Danaher Corp (DHR) 2003 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Danaher Corporation Third Quarter 2003 Earnings Call. (operator instruction)

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

You may begin, sir.

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 our earnings release and summary financial are available on our Web site as well as the 10-Q fro this quarter under the heading "Investor Information".

Our Web site address is www.danaher.com.

This call will be replayed through Monday, October 20th and 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 and the confirmation code is 324-9623.

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

I'd also like to note that in order to help you understand the company's direction, we would 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 G 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, and good morning, everyone.

I'm very pleased to report that our third quarter earnings improved 19% and EPS increased to 87 cents from last year's third quarter results of 74 cents per share.

Revenues were 14% higher than the same period a year ago with acquisitions contributing 10% positive currency effects of 4%, and flat core revenues.

Year-to-date sales have increased 15% with acquisitions accounting for 12%.

Currency effects were 3% and flat core revenues.

For the quarter, gross margins improved 140 basis points to 41.4% from 40% a year ago.

Gross margins for the first nine months improved 150 basis points to 40.3%.

Gross margin improvement for the third quarter as well as for the first nine months of 2003 resulted primarily from the continuing benefit of prior restructuring programs and cost reductions in recent acquisitions which helped offset the slightly lower gross margins of those same newly acquired businesses.

Selling, General and administrative expenses for the quarter and year-to-date were 25% of sales.

About a 100 basis point increase reflecting our continued investment in growth opportunities as well as a higher relative percentage of non-U.S. operations, which generally have a higher SG&A mix and which accounts for about 20 basis points of the increase.

This increase was mitigated somewhat by the continued improvements from restructuring programs and other cost reduction efforts in our recent acquisitions and in our core businesses.

Operating profit for the quarter was $216 million, a 50% increase over 2002 and $584 million for the first nine months of this year and 18% increase over 2002.

Operating margins for the quarter improved 20 basis points to 16.5%.

The continued benefit from previously mentioned restructuring activities and cost reduction initiatives contributed to this improvement.

For the nine months ended September 26, 2003, operating margins improved to 15.3% from 15% in 2002 due to these restructuring and cost containment factors.

Interest expense Decrease from $14.8 million to $14.5 million in the third quarter, primarily due to reduced debt levels offsetting the unfavorable impact of the Euro-U.S. dollar exchange rate on interest expense related to our Euro bond note.

Interest income was down 42% to $2.6 million despite over $300 million of additional invested cash in 2003 due to the lower rate of our short-term liquid investments.

As we recently communicated, our tax rate for the third quarter was 32%, making our effective tax rate 32.9% for the first nine months of 2003. 155 basis points lower than 2002.

We expect the fourth quarter rate will also be 32%.

Operating cash flows year-to-date remain strong at $619 million, a 10% improvement over a very strong 2002.

We generated free cash flow, which we define as operating cash flow less capital expenditures of $565 million or a 9% year-over-year improvement.

The increase in operating cash flow was driven primarily by earnings growth in the timing of payments for certain of the company's benefit programs.

The increase was partially offset by the expected lower working capital reductions and increased tax payments as compared with 2002.

Capital expenditures for the quarter were $16 million basically flat versus a year ago.

For the first nine months of 2003, capital expenditures have increased 20% to $54 million.

We now expect capital expenditures for the full year to be approximately $80 million, more than 20% greater than 2002 levels.

As is customary, we do experience seasonally lower cash flows in the second half of the year as we saw in 2002.

But at this point, we do expect our 2003 free cash flow to exceed the record cash flow of $640 million achieved in 2002 and exceed our net income for the 12th year in a row.

Our balance sheet remains strong with a debt-to-total-capital ratio of 27%, a net debt-to-total-capital ratio of 3% with cash and cash equivalents now over $1.1 billion.

Moving to our business segments, process and environmental controls revenues for the quarter increased 19.5% year-over-year from $840 million to just over $1 billion.

Positive currency effects accounted for approximately 5% of the year-over-year improvement with acquisitions primarily Thompson and Willett, adding 14% to the segment revenues for the quarter.

Core volume was up slightly when compared to 2002.

