Danaher Corp (DHR) 2004 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Danaher Corporation's third-quarter earnings results conference call. (OPERATOR INSTRUCTIONS).

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

Mr. Wilson, you may begin your conference.

Good morning, everyone, and thanks for joining us today.

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

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

Our Web site address is www.Danaher.com.

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

This call will be replayed through October 25th, and the audio portion will be archived on our Web site later today and will remain archived until our next quarterly call.

The replay number is 800-642-1687, and the confirmation code is 1307910.

I will repeat this information 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 the call which involve risks and uncertainties.

These risks and uncertainties related to customers, prior relationships and prices, competition, market demand, litigation and other contingent liabilities, the integration operation of acquired businesses, and economic, political and governmental and technological factors affecting the Company's operations, markets, products, services and prices among others is set forth in the Company's SEC filings.

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

Additional information regarding the factors that may cause actual results to differ from these predictions is available in our SEC filings.

With respect to any non-GAAP financial measures provided during the call today, the accompanying information required by SEC Regulation G relating to those measures can be found on our Web site, www.Danaher.com, under the section, Investor News.

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

Andy, thank you.

Good morning, everyone.

It is indeed a good morning in Red Sox nation.

We were very pleased to report this morning that our third-quarter earnings per share were 62 cents, representing another record third quarter for Danaher, and a 41 percent increase over last year's third -quarter earnings per share of 44 cents.

Included in our third-quarter earnings per share is approximately 1 cent per share related to the sale of excess real estate within our Tools, Hack Lange and Fluke operations.

Revenues for the quarter increased 33 percent to a record $1.7 billion as revenues from existing businesses, also described as core revenues, grew 9 percent from a year ago.

Acquisitions contributed an increase of 22 percent, and positive currency effects contributed an increase of 2 percent to the quarter.

Year-to-date revenues increased 29 percent to a record $4.9 billion.

Revenues from existing businesses contributed an increase of 9 percent.

Acquisitions contributed 15.5 percent.

A positive currency impact contributed 3 percent.

And the impact from three additional days in the first quarter of this year contributed approximately 1.5 percent.

Gross margin for the third quarter improved from 41.4 percent in 2003 to 42.4 percent.

Continued leverage from higher revenues, ongoing cost reductions in our existing businesses, including low-cost region initiatives both in sourcing and production, as well as higher gross margins in our recently acquired businesses, primarily Radiometer, contributed to this improvement, which was mitigated somewhat by higher steel prices experienced during the quarter.

Gross margins for the first nine months improved 160 basis points to 41.9 percent due primarily to these same factors.

Selling, general and administrative expenses for the third quarter were 25.9 percent of sales versus 25 percent last year.

Year-to-date SG&A expenses have also increased 90 basis points over the same period last year to 25.9 percent due to higher SG&A structures in our recently acquired businesses, primarily Radiometer and KaVo, as well as from the effect of growth and cost reduction investments improved during the first nine months of this year.

Operating profit for the quarter was $292 million, a 35 percent increase over 2003 and $789 million for the first nine months of this year, also a 35 percent increase over the same period last year.

Operating margins for the third quarter improved 20 basis points to 16.7 percent versus the third quarter of 2003, driven primarily by leverage from incremental core revenues and cost reduction activities offset somewhat by the higher cost structures and our 2004 acquisitions, primarily KaVo, which negatively impacted overall margins by approximately 60 basis points.

For the nine months ending October 1, 2004, operating margins improved 16.1 percent from 15.3 percent last year due primarily again to these same factors.

Net interest expense for the third quarter was $11.1 million compared with $11.9 million for the third quarter of last year, primarily due to the completion of the amortization of origination costs related to our zero-coupon convertible notes.

As expected, our effective income tax rate for the third quarter was 28.5 percent versus 32 percent in the third quarter of 2003, reflecting the growing percentage of profitability generated by our international operations.

Net income for the quarter was $201 million, a 45 percent increase over the third quarter of 2003 and another record third-quarter performance.

Net income for the first nine months was $528 million, an increase of 44 percent over the first nine months of 2003.

Cash flow generation continues to be robust with operating cash flows of $769 million for the first nine months of 2004, representing a 24 percent increase versus 2003.

A combination of strong earnings growth and the timing of income tax payments contributed to this growth.

This performance was achieved despite an increase in working capital requirements in support of our higher core revenue growth.

Nonetheless, working capital turns improved on-half turns versus the prior year.

Free cash flow, defined as operating cash flow less capital expenditures, was $699 million from the first nine months of 2004, also a 24 percent increase over the prior year.

