Danaher Corp (DHR) 2005 Q3 法說會逐字稿

Good morning.

My name is Rebecca and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Danaher Corporation earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you.

I will now turn the conference over to Andy Wilson.

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

With me is Larry Culp, our President and Chief Executive Officer;

Dan Comas, our Executive Vice President and Chief Financial Officer; and Pat Allender, our Executive Vice President.

I would like to point out that our earnings release and 10-Q are available on our website under the heading Investor Events, along with a supplemental schedule which contains important financial reconciliation information.

Additionally, a webcast presentation was posted at 8:00 AM today supplementing today's call and can be found under the same heading, Investor Events.

This call will be replayed through October 24 and the audio portion will be archived on our website later today and remain archived until next quarterly call.

The replay number for this is 1-800-642-1687 and the confirmation code is 9749427.

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 make some forward-looking statements during this call, including statements regarding events or developments that we believe or anticipate will or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties that could cause actual events to differ materially from those suggested by forward-looking statements, including risks and uncertainties related to litigation and other contingent liabilities; our ability to achieve projected efficiencies and cost reductions; sales growth and earnings; economic conditions in the end markets we sell into; our ability to expand our business in new geographic markets; commodity costs and surcharges; competition; market demand for our new products; currency exchange rates; changes in the market for acquisitions and divestitures; regulatory approvals; and our ability to consummate announced acquisitions and the integration of acquired businesses.

Additional information regarding the factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our 2004 annual report on Form 10-K and the third-quarter 2005 quarterly report on Form 10-Q.

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

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

Thanks, Andy.

Good morning, everyone.

We are pleased to report this morning that earnings per share for the third quarter were $0.70, a 13% increase over last year's third-quarter earnings per share of $0.62 and another record quarter for Danaher.

Excluding real estate gains realized in the 2004 third quarter, earnings per share increased by 15%.

Revenues for the quarter increased 12.5% to 1.97 billion, as revenues from existing businesses, also described as core revenues, grew 4%.

Acquisitions contributed an increase of 8.5% and currency effects were negligible.

Year-to-date, revenues increased 16.5% to $5.72 billion.

Core revenues contributed 4.5%, acquisitions 11%, and positive currency effects contributed an increase of 1%.

Gross margins improved to 43.1% in the third quarter from 42.4% during the same period last year.

Higher gross margins from recent acquisitions, operating leverage from higher revenues, and continuing cost reductions across the Corporation contributed to the 70 basis point improvement.

Gross margins for the first nine months of the year improved 130 basis points to 43.2%, due primarily to these same factors, as well as the impact of higher gross margins from our recent acquisitions, which had a greater effect year-to-date because of timing of the KaVo and Radiometer acquisitions in 2004.

Selling, general and administrative expenses for the third quarter were 26.6%, versus 25.9% in 2004, driven largely by higher SG&A cost structures and the recent acquisitions, as well as additional spending to fund growth opportunities.

Year-to-date, SG&A expenses were 27.4%, an increase of 150 basis points over the first nine months of 2004.

Operating profit for the third quarter was a record $320 million, a 9.5% increase over the same period a year ago and $913 million for the first nine months of the year, representing a 15.5% increase over the same period last year.

Operating margins for the quarter were 16.3% versus 16.7% in the third quarter of 2004.

Excluding the dilutive effects from recently acquired businesses, primarily Trojan and Leica Microsystems, operating margins would have improved 20 basis points on a year-over-year basis.

Year-to-date, operating margins were 16%, compared to 16.1% in the prior year.

Excluding acquisitions, current year margins would have improved by approximately 70 basis points.

Net interest expense for the quarter was $6.2 million, compared with $11.1 million for the third quarter of last year.

The decrease in net interest expense is primarily due to reduced debt levels, principally from the redemption of our Eurobond notes during the quarter, as well as higher interest rates on the Company's cash balances.

Our effective income tax rate for the third quarter was 27% versus 28.5% in the third quarter of '04.

This lower year-over-year rate is principally a reflection of the growing percentage of profitability generated by our international operations, as well as the impact of tax reserve adjustments in the quarter.

The tax rate for the fourth quarter of 2005 is expected to return to 27.5%.

Net income was $229 million, a 14% increase over the third quarter of last year.

Net income for the first nine months of 2005 was $646 million, an increase of 22.5% over the same period last year.

Operating cash flow for the first nine months was a record $902 million, 17.5% higher than the same period a year ago, driven primarily by stronger earnings, partially offset by seasonal increases in working capital.

Capital expenditures for the first nine months were $87 million, representing a 25% increase over the same period last year.

We expect capital expenditures for the full year to be approximately $130 million.

Free cash flow, defined as operating cash flow less capital expenditures, was $815 million year-to-date and represented a 16.5% increase versus 2004, putting us firmly on track to deliver in excess of $1 billion in free cash flow this year.

Our free cash to net income conversion ratio for the first nine months is 126%, and we believe that 2005 will be the 14th year in a row in which our free cash exceeds net income.

The balance sheet remains strong, with a debt to total capital ratio of 17.5% and $276 million in cash and cash equivalents at the end of the third quarter.