Operating margins for process and environmental controls increased 60 basis points to 17.2% due to continued savings from cost reduction initiatives completed last year coupled with integration savings in recent acquisitions.

For the first nine months of 2003, operating margins increased 50 basis points to 16.1%.

Environmental platform revenues were up 17% for the quarter with core growth of 6%.

The acquisition of Gas boy in 2003 combined with our 2002 acquisitions represented approximately 6% of the increase, with currency effects contributing approximately 5%.

Hach/Lange, the worldwide leader in water quality analytical instrumentation experienced high single digit revenue increases in the third quarter with low single digit core revenue growth.

Demand remains strong in our European lab and process instrumentation markets while demand in the U.S. remained flat.

We continue to experience softness in our ultra analytics markets.

Hach/Lange continues to gain share winning significant orders in Bergen county in New Jersey and Suffolkony (ph) in New York during the quarter, both involving multi product offering as well as orders from the Department of Defense for our water distribution panels.

Our Homeland Security team has finalized an agreement for the testing of restricted bio-terror agents providing access to key chemical and biological test data, and this data will be helpful to us as we continue to develop our Homeland Security product line.

Growth in China remains strong, up more than 50% year-to-date, and we recently captured a key order with a Fu Dong (ph), Shanghai Waste water treatment plant, the largest wastewater facility in China, primarily a result of the breadth of our product basket.

Gilbarco Veedor-root, the global leader in integrated automation and environmental products and services for the retail and commercial petroleum industry experienced strong high single digit core revenue growth for the quarter.

Gilbarco continues to take share with former telecom distributors and customers.

We also experienced share gains with our Red Jacket products in the U.S. Additionally; we secured a major contract with Italy's largest oil company, E and I AGPT (ph) for retail automation system as well as important supply agreements with Comedian Tyre and several major Latin American retailers.

For the quarter, we saw healthy year-over-year growth in the retail automation and environmental systems and service segments.

The gas for integration is proceeding and the facility move to Green for in Zagatatus (ph) Mexico is nearly complete.

Despite double digit declines prior to the start of the Iraqi war, (inaudible) sales volumes year-to-date now exceed the levels achieved over the same period in 2002.

Environmental regulations continue to evolve and create opportunities for Gilbarco (inaudible) with its California's new rules requiring a positive shutdown monitor for dispenser pumps, which represents a new multi-million dollar opportunity for us.

Longer term, we continue to be well positioned with our enhanced vapor recovery corporate breakthrough as our field trials in California continue to yield positive results.

Turning to our motion platform, revenues grew 37% for the quarter compared to last year driven by acquisition growth primarily due to Tompson of 29% and a favorable currency impact of 7% with core growth of 1%.

Continued strain from our Otis Gen2 and electric vehicle initiatives and motor and drive share gains in Europe were offset by a double digit decline in the linear component segment resulting primarily from slow machine tool end markets in both the U.S. and Europe.

In the U.S., direct drive sales continue to grow at double-digit rates driven by distributor share gains and recently won programs.

We continue to see growth across many of our serve-end markets and recent orders from photon dynamics and Seagate for flat panel and data storage applications respectively indicated somewhat improved technology sector outlook.

We launched the new coal Morgan AKM motor and Sirro star 200 drive both of which provide higher performance and lower cost products for the general Servo market.

These important products represent our first collaborative global product development effort within the motion platform.

Finally, integration-restructuring activities at Thompson continue to track two plans with four facility closures underway.

Our electronic test and measurement platform grew 11% in the quarter due to acquisition activity that contributed 8% and a favorable currency effect of approximately 4% which offset core volume declines of just under 1%, arising primarily from weak demand for Fluke network products and softness in the industrial end markets.

The core Fluke business was down slightly.

Fluke continued to see strong growth in China, which was offset by weak European sales.

While revenues in the United States were flat.

During the third quarter, Fluke received the Wesco superstar award recognizing its innovative use of co-operative business planning, target turnkey marketing programs.

These programs are evidence of the value of sharing our Danaher business system or DBS policy deployment and growth tools with the customer as we generated double digit increases in the sale of all Fluke products at Wesco over the past two years.

