Danaher Corp (DHR) 2003 Q2 法說會逐字稿

Good morning. My name is Kimberly, and I will be your conference facilitator today. At this time I'd like to welcome everyone to Danaher Corporation's 2003 Earnings 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 '*' then the number 1 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, VP of Investor Relations. Sir, you may proceed.

Good morning, everyone. And thanks for joining us today. With me is Larry Culp, our President and CEO, and Pat Allender, our EVP and CFO. I'd like to note that our earnings release and summary financials are available on our Web site, as well as the 10Q for this quarter under the heading Investor Information. Our Web site is www.danaher.com.

This call will be replayed through Monday, July 21st and will be archived on our Web site later today and remain archived until our quarterly. The replay number is 706-645-9291 and the confirmation code is 1697761. I'll repeat this information at the end of the call for late arrivals. I'd like to note in order to help you understand the company's direction we'll be making some forward-looking statements during this call. It's possible that our actual results might differ from those predictions that we might make today. Additional information regarding those factors is available in our SEC filings. With respect to any non GAAP financial measures provided during the call today, the accompanying information required by SEC regulation GE relating to those measures can be found on our web site www.danaher.com under the section investor information. With that, I'd like to turn the call over to Larry.

Thanks Andy. Good morning everyone. I am very pleased to report our second quarter earning has improved 21 % and earnings per share increased to 79 cents from last year's second quarter results of 66 cents per share. Revenues were 13 % higher than the same period a year ago, driven by acquisitions of 11 %, positive currency effects of 3.5 %, and a 1.5 % decline in core revenues. Year-to-date sales have increased 16 %, with acquisitions accounting for 13 %. Currency effects of 3.5 %, and core revenue decline of 0.5 %. For the quarter, gross margins improved 160 basis points, to 40.4 %, from 38.8 % due to the continued positive impact from prior year restructuring programs, the effect of cost reduction efforts in both our core business unit and in businesses acquired during the first quarter of 2002. Gross margins for the first six months also improved 160 basis points to 39.8 %.

Selling general and administrative expenses for the quarter were 24.9 % of sales, an increase of 70 basis points from a year ago. Year-to-date SG&A expenses have increased 100 basis points from last year to 25 %. The year-over-year increase is due to continued investments in our growth opportunities, as well as the higher cost structures of newly acquired businesses.

Operating profit for the quarter was $201 million, a 19% increase over 2002, and $368 million for the first six months of the year. A 20% increase in over 2002. Operating margins for the quarter improved 70 basis points to 15.5%. Core operating margins increased more than 100 basis points, with the typical margin dilution from recent acquisitions. The continued benefits from prior restructuring activities and cost reductions in both our newly acquired and core businesses contributed to this improvement. For the six months ended June the 27th, operating margins improved to 14.8% from 14.3% due to the same restructuring and cost containment factors. Interest expense increased from $13.8 million, to $15.3 million in the second quarter. Primarily due to the impact of the Euro/U.S. dollar exchange rate on interest expense related to our Euro bond notes. Interest income was down 8%, $2.3 million in spite of over $350 million of additional invested cash in 2003 due to lower rates on short-term liquid investments.

As we communicated on our first quarter conference call, our cash rate in the second quarter of 2003 was 33.5%. We are currently evaluating our expected effective tax rate for the full year 2003. We expect the effective tax rate to continue to decrease, reflecting increasing earnings from our foreign operations and the effect of restructuring operations in certain foreign jurisdictions. The magnitude of any changes in the effective tax rate is not yet known. Operating cash flow year-to-date remains strong, at $449 million, a 14% improvement over a very strong 2002, with free cash flow, which we define as operating cash flow less capital expenditures of $412 million, or a 13% year-over-year improvement.

Capital expenditures for the quarter increased 44% to $22 million, versus 2002. For the first six months of 2003, capital expenditures increased 33% to $38 million. While likely to continue higher than last year, capital expenditures may fall somewhat below our previously forecasted $100 million spend for this year. The increase in operating cash flow was driven primarily by earnings growth and the timing of payments for certain of the company's benefit programs. These increases were partially offset by a slowing of working capital improvements relating to accounts receivable and inventory compared with 2002. Timing differences such as income tax and interest payments will moderate the cash flow rate in the second half of this year as we saw in 2002. We fully expect our 2003 free cash flow will exceed net income and we continue to be confident that our free cash flow will exceed $600 million. Our balance sheet remains strong with a debt to total capital ratio of 29%, a net debt to total capital ratio of 5.6%, with cash and cash equivalents now over $1 billion.