And our free cash to net income conversion ratio for the first nine months remains solid at 132 percent.

We continue to be on track for another record year of cash flow, and we expect our free cash will again exceed net income -- this for the 13th year in a row.

Capital expenditures for the first nine months of 2004 increased 30 percent to $70 million.

Our current full-year estimate remains in the range of $100 to $120 million.

Our balance sheet continues to remain very strong with a debt to total capital ratio of 24 percent and over $500 million in cash and cash equivalents at the end of the quarter.

Moving onto the operating segments, processed environmental controls revenues increased 41 percent for the quarter to $1.4 billion.

Revenues from existing businesses contributed an increase of 10 percent.

Acquisitions contributed an increase of 28 percent, and currency gains provided an increase of 3 percent.

The strong core growth performance continued to be broad-based.

For the first time months of 2004, revenues increased 34 percent to $3.9 billion.

As revenues from existing businesses contributed 8.5 percent, acquisitions contributed 20 percent, currency gains contributed 4 percent and the extra days in the first quarter contributed the remainder or approximately 1.5 percent.

Operating margins for the quarter were 17.2 percent, essentially flat with the prior year primarily the result of recent acquisitions, principally KaVo, which had a dilutive impact on margins of approximately 80 basis points.

For the first nine months of 2004, operating margins increased 60 basis points to 16.7 percent.

Environmental platform revenues for the quarter improved 13 percent with core revenues accounting for growth of 9.5 percent and the remainder due to a positive currency impact of 3.5 percent.

Both Hach Lange and Gilbarco Veeder-Root delivered solid core growth performances during the quarter.

Core revenues in our water quality group in the quarter grew high single digits led by a robust performance for both the Hach Lange and the Hack Ultra Analytics businesses.

Hack Lange core growth was strong across all major geographies, led again by growth in China which was up more than 60 percent versus last year's third quarter.

Growth came from both lab and process products with the United States continuing to grow faster than Europe by a slight margin.

Hach Ultra Analytics' low double-digit core growth performance continued in the third quarter, driven again by strength in both Asia and the U.S. primarily in the food and beverage and electronics end markets.

In late September, we began shipping our new SCE 1000 process controller, a key new product at Hach Lange which consolidates multiple control platforms and which allows our industrial and process customers to easily integrate multiple water quality measurement sensors in the one system.

This product, which was recently launched at West Tech (ph), has generated strong interest amongst our customer base both here in the U.S. as well as in Europe.

Also during the quarter, Hach HydroMetrology (ph) business was selected to install a extensive flood warning network for Romania.

This three-year multimillion dollar project is one of the first of its type to be financed by the Export-Import Bank of the U.S..

On September 20, we announced our tender for Trojan Technologies, a leader in ultraviolet-based advanced water disinfection systems.

Trojan, which is based in Ontario, Canada and has annual revenues of approximately $100 million U.S., is one of the leading global suppliers of UV treatment systems and represents an exciting addition to our environmental platform.

This transaction remains subject to regulatory approvals and other customary closing conditions.

We are anticipating a November closing and are looking forward to working with the Trojan team.

Gilbarco Veeder-Root experienced low double-digit core revenue growth in the third quarter.

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

This represents the fourth quarter in a row of solid core growth performance at Gilbarco Veeder-Root.

We do, however, expect this rate of growth to moderate in the fourth quarter as we lap more difficult comparisons.

Our leadership in the development of environmental technologies for the retail petroleum market continues as we began shipment recently of our new secondary containment vacuum sensing system.

This product uniquely addresses the state of California requirements for continuous monitoring of pressure levels in double-walled underground storage tanks -- rules that went into effect this summer.

At the end of the quarter, we completed the acquisition of Dohm's (ph).

Based in Copenhagen, Denmark, Dohm's is a $25 million European leader in retail automation products used to remotely manage dispensers and point-of-sale investments across a customer's entire retail network, thus reducing their total cost of ownership.

Dohm's is an important strategic addition to the Gilbarco Veeder-Root product portfolio.

Turning to motion.

Danaher motion revenues grew nearly 28 percent in the quarter with core revenues providing growth of 18.5 percent, acquisitions contributing growth of 6.5 percent and a favorable currency impact contributing 3 percent.

Broad-based core growth was led by our corporate breakthroughs in Next Generation flat-panel displays with Otis Elevator, our electric lift truck initiatives and with our direct drive products.