Fluke's thermo view, thermal imager, continues to be well received in the market and is contributing to our performance.

Our electrical growth breakthrough continues to build organic momentum.

To accelerate that progress particularly in Europe in early October, we signed an agreement to acquire Beha, a $20 million leading German manufacturer of handheld electrical test equipment serving the European electrical market.

They have nicely complement Fluke's existing European presence by providing expanding product lines and stronger access to key European electrical sales channels.

This acquisition is subject to regulatory approval and other customary closing conditions.

Fluke networks improved significantly, up 10% sequentially, due largely to strength in copper and fiber installation tools.

And was nearly flat year-over-year for the quarter.

Higher end network test tools continue to be a tough sale as IT budgets remain tightly held.

Fluke networks innovations continue to win recognition, most recently with the best of show award at net world in Tokyo for the wave runner, a handheld device that detects rogue access points for enterprise network managers.

We also completed the acquisition of Loop Expert Technology incorporated during the quarter, a $10 million supplier of Telco Network and Preventive maintenance systems for U.S. telecom networks that nicely compliments our existing telecom products and service offerings.

Turning to product identification, revenues grew nearly 54% driven by the Willett acquisition of 48%, currency impact of 3%, and core unit volume increases of 2.5%.

Orders in the third quarter of 2003 were up mid single digit and key wins at Procter & Gamble, Kellogg, Anhighser (ph) Bush and Frito-Lay contributed to the momentum we're enjoining in our food and beverage markets.

The Willett integration continues to meet expectations and restructuring savings are on track for the year.

The combination of video jet lasers, thermal transfer over printers and high speed CIJ printers with Willett's value priced CIJ printer is providing exciting opportunities for the combined video jet and Willett sales team.

We delivered growth in both laser and thermal transfer over print during the quarter as we continue to strengthen our position as a global multi-technology product and service supplier.

Today we announced the signing of an agreement to acquire Accusort Systems incorporated, a leader in scanning and imaging products and services for a range of manufacturing, distribution and sortation applications.

Accusort products read barcodes and human readable characters for customers such as Wall-Mart, Federal Express and the United States Postal Service.

This $90 million U.S. based business complements or existing product identification platform, allowing us to provide integrated marking and verification systems to our existing customer base as well as broadening our serve market to include parcel and retail applications.

This acquisition is subject to regulatory approval and other customary closing conditions.

Switching to the tools and components segment, revenues declined approximately 2% over the same quarter a year ago. 9% core revenue growth at the hand tool group was offset by declines at Jacobs vehicle systems and continued end market softness at Delta and Jacob Chuck.

As communicated last quarter, the Jacobs vehicle systems business unit experienced volume declines of more than 30%, a result of the 2002 buildup in advance of pending regulatory changes.

We expect the fourth quarter trend to turn positive on a comparable basis as evidenced by the month to date-to-date orders here in October, up more than 30% over last year.

We were pleased with the strength in the mechanics hand tools businesses in the quarter, which were fueled by strong sell-in and sell-through at Sears and a continued ramp in both our Sears industrial and Lowe's initiatives.

The improved performance at Sears is due to increased promotional activity and a strong focus on maintaining in-stock category positions as well as new products such as the reversible gear wrench.

Revenues also increased at Mattco.

In our growth breakthrough in China continues with Soder brand sales in China, up high single digits in the quarter.

Operating margins for tools and components were 15.9%, a 70 basis point decline versus 2002 resulting from the lower of Jacob vehicle system and Delta.

Costs associated with the Armstrong facility closing and continued spending on growth initiatives.

For the first nine months of 2003, operating margins decreased 10 basis points to 14.8% as improvement from restructuring activities and other cost saving initiatives were offset by the volume declines and spending initiatives mentioned earlier.

The consolidation activity of our Armstrong, Chicago facility into existing tool group operations is on schedule with anticipated savings beginning in the first quarter of 2004.

As we look to the fourth quarter of 2003, we are encouraged by the positive signs we see across many of our businesses.

The economy remains challenging, but we remain focused on our organic growth and cost reduction opportunities.

Thus in the near term, we are comfortable with an EPS range for the fourth quarter of 90 to 95 cents, which equates to a full year EPS of $3.21 to $3.26.

