Danaher Corp (DHR) 2002 Q3 法說會逐字稿

Good morning everyone and welcome to Danaher Corporation third quarter 2002 earnings results conference call.

Today's call is being recorded.

For opening remarks and introductions, I would like to now turn the call over to Mr. Patrick Allender, Executive Vice President and Chief Financial Officer.

Please go ahead.

Thanks

and good morning everyone.

With me today is Larry Culp, our President and CEO.

I would like to point out that our earnings release is available on our website as is our 10-Q and our 10-Q is also available through the Securities and Exchange Commission's EDGAR site.

The call will be replayed through next Monday, October 21st.

The replay number is (706) 643-0434 confirmation number 6116037 and I'll repeat that at the end of the call.

I'd also like to point out, in order for you to help understand the company's direction, we will be making some forward-looking statements during the call.

It is possible that actual results might differ from those predictions that we make today.

Additional information regarding these factors is available in our SEC filings.

And with that, I'd like to turn it over to Larry.

Thanks Pat and good morning everyone.

We are pleased to report this morning our third quarter earnings per share of 74 cents which was a record for Danaher and a 25 percent increase over last year's third quarter EPS of 59 cents.

More importantly, as you're aware, this year's earnings reflected change in intangible amortization under FAS-142 and restating 2001 on the same accounting basis, earnings per share would have increased by 7 percent for the quarter, our first year over year quarterly increase this year on a pro forma basis.

Sales increased 28 percent for the quarter to a record $1.15 billion, in large part due to our strategic acquisitions which contributed a 26 percent increase versus 2001.

Perhaps more importantly, core growth for the first time since the fourth quarter of 2000, showed a modest increase versus the decline of 15 percent we saw in the first quarter and the 7 percent decline we saw in the second quarter on a year over year basis.

Year to date, sales have increased 15 percent with acquisitions accounting for 22 percent with a 7 percent core revenue decline with less than 1 percent net currency effect.

Gross margins for the third quarter improved slightly from 39.3 percent last year to 39.9 percent.

Our first gross margin increased for the year as the impact of our stabilizing top line, coupled with cost reductions, are providing the anticipated improvements.

Gross margin for the nine months at 38.8 percent was also up slightly, reflecting the sequential improvement experienced in the third quarter.

Selling general and administrative expenses for the third quarter were 23.7 percent of sales versus 2.1 percent in 2001, due principally to the higher cost structures of the newly acquired businesses.

At the time of acquisition, the newly acquired business's SG&A structures were, on average, 30 percent of sales, which currently stands at about 27 percent for the third quarter.

Also reflected in the third quarter was the gain on the sale of real estate, up $2.7 million, or $1.8 million after tax, or approximately one cent per share.

And for the year-to-date, we have recognized about two cents per share in profits from real estate sales.

Operating margins for the quarter were 16.3 percent versus 16.4 percent a year ago.

Acquisitions were fully responsible for the operating margin dilution, with margins before acquisitions, or margins on core operations, approximating 17 percent.

Operating margins year-to-date declined from 15.5 percent last year to approximately 15 percent, but again, on a year-to-date basis, margins would have been slightly higher at 15.8 percent on the core operations.

Net interest expense increased from $7.2 million last year to $10.3 million this year--in this quarter, principally due to the decline in short-term investment interest income as Treasury rates continue at generational lows.

This is in spite of the record level of cash investments in excess of $800 million at quarter's end.

Likewise, on a year-to-date basis, interest expense has increased from $19.4 million to $32.5 million with a decline in interest income nearly $10 million between years.

Despite the obviously dilutive effect of maintaining our cash balance in safe short-term liquid instruments, we believe that maintaining maximum liquidity flexibility is of primary importance as we position ourselves to maintain an appropriate acquisition program in a difficult capital market environment.

Pre-tax income for the quarter was $177 million, a 26 percent increase over 2001 and $462 million for the nine months, a nine percent increase over last year.

The income tax rate for the second quarter and for the year-to-date was consistent at 34.5 percent, but lower than last year's 37.5 percent, due primarily to the elimination of non-deductible goodwill in this year's income statement.

Net income for the quarter was $116 million, a 32 percent improvement over the third quarter of 2001, with the nine months earnings before the change in accounting for the adoption of FAS 142 of $302 million, a 14 percent increase year-over-year.

Cash flow continues to be a strength of Danaher and a function of our unique operating system and culture, The Danaher Business System.

Operating cash flow year-to-date is now $565 million, a 31 percent increase over 2001, with free cash flow of $540 million, a 45 percent increase over 2001, and an amount which already exceeds the free cash flow of all of 2001 -- itself, a previous record year, and a 20 percent increase over calendar year 2000.

Even setting aside proceeds of $19.3 million this year from the sale of real estate and other assets, free cash flow year-to-date has exceeded 2001 by 40 percent.

efforts drove working capital components to contribute to this performance.

Year-to-date operating cash flow equates to about $3.58 per share.

Free cash flow equates to about $3.42 per share, 175 percent of earnings per share, year-to-date.

As we've mentioned in the past, we do not expect this pace of free cash flow to continue, and we expect a significant moderation for the fourth quarter at certain timing differences relative to our income tax payment and funding of our 2003 employee benefit plan are made in the fourth quarter.

Despite these timing differences, 2002 if virtually certain now to be the 11th straight year when free cash flow exceeds net income.

Overall the balance sheet remains very strong, with a debt to total capital ratio of 30 percent, with over $800 million in cash and cash equivalents -- nearly a $100 million increase since the second quarter, in spite of the fact that we spent approximately $120 million to fund five strategic acquisitions.

Sales in the process environmental control segment increased 36 percent to $840 million.