Our flat-panel efforts continue to drive market share gains in the U.S. with both photon dynamics, as well as with new customers in Asia, positioning us well as the industry advances the Next Generation of flat-panel display manufacturing capacity.

This initiative is now expected to generate more than $25 million in revenues this year, putting us two years ahead of our projections just one year ago.

Our Otis Elevator initiative remains on track, generating more than $20 million in revenues this year, a result of strong demand particularly in China.

Our electric lift truck corporate breakthrough also continues to gain traction and is expected to ramp from over $100 million in 2004 to over $200 million in 2007 as we continue to drive and capitalize on this key DC to AC technology conversion.

Our direct drive business has more than doubled on the strength of design wins secured prior to this year.

Our linear business experienced high single digit core growth during the quarter, driven by improvement with our ballscrew business in both Europe and North America.

While our year-to-date orders with our semiconductor and electronic assembly customers are up more than 50 percent versus last year, we are seeing some general signs of softening in these two end markets.

As a result, we are forecasting a somewhat more conservative growth outlook in the fourth quarter for both of these verticals.

Our electronic test platform revenues grew 17 percent in the quarter with core revenue contributing growth of 5 percent, acquisitions contributing 10 percent and a favorable currency impact contributing 2 percent.

Fluke's low single digit core revenue growth was driven by continued strength in the U.S. industrial and European electrical channels and continued double-digit growth in China.

Included in the prior year third-quarter results is lower margin revenue related to a third-party distribution agreement that expired during the first half of 2004 and was not renewed.

This impacted Fluke's core growth revenue by 300 basis points in the quarter.

Thermography revenues remained strong and sales of the RayTek TI-30 (ph) continue to build momentum, while sell-through for our core temperature products increased by nearly 50 percent, resulting from the launch of the new RayTek ST product.

We continue to see sell-through strength in the U.S. industrial channel.

Upcoming new product launches, including both temperature and power quality offerings, will again drive positives organic growth in the fourth quarter.

Fluke Networks with double-digit core revenue growth was driven by cable installation and distributed enterprise network analysis products.

The sales performances was led by double-digit growth in Asia and Europe with the U.S. posting mid single digit gains in the quarter.

During the quarter, Fluke Networks introduced the new ether scope network assistant, our Next Generation network diagnostic tool.

This portable analyzer provides network managers and technicians the ability to quickly identify and solve problems with today's evolving networks.

Also during the quarter, our new DTX cable analyzer, our advanced high-speed fiber and copper cable tester, continued to gain strength with over 75 percent of our cable test business now converted to the new DTX product.

Product identification revenues improved 39 percent during the quarter with core growth contributing 5 percent; acquisitions, primarily Accu-Sort, contributing 30 percent and currency gains contributing the remainder.

Growth here was broad-based across the product portfolio, with particular strength coming from CIJ equipment sales in both China and Europe.

We continue to make progress with our efforts to offer the most complete lineup of marking encoding technologies with our thermal transfer overprint offering delivering our strongest performance to date with key wins at Frito-Lay, as well as with several key pharmaceutical companies.

This month we launched the new VX 6000 series of binary array printers, a new line of printers which provide breakthrough technology facilitating both ease-of-use and ease of maintenance for high-performance printers which are used primarily in graphics applications.

The increased up time and simplified user interface offered by the VX 6000 will further enhance Videojet's position in that key market segment.

Integration activity remains on track for ALLTEC and Cypher (ph), two key second-quarter acquisitions which provide laser and thermal transfer overprint technology and expertise.

Accu-Sort continues to win new business with our RFID label print and apply for LPA system, which allows our customers to apply both an RFID tag and a human readable or barcode label, as well as verify the functionality of the RFID tag.

We have successfully installed two LPA systems recently at a major retailer's RFID pilot site and are allocating additional sales and leadership resources at both Accu-Sort and Videojet to capture opportunities within the Wal-Mart supply chain.

Earlier this month we announced our intention to make a tender offer for Linx Printing Technologies, a leader in printing and marketing technology across Europe and Asia with an installed base of continuous inkjet equipment and consumables and important vertical market such as pharmaceuticals and food and beverages.

In addition to excellent synergies, Linx would also bring additional laser technology and manufacturing capabilities to Videojet's current offering.

We anticipate launching the tender offer soon, and the transaction remains subject to regulatory approvals and customary closing conditions.

We do look forward to having the Linx team joining us at Danaher.

Moving to our Medical Technology platform.

Pro forma revenues grew mid single digits on a constant currency basis when compared to 2003.

