Danaher Corp (DHR) 2006 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Danaher Corporation's second quarter earnings 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.

Mr. Wilson, you may begin your conference.

Good morning everyone and thanks for joining us today.

With me are Larry Culp, our President and Chief Executive Officer and Dan Comas, our Executive Vice President and Chief Financial Officer, as well as Pat Allender, our Executive Vice President.

I'd like to point out that our earnings release and 10-Q are available on our website under the heading investor events.

Additionally, access to a web cast presentation supplementing today's call can be found under the same heading under our website.

This call will be replayed through July 24 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 1-800-642-1687, confirmation code 2093155.

I will repeat this information at the end of the call for late arrivals.

I'd also like to note that in order to help you understand the Company's direction, we will be making some forward-looking statements during this call, 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, including those related to litigation and contingent liabilities, our ability to achieve projected efficiencies, 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 new products, currency exchange rates, changes in the market for acquisitions and divestitures, the integration of acquired businesses, regulatory approvals and the Company's ability to consummate announced acquisitions and general economic conditions.

It's possible that actual results might differ materially from any forward-looking statements that we might make today.

Additional information regarding the factors that may cause actual results to differ materially from those forward-looking statements is available in our SEC filings.

These forward-looking statements speak only as of the date they are made and we disclaim any duty to update any forward-looking statement.

With respect to the non-GAAP financial measures provided during the call today, the accompanying information and reconciliations 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 very pleased this morning to report that our second quarter earnings per share were $0.98, a 40% increase over last year's second quarter earnings per share of $0.70, representing another record second quarter for Danaher.

Included in our 2006 second quarter earnings per share is approximately $0.03 related to the gain on the investment in First Technology, as well as an additional $0.15 related to the reduction of previously provided tax reserves relating to prior years.

These tax reserve reductions resulted from the favorable resolution of foreign and domestic examinations of previously filed returns and due to the realization of previously reserved foreign tax credits.

Excluding these two items and including the impact of stock option expensing in both years, earnings per share for the second quarter were $0.80, representing an increase of 23% versus the same period a year ago, which excludes $0.03 per share on gains of the sale of the business and a minority interest.

Revenues for the quarter increased 21.5% to $2.35 billion as revenues from existing businesses, also described as core revenues, contributed just over 6%.

Acquisitions contributed an increase of 15.5% and currency effects were negligible.

Year-to-date, revenues grew 19.5% to $4.5 billion.

Revenues from existing businesses contributed 7%, acquisitions 14% and currency had a negative impact on revenues of 1.5%.

Our gross margin in the second quarter was 43.9%, a 20 basis point decrease compared to the same period last year as gross margins were negatively impacted by the higher percentage of revenues derived from lower gross margin businesses, Motion Gilbarco and Accu-Sort.

Selling, general and administrative expenses for the second quarter were 28.4% of sales versus 27.9 a year ago, driven primarily by the expensing of stock options while higher SG&A structures and our recent acquisitions, primarily in Med Tech, were offset by cost reductions and leverage from higher revenues.

Year-to-date, SG&A expenses were 28.6%, an increase of 70 basis points over the first half of last year.

Operating profits for the quarter was a record $381 million, a 19% increase over the same period a year ago.

And for the first six months of this year, operating profit was $678 million, a 14.5% increase over last year.

Operating margins for the second quarter were 16.2%, a 40-basis-point decline over 2005.

We were very pleased that on a comparable operating basis, operating margins improved 110 basis points, factoring out the dilutive effect of the lower operating margins and our recent acquisitions, the impact from expensing stock options, as well as excluding the positive impact in the prior year of the sale of business and collection of previously reserved note receivables and the gain on the sale of shares in First Technology, the impact of [DBS] clearly showing itself here.

Year-to-date, operating margins were 15.1%, a decrease of 70 basis points compared to the prior year.

The items I just mentioned, combined with a gain in the first quarter of '05 related to the sale of real estate and a $4.5 million charge in the first quarter of this year for the impairment of a minority interest in a medical technologies Company, impacted operating margin comparison. (indiscernible) volumes year-to-date operating margins improved approximately 80 basis points.

Net interest expense for the second quarter was $13.5 million compared to $5.1 million in the second quarter of last year.

The increase in interest expense is primarily due to higher debt levels related to borrowing under our commercial paper program utilized the fund the acquisition of Sybron.

Last week, we announced the pricing of a seven-year, EUR500 million, 4.5% bond offering.