Turning to our reporting segments, starting with Professional Instrumentation, revenues increased 19.5% for the quarter to $912 million; revenues from existing businesses contributed 1%; acquisitions contributed 18%; and currency gains contributed approximately 0.5%.

Solid growth across Electronic Test and Hach/Lange offset revenue declines at Gilbarco Veeder-Root and KaVo, both of which I will detail in a moment.

For the first nine months of 2005, revenues increased 29.5% to $2.61 billion.

Revenues from existing businesses grew 4%, acquisitions contributed 24%, and currency gains contributed 1.5%.

Operating margins for the quarter were 17.3% versus 18.8% due to the dilutive impact of acquisitions.

Without the dilutive effect of acquisitions, margins would have been flat for the quarter.

Cost reductions and low-cost region sourcing initiatives were able to offset the profit impact from lower revenues at Gilbarco and KaVo, as well as the restructuring costs incurred at KaVo during the quarter.

Excluding acquisitions, operating margins for the first nine months of 2005 increased 110 basis points to 18%, as the dilutive effect of these recent acquisitions, primarily Leica Microsystems and KaVo, negatively impacted margins by approximately 190 basis points.

Environmental revenues for the quarter increased 10%, with revenues from existing businesses essentially flat, acquisitions contributing 9.5%, and currency impact contributing 0.5%.

Hach/Lange delivered another solid core growth performance for the quarter, while we saw a revenue decline at Gilbarco Veeder-Root.

Hach/Lange revenues grew at a high single-digit rate in the quarter, led by continued momentum in both lab and process productlines, which was offset somewhat by softer Hach Ultra analytics sales, primarily in tech endmarket.

The U.S. and European markets were both strong and China was up again by more than 50% versus the prior year.

We were very pleased last week to learn that Trojan Technologies was selected as the sole source provider of ultraviolet drinking water disinfectant systems for the City of New York.

Representing the largest ultraviolet drinking water project in the world, this two-year, multi-million dollar opportunity will provide New York City with Trojan UV disinfection systems that will be capable of processing over 2 billion gallons of drinking water a day.

For the quarter, Gilbarco Veeder-Root's revenues from existing businesses were down mid-single digit, primarily a result of strong prior-year comps in the quarter, as well as a shift in the timing of retail automation shipments to the fourth quarter.

Importantly, third-quarter orders were up over prior year, driven by increased demand across the portfolio.

During September, Gilbarco Veeder-Root began shipping the first systems with in-station diagnostics, or ISD, to meet the recently enacted California Air Resource Board executive order.

Our products monitor the performance of required vapor recovery systems and alert the station operator or owner when the system performance spec falls below required levels.

All new and rebuilt stations in California will require this monitoring by September 2009.

Currently, Gilbarco Veeder-Root has the only certified solution on the market addressing this $50 million plus multiyear opportunity in California.

Moving over to Electronic Test, revenues grew 15.5% in the quarter, with revenues from existing businesses contributing 7.5%, acquisitions contributing 7.5%, and a favorable currency impact of 0.5%.

Fluke posted low double-digit core revenue growth for the third quarter, driven by broad-based strength in both industrial and electrical channels.

High single-digit growth in the industrial channel was driven by strong U.S. point-of-sale activity, as well as strength from new three-phase Power Quality products and digital multimeter sales.

Double-digit growth in the electrical channel, more than twice the market rate of growth, was achieved in both the U.S. and Europe, as significant core product sales and European electrical regulations contributed to the performance.

Worldwide sales of our thermography products grew by more than 20% in the quarter, a result of the strength of the transition to the Fluke brand for this productline, along with market expansion among Fluke's core end-users.

Fluke Networks' core revenue for the quarter grew at a low single-digit rate, as solid growth from enterprise, distributed analysis and portable network analysis products was offset by flattish performance from our Cable Test line, primarily the result of strong prior-year comps, due to the DTX launch.

Order rates in the U.S. and Europe remained healthy in the quarter, up high single digits, which should compensate somewhat for a difficult fourth quarter comp due to last year's large SBC installation.

Turning to Medical Technology, revenues increased 40.5%.

Core revenues declined 2.5%, acquisitions contributed 43%, and currency effects were negligible.

At Radiometer, a leader in critical care diagnostics, core revenues increased at a mid-single digit rate.

Continued strength from North American and Japanese instrument placements led by the new ABL 800 line, as well as healthy consumable and aftermarket sales, drove this performance.

Radiometer's new first automatic diagnostic system, a fully automated addition to the ABL 800, affords the use of faster and less error-prone measurements.

This product was introduced in September and initial customer interest has been very strong.

Turning to Dental, as expected, third-quarter core revenues from existing businesses declined mid-single digits, a result of our redirection of promotional activity towards the recently acquired businesses in anticipation of planned facility restructurings within the existing businesses, primarily in Germany.

Promotional activities for the quarter were focused on the third quarter launch of the Dexis sensor line with U.S. distribution, as well as supporting a strong performance at our most recent dental acquisition, Pelton & Crane, an $80 million U.S. leader in dental treatment units and related equipment.

Both Dexis and Pelton & Crane experienced mid-teens growth for the quarter, growth which is not included in core revenues.