With that, we're now available for questions.

[operator instructions]

Your first question comes from Robert Cornell of Lehman Brothers.

Yes, thanks, a lot of questions.

I guess one of the things I was wondering is of the restructuring you guys started a couple years ago, I mean, how far along are you in that process?

Is that bottoming out, Larry, are the restructuring costs running down?

I mean, you talked about it on a couple of the comments around the businesses, but sort of overall aggregate, where are you?

Pat Allender Let me help answer it in a couple pieces.

Firstly, the restructuring that we set up at the end of 1991, the approximately $70 million, those specific restructuring activities of spending and the plant facility closures related to those are finished.

Now, finished is essentially in the context of the spending set aside for that.

Obviously moving into a new facility, there's still a ramp-up opportunity from the productivity standpoint and the like that's ongoing, but relative to the actual specific money set aside for that, that was finished by the end of last year, and we have discontinued -- of course we have no reserve balance left for that.

We closed that out at the end of last year.

Yes, Thanks, Pat.

Larry, could you just expand on the point you just made, you say you were encouraged by positive signs, and, you know, maybe you could sort of articulate what your sense is now versus what it was a couple of months ago, what's changed, what gives you some of those signs of encouragement?

Sure, Bob.

I think fundamentally, simply the passage of another month where the positives seemed to outweigh the negatives is just additive to what we sense is a slowly building trend.

Clearly with the September that we enjoyed, we finished the third quarter very strong, and as we look across the entire portfolio, no one company blew out September, but on a broad basis, we had excellent performance versus even the near-term outlook, the businesses have been putting fort in August and early September.

I think as we mentioned in our prepared remarks, we're pleased to see both Fnet, Fluke networks change of Gilbarco no longer being the drag that they have been.

I think we're seeing strong sell-through both at retail and in industrial and electrical.

We haven't enjoyed the full benefit of that because of some inventory management issues that are out there, but frankly at the end of the day, what matters most to us is sell-through.

I think some of our broader niche businesses -- I should say our niche business that is serve the industrial market broadly by our instrument controls group, are continuing to report positive signs from across their end markets, and as we mentioned, whether it's the Seagate photon dynamics pickup that we saw, we saw that in some other businesses with Applied Materials, there seems to be a little bit of breadth still in the technology body.

It's still talk, it's still orders not shipments, granted, but we'll take it.

And I think that coupled with the fact that we just wrapped up strat, strategic plans, with the businesses.

We've been with everybody in the last 75 to 90 days, and I think there is a view that we're going to have a good end of this year and while no one is claiming that we're going to have a zooming economy in 2004, I think the mood is measurably more upbeat than three months ago.

So, I think all of that combined gives us a little bit more optimism Bob.

Can I throw in one of the questions?

The financial times keeps talking about Dentus metering systems, end data and others.

Is there any comment you can make about that at all?

I wouldn't believe everything you read in the FT.

I don't.

Good.

Thanks, Bob.

Your next question comes from Nicole Parent from Banc of America Securities.

Good morning, guys.

Good morning, Nicole.

I was just wondering if you could comment a little bit more on motion and demand there, and I guess more specifically, if we look at core growth year-over-year, sequentially it looks like it might have decelerated.

I don't know if that's the impact of acquisitions, but could you also just comment a little bit about second quarter Europe was strong, what we're seeing there.

You know in this quarter that linear acquisition is actually down double digits.

I don't know what it did in Q2 but I guess, could you also give us a little more end market color and what you think is going on there?

Sure, Nicole.

I think as we've tried to communicate during the course of the year given the sequential ramp-up that we saw in motion last year, we knew that we'd be facing some tougher comps in the second half of 2003 than we saw in the first half, and largely due to the fact that we were ramping up some of our internal growth initiatives last year effectively.

I think when you break the business down, clearly the core general-purpose business is doing quite well both here in the U.S. and in Europe.

The portion of the business that serves tech, the precision systems business is still -- is very tough and is a drag on us right now because while we're hearing talk on orders as I suggested to Bob a moment ago, it is not translating into shipments and that's what matters most when we look at those organic gross up numbers.