Core revenues declined three percent year-over-year.

As expected, the declines have moderated significantly from the 19 percent rate in the first quarter and the 11 percent rate in the second quarter.

As we discussed in the last quarterly call, the dramatic negative comps in both motion and power quality have abated.

Sequential growth rates continue to stabilize, although, it remains fairly sluggish overall.

Year-to-date process environmental controls core revenues have declined approximately 12 percent, with about a half percent positive currency effect.

Total segment growth for the nine months was slightly in excess of 20 percent.

Core growth in our environmental platform was again down low single digits in the third quarter; at the low to mid single digit growth we saw in our water quality markets was offset by weakness in the

business, as well as the Veeder-Root leak detection business.

In our water quality focus businesses, lab sales continue to remain strong, particularly in the higher margin

business, which was up high single digits in the quarter, with solid growth in both North America and Europe.

While the process side of the business continued to be more sluggish, overall the third quarter was the best quarter this year for the water quality business.

The market has been clearly more difficult on the retail petroleum portion of our environmental segment, as the major oils and major independents have responded to tighter margins by postponing equipment purchases, which are down double digits for both Gillbarco and Veeder-Root.

The service side of the business has been stabilizing with Veeder-Root environmental services increasing at a high single-digit rate over last year.

Although the current economic climate has made it difficult to post substantial profit improvements at Gilbarco, we have been able to use this downturn to accelerate our

implementation.

For example, at the company's primary facility in Greensboro, North Carolina, which is the single largest facility in all of Danaher, we've seen significant progress since the acquisition.

Nearly 100

events have now been held yielding substantial results.

For example, we have eliminated a warehouse and additional floor space within the plant to free up 150,000 square feet, which represents a 30 percent reduction from previous levels and have achieved productivity gains of 30 percent while maintaining on-time deliveries of 93 percent.

In spite of the revenue decline, we remain on target to achieve low double-digit operating margins in 2003.

Our motion platform was most affected by the industrial downturn, but as predicted last quarter, the segment stability has improved, resulting in slight year-over-year core growth.

Though still very modest and still more than 20 percent below year 2000 peak revenues, this performance and the top-line order book stability is encouraging.

While the performance is still mixed, with North American

performance a particular strength, the components markets and the European markets are still in modest decline.

High tech markets like semicon and telecom remain the most difficult markets, while healthcare and life sciences are stronger.

Our electronic test platform, led by our fluke operations, was down slightly in the third quarter, but with a significant improvement over the first six months which showed high single-digit core revenue declines.

The platform is led by the industrial lines of fluke which posted solid mid-single-digit growth in the quarter despite sluggishness in Europe and in the calibration markets.

While fluke networks continued to post double-digit revenue declines, it continues to outperform the market which has shown declines in excess of 20 percent and as importantly has shown sequential revenue improvements in each of the second and third quarters of this year and, in fact, a year-over-year quarter increase over the third quarter of 2001.

Cable test sales are soft and causing most of the decline as our enterprise test sales are relatively flat with new products like

and

receiving strong reviews amidst a tough IT spending environment.

As a testament to the fluke network's value proposition, the third quarter was highlighted by a $6 million order from Southwestern Bell, ironically the same day Southwestern Bell announced a reduction in force of over 11,000 employees.

With this momentum, there's a reasonable expectation that fluke networks will post comparable, potentially even positive, year-over-year revenues in the fourth quarter.

I should also note that we are now manufacturing products at fluke's new Shanghai facility, Danaher's first

electronics facility in China.

Our newest platform, product identification, and our new platform business,

, continue to operate ahead of schedule both from a profitability and revenue standpoint with the early

implementation allowing us to exit four facilities and with year over year revenues for quarter up mid single digits.

We are clearly ahead of expectations at this point in time.

Finishing 2002 with high teens to 20 percent operating margins is clearly now in sight.

Although we continue to look at opportunities to reduce cost and accelerate the expansion into higher growth markets such as China and Latin America.

We remain excited about this business and its prospects to broaden its geographic footprint and product range to accelerate growth.

Sequential operating margins for the process environmental control group continue to improve in the third quarter, increasing from 15.4 percent in the second quarter to 16.7 percent in the third quarter as the impact of the revenue stabilization and restructuring actions continue to take hold.

Year over year third quarter margins decreased from 17.6 percent to 16.7 percent, due primarily to margin delusions from acquisitions.

Taking into account the change in good will, the margin decline was approximately 200 basis points.

Turning to tools and components, the third quarter volume growth was a solid nine percent.

Higher than expected primarily as a result of the acceleration in orders and shipments related to the EPA change in truck emission standards driving our Jacobs Brake business.

Our hand tool group grew at low to mid single digits, lead again by our Matco operation which, again, increased at a mid single digit rate in the third quarter.

While shipments to our largest customer, Sears, remain flattish year over year, we are encouraged by the low to mid single digit growth we've seen in our industrial markets which had suffered significant declines last year.

Also encouraging is the restoration of Jacobs Chuck to profitability due to the restructuring, which included the elimination of our U.K. operation and a substantial increase in volume in our China manufacturing plant.

The substantial pre-buy in connection with the EPA emissions change at Jacobs Brake had been responsible for the majority of the segments third quarter increase, which as predicted, will almost certainly reverse in the fourth quarter.

Nevertheless, the combination of solid core growth and the effect of the restructuring at Jacobs Chuck has resulted in an operating profit improvement between years from 15.3 percent to 16.6 percent and a substantial - excuse me, and a sequential improvement from the second quarter from 15 percent to 16.6 percent.

Our strategic acquisition programs continue to produce, in addition to the previously announced acquisition of Raytek, which will provide a $50 million addition to our electronic test platform in non-contact temperature measurement.