Sales from existing businesses were also impacted by changes in German dental reimbursement rules.

Restructuring activities at KaVo are on track, with facility relocations in Germany well underway.

We have now completed over 400 headcount reductions to date, representing nearly a 15% reduction in the total KaVo headcount this year, with approximately 125 additional reductions slated for later this year.

We also announced the newest addition to the Medical Technology platform, Leica Microsystems.

Based in Wetzlar, Germany, Leica Microsystems is a $540 million leader in microscopy based life science tools, pathology diagnostics and surgical microscopes.

Although still in the early days, we are very pleased with the integration process we have seen in conjunction with the Leica team and we are working well together to build upon the very solid foundation already in place.

During the quarter we also announced the sale of the semiconductor equipment division of Leica Microsystems.

The sale of this $120 million noncore division was assumed as part of our due diligence and allows the Leica team to focus better its efforts on life sciences.

Moving over to our Industrial Technologies segment, revenues increased 11.5% for the third quarter to $731 million.

Revenues from existing businesses contributed an increase of 6%, acquisitions contributed 5.5%, currency gains were negligible.

For the first nine months of 2005, revenues are up 12% to $2.16 billion.

Core revenues contributed 5%, acquisitions 6%, and currency gains resulted in an increase of 1%.

Operating margins for the quarter were 16.1% versus 15.4% for the same period last year.

For the first nine months of 2005, operating margins improved 30 basis points to 14.8%.

Leverage from higher revenues and cost reduction initiatives, primarily in motion, contributed to this improvement.

Product ID, revenues improved 28% during the quarter, with core revenues contributing 13.5%, acquisitions contributing 14%, and currency gains contributing 0.5%.

Growth was driven by a solid performance at Videojet, which was up high single digits for the quarter, and continued strength from our AccuSort business.

Significant growth in both thermal transfer overprint and lasers, as well as solid increases across the CIJ productlines, contributed to this strong performance.

Our Linx brand, acquired in January of this year and not part of the core growth calculation, also had a very strong quarter, with revenues up double digit.

Our AccuSort scanning business again experienced robust growth during the quarter, up by more than 30%, driven primarily a key U.S.

Postal Service programs and new project wins with UPS and Swiss Post (ph).

Due to the lapping of some of the larger postal programs in the fourth quarter, AccuSort growth rates are expected to moderate.

Revenues in Motion were flat in the quarter, with core revenues down 2%, acquisitions contributing 2%, and a negligible currency effects.

Growth in the third quarter was negatively impacted by tough year-on-year declines in the Tech sector, offset by continued growth in our strategic initiatives, mobility, system sales, and new products, such as our AKM motor, which had record sales in the quarter as we doubled capacity to handle the demand created by new design wins.

We continue to leverage cross-selling opportunities with sales of our Thomson mechanical products through the Kollmorgen distribution channel, up by more than 10%, a trend we intend to continue.

Motion continues to make excellent progress with its low-cost region production initiative.

To date, more than 50% of Motion's production headcount is located in low-cost regions.

As a result, Motion's year-over-year operating margins improved by approximately 200 basis points on a year-to-date basis in spite of a flattish top line.

Finally, turning to the Tools and Components segment, revenues for the quarter were $323 million, with core revenues contributing 5%.

Total revenue for the quarter decreased 1%, a result of the divestiture of Joslyn Manufacturing in the fourth quarter of 2004.

Year-to-date, core revenues grew 4.5%, while overall revenues fell 1.5% to $945 million, again a result of the Joslyn divestiture.

Operating margins for the quarter were 17%, an increase of 40 basis points over the prior year.

The increase is primarily attributable to cost initiatives implemented across the segment.

Operating margins were 15.7% for the first nine months, up 20 basis points versus the comparable period last year.

The 6% core revenue increase for Mechanic's hand tools was once again led by Matco, our high-end mobile distribution brand, which grew at a low double-digit rate.

Growth was driven by increases in both distributor average purchase levels as well as in the number of distributors in the field.

Our retail business with Sears declined in the third quarter due to the Sears Kmart integration.

New product launches and store conversions are expected to partially offset the impact of inventory reductions, but much of the positive impact will not be felt until 2006.

Our business with Lowe's and Craftsman Industrial were both up double digits for the quarter, and our Sata brand business in China grew by more than 20%.

Turning back to corporate, in addition to the Leica Microsystems and Pelton & Crane acquisitions, there were two other transactions completed during the quarter.

In October, we acquired Infrared Solutions, broadening Fluke's product offering in thermography.

Infrared Solutions is a $12 million Minnesota-based company which manufactures and sells a broad array of thermal imaging products.

In August, we acquired TFE (ph), a $4 million manufacturer of power conversion devices, electric motor drives, and specialized control units, primarily for Aerospace and Defense applications.

TFE will be integrated into our Aerospace and Defense group.

With regard to our share buyback program announced in the first quarter, we have purchased 900,000 shares during the third quarter at an average price of $52.36.

Year-to-date, we have purchased 1.86 million shares at an average price of $51.86.

So far this year, the results we have seen across the portfolio have been in line with our expectations.