Moving to our business segments process and environmental controls revenues for the quarter increased more than 20% year-over-year from $844 million to just over $1 billion. Positive currency effects accounted for 5% of the year-over-year improvement, with acquisitions primarily Thompson and Willett, adding 15% to the segment's revenues for the quarter. Core volume was up slightly when compared to 2002. Operating margins for process environmental controls increased 80 basis points to 16.2%, due to the continuing savings from cost reduction initiatives completed last year. Core operating margins before the dilutive impact of acquisitions increased more than 100 basis points. For the first six months of 2003, operating margins increased 50 basis points, to 15.6%. Our environmental platform revenues were up 10% for the quarter.

The 2002 acquisitions as well as the Gasboy acquisition in the first quarter of this year represented approximately 7.5% of the increase. With currency effects contributing approximately 4.5% and core operations declining approximately 2%. Hachlonga (ph) the worldwide leader in water quality and (inaudible) instrumentation experienced a 17% increase in the second quarter driven by acquisition and foreign currency effects with flat core revenue a result of strength in both our lab and process instrumentation businesses, primarily in Europe, offsetting soft demand in our Ultra-Pure markets, largely here in the U.S. Hachlonga's new product pipeline continues to strengthen as we enter the second half of this year.

New introductions in the second quarter included our new Luminescent (ph) dissolves oxygen or LDO censor. A no calibration low maintenance high accuracy censor that measures dissolve oxygen, a key waste water parameter. Its price point ease of installation positions it well in that market. Another highlight from the quarter with the introduction of new controller platform allowing us to consolidate a half dozen legacy controllers onto a common controller with additional features and a lower cost position. Hach's automatic reagent replenishment service here in the U.S. continues to grow at double digit rates. Integration activities within the Ultra-Pure group continued in the quarter and the group was re-branded Hach Ultra Analyics (ph). And that business includes the Orba sphere Pacific scientific instruments, Annatell(ph) and Polyveetron products.

Revenues for our Hachlonga, business in China despite significant challenges caused by SARS grew at high double digit rates during the quarter in a drinking water, waste water. and ultrapure segment due to an expansion of our direct sales force and in turn our broader distribution network. The balance of our environmental platform, Gilbarco Veeder-Root continued to make progress when compared with the double digit Hachlonga's experienced at Gilbarco in the first quarter. As core revenue declined moderated to mid single digits in the second quarter versus a year ago. Orders strengthened in June but were tempered by continued weak demand for retail automation and dispensing equipment by major oil companies.

Gilbarco has been gaining share here in the U.S. by converting former Tokheim customers securing recently 15 of 18 targeted accounts, and we have also been aggressively pursuing the truck stop segment historically a Tokheim strong hold. To date we've signed new supply agreements in that segment with (inaudible) of America flying J Pilot and Love. Also during the quarter, Gilbarco launched a new technology, basically a smart end dispenser valve that delivers consistently high throughput at the nozzle, a key customer requirement particularly amongst high volume retailers. This feature is but one of a sweet of new products resulting from a corporate breakthrough initiative and delivering automation and environmental products and services to our retail petroleum customers, unmatched by any single Gilbarco Veeder-Root competitor.

Turning to our amortization platform, revenues grew 46% from the quarter compared to last year, driven by acquisition growth of 34% due primarily to Thompson industries. And solid core growth of 6%, with the remainder due to currency. Core volume growth has been achieved with particular strength in Europe, due to share gains and continued direct drive growth year in North America. Revenues for our corporate break through in electric lift trucks grew more than 50% during the quarter, versus last year, as the DC to AC conversion continues to gain momentum. Motor production capability was also recently expanded in our WAUR rest facility to address the North American vehicle demand. We continue to expand our relationship with Otis, with the introduction of the 2.5 and five ton Otis Gen2 machines in June both which are expected to be revenue generators for us in the second half of this year. Thompson acquisition integration and restructuring continues on track, with three facility consolidations well under way. Our electronic test platform grew 16 %, due to the acquisition activity that contributed 13 % and a favorable currency effect of approximately 5 %, which offset core volume declines of 2%, arising primarily from the still soft demand for Fluke Network test equipment. Fluke and its core revenues were up slightly as continued growth in China was offset by weak European sales, while sales in the U.S. were flat. Fluke's share in the electrical channel was up mid single digits for the quarter while the channel was down approximately low single digits. Raytek is up more than 20 %, growth that is not included in our core numbers, as a result of new product introductions and strong growth in portable temperature products.

