Danaher Corp (DHR) 2002 Q2 法說會逐字稿

Good day everyone. Welcome to this Danaher Corporation second quarter earnings results conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Patrick Allender, Executive Vice-President and Chief Financial Officer. Please go ahead, sir.

Thanks Bret. Good morning everyone and thanks for joining us today. Joining me today is Larry Culp, our President and Chief Executive Officer.

I would like to point out our earnings release and summary financials are available on our website, as well as our full 10-Q. If you did not get a copy of the press release itself, our website address is www.danaher.com. I understand we are having some technical difficulty this morning with our website, if it is not up and running by 09:30, approximately when this conference call would be over, if you would like to get a copy of our full 10-Q, you would contact Christina

at 202-828-0850 and she will e-mail that to you. Many of you have received it by email already, but there may be others, they would like to receive it. This call would be replayed through Monday, July 22 and will be archived on our website later today. The replay number is 719-457-0820 and the conference call confirmation code is 610-888. I repeat that at the end of the call for late arrivals. I would 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. It is 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 that, I would like to turn the call over to Larry.

Thanks Pat and good morning everyone. We are pleased to report this morning our second quarter earnings per share of 66 cents, which was a record for Danaher and a 5 percent increase over the last year's second quarter earnings per share of 63 cents. However, please remember that this year reflects the intangible amortization charge under FAS 142 and had 2001 that restated from a same accounting basis. Earnings per share would have declined 7 percent for the quarter. Sales increased 20 percent for the quarter to a record 1.146 billion dollars, driven a large part by strategic acquisitions, which contributed 26 percent versus 2001. Core growth declined 7 percent in the quarter with current year's tax slightly positive. Year-to-date sales had increased 10 percent with acquisitions accounting for 21 percent with a 11 percent core revenue decline and no net currency effect. Gross margins for the second quarter declined from 39.2 percent last year to 38.8 percent this year as the lower gross margins from acquired businesses as well as core revenue declines in our Process/Environmental Controls Segment was partially offset by cost reduction program across both business segments.

Gross margins for the first 6 months at 38.2 percent were essentially flat against 2001 with gross margins improving about 80 basis points between the first and second quarter of 2002. Selling, general, and administrative expenses for the second quarter were 23.9 percent of sales Versus 21.3 percent in 2001due principally to the higher cost structures of the newly acquired businesses, which at the time of acquisition had SG&A structures on average of around 30 percent of sales.

The situation clearly remains an opportunity as we build on the progress in recent months. Also reflected in the second quarter with a gain on the sale of real estate of 2.5 million dollars, 1.6 million dollars after tax, or about one penny per share. Overall, operating margins for the second quarter of 2002 were 14.8 percent versus 16.4 percent in 2001. The effect of operating margin dilution from acquisitions and the effect on Margins from our Process/Environmental Controls segment, which continues to be impacted by year-over-year core revenue declines, albeit at declining rates.

For the six months, operating margins declined from 15 percent to 14.3 percent due to the same factors. Net interest expense increased from 5.8 million dollars in 2001 to 11.3 million dollars in 2002 to almost entirely to lower interest income on short-term investments. We have made a conscious decision to maintain our cash in the safest most liquid form and therefore have experienced lower investment rates that have corresponded with the FAS, historically low state funds rate. Free cash income for the quarter was 158 million dollars, a 5 percent increase over 2001 and 285 million dollars for the 6 months and 1 percent increase over 2001. The income tax rate for the second quarter was 34.5 percent, the same as the first quarter, but lower than last year's 37.5 percent range due primarily to the effect of elimination of nondeductible Goodwill in this year's statements.

Net income of 104 million dollars with a 10 percent improvement over the second quarter of 2001. With the 6 months earnings before the change in accounting for the adoption of FAS 142 of 186 million dollars, a 5 percent year-over-year increase. Cash flow continues to be a strength of Danaher and its functions of our unique operating system, the Danaher business system. Operating cash flow year-to-date is 393 million dollars, a 26 percent increase over 2001. With free cash flow of 377 million dollars, a 39 percent increase over 2001. All working capital components contributed to this performance.

Year-to-date free cash flow equates to about 2 dollars and 40 cents per share, nearly double our earnings per share to-date and already in excess of our earnings for all of last year. While we do expect the pace of free cash flow to moderate for the balance of this year, 2002 is likely to be the 11th straight year with free cash flow exceeding net income. Overall our balance sheet remains strong with a debt-to-total capital ratio of 31 percent with over 700 million dollars in cash and cash equivalence. As many of you are aware, our 6.9 million-share stock offering in March raised 467 million dollars to keep us well positioned to fund strategic acquisitions. We are comfortable with this conservative balance sheet Posture, even though with the proceeds invested in money market equivalence, the share issuance resulted in about 2 cents per share dilution in the quarter. Our Process, Environmental Controls segment in the second quarter continues to compare Negatively to last year, on a core-sales basis with a decline of 11 percent. However, the second quarter is the last difficult competitive quarter as the second quarter of 2001 represented the last quarter of robust sales in the technology markets served by our Process/Environmental Controls segment, primarily in motion and our quality.