We've added several smaller acquisitions that will fortify several of our platforms in other businesses.

Instrument, an $18 million position control systems provider, will be added to our motion platforms precisions systems operation.

Perform a global leader in high precision stage systems and sub systems.

This represents another step in providing broader based solutions expertise to our precision motions customers.

Interestingly,

was a top acquisition target of Kollmorgen prior to our acquisition of Kollmorgen.

was consummated late in the third quarter at a price significantly more moderate than the price expectations back in 2000.

is a $15 million addition to our water quality platform.

As the European leader in hydrology instrumentation and related data acquisition equipment used in lakes, reservoirs and other natural bodies of water, high complements our hydro lab business which was acquired as part of

and is a leading US supplier to a similar customer base, as well as our American

operation which is the leader in sampling and flow metering equipment.

The previously announced

acquisition will add $25 million to our power quality business, supporting our

distribution transformer instrumentation product line.

is a $5 million company that will add to our industrial control business, primarily around

and printing products.

The total purchase price to these businesses was just under $50 million.

Additionally, the company is expected to complete the previously announced acquisition of

later this week which will provide the motion platform with an additional $160 million in linear component revenues, as well as adding the premier brand for precision motion components in North America.

To update on the restructuring announcement that we made at the end of last year, the program continues on schedule.

To date, we have ceased operations at 12 of 16 announced facilities resulting in the reduction of over 500,000 square feet of facility space and approximately 850 associates.

Through the end of the third quarter, we have spent approximately $37 million in cash of the $54 million of the cash proportion -- or portion, I should say, of the restructuring charge with all of the non-cash asset write-downs taken.

Reflected in the margin improvements in the third quarter, we are clearly on positive side of benefits of the restructuring activities and we continue to feel confident that the estimated $38 million in annualized net benefits is achievable.

We expect to achieve approximately half of this benefit this year.

As we look forward to the balance of 2002, we have now completed our strategic planned reviews and will begin our profit planning in early November.

While we are encouraged by the improvement in core revenue comparables, we remain cautious as we look to the balance of this year and into 2003.

We do expect positive core revenue comparables in the control segment for the fourth quarter, but this is expected to be offset by some decline in the tools and components segment; primarily because of the significant fall of in expected revenues at

.

Net

we expect to have flat two slightly positive year over year core revenue comparables for the full company in the fourth quarter, coupled with, obviously, a substantial uplift from current year acquisitions.

Having said all that, we are forecasting neither an economic recovery nor, for that matter, a double dip.

Our upcoming profit plan process will focus on developing performance targets for our best look at 2003, coupled with contingency planning to prepare for any potential further softness in the event the economy takes a turn for the worse.

Near term, we remain comfortable with an EPS range for the year of $2.70 to $2.75 which would equate to fourth quarter earnings in the 75 cents to 80 cents range.

As many of you know, it is not our custom to comment on the outlook for the next calendar year before the completion of our profit plan process.

As is typical, the range of estimates from the analyst community is quite wide, $3.10 to $3.30 at this point in time.

We do not have reason, at this point, to dispute this range as the stabilization of our core businesses, a read out on our restructuring efforts, and the impact of our recent acquisitions should contribute to positive earnings improvement without a significant tail wind from an improving economy.

Just one final note.

Those of you who've had an opportunity to review the 10-Q, or will have that opportunity after this call, will note that we have again substantially increased our disclosures in the footnotes in the

in an effort to provide greater transparency.

Of particular note are expanded disclosures related to our acquisitions and the related accounting.

The additional disclosures underscore our commitment to consistent and conservative accounting practices.

At Danaher, the Danaher Business System, or DBS, helps drive many things.

Perhaps foremost amongst them is our strong cash flow, which we reinvest in strategic acquisitions to augment our organic growth efforts to strengthen our Company.

These acquisitions are valued using accepted practices like returns on invested capital, not multiples of net book value.

Our acquisitions undergo substantial change as we integrate them so as to enhance performance.

Our accounting properly reflects those changes.

So, contrary to what some may be saying, we are the high integrity, high performance company our long-term shareholders believe us to be.

We're ready for questions, now.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1, on your telephone key pad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Harriet Baldwin of Deutsche Bank.

Morning.

Well, I was wondering if you could address some of the sequential order trends that you're seeing, particularly for motion control and the

businesses, if those contribute to stabilization or if there's any glimmer of inflection, either up or down?

Good morning, Harriet.

I would say those at motion and it's

what we're seeing right now, what we've seen sequentially, is certainly in case of motion, more stability than anything else.

I tell you, at

there are--we're obviously pleased on the industrial side with what we saw in the third quarter, but I don't think that we're yet calling a trend line.

We may be a bit conservative in that regard, but, I think given what we've seen through the course of this year, we are, again, encouraged, but again, not ready to call the trend.

In discussions with your customers, is there any sense that they're getting any, I guess, less depressed about their current outlook or are they getting more conservative in their spending habits or just kind of still battened down and hunkering down to see when it all ends?

Well, I think the psychology probably hasn't gotten better over the last, say, 60 to 90 days.

I'm not sure where it would have.

But, in terms of what we have seen with respect to the order books, again, I think we've seen relative stability.

But, if there's a change there, it's probably a slight down-tick to the more conservative on the part of customers as they just read the newspapers and begin to take a more sober look towards next year.

Definitely.

And then, thinking about the

, actually has techs revenues helping on the water demand side, particularly in municipal.

Any signs of that weakening, or expectations that it could weaken into '03?

Because, I know that's held up a little bit better than you might have guessed.

That's exactly right,

.

It certainly has.