On the linear side of the business, when we look at factory automation, machine tool particularly, in Europe, in the states, that continues to be a sluggish vertical for us, and frankly we also are probably suffering a bit from the integration of our existing linear business with Thompson.

We knew with Thompson we were picking up a stronger brand and channel network, but that there would be some near-term turbulence as we transition products and salespeople as part of that acquisition integration, and I think -- and we're seeing some of that.

Plus I think there's also some contribution from the fact that many of those products tend to be more distribution centric and as a result, probably a little later cycle than we might be seeing currently with some of our OE business.

But long term, I think we still feel very good about where this business is headed.

We are nowhere close to creating the integrated global motion business that we envision, but we're making really good strides and I'm very encouraged despite the decile that you note.

Great.

And could you also comment a little bit about the pace of acquisitions?

I think relative to where we would have thought acquisitions are year-to-date, we're a little bit behind and kind of given the sizable cash you have on the balance sheet, you announced Accusort, which is small in the grand scheme of things.

How should we think about acquisition activity as we roll forward in the next quarter or two?

Sure.

Sure.

Now granted, Nicole, I think Accusort and Bayha and Loop are smaller acquisitions, all of them strategically important as we indicated.

We're excited about the Accusort announcement.

This is a very strong player in the product ID space, a private family-run company, just a great story, and we're pleased to have them on the team.

I would share your view, Nicole, that I think we would have thought by this point in the year, we would have been able to talk to you more, or about more that we would have done on the acquisition front, but I would still characterize our current position as one mark by a lot of activity and a pipeline that I would still describe as very, very full.

I can't obviously talk too much detail there other than to suggest that the year is not over, and we continue to think we have a significant list of situations that will allow us to put that sizable cash balance to work for our shareholders to generate returns far better than what we're getting on the short-term market, which is probably a long-winded way of saying stay tuned, more to come.

Great.

Thank you.

Thanks, Nicole.

Your next question comes from Jim Lucas of Janney Montgomery.

Thanks.

Good morning, guys.

Good morning, Jim.

Larry, first housekeeping question.

Could you give us an update on how many break throughs you're currently funding right now?

Jim, I will be able -- I'm going to give you an updated number because we're kind of hashing through that right now as we put a bow around stats.

When we're together in New York in December at the investor meeting, we'll update that for you, but we're in the low 20's at this point.

OK.

Regarding Gilbarco Veeder-Root, one of the things you alluded to was the timing of orders from major oil customers.

Is this something that we're seeing the emergence of a trend of spending by the majors once again, or can you elaborate on that a little bit more?

Sure, Jim.

I think that clearly the second half here doesn't seem to have nearly the amount of geopolitical noise that the first half had, and even the second half of last year, so people are out spending money, margins are a little bit better as well, so part of it's, I think, pent up demand, part of it's overdue re-branding, and part of it is just people wanting to invest in their business again.

So it's hard to attribute a portion of the business to one versus the other of those factors, but I think they all are contributing right now to the uptick in demand that we're seeing at Gilbarco Veeder-Root.

OK.

And to follow up on Nicole's question on the acquisition environment, you commented that you were disappointed with the lack of meaningful opportunities that have materialized this year.

Can you talk about the things of maybe what has presented the acquisition environment from accelerating more than it has?

Is there any one or two particular reasons contributing to it?

No, I mean, I think, Jim, the opportunities that I suspect we might talk with you about at a point in time here, are in many situations the opportunities I thought, we might have been talking with you about already, so every deal takes its own course, and I think we're simply seeing discussions play out a little longer than they might typically.

I don't think we read much into that.

We're patient.

We're going to wait until the time is right, and the situations are right to - what to do things.

But I think all year, I've hopefully been consistent in describing the acquisition environment, at least from where we sit as one that is just loaded with good opportunities, good strategic assets in existing businesses and potential new platforms.

And I continue to believe that this may well be a lull here before a pickup in activity that we'll have, I suspect you and Nicole and other asking questions.

Is it more valuation sensitivity?

I wouldn't say that.

But as you know, we're always sharpening our pencil.

OK.

Fair enough.