These proceeds will be used to pay down a portion of our outstanding CP program and is expected to close tomorrow.

Our effective income tax for the second quarter was 14.5% versus 27.5% in the second quarter 2005.

As we stated earlier, our income tax rate this quarter was positively impacted by the reduction of certain tax reserves resulting from the favorable resolution of various domestic and international examinations related to prior years and the realization of certain foreign tax credits.

Excluding these items, our effective tax rate for the second quarter was 27.4%.

For the balance of 2006, excluding the reduction of prior-year tax reserves, we anticipate an effective tax rate of 27%, reflecting a slight increase from our previous guidance of 26.5%, primarily a result of the impact of Sybron.

Sybron has a higher overall effective tax rate than the balance of Danaher.

We're working to integrate Sybron into our overall tax structure and these actions are expected to produce our overall effective tax rate in future years.

Net income was a record $315 million, a 37% increase over the second quarter of 2005.

For the first half of 2006, net income was $530 million, increasing 27% over last year's first half.

Operating cash flow for the first six months of this year was $652 million, 10% higher than the same period last year.

Gross capital expenditures year-to-date increased to $59 million, representing a 4% increase over last year.

Our current full-year estimate remains at approximately 140 to $150 million.

Free cash flow, defined as operating cash flow, less capital expenditures, was $592 million for the first half and represents a 10% increase versus last year.

Our free cash to net income ratio for the first six months was 112%, moderating somewhat in the second quarter due to the positive non-cash impact that the tax reserve reduction had on earnings.

And please note that the cash gain from the sale of our investment in First Technology is reflected in cash flows from investing activities.

For the year we remain solidly on track to deliver free cash flow in excess of net income for the 15th straight year.

Our balance sheet remains strong with a debt to total capital ratio of 31% and over $280 million in cash and cash equivalents at quarter's end.

Turning into our operating performance, Professional Instrumentation revenues increased 41% for the quarter to $1.2 billion.

Revenues from existing businesses contributed 6%, acquisitions 35%, with a negligible impact from currency.

For the first six months of 2006, revenues increased 34.5% to $2.3 billion.

Revenues from existing businesses contributed 6%, acquisitions contributed 30% and currency had a negative impact on revenue of 1.5%.

Operating margins for the quarter were 17.4%, down 180 basis points versus the prior year due to the dilutive effect of acquisition of approximately 320 basis points and the impact of approximately 35 basis points relating to the 2006 expensing of options.

Operating margins from existing businesses excluding these items improved over 150 basis points.

This improvement is the result of leverage from higher revenues, as well as cost reduction initiatives across the segment with significant improvement from KaVo and our other dental equipment businesses.

Year-to-date, operating margins decreased 200 basis points to 16.4% when compared with last year, the decrease due primarily to these same factors, as well as a $4.5 million charge in the first of this year related to the write-down of a minority interest.

Operating margins from existing businesses excluding these items improved approximately 85 basis points versus the first half of 2005.

Environmental revenues for the quarter improved 9% with core revenues contributing 6.5%, acquisitions 2% and a positive currency impact contributing 0.5%.

Another strong performance from our water quality business, and as expected, a sequential strengthening of the top line at Gilbarco Veeder-Root contributed to the broad based core growth performance for the quarter.

For the first six months, sales increased 6.5% with core revenues contributing 6%, acquisitions 2% and negative currency having a negative impact of 1.5%.

Water quality core revenues grew at a mid-single-digit rate in the second quarter, led by a very robust performance from Hach/Lange.

Hach/Lange core revenues were up high-single digits, driven by strength in both laboratory and process instrumentation.

Revenue growth was broad-based across all geographies and product lines.

Hach Ultra Analytics core revenue in the second quarter grew at a low-single-digit rate as growth in Asia and Europe in the power and electronics markets was mitigated by softer North American large project activity versus a year ago.

Trojan, a global leader in ultraviolet disinfection, was awarded an eight-figure drinking water contract from the Aurora, Colorado Municipal Drinking Water Treatment System in the quarter.

Gilbarco Veeder-Root's order rates remain strong in the quarter, driven by solid U.S. market and regulatory-driven demand in Mexico.

Total revenues grew at a mid-single-digit rate with significant demand in the U.S. and Europe, particularly for our new Encore S dispenser, which is embedded with new technology directing vapor recovery regulations in both the U.S. and the UK.

Moving to electronic test where we recently hosted many of you at our investor and analyst day, revenues grew 13.5% in the quarter with core revenue contributing 5.5%, acquisitions 9% and currency having a negative impact of 1%.