Integration activities remain on track with DBS training and implementation continuing across and KaVo and Radiometer.

Strategic plan reviews are now complete in both businesses, and policy deployment and other DBS activities are well underway.

Radiometer turned in a strong performance for the quarter as pro forma revenues grew high single digits with momentum coming from Europe, primarily in Germany.

Radiometer's new top-of-the-line ABL 800 blood gas analyzer was released in August, and initial customer interest has been quite strong.

This critical care diagnostic system provides customers with highly accurate measurements of smaller blood samples, a comprehensive integrated IT solution as well as greater ease-of-use.

The ABL 800 also offers the highest quality and lowest cost per test for busy intensive care units and operating room environments.

The ABL 800 was reselling approved by the FDA for sale here in the U.S., allowing us to now fully launch that instrument in the United States.

KaVo and Gendex, leaders in the dental equipment market, continue to make progress on integration activities as perhaps best exhibited by the recently announced worldwide sales and marketing structure that is now in place.

KaVo grew low single digits in the quarter, and strength in Europe was mitigated somewhat by the impact of prior year promotional activities affecting its U.S. and Japanese businesses.

Within our niche businesses, aviation and events, core revenues improved low double digits when compared to the third quarter of 2003 due to higher business jet and commercial aircraft production rates, while our industrial sensors and controls core revenues grew mid single digit.

Turning to Tools and Components.

Revenue for the quarter grew 7 percent, solely a result of core revenue increases.

For the first nine months of 2004, revenues increased approximately 12 percent to $961 million as revenues from existing businesses contributed 10.5 percent and the extra days in the first quarter contributed the remainder.

Operating margins for the quarter were 16.6 percent, an increase of 70 basis points over the prior year, driven by the impact of incremental revenues and cost reduction programs, offset by continued increases in steel prices and related surcharges.

Price increases of approximately $10 million have begun to take effect and should mitigate some of this headwind going forward.

Operating margins year-to-date increased 70 basis points to 15.5 percent.

Handtool platform revenues grew 4 percent, entirely due to core revenue increases.

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

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

Shipments to Sears were down high single digits for the quarter when compared to the third quarter of 2003 due in large part to weak sell-through beginning in the latter part of the second quarter with the remainder of the result of timing and the type of promotion activity when compared to the same period a year ago.

Sears, however, did experience a rebound in September as Craftsman sell-through was up low single digits and sell-through year-to-date continues to remain positive.

Based upon the promotional activity in place for the remainder of this year, we expect positive sales growth at Sears in the fourth quarter.

Our Craftsman industrial offering continues to grow at double-digit rates.

Fasenal (ph), a key Craftsman distributor, has seen a substantial increase this year in purchases of those products from their industrial customers.

At Lowe's cobalt and GearWrench point of sale performance was up double-digit for the quarter.

Our task force brand, the import program at Lowe's, is exceeding the program it replaced and also grew at a double-digit rate.

Our niche businesses in this segment again posted low double-digit core revenue growth for the quarter led by continued strength from Jacobs Vehicle Systems, Jacobs Chuck and Hennessey.

As we enter the last quarter of 2004, we continue to realize the benefits from the numerous growth and cost savings investments made throughout the recent recession, as well as the now nearly $40 million of investments made and to be made this year.

These actions have helped support our strong organic topline performance, as well as our improved profitability and have positioned us well for 2005 and beyond.

With the first nine months of 2004 now behind us, we continue to see broad-based strength across the businesses.

We are, however, sensitive to the recent softness we have seen within the semiconductor market, as well as with our retail business at Sears.

This year's level of organic growth will temper somewhat as we begin to lap the stronger comparisons that begin in the fourth quarter of 2004.

Nevertheless, we expect our 2004 earnings per share in the fourth quarter to be in the range of 61 to 66 cents and full-year earnings per share for 2004 to be in the range of $2.24 to $2.29.

Thank you, Larry.

That concludes our formal comments.

We are now ready for questions.

(OPERATOR INSTRUCTIONS).

Jim Lucas.

Janney Montgomery.

That is a new pronunciation if I heard it.

One house-keeping, one strategic question if I might.

First, on the balance sheet, Pat, the debt it looks like some long-term moved into short-term.

Could you comment what is going on there?

Well, we have our Euro bond is due and payable within 12 months of the third quarter this year.

So that is the Euro bond moving from long-term to short-term.

Okay.

Larry, on the motion side, you talked a little bit about the semiconductor.

Two of the breakthroughs, the flat-panel and electrical lift, still looks like there is still some good runway left there.