In June, Raytek introduced a new product called Thermoview a line of competitively priced thermo-imaging products and another one of our new corporate breakthroughs. Early market acceptance for that product has been very encouraging. Additionally, growth in China was up mid single digits, a testament to the creative of the Fluke China team in driving business in a period of numerous travel and business restrictions.

Fluke Networks saw double digit subsequently improvement versus the first quarter, although year-over-year results were down mid single digits. We are encouraged by the strong growth in the wireless distributed analysis and hand-held network test product lines driven by product launches such as the Optifiber a new tool specifically designed to allow the user to stay on top of the latest requirements for testing and certifying single-mode fiber networks. Optifiber in fact recently received the product of the year award from Fiber Optic News. And while down we continue to believe we are outperforming the markets that we serve at Fluke Networks.

Turning to profit identification. Revenues grew 54 %, driven by the Willett acquisition of 38 %, currency impact of 5 %, and core unit volume increases of 11 %. Strong growth in the U.S. and increasing strength in Asia offset a softer European market. We experienced healthy growth resulting from significant equipment orders from both the U.S. and Canadian Postal Services as well as Procter and Gamble and Unilever. Additionally the timing of certain promotional activity during the quarter contributed to this performance when compared with the prior year.

The Videojet Willet merger announced in the first quarter is on track. The teams continue to work well together and have identified synergies that are being converted into sales growth and cost reductions. Key areas include cross-selling of Willett low priced printers through Videojet channels as well as the sale of Videojet lasers and large character marking products through Willett channels. The Videojet Willett combination has also resulted in improved sales intensity in China, Latin America and Eastern Europe. Costs take out targets are on plan and head count reductions of over 200 associates have already been achieved.

For the balance of our process environmental controls businesses, core revenues were down 3 %, as businesses focused on process end markets remain sluggish. Subsequent to the end of the second quarter, we acquired McCormick Self a business specializing in linear pyro (ph) technique devices used in aircraft, egress and other systems. This business will be integrated into our aerospace and defense group. Additionally we acquired Accurate Metering Systems a manufacturer of sanitary flow instrumentation for the food and beverage market. This business will compliment our existing Anderson Instruments product line, a part of our industrial control group. The combined purchase price of these businesses was approximately $50 million, with annual sales revenues of approximately $35 million.

Switching to the tools and components segment, revenues declined approximately 6 %, over the same quarter a year ago. Approximately 2 percentage points of the decline came from hand tool revenues, primarily from the impact of Sears inventory reductions during the quarter.

With June and Fathers Day retail sell through up double digit and quarterly sale through up mid single digit, we remain cautiously optimistic regarding the second half of the year. Matco sales were up slightly for the quarter, reversing the first quarter decline, and it's still difficult professional and market. As is expected, the Jacobs vehicle systems business unit experienced revenue declines just under 20 % and contributed 2 percentage points to the Segment decline a result of the 2002 buildup ahead of regulatory changes.

The Craftsman Industrial Program continues to build momentum. We have now received over -- we've now received orders from over 100 industrial distributors through the end of last month. We have completed the initial roll out of Cobalt and Cashforce (ph) products .The initial rollout included 850 directors towards shipments in a program of meeting both ours and Lowes expectations to date. The remaining businesses in the segment contributed the balance of the decline as end user demand remains soft, particularly at Delta.

Operating margins for tools and components were 15.3 %, a 30 basis points improvement versus 2002. For the first six months of 2003, operating margins increased 20 basis points to 14.2 %. Improvements from prior restructuring activities, particularly at Jacobs Chuck and other cost savings activity offset volume related declines, spending on growth opportunities and the costs associated with the start-up of our new Craftsman Industrial and Lowes programs.