And again, I think that we're not gonna be immune to the receipts issue that the states and municipalities are gonna deal with.

But, I think it's hard to go to cutting out clean water and waste water treatment as, at least, a first option.

Certainly, we see signs where everything is receiving greater scrutiny than it did two or three years ago.

But again, I think the politics of clean water

-- that's not where the authorities tend to go as the first option.

And is it continually the case that there's some homeland defense monies that are available?

Or, is that petered out at this point?

Well, I think it's still something that's percolating.

I'd like to see more dollars than newsprint around all that.

But, I think right now it's on a gradual -- perhaps even a modest burn.

But, nothing that's flaring up creating huge orders for us -- either out at

, where we get into anthrax detection, or at

.

So, we do have some -- we are continuing with the installations of the distribution monitoring-type equipment we put in for the winter games in Salt Lake.

Great.

Thank you.

Thank you, Harriet.

Your next question comes from Jeff Sprague of Salomon Smith Barney.

Hi.

Good morning, everyone.

First, Larry, a couple of questions on business items, and then maybe a couple of questions for Pat on the new disclosures and everything.

First, I was just wondering on

if you could comment on the comment on the growth.

Do you think it is something you've been able to instill in the business at this point?

Or, is it just the end markets have turned out to be stronger than you expected this year?

And what are your plans to accelerate growth above and beyond what the market may be doing?

Jeff, I don't think that we have had the full impact I think we will have on the top line at

.

The team that we have out there is really very focused on making sure that we get out -- that we reconnect with the customer base.

Again, there were a number of distractions, both under previous management and during the course of the transition -- or the transaction, I should say -- that didn't help the sales force, didn't help the business.

But, as we've gotten out, I think we recognized the

brand has great resonance with customers.

I think we're out listening a lot more, and certainly, the sales force is far more energized.

So, I think that right now it's probably more a result of getting the businesses back to basics, which, frankly, anybody probably could have done, and a more modest impact from the Danaher contribution.

I think going forward, we continue, again, to be very confident about our ability to grow this business, both in terms of taking share globally -- we still have a far more announced - or, pronounced position in North America than we do in the other major geographies, which are growing rapidly.

And certainly I think over time we have the opportunity to use this business to redefine the space that we serve and get into some adjacencies which I think will leverage the - again, the brands, the channels, and the install base in a very interesting way.

OK, great.

And on brake, can you give us a little more flavor on how you see that playing out?

You know, is there a just a precipitous decline immediately?

And, you know, can the business hold profitability flat or above break-even given how that plays out?

The decline is precipitous,

, and it is underway.

I mean we really walked off a cliff as we went from September to October, and we have seen just an incredible decline well in excess of 50 percent in just, you know, the day-to-day build rates.

I don't think that's unique relative to what our customers - the engine OEMs are doing and talking about themselves.

We are not in the near term going to be able to achieve a break-even position, so we're going to have to carry a loss position at brake for a couple of quarters.

I think the outlook would suggest that this quarter's going to be very light and I suspect that carries into the first quarter of next year with - I would imagine and I think others do, as well, that we get back to some level of more normal trends - more normal volumes in the spring.

But I think that's a somewhat fluid situation, but what the team did to their credit through the second and third quarter of this year was not only ramp up the business to take full advantage of the

end, but also prepare to take cost out as best we can given the near-term outlook.

Great.

And is there anything going on at Sears just programmatically for the holidays or anything that give you any visible boost in that side of the business?

Well, I continue to like what we're seeing from the promotional and program support.

We've got a number of catalogue covers, promotional placements, in-store merchandising efforts that we haven't - we haven't seen in a while.

And we also are going to get some infomercial support this year.

So I think from a - from a - you know, from a marketing perspective, we're going to have more support going into the fourth quarter of this year than we have in prior years and are optimistic as a result of that.

That obviously has to face the reality of what could be a soft consumer market going into the holidays.

So, that what we can control and coordinate with Sears, we feel good about, but obviously we're concerned like everyone else is about what the consumer's going to do over the next several months.

Great, and then, just - I'm sorry I'm going on so long here - Pat, could you just give us a little color on exactly the swing factor in the cash taxes and what you expect in the fourth quarter?

And additionally, on the - on the disclosure about the allocation of purchase prices for acquisitions paid, can you give us a little color around that "Other Assets and Liabilities Net" line which is generally a sizeable negative entry?

You're talking about the cash flow,

?

No, in the - in the table that shows the allocation of the purchase price on page 13 of the Q.

OK.

With respect to the taxes, I - we expect that we'll probably pay somewhere in the neighborhood of 50 million, U.S., taxes.

That's a, you know, still being determined.

It won't be known until December 15 and I would suspect we'll pay another 10 perhaps in non-U.S. taxes.

OK.

Tell me again what the question is?

, you still on?

Yes.

What are you looking at in particular?

His line is no longer open.

His line is off?

Sir, you can press star one to open your line ...

He'll come back, so we'll catch up with that later on.

I would like to remind everyone to please limit your questions to one question and one follow up question.

Your next question comes from Bob Cornell of Lehman Brothers.

Hey.

Good morning everybody.

Larry, did you say the core growth in process environmental was three percent in this quarter?

Is that right or is that a comment about a piece of the business?

I'm sorry, Bob, good morning.

The number was three percent but it's got brackets around it.

OK.

That's right.

And, you know, I think you said you expect the fourth quarter be better, you know.

Calibrate me on the fourth quarter and then I know you were careful about next year, but, you know, what do you think the range of possible expectations would be for, you know, the process environmental control business core world next year if the economy continues to poke along here?

I think with respect to the fourth quarter, again Bob, we're cautiously optimistic that we can pass the equator and get the segment core growth number into the position zone.