Both have exceeded expectations.

Could you just expand a little bit more what you're seeing there, especially on the flat-panel side given some recent weakness from other suppliers that have commented?

Sure.

What we see, Jim, is that the customer base that we're serving primarily photon, but also increasingly some of the Asian suppliers, are still going very very aggressively with their purchase of our product and in turn its installation in theirs as part of this flat-panel buildout.

We really see that as a discrete technology vertical separate from, say, core semiconductor hard disk drive electronic assembly.

And the view in the market from what we hear from the customers continues to be strong.

We obviously came into this year with the backlog and aggressive plans for '04, and those plans have done nothing but improve during the course of the year.

I know that there are comments out there relative to flat-panel pricing and what not in terms of what we see as consumers.

But in terms of the capacity buildout, we're still getting very strong indications from our customer base.

Okay.

And on the electric left side?

The electric lift side I think is obviously completely detached from anything related to the technology market.

I think what we're seeing is really the combined benefit of the numerous conversions our OEM customers are completing from the older power technology to our own, as well as obviously just some core volume increases in their own businesses which is putting more unit demand on us.

Steve Tusa.

J.P. Morgan.

Good morning, guys.

I just wanted to -- I don't know if I heard it before -- but the revenue growth forecast you mentioned there would be in moderation.

What kind of range should we think about as far as a core volume forecast for 4Q?

I think what we are looking at is something in the 5 to 7 core range constant currency.

Okay.

As far as the commentary in the Q about raw materials, how has you ability been to pass through those rising costs, and this is obviously not a new question, but have we seen the worst in your view on a net basis?

Do you have yet to really realize a full quarter of pricing benefits?

Steve, I think at this point we anticipate getting impacted to the tune of about 20 million at the operating profit line from the commodity headwinds, which for us are primarily a result of steel.

I am no commodity trader, so I won't predict whether we've seen the end of some of these increases.

But we probably have offset or will offset half of that this year with price increases.

I think it has gotten a little easier to get the price increases and/or the surcharges put in place to offset that inflation, but we have not fully benefited from that yet.

We will see more of that impact I think clearly here in the fourth quarter.

Okay.

Certainly for a full year next year.

Lastly just looking out to '05 a little bit, what is your sense of the economic landscape out there?

What is your 2 cents on the macro scene?

Well clearly, as we indicated, Steve, our business continues to be rather strong.

If you had asked me a year ago, how would you feel sitting here with this sort of core growth in the third quarter, I would have been thrilled.

So we don't want to take anything for granted.

But I think we are obviously sensitive to the headlines that we all see.

The downtick that we have seen in semi, the cautiousness that we hear from our customers there, obviously seeing a fairly soft sell-through at Sears in the third quarter, and some spotty signs of weakness here and there in Europe, primarily in Germany, have us I think out there with a watchful eye, but on balance I think we think we will see core growth next year and are a week away from beginning our annual budgeting process where we begin to lock down the budget numbers that we will take to the board in December and in turn share with you publicly at the investor meeting in December.

And then lastly, and maybe this is for Pat, there was a little bit of movement in the warranty account.

I am just wondering maybe what is going on there if there is anything in particular?

I don't think there is anything in particular.

It's just that being in a larger company the numbers are bigger now, but we did have some warranty settlements on some of our larger marking businesses like Matco and the Jacobs (inaudible) for example.

But nothing really out of the ordinary.

With all due respect to everybody else that is on the call, we have a number of people trying to get in.

If you could limit it to one question and a follow-on, that would be very much appreciated.

John Inch.

Merrill Lynch.

Larry, if you look from a high-level at sequential volume trends, I mean we can see the growth and the comparisons that you laid out, but could you just give us a little bit of insight into your processed business, processing controls businesses, which ones appear to be strengthening, which one is really holding, and which could be seeing slightly softer revenues as you look into the quarters ahead?

Good morning, John.

If we go through the process and environmental business, I think if we start with the environmental businesses as we indicated they continue to be quite strong.

Both Hach Lange and Gilbarco Veeder-Root have a bit of a fourth-quarter dynamic.

So the sequential trends in that business I think are not altogether relevant.

As we indicated, water in the Hach Lange business continues to be performing very well.

I think we will see a lower growth rate at Gilbarco, a bit of a wildcard in terms of what the major oil companies will do in terms of the year-end buy, and I don't think at this point we are anticipating anything close to what they did last year.

So we hopefully will be wrong in that regard.