We recently finalized plans for the consolidation of our Armstrong Chicago facility into existing tool group operations providing improved competitive position for this brand. Costs for this move are reflected in our outlook for the balance of this year.

Looking forward to the second half of 2003 for Danaher as a whole, we continue to see a slow and sluggish industrial economy. With Europe now showing additional signs of softness, we reiterate with you our belief that a sustained economic recovery in either the U.S. or Europe is unlikely for the second half of this year. As a result, our strategy of remaining tight on costs will continue. And that as you know has been our practice for what has now been for us a three-year period of industrial recession. While recognizing the challenges of the current economic environment, we are very encouraged by the opportunities our businesses are facing. We believe we continue to gain share, brought on by a large extent by our strong Danaher business system culture of customer focus and continuous improvement. Our corporate break through, our larger organic growth initiatives, which amounts more than $600 million of future potential are on track. Those opportunities in addition to the daily organic growth actions across Danaher combined with already implemented cost reductions and further reductions to be-realize from recent acquisitions. We enforced our outlook as we tighten our range of earnings per share for this year to $3.15 cents to $3.25 cents. For the third quarter our earnings should be in the 81 cents to 86 cents range. Wit that we are now available for questions.

+++q-&-a

At this time I would like to remind everyone in order to ask a question please press star then the number 1 on your telephone keypad. Your first question comes from Nicole Parent of Banc of America Securities.

Good morning, guys. Larry, I was just wondering, you alluded to the fact that you're looking into some, I guess where the tax rate could go for the full year. Could you give us a sense in terms of a narrowed guidance range what we should be thinking about, is it an incremental hundred basis points lower? How should we think about that?

Let me try to handle that one. I think the guidance; the revised guidance assumes no change in the rate from after where we are right now. So we'll evaluate the rate this quarter, if it looks like a fairly small reduction we probably won't do anything. But if it looks like it might be a little larger we'll know that well in advance of the quarter end and like I said it's not reflected in the guidance so it will be incremental to the guidance.

Great. Just one follow-up. I guess could you talk a little bit about uses of cash, particularly the acquisition pipeline and also are you considering raising the dividends?

Sure, Nicole, good morning. With respect to the cash stockpile, which as we noted is now over a dollars, I think acquisitions continue to be the first option. We're certainly cognizant that we didn't complete any acquisitions in the second quarter. We've shared with you two smaller ones that closed here in July, but we remained very busy on the acquisition front. It's unclear whether the second quarter will in retrospect be a lull before an uptick in activity. But we're currently engaged in a number of very interesting discussions, and I would anticipate the second half being more active than the first half in that regard. With respect to the dividend policy, I think we're certainly mindful of the changes in the tax rules and certainly the environment. But continue to believe that our first and best option for capital appreciation value creation is by way of growing Danaher.

Great. Thank you.

Thank you, Nicole.

Your next question comes from Jim Lucas of Janney Montgomery.

Thanks, good morning, guys.

Good morning, Jim.

On the Craftsman Industrial, speaking with different players in the channel, different customers, the feedback has been, you know, for the most part positive. But have heard that Armstrong has been removed from a couple of accounts. Can you talk about the overall relationships of what the feedback you're getting from customers of balancing Armstrong versus the Craftsman Industrial?

Sure, Jim, I think the response we're getting is we put this bundle of brands out into the marketplace with Armstrong as you know being the higher priced and positioned offering with the Craftsman Industrial coming in underneath that has been strong. I think we've certainly I think been challenged to get the program up to a level we'd like to see here in the second quarter. I mean we knew we would start to ship product April 1. We met that schedule. But we saw across a number of our businesses, not only with tools, but we also saw this at Fluke as well, that many industrial distributors I think were tempering their expectations for the second half of this year and as a result were taken inventory down during the quarter and watching their inventory positions very carefully. So they didn't move as aggressively as we would have liked to have seen, but we have a number of existing relationships which are strengthening, a number of new relationships with folks like Wesco, that are very exciting to us. So we're still very bullish on the program itself and what it does for the entire hand tool offering in that industrial distribution channel.