Thanks a lot.

Thanks, Jim.

Your next question comes from Deane Dray of Goldman Sachs.

Good morning, gentlemen.

I'd like to follow up on a comment you made earlier regarding having just completed the strategic planning process and be interested in getting any kind of color that you could provide regarding the discussions, especially in years past facing a tough economic horizon, you've battened down to say, zero growth assumptions for your businesses.

What sort of tone did you set for the businesses this year in terms of what they should be looking at for core growth?

Well, the process that you're alluding to is really a function of both Strat (ph) and budget, and we're going to be going into budget reviews here next month with everyone.

I think what we're seeing, and the tone that we set ahead of budgets with that the economy is still going to be challenging.

I think that across the management ranks, everybody understands that, but we're seeing our growth investments pay off.

We're seeing share taking across the businesses.

We saw that clearly in the strategic plan reviews.

So we want to make sure we do is stay tight, but continue to fund the opportunities that we know we have and perhaps not plan too conservatively with respect to the top line.

I mean, I would think that as we look to next year, as we refine the budgets, that we probably would be anticipating a little bit more of a positive organic environment than the one we laid in for this year.

You recall very accurately, Deane, that we told everybody to assume that it would be flat this year with the first half being a little tougher than the second half.

I think that's more or less the way the year will play out, but we will exit (ph)with some positive momentum.

Some of that, perhaps much of that of our own making, but I do think there is a slight positive baseline emerging out there which we want to make sure we're the full beneficiaries of in 2004.

That certainly sounds more positive.

When you talk about funding opportunities, how would that work out to be CAPEX?

You're up 20% this year.

Should we be expecting a similar increase in 2003 for growth opportunities -- or 2004?

Excuse me.

Deane, I think when we're through budgets, I'll give you a better number, but I would suspect that we'll probably end up still budgeting that elusive $100 million figure, or thereabouts.

Great.

Thank you very much.

Thanks, Deane.

Your next question comes from, Ajit Pai of Thomas Weisel Partners.

Good morning, gentlemen.

Good morning.

Two questions.

One is about Fluke networks.

You said orders grew sequentially by about 10%?

I believe that's what we said.

And what was that primarily due to?

Where were you seeing the strength?

Well, what we saw in the quarter was some nice growth in the copper and fiber cable installation and maintenance tools.

Admittedly, the lower end of the product scale at Fluke Networks.

With those products both to contractors and to the enterprise customers were up nicely.

And it really contrasts with more sluggish performance with the higher end network management tools that we sell.

And was that across the -- in terms of geography, was that primarily North America or across most countries?

North America and Asia outpaced Europe in that regard.

And the second is about the Accusort acquisition, what kind of growth is that business seeing, and does Accusort have a presence in the bidding for I.D activity at Wal-Mart?

Sure.

The business has been allowed a mid single digit grower over the cycle, and we think we have an opportunity obviously with the integration to do well, and when I say integration, keep in mind what we do at Video jet today is basically put marks on products.

But we're not able to read those products, and what we're able -- what we'll be able to do with Accusort's stationary scanning tech technology is read and verified very much that we put on with the other equipment.

That is an emerging need and trend of in the market, and we think we'll be very well positioned to tackle.

With respect to RFID, we don't mention Accusort's RFID position in the press release that we put out, but it's an excellent question.

We do think that as we look at that emerging technology, it will be relevant to a number of the customers that Accusort serves including, as you mentioned, Wal-Mart.

We think that what will happen is that RFID and barcodes will coexist, if you will, for quite some time, and I think as a result of our position today, we'll be able to participate in those new RFID applications.

We have several RFID installations under our belt over the last several years including a couple of airport baggage handling systems and several deployments in manufacturing facilities, so we're buying, if you will, a bit of an option, perhaps with Accusort with respect to the RFID trend and one that we obviously want to keep both eyes on.

Thank you.

Your next question comes from Greg McGowan (ph) of (inaudible).

This is Greg sitting in for Brian (inaudible).

How is everyone?

Good morning.

With Accusort, can you talk about the margin potential and how long it might take to get there?

Sure.