I think at Fluke and Fluke Networks and Electronic Test demand continues to be quite robust.

FNet (ph), more so than Fluke, has a quarter dynamic as well, which we would anticipate being there in this quarter.

I think in motion where we probably have the most pronounced exposure to (technical difficulty)-- approximately 15 percent of sales certainly in semiconductor, we clearly are seeing the downshift that I mentioned.

That is more of an order than a shipment dynamic for us, but we anticipate we would see lower growth in the fourth quarter as a result of that.

Product ID, I think we will see an uptick in the growth there in part because of some of the timing of some projects that have moved from the third to the fourth quarter because the (inaudible) integration a year ago, John, caused us to have a stronger third quarter than we might normally have had given that we were increasing backlog due to the facility moves that were going on.

So those are really the four core platforms in the business I think with respect to MedTech (ph).

On a pro forma basis, we were dealing with some promotional activities a year ago, which are not repeating at KaVo.

So it's a little hard to suggest we will see an uptick there.

Radiometer remains strong, and I think the launch of the ABL 800 here in the U.S. now with FDA approval will certainly help us.

Larry, it sounds like water and product ID have about the best momentum if you strip out the seasonal variables?

I think that is fair, John.

Then just as a quick follow-up, Larry, as these businesses within your process and environmental controls businesses get bigger, are you guys thinking about perhaps providing a little bit more official disclosure with some of these segments?

It is tough for someone who does not know or for people who are new to Danaher to look at the way you disclose out your businesses and try to discern official disclosure in terms of the moving parts.

Our Q and our K and our earnings call script get longer and longer with each quarter, and I think we continue to try to (inaudible) in that activity.

Bob Cornel.

Lehman Brothers.

Who won that game last night?

I could not stay up that late.

Earlier this year, Larry, you were saying it was difficult and your focus was on reorienting the organization and cutting costs and organic growth negative to getting people focused on and getting the organization growing.

So where are you now in terms of what is the emphasis out there, your message to the troops and how do you see that evolving in '05?

What is really the philosophy behind the numbers here?

Bob, I like where we are right now with respect to going for the growth and not continuing to have perhaps the more conservative posture which we took appropriately during the downturn.

I think we were able to transition more quickly to the growth mindset than we were to the recession mindset.

In part, this is just the nature of the change.

I think as we're gearing up for the budget, the message has been primarily one of preparing for an '05 that will have tailwind, but the tailwind is not likely to be anywhere close to the exceptional tailwind that we have had this year.

We strongly believe that our performance in a number of businesses has been driven in part by the economy, but also in part by the investments and the actions taken over the last several years.

That said, I think that as we again read the headlines and look at some of the signs of softness elsewhere that we would expect our core growth to continue to temper a bit and that we need to plan accordingly for next year.

I don't think we're headed into the bunker for '05, but by the same token, we want to make sure that we plan conservatively in order to hit both our top-line and bottom-line expectations.

Thanks.

On that core growth in the fourth quarter, the 5 to 7, what specifically is the difference in days in that computation?

It would be about three days and probably have about a 3 percent effect.

Jeff Sprague.

Smith Barney.

Good morning, everyone.

Larry, I was wondering if you could address in a little more detail the deal environment, and we don't want to make too much out of this little jumpball situation with Linx with you and ITW, but is there kind of a tightening of activity, a kind of intensifying competition?

Is there something to be kind of gleaned from what we have seen in the last couple of weeks, or do you view that as kind of isolated?

Jeff, I would not take too much from the headlines around the Linx situation.

Obviously we cannot get into much detail at this point, other than to say that that is a business that we will tender here for shortly.

I think the strategic rationale that we took to our Board about this being an excellent addition to the platform in the wake of both the Videojet and the (inaudible) transactions speaks for itself.

We are keen to get that behind us.

But from time to time we will have that dynamic when we are looking to make a strategic acquisition.

But I suspect it will be infrequent.

I was also just wondering in terms of altering the direction -- that may be too strong of a word -- but altering the direction of a platform.

So, for example, we think of Trojan, that clearly fits in under environmental and water, but it is kind of a new direction also.

You know, when you are kind of looking at your opportunity set currently of those type of deals versus maybe putting out a new marker and platform with the new platform, where do you see the largest set of opportunities, and what do you think we should expect going forward?

Jeff, I don't think our view has changed at all.

Clearly where we put the bulk of our activity is in and around situations like Linx where we clearly add to an existing core business.

I think the second option for us will be to find those smart adjacencies like we would do with Trojan where we will be able to serve existing customers and drive some of our geographic expansion in what is admittedly an adjacent market.