We saw continued strength from Fluke while Fluke Networks [were] somewhat softer.

For the first half of 2006, sales increased 14% with core revenues accounting for 7%, acquisitions 8.5% and currency accounting for a decline of 1.5%.

Fluke's high-single-digit core revenues was driven by strength in all geographies.

Low-teens growth in digital multimeters, combined with a strong performance from the recent introduction of the TI-20, our new lower-priced thermal imager, helped drive this performance.

China once again robust with sales up over 25%, which we believe reflects the strength of our partners and channel strategy within China.

Fluke Networks' core revenue for the quarter grew at a low-single-digit rate, adversely impacted by the timing of new product introductions in the prior year and a softer U.S. telecommunications market.

Momentum from copper certification products up high-single-digits contributed to the solid mid-single-digit performance in Europe, while overall international growth was also strong with Asia up at a mid-teens rate.

Turning to medical technologies, revenues grew 130% in the quarter with revenue from existing businesses contributing 5.5%, acquisitions 124.5% and a negligible currency impact.

Year-to-date, sales have increased 108% with core revenues up 5.5%, acquisitions accounting for 105% and currency accounting for a decline of 2.5%.

Dental equipment revenues grew at a mid-single-digit rate in the second quarter, led by strong growth in both imaging and instruments sales.

Sales in North America and Asia showed significant year-over-year improvement, while sales to our European customers grew more modestly.

Sales at Pelton & Crane grew at a pro forma low double-digit rate.

During the quarter, we announced the completion of our acquisition of Sybron Dental Specialties and I'm pleased to share with you that although it's early, the team is having a very strong year and their initial embrace of DBS has been quite positive.

Sales growth has continued at rates consistent with those reported prior to the acquisition with a strong performance from both professional, dental and specialty products.

We experienced broad-based growth across all core product categories in professional dental, with orthodontic and implant products performing especially well during the quarter.

Leica Microsystems revenue grew at a mid-single-digit rate on a pro forma basis during the quarter.

Strength from the sale of microscopy and diagnostics products drove this broad-based growth during the quarter.

Integration activities at Leica remain on track and we are pleased with our progress there to date.

Radiometer continues to deliver mid-single-digit growth, driven by broad-based instrument placements in the first half of the year with particular strength in Europe.

Moving to Industrial Technologies, revenues increased 7% for the quarter to $800 million.

Revenues from existing businesses contributed an increase of 7.5%, acquisitions accounted for a decline of 0.5%, while currency was not a factor.

The decline from acquisitions relates to the prior-year effects from a catch-up of a one-month reporting lag by a recently acquired product identification business.

For the first half, revenues increased 9% to $1.6 billion.

Revenues from existing businesses contributed 9%, acquisitions 1% and currency negatively impacted sales by 1%.

Operating margins for the quarter were 15.2%, a 10-basis-point decline versus the same period last year.

Stock option expensing diluted margins by 40 basis points.

In addition, previously discussed items contributed 130 basis points of operating margins in the prior year.

On a comparable basis, operating margins in the second quarter improved approximately 150 basis points versus the same period last year.

Year-to-date, operating margins increased 70 basis points to 14.9% as continued benefits from low-cost region sourcing and production, particularly in Motion, more than offset the impact of stock option expensing in prior-year onetime items.

Product identification revenues improved 3% during the quarter with core revenues contributing -- excuse me -- with core revenues up 7%.

Acquisitions, primarily [Lynx], provided a negative impact to revenue growth of 4% due to reasons just discussed and the currency impact was negligible.

For the first six months, sales increased 8.5% with core revenues up 9% and currency accounting for a decline of 0.5%.

Our Videojet business grew at a mid-single-digit rate, paced by healthy performance in both equipment and aftermarket sales.

Sales of our binary rate printers used in consumer goods and high-speed graphic applications were up more than 30% in the first half.

Accu-Sort revenues grew in the mid-teens during the quarter, driven in part by the completion of several large Postal Service projects, as well as high-teens growth in our recently launched new bar-code scanning system, a result in wins with customers such as UPS and Wal-Mart.

As we have mentioned before, the large lower margin in the Postal Service projects are not anticipated to recur in the second half of this year, which is expected to impact organic growth negatively for the product (indiscernible) platform.

Moving to Motion, revenues grew 8% in the quarter with core revenues adding 7.5%, acquisitions contributing 0.5% and a negligible impact from currency.