Further more, core sequential growth in controls from the first quarter was mid-single digit and while all platforms and controls are not performing a last step, it underscores our increasing comfort that we have seen at bottom. Including acquisitions, second quarter Process/Environmental Controls sales increased 27 percent to a record 844 million dollars. Current effects contributed about 1 percent of that growth. Poor growth in our environmental platform, our steadiest platform throughout this recession, declined at low-single digit rates for the quarter.

As low-single digit growth in the water quality markets was offset by weakness in our ultra pure instrumentation business, as well as softness in Viridor's weak detection market. Lab sales in water increased in both the US and in Europe. Our process sales were up in the US, but softened versus a year ago in Europe. Interestingly, the ET recently took up legal actions against 9 member countries including Spain, France, and Italy Regarding Wastewater rules, which stood over the medium and long-term, certainly help our business in Europe. With the addition of Gilbarco and Viridor, environmental is now our largest platform with annualized sales exceeding 1.1 billion dollars. Motion continues to be the platform most affected by the downturn with second quarter core revenue decline in the low teens Versus 2001, while still significant, but the second quarter decline was half of the first quarter decline was followed mid-single digit sequential growth from the first to the second quarter.

While the European market remains sluggish particularly Germany, the US markets for precision motors and drives as well as linear component has shown progressive strength in 2002.

This in spite of minimal help from

and other hi-tech markets. Within US distribution, June was another good month with orders up double digits, evidence we believe of our integrated business not taking share, as we go to market increasingly as one company. Design wins continued with a big win with Photon Dynamics, the world's leading supplier of flat panel display yield management equipment was selected up with their supplier for their core motion control products for their next generation of machines. The market core flat panel display yield management equivalence is expected to grow significantly over the next 5 years driven by an increasing penetration of LCD technologies, into television, as well as the desktop PC market. We are certainly looking-forward to our new relationship with Photon Dynamics. Within the first quarter, our electronic test platform posted high-single digit core revenue declines, but was able to achieve mid-single digit sequential improvement from the first quarter of 2002.

As in the first quarter, the majority of the decline relates to slow demand from media and cable test products. The industrial side of the business in the first quarter was down slightly year-over-year. We will secure a global agreement with Premier

, a leading electronic product distributor; it will take our permanent accessory lines, and our meter demand brand into Europe later this year. It will also apply to the reliable power meters, a 10 million dollar power quality instrumentation product line that will expand our electronic test offering for the electrical and industrial channels. During the quarter, Fluke Networks introduced Linkrunner, a follow on product to the NetTool, which gives us an updated range of easy use, low-cost tools for the enterprise network technician. We are quite pleased at this point with the integration progress with our three significant first quarter acquisitions, Gilbarco and Viridor in the environmental platform and Videojet, our platform entry into product identification market. While the retail petroleum end market continues to be soft for both Gilbarco and Viridor. The two businesses are working closely together and quickly began representing themselves as Gilbarco, Viridor to their customers.

The cooperation has taken place in the form of a merger of the two service organizations already in a broad pursuit of significant cost reduction opportunities made possible through the companies close product and customer outline net worldwide. Additional, early cross only wins in the second quarter took place at Exon Mobile and Morison, a UK grocery. EBX continues to take root with 41 Kaizens alone being conducted in the second quarter. Viridor is being actively integrated into the hot longest water quality business with significant manufacturing and back office operations being transferred to the hot operations in Loveland, Colorado. Videojet if anything is ahead of schedule in our integration plans. Its early DBS implementations have made it possible to exit 4 facilities this year. DBS implementation is accelerating with 24 kaizens in the second quarter alone and somewhat earlier than anticipated at the time of acquisition, its been the businesses return to top line growth, both sequentially and year-over-year. While still modest, it will likely accelerate the businesses' returns to high-teens operating margin. Although, there are many strategic investments still necessary for the business, both in new products and new market development. Operating margins for Process/Environmental Controls improved from 14.6 percent in the first quarter to 15.4 percent in the second quarter in spite of the dilutive effect of having the three first quarter acquisitions for the full second quarter.