Our businesses remain strong.

New product development continues at a brisk pace, with the number of new products expected to contribute to a solid growth performance in the fourth quarter.

We continue to anticipate core revenues to grow at a mid-single digit rate for the balance of 2005.

Based upon this revenue outlook and the continued progress made to date, we believe that our fourth-quarter earnings per share outlook will be in the range of $0.76 to $0.81, and our full year earnings per share outlook will be in the range of $2.74 to $2.79, which includes the impact of one-time gains realized in the first half of 2005, as well as approximately $0.01 per share of one-time charges incurred in the third quarter.

Thank you, Larry.

That concludes our formal comments.

We are now ready for questions.

(OPERATOR INSTRUCTIONS) Deane Dray, Goldman Sachs.

Could you share with us where you stand so far in the business review process and the strategic planning process at Danaher?

In particular, oftentimes you will approach the business heads with a core growth number assumption for '06.

In years past, you have seen a lower number.

Sometimes there is a sense of from there what growth expectations you will be looking for for '06.

Is it at a stage where you could discuss that?

I can tell you where we are in the strap (ph) plan process.

I am probably not a position to share the details of what we are laying in relative to the assumptions for the '06 budget.

Tomorrow, in fact, we will complete our last strategic plan review this year.

We will be out at Matco.

The businesses are in the process of preparing their '06 budgets, Deane.

We will do that during the course of October.

We will complete the reviews here at Corporate in November and then when we see you on the 15th of December, we will be in a position to talk about the outlook for '06.

I think what I can share with you is, hopefully the prepared remarks suggested, the businesses on balance are performing quite well, both the existing businesses and the newly acquired businesses.

I think we're going to continue to move at this pace into the fourth quarter and into '06.

I think we feel good about the prospects for '06, barring some downshift in the economy.

Despite the headlines, we really see no signs in any of our businesses of that occurring.

I would say the pace and the tone of business is quite positive out there.

But obviously, there are headlines that raise questions on the part of investors, analysts and CEOs.

But right now we're not seeing any of that read out into the businesses.

Good.

And then for the CapEx decline in the budget there, I know in years past in the third quarter, you've taken CapEx budgets down.

What is the decline in the 20 million?

Is there a particular project?

No, I think that is just what you tend to see typically from us, where we budget a higher number, we forecast a higher number, but we don't spend it.

As we get closer toward year's end, we have better visibility on that final number.

So nothing that has been pushed or canceled or postponed, anything like that.

Yes, we have seen that before.

Thank you very much.

Jeffrey Sprague, Citigroup.

Also just FYI, there are major, major errors in your slides.

It's not lining up with your spoken remarks this morning.

Jeff, if you downloaded those, if you go back to the website and redownload, the current version will be there.

Larry, could you just walk us with a little bit more detail how these movements in Dental are playing out, kind of the shift in promotion, the restructuring and what we should expect out of organic growth the next couple quarters as that kind of normalizes?

Sure, Jeff.

The restructuring progress at KaVo, I think, is something that we have talked about before.

The opportunity there is significant to readjust in a fairly fundamental way their cost structure.

The consolidation of the manufacturing footprint in Germany, the headcount reduction across the business, particularly in Europe, is well underway.

And I think what we decided to do during the course of the summer is to make sure that we were not pouring in the incremental promotional investments into some of those productlines, given that we were transitioning production.

We did not cut it down to zero but we were not trying to overdrive it.

And in turn, we decided to put that incremental effort into some of the new productlines where we obviously were not going through that sort of activity.

That, I think, bodes very well for the prospects for this business going forward, both in terms of the KaVo profitability and revenue trajectory, as well as what we're doing with the new businesses.

In terms of what you should expect from this business, we think this is a solid mid-single digit growth business with the potential to be in the high-single digit range when we are overdriving new products.

Clearly, we have still work to do in Germany.

I think the German reimbursement regulations, as well, that I mentioned are factoring into some of the performance that we're seeing there in Germany as an important market for the business, in addition to the location, where a good bit of the cost structure is.

So I think going forward, we don't look at what has happened here, the way the third quarter has played out, as in any way unexpected or fundamentally different with our expectations, that this business is going to make a significant contribution to our growth profile going forward.

I know it is always hard to decompose why sales did a certain thing, but I would not have thought that KaVo sales would be that sensitive to changes in promotion.

Dentists are using this stuff in the normal course of business.

You would be surprised how promotion intensive this business can be, Jeff.

And on Gilbarco Veeder-Root, is there any sign of just change in priorities in CapEx with upstream versus downstream considerations that oil and refinery companies have, given what is going on with oil prices?

On the margins, Jeff, we don't see anything in that regard.

And in fact, I think the profitability that we're seeing right now is a potential harbinger of some year-end money.

We are hearing rumblings, but it is a little early to see that firm yet.

But obviously, our fingers are crossed.

We're well positioned in the event that that money is there downstream at year's end.

Thanks a lot.

Nicole Parent, CSFB.

I guess could we just delve a little bit deeper into the core growth deceleration from the second quarter?

We have gone through the Dental and I think that was expected.