In the first half of '06, sales increased 5% with core revenues adding 6%, acquisitions contributing 1% and currency accounting for a decline of 2%.

As expected, Motion delivered broad-based growth across both product lines and geographies in the second quarter.

Accelerated growth in our controls business was the culmination of several key design wins and strong sales in both custom and standard motors.

We were also pleased with the significant improvement in our Thomson business as evidenced by a significant design win with the Boeing 787 program.

In addition, (indiscernible) medical applications, such as surgical hand tools and with aerospace and defense customers that contributed to the sequential and year-over-year growth.

Demand for Dover's laboratory quality [nano slide] small stage continues to accelerate.

This is a precision stage [as] a critical component embedded in imaging systems used in the detection of cervical cancers.

Turning to tools and components, total revenue was $322 million a quarter, up 3.5%, all core growth.

For the first half, core revenues increased 4.5% to $649 million.

Operating margins for the quarter were 14.7%, a decrease of 20 basis points, primarily due to the impact from the expensing of stock options in the second quarter of 40 basis points.

Pricing initiatives here helped offset a portion of the steel and commodity cost increases and also contributed to the margin performance.

Year-to-date, operating margins decreased approximately 140 basis points to 13.6% compared to last year.

Margins were positively impacted in the quarter -- excuse me -- margins were positively impacted in the first quarter of 2005 by a gain on the sale of real estate of approximately 85 basis points, as well as the impact of option expense for the first of 2006 of 40 basis points.

Absent these items, year-to-date operating margins were down slightly. (indiscernible) [tangible] revenues improved 4% during the quarter, all of which represented core growth.

For the first half, sales increased 4.5%, again, all of which is core growth.

Matco, our high-end mobile distribution brand, once again had a very strong quarter, generating low-double-digit growth, driven by strength across the product line.

Matco's performance continues to outpace market growth.

Sales to Sears were down slightly for the quarter.

However, as we anniversary the establishment of Sears Holdings, we believe that this performance will improve.

We were pleased to again receive the Partners in Progress award from Sears for the year 2005, reflecting our superior customer service and innovation ability.

Our performance through the first half of 2006 was encouraging as it was both robust and broad-based.

We were particularly pleased with our margin performance in the second quarter.

As we look to the remainder of 2006, we remain positive in our ability to deliver as we continue to see strength across the portfolio as well as across our key geographies.

We continue to anticipate 5%-plus core revenue growth for the balance of 2006 and we expect ongoing year-over-year improvements in the profitability of the businesses, driven by continuing cost and growth initiatives.

Given this outlook, we expect our earnings per share in the third quarter to be in the range of $0.77 to $0.82 per share.

Excluding the impact from the gain on the sale of our investment in First Technology and the impact from the second quarter tax reserve reductions, we are increasing our full-year earnings per share guidance from $3.07 to $3.17 to a new range of $3.15 to $3.22, which also assumes the higher 27% tax rate for the balance of 2006.

Thank you, Larry.

The concludes our formal comments.

We're now ready, Kimberly, for any questions.

(Operator Instructions).

Bob Cornell, Lehman Brothers.

Actually, I am impressed with the increase in the guidance for the year, Larry.

What is behind the jump in the guidance by business, maybe by market, what's driving that thought process?

I think more than anything, Bob, the view at this juncture is we have had a very strong first half, both in terms of the top line, really across the portfolio.

And obviously here in the second quarter, we are thrilled with the pickup in the op ratios.

We do not see any slowdown of any real significance in our markets right now.

Obviously, we read the headlines like everybody else and have a watchful eye out, but I think right now, we feel very good about where we are, both from a business and from a geographic perspective.

So we thought here at midyear, it was timely to raise the outlook a bit.

The one point that came out -- the free cash flow in the quarter was a little bit below what I would have thought, I mean, 90% of net I think -- any comment there?

A couple of things on that.

We obviously had the reduction in the tax reserves, as well as the First Technology gain and that gain was incorporated in the net income but not in the operating -- not in our free cash flow, it was down on investing activities.

So if you invested -- if you adjusted for that, it was more like 110%.

And on a year-to-date basis, again, if you adjusted for those two factors, our free cash conversion is kind of right in line with what we had a year ago.

A final question.

You mentioned the Trojan contract in Colorado, you sort of zoomed by that.

A little more color on that, and how does that compare with I think it's the New York contract?

Well, it's unfortunately a larger -- or excuse me -- a smaller win than New York, but I think it is another example, Bob, of Trojan's ability to differentiate itself on the drinking water side of things with their ultraviolet technology.