But I think we'll be a modest number.

If we have relative stability in the industrial economy, we don't have any wildcards, clearly that's a segment that should show positive organic growth next year.

I think the challenge for us as we go into budget is to make sure we're funding all of our corporate breakthroughs, which now number 22, and all of the strategies that we've just reviewed.

But staying very tight everywhere else, because I don't think any of us here have a strong sense of vision as a catalyst out there looking to move the industrial economy at an accelerated rate anytime in the foreseeable future.

Yes.

And just, you know, back on the three main acquisitions made this year, you know,

, you gave sort of a, you know, a comment on each of those units profitability but what were the aggregate sales of those businesses in the just reported quarter and what was the operating profit margin aggregate those three?

Hold on a second, Bob.

I think we can pull that together.

And, you know, the follow up question would be, you know, what would you expect the, you know, the rank of margin potential for those three businesses in '03?

Bob, on the revenue contribution for the quarter for those three businesses, we're looking at about 220 million.

And the margins, as you might expect, are still somewhat scattered between the three businesses ...

Right.

But we are still at the single digit rates for

.

The, you know, high single digits rates for

moving up, I think we still have a chance to get to 10 percent this year.

Videojet, pretty pleased with that.

We're running, you know, high teens at this point.

And

would be kind of in the middle of those two.

is a little harder to extract at this point because two of those facilities have now been moved into the

operation and measuring that is a little bit of an art right now.

But, I would say, basically they would be a mid-teens level.

Yes.

I think that's right.

Well, I mean, Larry referenced the, you know, the

events at the

operation, what would be, sort of, a reasonable range of expectations for profitability of those business in '03?

I mean, just given what we know now and what you commented on organic growth?

Well, I think -- I think we have a reasonable shot at a jumping off point of 10 percent for

in the next year if the revenue stabilize.

You know, we should be able to pick up another one to 200 basis points on that business for next year.

is clearly heading to 20 percent and I think the

businesses are, you know, as they get digested into the

business will be, if not at that rate, fairly close to it.

At the

rate, not 20 percent?

At the --

Close in on the 20 percent rate, yeah.

?

rate, yeah.

Let me stretch my window here and say, you know, you haven't closed the

deal yet, but when you do, I mean, what's the, you know, the -- what kind of components picture emerged?

You know, what's, sort of, the opportunity there?

I think the opportunity, Bob, is really to put the -- the

business together with our linear actuation business, part of the

acquisitions and really create, what we think, is going to be a very interesting powerhouse in liner motion -- linear precision solutions in North America and in Europe.

Clearly the position we will have is much stronger here.

We're going to take that Thompson brand, but it on our own business.

But we end up, I think, having a very strong position with customers that start with a load in mind as they tackle their motion challenges.

Today we've got a lot of folks, frankly, who start with the motor or the drive and then work downstream to the load.

There are a lot of different type of customers out there that gives us a very good entry point with the customers who -- who start with the load.

So, in some respects, the way we approached this market -- or will approach this market strategically, is to say, we don't care whether you're going to start with the motor in mind or the load in mind, we're going to have a gateway into Danaher motion for you, as a customer.

It's also going to give us the ability, frankly, to accelerate we think in combining motors to drive and the precision mechanics.

The conversion of some of the more traditional motion applications, like hydraulics and pneumatics into our type of technology.

So, we're -- we're pretty excited about that and, like I said in the prepared remarks, we think we're going to close that transaction out here momentarily.

OK.

Great.

Thanks you guys.

Bye.

Your next question is a follow-up question from Geoff Sprague of Salomon Smith Barney.

Hi, sorry about that.

Pat, the only thing I was trying to get at is that other assets and liabilities net line, is that just simply the assumption of existing liabilities of the acquired companies, or is there some other --

Well, that would be the majority of it, but that would -- that would also be the, you know, the restructuring reserves that would have been set up as part of the acquisitions and most of that -- there's probably about -- there's a little bit more than 50 million of that and most of it relates to -- to the three acquisitions made in February.

So these would be the restructuring activities, if you will that associated with the facility closures at

and downsizing at

primarily, as well as what hasn't been spent yet in the -- in the consolidations of these

facilities.

That's great.

And then we've got the additional disclosure that shows what those ...

... see that elsewhere in the report, as well, yes.

Alright, thanks.

OK.

We're--we have to speed it up a little bit because we still have a number of people in the queue here, so.

Your next question comes from ...

One question.

...

of Goldman Sachs.

: Good morning, Larry and Pat.

Can we get an update on the acquisition outlook?

One of the comments made last quarter was you felt as though you would be not focusing on looking at any new platforms, but would--looking at bolt-ons, we've seen a lot of bolt-ons here.

Just taking your temperature on appetite for anything larger.

Well, I think what we said,

--and good morning--was that the high probability of what we'd be talking about in the near terms would be bolt-ons and not new platform establishing transactions, just because of what we saw in the pipe.

And if I look into the pipe and share with you what we see in the fourth quarter, I think that still holds true.

But it does not mean that we aren't looking at opportunities to establish platform number six, but I think all we're saying is that while we have a number of different things on the radar screen, in terms of what's actionable and likely to be discussed publically here I would say in the next three to four months, it's still going to be acquisitions like

or like a

that are going to bolster the existing platforms as opposed to something that would create a new platform.

But, again, don't take that to suggest a change in strategy.

We still think that platform number six is out there somewhere.

And just, is it--would it be pricing that might be holding you back at this time or just not the environment at this time to do a deal of any kind of size?

Well, I think every deal gets driven by different dynamics.

I think there are opportunities that were--that are under review, you know, that sometimes the larger situations means public situations and it takes two to see something like that through.