The Hach Lange business, very focused in analytical instrumentation.

Trojan, serving that same customer base with disinfection technologies.

They do not compete, but they do serve the same customer base.

I think the third option remains the creation of new platforms.

I think those types of transactions will be less frequent, but obviously we started the fix platform this year with Radiometer and KaVo.

But I again think that is where in descending order where the volume of transactions are likely to occur.

Steve Volkman, Morgan Stanley.

I was just curious if you could give us kind of a China update and let us know how you think things are going there and at the margin any changes that you're seeing one way or another in the businesses?

Sure, Steve.

A timely question.

We got back from China Friday.

We spent last week there with our businesses.

It is clear that both at a macro level and even our businesses there that we continue to see very very strong growth.

I think right now we are tracking toward a 25 percent growth rate in China.

We are going to be in the $300 million range in terms of the businesses there.

All of the businesses are performing very well.

We're very pleased with what we saw during the course of the trip, both in terms of their product and marketshare strategies, but also frankly their implementation of DBS.

I do think we saw some evidence of the government's actions, which you have read about, to slow things down, whether it is some of the higher end Fluke products and the slowdown of purchases by the government of those particular products we see signs in our tool business of the slowdown in automotive.

We do see at Videojet some of the actions the government has taken in construction.

We serve construction on an indirect basis, but on balance the pace of business is still very brisk.

The outlook from the people we talked over there, both our folks and others, for '05 continues to be very positive.

So I think we continue to be bullish relative to the situation there.

Great.

And then a quick follow-up.

You mentioned the sell-through at Sears has been a little weak lately, but it might pick up again.

Given how important the fourth quarter is there, can you give us a little more color on the outlook for the fourth quarter?

You bet.

I think that we said bluntly we did not have a great Father's Day.

As you know, Father's Day and Christmas are really the two key points of the selling season.

I think that our team and the Sears team have put together a terrific plan.

The investment level in terms of promotional support, merchandising, advertising alike really from here on out is quite strong, and I think that bodes well for the performance here in the fourth quarter.

We have already begun to see, as we mentioned in the prepared remarks, the positive impact in sell-through from some of this work in September, and we are obviously quite hopeful that we will continue to build off that momentum and have a positive sell-through quarter on quarter.

Nicole Parent, Credit Suisse First Boston.

Good day here in New York.

Excellent call on your conviction.

I guess I want to just follow-up on kind of uses of cash, and you guys have obviously been fairly active on the M&A front, but I wanted to get your thoughts on potentially raising this dividend?

Nicole, we spent next to no time thinking about raising the dividend given both how active and how likely to continue to be active our acquisition efforts have been.

Fair enough.

I guess just a follow-up on Jeff's earlier question on expanding into other platforms.

Within Medical Technologies, is it reasonable to think that expanding the x-ray equipment business into -- I guess I am curious to get your thoughts on expanding into single use disposable products within the dental market.

I think as we look at the dental equipment market broadly the basis that we have with KaVo and Gendex set us up to look at a number of product categories, and at this point, I don't think we would probably rule out anything.

Great.

Thank you.

Don MacDougall.

Banc of America.

Larry, you have been very busy in the last 12 to 18 months on the M&A front.

The point has been raised by others.

The question I have, I guess a couple of questions, from a human resource standpoint, it takes a fair amount of work to integrate these companies and bring them into the DBS system.

So are you getting stretched from a personnel standpoint?

Should we expect to see a bit of a period of digestion here?

And as you look at your overall management bench, what is your capacity to kind of continue this pace of deal activity?

I think the assumptions based in your question are spot on.

Integrating any acquisition, implementing DBS into those acquisitions, is a fair bit of work.

We have been fortunate this year in that at both Radiometer and KaVo particularly, we inherited some pretty good management teams, and they have taken the DBS exceptionally well.

So neither business has required the dramatic insertion of talent, frankly, in the way that both Videojet and Gilbarco did.

So I don't think that there is a tight predictable correlation between acquired revenue dollars and the headcount required on a permanent basis to go integrate those businesses.

We never forecast acquisitions.

I can't tell you if the next six months are going to be exceptionally busy or slow, but we're not planning to go silent here for a period of time to digest.

We think the integration of the larger businesses just referenced is going very well, and we are soon going to be on the one-year anniversary of those deals, which is when the time commitment frankly tends to dissipate a bit.