But as you look at some of these other businesses, whether it is Motion down 2%, and I guess the strength of Product ID in the quarter, can we talk a little bit about relative to the expectations probably two quarters ago how we see things, I guess, improving and, relative to your expectations, where some of these other businesses might -- I mean, you had timing issues in Gilbarco Veeder-Root, but as you look at some of these other businesses, was Product ID better than you thought and how should we flesh that out?

Sure, Nicole.

Let me try to address some of that.

I think if you look at it in the context of what we were thinking about, say, at the end of the first quarter, early spring timeframe, I think we thought, frankly, that Motion would have a better back half, principally because of the tech end markets.

I think semi has on balance stayed soft, though recent bookings are encouraging; and flat-panel in a number of areas has pushed out into '06.

So we're just not going to have the back half in tech at Motion that we had anticipated.

I think that the noise at Sears early on with the integration was probably more encouraging, given what was anticipated relative to conversions and the like.

And as I indicated in the prepared remarks that that has not played out necessarily in our favor thus far this year, particularly here in the second half.

I think we are very optimistic about '06 in that regard, but there is some near-term integration disruption that we're seeing in the business.

And the other thing I would point to is we probably did not see with the clarity we do now what the right way to play the restructuring and the promotional programs in Dental was going to be back earlier this year.

But I think we played it out right.

I don't think we have anything to apologize for here.

I think we had a very good performance in Dental, particularly the Gilbarco situation that you pointed to -- primarily one of timing.

And I think with Motion, we clearly did not have the quarter and won't have the second half that we would have liked to.

But again, I think we are well positioned in those end markets and other markets.

So on balance, I think we're feeling -- we obviously would like to post a net-net higher number here, but on balance, I think the businesses are in very good shape.

That's helpful.

Thanks.

Just one follow-up on the big picture.

Obviously, you have external issues impacting your consumer related business, particularly in tools.

As you sit here today and think about what you are seeing with the consumer businesses, have you seen any material slowdown that you could attribute to an economic weakness?

The only other window we really have, Nicole, is the hand tools business with Lowe's.

And what we see there is just very strong sellthrough.

I would have to say that the work we're doing with Lowe's, the work they are doing is driving some of that for sure.

But we don't see any real slowdown there.

And when we look at point-of-sale in some of the other businesses where maybe the ticket purchases are low, like Fluke or at FNET (ph), again, sellthrough is strong.

So no signs there of retrenchment on the part of our customers.

Great, thank you.

John Inch, Merrill Lynch.

Larry, did you say mid-single budget growth for the fourth quarter?

I thought you had 4 percentage points of easier comparison in terms of year-over-year growth.

Maybe you could just give us a little bit of sense of what you're thinking vis-a-vis fourth quarter and how conservative that number you would like us to view it as.

I think what I said was we thought we would be in that mid-single digit range, that 4 to 6 range, that we've talked about for the full year for the purposes of the fourth quarter as well.

I am not -- I have to go back, John.

I don't think we have an easy comp in the fourth quarter.

I am not sure where that is coming from.

Maybe we can follow up with that off-line.

Core growth in last year was as strong as pretty much any quarter.

We also had that eight-figure order which we delivered to SBC and our Fluke Networks business.

I just thought your comp went from 9% in the third quarter to 5 in the fourth a year ago.

No, we were in high single digits.

Okay.

I will follow up with that.

I guess my question is -- and I understand the issues at Dental, but Dental, the whole medical space, it is a little bit of a pricier space.

You are sort of down in the core there.

We are down in the for firm Motion, with the industrial economy doing pretty well.

Larry, how would you like us to think about the portfolio?

Then you have some businesses doing better.

Does this cause you to perhaps think a little bit differently about what you think a normalized rate of sustainable organic growth is for Danaher going forward?

In no way whatsoever, John.

This Company is strong.

This portfolio is performing.

And I think if you look past the headline and read the article, I think what you see is a Professional Instrumentation segment that is performing quite well.

Clearly, a timing issue at Gilbarco.

Some noise as we integrate KaVo.

But a strong leadership position in Dental with the four businesses that we have acquired in the last 18 months in a market that I think has tremendous runway ahead of it.

Industrial tech, we're doing very well in Product ID, some of the niche businesses as well.

We have the sea anchor (ph) out at Motion in tech, which we -- it is what it is.

Tools and Components, we talked about the issue at retail.

But elsewhere I think very strong performance.

So I look at where we are today, look into the detail, and have a lot of confidence that pound for pound this is a portfolio that will continue to improve its growth trajectory over time.

And then just lastly, Larry, it looks like there was, I think, about a 5 million impairment charge.

And you guys laudably run your charges through the statements.

I think you referenced something in your prepared remarks about one-time charges.

What was that again and do you anticipate something else in terms of the fourth quarter perhaps of that magnitude as part of the range guidance you have given?

John, it was not an impairment of a business.

It actually reflected a minority investment, sort of a venture capital type investment that our businesses do over time.

It was basically a write-down of a minority investment.

It was not a business we were operating.

It was, as I said, a write-down of an investment.

And we don't have anything anticipated in the fourth quarter for any other items, positive or negative, in our fourth quarter guidance.

