So if we talked about Fluke, industrial, going into contract manufacturers, R&D, Fluke Networks, and particularly motion, you know, what you're seeing from your semiconductor cap equipment customers, the flat panel growth and so forth, and then maybe even, you know, a comment on Hach/Lange or Hach Ultra in terms of ultra pure water.

I can send you my whole financial report, Dean.

I'll get that out to you later today.

You can boil it down to what your customers are telling you.

Let me try to give you a little bit of color there, Dean.

Fair question certainly given the headlines of the last couple of weeks.

I think what we're seeing in semi and flat panel of late is very positive.

I think the businesses there that have the most relevant exposure are motion in our sensor and controls businesses.

We did see a slight slowing of the book to bill in June, but we were still north of 10 by a healthy margin so I think we're obviously watching that business carefully but clearly going into the second half with no insignificant amount of backlog.

We are watching the trends and talking to folks like Amat and Lamb fairly frequently, but as you know, sometimes these forecasts aren't necessarily on mark.

But I think we are right now well positioned to do well in those segments in the second half, barring some sort of real downturn that we don't yet see the signs of.

In terms of what we're seeing at FNet, Fluke Networks, selling into the enterprise, as we mentioned in the prepared remarks, Dean, Europe and Asia doing a little bit better than what we're seeing here, but again high single digit growth globally.

We did not see the softness that some of the enterprise software folks did in the quarter, and certainly toward the end of the month, or the end of the quarter rather.

We did see a pickup at the end of the month in June, as we often do at quarter's end, and we're off to a decent star here in July.

Here's another business where we're excited about the new products that we will have in the second half but obviously interested to see how spending plays out.

But what we're hearing is that when the new products come out, there will be folks wanting to put money down on the table.

So we're encouraged by that.

Don't see any dramatic softening in that space yet.

You mentioned the Hach Ultra business.

Those are products that deserve a broad array of technology customers.

I wouldn't call necessarily food and bev or pharma tech but clearly in semi and electronic disk drive manufacturing, we're off to a very strong start.

Again, I think we saw a little bit of weakening in, as the quarter closed, I think the question for that business is whether that is just a pause or whether things will soften a bit.

But I think on balance from what we see, we feel very good about the second half.

And I think that across these businesses, motion, the sensors business, FNet, certainly at Hach as well, they are a part of the increase in the guidance that we're offering up this morning given what we know at this point.

Then for a follow-up there, what about, you commented on book to bill to a degree in lead times.

How about on pricing and especially on some of the new products?

Are you getting price?

Well I think with new products, we always try to value price what we're delivering for the customer and oftentimes we'll be able to maintain or step up price if there is incremental value delivered.

In terms of just pricing generally, Dean, I would still contend that it's still a very challenging pricing environment.

We are having some success getting price, primarily in some of our distribution businesses, like tools and parts and motion, but still, if you look at the positive price impact that we've had so far, it's less than, well less than 1%.

Positive?

Positive, yes.

Okay.

Good.

Thank you.

Thanks, Dean.

Your next question comes from the line of Ann Dougan with Bear Stearns.

Hi, good morning.

Good morning, Ann.

Good morning.

Can you give us some color on commodity prices and import costs and where you're seeing the impact most and what you think the impact might be going forward?

Sure, in the commodity where I think we're seeing the most headwind continues to be steel.

We've talked previously that we thought we had approximately 10 million of operating profit headwind this year as a result of what is happening.

While there was some hope I think in the second quarter given some of the trends that that might abate, that was nothing more than a head fake, it would appear, at this point.

I think our current estimates are probably in the 12 to $14 million range in terms of headwind this year.

But I think on balance, we will still have positive purchasing variances this year, favorable purchasing variances as a result of leveraging the overall Danaher corporate buy more aggressively, and obviously, as we continue to make progress in our low cost region sourcing initiative.

We're currently up over 17% of our buy coming from low cost regions.

So we continue to make progress there.

But clearly, more runway there in the months and years to come.

Okay.

So a little bit more headwind on the steel than you might have anticipated but net-net, not a negative impact on earnings?

That's correct.

The revised, the upward revised guidance includes the cost pressure I just referred to.

Okay.

And just to follow up on China, you know, China construction, private construction has been somewhat stopped or slowed significantly.

Is that, do you anticipate that having any impact on any of your businesses going into the second half, for example, the Otis Elevator business, or your, the products that you ship to them, or any of the tools that you might sell into that sector in China?

Ann, we haven't seen any direct impact from any of the sectors like construction or automotive, certainly real estate and banking as well that have been the targets of much of what the Chinese government has tried to do.

We were certainly pleased to see the still robust GDP and industrial production numbers that came out recently that correspond very well with what we're seeing.

Our exposure to construction is not strong.

Many of the tools that we manufacture and sell in China are more related to automotive repair and industrial applications as opposed to construction.

You tend not to have mechanics hand tools used in the construction of large buildings or homes, for example.