The business is approximately mid single digit operating margin business today, and I would suspect that it's a business that, over time, can and should be in the mid teens.

OK.

And what is the product ID average margin there and how does that fit in with your existing product margins?

Well, we talked about video jet and Willett previously in the high teens, 20% range, and with the integration of Willett, we have improved the profitability of that business significantly, but clearly what this business will do is dilute those operating margins in the near term slightly as we work to improve them.

We would not anticipate seeing operating margins as high at Accusort as we do at Videojet and Willet, but don't tell them that.

We'll be working hard to improve profit profitability and obviously driving the top line at Accusort.

OK, thank very much.

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

I just a couple of questions I want to circle back to Gilbarco.

Is the order rate there strong enough to sustain high single digit growth into the fourth quarter?

Good morning.

It's an excellent question.

I think the team just back from a major trade show here in the U.S. is encouraged by what they're hearing.

The fourth quarter in that business is always a little funny because there still is a bit of year-end spending that can be there or not, which makes it a little hard to predict.

It was such a strong performance in the quarter that I'm not sure I would go that far, particularly because we did see some year-end money last year, but I think we have an opportunity to continue to show improved results in that business, and I think today I think that's probably where I'd like to leave it.

One other issue with Gilbarco has been the margin and the potential in their operating profit.

What's your comfort level that by the end of this year, we'll be, you know, double digits if not maybe 15%?

Double digits, I'm very comfortable. 15, I don't think that's necessarily where we're going to be with Gilbarco, per se.

OK.

But tracking toward that weigh point.

Let me ask one last question, Larry.

On the Hoche/Longa business, there's been a tremendous amount of noise about the water infrastructure upgrade in China.

It sounded from your commentary that orders there were up 50%.

Are you going to continue to benefit from that, and can that - can the magnitude of that business be significant for us?

I think so.

I mean, we look at that market today as one that is clearly the highest growth geography that we have anywhere in the world.

The Shanghai order we talked about, a number of others, are really giving us, I think, a lot of evidence that our products are relevant.

So I think over time, certainly China can be one of our top five geographies, and I'm sure ultimately one of our top three.

We're going to go through some organizational changes to make sure that we are adding as many people as we possibly can manage to drive the growth.

We have some products that are really specific to China that are well along in the pipeline and should be coming out next year to help those salespeople drive more sales, so we're very bullish about the water potential in China.

Rick, the instrumentation will slightly lag the infrastructure build out just because of the application obvious obviously has to be -- is most useful and functional after the infrastructure is in place, so there is a slight lag relative to, say, a big infrastructure build out, but clearly, we're gaining from infrastructure that's already been built out.

Thank you.

Thanks, Rick.

Your next question comes from Matt Summerville of McDonald Investments.

Good morning, guys.

Couple questions.

First on the homeland defense stuff as it pertains to Hoche, what inning are you in there?

Have you seen any money coming out of the budget there?

And can you also talk about, you know, in terms of dollars, how do you size up that opportunity, and where do you fit there from a competitive standpoint?

Those are all great questions, Matt, questions we continue to ask ourselves.

I think we have really not yet seen the movement in any meaningful way, either at a federal or at a state level, towards spending significant funds on either the water or air technologies, monitoring technologies that we provide.

Clearly lots of interest, lots of talk.

I think you see DHS trying to get organized to do things, but right now, we're continuing to, I think, fund the opportunity simply to make sure that if and when serious moneys are deployed, that we're there.

So in turn, it's very hard to estimate how big of an opportunity this ultimately could be.

We have, I believe, 16 people dedicated full time to this breakthrough.

It may be the sort of thing that ultimately goes nowhere, but I think what we're finding at a minimum is that the water utility customers that we talk to like the fact that the foundation of our Homeland Security offering is an excellent distribution monitoring system.

I've talked to -- utility, for example, that said put Homeland Security aside for a moment, this is a technology that will allow me to provide better service to my customers downstream from the treatment facility.

So that's an encouraging sign, but right now it's still an emerging opportunity I supposed to wanted is its well-defined.

Ok.

And then lastly, could you provide, you know, some more detail around what your core growth expectations are for the process in the tools business in Q4?