But I think right now we're very much in the game, both from a bolt-on perspective and from a perspective of looking at those situations that could create a new platform for us.

So I don't think we're in any way handcuffed by the current environment, anything but given the cash balance that we have.

I think you know,

, it drives Pat crazy us getting the dilution that we get, but, you know, we're going to keep that powder dry when we see opportunities that make sense for us, like a

, like a

, like an

, we're going to move.

And again, I think that probably some things we're talking about in 90 days that we'll see through in the fourth quarter that'll be very good additions to the Danaher portfolio.

Thank you.

Thank you,

.

Your next question comes from

of Banc of America Securities.

Good morning, guys.

Real quick, just broadly speaking, Larry, on Europe.

I know it's not a big percentage of total revenues, but, I guess, would you characterize--we saw motion stabilize, would you characterize the 15 percent of sales coming out of Germany as better or weaker and any other thoughts, I guess with respect to Europe trends?

Good morning,

.

With respect to motion, Germany specifically and Europe, it's soft.

And, I think, as we look more broadly in motion across Europe, as we look across Europe in some of the other businesses, certainly water continues to be a bit of an

positively.

But I think things in Europe are soft.

The trend line probably has seen a tad more softening over the last 60 to 90 days.

But on balance, I think we're taking a very cautious view to Europe as we look into next year, much like we are domestically.

Great.

And just a follow-up on water quality.

I think you mentioned that this quarter was the strongest performance of the business of this year.

Could you just talk about the seasonality?

When we think about it, I think last year the business had -- was probably much more resilient than anybody thought, just because you hadn't had it in a downturn -- and then, kind of walk us through the thought process and seasonality of expectations going forward.

Well, what I think we tend to see in that business, particularly in Europe,

, is some seasonality, where as we get toward the end of the year, projects get released, projects get completed.

So, that helps us a little bit.

Certainly in the fourth quarter as we look out, we tend to see that more in Europe than we do here.

That's really been a legacy of the

in the business.

But, on balance, again, we look at that business as a business that will be a better performing business for us than others in economies like this.

As we look into next year, I think that will still be the case.

Great.

And lastly on

, do you have a split?

I'm assuming that most of the growth came out of the after the market portion of the business, as opposed to the equipment side.

And then, just with respect to end market opportunity -- I think their biggest end market is food and beverage, with pharmaceuticals a strong number two.

And I guess, the more you hear in the press, there's kind of this whole notion of barcode enabled point of care technology in the healthcare field.

Is that something you guys are looking at expanding into?

, interestingly, the equipment business recovered nicely in the quarter, and certainly September was a nice positive month for us.

So, whereas some of the revenue stability that we'd seen at

previously was principally in the aftermarket, I'd say that has begun to balance out, and we're actually seeing some nice improvement in the equipment sales, as well.

There are a range of applications,

-- and they continue to boggle my mind -- where precision marking and coding is increasingly desired as part of a secure supply chain.

There's some regs over in Europe where they're talking about marking individual eggs, believe it or not.

So I think, given our presence, we get involved in early stages both with customers and with regulators around what is possible from a technology perspective.

I think that's where not only the brand and the installed base, but also the technology capability we have with respect to the inks and the make ups, position us very well to take advantage of any of these secure, or sufficient supply/chain initiatives.

Great.

Thank you.

Thanks,

.

Your next question comes from David

of T. Rowe Price.

Hi.

Congratulations on a nice quarter.

Do you guys want to spend maybe one or two minutes on the water electric transaction from a couple of years ago?

Just sort of, you know, how you came to buy it, how the price compared to other properties.

Could you just spend a few minutes on them?

I'd appreciate it.

Good morning, David.

And we certainly can do that.

I think the water business is important in a number of respects.

We talked a moment ago in response to Bob's question about how this fits so well with

to create that leadership position in linear actuation.

But, I know that that's probably not the interest in

that some other folks may have.

Let me just go back and share some facts with everyone around that transaction, which, as you indicated,

, occurred in 2000.

It was a related party transaction - a transaction that has been fully disclosed.

It was fully disclosed at the time, and we continue to do that in subsequent filings.

At the time,

owned Warner Electric, was in the process of conducting an auction to sell the business in its entirety.

We were invited to participate.

We looked at it.

Frankly, it didn't fit.

And, you know, if you start with strategy, our motion strategy is really geared around precision technologies, not the less precise mechanical technologies, which was

of the Warner business.

So, we liked the linear business.

We didn't like the rest.

wanted to sell the whole thing in one transaction.

So, we walked away.

There was no way to break it up.

, a company that Steven and Mitchell Rales are involved in, bought the business in February of 2000.

It fit with some things they were already doing in power transmission in the

business.

Subsequent to that transaction, we had an opportunity to look at the piece - the linear piece that we liked.

There was no precut deal between us and

in that regard.

Obviously, given the related party nature of the transaction that we wanted to see through, there was an independent committee of our board that was formed - again, something we have fully disclosed.

We brought in some third parties to help us with the valuation and fairness opinions.

And we ended up consummating that transaction in the third quarter of 2000 interestingly at about just under one-time sales and about eight times EBITDA, which I think it's important to note are lower multiples than what we paid for

and

, the other motion transactions that we competed in that same time period.

We got the premium property out of that - out of that business, and, again, really the foundation for the linear strategy that you're seeing take another step with the motion transaction or the Thomson transaction, I should say.

So, I think net/net, a very good deal for Danaher and something that I think all shareholders should feel good about.

I know - I know some folks are suggesting there's a hint of impropriety here.

I think that suggestion simply suggests to me that you don't know my predecessor, you don't know our board, you don't know the Rales if you think - if you think that's true.