The composite operating margins from those acquisitions were about 10 percent in the second quarter up from 8 percent in the first quarter. Year-over-year second quarter margins declined from 17.6 percent to 15.4 percent of which about 200 basis points were due to the margin dilution from acquisitions. Change in goodwill, amortization methods offset about 1 percent of the year-over-year segment margin decline that corresponded to the 11 percent decline in core volume. Returning to the tools and component segment, the second quarter core growth was a solid 5 percent. The first year-over-year core growth quarter since the second quarter of 2000, which marked our initial visibility on the then upcoming recession. Financial grew mid-single digits, lead by Matco with high-single digit growth as it continues to take share in the professional end of the market. 20 percent plus growth at jet rate in response to accelerated orders because of an EPA mandated change in truck emission standards that are effective in October offsetting some continued sluggish sales as

shuck, Delta and

manufacturing, but at moderating levels compared to 2001.

Operating margins for tools and components were consistent year-over-year at 15 percent. Next week, we start our annual strategic plan reviews. I anticipate, we will be adding to our list of corporate breakthroughs, the set of significant organic growth initiatives with at least 30 million dollars of growth potential that patternized monitor closely. Some second quarter highlights regarding the 20 projects that are actively funded today include hard work with water distribution system monitoring, modeled on our Salt Lake City Olympic projects. Two similar systems were shipped in the second quarter and enquiries continue to come into the Loveland operation. In motion, we are experiencing double-digit growth this year without its elevator and the precision motors we provide for the Gen 2 elevator and continued to see opportunities to work more closely with them. Two additional design wins for our electric vehicle initiative where we are the leading supplier to electric vehicle OEMs, as they transition to cleaner quieter motors with our total annualizing new volume at over 100 million dollars at full production level. Flukes growth initiative targeting the electrician in the electrical wholesaler channel continue to gain traction with growth again in the second quarter, both in terms of shipment and

has progress towards our 3 year goal up 30 million dollars in new revenue with this customers continues. Construction is continuing at Flukes Shangai Plant, the first electronic facilities that Danaher were having in China and production should begin later this month.

This site will ultimately serve many of Danaher's Process/Environmental Controls businesses as we aggressively pursue growth in China. With respect to the restructuring that we announced last year, we are executing 2 plans and schedules. Today, we have closed research operation in 9 of the 16 announced facilities representing over 450 thousand square feet of facility space and approximately 800 associates. Through the end of the second quarter, we have Spent approximately 25 million dollars in cash of the 53 million dollars estimated cash portion of the restructuring charge with the majority of the noncash asset write downs taken. With the collateral cost associated with the facility closures, such as plant efficiencies, training new associates, moving a relocation cost which have been incurred today, but which are not part of the restructuring.

The 38 million dollars of annualized net benefits have only been marginally realized to-date. This will change in the latter half of the year, which should yield about half of the estimated annual benefit. Looking forward to the balance of 2002, we expect to continue to see stabilized revenues and continue sequential improvements in core Process/Environmental Controls revenues. We would expect core sales comparisons to improve as well with the third quarter decline to be very modest, to negligible, in the fourth quarter, to be solidly positive. We are obviously encouraged to see our tools and Components segment growing again and we expect to see these trends continue into the second half. Excessive jake brake given this difficult to predict impact of post ETA deadline volumes.

Having said that, we are not attempting to forecast the timing of the substantial US industrial economic recovery and we intend to remain vigilant in our cost reduction and restructuring effort. Near term, we remain comfortable with the 2002 range of 2 dollars and 65 cents to 2 dollars and 75 cents per share and the range of analyst estimates for the third quarter 70 cents to 75 cents per share. That concludes our forward remarks and we are now open for questions.

Thank you. If you would like to ask a question or make a comment, press the * key followed by the number 1 on your telephone keypad at this time. We will take as many questions as time permits and in the interest of time, we do ask you to limit yourself to one question and a follow-up question. We will pause for just a moment to assemble the roster and once again press * followed by the number 1 on telephone. We will take our first question from Jeff Sprague at Salomon Smith Barney.

Hi, good morning everyone. First question Larry and may be one for Pat, on the environmental front, we have put in Gilbarco and Viridor together, are the negative sale trends at Gilbarco, similar to what they are at Viridor or is there a little bit different dynamic going on there if you could provide any color?

Sure Jeff and good morning, I think what we are seeing is really a tightening of CAPEX fairly broadly, both globally and across products in the retail petroleum market, I think a large part due to be the poor country margins many of our customers have experienced over the last say 69 months. So, I do not think that there is any thing specific to Gilbarco versus Viridor or vice versa that we see, yes in the business itself to the same customers often through the same channels and the products are often installed in context with each other. As Viridor ended our specific scientific instruments business, I think all we are seeing frankly in the ultra pure instrumentation business is the tight spending levels that we have seen in technology for sometime.

Okay thank you and just on the cash flow Pat, given the swing and working capital and I am guessing you are assuming that starts to swing back against you a little bit in the second half particularly if you get some sequential revenue improvement and I am just wondering on the CAPEX, do we see some pick up there in the second half given how tightly you held it in the first half?