So we are pleased I think with the competitive positioning with where we are with Trojan and obviously are excited I think over the longer-term relative to our ability to take full advantage of some of the regulatory drivers that clearly I think will stimulate demand for that particular segment.

Are there more of these things that you're bidding on that might come up over the next 12 months?

Is this unique, or is there more and more of them?

No, there are certainly contracts of that nature out there all the time, some larger, some smaller.

It is a bit -- it can be a bit of a lumpy business, given the nature of municipal bidding, but we have an active bid pipeline really at all times and have had since the acquisition of Trojan.

Okay, thanks, everybody.

Deane Dray, Goldman Sachs.

Good morning, Larry, Dan, Andy.

Just to follow up, additional questions on the guidance boost, if we could.

You're tracking right now core growth 7% so far for the first half.

Could you bracket for us what the core growth assumptions might be between the low end and the high end?

Yes, I think what we're seeing right now is that we think our core growth as we said, we're going to stick with the 5%-plus for the balance of the year.

Clearly, we have some businesses that are growing at a very healthy range right now, particularly in professional instrumentation.

As we have shared I think publicly on a couple of occasions, we think we will see some decel in the second half in product ID because of the way last year played out with some of the (indiscernible) USTS programs.

And even in Motion, Dover had a particularly good third quarter a year ago.

We won't fare well against that particularly well, given some of the timing of the LCD programs.

But I think on balance, absent the headlines, as we look at our order books, our pipelines, the tone across the businesses, I think we feel good about the second half.

And obviously with that top line and continued progress on margin expansion, we think we will have a very good earnings year.

That sounds good.

And you commented earlier that, based upon your current geographic perspective, you also felt comfortable raising guidance.

Can you give us some color from what you're seeing from the major geographies?

Sure.

I think what we see in Asia clearly is exceptional growth.

That continues.

I think our China businesses were all up, consistent with prior trajectories in the second quarter.

Europe, probably the surprise for me this year, given how strong Europe has been for us again on balance across the portfolio.

We've (indiscernible) a little bit of slowness in dental equipment, particularly in Germany and France, but that's probably the only soft spot we see in Europe.

We saw a slight decel I think in the U.S. first quarter to second quarter, but still a very good growth quarter, frankly, in the ,U.S. probably more on par with what we saw in the fourth quarter of last year.

Was there anything significant in that decelerating?

Was it an end market, or just tougher comps?

I don't think there was anything particularly we would point out, relative to the end markets that jumps out at us as newsworthy.

Great, thank you.

Ann Duignan, Bear Stearns.

Good morning everybody.

A couple of quick follow-ups, Larry.

The contract, the Colorado contract for Trojan, when would we expect that to start showing up in the numbers, and what is the duration of the contract?

Ann, I think we will see that in 2006, and I believe that is a two-year contract.

Okay.

And just on a similar matter, the shift down in product ID in the back of the year, you have been clear about articulating that.

I think you mentioned that it was lower-margin business.

How should we think about incremental profits in product ID in the back half of the year?

I think you can see a platform that, when you strip out the postal business, the core business will continue to kind of grow mid-single-digits with good follow-through.

So you could see the platform be relatively flat but operating profit dollars because of the growth in the core up high-single-digits of 10% year-over-year.

Okay, thank you.

And just a comment on the pricing environment.

I know you gave us the average pricing for each of the businesses.

Could you just give us a little bit of color on where you might be seeing greater than average pricing power, and are there any areas of the business where you're beginning to see any push-back on pricing?

Sure, Ann.

I think if you look across the portfolio, we clearly have made more progress in price in the first half in Tools and Components than we have in Industrial Tech, and both of those segments have done a little bit better than instrumentation.

We clearly have made this a point of emphasis for virtually all of our businesses, given the environment, and I would suspect that they will all be making progress.

Obviously in Tools and Motion, where we consume most of our steel and related medals commodities, we have more ability and we'll take more aggressive action to move price.

But it really, it clearly will be a point of emphasis here in the second half.

Push-back -- I think you always see push-back, but I think in this environment, I hope my friends down the street at the Fed aren't listing, but in this environment, clearly, I think we find a more open audience in light of the conditions than we have in prior years.

And, Ann, just to add, the Q talks about, we averaged 1% price in both quarters, but we actually got about 30 basis points more in Q2 versus Q1.

And we think that could accelerate here in the second half.