OK.

Thank you very much.

Thanks,

.

Your next question comes from Don MacDougall of J.P. Morgan.

Good morning, Larry and Pat.

Good morning.

I have two questions - the first probably for Pat.

Just wondering what the net impact on 2002 will end up being from the restructuring program last year, you know, keeping in mind that there is pay-as-you-go spending associated with that and what you would see that savings program as those pay-as-you-go come down, what the net number would end up being in 2003.

From the restructuring?

Yes.

Well, we are looking - we are looking at 38 million as the total annualized benefit of the restructuring.

And how much is - how much will you have gotten by the end of this year, Pat?

And then, how much therefore would be dropping into next?

Approximately half this year, and incrementally half next year.

OK.

The next question that I wanted to ask is on depreciation and we've had a couple of investors of the more skeptical nature ask us about your depreciation rate, particular focused on the end of last year if you look at the quarterly run rate on depreciation.

And then consider that the company has added substantial assets through acquisitions.

Comparing, say, the fourth quarter depreciation number to what the run rate in the second quarter would be after some of those acquisitions drop in.

Superficially, at least, it doesn't appear the depreciation came up enough to, you know, to justify those additional revenues.

I've got a pretty good idea of how that walk works, but I think it would be helpful if you could maybe explain some of the factors there.

, I'll try to get a little bit more clarity around that.

I think there's a number of things that are involved and first of all let me just say that relative to the new acquisition, we're booking about five million per quarter for the new acquisitions.

And so about 20 million on an annualized basis and the PP&E and that we acquire as part of these businesses was only 100 million.

So, you know, I think it's probably certainly in line with what you'd expect to see with any kind of PP&E rate.

Maybe even a little bit higher relative to the fact that there are a number of buildings certainly involved in this.

I think, you know, fourth quarter bridge is often times affected by year end minor adjustments that are made in some of the various businesses and that is part of what happened here.

I think, basically, breaks into a couple of components.

The second quarter '02 depreciation is about two million higher than the fourth quarter with about five million more in depreciation from the new acquisitions.

And the other three million is really kind of three pockets.

You've got a piece that relates to the restructurings that we did in the fourth quarter.

A lot of that was eliminating a lot of fixed assets there and that was probably in the neighborhood of, you know, a little less than a million impact in the quarter.

But certainly more than a half a million.

And the second factor would be that we had a fairly significant number of short-term IP software costs.

So installations go off depreciation.

Seems like ancient history now, but, you know, Y2K was quite an event from an IP spending standpoint.

We put a lot of IP spending in in '98 and '99 and we use a three-year life on all that equipment and software and a lot of that came off depreciation in 2000 for 2002.

And then lastly, are these kind of year-end adjustments that occur and it's probably - and a lot of it is in the tool group and it rolls up to probably about a $1 million as well.

And that's essentially year-end adjustments that are made.

A lot of, you know, most of the businesses is running some kind of a regulate - running a full recalculation of an item-by-item depreciation every month.

They'll run kind of an estimate and chew it up occasionally and fully chew it up at year-end.

And then, of course, there's a few when we take quick mounted service there's also - what typically happens is the companies will, if there not actually eliminated or sold but just taken out of service, they'll fully depreciate them in the last month.

And that's the balance.

OK.

Thanks.

That sounds like a pretty good lock and I'll slip one more in for Larry.

Larry, if you could maybe just provide an update on your recent, I guess, emphasis on maybe moving some manufacturing to lower cost countries, have you had an opportunity to flesh that strategy out a little bit?

Yeah, we actually

had a number of folks off-site working through that last week and what I'm hopeful to do -- because when we have everybody together in December out at

for the investor meeting, just take everybody through the learning and the early experience that we've had this year and talk about where we're headed.

Right.

I think we continue to be very encouraged by the progress that we have seen from a manufacturing perspective and from a sourcing perspective.

The -- the cost take-downs that we're seeing in China, Mexico, Eastern Europe are significant.

We're also beginning to have really some very early experience,

, in using some offshore development resources, principally in India which we're also very excited about.

Cost reductions are not insignificant, but I think, more importantly, the quality of delivery that we're seeing is exceeding expectations.

So, let me -- let me leave it there and come back when we can really unveil that -- that opportunity and that effort in full color in early December.

Thanks guys.

Good quarter.

Thanks Don.

Your next question comes from

of Merrill Lynch.

Good morning everybody.

Good morning.

I will actually try to keep this to one.

Larry, in the Q it looks like power quality was -- was -- was flattening out, I think you said it was down just 4 percent; do you think that's sustainable going forward or was there some unusual factor in there that brought that up?

: I think with power, Donna, what we've seen are really two things.

First, a general level of stability since the end of last year.

I think there's no reason that can't be sustained.

We certainly have seen some projects really in the power solutions space, projects that would involve installations of power system upgrades in the IT enterprise world get pushed out a little bit.

So, a little bit of softness there, but there does seem to be more push outs than cancellations.

I think what we are seeing, frankly, is, on balance, what we saw prior to the Dot companies explosion in that business and that is a -- a relatively stable market for those types of products.

So, going forward, I don't think we have expectations that -- that things return to the 99/2000 heyday, but, by the same token, I think long-term this is a market that has legs.

OK.

OK so it was -- just one quick follow-up on

industrial, a similar question, that looked pretty good in the quarter, even with the economy sort of bumping around through what we hope is the bottom, is that kind of performance sustainable over the next couple of quarters?

I think we're optimistic about what we're doing at

from a marketing program, from a new product perspective.

I would say the team there is making a lot of its own luck right now.