Jim, I might add that in terms of the new distributors that are picking up Craftsman, obviously a big part of the program is looking at those opportunities to bring both Craftsman and Armstrong into those industrial distributors. Now many of them carried Armstrong but about a third of those hundred are picking up Armstrong for the first time as well. So any time there's a new brand that gets in there and brand proliferation occurs there's going to be some disruption within the channel. But obviously we've been able to pick up a significant number of new accounts as well. Jim Lucas: Okay. Larry, you made a comment on CAPEX, most likely not hitting your original target of 100 million. And we've talked in past conference calls about the lessening capital intensity within the portfolio. But can you talk a little bit about what you're hearing from your business teams in terms of, why there's just not a big pickup in capital spending?

Jim, with respect to our own business?

With respect to your own businesses?

I think certainly we're up year on year both in the quarter and for the half. I think the tempering, if you will, of our expectation for this year is largely due to timing. Clearly we would like to put some money into our low cost region initiative and as you can imagine we really haven't progressed much of what we'd like to do in China over the last many months due to SARS. We recently have seen some capital requests here, we signed off on relative to some ERP investments in amortization. Some expansion of our inter-European manufacturing capability, and some other growth programs. So I think we knew that $100 million number would be an aggressive number. At this point all we're suggesting is that we think the [inaudible] on that right now is probably more weighted to the under. But no change whatsoever in velocity or intent, frankly.

Okay. Final question, you covered acquisitions in Nicole's question. When looking at the portfolio, are there any potential divestitures? Are you evaluating the portfolio at all these days?

I think the fact of the matter, Jim, as you would anticipate, we are a performance-oriented company and don't have any sacred cows if you will in the portfolio. But we have a lot of businesses that create value and have great runways ahead of them. I think from time to time as we have, we may trim here and there as we build, but nothing large, nothing imminent, if that's what you're poking at.

Okay. Thanks.

Your next question comes from John Inch of Merrill Lynch.

Good morning. Larry, just to follow up on Nicole's point, would you expect acquisitions in the second half pickup from the relatively static pace in the first half? Is that basically the message?

Good morning, John. I think that's the message. But again I don't want that to be taken as a forecast. We may not do an acquisition in the second half of this year. Having said that, though, I think given the activity level, giving where particular ideas are in the pipeline I suspect we'll have a busier second half than we've had here in the first half.

That's fair. Then Larry, just within the businesses. You mentioned amortization being relatively good performer in Europe. I'm just curious to know how much of that, firstly where in Europe and then how much of that do you think was Danaher-specific versus possibly end markets given that Europe in a lot of areas just seems to be actually getting a little bit worse, not better?

John, you're exactly right. I think Europe is getting worse, and the view that we have is that we are making all of our own luck over there. As you might imagine, given the nature of the industrial base in Europe, Germany and Italy are important countries for us in amortization, and that's where much of the new product success and share gains have occurred. But we do see that weakness that you're alluding to and don't have any illusions to the contrary.

A lot of the share gain that we're experiencing on the lift truck market is coming out of the European business. And most of the lift truck market is non-U.S. were obviously in the process of beginning to supply the U.S. lift truck market more directly out of Mexico. But the rest of the market, the rest of the worldwide market is supplied out of Europe, which is obviously helping that growth.

Great. Thanks, guys.

Thank you, John.

Your next question comes from Brian Langenberg (ph) of Langenberg & Company (ph).

Hi gentlemen how are you?

Good.Brian.

I had questions control particularly about the amortization segment. I was wondering if you guys could discuss quoting activity by end market, it seems that the economy is to say there's an upturn but the companies do not. Realistic expectations for pick up in capital spending by customers.

We could barely hear that question. Is this Brian Langenberg? .

Calling for Brian.

You didn't sound like Brian. I pass myself off like that. It's not myself. Could you ask that question maybe closer to the phone?

The question is for the controls and particularly the amortization segment, could you guys discuss a little bit about the quoting activity by end market, what are the realistic expectations for pick up in capital spending by customers.

I understand the question. The quoting activity is really occurring in pockets and that's where we're meeting with success. We talk about direct drive. We serve some medical applications, for example, in that product category. Pat mentioned electric vehicles. While we're thrilled with that growth, again, very healthy growth, 6% here in the quarter, we by no means are taking that to be a leading indicator of a broad uptick in spending across the industrial sectors that we serve. Perhaps other could lead to that conclusion. I would understand that logic. I simply wouldn't be buying into it at this point.