That's perfect, that's what I was kind of hinting at, is are we going to see an acceleration or a deceleration, so you expect acceleration?

Yes, we had good traction here in the second quarter and we could see some acceleration from there.

Thank you.

And just real quick, if you were to see a slowdown in your businesses, if the economy were to slow a little bit here in the back half, which of your businesses do you think you might see a slowdown in first?

Would it be consumables and product ID, or would it be in Tools and Components?

What have you watched to see whether there may be a slowdown going forward?

Ann, I watch everywhere, but I think that if you put aside our small window on the consumer in tools, clearly, sell-through in industrial distribution across our businesses, Fluke probably being our best bellwether, some of the OEM order rates at Motion -- those are our trip wires.

And I have to say right now, the tone is good.

Sell-through, I know Grainger talked the other day, some people are worried about the industrial distribution.

But from our perspective, industrial distribution sell-through continues to be very good, very encouraging.

Okay, thank you, I appreciate it.

Jeffrey Sprague, Citigroup.

Good morning, everyone.

Just a few questions.

Larry, you gave us a little color on how Med Tech, some of the pieces that haven't anniversaried, they're growing pro forma.

Given that that stuff is also kind of creating this margin drag as you digest it, I'm just wondering if on a pro forma basis, you're actually turning the corner yet on margins in any of those businesses, or are they [effect] kind of still heading down to the near-term as you integrate and restructure and such?

No.

I think on the new businesses, Jeff, in particular, we really are turning the corner.

I think we feel very good about the progress, particularly at cable as we highlighted.

I think Motion and Gilbarco are making progress.

By no means are they done or close to being done, but we like the way the ops teams are executing on the shop floor, the materials and purchasing teams as well and supply chain, and obviously a little bit of price as we just talked about with Ann helps as well.

So I like the execution in the second quarter.

We want to continue to do just that here in the second half.

And Jeff, part of is, we have not anniversaried Leica.

Leica came in at a 5% margin, so the overall margins ex-Leica are improving.

Dental is up probably 300 basis points here in the first half year-over-year, Radiometer continues to perform well.

We're making some progress on Leica, but when it gets reported, you're getting dragged down by the lower margins at Leica right now.

That's exactly what I was looking for.

And then you mentioned that the Motion strength had a drag on kind of blended gross margin, which is understandable.

But can you give us a little sense and magnitude of basis points improvement, how much better Motion is doing this year maybe versus last year?

It's up well over 100 basis points year-over-year in margins at Motion.

And then I guess -- actually two more quick things.

Larry, I wonder if you actually have visibility on it getting better, or was your comment just simply lapping kind of the reduction and everything, and therefore, the comps are easier?

Both, Jeff, to be frank.

Clearly, the anniversary, now that it is upon us, gives us an easier basis of comparison.

But I think as we look at the slotting and the programming and the merchandising for the second half, particularly the run-up to the Christmas holidays, we are optimistic about what we're headed with Sears and Kmart.

And then just finally, you mentioned the LCD comp in Motion separate and apart from the comp.

Are you actually seeing some downward pressure in that business as people think about their CapEx plans there?

We really have not seen that, to be honest, Jeff.

What we really deal with I think on flat panels is really the lumpiness, the lumpy nature of some of the capital expansions, and in turn, our shipment rates to the larger OEMs like Photon.

Thanks a lot guys.

Robert LaGaipa, CIBC World Markets.

Good morning.

Just a couple of questions.

One, I just wanted to focus in on the margin impact from the acquisitions and the Professional Instrumentation and predominately Med Tech, the 320 basis points.

Given your comments of obviously Leica being acquired, it's a 5% op margin.

I mean Sybron, which you just acquired in May, obviously has much higher margins.

Of that 320 basis points, where is that coming from?

Was Sybron a drag on margin in the quarter, or was it actually helpful?

It actually, on an operating margin basis, it's around the segment or a little higher.

But as we've talked about, we stepped up a fair amount of finished good inventory and we're advertising that in '06.

They have a pretty significant non-cash expense hitting the operating margins at Syborn, obviously won't repeat in '07.

So I think Sybron would've been a little bit of a drag here because of the expensing of the inventory step-up, but it's primarily Leica.

Is that something that's a late second quarter or third quarter event, just in terms of the impact to margin?

What I'm trying to get to here is, given some of the comments that you made just in terms of potential synergy opportunities and things going well at Sybron and identifying opportunities, has it changed you outlook just in terms of the accretion?

Are you expecting a little bit more accretion?