Are you looking at something similar to Q3 or more than uptick?

I would suspect man, we'll see a bit of an uptick, because clearly as we eluded to in our formal remarks, we won't be able to point to this dramatic year on year decline at Jacobs vehicle as an issue for the tool segment, so I think we'll be positive there, and I think we are building some momentum in the control segment and with Fnet and Gilbarco no longer being the granges that they were, we have an opportunity, I think, to show a bit better in the fourth quarter there as well.

Great.

Thanks a lot, guys.

Thanks, Matt.

Your next question comes from Darell Pardy (ph) of Merrill Lynch.

Good morning, guys.

Good morning, Darell.

Hello, a 20% increase in capital spending is pretty significant compared to many companies in the industrial space, and we're potentially looking at another 20% increase for next year.

Can you just talk about what your investment - you're investing those dollars in and what you're potentially going to invest in and how much is related to having a larger portfolio of businesses?

Sure.

Part of it clearly is having a larger portfolio of businesses, but I think, Darrell, that we tend to reject too many comparisons between our capital spending activities and other companies simply because with DBS, we tend not to have to pour a lot of capital to drive capacity expansion, let alone drive quality improvements in the businesses.

I think if you look at the increase this year, it's really a function of the investments that we've made in some of our growth initiatives that we've talked about previously.

Certainly our expansion of manufacturing capacity in eastern Europe and in Asia is a part of that, and we've had some IT deployments particularly in and around the motion business as we look to integrate that business into one cohesive whole.

As we look to '04, the number I shared in response to Deane's question is really one that is a function right now of a view that we should be stepping up our investment when and where we see good growth opportunities, but we've failed, I think, in the last several years to spend our budget, capital budget, not because we've been cutting back.

Again, it's just because, I think almost instinctively, our rigorous use of the DBS tool has us conserving capital smartly at every turn.

Great.

Thanks.

Thanks, Darrell.

Your final question comes from Don Khoshaba of Deutsche Bank.

Good morning, guys.

Good morning, Dan.

Larry, could you talk a little bit about pricing in the quarter?

Was pricing flat in the quarter?

What are your expectations for kind of company-wide pricing for 2004?

I don't know if you worked that into your thinking yet, but -

We'll put a sharper pencil, Dan, to the 2004 pricing assumptions as we go through budgets here in November, but I think what we saw here in the quarter was fundamentally a flattish pricing environment if we look broadly.

OK

We can't point to a big sinkhole due to price or a big upside that we were beneficiaries of.

If you're not really seeing any erosion in the marketplace either though, I guess?

No, but again, I think when we look at our position in a number of our markets, we tend not to be in situations where it's all price, price, price.

Right.

We've tried to evolve the portfolio in a direction that avoids, that is one kind of those types of dynamics.

OK.

Last question.

I thought you said that the machine tool business was still, you know, a bit weak, and I think that's clearly accurate, that's what we're hearing domestically, but it seems like in Japan and in some of the international markets, machine tool order may have picked up a little bit.

What did the ball-screw kind of servo motor, motion controls business kind of look like in the quarter, and what are you guys thinking about that business?

Do you think you'll see a pickup there any time soon?

The linear business, as we indicated, was down just double digits.

In terms of the pickup - so I think we clearly are feeling the effects of that slowdown you're eluding to here.

We don't have tremendous exposure in Japan, unfortunately.

Our European exposure is certainly not enjoying any real bounce there.

I think the outlook is, given everything they've been through, it's not an end market where I think they're going to get too far ahead of the curve, so I think expectations are still rather conservative.

Ok.

Well, thanks a lot.

Thank you, Dan.

At this time, there are no further questions.

Mr. Wilson, are there any closing remarks?

Yes.

Just want to remind everyone that the replay number on the call is 706-645-9291.

Confirmation code is 324-9263.

The replay will be available through next Monday while the archive of the Web cast will be available on our Web site until the next quarterly earnings release.

If there's anyone who has not been able to get a question in, Pat and I will be available for follow-up calls individually or anyone else who would like to follow up on some more details.

Thank you.

Thank you for participating in the Danaher Corporation third quarter 2003 earnings call.

You may now disconnect.