Also, could you guys talk little bit more about what is built into your guidance with the Euro/Dollar effectively?

Well. We never try and predict the direction of the FX rates so when we do our guidance is based on essentially where the relationship is as of today essentially.

Okay. And one last question. Your assumptions for M&A built into your earnings per year. Could you guys quickly -

Sure. We never have and never will include prospective acquisitions in any of our guidance. As I indicated a moment ago, you can't forecast acquisitions, if you do you put yourself in a box. I think you force yourself to do acquisitions to fulfill that promise. We'd rather look for good deals on their own merits rather than to have to fulfill an expectation that we would have only foolishly put out there.

Thank you guys very much for your time.

Thank you.

Your next question comes from Wendy Caplan of Wachovia securities. ]

A couple clarifications if I could, Larry, on the European weakness that you talked about, could you talk about whether there were any sequential patterns in the quarter, in terms of weakening throughout the quarter or remaining flat, and are there any other geographies in which there were some changes in the quarter?

I think what we are probably alluding to, Wendy, in Europe is more what we see and hear broadly, more so than anything we experience. Again, amortization is I think defined a bit of gravity there. We had I think a very good quarter in the environmental business there. Fluke was a bit weaker, Videojet as well. So it's mixed. But I think we know where we're having success. We really are doing better than a [inaudible] a couple of times here in the last four, five months. It seems to be gradually softening up with the passing of each month. We have seen, I think, sustained strength in Asia, particularly China. I have to admit I think China surprised me in the second quarter. I'm not sure we have fully seen the aftermath of the SARS dynamic, but we had a number of businesses as we alluded to do very well in China in the quarter. Fluke just went right through SARS as if nothing had really happened. We saw that same dynamic at Water. I think we were hit a little bit at Videojet and Willett, perhaps because of the larger ticket nature of those products. But on balance I think we were pleasantly surprised with how well the China businesses just ticked along.

Thank you. And another clarification. The 70 basis point increase in SG&A in the quarter, you mentioned that it was invested in growth opportunities as well as acquisitions. Can you split that for us in terms of which had the greater weight?

I think it was roughly equal on both sides, Wendy.

One last question, if I could. Could you give us an update on some of the express investor concern about the municipal funding for, in the water, particularly in the environmental business?

Sure, we hear that question from time to time in our travels. And I think the answer, which we've given, which I believe still holds, is that we're not as tightly tied to muni-spending (ph) as one might think, because the water authorities tend to operate as independent entities. And they have their own funding. And as long as water is in demand, that puts them in a pretty fairly stable economic financial position compared to states and municipalities at large. I was with one water customer recently that said the challenge they've had as of late, a customer on the East Coast, isn't the tax receipts dynamic. It's actually been on the rain. Because the rain people haven't been watering their lawns or washing their cars and it's caused them to put in some travel restrictions and the like, but fortunately at least here in Washington the rain has stopped and that will be helpful to the customer base.

Thank you very much.

Your next question comes from Deane Dray of Goldman Sachs.

Good morning, gentlemen. I had a couple follow-up questions regarding the acquisition outlook and then a question on water. With regard to the acquisition comments, Larry, could you give us a sense of where your attention is in terms of looking at new platforms or Bolton's, (ph) is there a priority there? That's the first question.

Sure, Dean, good morning. I think the priority will always be around Bolton when we have an opportunity to strengthen our strategic position around investing business that will always give the highest priority. As you've seen as you've seen some of the Fluke and Pop on the Bolton financially those transactions are very rewarding, but having said that we do continue to have a healthy list of potential new platforms for opportunities that would redefine the borders of an existing platform under review. It's hard to say whether platform number six is in the offing in the next 12 months. I simply couldn't rule it out.

Larry at one point you used to give a number as to the number of potential new platforms. It was somewhere in the mid teens. Where does that stand today?

I have to check, Dean. I believe it's 16 or 17 today.

Good. Then I don't know if this is related or not, but I saw in the Q this morning that you released that you are negotiating to add another 500 million senior unsecured credit facility. What's the nature of this addition to the facility? Is that for Pat?