And you originally anticipated later this year specifically in the fourth quarter in light of the increased guidance, and are you still comfortable with the $0.06 to $0.09 that you mentioned for '07 previously, especially in light of some of your most recent comments?

And also in light of the fact that the financing has been largely put in place.

Bob, I think we really aren't in a position at this point to change our guidance for Sybron, either for '06 or for '07.

We're very excited about the quarter that just finished.

The synergies you mentioned with some of our other dental businesses continued to expand.

They have really done a tremendous job here in the early days, getting their arms around DBS and seeing its potential for positive impact in what is already an exceptionally well-run business.

So we're excited to have Sybron on board.

We think it really puts us in a very, extremely enviable position in the dental space.

But at this point, I don't think we're going to be talking about incremental accretion either this year or next year.

Terrific.

Last question if I could, Larry and Dan, just with regard to the balance sheet, in light of the acquisitions more recently, specifically Sybron, it's a debt to cap moving up to close to about 30%, which is high if you spend it in a few years.

Has it changed to your willingness to do acquisitions of that size?

Can you just maybe comment on where the balance sheet is, your comfit level there and also the pipeline acquisitions?

I think you will see us continue to be aggressive with respect to acquisitions, Bob.

Remember that while that dent to total cap ratio may be the highest you've seen it in awhile, we throw off a lot of cash and I suspect we're going to continue to do that.

So we have the radar up and operating.

We're encouraged by a number of the conversations that we're having around some of our key platforms, Med Tech being one clearly, Environmental, Electronic test products being others where we're focused.

So I think going forward, you should expect a level of activity consistent with the past, not to suggest you're going to see a Sybron every quarter, but I think we'll continue to build our portfolio, strengthen our worldwide footprint in ways consistent with what you've seen in the past.

Terrific.

Thanks very much.

Steve Tusa, JP Morgan.

Just one question on Sybron.

Now that you have kind of had the business for about 1.5, 2 months, where would you say this deal, and Dan, you've done a lot of these deals, where would you say this deal ranks in all of the deals that you guys have ever done at Danaher?

Steve, we would never answer that question in the context of six weeks of experience.

It would be, with all due respect, it would be unfair.

But that said, I would do this deal again tomorrow without hesitation.

We're very excited about what we've learned about the team, the product positioning, the opportunities, the synergies.

There is just a lot of good top-line and bottom-line performance ahead of us at Sybron.

But to rate this one versus others after six weeks, I'm not sure that's the best basis.

But we are off to an excellent start -- let me say that.

Gotcha.

I'll get you back in about a couple of years.

And I didn't hear you comment really on Europe and the general economic fundamental trends over there.

Maybe you could just about that.

We had a good quarter, we had a good first half, Steve, in Europe again, probably for me the biggest positive surprise this year, and we saw a sequential improvement in the second versus the first.

Great, thanks.

Ajit Pai, Thomas Weisel Partners.

A couple of quick questions.

One is on inflation.

I think you talk in your 10-Q about the overall results not being impacted significantly in the first six months of '06 or '05.

Could you give us some color on inflation, whether the actual current prices of commodities that you have mentioned in your Q, whether it's fully reflected in your cost right, now or are they only partially reflected because of forward contracts?

And what timeline do you expect it to get fully reflected, if it's not fully reflected right now?

We obviously had some forward contracts, but not a lot.

So we're really -- we're pretty much playing spot for our key commodities.

I would say, if anything, it's probably slightly tempered from where it was at the end of the first quarter.

So I don't think it has gotten worse.

It's probably about the same, maybe slightly better.

I think what you're seeing in the margin performance is both kind of the efforts in DBS activities, and we're getting a little bit more price.

And I think just looking at the other component of inflation, which is labor, you watch employment rates go down quite substantially in the U.S., and then a couple of other markets also you're watching employment get quite tight.

Could you give us some color as to whether you expect wage inflation to increase in the intermediate future, or you think that that's not a factor in second half of '06?

Ajit, we cannot rule it out, but I don't think we're anticipating a material sequential step up in wage rates.

Okay.

I think that's it.

Thank you so much.

And apologies.

Martin Sankey, Newberger Berman.

With the latest bond as well as the changes in your capital structure, could you project out what interest expense might look like over the next couple of quarters?

I could.

I don't have that right on the tip of my tongue here.

But we talked about funding the Sybron acquisition at roughly a 5% rate.

Given kind of rising short-term rates, our 4.5% Euro bond, we're sort of in that zone.