So I think as we look at '05 we would anticipate continued activity and are hopeful that the environment will allow us to bring in both the quality and the quantity of businesses we have this year at reasonable prices.

In terms of our bench, more broadly we continue to develop our folks as best we can, promote them as we grow the Company.

I think we continue to look at acquisitions aggressively and believe firmly we have got the organizational capacity to bring them in as we always have.

I am on record with the board and I am on record publicly as well that that is the gating factor for us.

It is not cash, it's not ideas unfortunately; it's really our organizational bandwidth.

I still think we have capacity we can use this year and next to bring businesses, be they bolt-ons, be they new platforms into Danaher.

And Larry, following up on an earlier comment, that 5 to 7 percent core growth in the fourth quarter, was that before or after the effect of the extra -- or sorry -- the fewer selling days that we would see?

That was adjusted for the days.

Okay, 5 to 7 percent as you have laid out, your vision of the longer-term across the cycle performance at Danaher, what you are shooting for, based on what you see out there now, is it reasonable to expect the company to perform at that level next year if the economy does not really change a whole lot from what we see today?

Well, if the economy does not change, we have clearly done better.

I think that we would anticipate that the economy will slow a bit, which is why we are offering up the fourth-quarter guidance that we are.

I think we remain convinced that we've got a portfolio built for above-average core growth, and I think I will hold on until December at the investor meeting any specific comments relative to the specific '05 band that we are anticipating.

I was going to try anyway.

You did.

Matt Summerville.

McDonald Investments.

I want to talk a little bit more about price.

You mentioned obviously having a little bit of pricing power in tools.

Can you talk about what you're seeing in terms of pricing some of your other businesses?

And then to dig into tools a little bit more, if you can talk about within which businesses or verticals you are having pricing power and then what you can do incrementally in '05, particularly maybe on the retail side?

That is like three questions, but let me take a swing at them.

I think in terms of what we are seeing in price, again it is primarily steel.

We are seeing I think some modest pressure in resonant and corrugated, but for us the primary issue is steel.

We are able to offset that.

You mentioned tools.

I would not say that our ability to drive price is better in one vertical versus another.

Clearly when you sell through distribution, it is I think on the margin easier to put price increases through then because the channel typically can do the same than it might be in an OE business.

I am sorry and the third part of your question?

Well actually I was wondering what you're seeing in terms of pricing, selling prices, in some of your other businesses?

I was wondering based upon what you've already done in '04 in tools, can you do something incremental in '05 in maybe some of the areas you're not getting price increases now?

I think we will continue to look in all the businesses for pricing opportunities as we end this year and as we go into next year.

But I would not want to offer up a firm price forecast for '05 just yet, but we will be certainly looking for it, and it will be a frequent topic of conversation during, of course, in November during the budget reviews.

Deane Dray.

Goldman Sachs.

Just to stay on that pricing theme for a moment, Larry, if I heard you correctly in one of the questions you answered that you thought you had offset half of the raw materials cost this year with price increases.

So if you could just expand on that.

Have you seen the full benefit of the pricing that you have gotten so far year-to-date?

So is there more of a benefit in the fourth quarter?

And what might be the total year-to-date net unrecovered raw materials cost?

We have not seen the full benefit of the price increase.

I think when we do it will be roughly half of the 20 million cost increase that we are seeing.

So that would leave a net 10 that we were not able to offset this year.

Did you get any effect of a prebuy as you put in these price increases, and is there any lag in when you announce the price -- you announced a price increase away from, like, the tools?

I cannot recall a prebuy effect in any of those businesses as you describe them.

It is certainly possible, but I don't think we have seen that in those businesses you referenced.

Okay and then just one follow-up.

The comment that you have increased the 40 to 40 million, the incremental spending, do you know where that is going, or could you tell us where that is going?

Is there a chance that that goes higher?

I do know where it is going.

I thought you might.

We tend to approve those incremental investments here just to make sure we are putting them toward the best opportunity.

But I appreciate that.

I would say it is probably a good mix as there was in the earlier number, the 30 million.

Call it half oriented toward growth accelerators, the other half toward cost and restructuring activities.

Thank you.

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

I would now like to turn the call back over to management for any closing remarks.

Thanks, Matthew.

For those of you that were not able to ask questions on the call or may have additional questions, both Pat and I as usual will be available throughout the day.

And as a reminder, the replay member for today's call is 800-642-1687, confirmation code 1307910.

Thank you.

Ladies and gentlemen, that concludes Danaher Corporation's third-quarter earnings results conference call.

We thank you for your participation.

You may now disconnect at this time.