Jeff the cash flow will moderate as Larry mentioned in his comments I still think there will be, you know, well above net income for the year but obviously we are not going to keep this two times income pace going I mean you can even see at kind of sequentially as you kind of talked about in the first quarter review we have already seen as against sequential growth in receivables as the revenue sequential growth is we are experiencing, that was, that was worsely happening last year at this time so we were actually up about 20 million sequentially in receivables first and second quarter, lately we were down probably about 15 million so we had about , you know, just one quarter about the 35 million year-over-year swing. I would say that frankly hopefully we continue to see that positive cash flow effect from the receivables road of the year balances held and you know we get solid year-over-year growth.

And the I mean there is a pretty good gap between cash taxes and accrued taxes, does that catch up with you in the second half too is that Pat?

Yeah we will be paying some taxes in the second half mostly in the fourth quarter.

And then just one final one, the real estate gain, is that an SG&A Pat?

Yes.

Okay. Thanks a lot.

Jeff, one another point, just you asked about CAPEX, the CAPEX almost if you see first six months is net of the gain as well, so, we picked up the CAPEX pay from about a 10 million growth in the first quarter to roughly 17 in the second.

There will be a couple of other small real estate sales as we continued in the existing facilities this year play

break the timing of that?

Okay, terrific thanks a lot.

Thanks Jeff.

Moving on, we will go to Nicole Parent of Bank of America Securities.

Good morning guys. I guess just a followup on Jeff's question on environmental. It looks like Viridor has slowed sequentially. ; I think it was flat in the first quarter. Could you just comment on that and then also what is this revenue size of the ultra-pure business?

Good morning Nicole. The slow down of Viridor, I think, is a function of what we have been talking about a moment ago with Jeff. The customers do a fairly good job of almost what I would characterize as dynamically budgeting capital based on margins downstream and I think all the big oil companies came out in the first quarter and said their downstream margins were the worst they had seen in 10 years plus. So, I think that is causing some of the tightening that we have ever seen and we saw in the second quarter that [Inaudible] anyone has anticipated even at the first of the year. If you look at the ultra-pure business, the ultra-pure is about 50 million dollars, little bit of it in Hock, but really the bulk of it is, I think, just a little to do with in Viridor and Packside.

And I guess just a follow up on the tool business, flat margins on what I would consider significantly better sales. How should we think about tools profitability as we go out to the balance of the year?

Well, I think that the margins will improve particularly with Jacobs Chuck, which is a major restructuring target for us, and we spent a lot of money this year dealing with Jacobs Chuck and we are still dealing with a very difficult price environment there. So, we are doing a lot just to catch up, but we will see that, you know, the losses in fact that we are reckoning that what we have in the first half, it should disappear in the second half on Jacobs as we finish shutting down the UK operations and that will improve the overall margins obviously for Chuck. But, also it will impact the segment as well.

Great. Thank you.

Thanks Nicole.

Moving on to JP Morgan with Don MacDougall.

Good morning Larry and Pat. I was wondering if you could maybe elaborate a little bit on what you are seeing from the economy? What your sense of things is? Are we getting better, was there a trend, a noticeable trend within the quarter and then what kind of economic assumptions, if any, you have put into your second half forecast?

Good morning Don. I will take the rest of the hours to, I mean, tackle that. I think, what we saw in June and what we saw throughout the quarter Don was fairly consistent, sequential improvement as we worked towards easier comps, and I don't think, we saw an inflection up or down, or a change in the paces, that is a cause of great optimism frankly on the quarter, nor a source for pessimism. I think, it continues to be a stabilizing but certainly not a buoyant market. I would say that we do not have any data from June or even July to suggest some of the recent news is reading now, but I think that as we sit here, we obviously express some confidence about the second half, but I think it is certainly the drop last week that we saw in consumer confidence, certainly what I suspect to be a low level of CEO confidence, we will read out in CAPEX in different ways. But I don't think, we are taking anything for granted with respect to the US economy and we are certainly seeing challenges continue in Europe, but certainly not coming off the

that we are dealing with here. But, I think, it is precisely; it is certainly stable with some puts and takes here and there. By no means a strong uplift just yet.

Okay and just as a followup on, you had mentioned that a number of the Process/Environmental businesses saw some kind of mid-single digit sequential improvement over the first quarter. Do you have any way to separate seasonal effects from what might be improving trends in the business. I know seasonality has been kind of

at a wag with the pace of the decline in the industrial economy over the last year and a half, but normally you do see second quarter fair much better than the first. So, in your opinion is this a pick up in the pace over the first quarter or is this a normal seasonal boost on some of these businesses?