And that's most of our borrowings.

The rest is a 250 million 6% U.S. bond and 600 million convert that accretes at about 2.5%.

So that would give you the main components of the interest expense.

Now also after an acquisitions, [be] paying down 250 million plus a quarter of the short-term debt.

So would it be fair to say that the 13 million that you posted in the second quarter would be about the right number, maybe a little less going forward?

I think we did not have a full -- we only had about five, six weeks of interest [of] borrowings related to Sybron.

So if you look at that on a full, it would probably be probably about 10 million higher than that on a quarterly basis.

Right.

So what we're talking about would be somewhere in the neighborhood of 20 to 25 million in the (multiple speakers) third quarter and the second half?

Q3 would probably be towards the higher end of that.

And depending on acquisitions, that would -- you know, or lack of acquisitions would obviously likely come down.

Okay.

In looking at your increased guidance, are you looking at the higher volume and strong markets?

Have you incorporated any step-up in R&D or other investment activities in your guidance?

Martin, I think the short answer is yes.

As we talked about in December, we thought that in this environment, we would be taking full advantage of every opportunity we had to do that.

And I would add, when we're investing for growth, it's not simply a look at R&D, we're also obviously looking to smartly put money to work in sales and marketing, more feet on the street, things of that nature.

And I think we'll continue to do that here in the second half and are mindful of the opportunities and those intentions as we raise guidance this morning.

Okay, but you can't point to any big step-ups in investments as you have at other periods in the past?

Well, I'm not sure what specifically you're referring to, Martin, but there are not specific businesses or specific projects that we would identify per se today.

But I think you'll continue to see us invest aggressively in growth prospects for '07 and beyond.

Business by business, we have had this year, last year, pretty significant increases in both R&D and sales and marketing.

So I think we're very comfortable that we're investing in these businesses appropriately.

Okay.

So while there is going to be a step up, you can't really point to anything of major magnitude?

I guess another way to say it is, the 110 basis points in improvement year-over-year in the second quarter was despite the year-over-year increase on an apples-to-apples basis in both R&D and sales and marketing.

Okay.

Martin, we're going through right now our annual strategic plan reviews, and we just got back last night from Radiometer.

We were with the Hach/Lange team last week.

And if you're referring to our growth breakthroughs where I think we talked about over 40 of those initiatives last December, we're going to be updating that inventory during the next three months.

But after two reviews, we ended up with a net increase year-on-year, both at Hach and at Radiometer.

So if that's what you're referring to, by all means, I think when we finish that review and give you an update formally in December, you will see a more current, more robust inventory, and I think in aggregate, both a larger number projects, and more importantly, a larger dollar figure attached to the opportunity in the out years.

Great, thanks.

Kimberly, I think we have time for one more call.

Nigel Coe, Deutsche Bank.

Thanks, guys.

Quick question on SG&A.

It's up to 28.4% for the quarter I think, and I know that R&D is higher and (indiscernible) is higher and there's a bit of option in there as well.

But this has been [at a low of] 24% in the past.

Do you think you can get down to those kinds of levels, or do you think structural changes in the portfolio, meaning it will come out higher than in the past?

Nigel, I'm of the view that we clearly have structural change underway, given the higher gross margins that you also see attendant with the OpEx increase, and obviously, given the nature of the newer businesses, particularly Med Tech.

But I don't think we've yet seen the full impact of Danaher and DBS on the OpEx in those businesses other.

So it's hard to say exactly where all of that will settle out.

Obviously there's a balance there between the gross margin line and the OpEx line.

But I think you'll continue to see us invest in growth and expanding margins in those new businesses and across the portfolio.

Okay.

And just quickly, I know there's a question on the leverage mind how that impacts you thinking about impact positions, but does the -- you obviously (indiscernible) a bit more depth than you have in the past.

Does that kind of rule out the second half, anything meaningful in the second half of the year?

I think -- our debt to total capital is 31%, and we've committed to -- the rating agencies are sort of staying in the 25 to 40% band.

So just from where we are today, it would suggest that we have latitude plus the significant cash flow we will generate in the second half here.

But I don't think it suggests anything specific about our acquisition -- any specific slowdown about our acquisition efforts.

Okay, thanks guys.

Thanks, Nigel.

I think that's all the questions we have.

I would like to reiterate that our replay number for the call is 1-800-642-1687 with a confirmation code of 2093155.

As always, Dan and I will be available for any follow-up calls later today.

Thank you for joining us.

Bye.