Okay, thanks.

Don MacDougall, Banc of America Securities.

I would like to look at this Dental business just a little bit more.

Larry, you referenced a few things that you consider specific to Danaher, like promotional activity and German reimbursement.

We have seen some of the other publicly-traded dental companies trending sideways to down over the last several quarters.

How much of this do you think is the general market issue as opposed to Danaher specific issue?

Well, I think there are not, Don, a lot of public dental equipment comps out there.

I think it is important to draw that distinction between the consumables companies and the equipment companies, in part because I think the decline that you have seen with the consumable folks, particularly those that have the European, the German exposure, is largely due to these reimbursement changes, which really whacked them early in the year.

I think those of us on the equipment side were fortunate that we did not see that impact, at least in the first half of this year.

And while it is tough to pin this down to the third decimal point, we clearly began to see that impact demand on the part of our German customers in the third quarter.

I think when you look outside of what is happening relative to the integration that we have in our own businesses -- and this is why we point out what we're seeing at Dexis and at Pelton & Crane -- these are businesses that we have acquired pretty much in the mainstream of the dental equipment space, not having to deal with legacy products or cost issues, up nicely mid-teens with a lot of wind at their backs.

So to me, that is what confirms here in the immediate term the overall health of the dental equipment market, and I thin ultimately a market that the four companies we have acquired we're going to do very well with.

Thanks.

Jumping over to Product ID, it was clearly a standout in the quarter.

I was actually just out to see that team a few weeks ago and they were feeling pretty good about their business.

You mentioned in your prepared comments that you expect AccuSort to come down a little bit here, given, I think, the expiration of a large contract.

Stepping back and looking at the Product ID portfolio overall, what do you think the sustainable growth rate is going to settle in at over, say, the next 12 months?

We think that is another business that gives us the ability, Don, to be in that 5 to 7% range over a long cycle.

Clearly, we do lap some of these tougher comps with some of the project businesses at AccuSort.

You'll see that from time to time, I think, with ASI.

But on balance, the investments that we have made, both the new products and I think with the sales and service organizations, still haven't been fully realized.

So we are optimistic, again absent any downshift in the economy, about the potential for both Videojet, Linx, another new business that did quite well for us, not included in the core growth calculation, as well as AccuSort on the scanning side of the business.

Just one final one, Larry.

The acquisition question.

Outlook on the pipeline right now -- smaller or larger deals, usual stuff that you sometimes talk about.

I think the pipeline is good.

I think we have talked about prices on balance are rich, so you have to be smart about finding value.

I do not think we're going to announce a new platform anytime soon, but continue to look at the bolt-ons and the adjacent plays to do more of what we have done historically.

I think we feel pretty good about our ability to find value, Don, in this environment.

I think you know that we have done 12 transactions in the last year, brought on $1 billion of revenue, done that at approximately 1x sales, which in this environment we think is pretty good.

I don't think we sacrificed anything on the quality side.

Yet when we needed to be disciplined and walk away, which you saw with Geosystems, still quite able and willing to do that.

Thank you.

Robert LaGaipa, CIBC World Markets.

Just a couple questions.

One, I just want had to circle back to the range that you're expecting in the fourth quarter, the 76 to $0.81.

I was curious as to your thoughts sequentially, when we look from third quarter to fourth quarter.

What needs to happen, either from a growth rate perspective, a margin perspective, to get to the higher end of the range versus the lower end of the range?

Robert, this is Dan.

I think we feel pretty good about our margin opportunities, a number of businesses we talked about.

We saw some continued progress at Motion on the margin side despite basically flat revenues.

I think that will continue in the fourth quarter.

So I think if the order trend continues along the lines it has been late third quarter, early fourth quarter, we'll have a revenue growth number above where we were in the third quarter.

I think if we get that and we get the fallthrough we think we will, I think the quarter will play out pretty nicely.

Second question or follow-up, I just wanted to circle back to Gilbarco, in terms of the timing issue related to the shipments.

What caused that timing issue and are you confident that that is now going to land in the fourth quarter?

It better.

We have the inventory.

We'd better ship it.

This business is largely a construction project related business.

You're building new retail sites.

You're refurbishing old retail sites.

And the timing of those construction schedules is more variable than you'd ever appreciate.

I have been looking at this business for 15 years.

It is just something that we have seen.

I think to a degree some of the weather, the hurricanes down south had some impact on not only certain markets but also certain headquarter operations.

But on balance, I think we feel very good that Gilbarco will contribute here in the fourth quarter.

If I could just sneak one last one in.

Just related to the raw material costs, you had mentioned a catch-up just in terms of the pricing initiatives in the tools business.

Is that complete or should we look for some further expansion of the margin in the fourth quarter?

I was just curious as to -- over the last several quarters, what would have been the margin impact?

Was there 100% catch-up in the third quarter and is the expected to continue in the fourth quarter?

I think we really started on the pricing side in the second half of last year, so we are starting to lap that, so I think margins -- I think that has been a slight positive this quarter.

It is probably going to tail off a little bit.

We're doing other things on the sourcing side that I think continue to help us on the tool margin.

We saw very good improvement in the tool margins this quarter.