I think it is both done and I think you are right. I think, it is very hard to cut that precisely, but by no means, do not let us leave you with the impression that we did not get some seasonal benefit in second quarter. But, I think, given the nature of the week order books and everything that we saw, we were taking some confidence, frankly from that stabilization because as we saw last year, month-to-month trends throughout the year fundamentally blew a part most of the seasonality trends that we had experienced historically.

Okay and then just a final question on, you have got 700 million dollars of cash written on the balance sheet, it is not earning very attractive returns and I am sure you would like to spend some of it, if you could maybe comment on where you see the acquisition pipeline at present?

Sure Don, Patrick our CFO,

back only for a moment, I will say that we definitely don't like the returns that we are getting right now and certainly think our shareholders would be well served by putting that capital to good use. I would say that despite the fact we have already had a record year, in terms of the amount of money we put into acquisitions, we think the second half will be an active, M & A period for us. We obviously announced the half the way transactions, small transactions in mid way that will close later this month and we should be in a position, I think in the near term to announce a couple of other things that will be very strategic, very additive to the existing portfolio. Certainly, as we look out,

happy with what's happened to the public markets of late, certainly it does create an environment where we have some public valuations that are coming into the track of this zone where a number of private companies have been for some time. So, I like where we are. As you indicate from a financial position, I like the fact that we have a strategic point of view about a number of situations that make a lot of sense with Danaher and we will proceed, I think with an appropriate mix of aggressiveness and caution to make sure we do the right things for the long-term for our shareholders holding in no way unmindful of the environment in which we are operating today.

I am sorry Larry, just one more on that topic.

Sure.

Would you characterize these as bolt-on type acquisitions or new platforms and then I will end it there?

The ones that are alluded to Don would be bolt-on to the existing platforms. I don't think that you should anticipate that anything we would do in the near term would create platform number 6, I think, things that are well advanced in the pipeline all relate to existing businesses, which as you know, is always our preference.

Thank you.

Thanks Don.

Moving on, we will go to Jim Lucas with Janney Montgomery Scott.

All right. Thanks a lot, good morning gents. First question from a restructuring standpoint, obviously you guys are known for being one of the better operators out there; outside of the restructuring activities that were announced, can you give us little flavor, is there more additional cost cutting opportunities, that you are finding that continue to flow through the P&L?

Well, I think as you know, we talked about the restructurings at last year's meeting, we did mention that there were another 800 additional headcount actions that were planned to be taken this year, that did not relate to the 16 facilities closings and those were not part of the restructuring and they are ongoing, and those are being digested along with the restructuring activities. Mostly we are taking actions as I described with the new acquisitions as well. Viridor, you know, as a facility, can close back office facility closing, four facilities at Videojet, and a combination of Veeder-root, and Gilbarco.

Okay and House Keeping question on the balance sheet, the prepaid expenses were up, is that principally tax or is there anything else in that number that accounted for the increase?

There are some timing items, taxes are one of them, but nothing new.

Okay and from the strategic standpoint, one of the aspects of DBS in being a

organization, as you have gone through the integration of these recent acquisitions, are there any new aspects, have you found any new tools that you have added to the DBS toolbox, or is this just been a standard integration?

You know, I was,

, our VP of DBS, he and I were in a Toyota Facility last week, we picked up two new tools and I am excited to bring back. We will talk about that a little bit, bringing everybody together in December. I think the tool, more philosophical one that a tangible one that we take from Gilbarco and Videojet experience, is speed. If you look at what we have done with these acquisitions, I think we have taken Kaizen to the acquisition integration process itself and we were doing Kaizen's earlier. We were inserting talent into the organization more quickly than we ever have, so we are sitting here today, you heard the Kaizen numbers, for the first six months, those are really unprecedented numbers and as we discuss with our board, as part of an organizational review this past Tuesday, we have 10 to 12 senior executives from other Danaher companies in both at Gilbarco and Videojet organizations, and we compare that to the changes that we made, say, with the Fluke acquisition, we have certainly been able to move more quickly and I think all are already seeing the benefits of doing that, nothing to be reckless Jim, but we wanted to put our folks on the ground as appropriate, as quickly as we could.

Okay, great thanks a lot.

Thank you.

We will take our next question from Deane Dray from Goldman Sachs.

Good morning Larry and Pat. First, is just a clarification on the acquisition strategy going forward. You said back in December that EPG, that you had identified a pretty impressive list of potential new platforms

with 15 or 16, somewhere in that neighborhood and just now you commented that emphasis will be more on the bolt-on acquisitions. Is that a sense that market, you know, it might not get receptive to new platforms for Danaher or is it a valuation question, can you talk as to what you are thinking there?