So we don't see that linkage directly but indirectly perhaps there could be impact in time.

But we're monitoring this very closely.

All of our leaders, our entire China management board is very sensitive to this issue, but what they see right now, what they see in the second half continues to be robust demand on the part of their customers in their certain markets.

Okay.

And just a real quick clarification on the inventories.

We look at days on hand and days on hand have gone from 62 days, second quarter in '03, to 76 days, second quarter, '04.

Is that all related to a build-up of inventory, particularly on the hand tool side, maybe Sears purchasing of K-Mart in California and maybe you get some value out of that or is some of that also acquisition integration and just inventories of acquired businesses?

The biggest slug of that Ann, is KaVo's inventory which is in the 100 million plus range and of course we have no sales associated with that.

Okay.

That's the biggest factor, you know, in the quarter.

But on a turns basis, which we look at, you know, kind of in effect forward sales if you will, compared to the inventories we're up, as Larry mentioned, about a half a turn.

Right.

Okay.

So there is nothing unusual there that --

It's Radiometer and primarily KaVo's inventory add that is influencing the balance sheet dollars.

Okay.

So as you start to generate sales from KaVo then that should dissipate?

Yes, but it will go up slightly because KaVo's inventory levels, if you're tackling just days, it will go up just slightly because --

They carry more days, anyway.

They have a very high inventory level relative to the average Danaher company.

Obviously an opportunity going forward but for now, that's where we are.

Okay.

Thank you.

Thanks, Ann.

Ladies and gentlemen, due to the number of people in queue and time constraints, we suggest you limit your questions to one, two at the most.

Please try to limit your questions to one or two.

We'll now go to the line of Don McDougall of Banc of America Securities.

Good morning, gentlemen.

Good morning, Don.

Larry, a question on capital spending for Danaher.

I think it was about 1.5% of sales for the first six months of the year.

Should we think about that as a sustainable level?

Does it tick up from here?

And maybe update us on what your forecast for capital spending is this year.

We think we'll be somewhere in the 100 to $125 million range, Don, this year, which is obviously an uptick from a year ago.

I think because we tend to spend such a modest level of capital in the businesses, because of DBS, we tend not to think of a ratio as the throttle, if you will, on Cap Ex spending.

And I suspect that over time, that we'll bounce around that 1.5 to 2% range if we're spending money, but obviously, we always struggle to hit any of our Cap Ex forecasts to the positive because of the impact that DBS gives us on capital avoidance on the production floor, particularly.

Okay.

And maybe a question for Pat.

On cash tax rates.

Pat, I think your cash tax rate was about 15% in the first six months.

What's your expectation for the full year?

And maybe if you could explain what's pushing cash tax rates up this year relative to last?

We'd expect the cash tax rates for the full year to be in the mid teens, perhaps the high teens.

The biggest change this year, year-to-date, is a tax payment we made in the first quarter for taxes that were due for Radiometer's taxes before we owned the business.

There was a 25-approximately million dollar tax payment for Radiometer that we in effect inherited when we bought the business.

Okay.

I'll slip in one more.

Just the acquisition question, Larry, I've heard from other companies that the environment appears to be a little bit better, activity is picking up, sellers are more willing to talk on price.

Any comments you have there on the environment, and maybe your pipeline as you look into the second half of the year?

I think the environment is good.

But clearly, we continue to see more value in Europe than we do in the states.

Certainly see more reasonable valuation expectations on the private side than we do the public side on balance.

We never forecast deal activity but as you saw here just in the second quarter, in addition to KaVo, we had a number of smaller but certainly important add-ons to the business and I would suspect that we'll continue to be busy in the second half.

What that yields is uncertain.

But clearly, we continue to look for opportunities to put our cash flow to work back into the businesses.

Thanks, guys.

Thank you, Don.

Your next question comes from the line of David Jarue with T. Rowe Price.

Hi, congratulations on a nice quarter.

Thank you, David.

Just two quick questions.

Just, I apologize if you said this and I missed it, but what's the core revenue growth rate you're looking for in the second half of the year that corresponds with the new guidance?

And secondly, can you just talk about the $30 million of incremental spending and to the extent that revenue growth is a little bit better than what you were expecting, does that number, could that number be higher?

I think it was originally sort of 20 million now it's 30 million.

Could that number move up as the year progresses if revenue growth's a little bit stronger?

David, I think if you were to, to answer your first question, the implied core growth I think in our prior guidance for the second half was probably in the 4 to 6% range.

With the new guidance, you can back in, as we have, to say a 5 to 8% core growth range.

So the increase in the earnings that we're talking about for the second half is obviously a function of the increased revenue growth that we anticipate now compared to say 90 days ago.

I would certainly like to add to that $30 million figure that you referenced, as we look to accelerate our investment this year, for the purposes of being stronger in '05, '06 and beyond.