Yes, it's really the up -- we've had the facility for ten years and never borrowed against any of them. It's more of a back up. Its more kind of an appropriate-sized credit facility for a company our size. There's no specific direct need for it. But if we at some point in the future would have, say a commercial paper program or the like, having about that much in back-up facilities would be more in keeping with what we expected out there. And of course the best time to negotiate new credit facilities is when you don't need the money. So that's why we did it now.

Pat, what does that bring you up to, assuming you get that 500 addition.

One billion.

Good. Then for a business question, Larry, on the Waters side, a couple question, one can you give us an update on activity with Hach Homeland Security and then secondly there was an interesting article in the journal yesterday about the EPA proposing some additional water test for the U.S. municipalities and how does that factor into the Hachlonga prospects for next year.

Let me take the second question first. The article that you saw in the journal yesterday referred to some additional regulations around really chlorine byproducts. We're the leader in chlorine analysis and a number of different configurations. I think net it's hard to quantify the impact of that regulation as it is for almost any regulation in that business. But when they talk about additional filtration, that's always a good thing, because our turbidity meters tend to be deployed side by side filtration, almost regardless of the type of filtration being installed and to the extent that more and more filtration points are added or new filters are added, instrumentation will always get a look. So that's good.

With respect to your first question, Dean, regarding Homeland Security. Unfortunately given the nature of some of the projects, the progress that we've made in the quarter it's progress, I can't share publicly with you right now. As I'm sure you know the department of Homeland Security is still very much under construction, budget moneys are flowing slowly from Washington. So there are a number of efforts, but they're efforts that are still simmering, not having been brought to a boil yet. But the efforts we have both in air and water-based bio-terror agent detection continue, and we continue to fund this break through in the event serious moneys are deployed in this direction.

Have there been any contracts signed?

There have been a number of contracts signed, Dean. Actually one of the things we didn't mention in the prepared remarks was we actually had a very tough comp this quarter because we had a very big project a year ago. But again I'm telling you all I can. I appreciate the question. I wish I could share more. But it's still modest from a financial perspective at this point.

Thank you.

Thank you, Dean.

Your next question comes from Paul Knight of Thomas Weisel Partners.

This is Ajit Pai [ph] for Paul Knight

I just have two quick questions, first was actually for the [inaudible] business. Where do you see the weakness in the first half actually pent up demand for the first half or do you think the improvement will only be at the end of the year? And the second question is on the cost side when you look at your cost SG&A lines what the currency impact on what those two lines have been in the current quarter, it is possible to quantify it otherwise I could get more specific about [inaudible] How you look at that?

Sure. We'll see if we have a question to that second question. Andy Wilson will answer the first.

I was just going to try -- it would take a while to come up with the exact number, but I think it's fair to say certainly that the cost structures of the European operations tend to have higher gross margins and higher SG&A structures. So it would tend to certainly bring that number up on a relative basis. But I would be surprised if it was more than 20 basis points of the difference. But I don't have the number handy and I won't have it handy by the end of the call, unfortunately.

Thanks, Pat

With respect to the second half at Gilbarco Veeder-Root, we certainly see pent up demand but I think the pent up demand we see isn't a reflection of what happened or didn't happen in the first half. It's really pent up demand that's been out there for several years, given the restructuring and it's a very sluggish branding program that have gone on amongst the customer base there. I think that while we were down in the first half, we could be flat to up, I believe, in the second half, given what we're looking at. It's hard to break it out by quarters because of the timing of some of the larger projects in that business are a little harder to predict. But we really like the competitive position that we're in today. As I indicated, we are taking a bunch of share points here in the U.S. and the new products that we're going to use to really change the game are just beginning to reach the market. So we're well positioned in that business and just need a little bit of wind at our backs with respect to the customer spending activity.

Thank you.

Your next question comes from Richard Eastman of Robert W. Baird.

Richard Eastman Good Morning, just 2 things, one is on the operating profit within the process and environmental segment, if you look at that 16.2 % sequentially, could you just maybe shed some color on where the biggest -- did Gilbarco run in the quarter? Did it break the double-digit threshold for operating profit? Same question on amortization.

Sure. We did hit double digits at both of those businesses in the quarter.

Amortization was up kind of high single digit. Did break over 10 %. As you might sense the biggest change was at Gilbarco. We got off to a very slow start this year. And the sequential improvement was over 300 basis points.