Sure, sure Deane, I think as we step back, no change in strategy, no change in what we talked about EPG and in December, clearly we have a very active effort going on. I think if you look at the number of transactions that are in the pipeline, if you look at, if you set probabilities to those transactions, I think it is always going to be weighted towards more deals in the bolt-on arena than in either the new platform transactions or the Videojet. There are lot of transformational acquisition on our

. So, my response to Don's question is really to give you little bit flavor on what we see happening in the near-term types of transactions that are moving through and likely to be a source of some news in the near meeting term. Those transactions we have that at high visibility are bolt-on transactions. With respect to the current market situation Deane, I think that we realized that the market will want us ask some tough questions and get some good answers with respect to platform number 6. I think that's fair. I don't shy away from that opportunity when it presents itself. If I think internally, Pat or the rest of the management team, certainly our board as well asks those questions when it came to Videojet. So, I think the internal process of scrutiny that we have been giving ourselves both around bolt-on and new platforms will continue and will be prepared for the dialog with the market. When we add it. But, I think again in the near term, it is unlikely at this moment that we will be announcing platform number 6, just because of where different deals and different discussions are at this point of time.

And with regard to that, is there any sense of change in valuations as they come into what you consider to be attractive levels or have they been sticky?

No. Certainly, I think that with what has happened over the last several weeks or last couple of months to the extent, that there is a correction, we are seeing public companies coming into an attractive range. I don't think we are seeing much impact on private valuations but to the extent that the public markets are bringing different folks down and that in turn

our expectations, there should be opportunities.

Good. Then separately, any sense of changes at the margin in your pricing power and on the other side, what about the raw materials?

I don't think we are seeing anything on the pricing side being in terms of our power, either plus or minus. I think on commodities, I think we are continuing to push hard with our corporate procurement efforts. The initiatives to get more active in Asia and Mexico continue. So, we are getting a little bit of pickup there. I think, the only place where we are seeing commodity prices work against this obviously is within steel, given the tariff situation, but fortunately that is really limited to one business.

Great. Thank you.

Thanks Deane.

And moving on, we will take a question from Donna Takeda with Merrill Lynch.

Good morning Gentlemen. Larry, I think you said that you have already executed certain number closures that we have ever seen, in that some of them had even been sold. Of the remainder, how many do you own and how many do you lease?

We have other seven facilities that have not been closed, six of them are in Europe. I don't actually know the answer to that, Donna, but they are not with exception of one of the facilities in Germany, rest of them are relatively small facilities. So, unfortunately, I don't know if all of them are leased or which ones are leased

. If there was any one, leased besides the facility among the seven.

How was your business with Sears this quarter?

Sears was down Donna. They've been out same-store down 3.8 in the quarter for June. Obviously, an important month we were, and we didn't buck that trend unfortunately and I think, as we look for the second half, we have got a number of programs that obviously we are working hard to our dreams to fruition with Sears, and we are optimistic about that despite the sluggishness that we have seen off late.

Okay. The pace of Kaizens, particularly in the acquisition that you went through earlier, is really pretty impressive Larry, Can you keep that pace up or was that just, a sort of, to get out of the box very quickly?

We are going to try to keep it up Donna. It is probably less important to keep it up, but, I think, you are leading to an important point. We will certainly get quality, delivery, and cost impact favorably from those Kaizen efforts. But by

, we also do that exercise to set a tone, a hands-on, action-oriented tone in new businesses. And I think, the teams with Videojet and Gilbarco have done terrific job conveying the Danaher culture to the new businesses and the new associates.

Do you think it was just the same, maybe, I don't know, so

were ready to embrace that, or was there something different about the way that you started out with the integration?

I would say both Donna, I think that we were welcomed with open arms, both by the Gilbarco team and the Videojet team. They knew that, we were, they would be far more strategic and integral to our strategy, I think, they were

at Marconi and that, those open arms were met by a rush of people, both new people to their organization and the DBS office coming into hit the ground running and as they indicated some of that work happened, I had the close, so we were anxious to have a lot of impact early on and we had a number of willing and very able partners in both those businesses to help us do that.

Great, and then one last question. In motion control, you mentioned that, you said that Germany as one of the weaker spots. How much of their business is in Germany?

I would say Germany represents, say, 15 to 20 percent Donna.

Okay.

And actually we are closer to somewhere in that range and I don't

the exact number.

Okay

there is a lot of labor, and also it is of other issues going on right now, was it anything other than the macro issues in Germany?

I don't believe so. I mean, there is certainly nothing related to the IG metal settlement and some of the other things that are going on over there.

Okay. Right. Thanks a lot.

Thanks Donna.

And our next question will come from Lehman Brothers, Robert Cornell.

Hi, everybody. It sounds like a good quarter. I guess, the pattern you have talked about order rates and I think there has been a comment on the economy so far and so on but, you know, could you give us an idea of what some of the incoming order rates be, you know, the entry levels are, particularly, in things like motion, where the core business is running down interest of update on that type of things?