So, without, again, forecasting an economic recovery, we're optimistic that we really can control our destiny in that business, like we can with the other platform businesses both in this -- in the US market and elsewhere.

Terrific, thanks a lot.

Thanks Donna.

Your next question comes from Jim Lucas of Janney Montgomery Scott.

The

sale to

.

Did you look at that property in the sale process?

Good morning, Jim.

No.

No.

OK.

Cap ex was 45 million through the first nine months.

What is your outlook for the fourth quarter and, for the full year, could you break out your cap ex of maintenance versus what is being used for growth initiatives?

Jim, I think we're going to struggle to get close to 80 million this year, though clearly, we would anticipate a number of larger projects dropping into the fourth quarter to get us into that--into the vicinity of 80 million.

In terms of the break out between the different categories, I would say, in terms of cap ex, we'll probably--from a growth perspective, it's probably in the 25, 35 percent range, something like that.

I'd have to get you an exact number.

OK.

I was just looking for a ballpark, there.

And ...

Not enough, but that's one of the--when we go through budget I'd like to see us take up cap ex and take up that percentage, particularly to make sure we are investing as aggressively, organically as we possibly can.

And, you said in the past that it's not often that you turn away the requests.

Based on your last comment, could it maybe be indicative that maybe you need to spend a little more going into next year?

I'd like to try.

You know, I don't want to--we don't want to run the business in a way that says "Hey, let's be foolish and just spend to spend."

I think what we try to do in

is flush out any and all good organic growth opportunities.

I mentioned earlier that we've added a couple of corporate break-throughs, there a number of other smaller important initiatives, as well, that--the teams know as we go through budgets, we want to make sure that we've got this ability on the incremental positive increase in spending around those areas, which, in a tight environment means we've got to cut somewhere else.

It's the way we've always tried to run the business.

I think we want to make sure we're putting extra emphasis on it this year, not because we think we're missing the

to--I think, perhaps, more a reflection of the fact that the economy is unlikely to help us anytime soon and we have to continue to make good things happen ourselves on the top line.

OK.

And of the 22 break-through objectives, could you split that out among the five growth platforms or just give us a ballpark of where most of the initiatives are focused?

Most, but not all of the initiatives are focused on the platforms.

And proportionately, motion has the most.

I would say the rest are fairly equally spread, with perhaps

and

having more than Tools and Video Jet.

I think largely because of the nature of their markets.

And Video Jet is still, you know, evolving, frankly.

There's some things at Video Jet we want to do strategically which aren't, by definition, corporate break-throughs, but are certainly significant from an organic growth perspective.

Right, you have to walk before you run.

And that's exactly right, Jim, and, you know, there's a lot of daily work that we have to do at Video Jet before we really push the break-throughs.

And, in some cases, what they're doing as break-through may well really be daily work, in our view.

OK.

And finally, in the industrial tool channel where you indicated you were up -- is that a reflection of -- my sense is that the market is still down.

Were you able to benefit from one of your larger competitor's stumble in the quarter?

I think we certainly saw the market -- probably not differently than the way you've described it, Jim.

We've obviously been working a number of initiatives in that space, which both in industrial and in mobile distribution, continue to produce for us.

So, we're pretty pleased with that.

OK.

Thank you.

Your next question comes from John Baliotti of UBS Warburg.

The question has been answered, so I'm gonna try to call back to you.

Thanks.

Thanks, John.

Your final question comes from Matt Summerville of McDonald Investments.

Hey, good morning.

Good morning, Matt.

I have a couple of questions related to some of the internal opportunities that you've sort of hit on, here.

I was wondering if you could update us on some of the new program initiatives you have going on in motion.

Is there anything new to report there?

With respect to

-- how the thrust is going into China, as well as the new European distribution partnership?

And with respect to water quality -- if you can talk about some of the new product launches that I believe were slated for the back half of this year.

That's right, Matt.

Let me see if I can hit on a few of those for you.

With respect to water quality, there are some new technologies, which we're very excited about -- technologies as opposed to products -- that are really in the process of being transitioned into products.

And one of things we'd like to do particularly, since we'll be there in December, is see if they aren't advanced enough to really unveil them for the group that will be gathered there, so that you see the nature of the technology development, and the commercial opportunity that we're excited about.

It may be a bit vague for you right now -- frankly, intentionally so, because we'd like to make sure -- as Jim said a moment ago -- make sure we walk before we run.

But, we're very excited about those.

The Shanghai facility at

is important for us not only from a global production perspective, but also as really an additional core component to our China strategy.

You know that

really has been the fountain of a lot of our success in China.

We've got, actually,

China people now in water and

, helping us replicate the

experience in those businesses.

I think having a facility on the ground not only gives us local production, but also a bigger ear closer to the ground in that market, so that the products -- let alone the cost structures -- are appropriate for the rapidly growing China market.

With respect to motion, I think we continue to make very good headway on a number of the acquisition -- or, excuse me -- the breakthroughs.

One of the things we'll be doing here in a week's time -- which perhaps, we can lay out in more detail, as well, when we're together in December -- is the linear opportunity.

We'll go through that strategy with the Thompson team not too far from today.

And really, that integration, and getting into the bowels of what we can do in precision linear solutions is something that we're still very excited about and anxious to review in depth with the team.

So, that's -- hopefully, I hit on a number of those that you were asking about, Matt.

Thanks, guys.

Thanks, Matt.

And I'd like to thank you all.

We ran a little late today, but we did want to try to get the questions that came in.

And just for those that did turn in late and are still on the call, the reply number is 706-643-0434, confirmation 6116037.

And I will make myself available for the balance of the day for

calls afterwards.

Thank you.

This concludes today's conference call.

You may now disconnect.