Lastly, given the organic growth year-to-date, it looks like it's maybe down about a percentage point. Larry, I think you said in the previous call that you expect organic growth for the year to be about flat. But are we still close enough to flat here that we could end up there for the year, or do we perhaps run a little bit lower than zero and make up the difference in currency and acquisitions?

I think on a core basis I think we're still in a position to deliver what we've been talking about. And then that is without necessarily a reflection in the overall economy improving. The third quarter will be a quarter where again it will be a challenge particularly in tools, because of the Jacob systems effect. But that really goes the other way in the fourth quarter. And I think that coupled with some of the other things we've talked about kind of gives us some optimism that we'll be able to make up if not more what we have turned in here, the flash performance in the first half.

Lastly, could you take a rough cut at your China sales just in dollars?

It's approximately $200 million, with about half that in country and half of that on an export basis.

Kimberly.

Your next question comes from Matt Summerville from McDonald Investments Inc.

A couple of questions. Can you talk a little bit more about the closure, or the consolidation maybe is a better word, taking place at Armstrong. Is that in fact reflection manufacturing facility you're closing and where you're moving the production and secondly what sort of costs do you anticipate to occur with that as well as what sort of savings perhaps you envision maybe in '04.

Matt, the Armstrong facility there in the greater Chicago area that we're going to relocate it is principally going to relocate to facilities we have in Arkansas and Texas. So it's really not a reflection on the quality of the team that we've got there. It's more a reflection of the fact that we're continually in the hunt to take cost out of all of our businesses and we thought we had an opportunity to take this plant out of the network for some time. We wanted to avoid disrupting the manufacturing footprint in tools as we brought on both the Sears Industrial and Lowes Programs early this year, clearly we're at a point now having publicly announced it to the associates that we think we can tackle it and much of that work as we indicated would be completed this year.

We haven't -- it's not unusual for us to close a facility or two. We consider that kind of business as usual. So we don't really call out the cost of these things. Obviously there's a cost associated with this and it's in the guidance. And I think you can assume that it's a multi million dollar number cost side this year. But we expect to have an improvement in margins next year of at least that same amount.

Larry, can you talk a little bit more about the core product identification business? 10 or 11% organic growth in the second quarter. It sounds like maybe some business may have been pulled out of Q3 into Q2 based upon some promotional activity. Do you expect that organic growth rate to slow in product ID in the second half of the year?

Matt, the promotional dynamic that I alluded to, I should have been clearer. What happened a year ago really was more of the story. And we inherited a sales incentive program that created a little bit more noise for us and in turn an easier comp, if you will, here in the quarter, than we might otherwise have seen. So I wouldn't expect us to continue to cruise at 11% year on year in that business. I think we continue to be excited about that marketplace. I think we love the competitive position we have with Videojet and Willett combined. But I think that it is a slightly hot number in the quarter for that reason.

Essentially it was a pull forward from the first quarter of last year of '02 probably would have taken some of the sales out of the second quarter of last year. There's no, from a run rate basis, it has no impact on this year, it's more comparability to an abnormal prior second quarter. .

Then, Larry could you just clarify, based on a question asked a few moments ago on the organic expectations for Danaher, when you back out all the FX stuff from the back half of the year. Sounds like you're more leaning towards something in the modestly positive side, at least for the process businesses. Is that accurate?

I think what I was trying to get at is we still have a flattish quarter ahead of us this quarter because of the Jake Brake Dynamic. I think if we look out into the fourth quarter, we won't have the brake dynamic. And we have a couple of good things going on in the tools business. And controls I suspect will still be flat to slightly up. So in the second half, as I indicated to Rick, I think we have a good shot of making up what we lost here in the first half. If you were to weight that it would be more a fourth quarter than a third quarter effect.

Thanks, guys.

Thanks, Matt.

Ladies and gentlemen, we have reached the allotted time for questions and answers. I'd like to turn the call back over to Andy Wilson.

I just wanted to remind everyone that the replay number for this call is 706-645-9291 confirmation code 1697761. The replay will be available through next Monday and the archive of the Web cast will be available on our Web site until the next quarterly earnings release. If anyone who has not -if anybody didn't get the question in Pat Allender and I will be available in Washington for follow-up calls individually or if anyone else would like to follow up on some more details. Thank you.

This concludes Danaher Corporation 2003 earnings call. You may now disconnect.