Can I answer that Bob?

Sure Larry.

Okay.

Thanks. The good news that we look at the order rates for motion; I mean, they are not nearly down as far as the shipping numbers we talked about. But I think that is why we are in part optimistic about the second half. Certainly, we were down in motion in some places, which we are actually up and others stay in June, but on balance, I think we are getting to the point we are going to remove those parenthesis hopefully sometime soon in part, because of easier

, I think also important because of the fact that there are things in the market place, things that we are dealing that are finally joined.

I think in terms of a book to bill, Larry, in that business?

I do not have a book-to-bill off, let me

. Look at these emotions, if I, say in June Bob, book-to-bill would have been less than 1-0.

Okay, one more question on motion, I mean, you talked about motion like it is, you know, fully integrated, but you know that is really composite at three different things, you know, where are you in terms of getting the global foot prints for the

Morgan's' and APIs, and you know

, all put together with the branding and the different customer interests in focus?

Bob, I think, you are right; it is a complex make up of different businesses, I think, we are probably somewhere in the third quarter, of that efforts. Certainly, if you look at the way we broke in the businesses down, we do have three discrete businesses within motion. We have our general purpose of our

business, where that business has really come together quite well, to provide the motors that drives, both referred to major OEMs and in the distribution. When we talk about a big design win at a full time dynamics, when we talk about a double digit increase in domestic orders, domestic distribution orders, I think that's all proved positive, if that business is coming together, but there are a number of new products, and product rationalization efforts, that are still incomplete and some of those will actually take place and wrap up later this year, others have more time to run. I think, if we look, the other businesses our motion components business, that is really where we are taking a collection of discrete products to market largely through distributions, that is coming together. I think well, perhaps a little bit behind with

business and our specialist business where we are working with people like the electric vehicle, OEMs, and

that business operates very well attacking those special one off situations, very effectively today. But again I think, we have a lot of opportunities that we haven't yet touched that we make this business, one integrated business, all I meant to share with you, was some continuing signs of progress, but certainly not of completion.

Yeah, thanks. One final question, there has been a healthy comment around the Kaizen events, may be, can you give us an idea of what the profitability run rate is of the three businesses you have acquired this year, you know, Viridor,

but, you know, what is still the margin rate? It was like 82 percent in the first quarter, what was it this quarter and what do you think the run rate is going to be by the end of the year as it gets all these actions put together?

Well, the composite rate for the second quarter was 10 percent Bob, and it is the largest business, Gilbarco is the one that is still in single digit and that great part is function of the reviving situation there, but as we talked about fairly on, we do expect that business to be a 10 percent business going into next year, it could be as late or as early as end of this year is depending on how the revenue stabilizes. So, with that business, if it gets to 10 percent, I would take that composite closer to 14 percent.

That is great and thanks guys.

Thanks Bob.

Next, we have Harriet Baldwin with Deutsche Bank.

Good morning. We have not talked a lot about water and they said that the growth there was moderate in the sense that Europe is a little weaker than North America. How do you feel about some of the, you know, full strength in outlooks and you had expected to see that slowing, has that happened, and beyond this specific EU actions, any improving regulatory issues you should think about helping 2003-2004 type timeframe?

Harriet, good morning. I think that we certainly continue to like a lot about this water business. It certainly as resilience continues to show through. We have not really seen any material retraction and a muni CAPEX, at least to date. I think, if you look at the domestic business where you think that tax received, given

911 impact, we would be down more. We continue to do very well both in the plants and in labs. Europe, again as you indicated is a bit more mixed with the capital projects being hung up both with our muni customers and with our industrial customers with particular emphasis in Germany. So, I do not think that there are really any out layers there. With respect to the regulatory environment, the change that I indicated earlier with the EC coming after a number of countries on wastewater, amortization is a good thing because to the extent that certain countries have lesser regulations in the EU standards and they get tightened up, compliance will involve, hopefully with purchase of our equipment. From a

perspective, it has to. So, we will be going after that.

In the US, lots of different things are always coming out of the EPA, which benefit us certainly on the drinking water side. We are often in consultation with the EPA ad-hoc . Harriet, It is a type of dynamic where, I think, it is rare to any one role, it is something I can point to and say, hey, here is a 10 million dollar pop that will get next year. It is really more of a Combination of different smaller situations that has served to create wonderful businesses that we have at Hock. We see no change in the regulatory environment. Certainly, more interest in the way to Salt Lake City and distribution system monitoring and those queries that I referenced in my prepared remarks give us some optimism, though, as you know, as we depart the business, we need to keep hunting behind that and that's in a fluid situation right now.