As to how much that will be, where that will be placed, that's an ongoing discussion we have with great frequency here, as we look to make sure we've got all available funds going into our best growth opportunities.

If I can slip another, one little, if you think about $30 million, how much of that was in the first half and sort of how much is sort of in the second half?

It's probably more back-loaded, David.

I'd have to, you know, put pencil to paper, but the bulk of that would be, or the majority of that, I should say, is second half, compared to first half.

David, we didn't really initiate this program until we started to see good visibility in the first quarter on how the numbers were coming in, so just because of the timing of execution of the programs, it is probably, it's more than two-thirds in the back half.

Okay.

Thank you very much.

Thank you, David.

Your next question comes from the line of John Inch with Merrill Lynch.

Thank you, good morning.

Hey, Larry, Pat, if you look at Europe, there are signs that Europe is beginning as a sort of broader end market to improve.

Could you give us a sense of how, if you look at the revenues from your businesses in Europe, what's been happening there certainly in the second quarter?

Has business been picking up?

And what are your expectations?

John, business did pick up in Europe in the second quarter.

We really were frankly quite pleased with what we saw in the second quarter.

Growth on balance in Europe was on balance with what we saw in the U.S., and in a number of businesses was higher.

So we're very pleased with that.

I don't think that was largely a function of the economy, but our European businesses were up double digit.

I think a lot of that was us making a fair bit of our own luck.

Going forward, I think that we would certainly like to see the European economy improve.

I think that is happening in certain places.

But we would anticipate again because of the growth initiatives that have yielded the results so far, that we'll continue to see good performance in Europe, so as Pat mentioned earlier, we do get into some tougher comparisons in the second half, so the absolute growth rates that we report may slow down a bit.

And just to clarify, Larry, I understand the point of you guys taking share, but are your managers in Europe signaling that their end markets are actually beginning to get better?

Yes.

Okay.

And then just as a follow-up, I know it's a niche business, but could you talk a little bit about power quality?

I guess up high single digit.

You know Emerson has made a bid for Marconi's power business, and there seems to be sort of mixed industry signals vis-a-vis telecom customers and what's going on in that business.

I'm just wondering if you could talk a little bit about the end markets and do you ever see a scenario where power quality becomes less of a niche and more of a platform?

A number of questions there, John.

Let me try to hit on them quickly.

I think right now, power is a niche business for us, clearly, as you indicated, there have been several businesses, in fact, that have traded recently.

We took decisions, well-considered decisions to let those trades occur without our involvement.

I think as we look at the strong positions our niche businesses have, we are seeing some benefit from, I think, just general MRO spending by the electrical utilities here in the U.S.

But it really appears to be that.

We're not seeing significant project spending on the part of the utilities here.

Certainly Asia, where we have some exposure, is an area where we have enjoyed some good project wins.

We don't have a lot of exposure directly to the telecom folks.

So we don't see what's really happening there from a PQ perspective.

So on balance, I think it's like the water market, not all power markets are created equally.

We're seeing some good pickup in just general maintenance spending here, but the projects are still, I think closely held in the, amongst the U.S. utilities.

Okay.

Thanks, Larry.

You bet, John.

Thank you.

Your next question comes from the line of Steve Tusa with J.P. Morgan.

Good morning.

Good morning, Steve.

Just a question for you on some comments you made in your Q about the gross margin expected to improve through the rest of the year, you can just expand on that?

I mean it was a pretty good increase year-over-year.

I mean are we talking sequentially here?

And I guess that gets to kind of the seasonality in the earnings as well.

There have been, you know, significant portfolio changes over the last five or so years.

Can we look at the last two years, seasonality, and think about that as kind of typical or is it just too muddled to make that kind of assumption?

A lot of it has to do with, I mean, we will have sales increases and I think there's also, you know, some cost actions we took at the end of last year, you know, eliminating for example, you know, the Armstrong facility in the Tool group that will benefit the relative gross margins year-over-year.

Plus the new acquisitions, Radiometer and KaVo both will enrich the gross margin, from the company average, not necessarily the operating margins but certainly in the gross margin level, it will kick in in the second half and help us relatively speaking more than the first half.

So how does SG&A kind of trend through the rest of the year?

I would assume that as you integrate these things that should come down modestly?

Well, because KaVo is not in at all, it will go up because of, you know, the starting point that we have with KaVo being a mid single digits kind of operating margin business with north of 40% gross margins it will dilute the SG&A rate.

So you'll higher gross margins but also slightly higher SG&A margins.

As a percentage.

As a percentage.

Thanks.

You bet, Steve.

Thank you.

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

Mr. Wilson are there any closing remarks?

There are.

As a reminder the replay number for the call is 706-645-9291, ID code 8676766.

Also, as the norm, Pat and I will be available later today for anyone who we weren't able to address on the call or who might have additional questions.

Thank you for joining us.

Ladies and gentlemen, this does conclude today's Danaher Corporation conference call.

You may now disconnect.