So I think incrementally it may not be all that much in this impact, and given fuel prices, we are little cautious about their potential impact on metals and other materials.

Fair enough.

Thank you very much.

Ann Duignan, Bear Stearns.

Can we talk about Trojan just for a moment?

Your 10-Q says that the business will likely have about 100 million in incremental sales this year.

Given that it closed in November of last year, does that imply a kind of mid-single digit organic growth rate or are you saying that it will have absolute $100 million of sales this year, implying zero growth?

Can you just give (multiple speakers)?

It implies something in sort of a mid-single digit, maybe a little higher than that, growth rate for this year.

And then can you give us a little bit more color on the win that you just announced in New York and should we be looking forward to nice drinking water from here?

If you are a New York City resident, Ann, that is our sole intent.

So I will call you guys if it doesn't taste good.

Don't call us.

But we really aren't at liberty to say much more than we said, Ann, in the prepared remarks.

I would just add that I think is very good for the market because, as we said, this will be the largest drinking water UV installation in the world.

The technology has been predominantly deployed in wastewater.

This I think really cracks up in the other side of the market.

It is obviously very good for Trojan as well, because this will be a bellwether account and it is obviously good for Danaher.

As we indicated, we won't really see the revenue impact until the latter part of next year and into '07, but on all three points we are pretty pleased.

So the impact will start in '07, is that when I'm hearing you saying?

Yes.

Are there any technology risks associated with this project, given that it will be the first time that it is drinking water?

Well, it is not the first time it is drinking water, Ann.

At this scale, obviously, it will be the first program of this size, but I think given all of the trials that were completed by the city and their advisers, everyone feels confident that this can be deployed successfully.

Okay, just a quick --

Just to clarify, there is a segment already in place on the drinking water side of things.

This just I think will serve to accelerate the adoption, which will help us and others who participate in the market.

Okay, that's helpful.

Thank you.

Just a quick follow-up on Radiometer.

Again in the 10-Q, I noticed that the business said that it had placed products, new products, in the United States.

When we were over with Radiometer, they had talked about sometimes having to put products in hospitals or in laboratories for a test period before customers actually bought the products.

Is that what you mean by placement, or were those new products actually sales?

I think in that context, the use of the word "placed" was in lieu of the word "sold."

Okay, and that business is seeing weakness in Europe.

Can you just give us a little bit of color on what you're seeing in Europe overall?

I think overall, Radiometer is actually doing pretty well.

I think we have seen some weakness in Germany, but elsewhere, the business is doing pretty well.

Okay, thank you.

Steve Tusa, JP Morgan.

Speaking of Europe, could you just give us what you're most recent take is on the outlook there?

You were one of the first to really started talk cautiously about Europe at the end of last year.

Sure, Steve.

I think that right now what we see, what we saw in the third quarter was (indiscernible) were up slightly in Europe on balance.

Obviously, some of the issues we have talked about here impacted us, such as KaVo.

I would not say that we have a different posture there.

Clearly some of the headlines of late around the electoral stalemate in Germany have not been helpful for any big customer decisions there.

But I think on balance we are taking a "steady as she goes" view toward the macroenvironment there.

Eastern Europe, very different for us, obviously, where we are seeing I think very good performance on the part of some of our businesses, like our water quality business with Hach/Lange, for example, that participates in some of the infrastructure investments that are being made there.

Got you.

Just lastly on the guidance front, I think you started the year a little bit lower than where you are guiding to now, yet you're going to come in at the high end of the range in the organic growth number, which everybody seems to focus on, was a percent light of the high end of the range on that side.

Your SG&A as a percentage of sales going back has been about as low as 21% at one point in the last two years.

You are at 26% now.

Is there any reason why you can't get back to that kind of level over the next few years?

I think the mix of the recent acquisitions would suggest, given the very significant increase in gross margins, both because of operating performance and because of acquisitions, I think suggests a model where we are fundamentally going to be a higher gross margin, higher SG&A business.

I am not sure I see us going back to 21%, but I think there will be improvement there, there will be leverage off that SG&A base and continued improvement on the gross margin side,

So there's opportunity, but maybe not 5 points of opportunity?

I think that's right, Steve.

Okay.

Looks good, thanks.

Matt Summerville, KeyBanc Capital.

A couple questions.

First, can you maybe quantify around Gilbarco how much revenue got pushed out into the fourth quarter?

And then maybe just so we have a little more confidence that is going to hit, maybe assign the probability or the thought process that you have that you are going to get that back in the fourth quarter and that it won't push out into next year?

Well, I think the confidence that I have, Matt -- you can come to your own conclusion -- is that the orders are in hand and we had a good order quarter during the third quarter, and the construction schedules, the budgets are such that the customers want this product in the fourth quarter.

So I have got a bigger problem, I think, in the fourth quarter if we don't deliver, and that is unhappy customers.

Okay.

Then if you talk about the significant ramp in Product ID revenues on a year-over-year basis in the third quarter, can you maybe talk about how much of that related to the success you're having at AccuSort versus fixing the problems that were hindering the business early on in the year, and then maybe talk about the overall comparison and then a little more detail on the core marking business.