Speaking of funding, Is there any sense that with the view of 911 water as a strategic asset

some of the Homeland Security funding may find its way to water quality or some of your products?

Well if you look the way though, the rules have been written, there are specific call out's for water, I think the President himself four to six weeks ago was in Kansas City at a treatment facility as part of a [Inaudible] to highlight the fact that water was highlighted in some of the Homeland Security legislation, but I think our view has

to be a conservative one. We will put a lot of stock in that once the orders and serious [Inaudible] are percolating. So, I think you can make the case, but it is still early. So, we are optimistic, I think more importantly well positioned should that funding manifests itself into real CAPEX.

Great. Thank you.

Thank you.

And moving on we will go to UBS Warburg's, John Baliotti.

Thanks guys, I am actually all set and all my questions were answered. Thanks.

Thanks John. Take care.

Up next will be Will

with

.

Hi, good morning gentlemen.

Hi Will.

I wanted to turn quickly to cash flow and could you talk a little more about the sale of receivables? If I guess, if I read this correctly, this was, this did not happen in the first quarter, but in the second quarter you, Matco sold some receivables, it says that there is 93 million outstanding, how does this impact the cash flow statement?

At the end of the year we had 92 million outstanding, so it has gone up a million dollars; so, it would have had a positive 1 million dollar effect.

So that's on the balance sheet right?

One minute.

So it went from 92 to 93 that would be

There program went from 92 to 93; so, the amount of cummulative sold receivables went up 1 million dollars that would have had a 1 million dollar effect on cash flow.

All right , it is interesting because it was not in the first quarter. So, this had presently no impact on cash flow?

No it was there, it was there at the end of the year, it was in the year-end footnote, perhaps we did not put it in the first quarter queue, I do not know, but it was there, it was there the whole time.

All right. So that's the size of the program, now how does that impact the cash flow statement? Does it, when we look at the reduction in receivables, you know, is there, should I consider because the program did not change is that, this did not impact the cash flow in the quarter or in the first half?

It only affected it to the tune of 1 million dollar, Will.

Okay great. Next on Videojet, could you get a little more specific with the growth better than you expected, where was that in terms of customer end market or applications?

Well I think that, we certainly went in with fairly conservative assumptions relative to the near-term revenue outlook. I think if you look at what we saw in the quarter, as you would expect, the equipment was probably the weakest part of the product mix as you know nearly 60 percent of the revenue of Videojet comes in the aftermarket. All the aftermarket components were up nicely, whatever we look at, look at service, consumables, parts all of that was really kicking in, really that did not have any geographic outlayers. North America, Europe, Asia, all are moving in the same direction. So, I think what happened frankly was the benefit that we got from getting that business out of

, out from the sales process with its brand back on the door gave us little bit more early lift than we would have anticipated. I would not in any way claim that we have, we have had tangible impact on the top line just, I think all we have done so far has what Videojet to be Videojet and they are clearly a class franchise that is getting reacquainted with its customers on a full-time basis with each passing days. There is something for doing in the medium in the long-term and I think it well help strengthen that position.

It sounds like there was better execution in the aftermarket product?

You could say that but there are still opportunities, well it's early.

All right and lastly, with the confirmation of the guidance for the year, you know, your pick up from second to third is certainly, looks like it is expected to be stronger than the third to the fourth. Does that mean that as usual you expect a mix shift in the fourth quarter to the lower margin Sears products or is there some other reason to temper the fourth quarter sequential earnings growth?

Well I think the typical sequential earnings growth tends to be modest between, you know, again, if you kind of dig out the recessionary period, then it is usually fairly modest between the third and fourth quarter, more modest I should say.

All right.

So, it is in part because of the shift, the mix shift and in the fourth quarter we have also, we factored in a pretty negative expectation of what might happen on the post 10/02 change in the EPA regulations for heavy-duty trucks, so we have got some expected decline there to factor

.

Okay that's helpful. Thank you.

Thanks Will.

And at this point, we have time for one more question, that will come from Matt Summerville with McDonalds Investments.

Hi, good morning guys.

Good morning Matt.

Actually, most of my questions have been answered, although, if you can, I think in your prepared remarks Larry you talked about some sort of core volume guidance in both of the businesses in the third and fourth quarter. Can you go over that again please, I think I missed some of it?

Sure, sure. I think what we were saying is as we looked to the third quarter sequentially, we should continue to see improvement particularly in Controls and I think that on a year-to-year basis, we won't yet be positive, but I think in the fourth quarter with continued sequential improvement and the comp we're working against, I think, we would anticipate that we would see that. I think that's really what is important relative to the second half right now.

Okay, great, thank you.

Thank you Matt.

That concludes our question-and-answer session. Mr. Allender, I will turn things back to you.

Thanks

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Thank you.