Sure, I think core marking business clearly is strong.

We are seeing, I think, both positive contribution from the new products.

Remember the whole strategy at Videojet was to buy the leader in continuous inkjet technology, strengthen the position with the bolt-on at Willet, and then add to it a broader array of marking technologies like TTO, like laser.

We do not have necessarily everything that we would like from a product perspective, but we are in very good shape.

We will be updating some of the CIJ products as we speak with some new launches.

But we have that broad product portfolio.

I think that is giving us competitive advantage in the market.

We're doing quite well globally with that array.

The performance we highlighted relative to earlier in the year, a function of not having all the sales and service heads where we want them when we want them, has been rectified, over 50 adds this year.

And we are beginning, I think, to see positive impact there as well, Matt.

I would admit to you I don't think we have seen full impact from that incremental investment, but I don't share that with you to try to suggest we're going to accelerate that growth from here.

But I think we still have the potential to compete and win quite effectively there.

AccuSort, obviously a smaller business.

We talked about the business being up significantly here in the quarter, made a significant contribution, has been making a significant contribution.

But I think both businesses today are in very good shape.

Okay, great.

Thank you.

Chris Kotowicz, AG Edwards.

Good morning.

Wanted to ask another follow-on question about KaVo.

I guess restructuring, can you share how much restructuring you took in the quarter there?

We're not going to give out the specific number, but it was a mid-eight figure, mid single-digit million number.

Okay.

So it is safe to say that you basically didn't get any operating profit contribution from KaVo in the quarter?

We got some.

It was clearly less than previous quarters.

Can you come on the order trends at KaVo?

September was very good.

You may know that the ADA had their annual show in September.

We had the best ADA show we have ever had.

Order book was strong, new product response was good.

I think we're still fighting some of the issues we talked about relative to German reimbursement, but on balance, I think we feel good.

The new imaging suite of products with the Gendex brand comes to market here in the fourth quarter.

I think there are number of things that give us real encouragement, in addition to just the backdrop of robust demand we see at Pelton & Crane and at Dexis.

Okay.

How about for the whole quarter?

Were you up year-over-year on orders versus last year?

I guess you owned it, so it wouldn't be pro forma.

Pro forma to the whole Dental group would be for the nine months, if you looked at all the companies as if we held them for both periods, we would have been up.

Okay.

I guess the reason I ask is because you gave us Gilbarco and what the quarter looked like, and I guess we're all pretty interested in the dental business specifically in the third quarter.

What is the outlook in the fourth quarter there?

Should we have some confidence that that is going to get better like Gilbarco is in the fourth quarter and into next year or is that going to continue to be depressed?

I think what we said with -- the reason we gave you the color around Gilbarco is because it really is a clear timing issue, orders versus shipments.

I think with the dental business, frankly, you ship what you book.

So we're not carrying the backlog, if you will, in Dental the way we are at Gilbarco Veeder-Root.

We have to go out and we have to grow the business, but again, we're going to make sure we protect customers first as we address this cost structure.

But I do think that on balance we will do better here in the fourth quarter.

Okay.

One question on the niche businesses in industrial technology.

Should we infer, based on the comments in the Q, that the core sales growth there was 14%?

I think the businesses there did pretty well, led by the aerospace and defense business, as you would expect.

Okay, thanks.

Robert Cornell, Lehman Brothers.

I got on the call a little late, so if you addressed this I apologize.

But how about the trends you have seen so far in the fourth quarter related to the prospects of the full fourth quarter in terms of organic growth rate and order rates?

We did not get into that at all yet.

There is nothing that we have seen here in the first two weeks of the quarter to suggest anything differently than what we have communicated relative to our expectations for mid-single digit core growth and good earnings performance in the fourth here.

Okay.

So you are comfortable with the way things are tracking so far in the fourth quarter?

Haven't seen anything, Bob, to suggest anything other than the underlying strength that we think we see in the businesses.

We highlighted earlier in the call that the Gilbarco orderbook was stronger than shipments, and as a result, they should make a contribution, better contribution here in the fourth quarter.

We're very pleased with the Dental businesses.

Pelton & Crane and Dexis doing very well.

New products coming out at Gendex.

The KaVo restructuring doing well.

But we're not going to overdrive the KaVo business at a time when we're shutting plants down.

So I think we feel good about that.

Motion, clearly we would have preferred the tech end markets to be better here in the second half they are.

Slightly encouraged by the pickup in the orderbooks in September, but it is what it is.

But I think on balance when you look at the performance that we had across Electronic Test, Product ID, Hach/Lange, the big win in New York with Trojan, the tools business is doing very well despite the challenges at retail, I think we feel very good about the portfolio's performance and our positioning going forward.

Got it.

Thanks, Larry.

We have reached our allotted time for questions.

Mr. Wilson, do you have any closing remarks?

Yes, Rebecca.

The replay number for today's call is 1-800-642-1687, confirmation code 9749427.

And as I mentioned earlier, we recently posted a current copy of today's slides, which can be accessed under Investor Events on our website.

As always, Dan and I are available after the call for any follow-up question you may have.

Thank you for joining us.

Thank you for participating in today's conference call.

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